UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2007
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
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Commission
file number 000-22418
ITRON,
INC.
(Exact
name of registrant as specified in its charter)
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Washington
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91-1011792
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(State
of Incorporation)
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(I.R.S.
Employer Identification Number)
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2111
N Molter Road, Liberty Lake, Washington 99019
(509)
924-9900
(Address
and telephone number of registrant’s principal executive offices)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
stock, no par value
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NASDAQ
Global Select Market
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Preferred
share purchase rights
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NASDAQ
Global Select Market
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer x
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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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
June 30, 2007 (the last business day of the registrant’s most recently
completed second fiscal quarter), the aggregate market value of the shares of
common stock held by non-affiliates of the registrant (based on the closing
price for the common stock on the NASDAQ Global Select Market) was
$2,356,243,811.
As of
February 2, 2008, there were outstanding 30,673,066 shares of the registrant’s
common stock, no par value, which is the only class of common stock of the
registrant.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the Company
to be held May 6, 2008.
Itron, Inc.
Table
of Contents
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Page
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PART
I
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1
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9
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14
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15
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15
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15
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PART
II
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AND
ISSUER PURCHASES OF EQUITY SECURITIES
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16
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18
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RESULTS
OF OPERATIONS
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19
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33
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35
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38
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39
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40
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41
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42
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FINANCIAL
DISCLOSURE
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80
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80
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81
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PART
III
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82
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82
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RELATED
STOCKHOLDER MATTERS
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82
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82
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82
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PART
IV
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83
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85
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In this Annual Report on Form 10-K, the terms “we,” “us,”
“our,” “Itron” and the “Company” refer to Itron, Inc.
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 Annual Report on Form
10-K. 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, 4) changes in
domestic and foreign laws and regulations, 5) our dependence on new product
development and intellectual property, 6) current and future business
combinations, 7) changes in estimates for stock-based compensation or pension
costs, 8) changes in foreign currency exchange rates, 9) foreign business risks
and 10) other factors. You should not solely rely on these forward-looking
statements as they are only valid as of the date of this Annual Report on Form
10-K. 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” in Item 1A.
PART
I
ITEM 1: BUSINESS
Available
Information
Documents
we provide to the Securities and Exchange Commission (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.
General
We
provide a comprehensive portfolio of products and services to utilities for the
energy and water markets throughout the world. Our strong position in meter data
collection and software solutions started with our introduction of handheld
computer-based systems in 1977. Through product innovations and several
acquisitions, we have become one of the world’s leading providers of metering,
data collection and software, serving our customers for over 100
years.
The
acquisition of Actaris Metering Systems SA (Actaris) in April 2007 for
approximately $1.7 billion increased our total assets to $3.1 billion at
December 31, 2007. The acquisition of Actaris creates an opportunity to share
technology and expertise around the world as worldwide electric, gas and water
utilities look for advanced metering and communication products to better serve
their markets.
The
Actaris acquisition significantly changes many aspects of our results of
operations, financial condition and cash flows, which are described in each
applicable area within this Annual Report on Form 10-K.
Market
Overview, Products, Systems and Solutions
We have
two operating segments, Itron North America and Actaris. See Item 7:
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for specific segment results. Itron North America generates the
majority of its revenue in the United States and Canada and offers electric
meters, electric, gas and water automated meter reading (AMR) and advanced
metering infrastructure (AMI) systems, software and services. Actaris generates
the majority of its revenue in Europe, Africa, South America and Asia and offers
electric, gas and water meters, AMR systems and services. We have retained the
Actaris brand and, therefore, our branding of Itron and Actaris products follow
the operating segments. The following are our major products and
services.
Meters
We
estimate there are approximately 2.6 billion meters worldwide. In the United
States and Canada we estimate there are 150 million electric meters, 70
million gas meters and 80 million water meters. In the rest of the world we
estimate there are approximately 1.3 billion electric meters, 300 million gas
meters and 700 million water meters. We also estimate that approximately 30% of
all water points are not metered.
Meters
measure the consumption of energy and water and are critical components of a
utility’s distribution infrastructure. The basic purpose of a meter is to
accurately measure consumption, provide long-term durability and meet certain
safety needs of the utility. Changes in technology are providing increased
capabilities, reliability and accuracy through the use of electronic technology
rather than traditional gear-based technology. Electronic technology also allows
for simple and cost-effective integration of embedded AMR
functionality.
Meter
growth has traditionally been driven by new construction and the replacement of
old meters. Meters are typically replaced at specified intervals, depending on
the type of meter and the specific regulatory oversight in the respective
country. Normal meter replacements are typically not affected by factors that
influence overall utility capital spending. Therefore, due to the combined
replacement of the current installed base and the increase in meter population,
we estimate the metering market will continue to grow between 3% and 5%
annually, although the adoption of AMR and AMI systems is likely to cause
volatility and affect these growth rates. We cannot predict how, and to what
extent, the current slowdown in the U.S. housing market will impact this
historical growth rate.
We
produce electricity, gas, water and heat meters and a variety of other
associated metering products for residential, commercial and industrial
(C&I) and transmission and distribution (T&D) customers. Our meters
comply with the standards established by each standard setting regulatory body
in each of the over 130 countries where we sell our products. The primary
differences between meters used in each different country are the physical
configuration and the certification requirements of the meters.
Electricity
Meters, Products and Systems
The
world’s demand for energy continues to grow. Utilities are faced with the
challenges of rising fuel costs and the burden of increasingly stringent
environmental regulations affecting their operations and costs. These challenges
drive the need to conserve energy specifically during peak hours, defer the
building of additional generation facilities and improve customer service. In
addition to our residential, C&I and T&D electricity meters, we also
offer several meter reading choices to help meet these challenges. In North
America, electricity meters may have AMR functionality using either Itron North
America’s AMR or AMI technology, or AMR technology provided by our competitors
embedded in the meter. Actaris’ AMR and AMI solutions are being deployed in
Europe and in other parts of the world. In addition,
pre-payment electricity meters are widely used in the United Kingdom and
South Africa. Actaris is one of the largest prepayment meter suppliers in the
world, offering one-way and two-way electricity prepayment systems, using smart
key, keypad and smart card communication technologies. AMR systems in Europe and
other parts of the world utilize GPRS (general packet radio service), radio
frequency (RF) or power line carrier (PLC) communication devices depending on
the customer’s choice. (See also AMR and AMI Systems
below).
Gas
Meters, Products and Systems
Investments
in the natural gas industry are rising and gas T&D networks are expanding as
a result of growing demand. Throughout most of the world, accelerating market
deregulation trends are allowing more and more customers to choose gas suppliers
based on price. With these industry changes, there is increased need to conserve
energy and improve customer service. Actaris’ residential and industrial gas
meters include diaphragm, turbine and rotary technologies. Actaris provides a
wide selection of regulators and safety devices for most applications in natural
gas distribution, from high pressure regulators used in city gate stations to
residential regulators. Our products and systems combine modern metering,
regulation and safety devices, AMR, prepayment, energy metering, load monitoring
and operating controls.
Water
& Heat Meters, Products and Systems
Water
conservation continues to be a worldwide concern. There are many efforts
underway to stimulate more efficient use of water and heat. Water utilities are
focused on increasing the efficiency of water production and minimizing waste in
consumption. Demand for water metering and heating and cooling metering (the
measurement of energy consumed in district heating and cooling distribution
systems and in heat cost allocations) are constantly growing. Actaris supplies a
complete range of water and heat meters and associated AMR systems for
residential and C&I markets including mechanical detection (turbine and
piston) and ultrasonic technology. All water and heat meters are pre-equipped
for remote data reading needs. Benefiting from almost 25 years of AMR
experience, we provide a range of modules (wireless and wired technology),
advanced leak detection systems and a variety of software for managing the
collection and transmission of data from our AMR systems, including meter data
for billing systems and our knowledge applications.
AMR
and AMI Systems
Of the
total 2.6 billion electric, gas and water meters worldwide, we estimate about 6%
have been upgraded to AMR or AMI capability. We estimate that of the 300 million
energy and water meters in the United States and Canada, between 35% and 40% are
read with AMR or AMI systems, of which about half are read with Itron North
America technology. Throughout the rest of the world, we estimate about 2% of
the meters are read with AMR or AMI systems primarily due to infrequent meter
reads. AMR growth in the United States and Canada has primarily been driven by
the need to reduce operational cost, including the reduction of labor costs,
improve operating cash flow with shorter read-to-pay cycle times and enhance
customer service in the form of increased billing accuracy and timeliness of
billing cycles, as these utilities typically read meters each month. In many
parts of the world, meters are only read annually and bills are estimated
monthly or quarterly; however, with the increased demand for energy and water,
compounded by the scarcity of resources and concerns for the environment,
regulatory bodies worldwide are starting to require utilities to increase their
reading frequency.
We
believe AMI growth will be driven primarily by limited energy supplies
particularly at utilities with a high geographic concentration of customers.
Limited supplies of energy will force these utilities to utilize their current
energy supplies more efficiently. Many utilities are working to smooth
consumption during peak hours in order to reduce the need to buy or build new
sources of power generation in order to meet peak load demand. Construction
costs, combined with environmental and regulatory issues, make the addition of
new power generation assets a difficult endeavor. AMI will allow utilities to
communicate real-time pricing and usage information to their customers and
deploy time of use pricing strategies. As a result, AMI systems will help
decrease peak loads by allowing customers to make informed and real-time choices
about their energy consumption and associated costs.
AMI
systems have substantially more features and functions than AMR systems and
include such capabilities as the ability to remotely connect and disconnect
service to the meter, the ability to perform bi-directional metering and the
ability to communicate with in-home displays, smart thermostats and appliances.
AMI systems are generally implemented after extensive review by the utility’s
standard setting regulatory body and usually involve a limited trial of the
system before full deployment. While we believe most utilities will implement
AMR or AMI systems, the timing of these investments can be affected by many
factors including the rate of regulatory changes and utility capital spending
levels.
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o
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Itron
North America AMR systems
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For over
15 years, Itron North America has offered AMR technology that enables utilities
to migrate from one product offering, such as our handheld computer product, to
a mobile or fixed network, to achieve higher forms of automation and more
frequent meter reads. These AMR systems are comprised of AMR meters or modules,
data collection hardware and software.
Our North
America AMR meters and modules encode consumption, tamper and other information
from the meter and communicate the data via RF to our handheld, mobile and
network radio-based data collection technology. We embed our AMR technology into
our electronic electricity meters. Gas and water AMR modules can be retrofitted
to existing gas or water meters or installed in or on new meters.
Data
collection hardware consists of handheld computers, mobile AMR and fixed network
AMR. We provide several models of handheld computers that are used by meter
readers to walk a route. Most handheld units we sell today are radio-equipped
(handheld AMR); however, where there is not an AMR enabled meter, the meter
reader visually reads the meters and inputs the data. Mobile AMR uses a radio
transceiver located in a vehicle that communicates with all AMR-enabled meters
within range and receives meter reading, tamper and other information from the
meters. Mobile AMR is designed for reading concentrated deployments of
AMR-enabled meters. Fixed network AMR communicates with AMR-enabled meters
through an RF network on a more frequent basis. Concentrators are installed
within a utility’s territory and use a variety of public communication platforms
including GPRS, Ethernet, PSTN (public switched telephone networks), BPL
(broadband over power line) and others to transfer data between the
concentrators and a host processor at a utility
The data
collection systems manage the collection and transmission of data and provide
meter data for billing systems, data warehouses, Internet data presentment and
our knowledge applications.
Our water
fixed network and products are designed to cost-effectively address issues that
are unique to the water industry. In addition to fixed network AMR capabilities,
we provide an advanced water leak detection system and software for pipeline
management using patented acoustic technology that analyzes vibration patterns
from the distribution system. This technology significantly improves a
utilities’ ability to proactively maintain their water infrastructure and
provides them the ability to analyze the data collected to help pinpoint
leaks.
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o
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Actaris
AMR Systems
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Actaris
provides a range of AMR communication technologies for its electricity, gas,
water and heat metering products that provide consumption, tamper, outage and
leak detection and profile analysis. This information is transmitted from
modules embedded in the Actaris meter to either handheld computers and/or fixed
networks, allowing utilities to collect the data for billing systems and analyze
the meter data for better utility management. These communication technologies
include telephone (PSTN), RF, GSM (Global System for Mobile communications),
GPRS, PLC and Ethernet devices. Actaris’ AMR electric solutions also offer
single and multi-tariff capabilities and certain load shedding
functions.
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o
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Itron
North America AMI Systems
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Itron
North America offers AMI, or smart metering, systems with our OpenWay®
architecture. OpenWay is a standards-based, open-architecture smart metering
solution that helps utilities better manage limited energy supplies and provide
pertinent information about energy usage to energy consumers. The OpenWay system
provides two-way communication for residential and commercial electricity
meters, which allows for advanced data collection, and certain command and
control functions, including remote connect and disconnect, net metering,
integrated clock for critical peak pricing (CPP), time of use and CPP displays
on register, interval data storage, alarms and upgradeable firmware. Our AMI
software can be configured to include load management, demand response and
prepayment capabilities. Each OpenWay meter is equipped with a ZigBee® based
gateway (a low-power, short distance wireless standard) that enables the utility
to communicate with its customer’s designated in-home monitoring devices,
allowing the consumer to make more informed choices about energy consumption.
ZigBee technology has the ability to gather gas and water meter reads from AMR
enabled gas and water meters. The OpenWay system can utilize a variety of public
communication platforms to transfer data, including GPRS, Ethernet, PSTN, BPL,
WiFi, WiMax and others.
Other
Products
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o
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Meter Data
Management: Itron North America provides solutions for
residential and C&I meter data management. Our meter data management
software solutions provide functions that support the process of meter
data collection by using open and flexible interfaces, data validation,
estimation and editing, complex calculations and aggregation, time-of-use
information and interactive graphics. These databases are also used for
other complex data applications.
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o
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Knowledge
Applications: Itron North America provides utilities and large
C&I end-users with software knowledge applications, data warehouses
and analytic and visualization tools that use the meter and other data
collected. Our knowledge applications include modules for C&I complex
billing; web-based usage analysis for customers with advanced metering
data and C&I customers (customer care); distribution asset analysis;
load research and management; revenue protection, including theft
detection and identification of unbilled revenue; and central market data
collection and load settlement. We also offer forecasting services and
software products that are used by utilities, market operators, government
agencies and others for predicting load growth and requirements, revenue,
new facility requirements, customer reaction to proposed programs and
rates, day-ahead energy needs and longer-term energy
needs.
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o
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Consulting and
Analysis: Itron North America provides consulting and analysis
(C&A) services in the areas of market research, load research,
renewable and distribution generation program design and evaluation,
energy efficiency program evaluation and design, energy policies, rate
design and regulatory support. The C&A client base in these areas is
comprised of major energy utilities, research organizations, government
agencies and other institutional clients throughout the United
States.
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o
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Professional Services:
Itron North America offers professional services that help our customers
implement, install, project manage and maintain their meter reading
systems. Our service professionals assist our customers in identifying and
correcting operational issues, optimize the use of our innovative
solutions products and provide training and education. For Itron North
America products, we operate a call center 24 hours a day to help
customers with problems they may encounter. In addition, we have service
and repair depots for our handheld and AMR systems in several
locations.
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Managed Services:
Actaris’ managed service business provides a solution to allow utilities
to outsource their prepayment information technology needs. These managed
services include the issuing of prepayment devices (smart keys, smart
cards, mobile phone credit cards and tokens), automated processing of
transaction details, customer account management, maintenance of
historical financial transactions, business to business call centers and
personalized mailing services. In the United Kingdom, our managed services
are fully integrated into the nationwide industry standard utility data
transfer network, which allows data to be exchanged automatically with
other utilities in a standard
format.
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Operational
Capabilities
Sales
and Distribution
We have
two sales organizations: one for Itron North America and another for Actaris.
Both sales organizations use a combination of direct and indirect sales
channels. For the largest electric, gas and water utilities, with which we have
long-established relationships, we utilize a direct sales force with technical
support teams. For smaller utilities, we typically use an indirect sales force
that consists of distributors, representative agencies, partners and meter
manufacturer representatives. We also sell electricity and water AMR modules
through original equipment manufacturer arrangements with several major meter
manufacturers. In these arrangements, manufacturers incorporate our AMR modules
into new meters and then offer these AMR-enabled meters for sale. We also
license our North America AMR technology to certain meter manufacturers who
embed our AMR technology into their meters.
No single
customer represented more than 10% of total revenues for 2007 or 2005. One
customer, Progress Energy, represented 16% of total revenues for the year ended
December 31, 2006. During 2007, 2006 and 2005, our 10 largest customers in each
of those years accounted for approximately 14%, 40% and 26%, of total revenues,
respectively.
