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, 2009
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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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 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. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer x
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Accelerated
filer ¨
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Non-accelerated
filer ¨ (Do
not check if a smaller reporting company)
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Smaller
reporting company ¨
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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, 2009 (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
$2,201,140,741.
As of
January 31, 2010, there were outstanding 40,166,339 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 on May 4, 2010.
Itron,
Inc.
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Page
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PART
I
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PART
II
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PART
III
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PART
IV
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| SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS | 89 | ||
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, liquidity, and other items.
This document reflects our current plans and expectations and is 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. 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) competition, 4) changes in estimated liabilities for product warranties
and/or litigation, 5) our dependence on customers’ acceptance of new product and
their performance, 6) changes in domestic and international laws and
regulations, 7) future business combinations, 8) changes in estimates for
stock-based compensation and pension costs, 9) changes in foreign currency
exchange rates and interest rates, 10) international business risks, 11) our own
and our customers’ or suppliers’ access to and cost of capital, and 12) other
factors. You should not solely rely on these forward-looking statements as they
are only valid as of the date of this 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, refer
to Item 1A: “Risk Factors” included in this Annual Report on Form
10-K.
PART
I
Available
Information
Documents
we provide to the Securities and Exchange Commission (SEC) are available free of
charge under the Investors section of our website at www.itron.com as soon as
practicable after they are filed with or furnished to the SEC. In addition,
these documents are available at the SEC’s website (http://www.sec.gov) and at the SEC’s
Headquarters at 100 F Street, NE, Washington, DC 20549, or by calling
1-800-SEC-0330.
General
We
provide a comprehensive portfolio of products and services to utilities for the
energy and water markets throughout the world. We were incorporated in 1977 and
introduced a handheld computer-based system used to collect meter reads and
print on-site bills. Through innovation and acquisitions, we became the market
leader in automated meter reading (AMR) systems and software knowledge
applications that enabled our customers to analyze and manage meter-based data.
In 2004, we entered the electricity meter manufacturing business with the
acquisition of Schlumberger Electricity Metering. Then, in 2007, we established
a significant presence in global meter manufacturing and systems with the
acquisition of Actaris Metering Systems SA (Actaris). Today, together with our
subsidiary companies, we are one of the world’s leading providers of intelligent
metering, data collection, and utility software solutions, having served utility
customers for over 125 years.
Market
Overview, Products, Systems, and Solutions
The
market for managing the delivery and use of energy and water is dynamic and
competitive. Increased demand for energy and water, coupled with increased
scarcity of resources and environmental concerns, are causing regulatory bodies
worldwide to establish strict climate policies and promote smart grid and
intelligent metering initiatives. As a result, many electric, natural gas, and
water utilities are transforming their operations.
We
estimate there are approximately 2.7 billion meters currently installed
worldwide, of which we estimate approximately 9% have been
automated.
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·
1.3
billion electricity meters
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·
430
million gas meters
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·
945
million water meters
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Electric
utilities are striving to reduce demand during peak hours in lieu of building
additional generation capacity, while improving customer service. In addition,
utilities are faced with a convergence of factors including environmental
concerns, more stringent regulations and directives, and government funding and
incentives. The smart grid provides utilities with the tools necessary to tackle
these challenges as it consists of a multi-layered network that is an
interactive platform on which technology allows utilities to better
understand and control their energy usage and needs. Advanced metering
infrastructures (AMI), consisting of hardware, software, communications, and
meter data management, is the foundation of the smart grid. AMI uses two-way
communication between utilities and their customers, which allows utilities to
better manage energy usage and enables customers to become smarter about their
energy consumption. Given AMI’s advanced technological capabilities, as compared
with traditional metering, many major utilities are investing in
AMI.
Natural
gas utilities are also looking towards sustainability and conservation. In
addition, natural gas has increasingly become a preferred choice for electricity
generation and consumer consumption. Smart infrastructures, such as smart
metering, are helping natural gas utilities meet sustainability and conservation
requirements through two-way meter communications, accurate measurement, leak
detection and flow control, customer relationship management, distribution asset
optimization, and demand-side management.
Water
conservation continues to be a worldwide concern. Population growth and water
consumption are outpacing water resources across many parts of the world. This
trend reflects the need for more sustainable management and use of water
supplies. Water utilities and municipalities are committed to providing safe and
adequate water supplies while facing diminishing resources and infrastructure
challenges. Water utilities are focused on increasing the efficiency of water
production and minimizing waste both in delivery and consumption. Upgrading
infrastructures and deploying smart metering systems will help water utilities
meet conservation requirements through accurate measurement, leak detection
capabilities, and by allowing them to monitor water usage and time of use using
two-way meter communications.
We
operate under the Itron brand worldwide and sell solutions and provide expertise
to electric, gas, and water utilities around the world. Our operating segments
as of December 31, 2009 are Itron North America and Itron
International.
Itron
North America generates the majority of its revenue in the United States and
Canada and offers intelligent meters and data collection and communication
systems for electric, gas, and water utilities. Collection and communication
systems include AMI/AMR systems and a host of utility software and
services.
Itron
International generates the majority of its revenue in Europe, and the balance
primarily in South Africa, South America, and Asia/Pacific. Itron International
offers a variety of electricity, gas, water, and heat meters, AMR and AMI
systems, software, and services. Our Itron International operations are
primarily the result of the acquisition of Actaris in the second quarter of
2007.
The
following is a discussion of our operating segment markets and their major
products and solutions. Refer to Item 7: “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” included in this Annual Report
on Form 10-K for specific segment results.
The
Market
Itron North America
We
estimate there are approximately 355 million meters currently installed in North
America.
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·
175
million electricity meters
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·
80
million gas meters
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·
100
million water meters
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We
estimate 47% of the total installed meters are read with automated technologies
and about half of these automated meters are read with our
technology.
Historically,
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, a strong
focus on operating cash flow improvement from shorter read-to-pay cycles, and
enhanced customer service in the form of increased billing accuracy and faster
invoicing cycles.
The
United States’ American Recovery and Reinvestment Act of 2009 (ARRA) provided
grants and awards of $4.5 billion to utilities for investment in
electricity delivery and energy reliability (smart grid), $16.8 billion for
energy efficiency programs and tax incentives, and $6 billion for water
infrastructure upgrades. The ARRA, combined with limited energy supplies and
shrinking reserve margins, is increasing the interest in AMI and the devices
that enable the smart grid and is expected to accelerate growth.
Itron
International
We
estimate there are approximately 2.3 billion meters currently installed outside
of North America, of which 3% are read with automated technologies.
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·
1.1
billion electricity meters
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· 350
million gas meters
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·
845
million water meters
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Historically,
the meter industry has been driven by new construction and the replacement of
old meters. This combination of factors has resulted in annual growth rates
ranging between 3% and 7%.
The
European Commission has established a directive to cut greenhouse gas emissions
by 20% compared with 1990 levels, produce 20% of its energy from renewable
sources, and increase energy efficiency by 20% by 2020. The European Union (EU)
Energy Package, which became effective September 2009, directs EU Member States
to have 80% of their consumers using smart electric meters by 2020. This equates
to the replacement of approximately 145 million electricity meters. With
significant technological progress and encouragement from lawmakers and
regulators, smart metering is expected to revolutionize energy management and
grid reliability across the globe.
Our
Products, Systems, and Solutions
Our
solutions include:
· Meters
and AMI and AMR systems
· Software
for data collection, management, and analysis
· Professional
services
Meters and AMI and AMR
systems:
Worldwide,
we produce residential, commercial and industrial (C&I), and transmission
and distribution (T&D) electricity, gas, and water meters; gas and water AMR
modules; and a variety of data collection systems. The physical configuration
and the different certification requirements of the meters represent the primary
differentiator in each of the over 130 countries where we sell our
products.
Smart
metering solutions are available worldwide and have substantially more features
and functions than AMR systems. Smart meters provide energy and water utilities
demand side management, the ability to remotely connect and disconnect service
to the meter, bi-directional metering, reverse flow metering, support for time
of use and critical peak pricing, data logging, storage for interval data, and
upgradeable firmware (software contained in the meters).
Our AMI,
or smart metering, systems include OpenWay®, a
standards-based, open-architecture system that provides two-way communication to
residential and commercial electricity and gas meters. Our AMI software can be
configured for load management, demand response, prepayment, and other
capabilities. Each OpenWay electricity meter is equipped with a ZigBee®
component (a low-power, short distance wireless standard), which enables the
utility to communicate with and control in-home devices and can provide
information to help consumers make more informed choices about energy
consumption. The OpenWay system can utilize a variety of public communication
platforms to transfer data, including GPRS (general packet radio services), Ethernet, telephone, BPL
(broadband over power line), Wi-Fi, WiMax and others. For water utilities, we
offer an advanced water leak detection system that uses patented acoustic
technology analyzing vibration patterns in the distribution system. This
technology helps utilities optimize water infrastructure and reduce
waste.
For
almost 20 years, we have offered AMR technology worldwide, which allows
utilities to achieve greater operational efficiencies through reduced labor
costs and more accurate reads. Our AMR systems include AMR meters or modules and
a variety of data collection hardware and software, which enables utilities to
cost effectively deploy AMR. AMR meters and modules transmit a variety of
important information to the utility, such as consumption, tamper data, and
other information. Several communication options are available, which are
typically dependent on the country or region. In North America, information is
transmitted via radio frequency (RF) to our handheld, mobile, or network data
collection technology. In other parts of the world, telephone, RF, GSM (global
System for Mobile communications), GPRS, PLC (power line carrier), and Ethernet
devices may be utilized. Data collection systems manage the collection of meter
data and provide the data to billing systems, data warehouses, Internet
presentment, and knowledge applications.
Prepayment
electricity and gas metering systems are widely used in the United Kingdom and
South Africa. We are 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.
Meter
Data Management and Knowledge Applications
Our meter
data management software and knowledge application solutions provide utilities
and large C&I end-users with support for data collection, complex data
applications, data warehouses, and analytic and visualization
tools.
Professional
services
We offer
professional services that help our customers implement, install,
project-manage, operate, and maintain their AMR and AMI systems. We provide
managed services to utilities in North America, the United Kingdom, and South
Africa that allow them to outsource certain operations, such as meter reading
services and prepayment program activities. In North America, our consulting and
analysis services provide market research, load research, energy efficiency
program evaluation and design, energy policy design, rate design, and regulatory
support.
Operational
Capabilities
Sales
and Distribution
We use a
combination of direct and indirect sales channels in both Itron North America
and Itron International. A direct sales force is utilized for the largest
electric, gas, and water utilities, with which we have long-established
relationships. For smaller utilities, we typically use an indirect sales force
that consists of distributors, representative agencies, partners, and meter
manufacturer representatives. We offer our North America AMR/AMI technology to
certain meter manufacturers who embed our technology into their meters. We also
offer our European AMR/AMI technology and prepayment to certain meter and system
providers, who embed our technology into their network data concentrators and
routers.
No single
customer represented more than 10% of total revenues for the three years ended
December 31, 2009, 2008, and 2007. Our 10 largest customers in each of the years
ended December 31, 2009, 2008, and 2007 accounted for approximately 17%, 15%,
and 14%, of total revenues, respectively.
Manufacturing
We have
manufacturing facilities throughout the world. Our Itron North America operating
segment has manufacturing facilities located in Minnesota, South Carolina, and
Kentucky. Our Itron International operating segment has 30 manufacturing
facilities, the largest of which are located in France, Germany, and the United
Kingdom. Refer to Item 2: “Properties”, included in this Annual
Report on Form 10-K for a listing of the number of factories and offices we own
and lease by region. Contract manufacturers are used for certain low volume
products including handheld and mobile collection devices and peripheral
equipment.
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 and components
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 due to price fluctuations related to the nature of the
raw materials, such as electrical components, plastics, copper, and brass, which
are used in varying amounts in our meter products. Refer to
Item 1A: “Risk Factors”, included in this Annual Report on Form 10-K, for
further discussion related to risks.
