form10q3_2008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended September 30,
2008
|
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 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 filier x |
Accelerated
filer o |
Non-accelerated
filer o( Do
not check if a smaller reporting company) |
Smaller
reporting company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
As of October 31, 2008,
there were outstanding 34,474,211shares of the registrant’s common stock, no par
value, which is the only class of common stock of the registrant.
Itron,
Inc.
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|
Page
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PART
I: FINANCIAL INFORMATION
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1
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2
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3
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4
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31
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45
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47
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PART
II: OTHER INFORMATION
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48
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48
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48
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48
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49
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ITRON,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands, except per share data)
|
|
Revenues
|
|
$ |
484,818 |
|
|
$ |
434,034 |
|
|
$ |
1,477,225 |
|
|
$ |
983,504 |
|
Cost
of revenues
|
|
|
321,858 |
|
|
|
289,224 |
|
|
|
975,496 |
|
|
|
652,655 |
|
Gross
profit
|
|
|
162,960 |
|
|
|
144,810 |
|
|
|
501,729 |
|
|
|
330,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
41,363 |
|
|
|
35,677 |
|
|
|
127,534 |
|
|
|
84,990 |
|
Product
development
|
|
|
31,781 |
|
|
|
26,495 |
|
|
|
92,283 |
|
|
|
67,837 |
|
General
and administrative
|
|
|
34,088 |
|
|
|
27,503 |
|
|
|
100,000 |
|
|
|
69,134 |
|
Amortization
of intangible assets
|
|
|
30,395 |
|
|
|
25,864 |
|
|
|
93,114 |
|
|
|
58,127 |
|
In-process
research and development
|
|
|
- |
|
|
|
269 |
|
|
|
- |
|
|
|
35,820 |
|
Total
operating expenses
|
|
|
137,627 |
|
|
|
115,808 |
|
|
|
412,931 |
|
|
|
315,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
25,333 |
|
|
|
29,002 |
|
|
|
88,798 |
|
|
|
14,941 |
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,962 |
|
|
|
585 |
|
|
|
4,846 |
|
|
|
8,890 |
|
Interest
expense
|
|
|
(17,644 |
) |
|
|
(34,852 |
) |
|
|
(65,367 |
) |
|
|
(63,276 |
) |
Other
income (expense), net
|
|
|
(281 |
) |
|
|
(873 |
) |
|
|
(1,938 |
) |
|
|
6,068 |
|
Total
other income (expense)
|
|
|
(15,963 |
) |
|
|
(35,140 |
) |
|
|
(62,459 |
) |
|
|
(48,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
9,370 |
|
|
|
(6,138 |
) |
|
|
26,339 |
|
|
|
(33,377 |
) |
Income
tax (provision) benefit
|
|
|
(1,695 |
) |
|
|
2,692 |
|
|
|
(2,586 |
) |
|
|
13,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
7,675 |
|
|
$ |
(3,446 |
) |
|
$ |
23,753 |
|
|
$ |
(20,146 |
) |
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|
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|
|
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|
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|
|
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Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.22 |
|
|
$ |
(0.11 |
) |
|
$ |
0.73 |
|
|
$ |
(0.69 |
) |
Diluted
|
|
$ |
0.21 |
|
|
$ |
(0.11 |
) |
|
$ |
0.68 |
|
|
$ |
(0.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,385 |
|
|
|
30,415 |
|
|
|
32,632 |
|
|
|
29,239 |
|
Diluted
|
|
|
36,872 |
|
|
|
30,415 |
|
|
|
34,991 |
|
|
|
29,239 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
ITRON,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
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|
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|
ASSETS
|
|
|
|
|
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|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
147,391 |
|
|
$ |
91,988 |
|
Accounts
receivable, net
|
|
|
339,308 |
|
|
|
339,018 |
|
Inventories
|
|
|
188,224 |
|
|
|
169,238 |
|
Deferred
income taxes, net
|
|
|
8,171 |
|
|
|
10,733 |
|
Other
|
|
|
60,627 |
|
|
|
42,459 |
|
Total
current assets
|
|
|
743,721 |
|
|
|
653,436 |
|
|
|
|
|
|
|
|
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|
Property,
plant and equipment, net
|
|
|
317,598 |
|
|
|
323,003 |
|
Prepaid
debt fees
|
|
|
14,142 |
|
|
|
21,616 |
|
Deferred
income taxes, net
|
|
|
118,160 |
|
|
|
75,243 |
|
Other
|
|
|
16,474 |
|
|
|
15,235 |
|
Intangible
assets, net
|
|
|
525,400 |
|
|
|
695,900 |
|
Goodwill
|
|
|
1,316,904 |
|
|
|
1,266,133 |
|
Total
assets
|
|
$ |
3,052,399 |
|
|
$ |
3,050,566 |
|
|
|
|
|
|
|
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|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
217,754 |
|
|
$ |
198,997 |
|
Accrued
expenses
|
|
|
59,737 |
|
|
|
57,275 |
|
Wages
and benefits payable
|
|
|
86,177 |
|
|
|
70,486 |
|
Taxes
payable
|
|
|
24,071 |
|
|
|
17,493 |
|
Current
portion of long-term debt
|
|
|
355,944 |
|
|
|
11,980 |
|
Current
portion of warranty
|
|
|
25,911 |
|
|
|
21,277 |
|
Deferred
income taxes, net
|
|
|
2,942 |
|
|
|
5,437 |
|
Unearned
revenue
|
|
|
25,771 |
|
|
|
20,912 |
|
Total
current liabilities
|
|
|
798,307 |
|
|
|
403,857 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
848,917 |
|
|
|
1,578,561 |
|
Warranty
|
|
|
14,689 |
|
|
|
11,564 |
|
Pension
plan benefits
|
|
|
61,869 |
|
|
|
60,623 |
|
Deferred
income taxes, net
|
|
|
170,141 |
|
|
|
173,500 |
|
Other
obligations
|
|
|
51,489 |
|
|
|
63,659 |
|
Total
liabilities
|
|
|
1,945,412 |
|
|
|
2,291,764 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
- |
|
Common
stock
|
|
|
945,886 |
|
|
|
609,902 |
|
Accumulated
other comprehensive income, net
|
|
|
115,116 |
|
|
|
126,668 |
|
Retained
earnings
|
|
|
45,985 |
|
|
|
22,232 |
|
Total
shareholders' equity
|
|
|
1,106,987 |
|
|
|
758,802 |
|
Total
liabilities and shareholders' equity
|
|
$ |
3,052,399 |
|
|
$ |
3,050,566 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
23,753 |
|
|
$ |
(20,146 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
133,295 |
|
|
|
85,329 |
|
In-process
research and development
|
|
|
- |
|
|
|
35,820 |
|
Employee
stock plans income tax benefit
|
|
|
- |
|
|
|
2,020 |
|
Stock-based
compensation
|
|
|
12,560 |
|
|
|
8,998 |
|
Amortization
of prepaid debt fees
|
|
|
7,665 |
|
|
|
12,034 |
|
Deferred
income taxes, net
|
|
|
(27,473 |
) |
|
|
(47,418 |
) |
Other,
net
|
|
|
236 |
|
|
|
(944 |
) |
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,834 |
|
|
|
(15,231 |
) |
Inventories
|
|
|
(19,100 |
) |
|
|
2,801 |
|
Trade
payables, accrued expenses and taxes payable
|
|
|
15,373 |
|
|
|
24,199 |
|
Wages
and benefits payable
|
|
|
15,549 |
|
|
|
(6,510 |
) |
Unearned
revenue
|
|
|
5,339 |
|
|
|
(8,390 |
) |
Warranty
|
|
|
103 |
|
|
|
764 |
|
Effect
of foreign exchange rate changes
|
|
|
(2,214 |
) |
|
|
11,307 |
|
Other,
net
|
|
|
(10,696 |
) |
|
|
5,021 |
|
Net
cash provided by operating activities
|
|
|
156,224 |
|
|
|
89,654 |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from the maturities of investments, held to maturity
|
|
|
- |
|
|
|
35,000 |
|
Acquisitions
of property, plant and equipment
|
|
|
(41,422 |
) |
|
|
(30,173 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(95 |
) |
|
|
(1,716,138 |
) |
Other,
net
|
|
|
1,380 |
|
|
|
53 |
|
Net
cash used in investing activities
|
|
|
(40,137 |
) |
|
|
(1,711,258 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
- |
|
|
|
1,159,027 |
|
Payments
on debt
|
|
|
(384,426 |
) |
|
|
(37,278 |
) |
Issuance
of common stock
|
|
|
323,424 |
|
|
|
243,146 |
|
Prepaid
debt fees
|
|
|
(207 |
) |
|
|
(22,009 |
) |
Other,
net
|
|
|
(44 |
) |
|
|
- |
|
Net
cash (used in) provided by financing activities
|
|
|
(61,253 |
) |
|
|
1,342,886 |
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
569 |
|
|
|
2,448 |
|
Increase
(decrease) in cash and cash equivalents
|
|
|
55,403 |
|
|
|
(276,270 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
91,988 |
|
|
|
361,405 |
|
Cash
and cash equivalents at end of period
|
|
$ |
147,391 |
|
|
$ |
85,135 |
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
5,282 |
|
|
$ |
2,277 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
16,699 |
|
|
$ |
12,642 |
|
Interest,
net of amounts capitalized
|
|
|
58,195 |
|
|
|
50,449 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
ITRON,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(UNAUDITED)
In
this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron” and the
“Company” refer to Itron, Inc.
Note
1: Summary of Significant Accounting
Policies
We
were incorporated in the state of Washington in 1977. We provide a portfolio of
products and services to utilities for the energy and water markets throughout
the world.
Financial
Statement Preparation
The
condensed consolidated financial statements presented in this Quarterly Report
on Form 10-Q are unaudited and reflect entries necessary for the fair
presentation of the Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2008 and 2007, Condensed
Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
and Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2008 and 2007 of Itron, Inc. and its subsidiaries. All
entries required for the fair presentation of the financial statements are of a
normal recurring nature. Intercompany transactions and balances are eliminated
upon consolidation.
Certain
information and note disclosures normally included in financial statements
prepared in accordance with 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 2007 audited financial statements and notes included in our Annual Report on
Form 10-K, as filed with the SEC on February 26, 2008. The results of operations
for the three and nine months ended September 30, 2008 are not necessarily
indicative of the results expected for the full fiscal year or for any other
fiscal period.
Basis
of Consolidation
We
consolidate all entities in which we have a greater than 50% ownership interest.
We also consolidate entities in which we have a 50% or less investment and over
which we have control. We use the equity method of accounting for entities in
which we have a 50% or less investment and exercise significant influence.
Entities in which we have less than a 20% investment and where we do not
exercise significant influence are accounted for under the cost method. We
consider for consolidation any variable interest entity of which we are the
primary beneficiary. At September 30, 2008, we had no material investments in
variable interest entities.
On
April 18, 2007, we completed the acquisition of Actaris Metering Systems SA
(Actaris), which is reported as our Actaris operating segment. The operating
results of this acquisition are included in our condensed consolidated financial
statements commencing on the date of the acquisition. At March 31, 2008, we
completed allocations of the purchase price to the assets acquired and
liabilities assumed.
Cash
and Cash Equivalents
We
consider all highly liquid instruments with remaining maturities of three months
or less at the date of acquisition to be cash equivalents. Cash equivalents are
recorded at cost, which approximates fair value.
Derivative
Instruments
We
account for derivative instruments and hedging activities in accordance with
Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. All derivative
instruments, whether designated in hedging relationships or not, are recorded on
the Condensed Consolidated Balance Sheets at fair value as either assets or
liabilities. The components and fair values of our derivative instruments are
determined using the fair value measurements of significant other observable
inputs (Level 2), as defined by SFAS 157, Fair Value Measurements. We
use observable market inputs based on the type of derivative and the nature of
the underlying instrument. We also measure our counterparty credit risk based on
current published credit default swap rates when determining the fair value of
our derivatives. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded as a component of other comprehensive income and are
recognized in earnings when the hedged item affects earnings. If the derivative
is a net investment hedge, the effective portion of any unrealized gain or loss
is reported in accumulated other comprehensive income as a net unrealized gain
or loss on derivative instruments. Ineffective portions of fair value changes or
derivative instruments that do not qualify for hedging activities are recognized
in other income (expense) in the Condensed Consolidated Statement of Operations.
We classify cash flows from our derivative programs as cash flows from operating
activities in the Condensed Consolidated Statements of Cash Flows. Derivatives
are not used for trading or speculative purposes. Counterparties to our currency
exchange and interest rate derivatives consist of major international financial
institutions. We monitor our positions and include the credit risk of our
counterparties when valuing our derivatives.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded for invoices issued to customers in accordance with our
contractual arrangements. Interest and late payment fees are minimal. Unbilled
receivables are recorded when revenues are recognized upon product shipment or
service delivery and invoicing occurs at a later date. The allowance for
doubtful accounts is based on our historical experience of bad debts and our
specific review of outstanding receivables at period end. Accounts receivable
are written-off against the allowance when we believe an account, or a portion
thereof, is no longer collectible.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out method.
Cost includes raw materials and labor, plus applied direct and indirect
costs.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally thirty years for buildings and three to
five years for equipment, computers and furniture. Leasehold improvements are
capitalized 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 senior subordinated notes
(convertible notes), the related portion of unamortized prepaid debt fees is
written-off and included in interest expense in the Condensed Consolidated
Statements of Operations.
Business
Combinations
In
accordance with SFAS 141, Business Combinations, we
include in our results of operations the results of an acquired business from
the date of acquisition. Net assets of the company acquired and intangible
assets that arise from contractual/legal rights, or are capable of being
separated, are recorded at their fair values as of the date of acquisition. The
residual balance of the purchase price, after fair value allocations to all
identified assets and liabilities, represents goodwill. Amounts allocated to
in-process research and development (IPR&D) are expensed in the period of
acquisition. Costs to complete the IPR&D are expensed in the subsequent
periods as incurred.
Goodwill
and Intangible Assets
Goodwill
and intangible assets result from our acquisitions. Goodwill is tested for
impairment as of October 1 of each year, or more frequently, if a significant
impairment indicator occurs under the guidance of SFAS 142, Goodwill and Other Intangible
Assets. Goodwill is assigned to our reporting units based on the expected
benefit from the synergies arising from each business combination, determined by
using certain financial metrics, including the incremental discounted cash flows
associated with each reporting unit. Intangible assets with a finite life are
amortized based on estimated discounted cash flows. Intangible assets are tested
for impairment when events or changes in circumstances indicate the carrying
value may not be recoverable. We use estimates in determining and assigning the
fair value of goodwill and intangible assets, including estimates of useful
lives of intangible assets, discounted future cash flows and fair values of the
related operations. In testing goodwill for impairment, we forecast discounted
future cash flows at the reporting unit level based on estimated future revenues
and operating costs, which take into consideration factors such as existing
backlog, expected future orders, supplier contracts and general market
conditions.
Warranty
We
offer standard warranties on our hardware products and large application
software products. We accrue the estimated cost of projected warranty claims
based on historical and projected product performance trends, business volume
assumptions, supplier information and other business and economic projections.
Testing of new products in the development stage helps identify and correct
potential warranty issues prior to manufacturing. Continuing quality control
efforts during manufacturing reduce our exposure to warranty claims. If our
quality control efforts fail to detect a fault in one of our products, we could
experience an increase in warranty claims. We track warranty claims to identify
potential warranty trends. If an unusual trend is noted, an additional warranty
accrual may be assessed and recorded when a failure event is probable and the
cost can be reasonably estimated. Management continually evaluates the
sufficiency of the warranty provisions and makes adjustments when necessary. The
warranty allowances may fluctuate due to changes in estimates for material,
labor and other costs we may incur to replace projected product failures, and we
may incur additional warranty and related expenses in the future with respect to
new or established products. The long-term warranty balance includes estimated
warranty claims beyond one year.
A
summary of the warranty accrual account activity is as follows:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Beginning
balance
|
|
$ |
42,184 |
|
|
$ |
36,190 |
|
|
$ |
32,841 |
|
|
$ |
18,148 |
|
Actaris
acquisition opening balance/adjustments
(1)
|
|
|
713 |
|
|
|
(57 |
) |
|
|
7,655 |
|
|
|
17,833 |
|
New
product warranties
|
|
|
1,856 |
|
|
|
1,974 |
|
|
|
5,789 |
|
|
|
3,703 |
|
Other
changes/adjustments to warranties
|
|
|
1,318 |
|
|
|
1,433 |
|
|
|
5,405 |
|
|
|
4,687 |
|
Claims
activity
|
|
|
(3,908 |
) |
|
|
(3,786 |
) |
|
|
(11,424 |
) |
|
|
(8,663 |
) |
Effect
of change in exchange rates
|
|
|
(1,563 |
) |
|
|
371 |
|
|
|
334 |
|
|
|
417 |
|
Ending
balance
|
|
|
40,600 |
|
|
|
36,125 |
|
|
|
40,600 |
|
|
|
36,125 |
|
Less:
current portion of warranty
|
|
|
(25,911 |
) |
|
|
(17,687 |
) |
|
|
(25,911 |
) |
|
|
(17,687 |
) |
Long-term
warranty
|
|
$ |
14,689 |
|
|
$ |
18,438 |
|
|
$ |
14,689 |
|
|
$ |
18,438 |
|
(1) The
acquisition adjustment for the three months ended September 30, 2008 reflects a
reclassification from other liabilities.
Total
warranty expense, which consists of new product warranties issued and other
changes and adjustments to warranties, totaled approximately $3.2 million and
$3.4 million for the three months ended September 30, 2008 and 2007, and
approximately $11.2 million and $8.4 million for the nine months ended
September 30, 2008 and 2007, respectively.
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 $3.7 million for the three months ended September 30,
2008 and 2007, and $14.3 million and $11.6 million for the nine months ended
September 30, 2008 and 2007, respectively. The IBNR accrual, which is included
in wages and benefits payable, was $2.8 million and $2.1 million at
September 30, 2008 and December 31, 2007, respectively. Our IBNR accrual
and expenses can fluctuate due to the number of plan participants, claims
activity and deductible limits. Our U.S. employees from the Actaris acquisition
were transferred from a fully insured plan and added to our self-insured group
health insurance at the beginning of 2008, resulting in higher 2008
self-insurance expenses compared with 2007. 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
An
estimated loss for a contingency is recorded if it is probable that an asset has
been impaired or a liability has been incurred and the amount of the loss can be
reasonably estimated. We evaluate, among other factors, the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of the ultimate loss. Changes in these factors and
related estimates could materially affect our financial position and results of
operations.
Bonus
and Profit Sharing
We
have employee bonus and profit sharing plans 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 estimated 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 No. 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 taxes are measured using the tax rates expected to be in effect when
the temporary differences reverse. We establish a valuation allowance for a
portion of the deferred tax asset when we believe it is more likely than not
that a portion of the deferred tax asset will not be utilized. Deferred tax
liabilities have not been recorded on undistributed earnings of international
subsidiaries that are permanently reinvested.
We
evaluate whether our tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements in accordance with
Financial Accounting Standards Board (FASB) Interpretation 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109 (FIN 48). Under FIN 48, we
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained upon examination by the
taxing authorities based solely on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. We 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 an average rate for the relevant reporting period. Translation adjustments
resulting from this process are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity. Gains and losses that arise from
exchange rate fluctuations for balances that are not denominated in the
functional currency are included in the Condensed Consolidated Statements of
Operations. Currency gains and losses of intercompany balances deemed to be
long-term in nature or considered to be hedges of the net investment in
international subsidiaries are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity.
Revenue
Recognition
Revenues
consist primarily of hardware sales, software license fees, software
implementation, project management services, installation, consulting and
post-sale maintenance support. In determining appropriate revenue recognition,
we primarily consider the provisions of the following accounting
pronouncements: Staff Accounting Bulletin 104, Revenue Recognition in Financial
Statements, FASB’s Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with Multiple
Deliverables, Statement of Position (SOP) 97-2, Software Revenue Recognition,
SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts and EITF 03-5, Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software in determining the appropriate revenue
recognition policy.
Revenue
arrangements with multiple deliverables are divided into separate units of
accounting if the delivered item(s) have value to the customer on a standalone
basis, there is objective and reliable evidence of fair value of both the
delivered and undelivered item(s) and delivery/performance of the undelivered
item(s) is probable. The total arrangement consideration is allocated among the
separate units of accounting based on their relative fair values and the
applicable revenue recognition criteria considered for each unit of accounting.
For our standard contract arrangements that combine deliverables such as
hardware, meter reading system software, installation and project management
services, each deliverable is generally considered a single unit of accounting.
The amount allocable to a delivered item is limited to the amount that we are
entitled to collect without being contingent upon the delivery/performance of
additional items.
Revenues
are recognized when (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred or services have been rendered, (3) the sales price is
fixed or determinable and (4) collectibility is reasonably assured. Hardware
revenues are generally recognized at the time of shipment, receipt by customer,
or, if applicable, upon completion of customer acceptance provisions. For
software arrangements with multiple elements, revenue recognition is also
dependent upon the availability of vendor-specific objective evidence (VSOE) of
fair value for each of the elements. The lack of VSOE, or the existence of
extended payment terms or other inherent risks, may affect the timing of revenue
recognition for software arrangements. If implementation services are essential
to a software arrangement, revenue is recognized using either the
percentage-of-completion methodology if project costs can be estimated or the
completed contract methodology if project costs cannot be reliably estimated.