Manufacturing
Itron
North America has two primary manufacturing facilities in the United States: one
in Minnesota to manufacture gas and water AMR modules and one in South Carolina
to manufacture electricity meters. Contract manufacturers are used for certain
handheld systems, peripheral equipment and low volume AMR products.
Actaris
has manufacturing facilities throughout the world. The Actaris Electricity
division is headquartered in Felixstowe, United Kingdom, with principal
manufacturing facilities located in France, the United Kingdom, Hungary, Brazil,
Portugal and South Africa. The Actaris Gas division is headquartered in
Karlsruhe, Germany, with principal manufacturing facilities in Germany, the
United Kingdom, France, Italy, China, South America and the United States. The
Actaris Water division is headquartered in Mâcon, France, with principal
manufacturing facilities in France, Germany, Italy, the United States and
Brazil. All three business lines have a number of smaller local assembly, test,
service and calibration facilities to address local markets.
Our
products require a wide variety of components and materials. Although we have
multiple sources of supply for most of our material requirements, certain
components and raw materials are supplied by sole-source vendors, and our
ability to perform certain contracts depends on the availability of these
materials. In most instances, multiple vendors of raw materials are screened
during a qualification process to ensure that there will be no interruption of
supply should one of them discontinue operations. Nonetheless, in some
situations, there is a risk of shortages due to reliance on a limited number of
suppliers or because of price fluctuations due to the nature of the raw
materials, such as electrical components, plastics, copper and brass, which are
used in varying degrees in our meter products. See “Risk Factors” within
Item 1A, included in this Annual Report on Form 10-K, for a further
discussion related to risks.
Product
Development
Our
current product development focus is on improvements to existing technology as
well as the development of next-generation technology for electricity, gas and
water meters, data collection, communications technologies, data warehousing and
software knowledge applications. We spent approximately $95 million, $59
million and $47 million on product development in 2007, 2006 and 2005,
respectively. Actaris’ product development from the April 18, 2007 acquisition
date through December 31, 2007 was $28 million. Itron North America’s product
development was $67 million for the year ended December 31, 2007. During 2007,
Itron North America had a strong focus on our AMI solution
development.
Marketing
Our
marketing efforts focus on brand recognition and product solutions through an
integrated approach that includes participation in industry trade shows and
web-based seminars and the preparation and distribution of various brochures,
published papers, case studies, print advertising, direct mail, newsletters and
conferences. In addition, we direct customers to our global website that
provides information on all of our products and services.
We
maintain communications with our customers through integrated and targeted
marketing campaigns, market surveys, market trend analysis and at our annual
Itron North America Users’ Conference.
Employees
At
December 31, 2007, we had approximately 8,400 people, with approximately
2,600 in Itron North America and 5,800 at Actaris. We have not experienced any
work stoppages and consider our employee relations to be good.
Competition
We
provide a broad portfolio of products, systems and services to customers in the
utility industry and compete with a large number of competitors who also offer
similar products, systems and services. We believe that our competitive
advantage is based on established customer relationships, our track record of
reliable products, integrated solutions, product cost, product innovation,
upgradeable AMR systems and our knowledge application tools. During recent
years, vendor consolidation has occurred in the industry. In many of our
markets, there are participants who may be both competitors and
partners.
Our
primary competitors for our meters and products (including AMR and AMI
technology, software and services) are the ABB Group, Badger Meter, Inc., the
Bayard Group, Cooper Industries, Ltd., Dandong Visionseal Co., Datamatic, Ltd.,
Dresser, Inc., Echelon Corporation, the Elster Group, Emerson Electric Co.,
eMeter Corporation, EnergyICT NV, ESCO Technologies Inc., General Electric
Company, Holley Group Co., Ltd., Hydrometer, Iskraemeco, d.d., Oracle
Corporation, Roper Industries, Inc., Schneider Electric and Sensus Metering
Systems Inc. These competitors may offer a broad range of meters and related
products, or may specialize in a specific technology or service.
Bookings
and Backlog of Orders
Bookings
for a reported period represent contracts and firm purchase orders received
during the specified period. Total backlog represents committed but undelivered
contracts and purchase orders at period end. Twelve-month backlog represents the
portion of total backlog that we estimate will be recognized as revenue over the
next twelve months. Bookings and backlog exclude maintenance-related activity
and agreements that do not represent firm purchase orders. Customer agreements
that contain cancellation for convenience terms are generally not reflected in
bookings and backlog until firm purchase orders are received. Backlog is not a
complete measure of our future business due to these customer agreements, as
well as significant book-and-ship orders. Bookings and backlog can fluctuate
significantly due to the timing of large project awards. In addition, annual or
multi-year contracts are subject to rescheduling and cancellation by customers
due to the long-term nature of the contracts. Beginning total backlog, plus
bookings, minus revenues, will not equal ending total backlog due to
miscellaneous contract adjustments, foreign currency fluctuations and other
factors.
Information
on bookings and backlog is summarized as follows:
|
Year
Ended
|
Total
Bookings
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Total
Backlog
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12-Month
Backlog
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||||||||
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(in
millions)
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|||||||||||
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December
31, 2007
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$ | 1,419 | $ | 659 | $ | 501 | |||||
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December
31, 2006
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652 | 392 | 225 | ||||||||
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December
31, 2005
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655 | 324 | 188 | ||||||||
In
December 2007, Itron reached an agreement valued at approximately $480 million
with Southern California Edison (SCE) to deploy Itron’s OpenWay meter and
communications system. This is the largest contract in our history. However, the
agreement may be cancelled by SCE for convenience and does not guarantee a
specified volume of meters; therefore, we booked only $11.2 million in 2007 for
which we received a firm purchase order. As firm purchase orders are received
from SCE during the four year deployment period, we will add them to
bookings.
Other
Business Considerations
Intellectual
Property
Itron
North America owns or licenses 287 U.S. and counterpart international patents
and has on file 84 U.S. and 158 counterpart international patent
applications. Actaris owns or licenses 58 U.S. and 521 international patents and
has on file 8 U.S. and 164 international patent applications. These patents
cover a range of technologies related to metering, portable handheld computers,
water leak detection and AMR related technologies.
We also
rely on a combination of copyrights and trade secrets to protect our products
and technologies. We have registered trademarks for most of our major product
lines in the United States and many foreign countries. Itron North America’s
registered trademarks include, but are not limited to, ITRON®,
“KNOWLEDGE TO SHAPE YOUR FUTURE®”,
CENTRON®,
MV-90®,
MV-90®xi,
ENDPOINT-LINK®,
ERT®, EEM
SUITE®,
OPENWAY®,
QUANTUM® Q1000,
SENTINEL® and
SERVICE-LINK®. Itron
North America’s unregistered trademarks include, but are not limited, to
CHOICECONNECT™, ITRON
ENTERPRISE EDITION™,
LD-PRO™,
METRIXND™,
MLOG™, SREAD™ and
UNILOG™.
Actaris’ registered trademarks include, but are not limited to, ACTARIS®,
AQUADIS®,
CYBLE®,
FLOSTAR®,
WOLTEX®,
FLODIS®,
ECHO®,
GALLUS®,
RF1®,
DELTA®,
FLUXI®,
CORUS®,
ACE®,
SL7000® and
PULSADIS®.
Disputes
over the ownership, registration and enforcement of intellectual property rights
arise in the ordinary course of our business. We license some of our technology
to other companies, some of which are our competitors. Currently, we are not a
party to any material intellectual property litigation.
Regulation
and Allocation of Radio Frequencies
Certain
of our products made for the U.S. market use radio frequencies that are
regulated by the Federal Communications Commission (FCC) pursuant to the
Communications Act of 1934, as amended. In general, a radio station license
issued by the FCC is required to operate a radio transmitter. The FCC issues
these licenses for a fixed term, and the licenses must be renewed periodically.
Because of interference constraints, the FCC can generally issue only a limited
number of radio station licenses for a particular frequency band in any one
area.
Although
radio licenses generally are required for radio stations, Part 15 of the FCC’s
rules permits certain low-power radio devices (Part 15 devices) to operate on an
unlicensed basis. Part 15 devices are designed for use on frequencies used by
others. These other users may include licensed users, which have priority over
Part 15 users. Part 15 devices cannot cause harmful interference to licensed
users and must be designed to accept interference from licensed radio devices.
Our AMR modules and AMR-equipped electronic residential electricity meters are
typically Part 15 devices that transmit information back to handheld, mobile or
fixed network AMR reading devices pursuant to these rules. Many of our AMR
systems utilize the 902-928 MHz band pursuant to the Part 15 rules for these
transmissions.
The FCC
has initiated a rulemaking proceeding in which it is considering adopting
“spectrum etiquette” requirements for unlicensed Part 15 devices operating in
the 902-928 MHz band. Although the outcome of the proceeding is uncertain, we do
not expect to have to make material changes to our equipment, and adoption of
some of the proposals that have been made in the proceeding could reduce the
potential for interference with our systems from other Part 15
devices.
The FCC
has also adopted service rules governing the use of the 1427-1432 MHz band. We
use this band in connection with various devices in our network solutions. Among
other things, the rules reserve parts of the band for general telemetry,
including utility telemetry, and provide that nonexclusive licenses will be
issued in accordance with Part 90 rules and the recommendations of frequency
coordinators. Telemetry licensees must comply with power limits and out-of-band
emission requirements that are designed to avoid interference with other users
of the band. Although the FCC issues licenses on a nonexclusive basis and it is
possible that the demand for spectrum will exceed supply, we believe we will
continue to have access to sufficient spectrum in the 1429.5-1432 MHz band under
favorable conditions.
Outside
of the United States, certain of our products require the use of radio
frequencies and are also subject to regulations in those jurisdictions where we
have deployed such equipment. In some jurisdictions, radio station licensees are
generally required to operate a radio transmitter and such licenses may be for a
fixed term and must be periodically renewed. In other jurisdictions, the rules
permit certain low power devices to operate on an unlicensed basis. Our AMR
modules and AMR-equipped electronic residential electricity meters typically are
devices that transmit information back to handheld, mobile or fixed network AMR
reading devices in unlicensed bands pursuant to rules regulating such use.
Generally, we use the unlicensed Industrial, Scientific and Medical (ISM) bands
with the various devices in our network solutions. In Europe, we generally use
the 433 MHz and 868 MHz bands. In the rest of the world, we use the
2.4000-2.4835 GHz band. In either case, although the availability of unlicensed
bands or radio station licenses for a particular frequency band in jurisdictions
outside of the United States may be limited, we believe we will continue to have
access to sufficient spectrum under favorable conditions.
Environmental
Regulations
In the
ordinary course of our business we use metals, solvents and similar materials
that are stored on-site. The waste created by use of these materials is
transported off-site on a regular basis by unaffiliated waste haulers and is
processed by unaffiliated contractors or vendors. We have made a concerted
effort to reduce or eliminate the use of mercury and other hazardous materials
in our products. We believe we are in compliance with laws, rules and
regulations applicable to the storage, discharge, handling, emission,
generation, manufacture and disposal of, or exposure to, toxic or other
hazardous substances in each of those jurisdictions in which we operate. Two
Environmental Protection Agency reports issued in 1992 and 1997 identified
several solid waste management units and areas of concern at one of our South
Carolina manufacturing facilities. In addition, trichloroethylene (TCE) soil and
groundwater contamination exist at this South Carolina facility from a TCE
storage tank that was removed in 1994. Schlumberger Limited (Schlumberger) and
various related parties, from which we purchased the operations of this facility
in 2004, entered into a consent agreement with the South Carolina Department of
Health and Environmental Control regarding certain related environmental
remedial activities. Under the terms of the 2004 acquisition agreement,
Schlumberger is retaining all liability for these matters.
The
European Union has enacted the Waste Electrical and Electronic Equipment
Directive, which makes producers of certain types of electrical equipment
financially responsible for specified collection, recycling, treatment and
disposal of past and future covered products. The deadline for the individual
member states of the European Union to enact the directive in their respective
countries was August 13, 2004 (such legislation, together with the
directive is referred to as the WEEE Legislation). Producers participating in
the market were financially responsible for implementing these responsibilities
under the WEEE Legislation beginning in August 2005. Implementation in
certain of the member states was delayed until 2007. Similar legislation has
been or may be enacted in other jurisdictions, including in the United States,
Canada, Mexico, China and Japan. China has passed similar legislation, which
took effect March 1, 2007. California has drafted electronic recycling laws
similar to the WEEE legislation, but such legislation has not as yet been
enacted. The liability for such environmental costs is accrued when considered
probable and the costs can be reasonably estimated. We have determined the
liability for our responsibilities under the WEEE Legislation to be immaterial
to our operations and financial position at December 31, 2007, and we do
not currently anticipate material capital expenditures for environmental control
facilities. We are continuing to evaluate the impact of the WEEE Legislation and
similar legislation in other jurisdictions as individual countries issue their
implementation guidance.
The
European Union has also enacted the Restriction of Hazardous Substances (RoHS)
directive, which went into effect on July 1, 2006. Of
the numerous hazardous substances defined in this directive, our only
products known to be affected at this time are low volume handhelds, which
have been updated to comply with the RoHS directive. We are continuing to
evaluate the impact of RoHS legislation and similar legislation in other
jurisdictions as individual countries issue their implementation
guidance.
Incorporation
MANAGEMENT
Executive
Officers of the Registrant
Set forth
below are the names, ages and titles of our executive officers as of February
25, 2008.
|
Name
|
Age
|
Position
|
||
|
LeRoy
D. Nosbaum
|
61
|
Chairman
of the Board and Chief Executive Officer
|
||
|
Steven
M. Helmbrecht
|
45
|
Sr.
Vice President and Chief Financial Officer
|
||
|
John
W. Holleran
|
53
|
Sr.
Vice President, General Counsel and Corporate Secretary
|
||
|
Philip
C. Mezey
|
48
|
Sr.
Vice President and Chief Operating Officer, Itron North
America
|
||
|
Malcolm
Unsworth
|
58
|
Sr.
Vice President and Chief Operating Officer, Actaris
|
||
|
Jared
P. Serff
|
40
|
Vice
President, Competitive Resources
|
LeRoy Nosbaum is Chairman of
the Board and Chief Executive Officer. Mr. Nosbaum has been a director and our
CEO since 2000 and Chairman of the Board since 2002. Since joining Itron in
1996, Mr. Nosbaum has held positions as Chief Operating Officer and Vice
President with responsibilities over manufacturing, product development,
operations and marketing. Before joining Itron, Mr. Nosbaum was with
Metricom Inc., a supplier of wireless data communications networking technology.
Prior to joining Metricom, Mr. Nosbaum was with Schlumberger from 1969 to
1989 in various roles, including General Manager of Schlumberger’s Integrated
Metering Systems Division.
Steve Helmbrecht is Sr. Vice
President and Chief Financial Officer. Mr. Helmbrecht joined Itron in 2002
as Vice President and General Manager, International and was named Sr. Vice
President and Chief Financial Officer in 2005. From 2000 to 2002,
Mr. Helmbrecht was Chief Financial Officer of LineSoft Corporation
(LineSoft), which was acquired by Itron in 2002. Prior to joining LineSoft,
Mr. Helmbrecht spent seven years with SS&C Technologies, Inc., a
software company focused on portfolio management and accounting systems for
institutional investors.
John Holleran is Sr. Vice
President, General Counsel and Corporate Secretary. Mr. Holleran joined
Itron in January 2007. Prior to joining Itron, Mr. Holleran spent over 25 years
with Boise Cascade Corporation where he served as Vice President and General
Counsel for eight years prior to his promotion in 1999 to Senior Vice President,
Human Resources and General Counsel, a position he held until 2004. In 2005, he
served as Executive Vice President, Administration, and Chief Legal Officer for
Boise Cascade, LLC, the paper and forest products company resulting from the
reorganization of Boise Cascade Corporation. In 2006 he was associated with
Holleran Law Offices PLLC.
Philip Mezey is Sr. Vice
President and Itron North America’s Chief Operating Officer. Mr. Mezey
joined Itron in March 2003 as Managing Director of Software Development for
Itron’s Energy Management Solutions Group as a result of Itron’s acquisition of
Silicon Energy Corp. (Silicon). He later was promoted to Group Vice President
and Manager of Software Solutions in 2004. In 2005 he became Sr. Vice President
Software Solutions, and was promoted to his current position in 2007 following
our acquisition of Actaris. Mr. Mezey joined Silicon in 2000 as Vice
President, Software Development. Prior to joining Silicon, Mr. Mezey was a
founding member of Indus, a leading provider of integrated asset and customer
management software.
Malcolm Unsworth is Sr. Vice
President and Actaris’ Chief Operating Officer, based in Luxembourg.
Mr. Unsworth joined Itron in July 2004 as Sr. Vice President, Hardware
Solutions upon our acquisition of Schlumberger’s electricity metering business.