Product
Development
Our
product development is focused on both improving existing technology and
developing next-generation technology for electricity, gas, water, and heat
meters, data collection, communications technologies, data warehousing, and
software knowledge applications. We spent approximately $122 million,
$121 million, and $95 million on product development in 2009, 2008, and
2007, respectively.
Marketing
Our
marketing efforts focus on brand recognition and go-to-market strategies to
promote product solutions. We use an integrated approach that includes
participation in industry trade shows and web-based seminars and the preparation
and distribution of various publications, including brochures, published papers,
case studies, print advertising, direct mail, and newsletters. In addition, we
direct customers to our global website (www.itron.com), which
provides information on all of our products and solutions.
We
maintain communications with our customers through our direct and indirect sales
channels, integrated and targeted marketing campaigns, market surveys, market
trend research, and at our annual users’ conferences.
Workforce
At
December 31, 2009, we had approximately 9,000 people in our workforce, including
permanent and temporary employees and contractors. 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 have a large number of competitors who offer similar
products, systems, and services. In recent years, the market has experienced an
increase in acquisitions and alliances. We believe that our competitive
advantage is based on our ability to provide complete end-to-end integrated
solutions, our established customer relationships, and our track record of
delivering reliable, accurate, and long-lived products and systems. Refer to
Item 1A: “Risk Factors” included in this Annual Report on Form 10-K for a
discussion of the competitive pressures we face.
Our
primary competitors include the following:
|
· Badger
Meter, Inc.
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· Emerson
Electric Co.
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· Roper
Industries, Inc.
|
|
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· Cooper
Industries, Ltd.
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· eMeter
Corporation
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· Schneider
Electric SA
|
|
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· Dandong
Visionseal Co., Ltd.
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· ESCO
Technologies Inc.
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· Sensus
|
|
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· Datamatic,
Ltd.
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· General
Electric Company
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· Silver
Spring Networks
|
|
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· Diehl
Metering
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· Holley
Group Co., Ltd.
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· Shanghai
Fiorentini Gas
|
|
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· Dresser,
Inc.
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· Iskraemeco,
D.D.
|
Equipment Co., Ltd.
|
|
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· Echelon
Corporation
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· Landis+Gyr
Holdings AG
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· Trilliant
Incorporated
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· Elster
Group S.E.
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· Oracle
Corporation
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· Telvent
GIT, S.A.
|
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Bookings and Backlog of Orders
Bookings
for a reported period represent customer contracts and purchase orders received
during the period that have met certain conditions, such as regulatory approval.
Total backlog represents committed but undelivered contracts and purchase orders
at period end. Twelve-month backlog represents the portion of total backlog that
we estimate will be recognized as revenue over the next 12 months. Backlog is
not a complete measure of our future business as we have significant
book-and-ship orders. Bookings and backlog may 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:
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Year Ended
|
Annual
Bookings
|
Total
Backlog
|
12-Month
Backlog
|
|||||||
|
(in
millions)
|
||||||||||
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December
31, 2009
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$ | 1,849 | $ | 1,488 | $ | 807 | ||||
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December
31, 2008
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2,543 | 1,309 | 418 | |||||||
|
December
31, 2007
|
1,419 | 659 | 501 | |||||||
When we
sign AMI agreements to deploy our OpenWay meter and communications system, we
include these contracts in bookings and backlog when regulatory approvals are
received or certain other conditions are met. At December 31, 2009, three large
AMI contracts were included in bookings and backlog. Annual bookings for 2009
included $257 million related to the San Diego Gas & Electric AMI contract.
Annual bookings for 2008 reflected $334 million related to the CenterPoint
Energy AMI contract and $470 million related to the Southern California Edison
AMI contract.
Other
Business Considerations
Intellectual
Property
We own
180 U.S. patents and 636 international patents. We have on file 110 U.S.
patent applications and 343 international patent applications. These patents
cover a range of technologies, the more important of which relate to metering,
portable handheld computers, water leak detection, and AMR and AMI 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™.
Itron International’s registered trademarks include, but are not limited to,
ACTARIS®,
AQUADIS®,
CYBLE®,
FLOSTAR®,
WOLTEX®,
FLODIS®,
ECHO®,
EVERBLU®,
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. While we believe patents
and trademarks are important to our operations and in the aggregate constitute
valuable assets, no single patent or trademark, or group of patents or
trademarks, is critical to the success of our business. We license some of our
technology to other companies, some of which are our competitors. 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 RF 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 are generally 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 and AMI modules and AMR and AMI-equipped electronic residential
electricity, gas, and water meters are typically Part 15 devices that transmit
information back to handheld, mobile, or fixed network AMR reading devices
pursuant to these rules.
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, which many of our AMR and AMI systems utilize. Although
the outcome of the proceeding is uncertain, we do not expect to have to make
material changes to our equipment. Furthermore, the 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 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 RF 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 granted 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 and AMI
modules and AMR and AMI-equipped electronic residential electricity, gas, water,
and heat meters typically are devices that transmit information back to
handheld, mobile, or fixed network AMR and AMI 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 reading devices
in our solutions. In Europe, we generally use the 433 MHz and 868 MHz bands. In
the rest of the world, we use the 433 MHz and 2.4000-2.4835 GHz band. In either
case, we believe we will continue to have access to sufficient spectrum under
favorable conditions 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.
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 the 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.
Incorporation
We were
incorporated in the state of Washington in 1977.
MANAGEMENT
Set forth
below are the names, ages, and titles of our executive officers as of February
24, 2010.
|
Name
|
Age
|
Position
|
|||
|
Malcolm
Unsworth
|
60 |
President
and Chief Executive Officer
|
|||
|
Steven
M. Helmbrecht
|
47 |
Sr.
Vice President and Chief Financial Officer
|
|||
|
John
W. Holleran
|
55 |
Sr.
Vice President, General Counsel and Corporate Secretary
|
|||
|
Philip
C. Mezey
|
50 |
Sr.
Vice President and Chief Operating Officer - Itron North
America
|
|||
|
Marcel
Regnier
|
52 |
Sr.
Vice President and Chief Operating Officer - Itron
International
|
|||
|
Jared
P. Serff
|
42 |
Vice
President, Competitive Resources
|
|||
Malcolm Unsworth is President
and Chief Executive Officer, and a member of our Board of Directors.
Mr. Unsworth joined Itron in July 2004 as Sr. Vice President, Hardware
Solutions, upon our acquisition of Schlumberger’s electricity metering business.
In 2007, following our acquisition of Actaris (now known as Itron
International), he was promoted to Sr. Vice President and Chief Operating
Officer – Itron International. Mr. Unsworth was appointed President and Chief
Operating Officer of Itron in April 2008, and promoted to President and Chief
Executive Officer effective March 2009. Mr. Unsworth was elected to the Board of
Directors in December 2008.
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. Previously, Mr. Helmbrecht
was Chief Financial Officer of LineSoft Corporation, acquired by Itron in
2002.
John Holleran is Sr. Vice
President, General Counsel, and Corporate Secretary. Mr. Holleran joined
Itron in January 2007. In 2006, Mr. Holleran was associated with Holleran Law
Offices PLLC, and in 2005 was 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 2004.
While with Boise Cascade Corporation, Mr. Holleran most recently served as Sr.
Vice President, Human Resources, and General Counsel.
Philip Mezey is Sr. Vice
President and Chief Operating Officer - Itron North America. Mr. Mezey
joined Itron in March 2003 as Managing Director of Software Development for
Itron’s Energy Management Solutions Group with Itron’s acquisition of Silicon
Energy Corp. Mr. Mezey was promoted to Group Vice President and Manager of
Software Solutions in 2004. In 2005, Mr. Mezey became Sr. Vice President
Software Solutions and was promoted to his current position in
2007.
Marcel Regnier is Sr. Vice
President and Chief Operating Officer - Itron International. Mr. Regnier
joined Itron in April 2007 as part of our acquisition of Actaris. Mr. Regnier
served as Actaris’ Managing Director of its water and heat business unit from
2001, when Actaris was created as a result of the reorganization of
Schlumberger’s operations, until April 2008, when he was promoted to his current
position.
Jared Serff is Vice President,
Competitive Resources. Mr. Serff joined Itron in July 2004 as part of the
Schlumberger 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, Taiwan, and the United States.
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 utilities.
Purchases of our products may be deferred as a result of many factors including
economic downturns, slowdowns in new residential and commercial construction,
customers access to capital at acceptable terms, utility specific financial
circumstances, mergers and acquisitions, regulatory decisions, weather
conditions, and rising interest rates. 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 (i.e., meters without AMR and AMI features)
have typically been based on annual or bi-annual bid-based agreements. Customers
place purchase orders against these agreements as their inventories decline,
which can create fluctuations in our sales volumes.
Sales
cycles for AMR and AMI projects are generally long and unpredictable due to
several factors, including budgeting, purchasing, and regulatory approval
processes that can take 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. In addition, during 2009, the American Recovery and Reinvestment Act
allocated approximately $4.5 billion to the investment in electricity delivery
and energy reliability (smart grid). These requirements could change the process
and timing of evaluating and approving technology purchases, which could impact
sales.
The
European Union has issued the EU Energy Package, which includes directives and
regulations intended to strengthen consumer rights and protection in the EU
energy market. The EU’s 20-20-20 goals include a 20% increase in energy
efficiency, a 20% reduction of CO2 emissions compared
with 1990 levels, and produce 20% of its energy from renewable energy by 2020.
The package requires EU Member States to ensure the implementation of
intelligent metering systems and outlines deployment by 2022, with 80% of
consumers equipped with smart metering systems by 2020. While we believe these
initiatives will provide opportunities for sales of our products, the pace at
which these markets will grow is unknown due to the timing of legislation,
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 due to several
factors.
We have
experienced variability in quarterly results, including losses, and believe our
quarterly results will continue to fluctuate as a result of many factors,
including:
|
· size
and timing of significant customer orders
|
· changes
in accounting standards or practices
|
|
· the
gain or loss of significant customers
|
· changes
in existing taxation rules or practices
|
|
· required
product developments to maintain our
|
· shifts
in product or sales channel mix
|
|
competitive
advantage
|
· foreign
currency fluctuations
|
|
· the
shortage or change in price of certain
|
· access
to capital at acceptable terms
|
|
components
or materials
|
· costs
related to acquisitions
|
|
· increased
competition and pricing pressure
|
· intangible
asset amortization expenses
|
|
· changes
in interest rates
|
· stock-based
compensation
|
|
· litigation
expense
|
· FCC
or other governmental actions
|
|
· unexpected
warranty liabilities
|
· changes
in fair value of assets and liabilities
|
|
· restructuring
charges
|
· general
economic conditions affecting enterprise
|
|
spending
for the utility industry
|
Our
acquisitions of and investments in third parties have risks.
We have
acquired nine companies since December 31, 2002, the two largest of which
were our acquisition of Actaris for $1.7 billion in 2007 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, that we will be able to successfully identify suitable candidates or
negotiate acceptable 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 such financing would be available at 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. Impairment of an investment or goodwill and intangible
assets may also result if these risks were to materialize. For investments in
entities that are not wholly owned by Itron, such as joint ventures, a loss of
U.S. generally accepted accounting principles (GAAP) defined control could
result in significant change in accounting treatment and a change in the
carrying value of the entity. 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 noncontrolling interest investments.
In addition, acquisitions and investments in third parties may involve the
assumption of obligations, significant write-offs, or other charges associated
with the acquisition.
Impairment
of our intangible assets, long-lived assets, goodwill, or deferred tax assets
could result in significant charges that would adversely impact our future
operating results.
We have
significant intangible assets, long-lived assets, goodwill, and deferred tax
assets that are susceptible to valuation adjustments as a result of changes in
various factors or conditions.