Hardware and software post-sale maintenance support fees are recognized ratably
over the life of the related service contract.
Unearned
revenue is recorded for products or services for which cash has been received
from a customer, but for which the criteria for revenue recognition have not
been met as of the balance sheet date. Shipping and handling costs and
incidental expenses, which are commonly referred to as "out-of-pocket" expenses,
billed to customers are recorded as revenue, with the associated cost charged to
cost of revenues. We record sales, use and value added taxes billed to our
customers on a net basis in our Condensed Consolidated Statements of
Operations.
Product
and Software Development Costs
Product
and software development costs primarily include 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 expenses under SFAS 123(R) for
awards of stock options, our Employee Stock Purchase Plan (ESPP) and issuance of
restricted and unrestricted stock awards and units. The fair value of stock
options and ESPP awards are estimated at the date of grant using the
Black-Scholes option-pricing model, which includes assumptions for the dividend
yield, expected volatility, risk-free interest rate and expected life. For
restricted and unrestricted stock awards and units, the fair value is the market
close price of our common stock on the date of grant. We expense stock-based
compensation using the straight-line method over the requisite service period. A
substantial portion of our stock-based compensation cannot be expensed for tax
purposes. If we were to have tax deductions in excess of the compensation cost,
they would be classified as financing cash inflows in the Condensed Consolidated
Statements of Cash Flows.
Fair
Value Measurements
SFAS
157, Fair Value
Measurements, became effective on January 1, 2008 and establishes a
framework for measuring fair value, expands disclosures about fair value
measurements of our financial assets and liabilities and specifies a hierarchy
of valuation techniques based on whether the inputs used are observable or
unobservable. The fair value hierarchy prioritizes the inputs used in different
valuation methodologies, assigning the highest priority to unadjusted quoted
prices for identical assets and liabilities in actively traded markets (Level 1)
and the lowest priority to unobservable inputs (Level 3). Level 2 inputs consist
of quoted prices for similar assets and liabilities in active markets; quoted
prices for identical or similar assets and liabilities in non-active markets;
and model-derived valuations in which significant inputs are corroborated by
observable market data either directly or indirectly through correlation or
other means (inputs may include yield curves, volatility, credit risks and
default rates). The disclosure requirements include the fair value measurement
at the reporting date and the level within the fair value hierarchy in which the
fair value measurements fall. For fair value measurements using Level 3 inputs,
a reconciliation of the beginning and ending balances is required.
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.
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS 141(R), Business Combinations, which
replaces SFAS 141. SFAS 141(R) retains the fundamental purchase method of
accounting for acquisitions, but requires a number of changes, including the way
assets and liabilities are recognized in purchase accounting. SFAS 141(R)
requires the recognition of assets acquired and liabilities assumed arising from
contingencies to be recorded at fair value on the acquisition date; that
IPR&D be capitalized as an intangible asset and amortized over its estimated
useful life; and that acquisition-related costs are expensed as incurred. SFAS
141(R) also requires that restructuring costs generally be expensed in periods
subsequent to the acquisition date and that changes in accounting for deferred
tax asset valuation allowances and acquired income tax uncertainties after the
measurement period be recognized as a component of provision for taxes. SFAS
141(R) is effective for business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. We will apply SFAS 141(R) to any acquisition after the
date of adoption.
In
February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No.
157, which delays the effective date of SFAS 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years (see Note 1, Fair Value Measurements). We
are currently assessing the impact of SFAS 157 for nonfinancial assets and
nonfinancial liabilities on our condensed consolidated financial
statements.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, which
changes the accounting and reporting for minority interests. Minority interests
will be re-characterized as noncontrolling interests and will be reported as a
component of equity, separate from the parent’s equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by us in the first quarter of 2009. SFAS
160 is currently not expected to have a material effect on our condensed
consolidated financial statements.
In
March 2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement 133,
which requires enhanced disclosures about how and why derivative instruments are
used, how derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS 161 also requires the fair values of derivative
instruments and their gains and losses to be disclosed in a tabular format. SFAS
161 does not change how we record and account for derivative instruments. SFAS
161 is effective for fiscal years and interim periods beginning after November
15, 2008 and will be adopted by us in the first quarter of 2009.
In
May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion, addressing
convertible instruments that may be settled in cash upon conversion. This FSP
requires, among other things, the issuer to separately account for the liability
and equity components of the convertible instrument in a manner that reflects
the issuer’s non-convertible debt borrowing rate. This FSP is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008 and must be applied retrospectively to all periods
presented at the time of adoption. We will adopt the FSP on January 1,
2009. We expect the impact of the FSP to be material to our condensed
consolidated financial statements and are currently evaluating and quantifying
the impact on specific accounts and disclosures.
Note
2: Earnings Per Share and Capital Structure
The
following table sets forth the computation of basic and diluted
EPS.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands, except per share data)
|
|
Net
income (loss) available to common shareholders
|
|
$ |
7,675 |
|
|
$ |
(3,446 |
) |
|
$ |
23,753 |
|
|
$ |
(20,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding - Basic
|
|
|
34,385 |
|
|
|
30,415 |
|
|
|
32,632 |
|
|
|
29,239 |
|
Dilutive
effect of stock-based awards and convertible notes
|
|
|
2,487 |
|
|
|
- |
|
|
|
2,359 |
|
|
|
- |
|
Weighted
average number of shares outstanding - Diluted
|
|
|
36,872 |
|
|
|
30,415 |
|
|
|
34,991 |
|
|
|
29,239 |
|
Basic
earnings (loss) per common share
|
|
$ |
0.22 |
|
|
$ |
(0.11 |
) |
|
$ |
0.73 |
|
|
$ |
(0.69 |
) |
Diluted
earnings (loss) per common share
|
|
$ |
0.21 |
|
|
$ |
(0.11 |
) |
|
$ |
0.68 |
|
|
$ |
(0.69 |
) |
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. Weighted average common shares
outstanding, assuming dilution, include the incremental shares that would be
issued upon the assumed exercise of stock-based awards. At September 30, 2008
and 2007, we had stock-based awards outstanding of approximately 1.4 million and
1.6 million at weighted average option exercise prices of $51.26 and $36.56,
respectively. The number of anti-dilutive stock-based awards excluded from the
calculation of diluted EPS was 268,000 and 759,000 for the three months ended
September 30, 2008 and 2007 and 178,000 and 785,000 for the nine months ended
September 30, 2008 and 2007, respectively. These stock-based awards could be
dilutive in future periods.
For
our $345 million 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, if the average
closing stock price for a quarter exceeds the conversion price of $65.15, we
include the amount of shares it would take to satisfy the conversion obligation,
assuming that all of the convertible notes are converted. The average closing
price of our common stock for the three months ended September 30, 2008 exceeded
the conversion price of $65.16 and therefore, approximately 1.7 million
shares have been included in the calculation of diluted EPS. The number of
shares calculated each quarter is included in the year-to-date calculation on a
weighted-average basis. For the nine months ended September 30, 2008,
approximately 1.6 million shares have been included in the diluted EPS
calculation. For the three and nine months ended September 30, 2007, if we had
net income and included the dilutive shares in the calculation of diluted EPS
for those periods, approximately 1.2 million and 521,000 shares, respectively,
would have been included.
On
May 6, 2008, we sold 3.4 million shares of common stock, no par value, at a
public offering price of $91.52 per share, resulting in net proceeds of $310.9
million. The proceeds were primarily used to repay a portion of our
non-convertible debt (see Note 6, Debt).
We
have authorized 10 million shares of preferred stock with no par value. In the
event of a liquidation, dissolution or winding up of the affairs of the
corporation, whether voluntary or involuntary, the holders of any outstanding
stock will be entitled to be paid a preferential amount per share to be
determined by the Board of Directors prior to any payment to holders of common
stock. Shares of preferred stock may be converted into common stock based on
terms, conditions, rates and subject to such adjustments set by the Board of
Directors. There was no preferred stock issued or outstanding at
September 30, 2008 and 2007.
Note
3: Certain Balance Sheet Components
Accounts
receivable, net
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Trade
receivables (net of allowance of $6,304 and $6,391)
|
|
$ |
320,746 |
|
|
$ |
324,425 |
|
Unbilled
revenue
|
|
|
18,562 |
|
|
|
14,593 |
|
Total
accounts receivable, net
|
|
$ |
339,308 |
|
|
$ |
339,018 |
|
A
summary of the allowance for doubtful accounts activity is as
follows:
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
(in
thousands)
|
|
Beginning
balance
|
$ |
6,408 |
|
|
$ |
5,679 |
|
|
$ |
6,391 |
|
|
$ |
589 |
|
Actaris
acquisition opening balance/adjustments
|
|
- |
|
|
|
741 |
|
|
|
(471 |
) |
|
|
5,632 |
|
Provision
for doubtful accounts
|
|
314 |
|
|
|
623 |
|
|
|
1,057 |
|
|
|
1,013 |
|
Accounts
charged off
|
|
(105 |
) |
|
|
(231 |
) |
|
|
(661 |
) |
|
|
(390 |
) |
Effect
of change in exchange rates
|
|
(313 |
) |
|
|
219 |
|
|
|
(12 |
) |
|
|
187 |
|
Ending
balance, September 30
|
$ |
6,304 |
|
|
$ |
7,031 |
|
|
$ |
6,304 |
|
|
$ |
7,031 |
|
Inventories
A
summary of the inventory balances is as follows:
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Materials
|
|
$ |
95,078 |
|
|
$ |
81,636 |
|
Work
in process
|
|
|
16,071 |
|
|
|
16,859 |
|
Finished
goods
|
|
|
77,075 |
|
|
|
70,743 |
|
Total
inventories
|
|
$ |
188,224 |
|
|
$ |
169,238 |
|
Our
inventory levels may vary period to period as a result of our factory scheduling
and timing of contract fulfillments.
Property,
plant and equipment, net
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Machinery
and equipment
|
|
$ |
223,336 |
|
|
$ |
192,562 |
|
Computers
and purchased software
|
|
|
70,630 |
|
|
|
66,412 |
|
Buildings,
furniture and improvements
|
|
|
129,330 |
|
|
|
140,386 |
|
Land
|
|
|
38,503 |
|
|
|
41,750 |
|
Total
cost
|
|
|
461,799 |
|
|
|
441,110 |
|
Accumulated
depreciation
|
|
|
(144,201 |
) |
|
|
(118,107 |
) |
Property,
plant and equipment, net
|
|
$ |
317,598 |
|
|
$ |
323,003 |
|
Depreciation
expense was $13.5 million and $12.3 million for the three months ended September
30, 2008 and 2007, and $40.2 million and $27.2 million for the nine months
ended September 30, 2008 and 2007, respectively.
Note
4: Intangible Assets
The
gross carrying amount and accumulated amortization of our intangible assets,
other than goodwill, are as follows:
|
|
At
September 30, 2008
|
|
|
At
December 31, 2007
|
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(in
thousands)
|
|
Core-developed
technology
|
|
$ |
401,827 |
|
|
$ |
(174,893 |
) |
|
$ |
226,934 |
|
|
$ |
403,665 |
|
|
$ |
(126,488 |
) |
|
$ |
277,177 |
|
Customer
contracts and relationships
|
|
|
310,101 |
|
|
|
(50,302 |
) |
|
|
259,799 |
|
|
|
312,709 |
|
|
|
(25,151 |
) |
|
|
287,558 |
|
Trademarks
and trade names
|
|
|
78,267 |
|
|
|
(41,833 |
) |
|
|
36,434 |
|
|
|
154,760 |
|
|
|
(26,877 |
) |
|
|
127,883 |
|
Other
|
|
|
24,801 |
|
|
|
(22,568 |
) |
|
|
2,233 |
|
|
|
24,845 |
|
|
|
(21,563 |
) |
|
|
3,282 |
|
Total
intangible assets
|
|
$ |
814,996 |
|
|
$ |
(289,596 |
) |
|
$ |
525,400 |
|
|
$ |
895,979 |
|
|
$ |
(200,079 |
) |
|
$ |
695,900 |
|
A
summary of the intangible asset account activity is as follows:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
Beginning
balance, intangible assets, gross
|
|
$ |
864,049 |
|
|
$ |
775,073 |
|
|
$ |
895,979 |
|
|
$ |
231,868 |
|
Intangible
assets acquired
|
|
|
- |
|
|
|
76,135 |
|
|
|
- |
|
|
|
623,242 |
|
Adjustment
of previous acquisitions
|
|
|
- |
|
|
|
- |
|
|
|
(70,048 |
) |
|
|
(1,220 |
) |
Effect
of change in exchange rates
|
|
|
(49,053 |
) |
|
|
31,526 |
|
|
|
(10,935 |
) |
|
|
28,844 |
|
Ending
balance, intangible assets, gross
|
|
$ |
814,996 |
|
|
$ |
882,734 |
|
|
$ |
814,996 |
|
|
$ |
882,734 |
|
The
intangible assets acquired in 2007 relate to the Actaris acquisition. During the
first quarter of 2008, intangible assets were adjusted by $70.0 million for
trademarks and trade names based on our completion of our fair value assessment
associated with the Actaris acquisition. Intangible assets decreased by $1.2
million in the first nine months of 2007 due to an adjustment to intangible
assets for the Flow Metrix acquisition based on the final determination of fair
values of intangible assets acquired.
Intangible
assets are recorded in the functional currency of our international
subsidiaries; therefore, the carrying amount of intangible assets increase or
decrease, with a corresponding change in accumulated other comprehensive income,
due to changes in foreign currency exchange rates for those intangible assets
owned by our international subsidiaries. Intangible asset amortization expense
was $30.4 million and $25.9 million for the three months ended
September 30, 2008 and 2007, and $93.1 million and $58.1 million for
the nine months ended September 30, 2008 and 2007, respectively.
Estimated
future annual amortization expense is as follows:
Years
ending December 31,
|
|
Estimated
Annual Amortization
|
|
|
|
(in
thousands)
|
|
2008
(from October 1, 2008)
|
|
$ |
29,613 |
|
2009
|
|
|
102,406 |
|
2010
|
|
|
74,210 |
|
2011
|
|
|
63,522 |
|
2012
|
|
|
49,185 |
|
Beyond
2012
|
|
|
206,464 |
|
Total
intangible assets, net
|
|
$ |
525,400 |
|
Note
5: Goodwill
The
following table reflects goodwill allocated to each reporting segment during the
nine months ended September 30, 2008 and 2007, respectively.
|
|
Itron
North America
|
|
|
Actaris
|
|
|
Total
Company
|
|
|
|
(in
thousands)
|
|
Goodwill
balance at January 1, 2007
|
|
$ |
125,855 |
|
|
$ |
411 |
|
|
$ |
126,266 |
|
Goodwill
acquired
|
|
|
- |
|
|
|
1,043,821 |
|
|
|
1,043,821 |
|
Adjustment
to previous acquisitions
|
|
|
980 |
|
|
|
- |
|
|
|
980 |
|
Effect
of change in exchange rates
|
|
|
1,853 |
|
|
|
45,458 |
|
|
|
47,311 |
|
Goodwill
balance at September 30, 2007
|
|
$ |
128,688 |
|
|
$ |
1,089,690 |
|
|
$ |
1,218,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
balance at January 1, 2008
|
|
$ |
128,329 |
|
|
$ |
1,137,804 |
|
|
$ |
1,266,133 |
|
Adjustment
of previous acquisitions
|
|
|
- |
|
|
|
55,370 |
|
|
|
55,370 |
|
Effect
of change in exchange rates
|
|
|
(663 |
) |
|
|
(3,936 |
) |
|
|
(4,599 |
) |
Goodwill
balance at September 30, 2008
|
|
$ |
127,666 |
|
|
$ |
1,189,238 |
|
|
$ |
1,316,904 |
|
The
increase during 2007 was due to the goodwill acquired in the Actaris acquisition
on April 18, 2007. Goodwill was adjusted in 2008 and 2007 based on our final
determination of certain fair values of assets acquired and the payment of
additional consideration for our 2007 and 2006 acquisitions. Goodwill is
recorded in the functional currency of our international subsidiaries;
therefore, goodwill balances may increase or decrease, with a corresponding
change in accumulated other comprehensive income, due to changes in foreign
currency exchange rates.
On
January 1, 2008, we consolidated certain operations between our two operating
segments as a result of our continued integration of the Actaris acquisition.
The allocation of goodwill to our reporting units is based on the new segment
reporting structure and in accordance with SFAS 142, goodwill of $411,000 at
January 1, 2007 has been reallocated between the segments to conform to the new
segment reporting structure.
Note
6: Debt
The
components of our borrowings are as follows:
|
|
At
September 30,
2008
|
|
|
At
December 31,
2007
|
|
|
|
(in
thousands)
|
|
Credit
facility
|
|
|
|
|
|
|
USD
denominated term loan
|
|
$ |
377,256 |
|
|
$ |
596,793 |
|
EUR
denominated term loan
|
|
|
372,443 |
|
|
|
445,228 |
|
GBP
denominated term loan
|
|
|
- |
|
|
|
79,091 |
|
Convertible
senior subordinated notes
|
|
|
345,000 |
|
|
|
345,000 |
|
Senior
subordinated notes
|
|
|
110,162 |
|
|
|
124,429 |
|
|
|
|
1,204,861 |
|
|
|
1,590,541 |
|
Current
portion of debt
|
|
|
(355,944 |
) |
|
|
(11,980 |
) |
Total
long-term debt
|
|
$ |
848,917 |
|
|
$ |
1,578,561 |
|
Credit
Facility
The
Actaris acquisition in 2007 was financed in part by a $1.2 billion credit
facility. The credit facility, dated April 18, 2007, was comprised of a
$605.1 million first lien U.S. dollar denominated term loan; a
€335 million first lien euro denominated term loan; a £50 million
first lien pound sterling denominated term loan (collectively the term loans);
and a $115 million multicurrency revolving line-of-credit (revolver). Our
loan balances denominated in currencies other than the U.S. dollar fluctuate due
to currency exchange rates. Interest rates on the credit facility are based
on the respective borrowing’s denominated London Inter Bank Offering
Rate (LIBOR) or the Wells Fargo Bank, National Association’s prime rate, plus an
additional margin subject to factors including our consolidated leverage ratio.
In accordance with our Credit Agreement, when our consolidated leverage ratio
decreases below 4.5 times, the applicable margin decreases from 2.0% to 1.75%.
On August 5, 2008, upon completion of our quarterly compliance certificate, our
applicable margin decreased to 1.75%. Scheduled amortization of principal
payments is 1% per year (0.25% quarterly) with an excess cash flow provision for
additional annual principal repayment requirements. Maturities of the term loans
and multicurrency revolver are seven years and six years from the date of
issuance, respectively. Prepaid debt fees are amortized using the effective
interest method through the term loans’ earliest maturity date, as defined by
the credit agreement. The credit facility is secured by substantially all of the
assets of Itron, Inc., our operating subsidiaries, except our international
subsidiaries, and contains covenants, which contain certain financial ratios and
place restrictions on the incurrence of debt, the payment of dividends, certain
investments, incurrence of capital expenditures above a set limit and mergers.
We were in compliance with these debt covenants at September 30, 2008. At
September 30, 2008, there were no borrowings outstanding under the revolver and
$49.1 million was utilized by outstanding standby letters of credit resulting in
$65.9 million being available for additional borrowings.
We
repaid $34.7 million in borrowings during the three months ended September 30,
2008 and $384.4 million in borrowings during the nine months ended
September 30, 2008. These repayments were made with cash flows from operations
and $311 million in net proceeds from the completed sale of 3.4 million
shares of our common stock.
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 September 30, 2008. From time to time, we may reacquire a
portion of the subordinated notes on the open market, resulting in the early
extinguishment of debt. During 2008, we reacquired $14.4 million in
principal amount of the subordinated notes. The balance of the
subordinated notes, including accreted discount, was $110.2 million at
September 30, 2008. Some or all of the
subordinated notes may be redeemed at our option at any time on or after
May 15, 2008 at a face value 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 of $4.3 million are required every six
months, in February and August. For each six month period beginning August 2011,
contingent interest payments of approximately 0.19% of the average trading price
of the convertible notes will be made if certain thresholds and events are met,
as outlined in the indenture. The convertible notes are registered with the SEC
and are generally transferable. Our convertible notes are not considered
conventional convertible debt as defined in EITF 05-2, The Meaning of “Conventional
Convertible Debt Instruments” in Issue 00-19, as the number of shares, or
cash, to be received by the holders was not fixed at the inception of the
obligation. We have concluded that the conversion feature of our convertible
notes does not require bifurcation from the host contract in accordance with
SFAS 133, as the conversion feature is indexed to the Company’s own stock and
would be classified within stockholders’ equity if it were a freestanding
instrument as provided by EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.
The
convertible notes 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.
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 our Quarterly
Report on Form 10-Q):
o
|
during
any fiscal quarter commencing after September 30, 2006, if the closing
sale price per share of our common stock exceeds $78.19, which is 120% of
the conversion price of $65.16, for at least 20 trading days in the 30
consecutive trading day period ending on the last trading day of the
preceding fiscal quarter;
|
o
|
between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
|
o
|
during
the five business days after any five consecutive trading day period in
which the trading price of the convertible notes for each day was less
than 98% of the conversion value of the convertible
notes;
|
o
|
if
the convertible notes are called for
redemption;
|
o
|
if
a fundamental change occurs; or
|
o
|
upon
the occurrence of defined corporate
events.
|
The
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 principal amount will be less than
the $1,000 principle amount and will be settled in cash.