Mr. Unsworth was promoted to his current position in 2007 following our
acquisition of Actaris. Mr. Unsworth spent 25 years with Schlumberger, and
served most recently as President of its electricity metering business from 2000
to 2004.
Jared Serff is Vice President,
Competitive Resources. Mr. Serff joined Itron in July 2004 as part of the
Schlumberger electricity metering acquisition. Mr. Serff spent six years
with Schlumberger, the last four of which were as Director of Human Resources
with Schlumberger’s electricity metering business where he was in charge of
personnel for all locations in Canada, Mexico, France and Taiwan, in addition to
the United States.
ITEM 1A: RISK FACTORS
We
are dependent on the utility industry, which has experienced volatility in
capital spending.
We derive
the majority of our revenues from sales of products and services to the utility
industry. Purchases of our products may be deferred as a result of many factors
including mergers and acquisitions, regulatory decisions, weather conditions,
rising interest rates, slowdowns in new residential and commercial construction,
utility specific financial circumstances and general economic downturns. We have
experienced, and may in the future experience, variability in operating results,
on an annual and a quarterly basis, as a result of these factors.
Utility
industry sales cycles can be lengthy and unpredictable.
Sales
cycles for standalone meter products (those without AMR and AMI features) are
typically based on annual or bi-annual bid-based agreements, with no defined
delivery dates. Customers can place purchase orders against these contracts as
their meter stocks deplete, which can create fluctuations in our sales
volumes.
Sales
cycles for AMR and AMI projects are generally long and unpredictable due to
budgeting, purchasing and regulatory approval processes that can take up to
several years to complete. Our utility customers typically issue requests for
quotes and proposals, establish evaluation committees, review different
technical options with vendors, analyze performance and cost/benefit
justifications and perform a regulatory review, in addition to applying the
normal budget approval process within a utility. Section 1252 of the U.S. Energy
Policy Act of 2005 requires electric utilities to consider offering their
customers time-based rates. The Act also directs these utilities and state
utility commissions to study and evaluate methods for implementing demand
response, to shift consumption away from peak hours and to improve power
generation. These requirements could change the process of evaluating and
approving technology purchases, which could extend or delay sales.
The
European Union has also issued a directive stating that customers should have a
choice in their electric and gas suppliers. The directive obligates member
states to take necessary measures to achieve a competitive, secure and
environmentally sustainable market in electricity and gas. Member states must
ensure that all household customers and small enterprises enjoy the right to be
supplied with electricity and gas of a specified quality at reasonable,
comparable and transparent prices. While we believe the opening of these markets
will provide opportunities for sales of our products, the pace at which these
markets will be opened could be slowed substantially by legislative and
regulatory delays, regulatory approvals related to the deployment of new
technology, capital budgets of the utilities and purchasing decisions by our
customers.
Our
quarterly results may fluctuate substantially.
We have
experienced variability of quarterly results, including losses, and believe our
quarterly results will continue to fluctuate as a result of many factors,
including costs related to acquisitions, in-process research and development
(IPR&D), intangible amortization expenses, stock-based compensation, legal
activity, unexpected warranty liabilities, restructuring charges, size and
timing of significant customer orders, FCC or other governmental actions,
changes in accounting standards or practices, changes in existing taxation rules
or practices, the gain or loss of significant customers, timing and levels of
new product developments, shifts in product or sales channel mix, the shortage
or change in price of certain components or materials, foreign currency
fluctuations, changes in interest rates, increased competition and pricing
pressure and general economic conditions affecting enterprise spending for the
utility industry.
Our
acquisitions of and investments in third parties carry risks and may affect
earnings due to charges associated with the acquisition or could cause
disruption to the management of our business.
We have
acquired nine companies since December 31, 2002, the largest of which is
our most recent acquisition of Actaris for $1.7 billion and the acquisition of
Schlumberger’s electricity metering business for $256 million in 2004. We expect
to complete additional acquisitions and investments in the future, both within
and outside of the United States. There are no assurances, however, we will be
able to successfully identify suitable candidates or negotiate appropriate
acquisition terms. In order to finance future acquisitions, we may need to raise
additional funds through public or private financings, and there are no
assurances that we would be able to do so on acceptable terms. Acquisitions and
investments involve numerous risks such as the diversion of senior management’s
attention, unsuccessful integration of the acquired entity’s personnel,
operations, technologies and products, lack of market acceptance of new services
and technologies, difficulties in operating businesses in foreign legal
jurisdictions, changes in the legal and regulatory environment or a shift in
industry dynamics that negatively impacts the forecasted demand for the new
products. We may experience difficulties that could affect our internal control
over financial reporting, which could create a significant deficiency or
material weakness in our overall internal controls under Section 404 of the
Sarbanes-Oxley Act of 2002. Failure to properly or adequately address these
issues could result in the diversion of management’s attention and resources and
materially and adversely impact our ability to manage our business and our
results of operations. Impairment of an investment or goodwill and intangible
assets may also result if these risks materialize. There can be no assurances
that an acquired business will perform as expected, accomplish our strategic
objective or generate significant revenues, profits or cash flows. During prior
years, we have incurred impairments and write-offs of minority interest
investments.
Acquisitions
and investments in third parties may involve the assumption of obligations,
significant write-offs or other charges associated with the acquisition, such as
acquired IPR&D. During 2007, we expensed $36.0 million in IPR&D
expense associated with our Actaris acquisition. During the fourth quarter of
2004, we expensed $6.4 million in IPR&D expense associated with the
acquisition of Schlumberger’s electricity metering business.
We
are subject to international business uncertainties.
A
substantial portion of our revenues are derived from operations conducted
outside the United States. International sales and operations may be subject to
risks such as the imposition of government controls, political instability,
terrorist activities, restrictions on the import or export of critical
technology, currency exchange rate fluctuations, adverse tax burdens,
availability of qualified third-party financing, generally longer receivable
collection periods than in the United States, trade restrictions, changes in
tariffs, labor disruptions, difficulties in staffing and managing foreign
operations, potential insolvency of international distributors, burdens of
complying with different permitting standards and a wide variety of foreign laws
and obstacles to the repatriation of earnings and cash. Fluctuations in the
value of the U.S. dollar may impact our ability to compete in international
markets. International expansion and market acceptance depend on our ability to
modify our technology to take into account such factors as the applicable
regulatory and business environment, labor costs and other economic conditions.
In addition, the laws of certain countries do not protect our products or
technologies to the same extent as do the laws of the United States. There can
be no assurance that these factors will not have a material adverse effect on
our future international sales and, consequently, on our business, financial
condition and results of operations.
We
depend on our ability to develop new products.
Our
future success will depend, in part, on our ability to continue to design and
manufacture new competitive products and to enhance and sustain our existing
products, including technological advances, changing customer requirements,
international market acceptance and other factors in the markets in which we
sell our products. This product development will require continued investment in
order to maintain our market position. We have made, and expect to continue to
make, substantial investments in technology development. However, we may
experience unforeseen problems in the development or performance of our
technologies or products. In addition, we may not meet our product development
schedules. Oftentimes, new products require certifications or regulatory
approvals before the products can be used and we cannot be certain that our new
products will be approved in a timely manner. Finally, we may not achieve market
acceptance of our new products and services.
A
significant portion of our revenues are generated from a limited number of
customers.
Historically,
our revenues have been concentrated with a limited number of customers, which
change over time. The ten largest customers accounted for 14%, 40% and 26% of
revenues for the years ended 2007, 2006 and 2005, respectively. One customer,
Progress Energy, accounted for 16% of total Company revenues in 2006. No single
customer represented more than 10% of total Company revenues in 2007 and 2005.
We are often a party to large, multi-year contracts that are subject to
cancellation or rescheduling by our customers due to many factors, such as
extreme, unexpected weather conditions that cause our customers to redeploy
resources, convenience, regulatory issues or possible acts of terrorism.
Cancellation or postponement of one or more of these significant contracts could
have a material adverse effect on us. In addition, if a large customer contract
is not replaced upon its expiration with new business of similar magnitude, our
financial and operating results would be adversely affected.
As we
enter into agreements related to the deployment of AMI products and technology,
the potential value of these contracts could be substantially larger than
contracts we have had with our customers in the past. These deployments could
also last several years, which would be longer than prior deployment agreements
with our customers. The terms and conditions of these AMI agreements related to
testing, contractual liabilities, warranties, performance and indemnities could
be substantially different than the terms and conditions associated with our
standard products and services.
We
are facing increasing competition.
We face
competitive pressures from a variety of companies in each of the markets we
serve. Some of our present and potential future competitors have, or may have
substantially greater financial, marketing, technical or manufacturing resources
and, in some cases, have greater name recognition and experience. Some
competitors may enter markets we serve and sell products at lower prices in
order to obtain market share. Our competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements.
They may also be able to devote greater resources to the development, promotion
and sale of their products and services than we can. Some competitors have made,
and others may make, strategic acquisitions or establish cooperative
relationships among themselves or with third parties that enhance their ability
to address the needs of our prospective customers. It is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Other companies may also drive
technological innovation and develop products that are equal or superior to our
products, which could reduce our market share, reduce our overall sales and
require us to invest additional funds in new technology development. We may also
have to adjust the prices of some of our products to stay competitive. If we
cannot compete successfully against current or future competitors, this will
have a material adverse effect on our business, financial condition, results of
operations and cash flows.
We
are affected by availability and regulation of radio spectrum.
A
significant number of our products use radio spectrum, which in the United
States, are subject to regulation by the FCC. Licenses for radio frequencies
must be obtained and periodically renewed. Licenses granted to us or our
customers may not be renewed on acceptable terms, if at all. The FCC may adopt
changes to the rules for our licensed and unlicensed frequency bands that are
incompatible with our business. In the past, the FCC has adopted changes to the
requirements for equipment using radio spectrum, and it is possible that the FCC
or the U.S. Congress will adopt additional changes.
We have
committed, and will continue to commit, significant resources to the development
of products that use particular radio frequencies. Action by the FCC could
require modifications to our products. The inability to modify our products to
meet such requirements, the possible delays in completing such modifications and
the cost of such modifications all could have a material adverse effect on our
future business, financial condition and results of operations.
Our
radio-based products currently employ both licensed and unlicensed radio
frequencies. There must be sufficient radio spectrum allocated by the FCC for
our intended uses. As to the licensed frequencies, there is some risk that there
may be insufficient available frequencies in some markets to sustain our planned
operations. The unlicensed frequencies are available for a wide variety of uses
and may not be entitled to protection from interference by other users who
operate in accordance with FCC rules. The unlicensed frequencies are also often
the subject of proposals to the FCC requesting a change in the rules under which
such frequencies may be used. If the unlicensed frequencies become unacceptably
crowded, restrictive or subject to changed rules governing their use, our
business could be materially adversely affected.
We are
also subject to regulatory requirements in jurisdictions outside of the United
States. In those jurisdictions, licensees are generally required to operate a
radio transmitter and such licenses may be for a fixed term and must be
periodically renewed. In some jurisdictions, the rules permit certain low power
devices to operate on an unlicensed basis. Most of our AMR modules and
AMR-equipped electronic residential electricity meters are devices that transmit
information back to handheld, mobile or fixed network AMR reading devices in
unlicensed bands pursuant to rules regulating such use. To the extent we wish to
introduce into a new market products designed for use in the United States or
another country, such products may require significant modification or redesign
in order to meet frequency requirements and other regulatory specifications.
Further, in some countries, limitations on frequency availability or the cost of
making necessary modifications may preclude us from selling our products in
those countries.
We
may face liability associated with the use of products for which patent
ownership or other intellectual property rights are claimed.
We may be
subject to claims or inquiries regarding alleged unauthorized use of a third
party’s intellectual property. An adverse outcome in any intellectual property
litigation could subject us to significant liabilities to third parties, require
us to license technology or other intellectual property rights from others,
require us to comply with injunctions to cease marketing or using certain
products or brands, or require us to redesign, re-engineer, or rebrand certain
products or packaging, any of which could affect our business, financial
condition and results of operations. If we are required to seek licenses under
patents or other intellectual property rights of others, we may not be able to
acquire these licenses on acceptable terms, if at all. In addition, the cost of
responding to an intellectual property infringement claim, in terms of legal
fees, expenses and the diversion of management resources, whether or not the
claim is valid, could have a material adverse effect on our business, financial
condition and results of operations.
If our
products infringe the intellectual property rights of others, we may be required
to indemnify our customers for any damages they suffer. We generally indemnify
our customers with respect to infringement by our products of the proprietary
rights of third parties. Third parties may assert infringement claims against
our customers. These claims may require us to initiate or defend protracted and
costly litigation on behalf of our customers, regardless of the merits of these
claims. If any of these claims succeed, we may be forced to pay damages on
behalf of our customers or may be required to obtain licenses for the products
they use. If we cannot obtain all necessary licenses on commercially reasonable
terms, our customers may be forced to stop using our products.
We
may be unable to adequately protect our intellectual property.
While we
believe that our patents, trademarks and other intellectual property have
significant value, it is uncertain that this intellectual property or any
intellectual property acquired or developed by us in the future, will provide
meaningful competitive advantages. There can be no assurance that our patents or
pending applications will not be challenged, invalidated or circumvented by
competitors or that rights granted thereunder will provide meaningful
proprietary protection. Moreover, competitors may infringe our patents or
successfully avoid them through design innovation. To combat infringement or
unauthorized use, we may need to commence litigation, which can be expensive and
time-consuming. In addition, in an infringement proceeding a court may decide
that a patent or other intellectual property right of ours is not valid or is
unenforceable, or may refuse to stop the other party from using the technology
or other intellectual property right at issue on the grounds that it is
non-infringing or the legal requirements for an injunction have not been met.
Policing unauthorized use of our intellectual property is difficult and
expensive, and we cannot provide assurance that we will be able to, or have the
resources to, prevent misappropriation of our proprietary rights, particularly
in countries where the laws may not protect such rights as fully as do the laws
of the United States.
We
may face product-failure exposure that exceeds our recorded
liability.
We
provide product warranties for varying lengths of time and establish allowances
in anticipation of warranty expenses. In addition, we record contingent
liabilities for additional product-failure related costs. These warranty and
related product-failure allowances may be inadequate due to undetected product
defects, unanticipated component failures, as well as changes in various
estimates for material, labor and other costs we may incur to replace projected
product failures. As a result, we may incur additional warranty and related
expenses in the future with respect to new or established
products.
Our
key manufacturing facilities are concentrated.
In the
event of a significant interruption in production at any of our manufacturing
facilities, considerable expense, time and effort could be required to establish
alternative production lines to meet contractual obligations, which would have a
material adverse effect on our business, financial condition and results of
operation.
A
number of key personnel are critical to the success of our
business.
Our
success depends in large part on the efforts of our highly qualified technical
and management personnel in all disciplines. The loss of one or more of these
employees and the inability to attract and retain qualified replacements could
have a material adverse effect on our business.
We
depend on certain key vendors.
Certain
of our products, subassemblies and system components are procured from limited
sources. Our reliance on such limited sources involves certain risks, including
the possibility of shortages and reduced control over delivery schedules,
manufacturing capability, quality and costs. Any adverse change in the supply
of, or price for, these components could adversely affect our business,
financial condition and results of operations. In addition, we depend on a small
number of contract manufacturing vendors for a large portion of our low-volume
manufacturing business and all of our repair services for our domestic handheld
meter reading units. If any of these vendors should become unable to perform
their responsibilities, our operations could be materially
disrupted.
We
are subject to regulatory compliance.
We are
subject to various governmental regulations in all of the jurisdictions in which
we conduct business. Failure to comply with current or future regulations could
result in the imposition of substantial fines, suspension of production,
alteration of our production processes, cessation of operations or other
actions, which could materially and adversely affect our business, financial
condition and results of operations.
Changes
in environmental regulations, violations of the regulations or future
environmental liabilities could cause us to incur significant costs and
adversely affect our operations.
Our
business and our facilities are subject to a number of laws, regulations and
ordinances governing, among other things, the storage, discharge, handling,
emission, generation, manufacture, disposal, remediation of, or exposure to
toxic or other hazardous substances and certain waste products. Many of these
environmental laws and regulations subject current or previous owners or
operators of land to liability for the costs of investigation, removal or
remediation of hazardous materials. In addition, these laws and regulations
typically impose liability regardless of whether the owner or operator knew of,
or was responsible for, the presence of any hazardous materials and regardless
of whether the actions that led to the presence were conducted in compliance
with the law. In the ordinary course of our business, we use metals, solvents
and similar materials, which are stored on-site. The waste created by the use of
these materials is transported off-site on a regular basis by unaffiliated waste
haulers. Many environmental laws and regulations require generators of waste to
take remedial actions at, or in relation to, the off-site disposal location even
if the disposal was conducted in compliance with the law. The requirements of
these laws and regulations are complex, change frequently and could become more
stringent in the future. Failure to comply with current or future environmental
regulations could result in the imposition of substantial fines, suspension of
production, alteration of our production processes, cessation of operations or
other actions, which could materially and adversely affect our business,
financial condition and results of operations. There can be no assurance that a
claim, investigation or liability will not arise with respect to these
activities, or that the cost of complying with governmental regulations in the
future, will not have a material adverse effect on us.