We assess
impairment of amortizable intangible and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors that could trigger an impairment of such assets include the
following:
|
·
|
underperformance
relative to projected future operating
results;
|
|
·
|
changes
in the manner of or use of the acquired assets or the strategy for our
overall business;
|
|
·
|
negative
industry or economic trends;
|
|
·
|
decline
in our stock price for a sustained period or decline in our market
capitalization below net book value;
and
|
|
·
|
changes
in our organization or management reporting structure, which could result
in additional reporting units, requiring greater aggregation or
disaggregation in our analysis by reporting unit and potentially
alternative methods/assumptions of estimating fair
values.
|
We assess
the potential impairment of goodwill each year as of October 1. We also assess
the potential impairment of goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Adverse changes in our
operations or other unforeseeable factors could result in an impairment charge
in future periods that would impact our results of operations and financial
position in that period. Refer to Item 1: “Management’s Discussion and Analysis
of Financial Condition and Results of Operations, Critical Accounting
Estimates” included in
this Annual Report on Form 10-K for additional information regarding the results
of our October 1, 2009 goodwill impairment assessment.
The
realization of our deferred tax assets is supported by projections of future
profitability. 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
from that expected, we may not be able to realize some or all of the tax
benefit, which could have a material and adverse effect on our financial results
and cash flows.
We
are subject to international business uncertainties.
A
substantial portion of our revenues is derived from operations conducted outside
the United States. International sales and operations may be subjected to risks
such as the imposition of government controls, government expropriation of
facilities, lack of a well-established system of laws and enforcement of those
laws, access to a legal system free of undue influence or corruption, 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 those commonly used 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 international currencies 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 in the same manner as 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 competitive 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, in order to keep pace with technological advances, changing customer
requirements, international market acceptance, and other factors in the markets
in which we sell our products. Product development will require continued
investment in order to maintain our market position. We may not have the
necessary capital, or access to capital at acceptable terms, to make these
investments. 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 revenue is generated with a limited number of
customers.
Historically,
our revenues have been concentrated with a limited number of customers, which
change over time. The 10 largest customers accounted for 17%, 15%, and 14% of
revenues for 2009, 2008, and 2007, respectively. No single customer represented
more than 10% of total Company revenues in those years. 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 our financial and operating results. 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 value of these contracts is substantially larger than contracts we have had
with our customers in the past. These deployments last several years and may
exceed the length of prior deployment agreements. The terms and conditions of
these AMI agreements related to testing, contractual liabilities, warranties,
performance, and indemnities can be substantially different than the terms and
conditions associated with our previous contracts.
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 grow 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 in quality and performance or
superior to our products, which could put pressure on our market position,
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. Should we fail to compete successfully with
current or future competitors, we could experience material adverse effects 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 are subject to
regulation by the FCC in the United States. Licenses for radio frequencies must
be obtained and periodically renewed. Licenses granted to us or our customers
may not be renewed at 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. We depend upon sufficient radio spectrum to be 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 crowded
to unacceptable levels, 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. Such licenses may be for a fixed term and may have to be
periodically renewed. In some jurisdictions, the rules permit certain low power
devices to operate on an unlicensed basis. Our AMR/AMI meters and modules
transmit information to and from handheld, mobile, or fixed reading devices
primarily in unlicensed bands pursuant to rules regulating such use. To the
extent we introduce new products designed for use in the United States or
another country into a new market, 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 or negotiation 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 at 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 potentially 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 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
that do not protect such rights in the same manner as they do in 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.
Business
interruptions could adversely affect our business.
Our
worldwide operations could be subject to hurricanes, tornados, earthquakes,
floods, fires, extreme weather conditions, medical epidemics or pandemics, or
other natural or manmade disasters or business interruptions. The occurrence of
any of these business disruptions could seriously harm our business, financial
condition, and results of operations.
Our key
manufacturing facilities are concentrated and 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
operations.
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, costs, and our vendors’ access to capital at
acceptable terms. 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. Should any of these vendors become unable to perform up to their
responsibilities, our operations could be materially disrupted.
We
rely on information technology systems
We are
dependent on information technology systems, including, but not limited to,
networks, applications, and outsourced services. We continually enhance and
implement new systems and processes throughout our global operations. The
failure of these systems to operate effectively, problems with transitioning to
upgraded or replacement systems, or a breach in security of these systems could
materially and adversely affect our business, financial condition, and results
of operations.
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, and 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.
Our
credit facility and the indenture related to our convertible senior subordinated
notes limit our ability and the ability of most of our subsidiaries to take
certain actions.
Our
credit facility and convertible notes 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 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 required payments against such indebtedness. We cannot be
certain we will be able to remedy any such defaults. If our required payments
are accelerated, we cannot be certain that we will have sufficient funds
available to pay the indebtedness or that we will have the ability to raise
sufficient capital to replace the 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
credit facility is sensitive to interest rate and foreign currency exchange rate
risks that could impact our financial position and results of
operations.
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, including counterparty risks with banks and other financial
institutions. 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.
We
are potentially exposed to default risk on our interest rate swaps and our line
of credit.
As of
December 31, 2009, approximately 79% of our outstanding term loans were at fixed
London Interbank Offered Rate (LIBOR) rates as a result of interest rate swaps.
These interest rate swaps protect us against the risk of adverse fluctuations in
the borrowing’s denominated LIBOR.
Given the
current economic disruptions and the restructuring of various commercial
financing organizations, there is a risk of counter-party default on these
items. Currently, our exposure to default risk on our interest rate swap
agreements is minimal as we are in a liability position on all interest rate
swaps. However, if the LIBOR rates were to significantly increase, there is a
risk that one or more counterparties may be unable to meet its obligations under
the swap agreement.
At
December 31, 2009, we had outstanding standby letters of credit of $39.9 million
issued under our credit facility’s $115 million multicurrency revolver,
resulting in $75.1 million being available for additional borrowings. The
lenders of our credit facility consist of several participating financial
institutions. Our lenders may not be able to honor their line of credit
commitment due to the loss of a participating financial institution or other
circumstance, which could lead us to seek alternative financing and be unable to
obtain acceptable terms. This could adversely impact our ability to fund some of
our internal initiatives or future acquisitions.
We
are exposed to counterparty risks with our third party depository institutions
and insurance providers.
As the
worldwide fallout from the credit crisis persists, the financial strength of
some depository institutions has diminished, and this trend may continue. If one
or more of the depository institutions in which we maintain significant cash
balances were to fail, our ability to access these funds might be temporarily or
permanently limited, and we could face material liquidity problems and financial
losses.
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 for acquisition targets 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. Inadequate 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.
Changes
in tax laws and unanticipated tax liabilities could adversely affect our
effective income tax rate and profitability.
We are
subject to income taxes in the United States and numerous foreign jurisdictions.
Our effective income tax rate in the future could be adversely affected by a
number of factors, including: changes in the mix of earnings in countries with
differing statutory tax rates, changes in the realization of deferred tax
assets, changes in tax laws, the outcome of income tax audits in various
jurisdictions around the world, and any repatriation of non-U.S. earnings for
which we have not previously provided for U.S. taxes. We regularly assess all of
these matters to determine the adequacy of our tax provision, which is subject
to significant discretion.
None.
The
following table lists the number of factories and sales and administration
offices by region.
|
Manufacturing,
Assembly, Service, and Distribution
|
Sales,
Administration, and Other
|
|||||||||||
|
Owned
|
Leased
|
Owned
|
Leased
|
|||||||||
|
North
America
|
4 | 11 | 1 | 28 | ||||||||
|
Europe
|
14 | 6 | - | 26 | ||||||||
|
Asia/Pacific
|
2 | 7 | - | 20 | ||||||||
|
Other
(rest of world)
|
4 | 9 | - | 10 | ||||||||
|
Total
|
24 | 33 | 1 | 84 | ||||||||
Our
factory locations consist of manufacturing, assembly, service, and distribution
facilities. Our sales and administration offices may also include various
product development operations. Itron North America facilities are located
primarily in the United States, Canada, and Mexico, while Itron International’s
facilities are in Europe, Asia/Pacific, and throughout the rest of the world. We
own our headquarters facility, which is located in Liberty Lake, Washington. Our
other 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.
Our U.S.
AMR standalone module operations are located in Waseca, Minnesota and our
electricity meter operations are located in Oconee, South Carolina. Our
international operations are more diversified. If any of our facilities are
disrupted, our production capacity could be reduced, though most significantly
in the United States.
On
December 18, 2009, we received a statement of claim in the matter of an
arbitration between Cinclus Technology (Cinclus) and Itron Metering Solutions UK
Ltd (Itron UK). The claim relates to an alleged defect in meters sold to Cinclus
during 2007 for installation on a project Cinclus was managing for E.ON, a
utility with customers in Sweden. On December 23, 2009, we received a statement
of claim in the matter of an arbitration between Cinclus and Itron UK relating
to an alleged defect in meters sold to Cinclus during 2007 - 2009 for
installation on a project Cinclus was managing for Fortum, a utility with
customers in Sweden. Both arbitrations have been filed with the Arbitration
Institute of the Stockholm Chamber of Commerce. In both arbitrations, Cinclus
claims the meters provided by Itron UK fail to meet specifications because in
certain environments the meters are affected by external events, which impairs
the meter’s capability to measure energy accurately. Cinclus asserts that all
meters must be replaced at Itron UK’s cost and expense, including the cost of
field work to replace the meters, plus other losses and damages to be specified
at a later date. Itron UK has denied all of the allegations and will defend
these claims. We do not believe this matter will have a material adverse effect
on our business or financial condition, although an unfavorable outcome could
have a material adverse effect on Itron’s results of operations for the period
in which such a loss is recognized.
No
matters were submitted to a vote of shareholders of Itron, Inc. during the
fourth quarter of 2009.
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 2009 and 2008 as reported by the NASDAQ Global Select
Market.
|
2009
|
2008
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
First
Quarter
|
$ | 66.66 | $ | 40.10 | $ | 100.00 | $ | 70.48 | ||||||||
|
Second
Quarter
|
$ | 62.19 | $ | 42.77 | $ | 106.25 | $ | 88.77 | ||||||||
|
Third
Quarter
|
$ | 67.89 | $ | 50.15 | $ | 105.99 | $ | 84.71 | ||||||||
|
Fourth
Quarter
|
$ | 69.49 | $ | 54.92 | $ | 90.10 | $ | 34.25 | ||||||||
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 the NASDAQ
Composite Index and our peer group of companies used for the year ended December
31, 2009.
The above
presentation assumes $100 invested on December 31, 2004 in the common stock
of Itron, Inc., the NASDAQ Composite 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 annual period plotted. The stock prices
shown above for our common stock are historical and not necessarily indicative
of future price performance.
Our peer
group consists of global companies that are either direct competitors or have
similar industry and business operating characteristics. Our 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.
Holders
At
January 31, 2010, there were 309 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 prohibits the
declaration or payment of a cash dividend as long as this facility is 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.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL
DATA
The
selected consolidated financial data below is derived from our consolidated
financial statements, which have been audited by independent registered public
accounting firms. 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,
|
||||||||||||||||
|
2009
|
2008
(3)
|
2007 (1)
(3)
|
2006
(3)
|
2005
|
||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
|
Consolidated
Statements of Operations Data
|
||||||||||||||||
|
Revenues
|
$ | 1,687,447 | $ | 1,909,613 | $ | 1,464,048 | $ | 644,042 | $ | 552,690 | ||||||
|
Cost
of revenues
|
1,149,991 | 1,262,756 | 976,761 | 376,600 | 319,069 | |||||||||||
|
Gross
profit
|
537,456 | 646,857 | 487,287 | 267,442 | 233,621 | |||||||||||
|
Operating
income
|
45,027 | 109,822 | 46,473 | 61,743 | 46,238 | |||||||||||
|
Net
income (loss)
|
(2,249 | ) | 19,811 | (22,851 | ) | 33,759 | 33,061 | |||||||||
|
Earnings
(loss) per common share-Basic
|
$ | (0.06 | ) | $ | 0.60 | $ | (0.77 | ) | $ | 1.33 | $ | 1.41 | ||||
|
Earnings
(loss) per common share-Diluted
|
$ | (0.06 | ) | $ | 0.57 | $ | (0.77 | ) | $ | 1.28 | $ | 1.33 | ||||
|
Weighted
average common shares outstanding-Basic
|
38,539 | 33,096 | 29,584 | 25,414 | 23,394 | |||||||||||
|
Weighted
average common shares outstanding-Diluted
|
38,539 | 34,951 | 29,584 | 26,283 | 24,777 | |||||||||||
|
Consolidated
Balance Sheet Data
|
||||||||||||||||
|
Working
capital (2)
|
$ | 282,532 | $ | 293,296 | $ | 249,579 | $ | 492,861 | $ | 116,079 | ||||||
|
Total
assets
|
2,854,621 | 2,856,348 | 3,030,457 | 988,522 | 598,884 | |||||||||||
|
Total
debt
|
781,764 | 1,151,767 | 1,538,799 | 469,324 | 166,929 | |||||||||||
|
Shareholders'
equity
|
1,400,514 | 1,058,776 | 790,435 | 390,982 | 317,534 | |||||||||||
|
Other
Financial Data
|
||||||||||||||||
|
Cash
provided by operating activities
|
$ | 140,787 | $ | 193,146 | $ | 133,327 | $ | 94,773 | $ | 79,617 | ||||||
|
Cash
used in investing activities
|
(53,994 | ) | (67,075 | ) | (1,714,416 | ) | (85,499 | ) | (30,571 | ) | ||||||
|
Cash
(used in) provided by financing activities
|
(114,121 | ) | (63,376 | ) | 1,310,360 | 318,493 | (27,032 | ) | ||||||||
|
Capital
expenditures
|
(52,906 | ) | (63,430 | ) | (40,602 | ) | (31,739 | ) | (31,973 | ) | ||||||
|
(1)
|
On
April 18, 2007, we completed the acquisition of Actaris Metering Systems
SA (Actaris). 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)
|
Working
capital represents current assets less current liabilities.