Upon
conversion, the principal amount of the convertible notes will be settled in
cash and, at our option, the remaining conversion obligation (stock price in
excess of conversion price) may be settled in cash, shares or a combination. The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved. We
may redeem some or all of the convertible notes for cash, on or after
August 1, 2011, for a price equal to 100% of the principal amount plus accrued
and unpaid interest.
The
convertible notes are unsecured and subordinate to all of our existing and
future senior secured borrowings. The convertible notes are unconditionally
guaranteed, joint and severally, by all of our operating subsidiaries, except
for our international subsidiaries, all of which are wholly owned. The
convertible notes contain covenants, which place restrictions on the incurrence
of debt and certain mergers. We were in compliance with these debt covenants at
September 30, 2008.
At
September 30, 2008, the contingent conversion threshold was exceeded as the
closing sale price per share of our common stock on the NASDAQ Global Select
Market exceeded $78.19, which is 120% of the conversion price of $65.16, for at
least 20 trading days in the 30 consecutive trading day period ending September
30, 2008. As a result, the notes are convertible at the option of the holder
through the fourth quarter of 2008, and accordingly, the aggregate principal
amount of the convertible notes at September 30, 2008 is included in the current
portion of long-term debt. At December 31, 2007, the contingent conversion
threshold was not exceeded and, therefore, the aggregate principal amount of the
convertible notes is included in long-term debt. As our stock price is subject
to fluctuation, the contingent conversion threshold may be exceeded during any
quarter prior to July 2011, and the notes subject to conversion.
In
May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion, addressing
convertible instruments that may be settled in cash upon conversion (see Note 1,
Summary of Significant
Accounting Policies).
Prepaid
Debt Fees & Interest Expense
Prepaid
debt fees for our outstanding borrowings are amortized over the respective terms
using the effective interest method. Total unamortized prepaid debt fees were
approximately $14.1 million and $21.6 million at September 30, 2008 and
December 31, 2007, respectively. Accrued interest expense was $4.5 million
and $5.0 million at September 30, 2008 and December 31, 2007,
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. Our objective is to offset
gains and losses resulting from these exposures with losses and gains on the
derivative contracts used to hedge them, thereby reducing the impact of
volatility on earnings or protecting fair values of assets and
liabilities.
On
June 30, 2008, we entered into a one-year interest rate swap to convert $200
million of our USD term loan, which had a remaining balance of $377 million at
September 30, 2008, under our Credit Agreement dated April 18,
2007, from a floating 1-month LIBOR interest rate to a fixed 3.01%
interest rate. Our interest rate will continue to contain an additional margin
per the credit facility agreement. 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 other
comprehensive income 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 was $200
million and the fair value, recorded as a short-term asset, was $349,000 at
September 30, 2008. The amount of net gains expected to be reclassified into
earnings through the remaining contract of nine months is approximately $1.9
million based on the Wells Fargo swap yield curve as of October 1,
2008.
In
the third quarter of 2007, we entered into an interest rate swap to convert our
€335 million euro denominated variable rate term loan to a fixed-rate debt
obligation at a rate of 6.59% for the term of the debt, including expected
prepayments. 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 other comprehensive income 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 in accordance with
scheduled prepayments. The notional amount of the swap was $372 million (€255
million) and the fair value, recorded as a long-term liability, was $113,000 at
September 30, 2008. The amount of net gains expected to be reclassified into
earnings in the next twelve months is approximately $2.5 million based on the
Wells Fargo swap yield curve as of October 1, 2008.
In
the second quarter of 2008, we began entering into certain foreign exchange
forward contracts with the intent to reduce volatility of certain intercompany
financing transactions. These contracts are not designated as accounting hedges
and are de minimis in fair value and notional amounts.
In
the second quarter of 2007, we designated certain portions of our foreign
currency denominated term loans as hedges of our net investment in international
operations. Net gains of $32 million ($20 million after-tax) were reported as a
net unrealized gain on derivative instruments, a component of accumulated other
comprehensive income, which represented effective hedges of net investments for
the three months ended September 30, 2008. Net losses of $366,000 ($8,000
after-tax) were reported as a net unrealized loss on derivative instruments, a
component of accumulated other comprehensive income, which represented effective
hedges of net investments, for the nine months ended September 30, 2008. We had
no hedge ineffectiveness.
In
May 2008, we repaid the £50 million pound sterling denominated term loan.
We realized a $208,000 loss in other income (expense) from the termination of
the cross currency interest rate swap, which we entered into in the third
quarter of 2007.
In
April 2007, we completed the acquisition of Actaris and realized a
$2.8 million gain in other income (expense) from the termination of the
foreign currency range forward contracts. In the first quarter of 2007, we
signed a stock purchase agreement to acquire Actaris and entered into foreign
currency range forward contracts (transactions where put options were sold and
call options were purchased) to reduce our exposure to declines in the value of
the U.S. dollar and pound sterling relative to the euro denominated purchase
price. Under SFAS 133, the Actaris stock purchase agreement was considered an
unrecognized firm commitment for a business acquisition; therefore, these
foreign currency range forward contracts could not be designated as fair value
hedges.
The
components and fair values of our derivative instruments are determined using
the fair value measurements of significant other observable inputs (Level 2), as
defined by SFAS 157. We have used observable market inputs based on the type of
derivative and the nature of the underlying instrument. The key inputs used at
September 30, 2008 included interest rate yield curves, foreign exchange rates,
the spot price of the underlying instrument and related volatility, all of which
are considered to be available in an active market. The key inputs used at
September 30, 2008 were considered Level 2 inputs. We have utilized the
mid-market pricing convention for these inputs, which represents the mid-point
of the observable rates in an active market at the reporting date. The fair
values also included a measure of our counterparty credit risk based on current
published credit default swap rates. We have one counterparty for our
outstanding derivatives for which we have a master netting agreement. We believe
the netting agreement reduces our counterparty credit exposure. At September 30,
2008, the net fair value of our derivatives was an asset of $222,000. We
anticipate that our counterparty will be able to fully satisfy their obligations
under our outstanding derivative contracts.
The
fair values of our derivative instruments determined using the fair value
measurement of significant other observable inputs (Level 2) are as
follows:
|
|
At
September 30, 2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Other
current assets: $200 million USD term loan interest rate
swap
|
|
$ |
349 |
|
Accrued
expenses: Foreign exchange forward contracts
|
|
|
(14 |
) |
Long-term
other obligations: $372 million EUR term loan interest rate
swap
|
|
|
(113 |
) |
Net
fair value of derivative instruments valued using Level 2
inputs
|
|
$ |
222 |
|
Note
8: Pension Plan Benefits
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans offering
death and disability, retirement and special termination benefits to employees
in Germany, France, Spain, Italy, Belgium, Chile, Portugal, Hungary and
Indonesia. These plans were assumed with the acquisition of Actaris on April 18,
2007. Our general funding policy for these qualified pension plans is to
contribute amounts at least sufficient to satisfy regulatory funding standards
of the respective countries for each plan. For 2008, we expect to contribute a
total of $500,000 to our defined benefit pension plans. Our expected
contribution assumes that actual plan asset returns are consistent with our
expected rate of return and that interest rates remain constant. For the three
and nine months ended September 30, 2008, we contributed approximately
$33,000 and $126,000, respectively, to the defined benefit pension
plans.
Net
periodic pension benefit costs for our plans include the following
components:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended
|
|
|
April
18, 2007 Through
|
|
|
|
2008
|
|
|
2007
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
(in
thousands)
|
|
Service
cost
|
|
$ |
438 |
|
|
$ |
520 |
|
|
$ |
1,616 |
|
|
$ |
928 |
|
Interest
cost
|
|
|
955 |
|
|
|
812 |
|
|
|
2,825 |
|
|
|
1,456 |
|
Expected
return on plan assets
|
|
|
(78 |
) |
|
|
(60 |
) |
|
|
(230 |
) |
|
|
(107 |
) |
Settlements
and curtailments
|
|
|
- |
|
|
|
(134 |
) |
|
|
- |
|
|
|
(227 |
) |
Amortization
of actuarial net gain
|
|
|
(44 |
) |
|
|
- |
|
|
|
(119 |
) |
|
|
- |
|
Amortization
of unrecognized prior service costs
|
|
|
13 |
|
|
|
- |
|
|
|
44 |
|
|
|
- |
|
Net
periodic benefit cost
|
|
$ |
1,284 |
|
|
$ |
1,138 |
|
|
$ |
4,136 |
|
|
$ |
2,050 |
|
Note
9: Stock-Based Compensation
We
record stock-based compensation expense under SFAS 123(R) for awards of stock
options, our ESPP and issuance of restricted and unrestricted stock awards and
units. We expense stock-based compensation using the straight-line method over
the requisite service period. For the three months ended September 30, 2008 and
2007, stock-based compensation expense was $4.5 million and $3.1 million
and the related tax benefit was $1.1 million and $809,000, respectively. For the
nine months ended September 30, 2008 and 2007, stock-based compensation expense
was $12.5 million and $9.0 million and the related tax benefit was $2.9 million
and $2.2 million, respectively. We have capitalized no 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. Cash
received from the exercise of stock options and similar awards was $5.8 million
and $7.9 million for the three months ended September 30, 2008 and 2007,
and $12.4 million and $18.9 million for the nine months ended September 30, 2008
and 2007, respectively.
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
(1)
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
Dividend
yield
|
|
|
- |
|
|
|
- |
|
Expected
volatility
|
|
|
44.8 |
% |
|
|
38.4 |
% |
Risk-free
interest rate
|
|
|
3.0 |
% |
|
|
4.6 |
% |
Expected
life (years)
|
|
|
4.49 |
|
|
|
4.94 |
|
|
|
ESPP
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Dividend
yield
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Expected
volatility
|
|
|
36.8 |
% |
|
|
26.2 |
% |
|
|
52.6 |
% |
|
|
24.9 |
% |
Risk-free
interest rate
|
|
|
1.9 |
% |
|
|
5.0 |
% |
|
|
2.2 |
% |
|
|
5.0 |
% |
Expected
life (years)
|
|
|
0.25 |
|
|
|
0.25 |
|
|
|
0.25 |
|
|
|
0.25 |
|
(1)There
were no Employee Stock Options granted for the three months ended September 30,
2008 and 2007.
For
2008 and 2007, expected price volatility is based on a combination of historical
volatility of our common stock and the implied volatility of our traded options
for the related vesting period. We believe this combined approach is reflective
of current and historical market conditions and an appropriate indicator of
expected volatility. The risk-free interest rate is the rate available as of the
award date on zero-coupon U.S. government issues with a remaining term equal to
the expected life of the award. The expected life is the weighted average
expected life for the entire award based on the fixed period of time between the
date the award is granted and the date the award is fully exercised. Factors to
be considered in estimating the expected life include historical experience of
similar awards, with consideration to the contractual terms, vesting schedules
and expectations of future employee behavior. We have not paid dividends in the
past and do not plan to pay any dividends in the foreseeable
future.
Subject
to stock splits, dividends and other similar events, 5,875,000 shares of common
stock are reserved and authorized for issuance under our Amended and Restated
2000 Stock Incentive Plan, of which 534,201 shares remain available for issuance
at September 30, 2008. In addition, of the authorized shares under the plan, no
more than 1.0 million shares can be issued as non-stock options (awards).
Awards consist of restricted stock units, restricted stock awards and
unrestricted stock awards. Shares remaining for issuance as awards were 614,858
at September 30, 2008.
Stock
Options
Stock
options to purchase the Company’s common stock are granted to employees and the
Board of Directors with an exercise price equal to the fair market value of the
stock on the date of grant upon approval by our Board of Directors. Options
generally become exercisable in three or four equal installments beginning one
year from the date of grant and generally expire 10 years from the date of
grant.
The
fair value of each stock option granted is estimated on the date of grant using
the Black-Scholes option-pricing model. No stock options were granted during the
three months ended September 30, 2008 and 2007. The weighted average grant date
fair values of the stock options granted during the nine months ended September
30, 2008 and 2007 were $39.07 and $27.21 per share, respectively. Compensation
expense related to stock options recognized under SFAS 123(R) for the three
months ended September 30, 2008 and 2007 was $2.2 million and
$2.4 million and $6.8 million and $7.2 million for the nine months ended
September 30, 2008 and 2007, respectively. 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 nine months ended September 30,
2008 and 2007 is as follows:
|
|
Shares
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
(years)
|
|
|
(in
thousands)
|
|
Outstanding,
January 1, 2007
|
|
|
2,225 |
|
|
$ |
29.78 |
|
|
|
7.46 |
|
|
$ |
49,469 |
|
Granted
|
|
|
200 |
|
|
|
66.94 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(737 |
) |
|
|
23.76 |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(50 |
) |
|
|
44.01 |
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(7 |
) |
|
|
42.62 |
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2007
|
|
|
1,631 |
|
|
$ |
36.56 |
|
|
|
7.29 |
|
|
$ |
92,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
and expected to vest, September 30, 2007
|
|
|
1,472 |
|
|
$ |
35.18 |
|
|
|
7.14 |
|
|
$ |
85,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
September 30, 2007
|
|
|
839 |
|
|
$ |
24.18 |
|
|
|
5.98 |
|
|
$ |
57,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2008
|
|
|
1,561 |
|
|
$ |
37.81 |
|
|
|
6.98 |
|
|
$ |
90,769 |
|
Granted
|
|
|
247 |
|
|
|
95.79 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(399 |
) |
|
|
26.37 |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(19 |
) |
|
|
46.71 |
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2008
|
|
|
1,390 |
|
|
$ |
51.26 |
|
|
|
7.25 |
|
|
$ |
53,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
and expected to vest, September 30, 2008
|
|
|
1,324 |
|
|
$ |
49.90 |
|
|
|
7.16 |
|
|
$ |
52,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
September 30, 2008
|
|
|
804 |
|
|
$ |
34.88 |
|
|
|
6.12 |
|
|
$ |
43,182 |
|
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 our closing stock price as of
the last business day of the period, which represents amounts that would have
been received by the optionees had all options been exercised on that date. As
of September 30, 2008, total unrecognized stock-based compensation expense
related to nonvested stock options, net of estimated forfeitures, was
approximately $11.9 million, which is expected to be recognized over a weighted
average period of approximately 21 months. During the three months ended
September 30, 2008 and 2007, the total intrinsic value of stock options
exercised was $12.9 million and $17.7 million, respectively. During the nine
months ended September 30, 2008 and 2007, total intrinsic value of stock options
exercised was $28.2 million and $37.1 million, respectively.
Restricted
Stock Units
Certain
employees and senior management receive Restricted Stock Units or Restricted
Stock Awards (collectively “Restricted Awards”) as a portion of their total
compensation. The Restricted Awards issued under the Long-Term Performance Plan
(LTPP) are contingent on the attainment of yearly goals. Generally, the
Restricted Awards have a cliff vesting period in which employees become 100%
vested three years from the anniversary of the grant date. Upon
vesting, the Restricted Awards are converted into shares of the Company’s common
stock on a one-for-one basis and issued to employees. Compensation expense is
generally recognized over the vesting period from the date of grant and is
recognized only for those awards expected to vest, with forfeitures estimated
based on our historical experience and future expectations. The fair value is
the market close price of our common stock on the date of grant. The Company is
entitled to an income tax deduction in an amount equal to the taxable income
reported by the holder upon vesting of the Restricted Awards.
The
maximum LTPP awards attainable for the 2008 performance period is 53,119 shares
at a grant date fair value of $77.74 per share. The LTPP awards issued for the
2007 plan consisted of 21,392 shares at a grant date fair value of $62.52 per
share.
During
the three and nine months ended September 30, 2008, we granted 10,250 and
192,250 Restricted Awards, respectively. During the three and nine months ended
September 30, 2007, we granted 1,500 and 62,167 Restricted Awards, respectively.
Total compensation expense recognized for the Restricted Awards was $2.0 million
and $490,000 for the three months ended September 30, 2008 and 2007, and $5.1
million and $1.3 million for the nine months ended September 30, 2008 and 2007,
respectively. As of September 30, 2008, unrecognized compensation expense, net
of estimated forfeitures, was $16.2 million, which is expected to be
recognized over a weighted average period of approximately 23 months. The
aggregate intrinsic value of our Restricted Awards outstanding was
$27.6 million and $10.0 million at September 30, 2008 and 2007,
respectively.
The
following table summarizes Restricted Award activity for the nine months ended
September 30, 2008 and 2007:
|
|
Number
of Restricted Awards
(in
thousands)
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
Nonvested,
January 1, 2007
|
|
|
47 |
|
|
$ |
59.16 |
|
Issued
|
|
|
62 |
|
|
|
|
|
Vested
|
|
|
(1 |
) |
|
|
|
|
Forfeited
|
|
|
(1 |
) |
|
|
|
|
Nonvested,
September 30, 2007
|
|
|
107 |
|
|
$ |
62.74 |
|
|
|
|
|
|
|
|
|
|
Nonvested,
January 1, 2008
|
|
|
111 |
|
|
$ |
66.92 |
|
Issued
|
|
|
213 |
|
|
|
|
|
Vested
|
|
|
- |
|
|
|
|
|
Forfeited
|
|
|
(12 |
) |
|
|
|
|
Nonvested,
September 30, 2008
|
|
|
312 |
|
|
$ |
80.71 |
|
Unrestricted
Stock Awards
We
issue unrestricted stock awards to our Board of Directors as part of the Board
of Directors’ compensation. Awards are fully vested at issuance and are expensed
when issued. The fair value of unrestricted stock awards is the market close
price of our common stock on the date of grant. During the three months ended
September 30, 2008 and 2007, we issued a total of 1,184 and 1,728 shares of
these awards with a weighted average grant date fair value of $100.74 and $78.00
per share, respectively. During the nine months ended September 30,
2008 and 2007, we issued a total of 2,744 and 4,938 shares of these awards with
a weighted average grant date fair value of $97.94 and $61.61 per share,
respectively. The expense related to these awards was $119,000 and $134,000 for
the three months ended September 30, 2008 and 2007, and $269,000 and $304,000
for the nine months ended September 30, 2008 and 2007,
respectively.
Employee
Stock Purchase Plan
Eligible
employees who have completed three months of service, work more than 20 hours
each week and are employed more than five months in any calendar year are
eligible to participate in our ESPP. Employees who own 5% or more of our common
stock are not eligible to participate in the ESPP. Under the terms of the ESPP,
eligible employees can choose payroll deductions each year of up to 10% of their
regular cash compensation. Such deductions are applied toward the discounted
purchase price of our common stock. The purchase price of the common stock is
85% of the fair market value of the stock at the end of each fiscal quarter.
Under the ESPP, we sold 8,672 and 9,600 shares to employees in the three months
ended September 30, 2008 and 2007, and 24,647 and 32,920 shares to employees in
the nine months ended September 30, 2008 and 2007, respectively. The fair value
of ESPP awards issued is estimated using the Black-Scholes option-pricing model.
The weighted average fair value of the ESPP awards issued in the three months
ended September 30, 2008 and 2007 was $16.20 and $12.24 per share and $15.94 and
$9.78 per share for the nine months ended September 30, 2008 and 2007,
respectively. The expense related to ESPP recognized under SFAS 123(R) for
the three months ended September 30, 2008 and 2007 was $138,000 and $85,000,
respectively. The expense related to ESPP recognized under SFAS 123(R) for
the nine months ended September 30, 2008 and 2007 was $406,000 and $277,000,
respectively. We had no unrecognized compensation cost at September 30, 2008
associated with the awards issued under the ESPP. There were approximately
317,000 shares of common stock available for future issuance under the ESPP at
September 30, 2008.
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, IPR&D, research
credits, state income taxes and adjustments to valuation allowances, among other
items.
Our
tax provision (benefit) as a percentage of income (loss) before tax
was 18% and 10% for the three and nine months ended September 30,
2008, compared with 44% and 40% for the same periods in 2007. Our tax
provisions for the three and nine months ended September 30, 2008 are lower than
those in 2007 as 2008 reflects a benefit associated with lower effective tax
rates on international earnings. We made an election under Internal Revenue Code
Section 338 with respect to the Actaris acquisition, which resulted in a reduced
global effective tax rate. Additionally, our reduced international tax liability
reflects the benefit of international interest expense deductions.
Unrecognized
tax benefits in accordance with FIN 48 were $35.4 million and $34.8 million at
September 30, 2008 and December 31, 2007, respectively. We classify
interest expense and penalties related to unrecognized tax benefits and interest
income on tax overpayments as components of income tax expense. During the three
and nine months ended September 30, 2008, we recognized a benefit of
$305,000 and expense of $725,000, respectively, in interest and penalties. At
September 30, 2007, we had accrued approximately $7.9 million in interest and
penalties, which was primarily the result of the acquisition of Actaris on April
18, 2007. At September 30, 2008 and December 31, 2007, accrued interest was $3.1
million and $2.7 million and accrued penalties were $1.4 million and
$2.2 million, respectively. Unrecognized tax benefits that would affect our tax
provision at September 30, 2008 and December 31, 2007 were $9.7 million and $8.4
million, respectively. At September 30, 2008, we expect to pay $4.8 million in
income tax obligations 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.