We may in
the future be responsible for investigating and remediating contamination at the
sites we own or lease. With respect to one of our South Carolina facilities,
certain environmental remedial activities are required pursuant to a consent
agreement between Schlumberger (and various related parties), from which we
purchased the operations of this facility in 2004, and the South Carolina
Department of Health and Environmental Control (SCDHEC). Prior remedial
activities also were undertaken at this location under the guidance of the
United States Environmental Protection Agency. The consent agreement with the
SCDHEC requires Schlumberger to investigate and remediate groundwater and
related soil and surface water contamination and releases of any hazardous waste
or hazardous constituents that present an actual or potential threat to human
health and the environment. Under the terms of our 2004 acquisition agreement,
Schlumberger agreed to complete all remedial obligations associated with the
consent agreement, and agreed to indemnify us for all costs incurred as a result
of any releases and generation or transportation of hazardous materials prior to
the acquisition. Although we expect Schlumberger to comply with the terms of the
consent agreement and the acquisition, there is a risk that such remediation
will interfere with our future use of this South Carolina property, or if
Schlumberger did not comply, the remediation responsibility would transfer to
us.
We
potentially face costs and liabilities in connection with product take-back
legislation. The European Union has enacted the Waste Electrical and Electronic
Equipment Directive (WEEE), which makes producers of certain types of electrical
equipment financially responsible for specified collection, recycling, treatment
and disposal of past and future covered products. The deadline for the
individual member states of the European Union to enact the directive in their
respective countries was August 13, 2004. Producers participating in the
market became financially responsible for implementing their responsibilities
under the WEEE Legislation beginning in August 2005. Implementation in
certain European Union member states was delayed into 2007. Similar legislation
has been or may be enacted in other jurisdictions, including the United States,
Canada, Mexico, China and Japan. China has passed similar legislation, which
took effect March 1, 2007. California has drafted electronic recycling laws
similar to the WEEE legislation, but such legislation has not as yet been
enacted. Our potential liability resulting from the WEEE and similar
legislations could become substantial.
Our
credit facility (credit facility), and the indentures related to our senior
subordinated notes and our convertible senior subordinated notes, limit our
ability and the ability of most of our subsidiaries to take certain
actions.
Our
credit facility, senior subordinated notes (7.75% senior subordinated notes due
2012) and convertible notes (2.5% convertible senior subordinated notes due
2026) place restrictions on our ability and the ability of most of our
subsidiaries to, among other things:
|
·
|
incur
more debt;
|
|
·
|
pay
dividends and make distributions;
|
|
·
|
make
certain investments;
|
|
·
|
incur
capital expenditures above a set
limit;
|
|
·
|
redeem
or repurchase capital stock;
|
|
·
|
create
liens;
|
|
·
|
enter
into transactions with affiliates;
|
|
·
|
enter
into sale lease-back transactions;
|
|
·
|
merge
or consolidate; and
|
|
·
|
transfer
or sell assets.
|
Our
credit facility contains other customary covenants, including the requirement to
meet specified financial ratios. Our ability to borrow under our credit facility
will depend on the satisfaction of these covenants. Events beyond our control
can affect our ability to meet those covenants. Our credit facility is sensitive
to interest rate and foreign currency exchange rate risks that could impact our
financial position and results of operations.
Our
failure to comply with obligations under our borrowing arrangements may result
in declaration of an event of default. An event of default, if not cured or
waived, may permit acceleration of such indebtedness. In addition, indebtedness
under other instruments (such as our senior subordinated notes) that contain
cross-default or cross-acceleration provisions also may be accelerated and
become due and payable. We cannot be certain we will be able to remedy any such
defaults. If our indebtedness is accelerated, we cannot be certain that we will
have sufficient funds available to pay the accelerated indebtedness or that we
will have the ability to borrow sufficient funds to replace the accelerated
indebtedness on terms favorable to us or at all. In addition, in the case of an
event of default under our secured indebtedness such as our credit facility, the
lenders may be permitted to foreclose on our assets securing that
indebtedness.
Our
ability to service our indebtedness is dependent on our ability to generate
cash, which is influenced by many factors beyond our control.
Our
ability to make payments on or refinance our indebtedness, fund planned capital
expenditures and continue research and development will depend on our ability to
generate cash in the future. This is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We may need to refinance all or a portion of our indebtedness on or
before maturity. We cannot provide assurance that we will be able to refinance
any of our indebtedness on commercially reasonable terms or at all.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
Effective
internal controls are necessary for us to provide reliable and accurate
financial reports and effectively prevent fraud. We have devoted significant
resources and time to comply with the internal control over financial reporting
requirements of the Sarbanes-Oxley Act of 2002. In addition, Section 404
under the Sarbanes-Oxley Act of 2002 requires that our auditors attest to the
design and operating effectiveness of our controls over financial reporting. Our
compliance with the annual internal control report requirement for each fiscal
year will depend on the effectiveness of our financial reporting and data
systems and controls across our operating subsidiaries. Furthermore, an
important part of our growth strategy has been, and will likely continue to be,
the acquisition of complementary businesses, and we expect these systems and
controls to become increasingly complex to the extent that we integrate
acquisitions and our business grows. Likewise, the complexity of our
transactions, systems and controls may become more difficult to manage. We
cannot be certain that these measures will ensure that we design, implement and
maintain adequate controls over our financial processes and reporting in the
future, especially in light of acquisitions that may not have been required to
be in compliance with Section 404 of the Sarbanes-Oxley Act of 2002 at the
date of acquisition. Any failure to implement required new or improved controls,
difficulties encountered in their implementation or operation, or difficulties
in the assimilation of acquired businesses into our control system could harm
our operating results or cause it to fail to meet our financial reporting
obligations. Inferior internal controls could also cause investors to lose
confidence in our reported financial information, which could have a negative
effect on the trading price of our stock and our access to capital.
The
accounting method for convertible debt securities with net share settlement
features, like our convertible notes, may be subject to change.
In August
2006, we issued $345 million of 2.5% convertible senior subordinated notes
(convertible notes) with a net share settlement feature. Our convertible notes
are not considered conventional convertible debt as defined in Emerging Issues
Task Force (EITF) 05-02, The
Meaning of Conventional Convertible Debt instruments in Issue 00-19, as
the number of shares, or cash, to be received by the holders was not fixed at
the inception of the obligation. For the purpose of calculating diluted earnings
per share, a convertible debt security providing for net share settlement of the
conversion value and meeting specified requirements under EITF Issue No. 00-19,
Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock (Net Share Convertibles), interest expense is
accounted for in the same manner as non-convertible debt, with the stated coupon
constituting interest expense and any shares issuable upon conversion of the
security being accounted for under the treasury stock method. The effect of the
treasury stock method is that the shares potentially issuable upon conversion of
the notes are not included in the calculation of our earnings per share except
to the extent that the conversion value of the notes exceeds their principal
amount, in which case the number of shares of our common stock necessary to
settle the conversion are treated as having been issued for earnings per share
purposes.
A
proposed Financial Accounting Standards Board (FASB) Staff Position (FSP)
addressing convertible instruments that may be settled in cash upon conversion
was issued on August 31, 2007 for a 45-day comment period that ended October 15,
2007. The FASB is expected to begin its redeliberations of the guidance in that
proposed FSP in February 2008. The proposed FSP requires, among other things,
the issuer to separately account for the liability and equity components of the
instrument in a manner that reflects the issuer’s non-convertible debt borrowing
rate. We cannot predict the outcome of the FASB deliberations or any other
changes in Generally Accepted Accounting Principles (GAAP) that may be made
affecting accounting for convertible debt securities. Any change in the
accounting method for convertible debt securities could have an adverse impact
on our past or future financial results. In addition, these impacts could
adversely affect the trading price of our common stock.
ITEM 1B: UNRESOLVED STAFF
COMMENTS
None.
ITEM 2: PROPERTIES
Our Itron
North America operating segment operations are located primarily in North
America. Our Actaris operating segment operations are located in Europe and
throughout the rest of the world.
The
following table lists the number of factories and sales and administration
offices by region.
|
Manufacturing,
Assembly,
Service
and
Distribution
|
Administration,
Sales
and
Other
|
|||||||
|
Owned
|
Leased
|
Owned
|
Leased
|
|||||
|
North
America
|
4
|
9
|
1
|
24
|
||||
|
Europe
|
15
|
4
|
-
|
23
|
||||
|
Asia/Pacific
|
2
|
4
|
-
|
25
|
||||
|
Other
(rest of world)
|
4
|
3
|
-
|
15
|
||||
|
Total
|
25
|
20
|
1
|
87
|
||||
Our
factory locations consist of manufacturing, assembly, service and distribution
facilities. Our sales and administration offices may also include various
product development operations. Our headquarters facility is located in Liberty
Lake, Washington. Our principal properties are owned and in good condition and
we believe our current facilities will be sufficient to support our operations
for the foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with Statement of Financial Accounting Standards (SFAS) 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded when we determine that a loss is probable and the amount can be
reasonably estimated. Additionally, we disclose contingencies for which a
material loss is reasonably possible, but not probable. Legal contingencies at
December 31, 2007 were not material to our financial condition or results
of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger. PT Berca claims that it had preemptive rights
in the joint venture and has sought to nullify the transaction in 2001 whereby
Schlumberger transferred its ownership interest in PT Mecoindo to an Actaris
subsidiary. The plaintiff also seeks to collect damages for the earnings it
otherwise would have earned had its alleged preemptive rights been observed. The
Indonesian courts have awarded 129.6 billion rupiahs, or approximately $14.1
million, in damages against the defendants and have invalidated the 2001
transfer of the Mecoindo interest to a subsidiary of Actaris. All of the parties
have appealed the matter and it is currently pending before the Indonesian
Supreme Court. We believe the claims are without merit and no liability has been
recorded. However, Actaris has notified Schlumberger that it will seek to have
Schlumberger indemnify Actaris from any damages it may occur as a result of this
claim.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
No
matters were submitted to a vote of shareholders of Itron, Inc. during the
fourth quarter of 2007.
PART
II
ITEM 5: MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information for Common Stock
Our
common stock is traded on the NASDAQ Global Select Market. The following table
reflects the range of high and low common stock sales prices for the four
quarters of 2007 and 2006 as reported by the NASDAQ Global Select
Market.
|
2007
|
2006
|
||||||||||||||
|
High
|
Low
|
High
|
Low
|
||||||||||||
|
First
Quarter
|
$ | 68.91 | $ | 51.15 | $ | 62.75 | $ | 39.44 | |||||||
|
Second
Quarter
|
$ | 78.72 | $ | 64.57 | $ | 73.72 | $ | 52.58 | |||||||
|
Third
Quarter
|
$ | 96.08 | $ | 73.55 | $ | 60.46 | $ | 44.76 | |||||||
|
Fourth
Quarter
|
$ | 112.92 | $ | 72.78 | $ | 57.50 | $ | 46.87 | |||||||
Performance
Graph
The
following graph compares the five-year cumulative total return to shareholders
on our common stock with the five-year cumulative total return of NASDAQ (U.S.
Companies) Index, our peer group of companies used for the year ended December
31, 2007 and our prior peer group of companies used for the year ended December
31, 2006.
The above
presentation assumes $100 invested on December 31, 2002 in the common stock
of Itron, Inc., the NASDAQ (U.S. Companies) Index and the peer group, with all
dividends reinvested. With respect to companies in the peer group, the returns
of each such corporation have been weighted to reflect relative stock market
capitalization at the beginning of each period plotted. The stock prices shown
above for our common stock are historical and not necessarily indicative of
future price performance.
As a
result of the acquisition of Actaris on April 18, 2007, we reassessed our peer
group to identify global companies that were either direct competitors or had
similar industry and business operating characteristics. Our new peer group
includes the following publicly traded companies: Badger Meter, Inc., Cooper
Industries, Ltd., ESCO Technologies Inc., Mueller Water Products, LLC, National
Instruments Corporation and Roper Industries, Inc. Our previous peer group
included the following publicly traded companies: Analogic Corporation, Badger
Meter, Inc., EMS Technologies, Inc., ESCO Technologies Inc., Roper Industries,
Inc., Symbol Technologies, Inc. and Trimble Navigation Limited.
Holders
At
January 31, 2008 there were 324 holders of record of our common
stock.
Dividends
Since the
inception of the Company, we have not declared or paid cash dividends. In
addition, our credit facility dated April 18, 2007 and our senior
subordinated notes due 2012 prohibit the declaration or payment of a cash
dividend as long as these facilities are in place. Upon repayment of our
borrowings, we intend to retain future earnings for the development of our
business and do not anticipate paying cash dividends in the foreseeable
future.
Unregistered
Equity Security Sales
None.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL
DATA
The
selected consolidated financial data below is derived from our consolidated
financial statements, which have been audited by an independent registered
public accounting firm. This selected consolidated financial and other data
represents portions of our financial statements. You should read this
information together with Item 7: “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and Item 8: “Financial Statements
and Supplementary Data” included in this Annual Report on Form 10-K. Historical
results are not necessarily indicative of future performance.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2007 (1)
|
2006
|
2005
|
2004 (2)
|
2003
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Statements
of Operations Data
|
||||||||||||||||||||
|
Revenues
|
$ | 1,464,048 | $ | 644,042 | $ | 552,690 | $ | 399,194 | $ | 316,965 | ||||||||||
|
Cost
of revenues
|
976,761 | 376,600 | 319,069 | 228,525 | 173,411 | |||||||||||||||
|
Gross
profit
|
487,287 | 267,442 | 233,621 | 170,669 | 143,554 | |||||||||||||||
|
Operating
expenses
|
||||||||||||||||||||
|
Sales
and marketing
|
125,842 | 63,587 | 56,642 | 45,279 | 40,985 | |||||||||||||||
|
Product
development
|
94,926 | 58,774 | 47,077 | 44,379 | 41,508 | |||||||||||||||
|
General
and administrative
|
100,071 | 52,213 | 44,428 | 35,490 | 26,641 | |||||||||||||||
|
Amortization
of intangible assets
|
84,000 | 31,125 | 38,846 | 27,901 | 9,618 | |||||||||||||||
|
In-process
research and development
|
35,975 | - | - | 6,400 | 900 | |||||||||||||||
|
Restructurings
|
- | - | 390 | 7,258 | 2,208 | |||||||||||||||
|
Total
operating expenses
|
440,814 | 205,699 | 187,383 | 166,707 | 121,860 | |||||||||||||||
|
Operating
income
|
46,473 | 61,743 | 46,238 | 3,962 | 21,694 | |||||||||||||||
|
Other
income (expense)
|
||||||||||||||||||||
|
Interest
income
|
10,477 | 9,497 | 302 | 166 | 159 | |||||||||||||||
|
Interest
expense
|
(89,965 | ) | (17,785 | ) | (18,944 | ) | (13,145 | ) | (2,638 | ) | ||||||||||
|
Other
income (expense), net
|
435 | (1,220 | ) | (68 | ) | (389 | ) | (1,316 | ) | |||||||||||
|
Total
other income (expense)
|
(79,053 | ) | (9,508 | ) | (18,710 | ) | (13,368 | ) | (3,795 | ) | ||||||||||
|
Income
(loss) before income taxes
|
(32,580 | ) | 52,235 | 27,528 | (9,406 | ) | 17,899 | |||||||||||||
|
Income
tax (provision) benefit
|
16,436 | (18,476 | ) | 5,533 | 4,149 | (7,421 | ) | |||||||||||||
|
Net
income (loss)
|
$ | (16,144 | ) | $ | 33,759 | $ | 33,061 | $ | (5,257 | ) | $ | 10,478 | ||||||||
|
Earnings
(loss) per share
|
||||||||||||||||||||
|
Basic
|
$ | (0.55 | ) | $ | 1.33 | $ | 1.41 | $ | (0.25 | ) | $ | 0.51 | ||||||||
|
Diluted
|
$ | (0.55 | ) | $ | 1.28 | $ | 1.33 | $ | (0.25 | ) | $ | 0.48 | ||||||||
|
Weighted
average number of shares outstanding
|
||||||||||||||||||||
|
Basic
|
29,584 | 25,414 | 23,394 | 20,922 | 20,413 | |||||||||||||||
|
Diluted
|
29,584 | 26,283 | 24,777 | 20,922 | 21,740 | |||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
Working capital (deficit)
(3)
|
$ | 218,861 | $ | 492,861 | $ | 116,079 | $ | 58,123 | $ | (1,846 | ) | |||||||||
|
Total
assets
|
3,100,549 | 988,522 | 598,884 | 557,151 | 303,489 | |||||||||||||||
|
Total
debt
|
1,590,541 | 469,324 | 166,929 | 278,235 | 52,269 | |||||||||||||||
|
Shareholders'
equity
|
758,802 | 390,982 | 317,534 | 184,430 | 177,244 | |||||||||||||||
|
(1)
|
On
April 18, 2007, we completed the acquisition of Actaris Metering Systems
SA (Actaris). Refer to Item 8: "Financial Statements and Supplementary
Data, Note 4: Business Combinations" for a discussion of the effects of
the acquisition. The Consolidated Statement of Operations for the year ended
December 31, 2007 includes the operating activities of the Actaris
acquisition from April 18, 2007 through December 31,
2007.
|
|
(2)
|
On
July 1, 2004, we completed the acquisition of Schlumberger's electricity
metering business. The Consolidated Statement of Operations for the year
ended December 31, 2004 includes the operating activities of this
acquisition from July 1, 2004 through December 31,
2004.
|
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with
Item 8: “Financial Statements and Supplementary Data.”