|
|
(3)
|
On
January 1, 2009, we adopted Financial Accounting Standards Board (FASB)
Staff Position (FSP) APB 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (FSP 14-1) relating to our
convertible senior subordinate notes issued in August 2006. (The guidance
in FSP 14-1 is now embedded within Accounting Standards CodificationTM
(ASC) 470-20). We used the SEC staff’s Alternative A transition
election for presenting prior financial information, and therefore the
financial information as of and for the year ended December 31, 2006 has
not been adjusted and is not comparable to the financial information as of
and for the years ended December 31, 2009, 2008, and 2007. Refer to Item
8: "Financial Statements and Supplementary Data Note 1: Summary of
Significant Accounting Policies" included in this Annual Report on Form
10-K for a discussion of the effects of the implementation of FSP
14-1.
|
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.
Our products and services include hardware, software, managed services, and
consulting. Cost of revenues includes materials, labor, overhead, warranty
expense, and distribution and documentation costs for software.
Overview
Our 2009
financial results have been negatively impacted by a number of factors including
the economic downturn, foreign exchange rate volatility, and delayed purchases
by some utilities due to uncertainty related to a shift in technology choices
from automated meter reading (AMR) to advanced metering infrastructure (AMI)
systems and customers awaiting approval of projects that may qualify for
stimulus funding through the United States’ American Recovery and Reinvestment
Act of 2009.
With the
current economic environment and foreign exchange rate volatility, we took steps
to strengthen our financial position. During 2009, we reduced our borrowings by
$383.6 million, issued $290.0 million in common stock, and amended our
credit facility to reduce our current and future covenant
requirements.
Twelve-month
backlog was $807 million at December 31, 2009, compared with $418 million at
December 31, 2008.
Total
Company Revenues, Gross Profit and Margin, and Unit Shipments
|
Year
Ended December 31,
|
|||||||||||||||||
|
2009
|
%
Change
|
2008
|
%
Change
|
2007
|
|||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
|||||||||||||||
|
Revenues
|
$ | 1,687.4 | (12%) | $ | 1,909.6 | 30% | $ | 1,464.0 | |||||||||
|
Gross
Profit
|
537.5 | (17%) | 646.9 | 33% | 487.3 | ||||||||||||
|
Gross
Margin
|
32 | % | 34 | % | 33 | % | |||||||||||
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Revenues
by region
|
||||||||||
|
Europe
|
$ | 806.5 | $ | 916.3 | $ | 623.6 | ||||
|
United
States and Canada
|
606.5 | 648.0 | 596.6 | |||||||
|
Other
|
274.4 | 345.3 | 243.8 | |||||||
|
Total
revenues
|
$ | 1,687.4 | $ | 1,909.6 | $ | 1,464.0 | ||||
Revenues
Revenues
decreased 12%, or $222.2 million, in 2009, compared with 2008. A strengthening
U.S. dollar against most foreign currencies accounted for 46% of the decrease in
revenues. Revenue growth in 2008, compared with 2007, was primarily due to the
Actaris acquisition in the second quarter of 2007. A more detailed analysis of
these fluctuations is provided in Operating Segment
Results.
No single
customer represented more than 10% of total revenues for the years ended
December 31, 2009, 2008, and 2007. Our 10 largest customers accounted for
approximately 17%, 15%, and 14% of total revenues in 2009, 2008, and
2007.
Gross
Margins
Gross
margin was 32% in 2009, compared with 34% and 33% in 2008 and 2007,
respectively. Approximately two-thirds of the decline in gross margins was
attributable to the Itron North America operations and one-third was
attributable to the Itron International operations. During 2007, business
combination accounting rules required the valuation of Actaris 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. A more detailed analysis of these fluctuations is provided in Operating Segment
Results.
Meter
and Module Summary
Meters
are sold with and without advanced functionality. In addition, smart meter
modules (AMR/AMI) can be sold separately from the meter. Depending on customers’
preferences, we also incorporate other vendors’ technology in our meters. A
summary of our meter and AMR/AMI module shipments are as follows:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
Total
meters (with and without AMR/AMI)
|
(units
in thousands)
|
|||||||||
|
Itron
North America
|
||||||||||
|
Electricity
|
3,480 | 4,800 | 5,075 | |||||||
|
Gas
|
350 | 390 | 210 | |||||||
|
Itron
International
|
||||||||||
|
Electricity
|
7,790 | 7,840 | 5,400 | |||||||
|
Gas
|
4,980 | 5,400 | 3,100 | |||||||
|
Water
|
8,430 | 9,170 | 6,340 | |||||||
|
Total
meters with and without AMR/AMI
|
25,030 | 27,600 | 20,125 | |||||||
|
Additional
meter information (Total Company)
|
||||||||||
|
Meters
with AMR
|
3,110 | 4,690 | 3,600 | |||||||
|
Meters
with AMI
|
710 | 20 | - | |||||||
|
Standalone
AMR/AMI modules
|
3,830 | 4,890 | 4,675 | |||||||
|
Meters
with AMR/AMI and modules
|
7,650 | 9,600 | 8,275 | |||||||
|
Meters
with other vendors' AMR/AMI
|
630 | 840 | 925 | |||||||
Operating
Segment Results
For a
description of our operating segments, refer to Item 8: “Financial Statements
and Supplementary Data, Note 15: Segment Information” in this Annual Report on
Form 10-K. The following tables and discussion highlight significant changes in
trends or components of each operating segment.
|
Year
Ended December 31,
|
|||||||||||||||
|
2009
|
%
Change
|
2008
|
%
Change
|
2007
|
|||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
|||||||||||||
|
Segment
Revenues
|
|||||||||||||||
|
Itron
North America
|
$ | 615.8 | (12%) | $ | 696.7 | 9% | $ | 637.4 | |||||||
|
Itron
International
|
1,071.6 | (12%) | 1,212.9 | 47% | 826.6 | ||||||||||
|
Total
revenues
|
$ | 1,687.4 | (12%) | $ | 1,909.6 | 30% | $ | 1,464.0 | |||||||
|
Year
Ended December 31,
|
|||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||
|
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
|
$ | 211.8 | 34% | $ | 263.9 | 38% | $ | 257.5 | 40% | ||||||
|
Itron
International
|
325.7 | 30% | 383.0 | 32% | 229.8 | 28% | |||||||||
|
Total
gross profit and margin
|
$ | 537.5 | 32% | $ | 646.9 | 34% | $ | 487.3 | 33% | ||||||
|
Year
Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||
|
Segment
Operating Income (Loss)
|
Operating
Income (Loss)
|
Operating
Margin
|
Operating
Income (Loss)
|
Operating
Margin
|
Operating
Income (Loss)
|
Operating
Margin
|
||||||||||
|
and
Operating Margin
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
|||||||||||||
| Itron North America | $ | 36.9 | 6% | $ | 73.4 | 11% | $ | 72.6 | 11% | |||||||
| Itron International | 37.6 | 4% | 74.1 | 6% | 5.9 | 1% | ||||||||||
| Corporate unallocated | (29.5 | ) | (37.7 | ) | (32.0 | ) | ||||||||||
|
Total
Company
|
$ | 45.0 | 3% | $ | 109.8 | 6% | $ | 46.5 | 3% | |||||||
Itron North America: Revenues decreased $80.9 million, or 12%, in 2009, compared with 2008. Revenues in 2008 included electricity meter and AMR module shipments in support of a number of AMR contracts that were substantially completed in 2008. During 2009, these revenues were lower as utilities delayed orders due to the current spending environment and the uncertainty surrounding the announcement and disbursement of stimulus funds. AMI revenues began increasing in the fourth quarter of 2009 and totaled $101.8 million for the year.
Revenues
increased $59.3 million, or 9%, in 2008, compared with 2007, primarily due to
increased sales for many of our products and services, with the largest increase
in standalone AMR water and gas modules. Revenues in 2008 also included a full
year of sales from our North America gas and water meters, which were part of
the Actaris acquisition in 2007.
Gross
margin decreased four percentage points in 2009, compared with 2008, primarily
due to shipments of our first generation AMI meters, which currently have higher
costs, fewer AMR meter and module shipments, and reduced overhead absorption
resulting from lower overall production levels.
Gross
margin decreased two percentage points in 2008, compared with 2007, primarily as
a result of lower overhead absorption due to lower electricity meter
volumes.
No
customer represented more than 10% of Itron North America operating segment
revenues in 2009, 2008, or 2007.
Itron
North America operating expenses decreased $15.6 million, or 8%, in 2009,
compared with 2008, primarily due to lower sales expense and reduced
compensation associated with our 2009 suspension of bonus, profit sharing, and
employee savings plan match. Operating expenses as a percentage of revenues were
28% for 2009 and 27% for 2008, as a result of lower revenues in
2009.
Operating
expenses increased $5.6 million, or 3%, in 2008, compared with 2007. Higher
product development, sales, and marketing were partially offset by reduced
general and administrative expenses and amortization of intangible assets.
Operating expenses as a percentage of revenues were 29% for 2007.
Itron International: Revenues
decreased $141.3 million, or 12% in 2009, compared 2008. Excluding the effect of
a strengthening U.S. dollar against most foreign currencies, as compared with
the prior year, revenues declined 4% as a result of the completion of a smart
metering/AMI project in 2008 and softening demand in some markets, such as Spain
and the United Kingdom, which was due to financial and economic
conditions.
Revenues
for 2008 increased by $386.3 million due to a full year of results, whereas
revenues for 2007 primarily included results of 8.5 months of operations from
April 18, 2007, the date of the Actaris acquisition.
Gross
margin decreased two percentage points in 2009, compared with 2008, primarily as
a result of expenses for discontinuing certain product lines and streamlining
our service operations in Brazil.
Gross
margin for 2008 was four percentage points higher at 32%, compared with 28% in
2007. In 2007, gross margin was negatively impacted by a two percentage point
reduction due to the revaluation of inventory on hand at the acquisition date in
accordance with business combination accounting rules, which increased cost of
sales. Gross margin was also favorably impacted in 2008 by product mix and lower
indirect cost of sales.
Business
line revenues for Itron International were as follows:
|
Year
Ended December 31,
|
April 18, 2007
through December
31,
|
|||||||
|
2009
|
2008
|
2007
|
||||||
|
Electricity
|
40% | 40% | 45% | |||||
|
Gas
|
30% | 30% | 28% | |||||
|
Water
|
30% | 30% | 27% | |||||
No single
customer represented more than 10% of Itron International operating segment
revenues in 2009, 2008, or 2007.
