Business Combinations

6 Months Ended

Jun. 30, 2012

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

Business Combinations

SmartSynch

On May 1, 2012, we completed our acquisition of 100% of SmartSynch. The acquisition was financed through borrowings on our multicurrency revolving line of credit and cash on hand. SmartSynch is a provider of smart grid solutions that utilize cellular networks for communications. The acquisition strengthens our cellular communications offerings, and we believe the acquisition brings greater choice to utility customers across the spectrum of smart metering deployments.

The preliminary purchase price for SmartSynch was $78.7 million in cash (net of $6.8 million of cash and cash equivalents acquired). The announced purchase price of $100 million included restricted and unrestricted cash, employee retention payments, and change in control fees. Although these payments were settled at closing, in accordance with GAAP they are considered assumed liabilities. The announced purchase price also excluded the net working capital adjustment.

We have made a preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on estimated fair value assessments. We are continuing to collect information to determine the fair values of inventory, intangible assets, other assets, accrued liabilities, and income taxes, all of which would affect goodwill. Due to the timing of the acquisition, we completed a preliminary assessment of the fair values of these assets and liabilities. As a result, the fair values of these assets and liabilities are provisional until we are able to complete our assessment. The following reflects our preliminary allocation of purchase price as of May 1, 2012:

	Fair Value			Weighted Average Useful Life
	(in thousands)			(in years)
Current assets(1)	$	13,928
Property, plant, and equipment	1,653
Identified intangible assets
Core-developed technology	15,100			7
Customer contracts and relationships	8,900			11
Total identified intangible assets subject to amortization	24,000			8
In-process research and development (IPR&D)	19,400
Total identified intangible assets	43,400
Goodwill	42,620
Current liabilities	(22,593		)
Long-term liabilities	(263		)
Total net assets acquired	$	78,745

⁽¹⁾   Current assets include the fair value of accounts receivable of $7.6 million, which equals its contractual balance as it is considered fully collectible.

The fair values for the identified intangible assets were estimated using the income approach. Under the income approach, the fair value reflects the present value of the projected cash flows that are expected to be generated. The intangible assets will be amortized using the estimated discounted cash flows assumed in the valuation models. Existing technology represents the fair values of SmartSynch products that have reached technological feasibility and were part of SmartSynch's product offerings at the date of the acquisition. Customer contracts and relationships represent the fair value SmartSynch developed with its customers, including backlog.

IPR&D assets acquired represent the fair value of SmartSynch research and development projects that had not yet reached technological feasibility and consist primarily of projects to upgrade the hardware components of cellular communication modules to be compatible with 3G cellular network standards. These projects are expected to be completed in the next 12 months. Incremental costs to be incurred for these projects, currently estimated at $3.1 million, will be expensed as incurred in product development operating expenses. Once the projects are completed, they will be amortized over the expected life of the technology, which is expected to be seven years.

Goodwill of $42.6 million arising from the acquisition consists largely of the synergies expected from combining the operations of Itron and SmartSynch, as well as certain intangible assets that do not qualify for separate recognition. All of the goodwill balance was preliminarily assigned to the Electricity reporting unit, which is a part of the Energy operating segment. In the third quarter of 2012, we expect to complete our assessment to determine if any portion of the goodwill balance should be allocated to the Gas reporting unit, which is also part of the Energy segment, and/or to the Water reporting unit. The entire goodwill balance is expected to be deductible for income tax purposes.

Itron's acquisition related expenses of $900,000 and $2.9 million were recognized during the three and six months ended June 30, 2012 and are included in general and administrative expenses.

The following table presents the revenues and net income (loss) from SmartSynch's operations that are included in our consolidated statements of operations:

	May 1, 2012 - June 30, 2012
	(in thousands)
Revenues	$	3,975
Net income (loss)	(2,771		)

The following supplemental pro forma results are based on the individual historical results of Itron and SmartSynch, with adjustments to give effect to the combined operations as if the acquisition had been consummated on January 1, 2011.

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
Revenues	$	584,561	$	616,446	$	1,161,834	$	1,184,176
Net income	28,352		32,063		50,571		56,478

The significant nonrecurring adjustments, net of the estimated tax impact, include the following:

• Elimination from the supplemental pro forma net income of acquisition-related expenses incurred by SmartSynch prior to the acquisition and by Itron pre- and post-acquisition totaling $3.8 million and $5.1 million for the three and six months ended June 30, 2012, respectively.

The supplemental pro forma results are intended for information purposes only and do not purport to represent what the combined companies' results of operations would actually have been had the transaction in fact occurred at an earlier date or project the results for any future date or period.