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
On April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris)
for €800 million (approximately $1.1 billion) plus the retirement of
approximately $642.9 million of debt. The acquisition was financed with a
$1.2 billion credit facility (credit facility), $225.2 million in net
proceeds from the sale of our common stock and cash on hand. The Actaris
acquisition includes all of Actaris’ electricity, gas and water meter
manufacturing and sales operations, located throughout the world. The
acquisition of Actaris creates an opportunity to share technology and expertise
around the world as worldwide electric, gas and water utilities look for
advanced metering and communication products to better serve their markets. The
operating results of the Actaris acquisition are included in our consolidated
financial statements commencing on the date of acquisition. The acquisition of
Actaris significantly changes many aspects of our results of operations,
financial condition and cash flows, which are described in each applicable area
within the discussion that follows.
Total
Company Revenues, Gross Profit and Margin and Unit Shipments
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2007
|
%
Change
|
2006
|
%
Change
|
2005
|
||||||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||||
|
Revenues
|
$ | 1,464.0 | 127 | % | $ | 644.0 | 17 | % | $ | 552.7 | ||||||||||
|
Gross
Profit
|
$ | 487.3 | 82 | % | $ | 267.4 | 14 | % | $ | 233.6 | ||||||||||
|
Gross
Margin
|
33 | % | 42 | % | 42 | % | ||||||||||||||
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
(in
millions)
|
|||||||||||
|
Revenues
by region
|
|||||||||||
|
Europe
|
$ | 623.6 | $ | 4.0 | $ | 5.6 | |||||
|
United
States and Canada
|
596.6 | 602.9 | 513.4 | ||||||||
|
Other
|
243.8 | 37.1 | 33.7 | ||||||||
|
Total
revenues
|
$ | 1,464.0 | $ | 644.0 | $ | 552.7 | |||||
Revenues
Revenues
increased $820.0 million in 2007, compared with 2006. Actaris contributed $833.7
million from the date of acquisition to December 31, 2007, which is the primary
reason for the increase in total revenue as well as the increase in revenue in
Europe and throughout the rest of the world. The decline in revenue in the
United States and Canada from 2006 to 2007 was due to the completion of a large
contract with Progress Energy. Revenues increased $91.3 million in 2006
compared with 2005, as a result of increased sales of electricity
meters.
No single
customer represented more than 10% of total revenues for 2007 or 2005. One
customer, Progress Energy, represented 16% of total revenues for the year ended
December 31, 2006. The 10 largest customers accounted for approximately 14%, 40%
and 26% in each of the years ending 2007, 2006 and 2005,
respectively.
Gross
Margins
Gross
margin was 33% in 2007, compared with 42% in both 2006 and 2005. Gross margin
for Actaris’ products and services is lower than Itron North America’s as a
result of Actaris’ product mix of higher meter only sales as compared with Itron
North America’s systems focused offerings. Business combination accounting rules
require the valuation of inventory on hand at the acquisition date to equal the
sales price, less costs to complete and a reasonable profit allowance for
selling effort. Accordingly, the historical cost of inventory acquired as part
of the Actaris acquisition was increased by $16.0 million, which lowered the
2007 total company gross margin by one percentage point.
Unit
Shipments
Meters
can be sold with and without automated meter reading (AMR). In addition, AMR can
be sold separately from the meter. Depending on customers’ preferences, we also
incorporate other vendors’ AMR technology in our meters. Meter and AMR shipments
are as follows:
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
(in
thousands)
|
|||||||||||
|
Total
meters (with and without AMR)
|
|||||||||||
|
Electricity
|
9,450 | 6,625 | 4,675 | ||||||||
|
Gas
|
2,550 | - | - | ||||||||
|
Water
|
5,575 | - | - | ||||||||
|
Total
meters
|
17,575 | 6,625 | 4,675 | ||||||||
|
AMR
units (Itron and Actaris)
|
|||||||||||
|
Meters
with AMR
|
3,600 | 4,000 | 2,250 | ||||||||
|
AMR
modules
|
4,675 | 4,625 | 5,100 | ||||||||
|
Total
AMR units
|
8,275 | 8,625 | 7,350 | ||||||||
|
Meters
with other vendors' AMR
|
925 | 925 | 675 | ||||||||
Segment
Revenues, Gross Profit, Gross Margin and Operating Income (Loss) and Operating
Margin
We
changed our management structure with the acquisition of Actaris on April 18,
2007 and, as a result, now have two operating segments. The Actaris operating
segment consists of our Actaris operations, which are primarily located in
Europe and throughout the rest of the world outside of North America. The
remainder of our operations, primarily located in the United States and Canada,
have been combined into a single segment called Itron North America. The
operating segment information as set forth below is based on this new 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 2007 Actaris
acquisition.
We have
three measures of segment performance: revenue, gross profit (margin) and
operating income (margin). There were no intersegment revenues. Corporate
operating expenses, interest income, interest expense, other income (expense)
and income tax expense (benefit) are not allocated to the segments, nor included
in the measure of segment profit or loss. Assets and liabilities are not used in
our measurement of segment performance and, therefore, are not allocated to our
segments. Substantially all depreciation expense is allocated to our
segments.
Segment
Products
|
Itron
North America
|
Electronic
electricity meters with and without AMR; gas and water AMR modules;
handheld, mobile and network AMR data collection technologies; advanced
metering infrastructure (AMI) technologies; software, installation,
implementation, maintenance support and other services.
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water and
heat meters; diaphragm, turbine and rotary gas meters; one-way and
two-way electricity prepayment systems, including smart key, keypad and
smart card; two-way gas prepayment systems using smart card; AMR data
collection technologies; installation, implementation, maintenance support
and other services.
|
The
following tables and discussion highlight significant changes in trends or
components of each segment.
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
%
Change
|
2006
|
%
Change
|
2005
|
||||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||||||||
|
Segment
Revenues
|
||||||||||||||||||||||||
|
Itron
North America
|
$ | 630.3 | (2 | %) | $ | 644.0 | 17 | % | $ | 552.7 | ||||||||||||||
|
Actaris
|
833.7 | - | - | - | - | |||||||||||||||||||
|
Total
revenues
|
$ | 1,464.0 | 127 | % | $ | 644.0 | 17 | % | $ | 552.7 | ||||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Gross
Profit
|
Gross
Margin
|
Gross
Profit
|
Gross
Margin
|
Gross
Profit
|
Gross
Margin
|
|||||||||||||||||||
|
Segment
Gross Profit and Margin
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||
|
Itron
North America
|
$ | 256.8 | 41 | % | $ | 267.4 | 42 | % | $ | 233.6 | 42 | % | ||||||||||||
|
Actaris
|
230.5 | 28 | % | - | - | - | - | |||||||||||||||||
|
Total
gross profit and margin
|
$ | 487.3 | 33 | % | $ | 267.4 | 42 | % | $ | 233.6 | 42 | % | ||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Operating
Income
(Loss)
|
Operating
Margin
|
Operating
Income
(Loss)
|
Operating
Margin
|
Operating
Income
(Loss)
|
Operating
Margin
|
|||||||||||||||||||
|
Segment
Operating Income (Loss) (in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||||||||
|
and
Operating Margin
|
|
|
|
|||||||||||||||||||||
|
Itron
North America
|
$ | 74.6 | 12 | % | $ | 89.0 | 14 | % | $ | 69.9 | 13 | % | ||||||||||||
|
Actaris
|
3.9 | 0 | % | - | - | |||||||||||||||||||
|
Corporate
unallocated
|
(32.0 | ) | (27.3 | ) | (23.7 | ) | ||||||||||||||||||
|
Total
Company
|
$ | 46.5 | 3 | % | $ | 61.7 | 10 | % | $ | 46.2 | 8 | % | ||||||||||||
Itron North America: Revenues
decreased $13.7 million, or 2%, in 2007, compared with 2006. Shipments of
electricity meters decreased 23% in 2007, compared with 2006. During 2006, we
shipped over 2.2 million meters under the Progress Energy contract. This
accelerated delivery schedule, which was substantially complete at the end of
2006, increased our historical electricity meter production levels, resulting in
increased revenues and higher overhead absorption. Approximately 45% of our
meters sold in 2007 were equipped with our AMR technology, compared with 60% in
2006. Gross margin decreased one percentage point in 2007, compared with 2006,
as a result of product mix and lower overhead absorption.
Revenues
increased $91.3 million, or 17%, in 2006, compared with 2005, due to a 42%
increase in meter shipments. The growth in meter shipments was primarily related
to shipments of residential meters with AMR under a contract with Progress
Energy. Approximately 60% of our meters sold in 2006 were equipped with our AMR
technology, compared with 48% in 2005.
No single
customer represented more than 10% of Itron North America operating segment
revenues in 2007 and 2005. One customer, Progress Energy, accounted for 16% of
the Itron North America operating segment revenues in 2006.
Itron
North America operating expenses as a percentage of revenues were 29% in 2007,
compared with 28% and 30% in 2006 and 2005, respectively. Research and
development costs have increased as a percentage of revenue from 9% in 2006 and
2005 to approximately 11% in 2007 as a result of the development of our AMI
technologies. This increase was partially offset by a decline in intangible
asset amortization and lower bonus and profit sharing expenses.
Actaris: Actaris was acquired
on April 18, 2007. Revenues were $833.7 million for the period from acquisition
to December 31, 2007 with 40%, 32% and 28% from electricity, gas and water
meter products and services, respectively. Gross margin was 28% from the date of
acquisition to December 31, 2007. Business combination accounting rules require
the valuation of inventory on hand at the acquisition date to equal the sales
price, less costs to complete and a reasonable profit allowance for selling
effort. Accordingly, the historical cost of inventory acquired was increased by
$16.0 million, which lowered gross margins by two percentage points from the
date of acquisition to December 31, 2007. The acquired inventory was sold in the
first quarter subsequent to the acquisition.
No single
customer represented more than 10% of the Actaris operating segment revenues for
the period from April 18, 2007 to December 31, 2007.
Operating
expenses for Actaris were $226.6 million for the period from acquisition to
December 31, 2007 of which $36.0 million represented in-process
research and development (IPR&D) related to the acquisition. Operating
expenses as a percentage of revenues were 27% from the date of acquisition to
December 31, 2007. Actaris product development and general and
administrative expenses may increase as we expand our product offering and
increase expenses for internal controls over financial reporting.
Corporate
unallocated: Operating
expenses not directly associated with an operating segment are classified as
“Corporate unallocated.” These expenses, as a percentage of total Company
revenues, were 2% in 2007, compared with 4% in 2006 and
2005.
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues.
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
%
of Revenue
|
2006
|
%
of Revenue
|
2005
|
%
of Revenue
|
|||||||||||||||||||
|
(in millions)
|
(in millions)
|
(in millions)
|
||||||||||||||||||||||
|
Sales
and marketing
|
$ | 125.8 | 9 | % | $ | 63.6 | 10 | % | $ | 56.6 | 10 | % | ||||||||||||
|
Product
development
|
94.9 | 6 | % | 58.8 | 9 | % | 47.1 | 9 | % | |||||||||||||||
|
General
and administrative
|
100.1 | 7 | % | 52.2 | 8 | % | 44.8 | 8 | % | |||||||||||||||
|
Amortization
of intangible assets
|
84.0 | 6 | % | 31.1 | 5 | % | 38.9 | 7 | % | |||||||||||||||
|
In-process
research and development
|
36.0 | 2 | % | - | - | - | - | |||||||||||||||||
|
Total
operating expenses
|
$ | 440.8 | 30 | % | $ | 205.7 | 32 | % | $ | 187.4 | 34 | % | ||||||||||||
Operating
expenses for 2007 contain Actaris’ operating expenses from April 18, 2007.
Itron North America’s product development expenses have increased as a
percentage of revenue from 9% in 2006 to approximately 11% in 2007 as a result
of the development of our AMI technologies. Overall, product development
expenses declined as a percent of revenues from 9% to approximately 6% due to
Actaris’ lower product development expenses in 2007. Actaris product development
and general and administrative expenses may increase as we expand our product
offering and increase expenses for internal controls over financial reporting.
The increase in the amortization of intangible assets was the result of the
acquisition of Actaris.
For 2006,
total operating expenses included approximately $8.3 million associated
with our January 1, 2006 adoption of SFAS 123(R), Share-Based Payment, which
requires expensing of stock-based compensation commencing in the year of
adoption. Product development increased $11.7 million in 2006 compared with
2005. The 25% increase in product development in 2006 was primarily due to the
development of our AMI solution. The fluctuation in the amortization expense of
intangible assets is the result of the timing of our acquisitions and our
amortization methodology using the estimated discounted cash flows, which
typically results in higher amortization at the beginning of the asset’s life.
While total operating expenses have increased each year, they have decreased as
a percentage of revenue.
In-Process
Research and Development Expenses
Our
acquisition of Actaris resulted in $36.0 million of IPR&D expense,
consisting primarily of next generation technology. The IPR&D projects were
analyzed according to exclusivity, substance, economic benefit, incompleteness,
measurability and alternative future use. The primary projects are intended to
make key enhancements and improve functionality of our residential and
commercial and industrial meters. We value IPR&D using the income approach,
which uses the present value of the projected cash flows that are expected to be
generated over the next one to six years. The risk adjusted discount rate was 12
percent, which was based on an industry composite of weighted average cost of
capital, with certain premiums for equity risk and size, and the uncertainty
associated with the completion of the development effort and subsequent
commercialization. We estimate these research and development projects to be
approximately 70% complete at December 31, 2007, when compared against the
expected costs. We estimate the cost to complete these projects will be
approximately $7 million during 2008, which we will record as research and
development expense as the costs are incurred.
Our
future success depends, in part, on our ability to continue to design and
manufacture new competitive products and to enhance and sustain our existing
products. However, we may experience unforeseen problems in the development or
performance of our technologies or products, we may not meet our product
development schedules or we may not achieve market acceptance of our new
products or solutions.
Other
Income (Expense)
The
following table shows the components of other income (expense).
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Interest
income
|
$ | 10,477 | $ | 9,497 | $ | 302 | ||||||
|
Interest
expense
|
(76,443 | ) | (13,205 | ) | (13,807 | ) | ||||||
|
Amortization
of debt placement fees
|
(13,522 | ) | (4,580 | ) | (5,137 | ) | ||||||
|
Other
income (expense), net
|
435 | (1,220 | ) | (68 | ) | |||||||
|
Total
other income (expense)
|
$ | (79,053 | ) | $ | (9,508 | ) | $ | (18,710 | ) | |||
The
increase in interest income for 2007 and 2006, compared with 2005, was the
result of our higher cash and cash equivalent balances and short-term
investments. During August 2006, we issued $345 million 2.50% convertible senior
subordinated notes (convertible notes) and on March 1, 2007 we issued and sold
4.1 million shares of common stock, resulting in net proceeds of $225.2
million. Our average cash balances were $168.2 million in 2007, compared with
$135.2 million and $16.2 million in 2006 and 2005,
respectively.
The
increase in interest expense in 2007, compared with 2006 and 2005, is primarily
the result of the new $1.2 billion credit facility used to finance the Actaris
acquisition. Interest expense also increased in 2007 as a result of our
$345 million 2.50% convertible notes issued in August 2006. Interest
expense for 2006 was comparable with interest expense incurred in 2005. Average
outstanding borrowings were $1.3 billion in 2007, compared with
$273.7 million and $200.4 million in 2006 and 2005, respectively. The
fluctuation in borrowings in 2006 resulted from the issuance of
$345 million in convertible notes in the third quarter of 2006, offset by
our repayment of $42.7 million in previous borrowings earlier in the year.