Operating
expenses for Itron International were $288.1 million, or 27% of revenues, for
2009, compared with $308.9 million, or 25% of revenues, in 2008, and $223.9
million, or 27% of revenues, in 2007. In 2009, decreased operating expense
consisted of lower amortization expense of $18.0 million and a $16.5 million
decrease due to a stronger U.S. dollar, which was partially offset by an
increase in product development and administrative expense.
Operating
expenses in 2008 increased, compared with 2007, in all areas due to higher
revenues, increased emphasis on product development, higher intangible asset
amortization, administrative expenses, and foreign exchange fluctuations.
Operating expenses for 2007 included results from the date of acquisition as
well as $35.8 million of in-process research and development (IPR&D)
costs recorded in accordance with business combination accounting
rules.
Corporate unallocated:
Operating expenses not directly associated with an operating segment are
classified as “Corporate unallocated.” These expenses decreased $8.2 million in
2009, compared with 2008, due primarily to reduced compensation expense
associated with our 2009 suspension of bonus and profit sharing and reduced
consulting fees primarily for Sarbanes-Oxley Act of 2002 compliance. Corporate
unallocated expenses increased $5.7 million in 2008, compared with 2007, due to
increased variable compensation and financial integration expenses. These
expenses, as a percentage of total Company revenues, were 2% in 2009, 2008, and
2007.
Total
Company
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues:
|
Year
Ended December 31,
|
||||||||||||||||||
|
2009
|
%
of Revenue
|
2008
|
%
of Revenue
|
2007
|
%
of Revenue
|
|||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||
|
Sales
and marketing
|
$ | 152.4 | 9% | $ | 167.5 | 9% | $ | 125.8 | 9% | |||||||||
|
Product
development
|
122.3 | 7% | 120.7 | 6% | 94.9 | 6% | ||||||||||||
|
General
and administrative
|
119.1 | 7% | 128.5 | 7% | 100.1 | 7% | ||||||||||||
|
Amortization
of intangible assets
|
98.6 | 6% | 120.3 | 6% | 84.0 | 6% | ||||||||||||
|
In-process
research and development
|
- | - | - | - | 36.0 | 2% | ||||||||||||
|
Total
operating expenses
|
$ | 492.4 | 29% | $ | 537.0 | 28% | $ | 440.8 | 30% | |||||||||
Operating
expenses decreased $44.6 million, or 8%, in 2009, compared with 2008, as a
result of lower amortization of intangible assets of $21.7 million and foreign
exchange rate fluctuations of $17.0 million, with the remaining decrease
primarily due to cost containment measures. As a percentage of revenues,
operating expenses have remained constant between 2008 and 2007, except for
IPR&D, which was directly related to the Actaris acquisition. Amortization
of intangible assets increased $36.3 million in 2008, compared with 2007,
due to recording a full year of amortization related to the Actaris acquisition.
General and administrative expenses in 2008 were impacted by increased
compensation and financial integration expenses. In 2007, the acquisition of
Actaris also resulted in $36 million of IPR&D expense, consisting primarily
of next generation technology. These research and development projects were
completed in 2008 and expensed as product development.
Other
Income (Expense)
The
following table shows the components of other income (expense):
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Interest
income
|
$ | 1,186 | $ | 5,970 | $ | 10,477 | ||||
|
Interest
expense
|
(62,053 | ) | (85,260 | ) | (87,409 | ) | ||||
|
Amortization
of debt placement fees
|
(8,258 | ) | (8,917 | ) | (13,526 | ) | ||||
|
Loss
on extinguishment of debt, net
|
(12,800 | ) | - | - | ||||||
|
Other
income (expense), net
|
(9,176 | ) | (3,033 | ) | 435 | |||||
|
Total
other income (expense)
|
$ | (91,101 | ) | $ | (91,240 | ) | $ | (90,023 | ) | |
Interest income: Interest
income decreased in 2009, compared with 2008, primarily due to lower interest
rates in 2009, partially offset by an average cash balance that was
approximately 15% higher than during 2008. The decrease in interest income in
2008, compared with 2007, was primarily the result of lower average cash and
cash equivalent balances and short-term investments. The decrease in interest
income in 2008 was also impacted by lower interest rates, compared with
2007.
Interest expense: Interest
expense decreased 27% in 2009, compared with 2008, primarily due to the decline
in the principal balance of our debt outstanding as well as the LIBOR interest
rate. The weighted average debt balance outstanding during 2009 was $923.0
million, compared with $1.3 billion during 2008, representing a decline of 30%.
The decrease in interest expense was partially offset by an increase in the
applicable margin on our term loans related to our term loan agreement
amendment, which went from 1.75% to 3.50% effective April 24, 2009, and
subsequently increased to 3.75% in August 2009. At December 31, 2009, inclusive
of our interest rate swaps, 79% of our term loans were at fixed LIBOR rates.
Interest expense decreased 2% in 2008, compared with 2007 due to a reduction in
our term loan’s applicable margin from 2% to 1.75% in August 2008 and lower
market rates on the floating portion of our debt, partially offset by a full
year of interest expense from the $1.2 billion credit facility used to finance
the Actaris acquisition on April 18, 2007.
Amortization of prepaid debt
fees: Amortization of prepaid debt fees decreased 7% during 2009,
compared with 2008, due to lower debt repayments. Debt repayments were $275.8
million during 2009, compared with $388.4 million in 2008. When debt is repaid
early, the related portion of unamortized prepaid debt fees is written-off and
included in interest expense. Amortization of debt placement fees decreased in
2008, compared with 2007, due to the write-off of $6.6 million associated with
our convertible notes in September 2007.
Loss on extinguishment of
debt: During the second quarter of 2009, we redeemed the $109.6 million
remaining principal balance of our senior subordinated notes at 101.938% of the
principal amount, which was $111.7 million. This redemption resulted in a
$2.5 million loss on extinguishment of debt.
During
the first quarter of 2009, we entered into exchange agreements with certain
holders of our convertible notes to issue, in the aggregate, approximately 2.3
million shares of common stock, valued at $132.9 million, in exchange for, in
the aggregate, $121.0 million principal amount of the convertible notes,
representing 35% of the aggregate principal outstanding at the date of the
exchanges. As a result, we recognized a net loss on extinguishment of debt of
$10.3 million, calculated as the inducement loss, plus an allocation of advisory
fees less the revaluation gain. For a description of the redemption of our
subordinated notes and the induced conversion of a portion of our convertible
notes, refer to Item 8: “Financial Statements and Supplementary Data,
Note 6: Debt” included in this Annual Report on Form 10-K.
Other income (expense), net: In 2009, other
expenses, net, resulted primarily from net foreign currency losses due to the
revaluation of monetary asset and liability balances denominated in a currency
other than the reporting entity’s functional currency and $1.5 million in legal
and advisory fees associated with the amendment to our credit facility. In 2008,
other expenses, net resulted primarily from net foreign currency losses due to
balances denominated in a currency other than the reporting entity’s functional
currency. In 2007, in addition to foreign currency fluctuations, other income,
net included $3.0 million in unrealized gains on our euro denominated
borrowings, which are now designated as a hedge of a net investment in foreign
operations, with future foreign currency fluctuations recorded in other
comprehensive income. Other income, net 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 Actaris acquisition.
Income
Tax Provision (Benefit)
Our tax
provision (benefit) as a percentage of income (loss) before tax typically
differs from the federal statutory rate of 35%. Changes in our actual 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 in domestic and foreign jurisdictions, tax credits (including
research and development and foreign tax), state income taxes, and changes in
our valuation allowance.
Our tax
benefit as a percentage of loss before tax was 95.1% for 2009. Our actual tax
rate for 2009 was higher than the federal statutory rate due to a variety of
factors, including: (1) lower effective tax rates on certain international
earnings due to an election made under Internal Revenue Code Section 338 with
respect to the Actaris acquisition in 2007; (2) benefit of foreign interest
expense deductions; (3) tax planning and tax elections regarding the
repatriation of foreign earnings and the associated foreign tax credits; (4) a
decrease in pretax income in high tax jurisdictions for the year; and (5) a
refund of taxes previously paid in foreign tax audits.
Our tax
benefit as a percentage of income before tax was (6.6%) for
2008. Our actual tax rate for 2008 was lower than the federal statutory
rate due to a variety of factors, including lower effective tax rates on certain
international earnings due to an election made under Internal Revenue Code
Section 338 with respect to the Actaris acquisition in 2007. Additionally, our
reduced foreign tax liability reflects the benefit of foreign interest expense
deductions.
Our tax
benefit as a percentage of loss before tax was 47.5% for 2007. Our actual tax
rate for 2007 was higher than the federal statutory rate as a result of benefits
from legislative tax rate reductions in Germany and the United Kingdom. The
German Business Tax Reform 2008 was finalized on August 17, 2007, which reduced
the German tax rate from approximately 39% to 30%. On July 19, 2007, the United
Kingdom enacted the Finance Act of 2007, which lowered the main corporate tax
rate from 30% to 28%. These benefits were offset by IPR&D, which was not tax
deductible and increased our effective tax rate. The 2007 effective tax rate was
also favorably impacted by lower effective tax rates on international earnings
due to the Internal Revenue Code Section 338 election with respect to the
Actaris acquisition.
Our net
deferred tax assets consist primarily of accumulated net operating loss
carryforwards, hedging activities, and tax credits that can be carried forward,
some of which are limited by Internal Revenue Code Sections 382 and 383. The
limited deferred tax assets resulted primarily from acquisitions.
Our
deferred tax assets at December 31, 2009 do not include the tax effect on $57.8
million of tax benefits from employee stock option exercises. Equity (common
stock) will be increased by $22.2 million if and when such excess tax benefits
reduce cash taxes payable.
Our cash
income tax payments for 2009, 2008, and 2007 are as follows:
|
Years
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
State
income taxes paid
|
$ | 0.6 | $ | 0.1 | $ | 1.1 | ||||
|
Foreign
and local income taxes paid
|
31.1 | 26.3 | 20.6 | |||||||
|
Total
income taxes paid
|
$ | 31.7 | $ | 26.4 | $ | 21.7 | ||||
For 2009,
2008, and 2007, we had operating losses for federal income taxes purposes and
did not pay significant cash taxes. Based on current projections, we expect to
pay minimal U.S. federal and state taxes and approximately $22.0 million in
foreign and local income taxes in 2010.
Refer to
Item 8: “Financial Statements and Supplementary Data, Note 11: Income Taxes”
included in this Annual Report on Form 10-K for a discussion of our tax
provision (benefit) and unrecognized tax benefits.
Financial
Condition
Cash
Flow Information:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Operating
activities
|
$ | 140.8 | $ | 193.2 | $ | 133.3 | ||||
|
Investing
activities
|
(54.0 | ) | (67.1 | ) | (1,714.4 | ) | ||||
|
Financing
activities
|
(114.1 | ) | (63.4 | ) | 1,310.4 | |||||
|
Effect
of exchange rates on cash and cash equivalents
|
4.8 | (10.3 | ) | 1.3 | ||||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | (22.5 | ) | $ | 52.4 | $ | (269.4 | ) | ||
Cash and
cash equivalents was $121.9 million at December 31, 2009, compared with $144.4
million at December 31, 2008. The decrease was primarily due to lower
operating results and higher repayments of borrowings in excess of net proceeds
from public offerings of common stock. Cash and cash equivalents increased from
$92.0 million at December 31, 2007 to $144.4 million at December 31, 2008.
The increase in cash was the result of cash flows from operating results
that included a full year of the Actaris acquisition operations and the $310.9
million stock offering in May 2008, partially offset by $388.4 million in
debt repayments.
Operating
activities:
Cash
provided by operating activities for 2009 was $52.4 million lower, compared with
2008, primarily due to lower earnings and less non-cash expenses, such as
depreciation and amortization. Cash provided by operating activities increased
$59.9 million in 2008, compared with 2007. Operating results for 2008 included a
full year of the Actaris acquisition operations and higher non-cash expenses,
such as depreciation and amortization.
Investing
activities:
Net cash
used in investing activities decreased 20% in 2009, compared with 2008,
primarily due to delayed purchases of machinery and equipment. Contingent
consideration of $4.3 million was paid during 2009 to shareholders of three of
our previous acquisitions for the achievement of certain earn-out thresholds.