On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 was signed
into law, extending the research tax credit for qualified research expenses
incurred throughout 2008 and 2009. In the fourth quarter of 2008, we expect to
record approximately $2.5 million in federal and state research credits, which
will reduce our tax provision.
Note
11: Commitments and Contingencies
Guarantees
and Indemnifications
Under
FASB Interpretation 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, we record a liability for certain types of
guarantees and indemnifications for agreements entered into or amended
subsequent to December 31, 2002. We had no such guarantees or
indemnifications as of September 30, 2008 and December 31, 2007.
We
are often required to obtain letters of credit or bonds in support of our
obligations for customer contracts. These letters of credit or bonds typically
provide a guarantee to the customer for future performance, which usually covers
the installation phase of a contract and may on occasion cover the operations
and maintenance phase of outsourcing contracts. In addition to the outstanding
standby letters of credit of $49.1 million issued under our credit facility’s
$115 million multicurrency revolver, our Actaris operating segment has a total
of $26.5 million of unsecured multicurrency revolving lines of credit with
various financial institutions with total outstanding standby letters of credit
of $5.9 million at September 30, 2008. Unsecured surety bonds in force were
$12.7 million and $13.8 million at September 30, 2008 and December 31,
2007, respectively. In the event any such bonds or letters of credit are called,
we would be obligated to reimburse the issuer of the letter of credit or bond;
however, we do not believe that any currently outstanding bonds or letters of
credit will be called.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments. We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Legal
Matters
We
are subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded and charged to operating expense when we determine that a loss is
probable and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. Legal contingencies at September 30, 2008 were not material to
our financial condition or results of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger. PT Berca claims that it had preemptive rights
in the joint venture and has sought to nullify the transaction in 2001 whereby
Schlumberger transferred its ownership interest in PT Mecoindo to an Actaris
subsidiary. The plaintiff also seeks to collect damages for the earnings it
otherwise would have earned had its alleged preemptive rights been observed. The
Indonesian courts have awarded 129.6 billion rupiahs ($13.8 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
Actaris. All of the parties have appealed the matter and it is currently pending
before the Indonesian Supreme Court. We intend to continue vigorously defending
our interest. In addition, Actaris has notified Schlumberger that it will seek
to have Schlumberger indemnify Actaris from any damages it may incur as a result
of this claim. In any event, we do not believe that an adverse outcome is likely
to have a material adverse impact to our financial condition or results of
operations.
In
March 2008, IP Co. LLC filed a complaint in the U.S. District Court for the
Eastern District of Texas against Itron, Inc., CenterPoint Energy and Eaton
Corp. alleging infringement of a patent owned by IP Co. LLC. The complaint
alleges that one U.S. patent, concerning wireless mesh networking systems that
optimize data sent across a general area, is being infringed by the defendants.
The complaint seeks unspecified damages as well as injunctive relief. We believe
these claims are without merit and we intend to vigorously defend our interests.
In any event, we do not believe an adverse outcome is likely nor do we believe
an adverse outcome will have a material adverse impact to our financial
condition or results of operations.
Note
12: Other Comprehensive Income
Other
comprehensive income (loss) is reflected as an 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:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Net
income (loss)
|
|
$ |
7,675 |
|
|
$ |
(3,446 |
) |
|
$ |
23,753 |
|
|
$ |
(20,146 |
) |
Foreign
currency translation adjustment
|
|
|
(179,516 |
) |
|
|
94,543 |
|
|
|
(14,272 |
) |
|
|
88,791 |
|
Net
unrealized gain (loss) on derivative instruments
|
|
|
28,764 |
|
|
|
(25,074 |
) |
|
|
7,260 |
|
|
|
(25,074 |
) |
Net
hedging gains reclassified into net income
|
|
|
111 |
|
|
|
138 |
|
|
|
448 |
|
|
|
138 |
|
Pension
plan benefits liability adjustment
|
|
|
- |
|
|
|
- |
|
|
|
(99 |
) |
|
|
- |
|
Other
comprehensive (loss) income before income taxes
|
|
|
(142,966 |
) |
|
|
66,161 |
|
|
|
17,090 |
|
|
|
43,709 |
|
Income
tax benefit (provision)
|
|
|
14,127 |
|
|
|
9,204 |
|
|
|
(4,889 |
) |
|
|
8,646 |
|
Other
comprehensive income (loss), net
|
|
$ |
(128,839 |
) |
|
$ |
75,365 |
|
|
$ |
12,201 |
|
|
$ |
52,355 |
|
Accumulated
other comprehensive income, net of income taxes, was approximately $115.1
million and $126.7 million at September 30, 2008 and December 31, 2007,
respectively, and consisted of the adjustments for foreign currency translation,
the unrealized loss on our derivative instruments, the hedging gain and the
pension liability adjustment as indicated above.
Note
13: Segment Information
The
Actaris operating segment consists primarily of the operations from the Actaris
acquisition, which occurred on April 18, 2007, as well as other Itron operations
not located in North America that are now included in the Actaris segment. The
operations of the Actaris operating segment are primarily located in Europe,
with approximately 5% of operations located in the United States and
approximately 20% located throughout the rest of the world. The remainder of our
operations, primarily located in the United States and Canada, has been combined
into a single operating segment called Itron North America. As we continue to
integrate the Actaris acquisition, certain refinements of our segments may
occur. The operating segment information as set forth below is based on our
current segment reporting structure. In accordance with SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, historical segment information has
been restated from the segment information previously provided to conform to the
segment reporting structure after the April 18, 2007 Actaris acquisition and our
January 1, 2008 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. Assets and liabilities are not used in
our measurement of segment performance and, therefore, are not allocated to our
segments. Substantially all depreciation expense is allocated to our
segments.
Segment
Products
Itron
North America
|
Electronic
electricity meters with and without automated meter reading (AMR); gas and
water AMR modules; handheld, mobile and network AMR data collection
technologies; advanced metering infrastructure (AMI) technologies;
software, installation, implementation, consulting, maintenance support
and other services.
|
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water and
heat meters; diaphragm, turbine and rotary gas meters; one-way and
two-way electricity prepayment systems, including smart key, keypad and
smart card; two-way gas prepayment systems using smart card; AMR and AMI
data collection technologies; installation, implementation, maintenance
support and other managed services.
|
Segment
Information
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
160,096 |
|
|
$ |
142,706 |
|
|
$ |
474,956 |
|
|
$ |
426,374 |
|
Actaris
|
|
|
324,722 |
|
|
|
291,328 |
|
|
|
1,002,269 |
|
|
|
557,130 |
|
Total
Company
|
|
$ |
484,818 |
|
|
$ |
434,034 |
|
|
$ |
1,477,225 |
|
|
$ |
983,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
63,011 |
|
|
$ |
58,746 |
|
|
$ |
187,511 |
|
|
$ |
179,668 |
|
Actaris
|
|
|
99,949 |
|
|
|
86,064 |
|
|
|
314,218 |
|
|
|
151,181 |
|
Total
Company
|
|
$ |
162,960 |
|
|
$ |
144,810 |
|
|
$ |
501,729 |
|
|
$ |
330,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
19,774 |
|
|
$ |
17,244 |
|
|
$ |
57,687 |
|
|
$ |
50,718 |
|
Actaris
|
|
|
16,567 |
|
|
|
20,209 |
|
|
|
61,682 |
|
|
|
(12,019 |
) |
Corporate
unallocated
|
|
|
(11,008 |
) |
|
|
(8,451 |
) |
|
|
(30,571 |
) |
|
|
(23,758 |
) |
Total
Company
|
|
|
25,333 |
|
|
|
29,002 |
|
|
|
88,798 |
|
|
|
14,941 |
|
Total
other income (expense)
|
|
|
(15,963 |
) |
|
|
(35,140 |
) |
|
|
(62,459 |
) |
|
|
(48,318 |
) |
Income
(loss) before income taxes
|
|
$ |
9,370 |
|
|
$ |
(6,138 |
) |
|
$ |
26,339 |
|
|
$ |
(33,377 |
) |
No
single customer represented more than 10% of total Company revenues for the
three and nine months ended September 30, 2008. One customer accounted for 12%
of Itron North America revenues for the nine months ended September 30, 2008. No
single customer represented more than 10% of Itron North America revenues for
the three months ended September 30, 2008. No single customer accounted for more
than 10% of the Actaris operating segment revenues for the three and nine months
ended September 30, 2008.
No
single customer represented more than 10% of total Company revenues or of
operating segment revenues for the three and nine months ended September 30,
2007.
Revenues
by region were as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Revenues
by region
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$ |
232,979 |
|
|
$ |
214,684 |
|
|
$ |
722,415 |
|
|
$ |
403,134 |
|
United
States and Canada
|
|
|
161,262 |
|
|
|
148,856 |
|
|
|
488,298 |
|
|
|
433,751 |
|
Other
|
|
|
90,577 |
|
|
|
70,494 |
|
|
|
266,512 |
|
|
|
146,619 |
|
Total
revenues
|
|
$ |
484,818 |
|
|
$ |
434,034 |
|
|
$ |
1,477,225 |
|
|
$ |
983,504 |
|
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.
The
Actaris acquisition on April 18, 2007, consisted primarily of international
entities, which are considered non-guarantor subsidiaries of our subordinated
notes and convertible notes.
Condensed
Consolidating Statement of Operations
|
|
Three
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor
Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
155,224 |
|
|
$ |
18,639 |
|
|
$ |
319,800 |
|
|
$ |
(8,845 |
) |
|
$ |
484,818 |
|
Cost
of revenues
|
|
|
94,151 |
|
|
|
15,366 |
|
|
|
221,186 |
|
|
|
(8,845 |
) |
|
|
321,858 |
|
Gross
profit
|
|
|
61,073 |
|
|
|
3,273 |
|
|
|
98,614 |
|
|
|
- |
|
|
|
162,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
13,541 |
|
|
|
2,464 |
|
|
|
25,358 |
|
|
|
- |
|
|
|
41,363 |
|
Product
development
|
|
|
18,724 |
|
|
|
920 |
|
|
|
12,137 |
|
|
|
- |
|
|
|
31,781 |
|
General
and administrative
|
|
|
14,618 |
|
|
|
754 |
|
|
|
18,716 |
|
|
|
- |
|
|
|
34,088 |
|
Amortization
of intangible assets
|
|
|
5,661 |
|
|
|
- |
|
|
|
24,734 |
|
|
|
- |
|
|
|
30,395 |
|
Total
operating expenses
|
|
|
52,544 |
|
|
|
4,138 |
|
|
|
80,945 |
|
|
|
- |
|
|
|
137,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
8,529 |
|
|
|
(865 |
) |
|
|
17,669 |
|
|
|
- |
|
|
|
25,333 |
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
31,529 |
|
|
|
(17 |
) |
|
|
1,720 |
|
|
|
(31,270 |
) |
|
|
1,962 |
|
Interest
expense
|
|
|
(17,516 |
) |
|
|
(31 |
) |
|
|
(31,367 |
) |
|
|
31,270 |
|
|
|
(17,644 |
) |
Other
income (expense), net
|
|
|
693 |
|
|
|
91 |
|
|
|
(1,065 |
) |
|
|
- |
|
|
|
(281 |
) |
Total
other income (expense)
|
|
|
14,706 |
|
|
|
43 |
|
|
|
(30,712 |
) |
|
|
- |
|
|
|
(15,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
23,235 |
|
|
|
(822 |
) |
|
|
(13,043 |
) |
|
|
- |
|
|
|
9,370 |
|
Income
tax (provision) benefit
|
|
|
(4,349 |
) |
|
|
1,356 |
|
|
|
1,298 |
|
|
|
- |
|
|
|
(1,695 |
) |
Equity
in losses of guarantor and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries, net
|
|
|
(11,211 |
) |
|
|
(19 |
) |
|
|
- |
|
|
|
11,230 |
|
|
|
- |
|
Net
income (loss)
|
|
$ |
7,675 |
|
|
$ |
515 |
|
|
$ |
(11,745 |
) |
|
$ |
11,230 |
|
|
$ |
7,675 |
|
Condensed
Consolidating Statement of Operations
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor
Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
141,031 |
|
|
$ |
15,081 |
|
|
$ |
286,960 |
|
|
$ |
(9,038 |
) |
|
$ |
434,034 |
|
Cost
of revenues
|
|
|
84,674 |
|
|
|
12,045 |
|
|
|
201,492 |
|
|
|
(8,987 |
) |
|
|
289,224 |
|
Gross
profit
|
|
|
56,357 |
|
|
|
3,036 |
|
|
|
85,468 |
|
|
|
(51 |
) |
|
|
144,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
11,715 |
|
|
|
1,738 |
|
|
|
22,224 |
|
|
|
- |
|
|
|
35,677 |
|
Product
development
|
|
|
16,844 |
|
|
|
591 |
|
|
|
9,111 |
|
|
|
(51 |
) |
|
|
26,495 |
|
General
and administrative
|
|
|
12,798 |
|
|
|
998 |
|
|
|
13,707 |
|
|
|
- |
|
|
|
27,503 |
|
Amortization
of intangible assets
|
|
|
6,636 |
|
|
|
- |
|
|
|
19,228 |
|
|
|
- |
|
|
|
25,864 |
|
In-process
research and development
|
|
|
- |
|
|
|
- |
|
|
|
269 |
|
|
|
- |
|
|
|
269 |
|
Total
operating expenses
|
|
|
47,993 |
|
|
|
3,327 |
|
|
|
64,539 |
|
|
|
(51 |
) |
|
|
115,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
8,364 |
|
|
|
(291 |
) |
|
|
20,929 |
|
|
|
- |
|
|
|
29,002 |
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
30,462 |
|
|
|
(34 |
) |
|
|
2,156 |
|
|
|
(31,999 |
) |
|
|
585 |
|
Interest
expense
|
|
|
(32,648 |
) |
|
|
(3,276 |
) |
|
|
(30,927 |
) |
|
|
31,999 |
|
|
|
(34,852 |
) |
Other
income (expense), net
|
|
|
1,640 |
|
|
|
(488 |
) |
|
|
(2,025 |
) |
|
|
- |
|
|
|
(873 |
) |
Total
other income (expense)
|
|
|
(546 |
) |
|
|
(3,798 |
) |
|
|
(30,796 |
) |
|
|
- |
|
|
|
(35,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
7,818 |
|
|
|
(4,089 |
) |
|
|
(9,867 |
) |
|
|
- |
|
|
|
(6,138 |
) |
Income
tax benefit (provision)
|
|
|
3,995 |
|
|
|
783 |
|
|
|
(2,086 |
) |
|
|
- |
|
|
|
2,692 |
|
Equity
in (losses) earnings of guarantor and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries, net
|
|
|
(15,259 |
) |
|
|
745 |
|
|
|
- |
|
|
|
14,514 |
|
|
|
- |
|
Net
loss
|
|
$ |
(3,446 |
) |
|
$ |
(2,561 |
) |
|
$ |
(11,953 |
) |
|
$ |
14,514 |
|
|
$ |
(3,446 |
) |
Condensed
Consolidating Statement of Operations
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor
Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
459,504 |
|
|
$ |
60,240 |
|
|
$ |
985,562 |
|
|
$ |
(28,081 |
) |
|
$ |
1,477,225 |
|
Cost
of revenues
|
|
|
279,154 |
|
|
|
46,499 |
|
|
|
677,864 |
|
|
|
(28,021 |
) |
|
|
975,496 |
|
Gross
profit
|
|
|
180,350 |
|
|
|
13,741 |
|
|
|
307,698 |
|
|
|
(60 |
) |
|
|
501,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
40,770 |
|
|
|
6,766 |
|
|
|
79,998 |
|
|
|
- |
|
|
|
127,534 |
|
Product
development
|
|
|
56,135 |
|
|
|
2,519 |
|
|
|
33,689 |
|
|
|
(60 |
) |
|
|
92,283 |
|
General
and administrative
|
|
|
41,272 |
|
|
|
1,982 |
|
|
|
56,746 |
|
|
|
- |
|
|
|
100,000 |
|
Amortization
of intangible assets
|
|
|
16,987 |
|
|
|
- |
|
|
|
76,127 |
|
|
|
- |
|
|
|
93,114 |
|
Total
operating expenses
|
|
|
155,164 |
|
|
|
11,267 |
|
|
|
246,560 |
|
|
|
(60 |
) |
|
|
412,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
25,186 |
|
|
|
2,474 |
|
|
|
61,138 |
|
|
|
- |
|
|
|
88,798 |
|
Otr
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
94,417 |
|
|
|
14 |
|
|
|
3,896 |
|
|
|
(93,481 |
) |
|
|
4,846 |
|
Interest
expense
|
|
|
(64,836 |
) |
|
|
(120 |
) |
|
|
(93,892 |
) |
|
|
93,481 |
|
|
|
(65,367 |
) |
Other
income (expense), net
|
|
|
2,190 |
|
|
|
(733 |
) |
|
|
(3,395 |
) |
|
|
- |
|
|
|
(1,938 |
) |
Total
other income (expense)
|
|
|
31,771 |
|
|
|
(839 |
) |
|
|
(93,391 |
) |
|
|
- |
|
|
|
(62,459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
56,957 |
|
|
|
1,635 |
|
|
|
(32,253 |
) |
|
|
- |
|
|
|
26,339 |
|
Income
tax (provision) benefit
|
|
|
(2,001 |
) |
|
|
1,600 |
|
|
|
(2,185 |
) |
|
|
- |
|
|
|
(2,586 |
) |
Equity
in (losses) earnings of guarantor and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries, net
|
|
|
(31,203 |
) |
|
|
534 |
|
|
|
- |
|
|
|
30,669 |
|
|
|
- |
|
Net
income (loss)
|
|
$ |
23,753 |
|
|
$ |
3,769 |
|
|
$ |
(34,438 |
) |
|
$ |
30,669 |
|
|
$ |
23,753 |
|
Condensed
Consolidating Statement of Operations
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor
Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
422,370 |
|
|
$ |
29,616 |
|
|
$ |
561,929 |
|
|
$ |
(30,411 |
) |
|
$ |
983,504 |
|
Cost
of revenues
|
|
|
249,668 |
|
|
|
23,301 |
|
|
|
409,939 |
|
|
|
(30,253 |
) |
|
|
652,655 |
|
Gross
profit
|
|
|
172,702 |
|
|
|
6,315 |
|
|
|
151,990 |
|
|
|
(158 |
) |
|
|
330,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
37,427 |
|
|
|
3,187 |
|
|
|
44,376 |
|
|
|
- |
|
|
|
84,990 |
|
Product
development
|
|
|
49,997 |
|
|
|
1,031 |
|
|
|
16,957 |
|
|
|
(148 |
) |
|
|
67,837 |
|
General
and administrative
|
|
|
39,733 |
|
|
|
1,806 |
|
|
|
27,595 |
|
|
|
- |
|
|
|
69,134 |
|
Amortization
of intangible assets
|
|
|
19,900 |
|
|
|
- |
|
|
|
38,227 |
|
|
|
- |
|
|
|
58,127 |
|
In-process
research and development
|
|
|
- |
|
|
|
- |
|
|
|
35,820 |
|
|
|
- |
|
|
|
35,820 |
|
Total
operating expenses
|
|
|
147,057 |
|
|
|
6,024 |
|
|
|
162,975 |
|
|
|
(148 |
) |
|
|
315,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
25,645 |
|
|
|
291 |
|
|
|
(10,985 |
) |
|
|
(10 |
) |
|
|
14,941 |
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
62,095 |
|
|
|
10 |
|
|
|
3,191 |
|
|
|
(56,406 |
) |
|
|
8,890 |
|
Interest
expense
|
|
|
(59,361 |
) |
|
|
(5,522 |
) |
|
|
(54,809 |
) |
|
|
56,416 |
|
|
|
(63,276 |
) |
Other
income (expense), net
|
|
|
9,468 |
|
|
|
(408 |
) |
|
|
(2,992 |
) |
|
|
- |
|
|
|
6,068 |
|
Total
other income (expense)
|
|
|
12,202 |
|
|
|
(5,920 |
) |
|
|
(54,610 |
) |
|
|
10 |
|
|
|
(48,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
37,847 |
|
|
|
(5,629 |
) |
|
|
(65,595 |
) |
|
|
- |
|
|
|
(33,377 |
) |
Income
tax benefit
|
|
|
5,045 |
|