In addition, we capitalized interest expense of approximately $900,000 in 2006
related to qualified expenditures for improvements to our new corporate
headquarters facility, which was substantially complete at September 30, 2006.
The interest expense in 2005 was related to the debt we issued in May and July
of 2004 to fund the acquisition of Schlumberger’s electricity metering business.
This debt consisted of $125 million in senior subordinated notes
(subordinated notes) and a $185 million senior secured term loan, which was
repaid in 2006.
The
increase in amortization of debt placement fees in 2007 is the result of the new
borrowings used to fund the Actaris acquisition. In addition, our debt fees for
the convertible notes were to be amortized through the date of the earliest put
or conversion option, which occurred at September 30, 2007; therefore we
expensed approximately $6.6 million of the remaining prepaid debt fees
associated with the convertible notes. Amortization of prepaid debt fees
fluctuated in 2006 as a result of the issuance of our convertible notes and the
voluntary prepayments of the senior secured term loan.
Other
income (expense) consists primarily of foreign currency gains and losses, which
can vary from period to period, as well as other non-operating events or
transactions. In 2007, other income included foreign currency gains of
$3.0 million as a result of unrealized gains on our euro denominated
borrowings, which are now designated as a hedge of a net investment in foreign
operations, with future foreign currency fluctuations recorded in other
comprehensive income. Other income in 2007 also included $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. These gains
in 2007 were offset by unrealized foreign currency exchange losses on working
capital accounts, including accrued interest balances on intercompany loans.
During 2006, in addition to foreign currency fluctuations, other income
(expense) also included higher banking fees and a $242,000 loss on the sale of
our investment in Servatron.
Income
Taxes
Our
actual income tax rates typically differ from the federal statutory rate of 35%,
and can vary from period to period, due to fluctuations in operating results,
new or revised tax legislation and accounting pronouncements, changes in the
level of business performed in domestic and foreign jurisdictions, research
credits and state income taxes.
Our
actual income tax rate was a benefit of 50.45% for 2007. We
recorded benefits from legislative reductions in tax rates in Germany and
the United Kingdom during the third quarter of 2007. The German Business Tax Reform
2008 was finalized on August 17, 2007, which reduced the German tax rate
from approximately 39% to 30%. On July 19, 2007, the United Kingdom enacted the
Finance Act of 2007,
which lowered the main corporate tax rate from 30% to 28%. These
benefits were offset by IPR&D, which is not deductible and increases our
actual tax rate.
Itron’s
tax benefit for 2007 reflects a benefit associated with lower effective tax
rates on foreign 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 foreign tax liability
reflects the benefit of foreign interest expense deductions.
Effective
January 1, 2007, we adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109 (FIN 48). As a result of the
implementation of FIN 48, we recognized a $5.4 million increase in the liability
for unrecognized tax benefits, with a corresponding increase in deferred tax
assets. At January 1, 2007 and December 31, 2007, the amount of unrecognized tax
benefits was $5.4 million and $34.8 million, respectively. Approximately
$27.5 million of unrecognized tax benefits were acquired as part of the Actaris
acquisition on April 18, 2007. Other than $1.7 million in income tax obligations
related to FIN 48 that we expect to pay in 2008, we do not expect any
reasonably possible material changes to the estimated amount of liability
associated with our unrecognized tax benefits through December 31, 2008. The
amount of unrecognized tax benefits that, if recognized, would affect our
effective tax rate as of January 1, 2007 and December 31, 2007 were
$5.4 million and $8.4 million, respectively.
Our 2006
actual income tax rate for the year was 35%. Although our actual income tax rate
was the same as the statutory tax rate, this was due to several factors,
including state income taxes that increase the actual income tax rate and the
adoption of SFAS 123(R) and current year federal, state and Canadian R&D
credits that decrease the actual income tax rate. The tax provision was further
reduced by approximately $1.5 million due to prior year state and Canadian
R&D credits and the realization of deferred tax assets related to a foreign
subsidiary that had been fully reserved. On December 20, 2006, the Tax Relief
and Health Care Act was signed into law, extending the research tax credit for
qualified research expenses incurred throughout 2006 and 2007. We recorded
approximately $2.2 million in federal and state R&D credits after the
effective date of this legislation.
Our 2005
actual income tax rate was a benefit of 20%, which was lower than the statutory
tax rate due to the benefit of research credits and the completion of a research
credit study for the years 1997 through 2004, in which we recognized a
$5.9 million net tax credit as an offset to the provision for income taxes.
In addition, as part of a reorganization of our legal entities for operational
efficiencies, we recognized $8.0 million in deferred tax assets from prior years
that had been fully reserved, associated primarily with certain foreign
operations.
We are
subject to income tax in the U.S. federal jurisdiction and numerous foreign and
state jurisdictions. The Internal Revenues Service has completed its
examinations of our federal income tax returns for the tax years 1993 through
1995. Due to the existence of net operating loss and tax credit carryforwards,
tax years subsequent to 1995 remain open to examination by the major tax
jurisdictions to which we are subject. Actaris’ subsidiaries in France are
currently under examination for the years 2004 through 2006. We reflect interest
and penalties related to unrecognized tax benefits in our provision for income
taxes. Accrued interest and penalties were $9,000 at January 1, 2007. At
December 31, 2007, accrued interest was $2.7 million and accrued penalties
were $2.2 million. The increase from January 1, 2007 to December 31,
2007 was the result of the Actaris acquisition on April 18, 2007.
Financial
Condition
Cash
Flow Information:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Operating
activities
|
$ | 133.3 | $ | 94.8 | $ | 79.6 | ||||||
|
Investing
activities
|
(1,714.4 | ) | (85.5 | ) | (30.6 | ) | ||||||
|
Financing
activities
|
1,310.4 | 318.5 | (27.0 | ) | ||||||||
|
Effect
of exchange rates on cash and cash equivalents
|
1.3 | - | - | |||||||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | (269.4 | ) | $ | 327.8 | $ | 22.0 | |||||
The
Actaris acquisition on April 18, 2007 was funded with a $1.2 billion credit
facility, $225.2 million in net proceeds from the sale of 4.1 million
shares of common stock and cash on hand. The cash and cash equivalents balance
of $361.4 million at December 31, 2006 consisted primarily of the proceeds of
the $345 million of convertible notes issued in August 2006, which were
subsequently used in 2007 to fund the Actaris acquisition.
Operating activities: As a
result of the Actaris acquisition, cash provided by operating activities
increased $38.5 million. Increased revenue activity resulted in cash received
from customers of $1.4 billion for 2007, compared with $646.5 million for 2006,
partially offset by cash paid to suppliers and employees of $1.2 billion in
2007, compared with $542.8 million in 2006. This increase in operating activity
in 2007 was partially offset by a $70.1 million increase in net
interest paid and an increase in taxes paid of $18.3 million in 2007,
compared with 2006. Cash provided by operating activities increased
$15.2 million in 2006, compared with 2005. In 2006, increased revenues
generated an additional $107.8 million in cash, which was partially offset
by an increase of $99.0 million in cash paid to suppliers and employees. In
addition, we paid $16.1 million less in net interest and taxes. In 2006,
$9.7 million in excess tax benefits from stock-based compensation associated
with our January 1, 2006 adoption of SFAS 123(R) is reflected in financing
activities. In 2007, no excess tax benefits from stock-based compensation were
recognized due to the current year net tax loss resulting from increased
interest expense.
Investing activities: Cash
paid for the acquisition of Actaris was approximately $1.7 billion. In the
first quarter of 2007, $35.0 million in short-term investments matured with
the proceeds used to partially fund the acquisition. The acquisition of
property, plant and equipment was $40.6 million in 2007, which was partially
offset by the $7.2 million in proceeds from the sale of our prior headquarters
facility that was held for sale. During 2006, we invested $205.0 million in
short-term held to maturity investments from the net proceeds of our $345
million convertible notes issuance. The remaining proceeds were placed in cash
and cash equivalents. As the investments matured, $170.4 million was placed
in cash and cash equivalents. For 2006, property, plant and equipment purchases
were $31.7 million and were primarily related to capital improvements to
our new corporate headquarters and our enterprise resource planning system
upgrade. Investing activities in 2006 also included a total of $21.1 million
used for three small acquisitions, with no similar activity in 2005. During
2005, we used $32.0 million in cash for property, plant and equipment
purchases, of which $19.8 million was for the purchase of our new corporate
headquarters. We received $2.6 million in proceeds from the sale of a
manufacturing facility in Quebec, Canada in 2005.
Financing activities:
Proceeds from our new credit facility were $1.2 billion in 2007, with $22.1
million in debt placement fees. We subsequently repaid $76.1 million of the
credit facility during 2007. The revaluation of the euro and pound sterling
denominated loans to the U.S. dollar at December 31, 2007 resulted in an
increase of $38.2 million to the loan balances, which was recognized in other
comprehensive income. Net proceeds from the sale of common stock provided $225.2
million in 2007. Cash generated from the exercise of stock-based awards was
$22.4 million during 2007, compared with $15.3 million in 2006 and $24.9
million in 2005. There were no excess tax benefits from stock-based compensation
as a result of our current year net tax loss for 2007, compared with $9.7
million in 2006. In 2006, we received $345.0 million in gross proceeds from the
issuance of our convertible notes, with debt placement fees of
$8.8 million. During 2006, we paid off various debt balances from December
31, 2005, including $24.7 million of our term loan, $14.8 million of our
real estate term note and $3.2 million of project financing debt. During
2005, we made $126.2 million in payments on borrowings, $59.8 million of
which were net proceeds from an equity offering and received $14.8 million in
proceeds from a real estate term note, which was used to partially finance the
purchase of our new corporate headquarters building.
Effect of exchange rates on cash and
cash equivalents: As a result of the Actaris acquisition, the effect of
exchange rates on the cash balances of currencies held in foreign denominations
(primarily euros) was an increase of $1.3 million for 2007.
Disclosures about contractual obligations and commitments:
Disclosures about contractual obligations and commitments:
The
following table summarizes our known obligations to make future payments
pursuant to certain contracts as of December 31, 2007, as well as an
estimate of the timing in which these obligations are expected to be
satisfied.
|
Less
than
|
1-3
|
3-5
|
Beyond
|
||||||||||||||||
|
Total
|
1
year
|
years
|
years
|
5
years
|
|||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Credit facility (1)
|
|||||||||||||||||||
|
USD
denominated term loan
|
$ | 823,331 | $ | 46,153 | $ | 83,403 | $ | 81,425 | $ | 612,350 | |||||||||
|
EUR
denominated term loan
|
626,971 | 35,245 | 68,700 | 66,404 | 456,622 | ||||||||||||||
|
GBP
denominated term loan
|
114,398 | 7,277 | 13,542 | 12,730 | 80,849 | ||||||||||||||
|
Senior subordinated notes
(1)
|
168,025 | 9,688 | 19,376 | 138,961 | - | ||||||||||||||
|
Convertible senior subordinated
notes (1)
|
508,875 | 8,625 | 17,250 | 17,250 | 465,750 | ||||||||||||||
|
Operating lease obligations
(2)
|
27,007 | 11,919 | 11,670 | 2,191 | 1,227 | ||||||||||||||
|
Purchase and service commitments
(3)
|
165,499 | 162,907 | 2,373 | 219 | - | ||||||||||||||
|
Other
long-term liabilities reflected on the balance
|
|||||||||||||||||||
|
sheet under
generally accepted accounting principles (4)
|
83,536 | 6,910 | 41,717 | 11,427 | 23,482 | ||||||||||||||
|
Total
|
$ | 2,517,642 | $ | 288,724 | $ | 258,031 | $ | 330,607 | $ | 1,640,280 | |||||||||
|
(1)
|
Borrowings
are disclosed within Item 8: Financial Statements and Supplementary
Data, Note 7 – Debt, with the addition of estimated interest
expense.
|
|
(2)
|
Operating
lease obligations are disclosed in Item 8: Financial Statements and
Supplementary Data, Note 13 – Commitments and Contingencies, and do not
include common area maintenance charges, real estate taxes and insurance
charges for which we are obligated.
|
|
(3)
|
We
enter into standard purchase orders in the ordinary course of business
that typically obligate us to purchase direct materials and other items.
Purchase orders can vary in terms, which include open-ended agreements
that provide for estimated quantities over an extended shipment period,
typically up to one year at an established unit cost. Our long-term
executory purchase agreements that contain termination clauses have been
classified as less than one year, as the commitments are the estimated
amounts we would be required to pay at December 31, 2007 if the
commitments were canceled.
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(4)
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Other
long-term liabilities consist of warranty obligations, estimated pension
benefit payments, FIN 48 liabilities and other obligations. FIN 48
liabilities totaling $38.0 million, which includes interest and penalties,
recorded as long-term liabilities, are not included in the above
contractual obligations and commitments table as we cannot make a
reasonably reliable estimate of the period of cash settlement with the
respective taxing authorities.
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Liquidity,
Sources and Uses of Capital:
We have
historically funded our operations and growth with cash flow from operations,
borrowings and issuances of common stock.
Credit
Facility
The
Actaris acquisition was financed in part by a $1.2 billion credit facility. The
credit facility, dated April 18, 2007, was comprised of a $605.1 million
first lien U.S. dollar denominated term loan; a €335 million first lien
euro denominated term loan; a £50 million first lien pound sterling
denominated term loan (collectively the term loans); and a $115 million
multicurrency revolving line-of-credit (revolver). Interest rates on the credit
facility are based on the respective borrowing’s denominated LIBOR
rate (U.S. dollar, euro or pound sterling) or the Wells Fargo Bank, National
Association’s prime rate, plus an additional margin subject to factors including
our consolidated leverage ratio. Our interest rates were 6.84%, 8.05% and 6.78%
for the U.S. dollar denominated, the pound sterling denominated and the euro
denominated term loans at December 31, 2007, respectively. 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 our operating subsidiaries,
except our foreign subsidiaries, and contains covenants, which contain certain
financial ratios and place restrictions on the incurrence of debt, the payment
of dividends, certain investments and mergers. We were in compliance with these
debt covenants at December 31, 2007. At December 31, 2007, there were no
borrowings outstanding under the revolver and $54.7 million was utilized by
outstanding standby letters of credit resulting in $60.3 million being available
for additional borrowings.
Senior
Subordinated Notes
Our
senior subordinated notes consist of $125 million aggregate principal amount of
7.75% notes, issued in May 2004 and due in 2012. The subordinated notes were
discounted to a price of 99.265 to yield 7.875%. The discount on the
subordinated notes is accreted resulting in a balance of $124.4 million at
December 31, 2007. Prepaid debt fees are amortized over the life of the
subordinated notes. The subordinated notes are registered with the Securities
and Exchange Commission (SEC) and are generally transferable. Fixed interest
payments of $4.8 million are required every six months, in May and
November. The notes are subordinated to our credit facility (senior secured
borrowings) and are guaranteed by all of our operating subsidiaries, except for
our foreign subsidiaries. The subordinated notes contain covenants, which place
restrictions on the incurrence of debt, the payment of dividends, certain
investments and mergers. The Actaris acquisition and the associated financing
were not prohibited under these covenants. We were in compliance with these debt
covenants at December 31, 2007. Some or all of the subordinated notes may be
redeemed at our option at any time on or after May 15, 2008, at their principal
amount plus a specified premium price of 103.875%, decreasing each year
thereafter.
Convertible
Senior Subordinated Notes
On August
4, 2006, we issued $345 million of 2.50% convertible notes due August 2026.
Fixed interest payments of $4.3 million are required every six months, in
February and August. For each six month period beginning August 2011, contingent
interest payments of approximately 0.19% of the average trading price of the
convertible notes will be made if certain thresholds and events are met, as
outlined in the indenture. The convertible notes are registered with the SEC and
are generally transferable.
The
convertible notes may be converted at the option of the holder at an initial
conversion rate of 15.3478 shares of our common stock for each $1,000 principal
amount of the convertible notes (conversion price of $65.16 per share), under
the following circumstances, as defined in the indenture:
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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;
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between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
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o
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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;
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if
the convertible notes are called for
redemption;
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if
a fundamental change occurs; or
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upon
the occurrence of defined corporate
events.
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The
convertible notes also contain purchase options, at the option of the holders,
which may require us to repurchase all or a portion of the convertible notes on
August 1, 2011, August 1, 2016 and August 1, 2021 at the principal amount, plus
accrued and unpaid interest.
Upon
conversion, the principal amount of the convertible notes will be settled in
cash and, at our option, the remaining conversion obligation (stock price in
excess of conversion price) may be settled in cash, shares or a combination. The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved. We
may redeem some or all of the convertible notes for cash, on or after
August 1, 2011, for a price equal to 100% of the principal amount plus accrued
and unpaid interest.