The acquisition of property, plant, and equipment increased $22.8 million in
2008, compared with 2007, consisting primarily of manufacturing equipment for
production capacity expansion and our new AMI product line. Cash paid for the
acquisition of Actaris in 2007 was approximately $1.7 billion. In 2007,
$35.0 million in short-term investments matured with the proceeds used to
partially fund the Actaris acquisition.
Financing
activities:
During
2009, we repaid $275.8 million in borrowings, which included utilizing $160.4
million in net proceeds from a public offering of approximately 3.2 million
shares of common stock. In 2008, we repaid $388.4 million in borrowings, which
included $310.9 million in net proceeds from a public offering of approximately
3.4 million shares of common stock. In 2007, we financed the acquisition of
Itron International with proceeds from a new credit facility and sale of common
stock. Proceeds from the credit facility were $1.2 billion, partially offset by
debt placement fees of $22.1 million. Net proceeds from the sale of common stock
were $225.2 million in 2007.
Effect
of exchange rates on cash and cash equivalents:
Our
primary foreign currency exposure relates to non-U.S. dollar denominated
transactions in our international subsidiary operations, the most significant of
which is the euro. The effect of exchange rates on cash balances held in foreign
currency denominations was $4.8 million, $10.3 million, and $1.3 million in
2009, 2008, and 2007, respectively.
Non-cash
transactions:
During
2009, we completed exchanges with certain holders of our convertible notes in
which we issued, in the aggregate, approximately 2.3 million shares of common
stock recorded at $123.4 million, in exchange for $107.8 million net carrying
amount of the convertible notes and the reversal of deferred taxes of $5.8
million. Refer to Item 8: “Financial Statements and Supplemental
Data, Note 6: Debt” included in this Annual Report on Form 10-K for a further
discussion associated with the exchange agreements and the derecognition
requirement for induced conversions.
Off-balance
sheet arrangements:
We have
no off-balance sheet financing agreements or guarantees as defined by Item 303
of Regulation S-K at December 31, 2009 and 2008 that we believe are reasonably
likely to have a current or future effect on our financial condition, results of
operations, or cash flows.
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, 2009, 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
|
$ | 344,469 | $ | 17,956 | $ | 39,535 | $ | 286,978 | $ | - | ||||||
|
EUR
denominated term loan
|
354,281 | 18,298 | 39,857 | 296,126 | - | |||||||||||
|
Convertible
senior subordinated notes (1)
(2)
|
234,784 | 5,590 | 229,194 | - | - | |||||||||||
|
Operating
lease obligations (3)
|
28,901 | 10,260 | 11,435 | 5,540 | 1,666 | |||||||||||
|
Purchase
and service commitments (4)
|
252,163 | 251,716 | 447 | - | - | |||||||||||
|
Other
long-term liabilities reflected on the balance
|
||||||||||||||||
|
sheet
under generally accepted accounting principles (5)
|
92,769 | - | 55,818 | 11,982 | 24,969 | |||||||||||
|
Total
|
$ | 1,307,367 | $ | 303,820 | $ | 376,286 | $ | 600,626 | $ | 26,635 | ||||||
|
(1)
|
Borrowings
are disclosed within Item 8: “Financial Statements and Supplementary
Data, Note 6: Debt” included in this Annual Report on Form 10-K, with the
addition of estimated interest expense, not including the amortization of
prepaid debt fees and debt discount.
|
|
(2)
|
Our
convertible notes have a stated due date of August 2026. We reflected the
principal repayment in 2011 due to the combination of put, call, and
conversion options that are part of the terms of the convertible note
agreement.
|
|
(3)
|
Operating
lease obligations are disclosed in Item 8: “Financial Statements and
Supplementary Data, Note 12: Commitments and Contingencies” included in
this Annual Report on Form 10-K and do not include common area maintenance
charges, real estate taxes, and insurance charges for which we are
obligated.
|
|
(4)
|
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, 2009 if the
commitments were canceled.
|
|
(5)
|
Other
long-term liabilities consist of warranty obligations, estimated pension
benefit payments, and other obligations. Estimated pension benefit
payments include amounts through 2019. Noncurrent unrecognized tax
benefits totaling $42.6 million recorded in other long-term liabilities,
which include interest and penalties, are not included in the above
contractual obligations and commitments table as we cannot reliably
estimate the period of cash settlement with the respective taxing
authorities.
|
Liquidity,
Sources and Uses of Capital:
Our
principal sources of liquidity are cash flows from operations, borrowings, and
sales of common stock. Cash flows may fluctuate and are sensitive to many
factors including changes in working capital and the timing and magnitude of
capital expenditures and payments on debt.
For a
description of our credit facility, senior subordinated notes, and convertible
senior subordinated notes, refer to Item 8: “Financial Statements and
Supplementary Data, Note 6: Debt” included in this Annual Report on Form
10-K.
With the
current economic environment and volatile foreign exchange rates, we took steps
to strengthen our financial position. In addition to our financing activities and
non-cash transactions
discussed above, in April 2009, we amended our credit facility to adjust our
maximum leverage ratio and the minimum interest coverage ratio. The amendment
also allows us to seek a $75 million increase to the $115 million multicurrency
revolving line-of-credit without further amendment. The current lending
participants may then choose to increase their level of participation or approve
the participation of additional lenders. The revolver may also be increased
beyond the $75 million with the approval of the majority of revolver banks, the
issuing agents, the swingline lender, and the administrative agent. This
option will provide further potential sources of liquidity to allow us to
support the growth of our business. At December 31, 2009, there were no
borrowings outstanding under the revolver, and $39.9 million was utilized by
outstanding standby letters of credit, resulting in $75.1 million being
available for additional borrowings.
Other
Sources and Uses of Capital:
For a
description of our letters of credit and performance bonds, refer to Item 8:
“Financial Statements and Supplementary Data, Note 12: Commitments and
Contingencies” included in this Annual Report on Form 10-K. For a description of
our funded and unfunded non-U.S. defined benefit pension plans and our expected
2010 contributions, refer to Item 8: “Financial Statements and Supplementary
Data, Note 8: Defined Benefit Pension Plans” included in this Annual Report on
Form 10-K.
Working
capital, which represents current assets less current liabilities, was $282.5
million at December 31, 2009, compared with $293.3 million at December 31,
2008.
We expect
to continue to expand our operations and grow our business through a combination
of internal new product development, licensing technology from and to others,
distribution agreements, partnership arrangements, and acquisitions of
technology or other companies. We expect these activities to be funded with
existing cash, cash flow from operations, borrowings, and the sale of common
stock or other securities. We believe existing sources of liquidity will be
sufficient to fund our existing operations and obligations for the next 12
months and into the foreseeable future, but offer no assurances. Our liquidity
could be affected by the stability of the energy and water industries,
competitive pressures, international risks, intellectual property claims,
capital market fluctuations, and other factors described under Item 1A: “Risk
Factors” included in this Annual Report on Form 10-K.
Contingencies
Refer to
Item 8: “Financial Statements and Supplementary Data, Note 12: Commitments and
Contingencies” included in this Annual Report on Form 10-K.
Critical
Accounting Estimates
Revenue
Recognition
The
majority of our revenue arrangements involve multiple elements, which require us
to determine the estimated fair value of each element and then allocate the
total arrangement consideration among the separate elements based on the
relative fair value percentages. Revenues for each element are then recognized
based on the type of element, such as 1) when the products are shipped, 2)
services are delivered, 3) percentage-of-completion when implementation services
are essential to other elements in the arrangements, 4) upon receipt of customer
acceptance, or 5) transfer of title. A majority of our revenue is recognized
when products are shipped to or received by a customer or when services are
provided.
Fair
values represent the estimated price charged when an item is sold separately. 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. We review our
fair values on an annual basis or more frequently if a significant trend is
noted.
If
implementation services are essential to a software arrangement, revenue is
recognized using either the percentage-of-completion methodology if project
costs can be estimated or the completed contract methodology if project costs
cannot be reliably estimated. The estimation of costs through completion of a
project is subject to many variables such as the length of time to complete,
changes in wages, subcontractor performance, supplier information, and business
volume assumptions. Changes in underlying assumptions/estimates may adversely or
positively affect financial performance. Hardware and software post-sale
maintenance support fees are recognized ratably over the performance period.
Shipping and handling costs and incidental expenses billed to customers are
recorded as revenue, with the associated cost charged to cost of revenues. We
record sales, use, and value added taxes billed to our customers on a net
basis.
Unearned
revenue is recorded when a customer pays for products or services where the
criteria for revenue recognition have not been met as of the balance sheet date.
Unearned revenues relate primarily to professional services and software
associated with our OpenWay®
contracts, extended warranty, and prepaid post contract support. Unearned
revenue is recognized when the applicable revenue recognition criteria are met.
Deferred cost is recorded for products or services for which ownership
(typically defined as title and risk of loss) has transferred to the customer,
but for which the criteria for revenue recognition have not been met as of the
balance sheet date. Deferred costs are recognized when the applicable revenue
recognition criteria are met. Refer to Item 8: “Financial Statements and
Supplementary Data, Note 1: Summary of Significant Accounting Policies” included
in this Annual Report on Form 10-K for unearned revenue and deferred costs
outstanding at December 31, 2009 and 2008.
Warranty
We offer
standard warranties on our hardware products and large application software
products. We accrue the estimated cost of warranty claims based on historical
and projected product performance trends and costs. Testing of new products in
the development stage helps identify and correct potential warranty issues prior
to manufacturing. Continuing quality control efforts during manufacturing reduce
our exposure to warranty claims. If our quality control efforts fail to detect a
fault in one of our products, we could experience an increase in warranty
claims. We track warranty claims to identify potential warranty trends. If an
unusual trend is noted, an additional warranty accrual may be assessed and
recorded when a failure event is probable and the cost can be reasonably
estimated. When new products are introduced, our process relies on historical
averages until sufficient data are available. As actual experience becomes
available, it is used to modify the historical averages to ensure the expected
warranty costs are within a range of likely outcomes. Management continually
evaluates the sufficiency of the warranty provisions and makes adjustments when
necessary. The warranty allowances may fluctuate due to changes in estimates for
material, labor, and other costs we may incur to repair or replace projected
product failures, and we may incur additional warranty and related expenses in
the future with respect to new or established products, which could adversely
affect our gross margin. The long-term warranty balance includes estimated
warranty claims beyond one year.
Income
Taxes
We
estimate income taxes in each of the taxing jurisdictions in which we operate.
Changes in our actual 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 in domestic and foreign
jurisdictions, tax credits (including research and development and foreign tax),
state income taxes, and changes in our valuation allowance. Significant judgment
is required in determining our actual tax rate and in evaluating our tax
positions. Changes in tax laws and unanticipated tax liabilities could
significantly impact our actual tax rate and profitability. We assess the
likelihood of recovering our deferred tax assets, which include net operating
loss and credit carryforwards and temporary differences expected to be
deductible in future years.
We record
valuation allowances to reduce deferred tax assets to the extent we believe it
is more likely than not that a portion of such assets will not be realized. In
making such determinations, we consider all available positive and negative
evidence, including scheduled reversals of deferred tax liabilities, projected
future taxable income, tax planning strategies, and our ability to carry back
losses to prior years. We are required to make assumptions and judgments about
potential outcomes that lie outside management’s control. Our most sensitive and
critical factor is projected future taxable income. Although realization is not
assured, management believes it is more likely than not that deferred tax assets
will be realized. The amount of deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward periods are reduced or current tax planning strategies
are not implemented.
We are
subject to audit in multiple taxing jurisdictions in which we operate. These
audits may involve complex issues, which may require an extended period of time
to resolve. We believe we have recorded adequate income tax provisions and
reserves for uncertain tax positions.
In
evaluating uncertain tax positions, we consider the relative risks and merits of
positions taken in tax returns filed and to be filed, considering statutory,
judicial, and regulatory guidance applicable to those positions. We make
assumptions and judgments about potential outcomes that lie outside management’s
control. To the extent the tax authorities disagree with our conclusions and
depending on the final resolution of those disagreements, our actual tax rate
may be materially affected in the period of final settlement with the tax
authorities.