|
|
652 |
|
|
|
7,534 |
|
|
|
- |
|
|
|
13,231 |
|
Equity
in losses of guarantor and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries, net
|
|
|
(63,038 |
) |
|
|
(1,829 |
) |
|
|
- |
|
|
|
64,867 |
|
|
|
- |
|
Net
loss
|
|
$ |
(20,146 |
) |
|
$ |
(6,806 |
) |
|
$ |
(58,061 |
) |
|
$ |
64,867 |
|
|
$ |
(20,146 |
) |
Condensed
Consolidating Balance Sheet
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor
Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
63,995 |
|
|
$ |
5,752 |
|
|
$ |
77,644 |
|
|
$ |
- |
|
|
$ |
147,391 |
|
Accounts
receivable, net
|
|
|
86,540 |
|
|
|
9,301 |
|
|
|
243,467 |
|
|
|
- |
|
|
|
339,308 |
|
Intercompany
accounts receivable
|
|
|
12,558 |
|
|
|
573 |
|
|
|
5,210 |
|
|
|
(18,341 |
) |
|
|
- |
|
Inventories
|
|
|
50,573 |
|
|
|
7,527 |
|
|
|
131,118 |
|
|
|
(994 |
) |
|
|
188,224 |
|
Deferred
income taxes, net
|
|
|
(3,512 |
) |
|
|
4,580 |
|
|
|
7,103 |
|
|
|
- |
|
|
|
8,171 |
|
Other
|
|
|
18,629 |
|
|
|
174 |
|
|
|
41,824 |
|
|
|
- |
|
|
|
60,627 |
|
Intercompany
other
|
|
|
3,874 |
|
|
|
15 |
|
|
|
6,313 |
|
|
|
(10,202 |
) |
|
|
- |
|
Total
current assets
|
|
|
232,657 |
|
|
|
27,922 |
|
|
|
512,679 |
|
|
|
(29,537 |
) |
|
|
743,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
94,556 |
|
|
|
12,372 |
|
|
|
210,670 |
|
|
|
- |
|
|
|
317,598 |
|
Prepaid
debt fees
|
|
|
14,142 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14,142 |
|
Deferred
income taxes, net
|
|
|
85,435 |
|
|
|
- |
|
|
|
32,725 |
|
|
|
- |
|
|
|
118,160 |
|
Other
|
|
|
2,516 |
|
|
|
113 |
|
|
|
13,845 |
|
|
|
- |
|
|
|
16,474 |
|
Intangible
assets, net
|
|
|
60,032 |
|
|
|
- |
|
|
|
465,368 |
|
|
|
- |
|
|
|
525,400 |
|
Goodwill
|
|
|
113,846 |
|
|
|
9,926 |
|
|
|
1,193,132 |
|
|
|
- |
|
|
|
1,316,904 |
|
Investment
in subsidiaries
|
|
|
98,532 |
|
|
|
72,031 |
|
|
|
(65,716 |
) |
|
|
(104,847 |
) |
|
|
- |
|
Intercompany
notes receivable
|
|
|
1,752,659 |
|
|
|
- |
|
|
|
2,612 |
|
|
|
(1,755,271 |
) |
|
|
- |
|
Total
assets
|
|
$ |
2,454,375 |
|
|
$ |
122,364 |
|
|
$ |
2,365,315 |
|
|
$ |
(1,889,655 |
) |
|
$ |
3,052,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
43,768 |
|
|
$ |
5,975 |
|
|
$ |
168,011 |
|
|
$ |
- |
|
|
$ |
217,754 |
|
Accrued
expenses
|
|
|
7,406 |
|
|
|
189 |
|
|
|
52,142 |
|
|
|
- |
|
|
|
59,737 |
|
Intercompany
accounts payable
|
|
|
2,873 |
|
|
|
4,424 |
|
|
|
11,044 |
|
|
|
(18,341 |
) |
|
|
- |
|
Wages
and benefits payable
|
|
|
30,256 |
|
|
|
2,255 |
|
|
|
53,666 |
|
|
|
- |
|
|
|
86,177 |
|
Taxes
payable
|
|
|
1,448 |
|
|
|
528 |
|
|
|
22,095 |
|
|
|
- |
|
|
|
24,071 |
|
Current
portion of long-term debt
|
|
|
355,944 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
355,944 |
|
Current
portion of warranty
|
|
|
9,208 |
|
|
|
149 |
|
|
|
16,554 |
|
|
|
- |
|
|
|
25,911 |
|
Deferred
income taxes, net
|
|
|
1 |
|
|
|
- |
|
|
|
2,941 |
|
|
|
- |
|
|
|
2,942 |
|
Short-term
intercompany advances
|
|
|
4,999 |
|
|
|
4,693 |
|
|
|
510 |
|
|
|
(10,202 |
) |
|
|
- |
|
Unearned
revenue
|
|
|
20,170 |
|
|
|
269 |
|
|
|
5,332 |
|
|
|
- |
|
|
|
25,771 |
|
Total
current liabilities
|
|
|
476,073 |
|
|
|
18,482 |
|
|
|
332,295 |
|
|
|
(28,543 |
) |
|
|
798,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
848,918 |
|
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
848,917 |
|
Warranty
|
|
|
11,191 |
|
|
|
124 |
|
|
|
3,374 |
|
|
|
- |
|
|
|
14,689 |
|
Pension
plan benefits
|
|
|
- |
|
|
|
- |
|
|
|
61,869 |
|
|
|
- |
|
|
|
61,869 |
|
Intercompany
notes payable
|
|
|
1,399 |
|
|
|
1,211 |
|
|
|
1,752,661 |
|
|
|
(1,755,271 |
) |
|
|
- |
|
Deferred
income taxes, net
|
|
|
1 |
|
|
|
(283 |
) |
|
|
170,423 |
|
|
|
- |
|
|
|
170,141 |
|
Other
obligations
|
|
|
9,806 |
|
|
|
36 |
|
|
|
41,647 |
|
|
|
- |
|
|
|
51,489 |
|
Total
liabilities
|
|
|
1,347,388 |
|
|
|
19,570 |
|
|
|
2,362,268 |
|
|
|
(1,783,814 |
) |
|
|
1,945,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock
|
|
|
945,886 |
|
|
|
98,547 |
|
|
|
99,961 |
|
|
|
(198,508 |
) |
|
|
945,886 |
|
Accumulated
other comprehensive income, net
|
|
|
115,116 |
|
|
|
6,396 |
|
|
|
12,397 |
|
|
|
(18,793 |
) |
|
|
115,116 |
|
Retained
earnings (accumulated deficit)
|
|
|
45,985 |
|
|
|
(2,149 |
) |
|
|
(109,311 |
) |
|
|
111,460 |
|
|
|
45,985 |
|
Total
shareholders' equity
|
|
|
1,106,987 |
|
|
|
102,794 |
|
|
|
3,047 |
|
|
|
(105,841 |
) |
|
|
1,106,987 |
|
Total
liabilities and shareholders' equity
|
|
$ |
2,454,375 |
|
|
$ |
122,364 |
|
|
$ |
2,365,315 |
|
|
$ |
(1,889,655 |
) |
|
$ |
3,052,399 |
|
Condensed
Consolidating Balance Sheet
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor
Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
27,937 |
|
|
$ |
1,664 |
|
|
$ |
62,387 |
|
|
$ |
- |
|
|
$ |
91,988 |
|
Accounts
receivable, net
|
|
|
95,908 |
|
|
|
7,151 |
|
|
|
235,959 |
|
|
|
- |
|
|
|
339,018 |
|
Intercompany
accounts receivable
|
|
|
15,359 |
|
|
|
25 |
|
|
|
5,855 |
|
|
|
(21,239 |
) |
|
|
- |
|
Inventories
|
|
|
50,049 |
|
|
|
6,584 |
|
|
|
113,804 |
|
|
|
(1,199 |
) |
|
|
169,238 |
|
Deferred
income taxes, net
|
|
|
5,528 |
|
|
|
1,294 |
|
|
|
3,911 |
|
|
|
- |
|
|
|
10,733 |
|
Other
|
|
|
13,322 |
|
|
|
17 |
|
|
|
29,120 |
|
|
|
- |
|
|
|
42,459 |
|
Intercompany
other
|
|
|
7,729 |
|
|
|
7,800 |
|
|
|
19,365 |
|
|
|
(34,894 |
) |
|
|
- |
|
Total
current assets
|
|
|
215,832 |
|
|
|
24,535 |
|
|
|
470,401 |
|
|
|
(57,332 |
) |
|
|
653,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
85,036 |
|
|
|
12,543 |
|
|
|
225,424 |
|
|
|
- |
|
|
|
323,003 |
|
Prepaid
debt fees
|
|
|
21,616 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21,616 |
|
Deferred
income taxes, net
|
|
|
85,963 |
|
|
|
1,275 |
|
|
|
(11,995 |
) |
|
|
- |
|
|
|
75,243 |
|
Other
|
|
|
1,762 |
|
|
|
15 |
|
|
|
13,458 |
|
|
|
- |
|
|
|
15,235 |
|
Intangible
assets, net
|
|
|
77,017 |
|
|
|
- |
|
|
|
618,883 |
|
|
|
- |
|
|
|
695,900 |
|
Goodwill
|
|
|
113,846 |
|
|
|
10,001 |
|
|
|
1,142,286 |
|
|
|
- |
|
|
|
1,266,133 |
|
Investment
in subsidiaries
|
|
|
118,733 |
|
|
|
71,943 |
|
|
|
(66,192 |
) |
|
|
(124,484 |
) |
|
|
- |
|
Intercompany
notes receivable
|
|
|
1,764,792 |
|
|
|
3,282 |
|
|
|
8,656 |
|
|
|
(1,776,730 |
) |
|
|
- |
|
Total
assets
|
|
$ |
2,484,597 |
|
|
$ |
123,594 |
|
|
$ |
2,400,921 |
|
|
$ |
(1,958,546 |
) |
|
$ |
3,050,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
39,701 |
|
|
$ |
4,336 |
|
|
$ |
154,960 |
|
|
$ |
- |
|
|
$ |
198,997 |
|
Accrued
expenses
|
|
|
7,124 |
|
|
|
546 |
|
|
|
49,605 |
|
|
|
- |
|
|
|
57,275 |
|
Intercompany
accounts payable
|
|
|
4,258 |
|
|
|
1,842 |
|
|
|
15,139 |
|
|
|
(21,239 |
) |
|
|
- |
|
Wages
and benefits payable
|
|
|
17,419 |
|
|
|
1,750 |
|
|
|
51,317 |
|
|
|
- |
|
|
|
70,486 |
|
Taxes
payable
|
|
|
1,335 |
|
|
|
(158 |
) |
|
|
16,316 |
|
|
|
- |
|
|
|
17,493 |
|
Current
portion of long-term debt
|
|
|
11,980 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,980 |
|
Current
portion of warranty
|
|
|
8,411 |
|
|
|
151 |
|
|
|
12,715 |
|
|
|
- |
|
|
|
21,277 |
|
Deferred
income taxes, net
|
|
|
- |
|
|
|
- |
|
|
|
5,437 |
|
|
|
- |
|
|
|
5,437 |
|
Short-term
intercompany advances
|
|
|
12,807 |
|
|
|
14,782 |
|
|
|
7,305 |
|
|
|
(34,894 |
) |
|
|
- |
|
Unearned
revenue
|
|
|
15,120 |
|
|
|
- |
|
|
|
5,792 |
|
|
|
- |
|
|
|
20,912 |
|
Total
current liabilities
|
|
|
118,155 |
|
|
|
23,249 |
|
|
|
318,586 |
|
|
|
(56,133 |
) |
|
|
403,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,578,563 |
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
|
|
1,578,561 |
|
Warranty
|
|
|
10,104 |
|
|
|
100 |
|
|
|
1,360 |
|
|
|
- |
|
|
|
11,564 |
|
Pension
plan benefits
|
|
|
1 |
|
|
|
- |
|
|
|
60,622 |
|
|
|
- |
|
|
|
60,623 |
|
Intercompany
notes payable
|
|
|
1,474 |
|
|
|
7,153 |
|
|
|
1,768,103 |
|
|
|
(1,776,730 |
) |
|
|
- |
|
Deferred
income taxes, net
|
|
|
962 |
|
|
|
- |
|
|
|
172,538 |
|
|
|
- |
|
|
|
173,500 |
|
Other
obligations
|
|
|
16,536 |
|
|
|
25 |
|
|
|
47,098 |
|
|
|
- |
|
|
|
63,659 |
|
Total
liabilities
|
|
|
1,725,795 |
|
|
|
30,527 |
|
|
|
2,368,305 |
|
|
|
(1,832,863 |
) |
|
|
2,291,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock
|
|
|
609,902 |
|
|
|
90,437 |
|
|
|
97,021 |
|
|
|
(187,458 |
) |
|
|
609,902 |
|
Accumulated
other comprehensive income, net
|
|
|
126,668 |
|
|
|
8,548 |
|
|
|
10,468 |
|
|
|
(19,016 |
) |
|
|
126,668 |
|
Retained
earnings (accumulated deficit)
|
|
|
22,232 |
|
|
|
(5,918 |
) |
|
|
(74,873 |
) |
|
|
80,791 |
|
|
|
22,232 |
|
Total
shareholders' equity
|
|
|
758,802 |
|
|
|
93,067 |
|
|
|
32,616 |
|
|
|
(125,683 |
) |
|
|
758,802 |
|
Total
liabilities and shareholders' equity
|
|
$ |
2,484,597 |
|
|
$ |
123,594 |
|
|
$ |
2,400,921 |
|
|
$ |
(1,958,546 |
) |
|
$ |
3,050,566 |
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor
Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
23,753 |
|
|
$ |
3,769 |
|
|
$ |
(34,438 |
) |
|
$ |
30,669 |
|
|
$ |
23,753 |
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
30,551 |
|
|
|
1,658 |
|
|
|
101,086 |
|
|
|
- |
|
|
|
133,295 |
|
Stock-based
compensation
|
|
|
12,560 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,560 |
|
Amortization
of prepaid debt fees
|
|
|
7,665 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,665 |
|
Deferred
income taxes, net
|
|
|
1,534 |
|
|
|
(3,023 |
) |
|
|
(25,984 |
) |
|
|
- |
|
|
|
(27,473 |
) |
Equity
in (earnings) losses of guarantor and non-guarantor subsidiaries,
net
|
|
|
31,203 |
|
|
|
(534 |
) |
|
|
- |
|
|
|
(30,669 |
) |
|
|
- |
|
Other,
net
|
|
|
595 |
|
|
|
46 |
|
|
|
(405 |
) |
|
|
- |
|
|
|
236 |
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
9,368 |
|
|
|
(2,150 |
) |
|
|
(5,384 |
) |
|
|
- |
|
|
|
1,834 |
|
Inventories
|
|
|
(729 |
) |
|
|
(943 |
) |
|
|
(17,428 |
) |
|
|
- |
|
|
|
(19,100 |
) |
Trade
payables, accrued expenses and taxes payable
|
|
|
3,019 |
|
|
|
1,868 |
|
|
|
10,486 |
|
|
|
- |
|
|
|
15,373 |
|
Wages
and benefits payable
|
|
|
12,837 |
|
|
|
505 |
|
|
|
2,207 |
|
|
|
- |
|
|
|
15,549 |
|
Unearned
revenue
|
|
|
5,480 |
|
|
|
271 |
|
|
|
(412 |
) |
|
|
- |
|
|
|
5,339 |
|
Warranty
|
|
|
1,884 |
|
|
|
22 |
|
|
|
(1,803 |
) |
|
|
- |
|
|
|
103 |
|
Effect
of foreign exchange rate changes
|
|
|
- |
|
|
|
- |
|
|
|
(2,214 |
) |
|
|
- |
|
|
|
(2,214 |
) |
Intercompany
transactions, net
|
|
|
(1,759 |
) |
|
|
5,209 |
|
|
|
(3,450 |
) |
|
|
- |
|
|
|
- |
|
Other,
net
|
|
|
(2,392 |
) |
|
|
(246 |
) |
|
|
(8,058 |
) |
|
|
- |
|
|
|
(10,696 |
) |
Net
cash provided by operating activities
|
|
|
135,569 |
|
|
|
6,452 |
|
|
|
14,203 |
|
|
|
- |
|
|
|
156,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of property, plant and equipment
|
|
|
(22,439 |
) |
|
|
(1,434 |
) |
|
|
(17,549 |
) |
|
|
- |
|
|
|
(41,422 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(95 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(95 |
) |
Cash
transferred to parent
|
|
|
- |
|
|
|
7,806 |
|
|
|
- |
|
|
|
(7,806 |
) |
|
|
- |
|
Cash
transferred to guarantor subsidiaries
|
|
|
- |
|
|
|
- |
|
|
|
7,806 |
|
|
|
(7,806 |
) |
|
|
- |
|
Cash
transferred to non-guarantor subsidiaries
|
|
|
4,197 |
|
|
|
- |
|
|
|
- |
|
|
|
(4,197 |
) |
|
|
- |
|
Intercompany
notes, net
|
|
|
(1,232 |
) |
|
|
3,282 |
|
|
|
6,008 |
|
|
|
(8,058 |
) |
|
|
- |
|
Other,
net
|
|
|
(10,808 |
) |
|
|
1,721 |
|
|
|
10,467 |
|
|
|
- |
|
|
|
1,380 |
|
Net
cash (used in) provided by investing activities
|
|
|
(30,377 |
) |
|
|
11,375 |
|
|
|
6,732 |
|
|
|
(27,867 |
) |
|
|
(40,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on debt
|
|
|
(384,426 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(384,426 |
) |
Issuance
of common stock
|
|
|
323,424 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
323,424 |
|
Prepaid
debt fees
|
|
|
(207 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(207 |
) |
Cash
received from parent
|
|
|
- |
|
|
|
- |
|
|
|
(4,197 |
) |
|
|
4,197 |
|
|
|
- |
|
Cash
received from guarantor subsidiaries
|
|
|
(7,806 |
) |
|
|
- |
|
|
|
- |
|
|
|
7,806 |
|
|
|
- |
|
Cash
received from non-guarantor subsidiaries
|
|
|
- |
|
|
|
(7,806 |
) |
|
|
- |
|
|
|
7,806 |
|
|
|
- |
|
Intercompany
notes payable
|
|
|
(75 |
) |
|
|
(5,933 |
) |
|
|
(2,050 |
) |
|
|
8,058 |
|
|
|
- |
|
Other,
net
|
|
|
(44 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(44 |
) |
Net
cash used in financing activities
|
|
|
(69,134 |
) |
|
|
(13,739 |
) |
|
|
(6,247 |
) |
|
|
27,867 |
|
|
|
(61,253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
- |
|
|
|
- |
|
|
|
569 |
|
|
|
- |
|
|
|
569 |
|
Increase
in cash and cash equivalents
|
|
|
36,058 |
|
|
|
4,088 |
|
|
|
15,257 |
|
|
|
- |
|
|
|
55,403 |
|
Cash
and cash equivalents at beginning of period
|
|
|
27,937 |
|
|
|
1,664 |
|
|
|
62,387 |
|
|
|
- |
|
|
|
91,988 |
|
Cash
and cash equivalents at end of period
|
|
$ |
63,995 |
|
|
$ |
5,752 |
|
|
$ |
77,644 |
|
|
$ |
- |
|
|
$ |
147,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
2,989 |
|
|
$ |
160 |
|
|
$ |
2,133 |
|
|
$ |
- |
|
|
$ |
5,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
137 |
|
|
$ |
- |
|
|
$ |
16,562 |
|
|
$ |
- |
|
|
$ |
16,699 |
|
Interest,
net of amounts capitalized
|
|
|
57,668 |
|
|
|
- |
|
|
|
527 |
|
|
|
- |
|
|
|
58,195 |
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor
Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(20,146 |
) |
|
$ |
(6,806 |
) |
|
$ |
(58,061 |
) |
|
$ |
64,867 |
|
|
$ |
(20,146 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
32,590 |
|
|
|
933 |
|
|
|
51,806 |
|
|
|
- |
|
|
|
85,329 |
|
In-process
research and development
|
|
|
- |
|
|
|
- |
|
|
|
35,820 |
|
|
|
- |
|
|
|
35,820 |
|
Employee
stock plans income tax benefits
|
|
|
2,020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,020 |
|
Stock-based
compensation
|
|
|
8,998 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,998 |
|
Amortization
of prepaid debt fees
|
|
|
11,804 |
|
|
|
230 |
|
|
|
- |
|
|
|
- |
|
|
|
12,034 |
|
Deferred
income taxes, net
|
|
|
(11,660 |
) |
|
|
(2,110 |
) |
|
|
(33,648 |
) |
|
|
- |
|
|
|
(47,418 |
) |
Equity
in (earnings) losses of guarantor and non-guarantor subsidiaries,
net
|
|
|
62,803 |
|
|
|
1,829 |
|
|
|
- |
|
|
|
(64,632 |
) |
|
|
- |
|
Other,
net
|
|
|
(3,759 |
) |
|
|
3,038 |
|
|
|
12 |
|
|
|
(235 |
) |
|
|
(944 |
) |
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
613 |
|
|
|
(1,538 |
) |
|
|
(14,306 |
) |
|
|
- |
|
|
|
(15,231 |
) |
Inventories
|
|
|
(6,557 |
) |
|
|
1,025 |
|
|
|
8,333 |
|
|
|
- |
|
|
|
2,801 |
|
Trade
payables, accrued expenses and taxes payable
|
|
|
5,049 |
|
|
|
1,235 |
|
|
|
17,915 |
|
|
|
- |
|
|
|
24,199 |
|
Wages
and benefits payable
|
|
|
(4,354 |
) |
|
|
149 |
|
|
|
(2,305 |
) |
|
|
- |
|
|
|
(6,510 |
) |
Unearned
revenue
|
|
|
(5,586 |
) |
|
|
- |
|
|
|
(2,804 |
) |
|
|
- |
|
|
|
(8,390 |
) |
Warranty
|
|
|
(164 |
) |
|
|
75 |
|
|
|
853 |
|
|
|
- |
|
|
|
764 |
|
Intercompany
transactions, net
|
|
|
(4,198 |
) |
|
|
3,302 |
|
|
|
896 |
|
|
|
- |
|
|
|
- |
|
Effect
of foreign exchange rate changes
|
|
|
- |
|
|
|
- |
|
|
|
11,307 |
|
|
|
- |
|
|
|
11,307 |
|
Other,
net
|
|
|
4,745 |
|
|
|
469 |
|
|
|
(193 |
) |
|
|
- |
|
|
|
5,021 |
|
Net
cash provided by operating activities
|
|
|
72,198 |
|
|
|
1,831 |
|
|
|
15,625 |
|
|
|
- |
|
|
|
89,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from the maturities of investments, held to maturity
|
|
|
35,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
35,000 |
|
Acquisitions
of property, plant and equipment
|
|
|
(17,443 |
) |
|
|
6,124 |
|
|
|
(18,854 |
) |
|
|
- |
|
|
|
(30,173 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(1,716,138 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,716,138 |
) |
Cash
transferred to non-guarantor subsidiaries
|
|
|
(22,492 |
) |
|
|
- |
|
|
|
- |
|
|
|
22,492 |
|
|
|
- |
|
Intercompany
notes, net
|
|
|
(4,399 |
) |
|
|
- |
|
|
|
(47,878 |
) |
|
|
52,277 |
|
|
|
- |
|
Other,
net
|
|
|
(25,651 |
) |
|
|
(53,169 |
) |
|
|
78,873 |
|
|
|
- |
|
|
|
53 |
|
Net
cash (used in) provided by investing activities
|
|
|
(1,751,123 |
) |
|
|
(47,045 |
) |
|
|
12,141 |
|
|
|
74,769 |
|
|
|
(1,711,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
1,159,026 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
1,159,027 |
|
Payments
on debt
|
|
|
(37,278 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(37,278 |
) |
Issuance
of common stock
|
|
|
243,146 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
243,146 |
|
Prepaid
debt fees
|
|
|
(20,538 |
) |
|
|
(2,646 |
) |
|
|
1,175 |
|
|
|
- |
|
|
|
(22,009 |
) |
Cash
transferred from parent
|
|
|
- |
|
|
|
- |
|
|
|
22,492 |
|
|
|
(22,492 |
) |
|
|
- |
|
Intercompany
notes payable
|
|
|
272 |
|
|
|
47,606 |
|
|
|
4,399 |
|
|
|
(52,277 |
) |
|
|
- |
|
Other,
net
|
|
|
(1,541 |
) |
|
|
1,541 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
cash provided by financing activities
|
|
|
1,343,087 |
|
|
|
46,502 |
|
|
|
28,066 |
|
|
|
(74,769 |
) |
|
|
1,342,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
- |
|
|
|
- |
|
|
|
2,448 |
|
|
|
- |
|
|
|
2,448 |
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(335,838 |
) |
|
|
1,288 |
|
|
|
58,280 |
|
|
|
- |
|
|
|
(276,270 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
353,483 |
|
|
|
- |
|
|
|
7,922 |
|
|
|
- |
|
|
|
361,405 |
|
Cash
and cash equivalents at end of period
|
|
$ |
17,645 |
|
|
$ |
1,288 |
|
|
$ |
66,202 |
|
|
$ |
- |
|
|
$ |
85,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
364 |
|
|
$ |
- |
|
|
$ |
1,913 |
|
|
$ |
- |
|
|
$ |
2,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
2,703 |
|
|
$ |
- |
|
|
$ |
9,939 |
|
|
$ |
- |
|
|
$ |
12,642 |
|
Interest
|
|
|
46,804 |
|
|
|
3,012 |
|
|
|
633 |
|
|
|
- |
|
|
|
50,449 |
|
ITEM 2: Management’s Discussion and Analysis
of Financial Condition and Results of Operations
In
this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron” and the
“Company” refer to Itron, Inc.