The
convertible notes are unsecured and subordinate to all of our existing and
future senior secured borrowings. The convertible notes are unconditionally
guaranteed, joint and severally, by all of our operating subsidiaries, except
for our foreign subsidiaries, all of which are wholly owned. The convertible
notes contain covenants, which place restrictions on the incurrence of debt and
certain mergers. The Actaris acquisition and the associated financing were not
prohibited under these covenants. We were in compliance with these debt
covenants at December 31, 2007.
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. At September 30, 2007, the contingent conversion threshold of
our convertible notes was exceeded. As a result, the notes were convertible at
the option of the holder as of September 30, 2007 and through the fourth quarter
of 2007, and accordingly, the aggregate principal amount of the convertible
notes at September 30, 2007 was included in the current portion of
long-term debt; and since our debt fees were amortized through the date of the
earliest conversion option, in accordance with our policy we expensed
approximately $6.6 million of the remaining prepaid debt fees associated with
the convertible notes at September 30, 2007. As our stock price is subject to
fluctuation, the contingent conversion threshold may be exceeded during any
quarter prior to July 2011, and subject the notes to conversion. However, we
believe it is unlikely that a significant portion of the convertible notes would
be converted prior to maturity because the market value of the convertible notes
would likely exceed the value that holders of the convertible notes would
receive upon conversion. If holders elect to convert, however, we would be
required to settle the principal amount of the convertible notes in cash and the
conversion premium in cash or shares of our common stock. We would likely fund
the repayment with existing cash and cash equivalents, common stock issuances
and/or additional borrowings. No convertible notes were converted during the
fourth quarter of 2007.
Other
Sources and Uses of Capital
Prepaid
debt fees for all our outstanding borrowings are amortized over the respective
terms using the effective interest method. Total unamortized prepaid debt fees
were approximately $21.6 million and $13.2 million at December 31, 2007 and
2006, respectively.
Our net
deferred tax assets consist primarily of accumulated net operating loss
carryforwards and tax credits that can be carried forward, some of which are
limited by Internal Revenue Code Sections 382 and 383. The limited deferred tax
assets resulted primarily from acquisitions. For
2007, we had an operating loss for federal and state income tax purposes
and did not pay cash taxes. However, we paid approximately $21.7 million in
local and foreign tax obligations. Approximately $5.5 million of the 2007
provision will be paid in 2008. Based on current projections, we expect to pay
no federal and state taxes and approximately $21.0 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. 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. We contributed $131,000 to the defined benefit pension
plans from the date of the Actaris acquisition through December 31, 2007.
Assuming that actual plan asset returns are consistent with our expected rate of
return in 2007 and beyond, and that interest rates remain constant, we expect to
contribute approximately $500,000 in 2008 to our defined benefit pension
plans.
Working
capital, which includes current assets less current liabilities, was $249.6
million at December 31, 2007, compared with $492.9 million at December 31, 2006.
The $243.3 million decrease in working capital resulted primarily from the
reduction of cash and cash equivalents from the proceeds used to partially fund
the acquisition of Actaris.
We expect
to continue to expand our operations and grow our business through a combination
of internal new product development, licensing technology from or to others,
distribution agreements, partnership arrangements and acquisitions of technology
or other companies. We expect these activities to be funded with existing cash,
cash flow from operations, borrowings and the issuance of common stock or other
securities. We believe existing sources of liquidity will be sufficient to fund
our existing operations and obligations for at least the next year and
foreseeable future, but offer no assurances. Our liquidity could be affected by
the stability of the energy and water industries, competitive pressures,
international risks, intellectual property claims and other factors described
under “Risk Factors” within Item 1A and “Quantitative and Qualitative
Disclosures About Market Risk” within Item 7A, included in this Annual Report on
Form 10-K.
Off-balance
sheet arrangements:
We had no
off-balance sheet financing agreements or guarantees at December 31, 2007
and 2006 that we believe were reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
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 $54.7 million issued under our credit facility’s
$115 million multicurrency revolver, our Actaris operating segment has a total
of $28.0 million of unsecured multicurrency revolving lines of credit with
various financial institutions with total outstanding standby letters of credit
of $5.9 million at December 31, 2007. Unsecured surety bonds in force were $13.8
million and $6.0 million at December 31, 2007 and 2006, respectively. The
increase in bonds was primarily the result of the Actaris acquisition. 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.
Contingencies
We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded when we determine that a loss is probable and the amount can be
reasonably estimated. Additionally, we disclose contingencies for which a
material loss is reasonably possible, but not probable. Legal contingencies at
December 31, 2007 were not material to our financial condition or results
of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger. PT Berca claims that it had preemptive rights
in the joint venture and has sought to nullify the transaction in 2001 whereby
Schlumberger transferred its ownership interest in PT Mecoindo to an Actaris
subsidiary. The plaintiff also seeks to collect damages for the earnings it
otherwise would have earned had its alleged preemptive rights been observed. The
Indonesian courts have awarded 129.6 billion rupiahs, or approximately $14.1
million, in damages against the defendants and have invalidated the 2001
transfer of the Mecoindo interest to a subsidiary of Actaris. All of the parties
have appealed the matter and it is currently pending before the Indonesian
Supreme Court. We believe the claims are without merit and no liability has been
recorded. However, Actaris has notified Schlumberger that it will seek to have
Schlumberger indemnify Actaris from any damages it may occur as a result of this
claim.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments. We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Critical
Accounting Policies
Revenue Recognition: The
majority of our revenues are recognized when products are shipped to or received
by a customer or when services are provided. For arrangements involving multiple
elements, we determine the estimated fair value of each element and then
allocate the total arrangement consideration among the separate elements based
on the relative fair value percentages. Revenues for each element are then
recognized based on the type of element, such as 1) when the products are
shipped, 2) services are delivered, 3) percentage-of-completion when
implementation services are essential to the software’s performance, 4) upon
receipt of customer acceptance or 5) transfer of title. Fair values represent
the estimated price charged when an item is sold separately. We review our fair
values on an annual basis or more frequently if a significant trend is
noted.
We
recognize revenue for delivered elements when the delivered elements have
standalone value and we have objective and reliable evidence of fair value for
each undelivered element. If the fair value of any undelivered element included
in a multiple element arrangement cannot be objectively determined, revenue is
deferred until all elements are delivered and services have been performed, or
until fair value can objectively be determined for any remaining undelivered
elements.
If
implementation services are essential to a software arrangement, revenue is
recognized using either the percentage-of-completion methodology if project
costs can be estimated or the completed contract methodology if project costs
cannot be reliably estimated. The estimation of costs through completion
of a project is subject to many variables such as the length of time to
complete, subcontractor performance, supplier information and business volume
assumptions. Changes in underlying assumptions/estimates may adversely or
positively affect financial performance. Hardware and software post-sale
maintenance support fees are recognized ratably over the performance
period.
Unearned
revenue is recorded for products or services for which cash has been
received from a customer but for which the criteria for revenue recognition
have not been met as of the balance sheet date. Unearned revenue relates to
payments received from customers in connection with product and service
invoicing for which revenue recognition criteria have not been met. Shipping and
handling costs and incidental expenses billed to customers are recorded as
revenue, with the associated cost charged to cost of revenues.
Warranty: We offer industry
standard warranties on our hardware products and large application software
products. We accrue the estimated cost of projected warranty claims based on
historical and projected product performance trends, business volume
assumptions, supplier information and other business and economic projections.
Testing of new products in the development stage helps identify and correct
potential warranty issues prior to manufacturing. Continuing quality control
efforts during manufacturing reduce our exposure to warranty claims. If our
quality control efforts fail to detect a fault in one of our products, we could
experience an increase in warranty claims. We track warranty claims to identify
potential warranty trends. If an unusual trend is noted, an additional warranty
accrual may be assessed and recorded when a failure event is probable and the
cost can be reasonably estimated. Management continually evaluates the
sufficiency of the warranty provisions and makes adjustments when necessary. The
warranty allowances may fluctuate due to changes in estimates for material,
labor and other costs we may incur to replace projected product failures, and we
may incur additional warranty and related expenses in the future with respect to
new or established products.
Inventories: Items are
removed from inventory using the first-in, first-out method. Inventories include
raw materials, sub-assemblies and finished goods. Inventory amounts include the
cost to manufacture the item, such as the cost of raw materials, labor and other
applied direct and indirect costs. We also review idle facility expense,
freight, handling costs and wasted materials to determine if abnormal amounts
should be recognized as current-period charges. We review our inventory for
obsolescence and marketability. If the estimated market value, which is based
upon assumptions about future demand and market conditions, falls below the
original cost, the inventory value is reduced to the market value. If technology
rapidly changes or actual market conditions are less favorable than those
projected by management, inventory write-downs may be required.
Business Combinations: In
accordance with SFAS 141, Business Combinations, we
record the results of operations of an acquired business from the date of
acquisition. We make preliminary allocations of the purchase price to the assets
acquired and liabilities assumed based on estimated fair value assessments.
Until we finalize the fair values, we may have changes to the carrying values of
tangible and intangible assets, goodwill, commitments and contingencies,
liabilities, deferred taxes, uncertain tax positions and restructuring
activities. Amounts allocated to IPR&D are expensed in the period
of acquisition. Costs to complete the IPR&D are expensed in the subsequent
period as incurred. We may experience unforeseen problems in the development or
performance of the IPR&D, we may not meet our product development schedules
or we may not achieve market acceptance of these new products or
solutions.
Goodwill and Intangible
Assets: Goodwill and intangible assets result from our acquisitions. We
use estimates in determining the value assigned to goodwill and intangible
assets, including estimates of useful lives of intangible assets, discounted
future cash flows and fair values of the related operations. We test goodwill
for impairment each year as of October 1, under the guidance of SFAS 142, Goodwill and Other Intangible
Assets. At October 1, 2007, our Itron North America segment represents
one reporting unit, while our Actaris segment has three reporting units. We
forecast discounted future cash flows at the reporting unit level based on
estimated future revenues and operating costs, which take into consideration
factors such as existing backlog, expected future orders, supplier contracts and
general market conditions. Changes in our forecasts or cost of capital may
result in asset value adjustments, which could have a significant effect on our
current and future results of operations and financial condition. Intangible
assets with a finite life are amortized over that life based on estimated
discounted cash flows, and are tested for impairment when events or changes in
circumstances indicate the carrying value may not be recoverable.
Stock-Based Compensation: We
measure compensation cost for stock-based awards at fair value and recognize
compensation cost over the service period for awards expected to vest. We use
the Black-Scholes option-pricing model, which requires the input of assumptions,
including the estimated length of time employees will retain their vested stock
options before exercising them (expected term) and the estimated volatility of
our common stock’s price over the expected term. Furthermore, in calculating
compensation for these awards, we are also required to estimate the approximate
number of options that will be forfeited prior to completing their vesting
requirement (forfeitures). We consider many factors when estimating expected
forfeitures, including types of awards, employee class and historical
experience. To the extent actual results or updated estimates differ from our
current estimates; such amounts will be recorded as a cumulative adjustment in
the period estimates are revised.
Defined Benefit Pension Plans: As part of the Actaris
acquisition, we assumed Actaris’ defined benefit pension plans. Actaris sponsors
both funded and unfunded non-U.S. defined benefit pension plans. FASB Statement
87, Employers' Accounting for
Pensions, as amended by SFAS 158, Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans, requires the assets acquired and
liabilities assumed in a business combination to include a liability for the
projected benefit obligation in excess of plan assets or an asset for plan
assets in excess of the projected benefit obligation, thereby eliminating any
previously existing net gain or loss, prior service cost or credit or transition
asset or obligation recognized in accumulated other comprehensive income. SFAS
158 also requires employers to recognize the funded status of their defined
benefit pension plans on their consolidated balance sheet and recognize as a
component of other comprehensive income, net of tax, the actuarial gains or
losses, prior service costs or credits and transition assets or obligations, if
any, that arise during the period but are not recognized as components of net
periodic benefit cost.
Several
statistical and other factors that attempt to anticipate future events are used
in calculating the expense and obligations related to these plans. These factors
are updated annually at December 31 and include assumptions about the discount
rate, expected rate of return on plan assets, turnover rates and rate of future
compensation increase. The discount rate is a significant assumption used to
value our pension benefit obligation. We use the average 15 year corporate bond
yield curve from the central banks of each respective country in which we have
an established benefit pension plan. The weighted average discount rate used to
measure the projected benefit obligation for the year ended December 31, 2007
was 5.48%. A change in the discount rate of 25 basis points would change our
pension benefit obligation by approximately $2 million. The financial and
actuarial assumptions used at December 31, 2007 may differ materially from
actual results due to changing market and economic conditions and higher or
lower withdrawal rates. These differences could result in a significant change
in the amount of pension expense recorded in future periods. Changes in annual
discount rates are recognized in other comprehensive income in the period
in which they occur.
Income Taxes: We estimate income taxes in each of the taxing
jurisdictions in which we operate. Changes in our effective tax rate are subject
to several factors, including fluctuations in operating results, new or revised
tax legislation and accounting pronouncements, changes in the level of business
performed in domestic and foreign jurisdictions, research credits and state
income taxes. Significant judgment is required in determining our annual tax
rate and in evaluating our tax positions. We assess the likelihood that deferred
tax assets, which include net operating loss carryforwards and temporary
differences expected to be deductible in future years, will be recoverable. 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. 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.
On
January 1, 2007, we adopted the provisions of FIN 48, which addresses whether
tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained upon examination by the taxing authorities
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FIN 48 requires increased disclosures,
provides guidance on de-recognition, classification, interest and penalties on
income taxes and the accounting in interim periods. As of January 1, 2007 and
December 31, 2007, the amount of unrecognized tax benefits was $5.4 million and
$34.8 million, of which $5.4 million and $8.4 million would, if
recognized, affect
our effective tax rate, respectively. In 2008, we expect to pay $1.7 million in
income tax obligations related to FIN 48. Additionally, the amount of the
unrecognized tax benefits will change in the next twelve months due to audits in
various foreign jurisdictions. However, we do not expect that change to have a
significant impact on our results of operations.
Legal Contingencies: We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, and related pronouncements. In accordance with
SFAS 5, a liability is recorded when we determine that a loss is probable
and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. Legal contingencies at December 31, 2007 and 2006 were not
material to our financial condition or results of operations.
Derivative Instruments: We
account for derivative instruments and hedging activities in accordance with
SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. All derivative
instruments, whether designated in hedging relationships or not, are recorded on
the Consolidated Balance Sheets at fair value as either assets or liabilities.
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; ineffective portions of fair
value changes or derivative instruments that do not qualify for hedging
activities are recognized in earnings. Derivatives are not used for trading or
speculative purposes.
Foreign Exchange: Our
consolidated financial statements are reported in U.S. dollars. Assets and
liabilities of foreign subsidiaries with a non-U.S. dollar functional currency
are translated to U.S. dollars at the exchange rates in effect on the balance
sheet date, or the last business day of the period, if applicable. Revenues and
expenses for these subsidiaries are translated to U.S. dollars using an average
rate for the relevant reporting period. Translation adjustments resulting from
this process are included, net of tax, in accumulated other comprehensive income
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 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 foreign subsidiaries are included, net of
tax, in accumulated other comprehensive income in shareholders’
equity.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. We are currently evaluating the impact
of the adoption of SFAS 157 on our consolidated financial statements for
the first quarter of 2008 but have not yet determined if it will be material at
this time.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities –Including an amendment of FASB Statement No.
115. This statement permits entities to choose to measure many financial
assets and liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected would be reported in net income.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. We
have not yet determined if we will elect to apply any of the provisions of SFAS
159 or what effect the adoption of SFAS 159 would have, if any, on our
consolidated financial statements.
In
December 2007, the FASB issued SFAS 141(R), Business Combinations, which
replaces SFAS 141. SFAS 141(R) retains the fundamental purchase method of
accounting for acquisitions, but requires a number of changes, including the way
assets and liabilities are recognized in purchase accounting. SFAS 141(R) also
changes the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value and requires the expensing of acquisition-related
costs as incurred. SFAS 141(R) is effective for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We will apply SFAS 141(R) to any
acquisition after the effective date.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, which
changes the accounting and reporting for minority interests. Minority interests
will be re-characterized as noncontrolling interests and will be reported as a
component of equity, separate from the parent’s equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by us in the first quarter of fiscal year
2009. SFAS 160 is currently not expected to have a material effect on our
consolidated financial statements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
In the
normal course of business, we are exposed to interest rate and foreign currency
exchange rate risks that could impact our financial position and results of
operations. As part of our risk management strategy, we are using derivative
financial instruments to hedge certain foreign currency and interest rate
exposures. Our objective is to offset gains and losses resulting from these
exposures with losses and gains on the derivative contracts used to hedge them,
therefore reducing the impact of volatility on earnings or protecting fair
values of assets and liabilities. We use derivative contracts only to manage
existing underlying exposures. Accordingly, we do not use derivative contracts
for speculative purposes.