Inventories
Items are
removed from inventory using the first-in, first-out method. Inventories include
raw materials, sub-assemblies, and finished goods. Inventory amounts include the
cost to manufacture the item, such as the cost of raw materials, labor, and
other applied direct and indirect costs. We also review idle facility expense,
freight, handling costs, and wasted materials to determine if abnormal amounts
should be recognized as current-period charges. We review our inventory for
obsolescence and marketability. If the estimated market value, which is based
upon assumptions about future demand and market conditions, falls below the
original cost, the inventory value is reduced to the market value. If technology
rapidly changes or actual market conditions are less favorable than those
projected by management, inventory write-downs may be required. Our inventory
levels may vary period to period as a result of our factory scheduling and
timing of contract fulfillments.
Goodwill
and Intangible Assets
Goodwill
and intangible assets result from our acquisitions. We use estimates, including
estimates of useful lives of intangible assets, the amount and timing of related
future cash flows, and fair values of the related operations, in determining the
value assigned to goodwill and intangible assets. Our intangible assets have a
finite life and are amortized over their estimated useful lives based on
estimated discounted cash flows. Intangible assets are tested for impairment
when events or changes in circumstances indicate the carrying value may not be
recoverable.
We test
goodwill for impairment each year as of October 1, or more frequently
should a significant impairment indicator occur. Our Itron North America
operating segment represents one reporting unit, while our Itron International
operating segment has three reporting units.
Determining
the fair value of a reporting unit is judgmental in nature and involves the use
of significant estimates and assumptions. We forecast discounted future cash
flows at the reporting unit level using risk-adjusted discount rates and
estimated future revenues and operating costs, which take into consideration
factors such as existing backlog, expected future orders, supplier contracts,
and expectations of competitive and economic environments. We also identify
similar publicly traded companies and develop a correlation, referred to as a
multiple, to apply to the operating results of the reporting units. Our 2009
annual goodwill impairment analysis did not result in an impairment charge as
the fair value of each reporting unit exceeded its carrying value. The
percentage by which the fair value of each reporting unit exceeded its carrying
value and the amount of goodwill allocated to each reporting unit at October 1,
2009 was as follows:
|
October
1, 2009
|
||||||
|
Goodwill
|
Fair
Value Exceeded Carrying Value
|
|||||
|
(in
millions)
|
||||||
|
Itron
North America
|
$ | 187.9 | 85% | |||
|
Itron
International - Electricity
|
379.7 | 3% | ||||
|
Itron
International - Gas
|
337.3 | 24% | ||||
|
Itron
International - Water
|
419.0 | 4% | ||||
| $ | 1,323.9 | |||||
Changes
in market demand, the volatility and decline in the worldwide equity markets,
and the decline in our market capitalization could negatively impact our annual
goodwill impairment test, which could have a significant effect on our current
and future results of operations and financial condition.
Derivative
Instruments
All
derivative instruments, whether designated in hedging relationships or not, are
recorded on the Consolidated Balance Sheets at fair value as either assets or
liabilities. The components and fair values of our derivative instruments, which
are primarily interest rate swaps, are determined using the fair value
measurements of significant other observable inputs (also known as “Level 2”),
as defined by Financial Accounting Standards Board (FASB) ASC 820-10-20, Fair Value Measurements. We
include the effect of our counterparty credit risk based on current published
credit default swap rates when the net fair value of our derivative instruments
are in a net asset position and the effect of our own nonperformance risk when
the net fair value of our derivative instruments are in a net liability
position. If the derivative is designated as a fair value hedge, the changes in
the fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings. If the derivative is designated as a
cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded as a component of other comprehensive income and are
recognized in earnings when the hedged item affects earnings. If the derivative
is a net investment hedge, the effective portion of any unrealized gain or loss
is reported in accumulated other comprehensive income as a net unrealized gain
or loss on derivative instruments. Ineffective portions of fair value changes or
the changes in fair value of derivative instruments that do not qualify for
hedging activities are recognized in other income (expense) in the Consolidated
Statements of Operations. We classify cash flows from our derivative programs as
cash flows from operating activities in the Consolidated Statements of Cash
Flows. Derivatives are not used for trading or speculative purposes. Our
derivatives are with major international financial institutions, with whom we
have master netting agreements; however, our derivative positions are not
disclosed on a net basis. There are no credit-risk-related contingent features
within our derivative instruments.
Convertible
Debt
Originally
issued as FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) (FSP 14-1), ASC 470-20 requires our convertible notes to
be separated into its liability and equity components in a manner that reflects
our non-convertible debt borrowing rate, which we determined to be 7.38% at the
time of the convertible notes issuance in August 2006. Upon derecognition
of the convertible notes, we are required to remeasure the fair value of the
liability and equity components using a borrowing rate for similar
non-convertible debt that would be applicable to Itron at the date of the
derecognition. Any increase or decrease in borrowing rates from the inception of
the debt to the date of derecognition could result in a gain or loss,
respectively, on extinguishment. Based on market conditions and our credit
rating at the date of derecognition, the borrowing rate could be materially
different from the rate determined at the inception of the convertible
debt.
Defined
Benefit Pension Plans
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans. We
recognize 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. We also recognize the funded status of our defined benefit pension
plans on our Consolidated Balance Sheets and recognize as a component of other
comprehensive income, net of tax, the actuarial gains or losses and prior
service costs or credits, if any, that arise during the period but are not
recognized as components of net periodic benefit cost.
Several
economic assumptions and actuarial data are used in calculating the expense and
obligations related to these plans. The assumptions are updated annually at
December 31 and include the discount rate, the expected remaining service
life, the expected rate of return on plan assets, and rate of future
compensation increase. The discount rate is a significant assumption used to
value our pension benefit obligation. We determine a discount rate for our plans
based on the estimated duration of each plan’s liabilities. For our euro
denominated defined benefit pension plans, which consist of 95% of our benefit
obligation, we match the plans’ expected future benefit payments against select
bonds (bonds with market values that exceed €500 million, have a maturity
greater than one year with no special features, and have a spread between the
bid and ask prices of less than 5% of the average bid and ask prices).The yield
curve derived for the euro denominated plans was 5.5%. The weighted average
discount rate used to measure the projected benefit obligation for all of the
plans as of December 31, 2009 was 5.6%. A change of 25 basis points in the
discount rate would change our pension benefit obligation by approximately $75
million. The financial and actuarial assumptions used at December 31, 2009
may differ materially from actual results due to changing market and economic
conditions and other factors. These differences could result in a significant
change in the amount of pension expense recorded in future periods. Gains and
losses resulting from changes in actuarial assumptions, including the discount
rate, are recognized in other comprehensive income in the period in which they
occur.
Our
general funding policy for these qualified pension plans is to contribute
amounts at least sufficient to satisfy funding standards of the respective
countries for each plan. Refer to Item 8: “Financial Statements and
Supplementary Data, Note 8: Defined Benefit Pension Plans” included in this
Annual Report on Form 10-K for our expected contributions for 2010.
Stock-Based
Compensation
We
measure and recognize compensation expense for all stock-based awards made to
employees and directors, including awards of stock options, stock issued
pursuant to our Employee Stock Purchase Plan (ESPP), and the issuance of
restricted and unrestricted stock awards and units, based on estimated fair
values. The fair values of stock options and ESPP awards are estimated at the
date of grant using the Black-Scholes option-pricing model, which includes
assumptions for the dividend yield, expected volatility, risk-free interest
rate, and expected life. In valuing our stock-based awards, significant judgment
is required in determining the expected volatility of our common stock and the
expected life that individuals will hold their stock-based awards prior to
exercising. Expected volatility is based on the historical and implied
volatility of our own common stock. The expected life of stock option grants is
derived from the historical actual term of option grants and an estimate of
future exercises during the remaining contractual period of the option. While
volatility and estimated life are assumptions that do not bear the risk of
change subsequent to the grant date of stock-based awards, these assumptions may
be difficult to measure as they represent future expectations based on
historical experience. Further, our expected volatility and expected life may
change in the future, which could substantially change the grant-date fair value
of future awards of stock options and ultimately the expense we record. For
restricted and unrestricted stock awards and units, the fair value is the market
close price of our common stock on the date of grant. We consider many factors
when estimating expected forfeitures, including types of awards, employee class,
and historical experience. Actual results and future estimates may differ
substantially from our current estimates. We expense stock-based compensation,
adjusted for estimated forfeitures, using the straight-line method over the
vesting requirement. Our excess tax benefit cannot be credited to common stock
until the deduction reduces cash taxes payable. When we have tax deductions in
excess of the compensation cost, they are classified as financing cash inflows
in the Consolidated Statements of Cash Flows.
New
Accounting Pronouncements
Refer to
Item 8: “Financial Statements and Supplementary Data, Note 1: Summary of
Significant Accounting Policies” included in this Annual Report on Form
10-K.
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 use derivative financial
instruments to hedge certain foreign currency and interest rate exposures. Our
objective is to offset gains and losses resulting from these exposures with
losses and gains on the derivative contracts used to hedge them, therefore
reducing the impact of volatility on earnings or protecting fair values of
assets and liabilities. We use derivative contracts only to manage existing
underlying exposures. Accordingly, we do not use derivative contracts for
trading or speculative purposes.
Interest
Rate Risk
The table
below provides information about our financial instruments that are sensitive to
changes in interest rates and the scheduled minimum repayment of principal and
estimated cash interest payments over the remaining lives of our debt at
December 31, 2009. Including the effect of our interest rate swaps at December
31, 2009, 85% of our borrowings are at fixed rates. Weighted average variable
rates in the table are based on implied forward rates in the Bloomberg U.S.
dollar yield curve as of December 31, 2009, our estimated leverage ratio, which
determines our additional interest rate margin, and a static foreign exchange
rate at December 31, 2009.
|
2010
|
2011
|
2012
|
2013
|
2014
|
Beyond
2014
|
Total
|
|||||||||||||||
|
(in
millions)
|
|||||||||||||||||||||
|
Fixed
Rate Debt
|
|||||||||||||||||||||
|
Principal:
Convertible notes (1)
|
$ | - | $ | 223.6 | $ | - | $ | - | $ | - | $ | - | $ | 223.6 | |||||||
|
Interest
rate
|
2.50 | % | 2.50 | % | |||||||||||||||||
|
Variable
Rate Debt
|
|||||||||||||||||||||
|
Principal:
U.S. dollar term loan
|
$ | 6.1 | $ | 6.1 | $ | 6.1 | $ | 6.1 | $ | 260.3 | $ | - | $ | 284.7 | |||||||
|
Average
interest rate
|
4.16 | % | 4.73 | % | 5.16 | % | 5.79 | % | 6.31 | % | |||||||||||
|
Principal:
Euro term loan
|
$ | 4.8 | $ | 4.8 | $ | 4.8 | $ | 4.8 | $ | 269.7 | $ | - | $ | 288.9 | |||||||
|
Average
interest rate
|
4.63 | % | 5.00 | % | 5.64 | % | 6.00 | % | 6.31 | % | |||||||||||
|
Interest
rate swaps on U.S. dollar term loan
(2)
|
|||||||||||||||||||||
|
Average
interest rate (Pay)
|
2.40 | % | 2.13 | % | |||||||||||||||||
|
Average
interest rate (Receive)
|
0.41 | % | 0.98 | % | |||||||||||||||||
|
Net/Spread
|
(1.99 | %) | (1.15 | %) | |||||||||||||||||
|
Interest
rate swap on euro term loan
(3)
|
|||||||||||||||||||||
|
Average
interest rate (Pay)
|
6.59 | % | 6.59 | % | 6.59 | % | |||||||||||||||
|
Average
interest rate (Receive)
|
2.88 | % | 3.25 | % | 3.89 | % | |||||||||||||||
|
Net/Spread
|
(3.71 | %) | (3.34 | %) | (2.70 | %) | |||||||||||||||
|
(1)
|
The
face value of our convertible notes is $223.6 million, while the carrying
value is $208.2 million. (Refer to Item 8: “Financial Statements and
Supplementary Data, Note 6: Debt” included in this Annual Report on Form
10-K for a summary of our convertible note terms and a reconciliation
between the face and carrying values). Our convertible notes mature
in August 2026. We are amortizing the remaining $15.4 million discount on
the liability component of the convertible notes over the next 18 months
and have reflected the principal repayment in 2011 due to the combination
of put, call, and conversion options that are part of the terms of the
convertible note agreement.
|
|
(2)
|
The
one-year interest rate swaps are used to convert $200 million of our
$284.7 million U.S. dollar denominated variable rate term loan from a
floating LIBOR interest rate, plus the applicable margin, to a fixed
interest rate, plus the applicable margin (refer to Item 8: “Financial
Statements and Supplementary Data, Note 7: Derivative Financial
Instruments and Hedging Activities” included in this Annual Report on Form
10-K).
|
|
(3)
|
The
amortizing euro denominated interest rate swap is used to convert $252.9
million (€175.8 million) of our $288.9 million (€200.8 million) euro
denominated variable rate term loan from a floating Euro Interbank Offered
Rate (EURIBOR), plus the applicable margin, to a fixed interest rate of
6.59%, through December 31, 2012, plus or minus the variance in the
applicable margin from 2%. As a result of the amortization schedule, the
interest rate swap will terminate before the stated maturity of the term
loan (refer to Item 8: “Financial Statements and Supplementary Data, Note
7: Derivative Financial Instruments and Hedging Activities” included in
this Annual Report on
Form 10-K).
|
Based on
a sensitivity analysis as of December 31, 2009, we estimate that if market
interest rates averaged one percentage point higher in 2010 than in the table
above, our earnings before income taxes in 2010 would not be materially impacted
due to our interest rate swaps in place at December 31, 2009.
