Business Combinations

9 Months Ended

Sep. 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 $77.7 million in cash (net of $6.8 million of cash and cash equivalents acquired). The purchase price is subject to a working capital adjustment, which is expected to be finalized in the fourth quarter of 2012. The announced purchase price of $100 million included employee retention payments and change in control fees. Although these payments were settled at closing, in accordance with GAAP they are considered assumed liabilities.

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 certain accrued liabilities associated with specific contracts and income taxes, which would affect goodwill. 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 the acquisition date, May 1, 2012:

	Fair Value
	(in thousands)
Current assets(1)	$	12,412
Property, plant, and equipment	1,653
Intangible assets	43,400
Goodwill	46,881
Total assets acquired	104,346
Current liabilities	26,143
Long-term liabilities	465
Total liabilities assumed	26,608
Total net assets acquired	$	77,738

⁽¹⁾   Current assets include the fair value of accounts receivable of $6.1 million, which equals its contractual balance as it is considered fully collectible.

Intangible assets acquired were as follows:

	Fair Value		Weighted Average Useful Life
	(in thousands)		(in years)
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	19,400
Total identified intangible assets	$	43,400

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 $2.3 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 $46.9 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. Based on synergies expected to be realized by the Electricity and Gas reporting units within the Energy operating segment, $37.3 million was assigned to the Electricity reporting unit and $9.6 million was assigned to the Gas reporting unit. The entire goodwill balance is expected to be deductible for income tax purposes.

Itron's acquisition related expenses of $44,000 and $3.0 million were recognized during the three and nine months ended September 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:

	July 1, 2012 - September 30, 2012			May 1, 2012 - September 30, 2012
	(in thousands)
Revenues	$	7,910		$	11,885
Net income (loss)	(3,808		)	(6,579		)

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 September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
	(in thousands)
Revenues	$	504,063	$	627,237		$	1,665,897	$	1,811,413
Net income (loss)	35,273		(519,943		)	87,220		(463,944		)

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 $5.1 million for the nine months ended September 30, 2012.

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.