The
following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and notes included in this
report and with our Annual Report on Form 10-K filed with the Securities and
Exchange Commission (SEC) on February 26, 2008.
Documents
we provide to the SEC are available free of charge under the Investor
Information section of our website at www.itron.com as soon as
practicable after they are filed with or furnished to the SEC. In addition,
these documents are available at the SEC’s website (http://www.sec.gov) and at the SEC’s
Headquarters at 100 F Street, NE, Washington, DC 20549, or by calling
1-800-SEC-0330.
Certain
Forward-Looking Statements
This
document contains forward-looking statements concerning our operations,
financial performance, revenues, earnings growth, estimated stock-based
compensation expense, pension liabilities, cost reduction programs and other
items. These statements reflect our current plans and expectations and are based
on information currently available as of the date of this Quarterly Report on
Form 10-Q. When we use the words “expect,” “intend,” “anticipate,” “believe,”
“plan,” “project,” “estimate,” “future,” “objective,” “may,” “will,” “will
continue” and similar expressions, they are intended to identify forward-looking
statements. Any statements that refer to expectations, projections or other
characterizations of future events or circumstances are also forward-looking
statements. Forward-looking statements rely on a number of assumptions and
estimates. These assumptions and estimates could be inaccurate and cause our
actual results to vary materially from expected results. Risks and uncertainties
include 1) the rate and timing of customer demand for our products, 2)
rescheduling or cancellations of current customer orders and commitments,
3) changes in estimated liabilities for product warranties or litigation,
4) our dependence on new product development and performance, 5) changes in
domestic and international laws and regulations, 6) current and future business
combinations, 7) changes in estimates for stock-based compensation or pension
costs, 8) changes in foreign currency exchange rates, 9) international business
risks, 10) availability of capital, 11) our customer’s or supplier’s access to
and cost of capital and 12) other factors. You should not solely rely on these
forward-looking statements as they are only valid as of the date of this
Quarterly Report on Form 10-Q. We do not have any obligation to publicly update
or revise any forward-looking statement in this document. For a more complete
description of these and other risks, see “Risk Factors” within Item 1A
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2007, which was filed with the SEC on February 26, 2008 and Item 1A included
in this Form 10-Q for material changes to our risk factors as of September 30,
2008.
Results
of Operations
We
derive the majority of our revenues from sales of products and services to
utilities. Revenues include hardware, software, post-sale maintenance and
professional services. Cost of revenues includes materials, direct labor,
warranty expense, other manufacturing spending, distribution and documentation
costs for software applications and labor and operating costs for professional
services.
Highlights
Our
financial results for the three and nine months ended September 30, 2008 reflect
both the operations of Itron North America and Actaris Metering Systems SA
(Actaris). Actaris was acquired on April 18, 2007; therefore our prior year 2007
operating results reflect Actaris’ operations only from the date of acquisition
through September 30, 2007 and a small portion of Itron North America’s
operations outside North America that were transferred to our Actaris operating
segment on January 1, 2008, resulting in a restatement of prior year
segment information for comparative purposes.
Highlights
for our quarter and nine months ended September 30, 2008 include:
·
|
quarterly
and nine month revenues of $485 million and $1.48
billion;
|
·
|
quarterly
and nine month diluted EPS of 21 cents and 68 cents per
share.
|
·
|
quarterly
bookings of $894 million
|
We
have continued to make additional repayments on our borrowings, which consisted
of $34.7 million during the three months ended September 30, 2008 and
$384.4 million in the nine months ended September 30, 2008. These
repayments were made with cash flows from operations and $311 million in net
proceeds from the sale of 3.4 million shares of our common stock, which was
completed in the second quarter of 2008. Cash and cash equivalents were $147.4
million at September 30, 2008.
The
contingent conversion threshold of our convertible senior subordinated notes
(convertible notes) was met at September 30, 2008; therefore, through the
fourth quarter of 2008, the notes can be converted at the option of the holder.
We believe it is unlikely that a significant portion of the convertible notes
will be converted because the market value of the convertible notes continues to
exceed the value that holders of the convertible notes would receive upon
conversion.
Total
Company Revenues, Gross Profit and Margin and Unit Shipments
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
|
(in
millions, except gross margin)
|
|
|
|
|
|
(in
millions, except gross margin)
|
|
|
|
|
Revenues
|
|
$ |
484.8 |
|
|
$ |
434.0 |
|
|
|
12%
|
|
|
$ |
1,477.2 |
|
|
$ |
983.5 |
|
|
|
50%
|
|
Gross
Profit
|
|
$ |
162.9 |
|
|
$ |
144.8 |
|
|
|
13%
|
|
|
$ |
501.7 |
|
|
$ |
330.9 |
|
|
|
52%
|
|
Gross
Margin
|
|
|
34 |
% |
|
|
33 |
% |
|
|
|
|
|
|
34 |
% |
|
|
34 |
% |
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Revenues
by region
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$ |
233.0 |
|
|
$ |
214.6 |
|
|
$ |
722.4 |
|
|
$ |
403.1 |
|
United
States and Canada
|
|
|
161.3 |
|
|
|
148.9 |
|
|
|
488.3 |
|
|
|
433.8 |
|
Other
|
|
|
90.5 |
|
|
|
70.5 |
|
|
|
266.5 |
|
|
|
146.6 |
|
Total
revenues
|
|
$ |
484.8 |
|
|
$ |
434.0 |
|
|
$ |
1,477.2 |
|
|
$ |
983.5 |
|
Revenues
Revenues
increased $50.8 million and $493.7 million for the three and nine months ended
September 30, 2008, compared with the same periods in 2007. Revenues for the
third quarter and first nine months of 2008 and the third quarter of 2007
include full periods of Actaris operations. The results for the nine months
ended September 30, 2007 included Actaris results from the date of acquisition
on April 18, 2007.
No
single customer represented more than 10% of total revenues for the three and
nine months ended September 30, 2008 and 2007. Our 10 largest
customers accounted for 16% of total revenues for the three and nine months
ended September 30, 2008. For the three and nine months ended September 30,
2007, our 10 largest customers accounted for 16% and 14% of total
revenues.
Gross
Margins
Gross
margin of 34% for the third quarter of 2008 was comparable with the third
quarter of 2007. For the nine months ended September 30, 2007, total company
gross profit was reduced by $16 million due to business combination accounting
rules, which require valuing the inventory on hand at the acquisition date at
the selling price, less costs to complete plus a reasonable profit allowance for
the selling effort. Without the impact of purchase accounting, gross margin for
the same period in 2008 decreased two percentage points due to the full period
of Actaris operations that have a higher proportion of meter-only sales, which
are at lower margins, and the decrease in Itron North America gross
margins.
Unit
Shipments
Meters
can be sold with and without automated meter reading (AMR). In addition, AMR can
be sold separately from meters. Depending on customers’ preferences, we
incorporate other vendors’ AMR technology in our meters. Meter and AMR shipments
are as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Total
meters (with or without AMR)
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
- Itron North America
|
|
|
1,245 |
|
|
|
1,150 |
|
|
|
3,870 |
|
|
|
3,475 |
|
Electricity
- Actaris
|
|
|
2,060 |
|
|
|
1,825 |
|
|
|
5,760 |
|
|
|
3,450 |
|
Gas
|
|
|
1,045 |
|
|
|
900 |
|
|
|
3,020 |
|
|
|
1,675 |
|
Water
|
|
|
1,960 |
|
|
|
1,775 |
|
|
|
6,560 |
|
|
|
3,625 |
|
Total
meters
|
|
|
6,310 |
|
|
|
5,650 |
|
|
|
19,210 |
|
|
|
12,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMR
units (Itron and Actaris)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meters
with AMR
|
|
|
1,170 |
|
|
|
850 |
|
|
|
3,870 |
|
|
|
2,250 |
|
AMR
modules
|
|
|
1,250 |
|
|
|
1,150 |
|
|
|
3,550 |
|
|
|
3,500 |
|
Total
AMR units
|
|
|
2,420 |
|
|
|
2,000 |
|
|
|
7,420 |
|
|
|
5,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meters
with other vendors' AMR
|
|
|
220 |
|
|
|
225 |
|
|
|
620 |
|
|
|
650 |
|
Operating
Segment Results
The
Actaris operating segment consists primarily of the operations from the Actaris
acquisition, which occurred on April 18, 2007, as well as other Itron operations
not located in North America that are now included in the Actaris segment. The
operations of the Actaris operating segment are primarily located in Europe,
with approximately 5% of operations located in the United States and
approximately 20% located throughout the rest of the world. The remainder of our
operations, primarily located in the United States and Canada, has been combined
into a single operating segment called Itron North America. As we continue to
integrate the Actaris acquisition, certain refinements of our segments may
occur. 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 the
segment reporting structure after the April 18, 2007 Actaris acquisition and our
January 1, 2008 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. Assets and liabilities are not used in
our measurement of segment performance and, therefore, are not allocated to our
segments. Substantially all depreciation expense is allocated to our
segments.
Segment
Products
Itron
North America
|
Electronic
electricity meters with and without AMR; gas and water AMR modules;
handheld, mobile and network AMR data collection technologies; advanced
metering infrastructure (AMI) technologies; software, installation,
implementation, consulting, maintenance support and other
services.
|
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water and
heat meters; diaphragm, turbine and rotary gas meters; one-way and two-way
electricity prepayment systems, including smart key, keypad and smart
card; two-way gas prepayment systems using smart card; AMR 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 segment.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
160.1 |
|
|
$ |
142.7 |
|
|
|
12%
|
|
|
$ |
475.0 |
|
|
$ |
426.4 |
|
|
|
11%
|
|
|
|
|
|
|
|
Actaris
|
|
|
324.7 |
|
|
|
291.3 |
|
|
|
11%
|
|
|
|
1,002.2 |
|
|
|
557.1 |
|
|
|
80%
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
484.8 |
|
|
$ |
434.0 |
|
|
|
12%
|
|
|
$ |
1,477.2 |
|
|
$ |
983.5 |
|
|
|
50%
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
Segment
Gross Profit and Margin
|
|
(in
millions)
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
Itron
North America
|
|
$ |
63.0 |
|
|
|
39%
|
|
|
$ |
58.7 |
|
|
|
41%
|
|
|
$ |
187.5 |
|
|
|
39%
|
|
|
$ |
179.7 |
|
|
|
42%
|
|
Actaris
|
|
|
99.9 |
|
|
|
31%
|
|
|
|
86.1 |
|
|
|
30%
|
|
|
|
314.2 |
|
|
|
31%
|
|
|
|
151.2 |
|
|
|
27%
|
|
Total
gross profit and margin
|
|
$ |
162.9 |
|
|
|
34%
|
|
|
$ |
144.8 |
|
|
|
33%
|
|
|
$ |
501.7 |
|
|
|
34%
|
|
|
$ |
330.9 |
|
|
|
34%
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
|
Segment
Operating Income (Loss)
|
and
Operating Margin
|
|
(in
millions)
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
Itron
North America
|
|
$ |
19.8 |
|
|
|
12%
|
|
|
$ |
17.2 |
|
|
|
12%
|
|
|
$ |
57.7 |
|
|
|
12%
|
|
|
$ |
50.7 |
|
|
|
12%
|
|
Actaris
|
|
|
16.5 |
|
|
|
5%
|
|
|
|
20.2 |
|
|
|
7%
|
|
|
|
61.7 |
|
|
|
6%
|
|
|
|
(12.0 |
) |
|
|
(2%)
|
|
Corporate
unallocated
|
|
|
(11.0 |
) |
|
|
|
|
|
|
(8.4 |
) |
|
|
|
|
|
|
(30.6 |
) |
|
|
|
|
|
|
(23.8 |
) |
|
|
|
|
Total
Company
|
|
$ |
25.3 |
|
|
|
5%
|
|
|
$ |
29.0 |
|
|
|
7%
|
|
|
$ |
88.8 |
|
|
|
6%
|
|
|
$ |
14.9 |
|
|
|
2%
|
|
Itron North
America: Revenues increased $17.4 million, or 12%, in the third quarter
of 2008, compared with the third quarter of 2007, due to increased sales for
most of our products and services, with the largest increase in standalone AMR
gas modules. For the nine months ended September 30, 2008, revenues increased
$48.6 million, or 11%, compared with the same period in 2007, due to an 11%
increase in meter shipments, increased revenues for standalone water AMR
shipments and implementation and installation services. Meters equipped with our
AMR technology continue to increase and represented 61% and 62% of meters sold
in the three and nine months ended September 30, 2008, compared with 35% and 40%
for the same periods in 2007. Gross margin decreased two and three percentage
points in the three and nine months ended September 30, 2008, compared with the
same periods in 2007, due to product mix, including lower commercial and
industrial (C&I) meter sales and costs associated with the first version of
our AMI meters.
One
customer represented 12% of the Itron North America operating segment revenues
in the nine months ended September 30, 2008. No single customer accounted
for more than 10% of the Itron North America operating segment revenues for the
three months ended September 30, 2008 and three and nine months ended September
30, 2007.
Itron
North America operating expenses as a percentage of revenues were 27% for the
three and nine months ended September 30, 2008, compared with 29% and 30% for
the same periods in 2007. This decrease is primarily the result of higher
revenue in 2008 and decreasing amortization of intangible assets.
Actaris: Actaris was acquired
on April 18, 2007. As we continue to integrate the Actaris acquisition and align
our operations, certain operations not located in North America that were
previously reported within the Itron North America operating segment were moved
to the Actaris operating segment on January 1, 2008. Therefore, historical
segment information has been restated to conform to the January 1, 2008
reporting presentation.
Actaris
revenues for the three months ended September 30, 2008 increased $33.4 million,
or 11%, compared with the same period in 2007, as a result of favorable foreign
exchange rates and a 13% increase in meter shipments. Actaris revenues for the
nine months ended September 30, 2008 increased $445.1 million since they
included a full period of results, whereas revenue for the 2007 period only
included results of operations from the date of acquisition on April 18, 2007.
Business line revenues for Actaris were as follows:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Electricity
|
|
|
38%
|
|
|
42%
|
|
|
38%
|
|
|
43%
|
Gas
|
|
|
34%
|
|
|
31%
|
|
|
32%
|
|
|
30%
|
Water
|
|
|
28%
|
|
|
27%
|
|
|
30%
|
|
|
27%
|
Gross
margin for the third quarter of 2008 was one percentage point higher at 31%,
compared with the same period in 2007, due to higher manufacturing efficiencies,
increased volumes and product mix. Gross margins increased for the nine months
ended September 30, 2008, compared with 2007, primarily as a result of a 3%
percentage point reduction in 2007 due to the revaluation of inventory on hand
at the acquisition date in accordance with business combination accounting
rules, which increased cost of sales in the nine months ended September 30,
2007. Gross margins were also favorably impacted for the nine months ended
September 30, 2008 by product mix and lower indirect cost of sales.
No
single customer represented more than 10% of Actaris operating segment revenues
for the three and nine months ended September 30, 2008 or 2007.
Operating
expenses for Actaris were $83.4 million and $252.5 million for the three and
nine months ended September 30, 2008, or 26% and 25% of revenues, respectively.
Operating expenses for the three and nine months ended September 30, 2007 were
$65.9 million and $163.2 million, or 23% and 29% of revenues, respectively.
Operating expenses have increased in all areas due to higher revenues, increased
emphasis on product development, higher amortization of intangible asset
amortization expense and foreign exchange fluctuations. Operating expenses for
the nine months ended September 30, 2007 included results from the date of
acquisition as well as $35.8 million of in-process research and development
(IPR&D) costs recorded in accordance with business combination accounting
rules.
Corporate unallocated:
Operating expenses not directly associated with an operating segment are
classified as “Corporate unallocated.” Corporate unallocated expenses increased
$2.6 million and $6.8 million for the three and nine months ended September 30,
2008, compared with the same periods last year, due to increased compensation
and financial integration expenses. As a percentage of total Company revenues,
corporate unallocated expenses were 2% for the three and nine months ended
September 30, 2008 and 2007.
Bookings
and Backlog of Orders
Bookings
for a reported period represent customer contracts and purchase orders received
during the quarter 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
twelve months. Bookings and backlog exclude maintenance-related activity.
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)
|
|
September
30, 2008
|
|
$ |
894 |
|
|
$ |
1,012 |
|
|
$ |
436 |
|
June
30, 2008
|
|
|
432 |
|
|
|
609 |
|
|
|
493 |
|
March
31, 2008
|
|
|
484 |
|
|
|
683 |
|
|
|
552 |
|
December
31, 2007
|
|
|
448 |
|
|
|
659 |
|
|
|
501 |
|
September
30, 2007
|
|
|
440 |
|
|
|
668 |
|
|
|
494 |
|
June
30, 2007
|
|
|
413 |
|
|
|
656 |
|
|
|
491 |
|
March
31, 2007
|
|
|
118 |
|
|
|
376 |
|
|
|
225 |
|
As
we enter into AMI agreements to deploy our OpenWay® meter and communications
system, we do not include these contracts in bookings and backlog until
regulatory approvals are received or other certain conditions are met. At
September 30, 2008, we had four signed AMI contracts. In September 2008,
the California Public Utility Commission approved Southern California Edison’s
(SCE) AMI project. As a result of this regulatory approval, which was a
significant condition for the SCE contract, bookings and backlog for the third
quarter of 2008 include $470 million related to our AMI contract with
SCE.
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues.