Interest
Rate Risk
The table
below provides information about our financial instruments that are sensitive to
changes in interest rates and the scheduled minimum repayment of principal over
the remaining lives of our debt at December 31, 2007. Weighted average variable
rates in the table are based on implied forward rates in the Wells Fargo swap
yield curve as of January 4, 2008, our estimated ratio of funded debt
to EBITDA, which determines our rate margin, and a static foreign exchange rate
at December 31, 2007.
|
2008
|
2009
|
2010
|
2011
|
2012
|
Beyond
2012
|
Total
|
|||||||||||||||||||||
|
(in
millions)
|
|||||||||||||||||||||||||||
|
Fixed
Rate Debt
|
|||||||||||||||||||||||||||
|
Convertible senior subordinated
notes (1)
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | 345.0 | $ | 345.0 | |||||||||||||
|
Interest
rate
|
- | - | - | - | - | 2.50 | % | ||||||||||||||||||||
|
Senior subordinated notes
(2)
|
$ | - | $ | - | $ | - | $ | - | $ | 125.0 | $ | - | $ | 125.0 | |||||||||||||
|
Interest
rate
|
- | - | - | - | 7.75 | % | - | ||||||||||||||||||||
|
Variable Rate Debt
(3)
|
|||||||||||||||||||||||||||
|
U.S.
dollar term loan
|
$ | 6.0 | $ | 6.0 | $ | 6.0 | $ | 6.0 | $ | 6.0 | $ | 566.8 | $ | 596.8 | |||||||||||||
|
Average
interest rate
|
6.63 | % | 6.22 | % | 5.79 | % | 5.88 | % | 6.03 | % | 6.19 | % | |||||||||||||||
|
Euro
term loan
|
$ | 4.9 | $ | 4.9 | $ | 4.9 | $ | 4.9 | $ | 4.9 | $ | 420.7 | $ | 445.2 | |||||||||||||
|
Average
interest rate
|
6.72 | % | 6.75 | % | 6.56 | % | 6.53 | % | 6.54 | % | 6.56 | % | |||||||||||||||
|
GBP
term loan
|
$ | 1.0 | $ | 1.0 | $ | 1.0 | $ | 1.0 | $ | 1.0 | $ | 74.1 | $ | 79.1 | |||||||||||||
|
Average
interest rate
|
7.95 | % | 7.74 | % | 7.21 | % | 7.14 | % | 7.11 | % | 7.08 | % | |||||||||||||||
|
Interest rate swap on euro term
loan
(4)
|
|||||||||||||||||||||||||||
|
Average
interest rate (Pay)
|
6.59 | % | 6.59 | % | 6.59 | % | 6.59 | % | 6.59 | % | 0.00 | % | |||||||||||||||
|
Average
interest rate (Receive)
|
6.72 | % | 6.75 | % | 6.56 | % | 6.53 | % | 6.54 | % | 0.00 | % | |||||||||||||||
|
Net/Spread
|
0.13 | % | 0.16 | % | (0.03 | %) | (0.06 | %) | (0.05 | %) | 0.00 | % | |||||||||||||||
|
Cross currency swap on GBP term
loan
(5)
|
|||||||||||||||||||||||||||
|
Average
interest rate (Pay)
|
6.73 | % | 6.32 | % | 5.89 | % | 5.98 | % | 0.00 | % | 0.00 | % | |||||||||||||||
|
Average
interest rate (Receive)
|
7.94 | % | 7.74 | % | 7.21 | % | 7.14 | % | 0.00 | % | 0.00 | % | |||||||||||||||
|
Net/Spread
|
1.21 | % | 1.42 | % | 1.32 | % | 1.16 | % | 0.00 | % | 0.00 | % | |||||||||||||||
|
(1)
|
$345.0
million of 2.50% convertible notes due on August 2026, with fixed interest
payments of $4.3 million due every six months, in February and August. The
convertible notes may be converted, at the option of the holder, under
certain circumstances. (see Note
7).
|
|
(2)
|
The
$125.0 million aggregate principal amount of 7.75% senior subordinated
notes, due in 2012, was discounted to 99.265 per $100 of principal to
yield 7.875% (see Note 7).
|
|
(3)
|
The
Actaris acquisition was financed in part by a $1.2 billion senior secured
credit facility. The facility is comprised of $605.1 million, €335 million
and £50 million term loans denominated in USD, EUR and GBP, respectively
(see Note 7).
|
|
(4)
|
Interest
rate swap to convert our €335 million euro denominated variable rate term
loan to a fixed-rate debt obligation at a rate of 6.59% for the term of
the loan, including expected prepayments. This variable-to-fixed interest
rate swap is considered a highly effective cash flow hedge (see Note
8).
|
|
(5)
|
Cross
currency interest rate swap to convert our £50 million pound sterling
denominated term loan and the pound sterling LIBOR variable interest rate
to a U.S. dollar denominated term loan and a U.S. LIBOR interest rate,
plus an additional margin of 210 basis points, including expected
prepayments. This instrument is not designated as an accounting hedge (see
Note 8).
|
Based on
a sensitivity analysis as of December 31, 2007, we estimate that if market
interest rates average one percentage point higher in 2008, than in the table
above, our earnings before income taxes in 2008 would decrease by approximately
$5.1 million.
As part
of the acquisition of Actaris on April 18, 2007, we entered into a $1.2 billion
credit facility, comprised of a $605.1 million first lien U.S. dollar
denominated term loan; a €335 million first lien euro denominated term
loan; a £50 million first lien pound sterling denominated term loan
(collectively the term loans); and a $115 million multicurrency revolving
line-of- credit (revolver). Interest rates on the credit facility are based
on the respective borrowing’s denominated LIBOR rate (U.S. dollar,
euro or pound sterling) or the Wells Fargo Bank, National Association’s prime
rate, plus an additional margin subject to factors including our consolidated
leverage ratio. Our interest rates were 6.84%, 8.05% and 6.78% for the U.S.
dollar denominated, the pound sterling denominated and the euro denominated term
loans at December 31, 2007, respectively. Scheduled amortization of principal
payments is 1% per year (0.25% quarterly) with an excess cash flow provision for
additional annual principal repayment requirements. Maturities of the term loans
and multicurrency revolver are seven years and six years from the date of
issuance, respectively.
These
variable rate financial instruments are sensitive to changes in interest rates.
During the third quarter of 2007, we entered into an interest rate swap to
convert our €335 million euro denominated variable rate term loan to a
fixed-rate debt obligation at a rate of 6.59% for the term of the debt,
including expected prepayments. This variable-to-fixed interest rate swap is
considered a highly effective cash flow hedge. Consequently, changes in the fair
value of the interest rate swap are recorded as a component of other
comprehensive income and are recognized in earnings when the hedged item affects
earnings. The cash flow hedge is expected to be highly effective in achieving
offsetting cash flows attributable to the hedged risk during the term of the
hedge. The amounts paid or received on the hedge are recognized as adjustments
to interest expense. The notional amount of the swap was $445.2 million
(€302.5 million) and the fair value, recorded as a long-term liability, was
$1.7 million at December 31, 2007. The amount of net gains expected to be
reclassified into earnings in the next twelve months is approximately $611,000.
We will monitor and assess our interest rate risk and may institute additional
interest rate swaps or other derivative instruments to manage interest rate
risk.
Foreign
Currency Exchange Rate Risk
We
conduct business in a number of foreign countries and, therefore, face exposure
to adverse movements in foreign currency exchange rates. As a result of the
Actaris acquisition, commencing in the second quarter of 2007, a majority of our
revenues and operating expenses are now denominated in foreign currencies,
resulting in changes in our foreign currency exchange rate exposures that could
have a material effect on our financial results. International revenues were 59%
of total revenues for the year ended December 31, 2007, compared with 6% for the
year ended December 31, 2006, respectively.
Our
primary foreign currency exposure relates to non-U.S. dollar denominated
revenues, cost of revenues and operating expenses in our foreign subsidiary
operations, the most significant of which is the euro. Risk-sensitive financial
instruments in the form of intercompany trade receivables and notes are mostly
denominated in the local foreign currencies. As foreign currency exchange rates
change, intercompany trade receivables may affect current earnings, while
intercompany notes, for which settlement is not planned or anticipated in the
foreseeable future, may be revalued and result in unrealized translation gains
or losses that are reported in accumulated other comprehensive
income.
As a
result of the Actaris acquisition, effective June 29, 2007, we designated
certain portions of our foreign currency denominated term loans as hedges of our
net investment in foreign operations. Net losses of $41.1 million
($25.5 million after-tax) were reported as a net unrealized loss on
derivative instruments, a component of accumulated other comprehensive income,
which represented the effective hedges of net investments, for the year ended
December 31, 2007. During the third quarter of 2007, we also entered into a
cross currency interest rate swap for the purpose of converting our
£50 million pound sterling denominated term loan and the pound sterling
LIBOR variable interest rate to a U.S. dollar denominated term loan and a U.S.
LIBOR interest rate (plus an additional margin of 210 basis points), which was
not designated as an accounting hedge. The cross currency interest rate swap has
terms similar to the pound sterling denominated term loan, including expected
prepayments. This instrument is intended to reduce the impact of volatility
between the pound sterling and the U.S. dollar. Therefore, gains and losses are
recorded in other income (expense), as an offset to the gains (losses) on the
underlying term loan revaluation to the U.S. dollar. The amounts paid or
received on the interest rate swap are recognized as adjustments to interest
expense. The fair value of the cross currency swap, recorded as a long-term
liability, was $410,000. The pound sterling denominated notional amount of the
cross currency interest rate swap was $79.1 million (£39.6 million) at
December 31, 2007. The U.S. denominated notional amount was $79.3 million at
December 31, 2007. We expect the interest rate swap to reduce interest expense
by $810,000 during the next twelve months.
In future
periods, we may use a combination of derivative contracts to protect against
foreign currency exchange rate risks. Alternatively, we may choose not to hedge
certain foreign currency risks associated with our foreign currency exposures if
such exposures act as a natural foreign currency hedge for other offsetting
amounts denominated in the same currency.
Because
our earnings are affected by fluctuations in the value of the U.S. dollar
against foreign currencies, we have performed a sensitivity analysis assuming a
hypothetical 10% increase or decrease in the value of the dollar relative to the
currencies in which our transactions are denominated. At December 31, 2007, the
analysis indicated that a 10%
increase in the value of the U.S. dollar against our operations denominated in
foreign currencies would have increased our results from operations by
approximately $8.2 million. A 10% decrease in the value of the U.S. dollar
against our operations denominated in foreign currencies would have decreased
our results from operations by approximately $10.0 million at December 31, 2007.
The model assumes foreign currency exchange rates will shift in the same
direction and relative amount. However, exchange rates rarely move in the same
direction. This assumption may result in the overstatement or understatement of
the effect of changing exchange rates on assets and liabilities denominated in a
foreign currency. Consequently, the actual effects on operations in the future
may differ materially from results of the analysis for the year ended December
31, 2007.
We may be
exposed to certain market risks arising from particular transactions. As part of
our funding necessary to complete the Actaris acquisition, we entered into
foreign currency range forward contracts (transactions where put options were
sold and call options were purchased) to reduce our exposure to declines in the
value of the U.S. dollar and pound sterling relative to the euro denominated
purchase price. Under SFAS 133, the Actaris stock purchase agreement was
considered an unrecognized firm commitment; therefore, these foreign currency
range forward contracts could not be designated as fair value hedges. In April
2007, we completed the acquisition of Actaris and realized a $2.8 million
gain from the termination of the foreign currency range forward
contracts.
ITEM 8: FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
REPORT
OF MANAGEMENT
To the
Board of Directors and Shareholders of Itron, Inc.
Management
is responsible for the preparation of our consolidated financial statements and
related information appearing in this Annual Report on Form 10-K. Management
believes that the consolidated financial statements fairly reflect the form and
substance of transactions and that the financial statements reasonably present
our financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America.
Management has included in our financial statements amounts based on estimates
and judgments that it believes are reasonable under the
circumstances.
Management’s
explanation and interpretation of our overall operating results and financial
position, with the basic financial statements presented, should be read in
conjunction with the entire report. The notes to consolidated financial
statements, an integral part of the basic financial statements, provide
additional detailed financial information. Our Board of Directors has an Audit
and Finance Committee composed of independent directors. The Committee meets
regularly with financial management and Ernst & Young LLP to review internal
control, auditing and financial reporting matters.
|
LeRoy
D. Nosbaum
|
Steven
M. Helmbrecht
|
|
Chairman
and Chief Executive Officer
|
Sr.
Vice President and Chief Financial
Officer
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of Itron Inc.
We have
audited the accompanying consolidated balance sheet of Itron Inc. (and
subsidiaries) as of December 31, 2007, and the related consolidated statement of
income, shareholders' equity, and cash flows for the year ended December 31,
2007. Our audit also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Itron Inc. (and
subsidiaries) at December 31, 2007, and the consolidated results of its
operations and its cash flows for the year ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 48, Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109
which was effective January 1, 2007. Also, as discussed in Note 1, the Company
adopted the provisions of Statement of Financial Accounting Standards Board No.
158, Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R), as of
December 31, 2007.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Itron Inc.’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 25, 2008 expressed an
unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Seattle,
Washington
February
25, 2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Itron,
Inc.
Liberty
Lake, Washington
We have
audited the accompanying consolidated balance sheet of Itron, Inc. and
subsidiaries (the “Company”) as of December 31, 2006, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
each of the two years in the period ended December 31, 2006. Our audits
also included the financial statement schedule for the years ended December 31,
2006 and 2005 listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Itron, Inc. and subsidiaries at
December 31, 2006, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule for the years
ended December 31, 2006 and 2005, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No.
123(R), Share-Based Payment, effective
January 1, 2006.
/s/
DELOITTE & TOUCHE LLP
Seattle,
Washington
February
22, 2007 (September 12, 2007, as to Notes 16 and 17)
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands, except per share data)
|
||||||||||||
|
Revenues
|
$ | 1,464,048 | $ | 644,042 | $ | 552,690 | ||||||
|
Cost
of revenues
|
976,761 | 376,600 | 319,069 | |||||||||
|
Gross
profit
|
487,287 | 267,442 | 233,621 | |||||||||
|
Operating
expenses
|
||||||||||||
|
Sales
and marketing
|
125,842 | 63,587 | 56,642 | |||||||||
|
Product
development
|
94,926 | 58,774 | 47,077 | |||||||||
|
General
and administrative
|
100,071 | 52,213 | 44,818 | |||||||||
|
Amortization
of intangible assets
|
84,000 | 31,125 | 38,846 | |||||||||
|
In-process
research and development
|
35,975 | - | - | |||||||||
|
Total
operating expenses
|
440,814 | 205,699 | 187,383 | |||||||||
|
Operating
income
|
46,473 | 61,743 | 46,238 | |||||||||
|
Other
income (expense)
|
||||||||||||
|
Interest
income
|
10,477 | 9,497 | 302 | |||||||||
|
Interest
expense
|
(89,965 | ) | (17,785 | ) | (18,944 | ) | ||||||
|
Other
income (expense), net
|
435 | (1,220 | ) | (68 | ) | |||||||
|
Total
other income (expense)
|
(79,053 | ) | (9,508 | ) | (18,710 | ) | ||||||
|
Income
(loss) before income taxes
|
(32,580 | ) | 52,235 | 27,528 | ||||||||
|
Income
tax (provision) benefit
|
16,436 | (18,476 | ) | 5,533 | ||||||||
|
Net
income (loss)
|
$ | (16,144 | ) | $ | 33,759 | $ | 33,061 | |||||
|
Earnings
(loss) per share
|
||||||||||||
|
Basic
|
$ | (0.55 | ) | $ | 1.33 | $ | 1.41 | |||||
|
Diluted
|
$ | (0.55 | ) | $ | 1.28 | $ | 1.33 | |||||
|
Weighted
average number of shares outstanding
|
||||||||||||
|
Basic
|
29,584 | 25,414 | 23,394 | |||||||||
|
Diluted
|
29,584 | 26,283 | 24,777 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
|
At
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 91,988 | $ | 361,405 | ||||
|
Short-term
investments, held to maturity
|
- | 34,583 | ||||||
|
Accounts
receivable, net
|
339,018 | 109,924 | ||||||
|
Inventories
|
169,238 | 52,496 | ||||||
|
Deferred
income taxes, net
|
10,733 | 20,916 | ||||||
|
Other
|
42,459 | 17,121 | ||||||
|
Total
current assets
|
653,436 | 596,445 | ||||||
|
Property,
plant and equipment, net
|
323,003 | |||||||