We
continually monitor and assess our interest rate risk and may institute
additional interest rate swaps or other derivative instruments to manage such
risk in the future.
Foreign
Currency Exchange Rate Risk
We
conduct business in a number of countries. As a result, the majority of our
revenues and operating expenses are denominated in foreign currencies;
therefore, we face exposure to movements in foreign currency exchange rates that
could have a material effect on our financial results. Our primary foreign
currency exposure relates to non-U.S. dollar denominated transactions in our
international subsidiary operations, the most significant of which is the euro.
International revenues were 64%, 66%, and 59% of total revenues for the years
ended December 31, 2009, 2008, and 2007, respectively.
As a
result of our acquisition of an international company, we entered into a euro
denominated term loan in 2007, which exposes us to fluctuations in the euro
foreign exchange rate. Therefore, we have designated this foreign currency
denominated term loan as a hedge of our net investment in international
operations. The non-functional currency term loan is revalued into U.S. dollar
at each balance sheet date and the changes in value associated with currency
fluctuations are recorded as adjustments to long-term debt with offsetting gains
and losses recorded in other comprehensive income. We had no hedge
ineffectiveness. (Refer to Item 8: “Financial Statements and Supplementary Data,
Note 7: Derivative Financial Instruments and Hedging Activities” included in
this Annual Report on Form 10-K).
We are
also exposed to foreign exchange risk when we enter into non-functional currency
transactions, both intercompany and third-party. At each period end, foreign
currency monetary assets and liabilities are revalued with the change recorded
to other income and expense. In 2008, we began entering into monthly foreign
exchange forward contracts, not designated for hedge accounting, with the intent
to reduce earnings volatility associated with certain of these balances. During
2009, the notional amount of our outstanding forward contracts ranged from less
than $1 million to $60 million offsetting our exposures primarily from the euro,
British pound, Canadian dollar, Czech koruna, and Hungarian forint.
In future
periods, we may use additional derivative contracts to protect against foreign
currency exchange rate risks.
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
U.S. generally accepted accounting principles. 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 the 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.
|
Malcolm
Unsworth
|
Steven
M. Helmbrecht
|
|
President
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 sheets of Itron, Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2009. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2). 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 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, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Itron, Inc. at
December 31, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2009, 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, presents fairly, in
all material respects, the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, in
2009 the Company retrospectively changed its method of accounting for
its convertible debt upon the adoption of Financial Accounting Standards
Board ASC Topic 470-20.
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, 2009, 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 24, 2010 expressed an
unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Seattle,
Washington
February
24, 2010
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Revenues
|
$ | 1,687,447 | $ | 1,909,613 | $ | 1,464,048 | ||||
|
Cost
of revenues
|
1,149,991 | 1,262,756 | 976,761 | |||||||
|
Gross
profit
|
537,456 | 646,857 | 487,287 | |||||||
|
Operating
expenses
|
||||||||||
|
Sales
and marketing
|
152,405 | 167,457 | 125,842 | |||||||
|
Product
development
|
122,314 | 120,699 | 94,926 | |||||||
|
General
and administrative
|
119,137 | 128,515 | 100,071 | |||||||
|
Amortization
of intangible assets
|
98,573 | 120,364 | 84,000 | |||||||
|
In-process
research and development
|
- | - | 35,975 | |||||||
|
Total
operating expenses
|
492,429 | 537,035 | 440,814 | |||||||
|
Operating
income
|
45,027 | 109,822 | 46,473 | |||||||
|
Other
income (expense)
|
||||||||||
|
Interest
income
|
1,186 | 5,970 | 10,477 | |||||||
|
Interest
expense
|
(70,311 | ) | (94,177 | ) | (100,935 | ) | ||||
|
Loss
on extinguishment of debt, net
|
(12,800 | ) | - | - | ||||||
|
Other
income (expense), net
|
(9,176 | ) | (3,033 | ) | 435 | |||||
|
Total
other income (expense)
|
(91,101 | ) | (91,240 | ) | (90,023 | ) | ||||
|
Income
(loss) before income taxes
|
(46,074 | ) | 18,582 | (43,550 | ) | |||||
|
Income
tax benefit
|
43,825 | 1,229 | 20,699 | |||||||
|
Net
income (loss)
|
$ | (2,249 | ) | $ | 19,811 | $ | (22,851 | ) | ||
|
Earnings
(loss) per common share-Basic
|
$ | (0.06 | ) | $ | 0.60 | $ | (0.77 | ) | ||
|
Earnings
(loss) per common share-Diluted
|
$ | (0.06 | ) | $ | 0.57 | $ | (0.77 | ) | ||
|
Weighted
average common shares outstanding-Basic
|
38,539 | 33,096 | 29,584 | |||||||
|
Weighted
average common shares outstanding-Diluted
|
38,539 | 34,951 | 29,584 | |||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
BALANCE SHEETS
|
December
31
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$ | 121,893 | $ | 144,390 | |||
|
Accounts
receivable, net
|
337,948 | 321,278 | |||||
|
Inventories
|
170,084 | 164,210 | |||||
|
Deferred
tax assets current, net
|
20,762 | 31,807 | |||||
|
Other
current assets
|
75,229 | 56,032 | |||||
|
Total
current assets
|
725,916 | 717,717 | |||||
|
Property,
plant, and equipment, net
|
318,217 | 307,717 | |||||
|
Prepaid
debt fees
|
8,628 | 12,943 | |||||
|
Deferred
tax assets noncurrent, net
|
89,932 | 30,917 | |||||
|
Other
noncurrent assets
|
18,117 | 19,315 | |||||
|
Intangible
assets, net
|
388,212 | 481,886 | |||||
|
Goodwill
|
1,305,599 | 1,285,853 | |||||
|
Total
assets
|
$ | 2,854,621 | $ | 2,856,348 | |||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$ | 219,255 | $ | 200,725 | |||
|
Other
current liabilities
|
64,583 | 66,365 | |||||
|
Wages
and benefits payable
|
71,592 | 78,336 | |||||
|
Taxes
payable
|
14,377 | 18,595 | |||||
|
Current
portion of long-term debt
|
10,871 | 10,769 | |||||
|
Current
portion of warranty
|
20,941 | 23,375 | |||||
|
Unearned
revenue
|
40,140 | 24,329 | |||||
|
Deferred
tax liabilities current, net
|
1,625 | 1,927 | |||||
|
Total
current liabilities
|
443,384 | 424,421 | |||||
|
Long-term
debt
|
770,893 | 1,140,998 | |||||
|
Warranty
|
12,932 | 14,880 | |||||
|
Pension
plan benefits
|
63,040 | 55,810 | |||||
|
Deferred
tax liabilities noncurrent, net
|
80,695 | 102,720 | |||||
|
Other
noncurrent obligations
|
83,163 | 58,743 | |||||
|
Total
liabilities
|
1,454,107 | 1,797,572 | |||||
|
Commitments
and contingencies
|
|||||||
|
Shareholders'
equity
|
|||||||
|
Preferred
stock, no par value, 10 million shares authorized,
|
|||||||
|
no
shares issued or outstanding
|
- | - | |||||
|
Common
stock, no par value, 75 million shares authorized,
|
|||||||
|
40,142,924
and 34,486,318 shares issued and outstanding
|
1,299,134 | 992,184 | |||||
|
Accumulated
other comprehensive income, net
|
71,130 | 34,093 | |||||
|
Retained
earnings
|
30,250 | 50,291 | |||||
|
Cumulative
effect of change in accounting principle (Note 1)
|
- | (17,792 | ) | ||||
|
Total
shareholders' equity
|
1,400,514 | 1,058,776 | |||||
|
Total
liabilities and shareholders' equity
|
$ | 2,854,621 | $ | 2,856,348 | |||
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(in
thousands)
|
Shares
|
Amount
|
Accumulated
Other Comprehensive Income
|
Retained
Earnings
|
Total
|
||||||||||||
|
Balances
at January 1, 2007
|
25,675 | $ | 392,195 | $ | 1,588 | $ | 38,376 | $ | 432,159 | |||||||
|
Net
loss
|
(22,851 | ) | (22,851 | ) | ||||||||||||
|
Foreign
currency translation adjustment, net of
|
||||||||||||||||
|
income
tax benefit of $755
|
147,654 | 147,654 | ||||||||||||||
|
Net
unrealized loss on derivative instruments, designated as
|
||||||||||||||||
|
cash
flow hedges, net of income tax benefit of $653
|
(1,062 | ) | (1,062 | ) | ||||||||||||
|
Net
unrealized loss on nonderivative hedging instrument,
|
||||||||||||||||
|
net
of income tax benefit of $15,644
|
(25,460 | ) | (25,460 | ) | ||||||||||||
|
Net
hedging gain reclassified into net income,
|
||||||||||||||||
|
net
of income tax benefit of $12
|
(19 | ) | (19 | ) | ||||||||||||
|
Pension
plan benefits liability adjustment,
|
||||||||||||||||
|
net
of income tax provision of $1,653
|
3,967 | 3,967 | ||||||||||||||
|
Total
comprehensive income
|
102,229 | |||||||||||||||
|
Cumulative
effect of a change in accounting principle
|
||||||||||||||||
|
adoption
of FSP 14-1, net of income tax provision of $1,804
|
(2,837 | ) | (2,837 | ) | ||||||||||||
|
Stock
issues:
|
||||||||||||||||
|
Options
exercised
|
828 | 20,136 | 20,136 | |||||||||||||
|
Employee
stock plans income tax benefits
|
(389 | ) | (389 | ) | ||||||||||||
|
Issuance
of stock-based compensation awards
|
6 | 304 | 304 | |||||||||||||
|
Employee
stock purchase plan
|
40 | 2,315 | 2,315 | |||||||||||||
|
Stock-based
compensation expense
|
11,352 | 11,352 | ||||||||||||||
|
Issuance
of common stock
|
4,087 | 225,166 | 225,166 | |||||||||||||
|
Balances
at December 31, 2007
|
30,636 | $ | 651,079 | $ | 126,668 | $ | 12,688 | $ | 790,435 | |||||||
|
Net
income
|
19,811 | 19,811 | ||||||||||||||
|
Foreign
currency translation adjustment, net of
|
||||||||||||||||
|
income
tax benefit of $10,740
|
(92,069 | ) | (92,069 | ) | ||||||||||||
|
Net
unrealized loss on derivative instruments, designated as
|
||||||||||||||||
|
cash
flow hedges, net of income tax benefit of $5,736
|
(9,239 | ) | ||||||||||||||