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
2008
|
|
%
of Revenue
|
|
2007
|
|
%
of Revenue
|
|
2008
|
|
%
of Revenue
|
|
2007
|
|
%
of Revenue
|
|
(in
millions)
|
|
|
|
(in
millions)
|
|
|
|
(in
millions)
|
|
|
|
(in
millions)
|
|
|
Sales
and marketing
|
$ |
41.3 |
|
|
9%
|
|
$ |
35.7 |
|
|
8%
|
|
$ |
127.5 |
|
|
9%
|
|
$ |
85.0 |
|
|
8%
|
Product
development
|
|
31.8 |
|
|
6%
|
|
|
26.5 |
|
|
6%
|
|
|
92.3 |
|
|
6%
|
|
|
67.8 |
|
|
6%
|
General
and administrative
|
|
34.1 |
|
|
7%
|
|
|
27.5 |
|
|
7%
|
|
|
100.0 |
|
|
7%
|
|
|
69.2 |
|
|
7%
|
Amortization
of intangible assets
|
|
30.4 |
|
|
6%
|
|
|
25.8 |
|
|
6%
|
|
|
93.1 |
|
|
6%
|
|
|
58.1 |
|
|
6%
|
In-process
research and development |
|
-
|
|
|
-
|
|
|
0.3 |
|
|
-
|
|
|
- |
|
|
-
|
|
|
35.8 |
|
|
4%
|
Total
operating expenses
|
$ |
137.6 |
|
|
28%
|
|
$ |
115.8 |
|
|
27%
|
|
$ |
412.9 |
|
|
28%
|
|
$ |
315.9 |
|
|
32%
|
As
a percentage of revenues, operating expenses in most areas have remained
constant period over period, except for IPR&D, which was directly related to
the Actaris acquisition. Amortization of intangible assets has increased $4.6
million and $35.0 million for the three and nine months ended September 30,
2008, compared with 2007, as a result of amortization based on the estimated
discounted cash flows as well as a full nine months of expense in 2008, compared
with 2007. General and administrative expenses for the three and nine months
ended September 30, 2008 have been impacted by increased compensation and
financial integration expenses. We are devoting significant resources and time
to comply with the internal control over financial reporting requirements of the
Sarbanes-Oxley Act of 2002. We expect these costs to continue through
2008.
In-Process
Research and Development Expenses
Our
acquisition of Actaris resulted in $36 million of IPR&D expense in 2007,
consisting primarily of next generation technology. The IPR&D projects were
analyzed according to exclusivity, substance, economic benefit, incompleteness,
measurability and alternative future use. The primary projects are intended to
make key enhancements and improve functionality of our residential and C&I
meters. We value IPR&D using the income approach, which uses the present
value of the projected cash flows that are expected to be generated over the
next one to six years. The risk adjusted discount rate was 12 percent, which was
based on an industry composite of weighted average cost of capital, with certain
premiums for equity risk and size, and the uncertainty associated with the
completion of the development effort and subsequent commercialization. These
research and development projects are substantially complete at September 30,
2008.
Other
Income (Expense)
The
following table shows the components of other income (expense).
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Interest
income
|
|
$ |
1,962 |
|
|
$ |
585 |
|
|
$ |
4,846 |
|
|
$ |
8,890 |
|
Interest
expense
|
|
|
(15,864 |
) |
|
|
(25,631 |
) |
|
|
(57,700 |
) |
|
|
(51,242 |
) |
Amortization
of debt placement fees
|
|
|
(1,780 |
) |
|
|
(9,221 |
) |
|
|
(7,667 |
) |
|
|
(12,034 |
) |
Other
income (expense), net
|
|
|
(281 |
) |
|
|
(873 |
) |
|
|
(1,938 |
) |
|
|
6,068 |
|
Total
other income (expense)
|
|
$ |
(15,963 |
) |
|
$ |
(35,140 |
) |
|
$ |
(62,459 |
) |
|
$ |
(48,318 |
) |
Interest income: For the
three months ended September 30, 2008, our average monthly cash and cash
equivalent balance was $146 million, compared with $87 million for the same
period last year. For the nine months ended September 30, 2008, our monthly
average cash and cash equivalent balance was $118 million, compared with $194
million for the same period last year. Our cash balances have fluctuated period
over period due to the timing of proceeds from the sale of common stock and
repayments on borrowings. In May 2008, we sold 3.4 million shares of common
stock, with net proceeds of approximately $311 million, partially offset by our
repayment of borrowings in the same quarter. In August 2006, we issued $345
million 2.5% convertible notes and in February 2007 sold 4.1 million shares of
common stock resulting in net proceeds of $225.2 million, which were used to
fund a portion of the Actaris acquisition on April 18, 2007.
Interest expense: Interest
expense for the three months ended September 30, 2008 decreased $9.8 million,
compared with the same period last year due to repayments on borrowings. Average
daily debt outstanding for the third quarter of 2008 was $1.3 billion, compared
with $1.6 billion for the third quarter of 2007. Interest expense increased for
the nine months ended September 30, 2008, compared with the same period in 2007,
as a result of a full period of interest expense from the $1.2 billion credit
facility used to finance the Actaris acquisition on April 18, 2007. Average
daily debt outstanding for the nine months ended September 30, 2008 was $1.4
billion, compared with $1.2 billion for the same period in 2007.
Amortization of debt placement
fees: Amortization of debt placement fees decreased for the three and
nine months ended September 30, 2008, compared with the same periods last year,
due to the write-off of $6.6 million associated with our convertible notes in
September 2007. The debt placement fees associated with our convertible notes
were amortized through the date of the earliest put or conversion option;
therefore, at September 30, 2007, when our convertible notes exceeded the
conversion threshold, the remaining debt placement fees were written-off. In
addition, when debt is repaid early, the portion of unamortized prepaid debt
fees related to the early principal repayment is written-off and included in
interest expense.
Other income (expense): Other
income (expense) consists primarily of foreign currency gains and losses, which
can vary from period to period, as well as other non-operating items or
transactions. In the three and nine months ended September 30, 2008 and the
three months ended September 30, 2007, other expense, net resulted primarily
from net foreign currency losses due to balances denominated in a currency other
than the reporting entity’s functional currency. For the nine months ended
September 30, 2007, other income, net included $3.0 million in unrealized gains
on our euro denominated borrowings, which are now designated as a hedge of a net
investment in foreign operations, $2.8 million in net realized gains from
foreign currency hedge range forward contracts that were settled as part of the
Actaris acquisition and a $1.0 million realized gain from an overnight euro rate
change prior to the acquisition of Actaris.
Income
Taxes
Our
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, IPR&D, research
credits, state income taxes and adjustments to valuation allowances, among other
items.
Our
tax provision (benefit) as a percentage of income (loss) before tax was 18% and
10% for the three and nine months ended September 30, 2008, compared
with 44% and 40% for the same periods in 2007. Our tax provisions for the
three and nine months ended September 30, 2008 are lower than those in 2007 as
2008 reflects a benefit associated with lower effective tax rates on
international earnings. We made an election under Internal Revenue Code Section
338 with respect to the Actaris acquisition, which resulted in a reduced global
effective tax rate. Additionally, our reduced international tax liability
reflects the benefit of international interest expense deductions.
Unrecognized
tax benefits in accordance with FASB Interpretation (FIN) 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109, were $35.4 million and $34.8
million at September 30, 2008 and December 31, 2007, respectively. We
classify interest expense and penalties related to unrecognized tax benefits and
interest income on tax overpayments as components of income tax expense. During
the three and nine months ended September 30, 2008, we recognized a benefit of
$305,000 and expense of $725,000, respectively, in interest and penalties. At
September 30, 2007, we had accrued approximately $7.9 million in interest and
penalties, which was primarily the result of the acquisition of Actaris on April
18, 2007. At September 30, 2008 and December 31, 2007, accrued interest was $3.1
million and $2.7 million and accrued penalties were $1.4 million and
$2.2 million, respectively. Unrecognized tax benefits that would affect our
tax provision, at September 30, 2008 and December 31, 2007 were $9.7 million and
$8.4 million, respectively. At September 30, 2008, we expect to pay $4.8 million
in income tax obligations 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.
On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 was signed
into law, extending the research tax credit for qualified research expenses
incurred throughout 2008 and 2009. In the fourth quarter of 2008, we expect to
record approximately $2.5 million in federal and state research credits, which
will reduce our tax provision.
Financial
Condition
Cash
Flow Information:
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Operating
activities
|
|
$ |
156.2 |
|
|
$ |
89.7 |
|
Investing
activities
|
|
|
(40.1 |
) |
|
|
(1,711.3 |
) |
Financing
activities
|
|
|
(61.3 |
) |
|
|
1,342.9 |
|
Effect
of exchange rates on cash and cash equivalents
|
|
|
0.6 |
|
|
|
2.4 |
|
Increase
(decrease) in cash and cash equivalents
|
|
$ |
55.4 |
|
|
$ |
(276.3 |
) |
Cash
and cash equivalents increased from $92.0 million at December 31, 2007 to $147.4
million at September 30, 2008. The increase in cash was the result of
strong cash flows from operations and the $311 million stock offering in May
2008, partially offset by $384 million in debt repayments.
Operating activities: Cash
provided by operating activities increased by $66.5 million in the first nine
months of 2008, compared with the same period in 2007. Non-cash charges for 2008
consist primarily of depreciation on property, plant and equipment, amortization
of intangible assets, deferred income taxes, stock-based compensation and
amortization of prepaid debt fees. Non-cash charges in 2007 also include
IPR&D related to the Actaris acquisition. Changes in our operating assets
and liabilities during the nine months ended September 30, 2008 consisted
primarily of increased payables, partially offset by increased inventories.
Changes in our operating assets and liabilities during the nine months ended
September 30, 2007 consisted primarily of increased payables, partially offset
by increased accounts receivable. The changes in our operating assets and
liabilities can fluctuate as a result of the timing of customer orders and
revenues.
Investing activities: The
acquisition of property, plant and equipment increased $11.2 million in the
first nine months of 2008 compared with the same period in 2007, consisting
primarily of manufacturing equipment for production capacity expansion and our
new AMI product line. Cash paid for the acquisition of Actaris in
2007 was approximately $1.7 billion. In the first nine months of 2007,
$35.0 million in short-term investments matured with the proceeds used to
partially fund the Actaris acquisition.
Financing activities: We
financed the April 18, 2007 acquisition of Actaris with proceeds from a new
credit facility and sale of common stock. Proceeds from the credit facility were
$1.2 billion in the first nine months of 2007, partially offset by debt
placement fees of $22.0 million. Net proceeds from the sale of common stock were
$311 million in 2008 and $225.3 million in 2007. The net proceeds from the 2008
sale of common stock were primarily used to repay a portion of our
non-convertible debt. Cash generated from the exercise of stock-based awards was
$12.4 million during the first nine months of 2008, compared with
$17.8 million for the same period in 2007. During the first nine months of
2008, we repaid $384.4 million of the credit facility, compared with $37.3
million for the same period in 2007.
Effect of exchange rates on cash and
cash equivalents: The effect of exchange rates on the cash balances of
currencies held in foreign denominations (primarily euros) for the nine months
ended September 30, 2008 was an increase of $569,000 compared with $2.4 million
for the same period in 2007.
Off-balance
sheet arrangements:
We
had no off-balance sheet financing agreements or guarantees at September 30,
2008 and December 31, 2007 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. Operating cash flows can fluctuate and are sensitive to
many factors including changes in working capital and the timing and magnitude
of capital expenditures.
Credit
Facility
The
Actaris acquisition in 2007 was financed in part by a $1.2 billion credit
facility. The credit facility, dated April 18, 2007, was comprised of a
$605.1 million first lien U.S. dollar denominated term loan; a
€335 million first lien euro denominated term loan; a £50 million
first lien pound sterling denominated term loan (collectively the term loans);
and a $115 million multicurrency revolving line-of-credit (revolver). Our
loan balances denominated in currencies other than the U.S. dollar fluctuate due
to currency exchange rates. Interest rates on the credit facility are based
on the respective borrowing’s denominated London Inter Bank Offering
Rate (LIBOR) or the Wells Fargo Bank, National Association’s prime rate, plus an
additional margin subject to factors including our consolidated leverage ratio.
In accordance with our Credit Agreement, when our consolidated leverage ratio
decreases below 4.5 times, the applicable margin decreases from 2.0% to 1.75%.
On August 5, 2008, upon completion of our quarterly compliance certificate, our
applicable margin decreased to 1.75%. Scheduled amortization of principal
payments is 1% per year (0.25% quarterly) with an excess cash flow provision for
additional annual principal repayment requirements. Maturities of the term loans
and multicurrency revolver are seven years and six years from the date of
issuance, respectively. Prepaid debt fees are amortized using the effective
interest method through the term loans’ earliest maturity date, as defined by
the credit agreement. The credit facility is secured by substantially all of the
assets of Itron, Inc., our operating subsidiaries, except our international
subsidiaries, and contains covenants, which contain certain financial ratios and
place restrictions on the incurrence of debt, the payment of dividends, certain
investments, incurrence of capital expenditures above a set limit and mergers.
We were in compliance with these debt covenants at September 30, 2008. At
September 30, 2008, there were no borrowings outstanding under the revolver and
$49.1 million was utilized by outstanding standby letters of credit resulting in
$65.9 million being available for additional borrowings.
We
repaid $34.7 million in borrowings during the three months ended September 30,
2008 and $384.4 million in borrowings during the nine months ended
September 30, 2008. These repayments were made with cash flows from operations
and $311 million in net proceeds from the completed sale of 3.4 million
shares of our common stock.
Senior
Subordinated Notes
In
May, 2004, we issued $125 million of 7.75% senior subordinated notes
(subordinated notes) due in 2012. 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 September 30, 2008. From time to time, we may
reacquire a portion of the subordinated notes on the open market, resulting in
the early extinguishment of debt. During 2008, we reacquired
$14.4 million in principal amount of the subordinated notes. The
balance of the subordinated notes, including accreted discount, was $110.2
million at September 30, 2008. Some or all of the
subordinated notes may be redeemed at our option at any time on or after
May 15, 2008 at a redemption price of 103.875% of their 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 of $4.3 million are required every six
months, in February and August. The convertible notes 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. 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 our Quarterly Report on Form 10-Q):
o
|
during
any fiscal quarter commencing after September 30, 2006, if the closing
sale price per share of our common stock exceeds $78.19, which is 120% of
the conversion price of $65.16, for at least 20 trading days in the 30
consecutive trading day period ending on the last trading day of the
preceding fiscal quarter;
|
o
|
between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
|
o
|
during
the five business days after any five consecutive trading day period in
which the trading price of the convertible notes for each day was less
than 98% of the conversion value of the convertible
notes;
|
o
|
if
the convertible notes are called for
redemption;
|
o
|
if
a fundamental change occurs; or
|
o
|
upon
the occurrence of defined corporate
events.
|
The
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 principal amount will be less than
the $1,000 principal amount and will be settled in cash.
Upon
conversion, the principal amount of the convertible notes will be settled in
cash and, at our option, the remaining conversion obligation (stock price in
excess of conversion price) may be settled in cash, shares or a combination. The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved. We
may redeem some or all of the convertible notes for cash, on or after
August 1, 2011, for a price equal to 100% of the principal amount plus accrued
and unpaid interest.
The
convertible notes are unsecured and subordinate to all of our existing and
future senior secured borrowings. The convertible notes are unconditionally
guaranteed, joint and severally, by all of our operating subsidiaries, except
for our international subsidiaries, all of which are wholly owned. The
convertible notes contain covenants, which place restrictions on the incurrence
of debt and certain mergers. We were in compliance with these debt covenants at
September 30, 2008.
At
September 30, 2008, the contingent conversion threshold was exceeded as the
closing sale price per share of our common stock exceeded $78.19, which is 120%
of the conversion price of $65.16, for at least 20 trading days in the 30
consecutive trading day period ended September 30, 2008. As a result, the notes
are convertible at the option of the holder through the fourth quarter of 2008,
and accordingly, the aggregate principal amount of the convertible notes at
September 30, 2008 is included in the current portion of long-term debt. At
December 31, 2007, the contingent conversion threshold was not exceeded and,
therefore, the aggregate principal amount of the convertible notes is included
in long-term debt. We believe it is unlikely that a significant portion of the
convertible notes would be converted in the near-term because the market value
of the convertible notes exceeds the value that holders of the convertible notes
would receive upon conversion. As our stock price is subject to fluctuation, the
contingent conversion threshold may be exceeded during any quarter prior to July
2011, and the notes subject to conversion.
In May 2008, the Financial
Accounting Standards Board (FASB) issued FASB Staff Position (FSP) APB 14-1,
Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion, addressing convertible instruments that may be settled in
cash upon conversion. This FSP
is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008 and must be applied retrospectively to
all periods presented at the time of adoption. We will adopt the FSP on January
1, 2009. We expect the impact of the FSP to be material to our condensed
consolidated financial statements and are currently evaluating and quantifying
the impact on specific accounts and disclosures.
Other
Sources and Uses of Capital
We
are often required to obtain letters of credit or bonds in support of our
obligations for customer contracts. These letters of credit or bonds typically
provide a guarantee to the customer for future performance, which usually covers
the installation phase of a contract and may on occasion cover the operations
and maintenance phase of outsourcing contracts. In addition to the outstanding
standby letters of credit of $49.1 million issued under our credit facility’s
$115 million multicurrency revolver, our Actaris operating segment has a total
of $26.5 million of unsecured multicurrency revolving lines of credit with
various financial institutions with total outstanding standby letters of credit
of $5.9 million at September 30, 2008. Unsecured surety bonds in force were
$12.7 million and $13.8 million at September 30, 2008 and December 31,
2007, respectively. In the event any such bonds or letters of credit are called,
we would be obligated to reimburse the issuer of the letter of credit or bond;
however, we do not believe that any currently outstanding bonds or letters of
credit will be called.
Our
net deferred 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 tax assets resulted primarily from acquisitions. Based on
current projections, we expect to pay minimal U.S. federal and state taxes and
approximately $24.7 million in local and foreign taxes in
2008.
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans offering
death and disability, retirement and special termination benefits to employees
in Germany, France, Spain, Italy, Belgium, Chile, Portugal, Hungary and
Indonesia. These plans were assumed with the acquisition of Actaris on April 18,
2007. Our general funding policy for these qualified pension plans is to
contribute amounts at least sufficient to satisfy regulatory funding standards
of the respective countries for each plan. For 2008, we expect to contribute a
total of $500,000 to our defined benefit pension plans. Our expected
contribution assumes that actual plan asset returns are consistent with our
expected rate of return and that interest rates remain constant. For the three
and nine months ended September 30, 2008, we contributed approximately
$33,000 and $126,000, respectively, to the defined benefit pension
plans.
Working
capital, which represents current assets less current liabilities, was ($54.6)
million at September 30, 2008, compared with $249.6 million at December 31,
2007. The $304.2 million decrease in working capital resulted primarily from the
$345 million aggregate principal amount of convertible notes being
reclassified from long-term to current debt at September 30, 2008 as the
contingent conversion threshold was exceeded at September 30,
2008.
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 remainder of the year and into the foreseeable future, but offer no
assurances. Our liquidity could be affected by the stability of the energy and
water industries, competitive pressures, international risks, intellectual
property claims, capital market fluctuations and other factors described under
“Risk Factors” within Item 1A of Part 1 of our Annual Report on Form 10-K for
the fiscal year ended
December 31, 2007, which was filed with the SEC on February 26, 2008, as well as
in our “Quantitative and Qualitative Disclosures About Market Risk” within Item
3 of Part 1, included in this Quarterly Report on Form 10-Q.
Contingencies
We
are subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded and charged to operating expense when we determine that a loss is
probable and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. Legal contingencies at September 30, 2008 were not material to
our financial condition or results of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger. PT Berca claims that it had preemptive rights
in the joint venture and has sought to nullify the transaction in 2001 whereby
Schlumberger transferred its ownership interest in PT Mecoindo to an Actaris
subsidiary. The plaintiff also seeks to collect damages for the earnings it
otherwise would have earned had its alleged preemptive rights been observed. The
Indonesian courts have awarded 129.6 billion rupiahs ($13.8 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
Actaris. All of the parties have appealed the matter and it is currently pending
before the Indonesian Supreme Court. We intend to continue vigorously defending
our interest. In addition, Actaris has notified Schlumberger that it will seek
to have Schlumberger indemnify Actaris from any damages it may incur as a result
of this claim. In any event, we do not believe that an adverse outcome is likely
to have a material adverse impact to our financial condition or results of
operations.
In
March 2008, IP Co. LLC filed a complaint in the U.S. District Court for the
Eastern District of Texas against Itron, Inc., CenterPoint Energy and Eaton
Corp. alleging infringement of a patent owned by IP Co. LLC. The complaint
alleges that one U.S. patent, concerning wireless mesh networking systems that
optimize data sent across a general area, is being infringed by the defendants.
The complaint seeks unspecified damages as well as injunctive relief. We believe
these claims are without merit and we intend to vigorously defend our interests.
In any event, we do not believe an adverse outcome is likely nor do we believe
an adverse outcome will have a material adverse impact to our financial
condition or results of operations.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments. We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Critical
Accounting Policies
Revenue Recognition: The
majority of our revenues are recognized when products are shipped to or received
by a customer or when services are provided. For arrangements involving multiple
elements, we determine the estimated fair value of each element and then
allocate the total arrangement consideration among the separate elements based
on the relative fair value percentages. Revenues for each element are then
recognized based on the type of element, such as 1) when the products are
shipped, 2) services are delivered, 3) percentage-of-completion when
implementation services are essential to 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 for products or services for which cash has been received
from a customer but for which the criteria for revenue recognition has not been
met as of the balance sheet date. Unearned revenue relates to payments received
from customers in connection with product and service invoicing for which
revenue recognition criteria has not been met. Shipping and handling costs and
incidental expenses billed to customers are recorded as revenue, with the
associated cost charged to cost of revenues.
Warranty: We offer standard
warranties on our hardware products and large application software products. We
accrue the estimated cost of projected warranty claims based on historical and
projected product performance trends, business volume assumptions, supplier
information and other business and economic projections. Testing of new products
in the development stage helps identify and correct potential warranty issues
prior to manufacturing. Continuing quality control efforts during manufacturing
reduce our exposure to warranty claims. If our quality control efforts fail to
detect a fault in one of our products, we could experience an increase in
warranty claims. We track warranty claims to identify potential warranty trends.
If an unusual trend is noted, an additional warranty accrual may be assessed and
recorded when a failure event is probable and the cost can be reasonably
estimated. Management continually evaluates the sufficiency of the warranty
provisions and makes adjustments when necessary. The warranty allowances may
fluctuate due to changes in estimates for material, labor and other costs we may
incur to replace projected product failures, and we may incur additional
warranty and related expenses in the future with respect to new or established
products. 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.
Business Combinations: In
accordance with SFAS 141, Business Combinations, we
record the results of operations of an acquired business from the date of
acquisition. We make preliminary allocations of the purchase price to the assets
acquired and liabilities assumed based on estimated fair value assessments.
Until we finalize the fair values, we may have changes to the carrying values of
tangible and intangible assets, goodwill, commitments and contingencies,
liabilities, deferred taxes, uncertain tax positions and restructuring
activities. Amounts allocated to IPR&D are expensed in the period of
acquisition. Costs to complete the IPR&D are expensed in the subsequent
period as incurred. We may experience unforeseen problems in the development or
performance of the IPR&D, we may not meet our product development schedules
or we may not achieve market acceptance of these new products or
solutions.
Goodwill and Intangible
Assets: Goodwill and intangible assets result from our acquisitions. We
use estimates in determining the value assigned to goodwill and intangible
assets, including estimates of useful lives of intangible assets, discounted
future cash flows and fair values of the related operations. We test goodwill
for impairment each year as of October 1, under the guidance of SFAS 142, Goodwill and Other Intangible
Assets. Our Itron North America operating segment represents one
reporting unit, while our Actaris 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. Intangible
assets with a finite life are amortized over their estimated useful life based
on estimated discounted cash flows and are tested for impairment when events or
changes in circumstances indicate the carrying value may not be
recoverable.
Stock-Based Compensation: We
measure compensation cost for stock-based awards at fair value and recognize
compensation cost over the service period for awards expected to vest. We use
the Black-Scholes option-pricing model, which requires the input of assumptions,
including the estimated length of time employees will retain their vested stock
options before exercising them (expected term) and the estimated volatility of
our common stock’s price over the expected term. Furthermore, in calculating
compensation for these awards, we are also required to estimate the approximate
number of options that will be forfeited prior to completing their vesting
requirement (forfeitures). We consider many factors when estimating expected
forfeitures, including types of awards, employee class and historical
experience. To the extent actual results or updated estimates differ from our
current estimates, such amounts will be recorded as a cumulative adjustment in
the period estimates are revised.
Bonus and Profit Sharing: We
have employee bonus and profit sharing plans 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 estimated 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: We sponsor both funded and unfunded
non-U.S. defined benefit pension plans. FASB Statement 87, Employers'
Accounting for Pensions,
as amended by SFAS 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans, requires the assets
acquired and liabilities assumed in a business combination to include a
liability for the projected benefit obligation in excess of plan assets or an
asset for plan assets in excess of the projected benefit obligation. SFAS 158 also requires employers to
recognize the funded status of their defined benefit pension plans on their
consolidated balance sheet and recognize as a component of other comprehensive
income, net of tax, the actuarial gains or losses, prior service costs or
credits and transition assets or obligations, if any, that arise during the
period but are not recognized as components of net periodic benefit cost.
Our general funding policy
for these qualified pension plans is to contribute amounts at least sufficient
to satisfy regulatory funding standards of the respective countries for each
plan. For 2008, we expect to contribute a total of $500,000 to our defined
benefit pension plans. Our expected contribution assumes that actual plan asset
returns are consistent with our expected rate of return and that interest rates
remain constant. For the three and nine months ended September 30, 2008, we
contributed approximately $33,000 and $126,000, respectively, to the defined benefit pension
plans.
Income Taxes: We estimate
income taxes in each of the taxing jurisdictions in which we operate. Changes in
our effective tax rate are subject to several factors, including fluctuations in
operating results, new or revised tax legislation and accounting pronouncements,
changes in the level of business performed in domestic and international
jurisdictions, research credits, state income taxes and adjustments to
valuation allowances, among other items. Significant judgment is required in
determining our annual tax rate and in evaluating our tax positions. At the end
of each interim period, we make our best estimate of the effective tax rate
expected to be applicable for the full fiscal year and the impact of discrete
items, if any, and adjust the quarterly rate, as necessary. Income taxes are
accounted for in accordance with SFAS No. 109 Accounting for Income Taxes. We assess the
likelihood that deferred tax assets, which include net operating loss
carryforwards and temporary differences expected to be deductible in future
years, will be recoverable. The realization of our deferred tax asset related to
net operating loss carryforwards is supported by projections of future
profitability. If recovery of the deferred tax asset is not more likely than
not, we provide a valuation allowance based on estimates of future taxable
income in the respective taxing jurisdiction and the amount of deferred taxes
that are expected to be realizable. If future taxable income is different than
expected, we will adjust the valuation allowances through income tax expense in
future periods, creating variability in our calculated tax rates. We are also
subject to audit in multiple taxing jurisdictions in which we operate. Tax
liabilities are recorded based on estimates of additional taxes, which will be
due upon the conclusion of these audits. Estimates of these tax liabilities are
made based upon prior experience and are updated in light of changes in facts
and circumstances. Due to the uncertain and complex application of tax
regulations, it is possible that the ultimate resolution of audits may result in
liabilities, which could be different from these estimates. These audits can
involve complex issues, which may require an extended period of time to resolve.
We believe we have recorded adequate income tax provisions and FIN 48
reserves.
We
evaluate whether our tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements in accordance with FIN 48.
Under FIN 48, we recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained upon
examination by the taxing authorities based solely on the technical merits of
the position. The tax benefits recognized in the financial statements from such
a position should be measured based on the largest benefit that has a greater
than fifty percent likelihood of being realized upon ultimate settlement. We
classify interest expense and penalties related to unrecognized tax benefits and
interest income on tax overpayments as components of income tax expense. We
believe we have recorded adequate income tax provisions.
Legal Contingencies: We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, and related pronouncements. In accordance with
SFAS 5, a liability is recorded when we determine that a loss is probable
and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable.
Derivative Instruments: We
account for derivative instruments and hedging activities in accordance with
SFAS 133, as amended. All derivative instruments, whether designated in hedging
relationships or not, are recorded on the Condensed Consolidated Balance Sheets
at fair value as either assets or liabilities. The components and fair values of
our derivative instruments are determined using the fair value measurements of
significant other observable inputs (Level 2), as defined by SFAS 157, Fair Value Measurements. If
the derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged risk
are recognized in earnings. If the derivative is designated as a cash flow
hedge, the effective portions of changes in the fair value of the derivative are
recorded as a component of other comprehensive income and are recognized in
earnings when the hedged item affects earnings If the derivative is a net
investment hedge, the effective portion of any unrealized gain or loss is
reported in accumulated other comprehensive income as a net unrealized gain or
loss on derivative instruments. Ineffective portions of fair value changes or
derivative instruments that do not qualify for hedging activities are recognized
in other income (expense) in the Condensed Consolidated Statement of Operations.
We classify cash flows from our derivative programs as cash flows from operating
activities in the Condensed Consolidated Statements of Cash Flows. Derivatives
are not used for trading or speculative purposes. Counterparties to our currency
exchange and interest rate derivatives consist of major international financial
institutions. We monitor our positions and include the credit risk of our
counterparties when valuing our derivatives.
Foreign Exchange: Our
condensed consolidated financial statements are reported in U.S. dollars. Assets
and liabilities of international subsidiaries with a non-U.S. dollar functional
currency are translated to U.S. dollars at the exchange rates in effect on the
balance sheet date, or the last business day of the period, if applicable.
Revenues and expenses for these subsidiaries are translated to U.S. dollars
using an average rate for the relevant reporting period. Translation adjustments
resulting from this process are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity. Gains and losses that arise from
exchange rate fluctuations for balances that are not denominated in the
functional currency are included in the Condensed Consolidated Statements of
Operations. Currency gains and losses of intercompany balances deemed to be
long-term in nature or considered to be hedges of the net investment in
international subsidiaries are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity.
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS 141(R), Business Combinations, which
replaces SFAS 141. SFAS 141(R) retains the fundamental purchase method of
accounting for acquisitions, but requires a number of changes, including the way
assets and liabilities are recognized in purchase accounting. SFAS 141(R)
requires the recognition of assets acquired and liabilities assumed arising from
contingencies to be recorded at fair value on the acquisition date; that
IPR&D be capitalized as an intangible asset and amortized over its estimated
useful life; and that acquisition-related costs are expensed as incurred. SFAS
141(R) also requires that restructuring costs generally be expensed in periods
subsequent to the acquisition date and that changes in accounting for deferred
tax asset valuation allowances and acquired income tax uncertainties after the
measurement period be recognized as a component of provision for taxes. SFAS
141(R) is effective for business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. We will apply SFAS 141(R) to any acquisition after the
date of adoption.
In
February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No.
157, which delays the effective date of SFAS 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years (see Financial Statements, Note 1). We are currently
assessing the impact of SFAS 157 for nonfinancial assets and nonfinancial
liabilities on our condensed consolidated financial statements.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, which
changes the accounting and reporting for minority interests. Minority interests
will be re-characterized as noncontrolling interests and will be reported as a
component of equity, separate from the parent’s equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by us in the first quarter of 2009. SFAS
160 is currently not expected to have a material effect on our condensed
consolidated financial statements.
In
March 2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement 133,
which requires enhanced disclosures about how and why derivative instruments are
used, how derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS 161 also requires the fair values of derivative
instruments and their gains and losses to be disclosed in a tabular format. SFAS
161 does not change how we record and account for derivative instruments. SFAS
161 is effective for fiscal years and interim periods beginning after November
15, 2008 and will be adopted by us in the first quarter of 2009.
In
May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion, addressing
convertible instruments that may be settled in cash upon conversion. This FSP
requires, among other things, the issuer to separately account for the liability
and equity components of the convertible instrument in a manner that reflects
the issuer’s non-convertible debt borrowing rate. This FSP is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008 and must be applied retrospectively to all periods
presented at the time of adoption. We will adopt the FSP on January 1,
2009. We expect the impact of the FSP to be material to our condensed
consolidated financial statements and are currently evaluating and quantifying
the impact on specific accounts and disclosures.
Item 3: Quantitative and Qualitative
Disclosures About Market Risk
In
the normal course of business, we are exposed to interest rate and foreign
currency exchange rate risks that could impact our financial position and
results of operations. As part of our risk management strategy, we use
derivative financial instruments to hedge certain foreign currency and interest
rate exposures. Our objective is to offset gains and losses resulting from these
exposures with losses and gains on the derivative contracts used to hedge them,
therefore reducing the impact of volatility on earnings or protecting fair
values of assets and liabilities. We use derivative contracts only to manage
existing underlying exposures. Accordingly, we do not use derivative contracts
for speculative purposes.
Interest
Rate Risk
The
table below provides information about our financial instruments that are
sensitive to changes in interest rates and the scheduled minimum repayment of
principal over the remaining lives of our debt at September 30, 2008. As a
result or our interest rate swaps, 85% of our borrowings are at fixed rates.
Weighted average variable rates in the table are based on implied forward rates
in the Wells Fargo swap yield curve as of October 1, 2008, our estimated
ratio of funded debt to EBITDA, which determines our rate margin, and a static
foreign exchange rate at September 30, 2008.
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Beyond
2012
|
|
Total
|
|
|
(in
millions)
|
|
Fixed
Rate Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
senior subordinated notes (1)
|
$ |
345.0 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
345.0 |
|
Interest
rate
|
|
2.50 |
% |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
subordinated notes (2)
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
110.6 |
|
$ |
- |
|
$ |
110.6 |
|
Interest
rate
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
7.75 |
% |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate Debt
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
dollar term loan
|
$ |
1.5 |
|
$ |
6.1 |
|
$ |
6.1 |
|
$ |
6.1 |
|
$ |
6.1 |
|
$ |
351.4 |
|
$ |
377.3 |
|
Average
interest rate
|
|
5.65 |
% |
|
5.82 |
% |
|
5.11 |
% |
|
5.40 |
% |
|
5.59 |
% |
|
5.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
term loan
|
$ |
1.2 |
|
$ |
4.9 |
|
$ |
4.9 |
|
$ |
4.9 |
|
$ |
4.9 |
|
$ |
351.6 |
|
$ |
372.4 |
|
Average
interest rate
|
|
6.89 |
% |
|
7.17 |
% |
|
6.36 |
% |
|
6.35 |
% |
|
6.40 |
% |
|
6.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap on euro term loan
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest rate (Pay)
|
|
6.59 |
% |
|
6.59 |
% |
|
6.59 |
% |
|
6.59 |
% |
|
6.59 |
% |
|
0.00 |
% |
|
|
|
Average
interest rate (Receive)
|
|
7.14 |
% |
|
7.42 |
% |
|
6.61 |
% |
|
6.60 |
% |
|
6.65 |
% |
|
0.00 |
% |
|
|
|
Net/Spread
|
|
0.55 |
% |
|
0.83 |
% |
|
0.02 |
% |
|
0.01 |
% |
|
0.06 |
% |
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap on USD term loan
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest rate (Pay)
|
|
3.01 |
% |
|
3.01 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
|
|
Average
interest rate (Receive)
|
|
3.90 |
% |
|
4.09 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
|
|
Net/Spread
|
|
0.89 |
% |
|
1.08 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
|
|
(1)
|
$345.0
million of 2.50% convertible notes due August 2026, with fixed interest
payments of $4.3 million due every six months, in February and August. On
September 30, 2008, the convertible notes exceeded the conversion
threshold. As a result, the notes are convertible at the option of the
holder through the fourth quarter of 2008, and accordingly, the aggregate
principal amount of the convertible notes is included in the current
portion of long-term debt (see Note
6).
|
(2)
|
The
$110.6 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% (see Note 6, Debt).
|
(3)
|
The
Actaris acquisition was financed in part by a $1.2 billion senior secured
credit facility, of which $750 million remains outstanding at September
30, 2008 due to prepayments (see Note 6, Debt).
|
(4)
|
Interest
rate swap to convert our €335 million euro denominated variable rate term
loan to a fixed-rate debt obligation at a rate of 6.59% for the term of
the loan, including expected prepayments. As a result of the expected
prepayments, the interest rate swap will terminate before the stated
maturity of the term loan. This variable-to-fixed interest rate swap is
considered a highly effective cash flow hedge (see Note 7, Derivative Financial
Instruments and Hedging
Activities).
|
(5)
|
Interest
rate swap to convert $200 million of our $377 million U.S. dollar
denominated term loan from a floating 1-month LIBOR interest rate, plus an
additional margin, to a fixed 3.01% interest rate, plus the additional
margin, for one year. This variable-to-fixed interest rate swap is
considered a highly effective cash flow hedge (see Note 7, Derivative Financial
Instruments and Hedging
Activities).
|
Based
on a sensitivity analysis as of September 30, 2008, we estimate that if market
interest rates average one percentage point higher in 2008, than in the table
above, our earnings before income taxes in 2008 would not be materially impacted
due to our interest rate swaps in place at September 30, 2008.
As
part of the acquisition of Actaris on April 18, 2007, we entered into a $1.2
billion credit facility, comprised of a $605.1 million first lien U.S.
dollar denominated term loan; a €335 million first lien euro denominated
term loan; a £50 million first lien pound sterling denominated term loan
(collectively the term loans); and a $115 million multicurrency revolving
line-of-credit (revolver). As of June 30, 2008, the pound sterling denominated
term loan had been repaid. Interest rates on the credit facility are based
on the respective borrowing’s denominated LIBOR rate (U.S. dollar or
euro) or the Wells Fargo Bank, National Association’s prime rate, plus an
additional margin subject to factors including our consolidated leverage ratio.
Scheduled amortization of principal payments is 1% per year (0.25% quarterly)
with an excess cash flow provision for additional annual principal repayment
requirements. Maturities of the term loans and multicurrency revolver are seven
years and six years from the date of issuance, respectively.
These
variable rate financial instruments are sensitive to changes in interest rates.
On June 30, 2008, we entered into a one-year interest rate swap to convert $200
million of our USD term loan, which had a remaining balance of $377 million at
September 30, 2008, from a floating 1-month LIBOR interest rate to a fixed 3.01%
interest rate. Our interest rate will continue to contain an additional margin
per the credit facility agreement. 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 other
comprehensive income 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 declines each
quarter in accordance with a contractual schedule. The notional amount of the
swap was $200 million and the fair value, recorded as a short-term liability,
was $349,000 at September 30, 2008. The amount of net gains expected to be
reclassified into earnings in the next nine months is approximately $1.9 million
based on the Wells Fargo swap yield curve as of October 1, 2008.
In
the third quarter of 2007, we entered into an interest rate swap to convert our
€335 million euro denominated variable rate term loan to a fixed-rate debt
obligation at a rate of 6.59% for the term of the debt, including expected
prepayments. 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 other comprehensive income 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 was $372 million (€255 million) and the fair
value, recorded as a long-term liability, was $113,000 at September 30, 2008.
The amount of net gains expected to be reclassified into earnings in the next
twelve months is approximately $2.5 million based on the Wells Fargo swap yield
curve as of October 1, 2008.
We
will monitor and assess our interest rate risk and may institute additional
interest rate swaps or other derivative instruments to manage interest rate
risk.
Foreign
Currency Exchange Rate Risk
We
conduct business in a number of international countries and, therefore, face
exposure to movements in foreign currency exchange rates. As a result of the
Actaris acquisition, commencing in the second quarter of 2007, a majority of our
revenues and operating expenses are now denominated in foreign currencies,
resulting in changes in our foreign currency exchange rate exposures that could
have a material effect on our financial results. 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 67% of total revenues for the three and nine months
ended September 30, 2008.
In
the second quarter of 2008, we began entering into certain foreign exchange
forward contracts with the intent to reduce volatility of certain intercompany
financing transactions. These contracts are not designated as accounting hedges
and are de minimis in fair value and notional amounts.
In
the second quarter of 2007, we designated certain portions of our foreign
currency denominated term loans as hedges of our net investment in international
operations. Net gains of $32 million ($20 million after-tax) were reported as a
net unrealized gain on derivative instruments, a component of accumulated other
comprehensive income, which represented effective hedges of net investments for
the three months ended September 30, 2008. Net losses of $366,000 ($8,000
after-tax) were reported as a net unrealized loss on derivative instruments, a
component of accumulated other comprehensive income, which represented effective
hedges of net investments, for the nine months ended September 30, 2008. We had
no hedge ineffectiveness.
In
future periods, we may use additional derivative contracts to protect against
foreign currency exchange rate risks. Alternatively, we may choose not to hedge
certain foreign currency risks associated with our foreign currency exposures if
such exposures act as a natural foreign currency hedge for other offsetting
amounts denominated in the same currency.
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 September 30,
2008 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 September 30,
2008 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial
reporting.
|
PART
II: OTHER INFORMATION
Item
1: Legal Proceedings
There
were no material changes during the third quarter of 2008 from legal proceedings
as previously disclosed in Item 1 included in our June 30, 2008 Quarterly Report
on Form 10-Q.
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.
Similar to other companies, we are susceptible to macroeconomic downturns in the
United States and abroad that may affect the general economic climate, our
performance and the performance of our customers and suppliers. Although we have
not been materially impacted by the tightening credit environment, the current
economic environment may impact our customers’ and suppliers’ abilities to
access credit from financial institutions that may be necessary to operate their
businesses. 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, 2008.
·
|
Purchases
of our products may be deferred as a result of many factors, including a
customer’s access to capital or access to capital on acceptable
terms.
|
·
|
Our
reliance on certain key vendors involves risks, including our vendors'
access to capital or access to capital on acceptable
terms.
|
·
|
Our
quarterly results may fluctuate substantially as a result of many factors,
including limited access to capital or access to capital on acceptable
terms.
|
Item
4: Submission of Matters to a Vote of
Security Holders
No
matters were submitted to a vote of shareholders of Itron during the third
quarter of 2008.
Exhibit
Number
|
|
Description
of Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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.
|
|
|
|
|
November
3, 2008
|
|
By:
|
/S/ STEVEN M. HELMBRECHT
|
Date
|
|
|
Steven
M. Helmbrecht
|
|
|
|
Sr.
Vice President and Chief Financial
Officer
|