ITRN

Business Context and Reporting Period

Company: Ituran Location & Control Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Accounting Basis: U.S. GAAP
Business Overview: Ituran is a leading provider of location-based services, primarily stolen vehicle recovery (SVR) and fleet management, operating in Israel, Brazil, Argentina, and the United States. The company also manufactures and sells wireless communications products (AVL) used in these services. As of December 31, 2010, the company served approximately 604,000 subscribers globally.

Key Financial Metrics (Year Ended Dec 31, 2010)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 21.7% to $147.8 million, driven by an 18% increase in location-based services ($108.1 million) and a 33.2% increase in wireless communications products ($39.7 million). Growth was fueled by subscriber increases and favorable exchange rate fluctuations.
• Profitability Decline: Despite revenue growth, Net Income attributable to stockholders dropped 52.3% to $8.7 million. This was primarily due to a significant non-operating charge of $14.7 million related to a district court decision in the "Leonardo" litigation case.
• Liabilities: Total liabilities increased significantly, largely due to the reclassification of capital notes to a current "Litigation obligation" of approximately $21.9 million following the court ruling.
• Segment Performance: The location-based services segment remained profitable with operating income of $32.0 million. The wireless communications products segment reduced its operating loss from $2.7 million in 2009 to $1.3 million in 2010.

Guidance, Outlook, Risks, and Contingencies

Outlook and Management Commentary

Management expects growth in the next 12 months to be driven by increased demand from insurance companies in Brazil and direct sales to self-insured subscribers. The company launched a new product line, "IturanSave," targeting medium-end vehicles in Israel. The company maintains a dividend policy of distributing at least 50% of net profits, having paid approximately $31.6 million in dividends in April 2010.

Material Risks and Contingencies

• Leonardo Litigation: An Israeli district court ruled against Ituran in a dispute with hedge fund Leonardo L.P., ordering the company to pay approximately $9.6 million plus interest and legal fees (totaling approx. $22.7 million). Ituran plans to appeal to the Israeli Supreme Court and has filed a motion to correct calculation errors, estimating a potential $10 million difference.
• Brazilian Tax Disputes:
  • ICMS Claim: São Paulo State Revenue Services issued a tax deficiency notice for approx. $22.1 million (plus interest and penalties totaling approx. $80 million) regarding the classification of services as telecommunications. Ituran is appealing and believes the claim lacks merit.
  • Federal Tax Assessment: A separate assessment of approx. $1.6 million plus penalties was issued regarding a 2005 receivable offset. Ituran is appealing this as well.
• Regulatory Compliance: Many base sites in Israel and Brazil operate without local building permits. While historically tolerated, enforcement actions could lead to fines or site closures, impacting network coverage.
• Monopoly Status: Ituran is declared a monopoly in Israel for vehicle location systems, subjecting it to restrictions on pricing and discounts that do not apply to competitors.
• Telematics Dispute: Arbitration regarding the 2007 sale of Telematics Wireless Ltd. resulted in a $4.4 million reduction to the purchase price, with further disputes pending regarding 2008 performance.

Key Facts for Investor Verification

• Leonardo Appeal Outcome: Verify the status and potential outcome of the appeal to the Israeli Supreme Court regarding the $22.7 million judgment, as this represents a significant contingent liability.
• Brazilian Tax Resolution: Monitor the progress of the appeals against the São Paulo State Revenue Services (ICMS) and Federal tax assessments, which could result in liabilities exceeding $80 million if penalties are upheld.
• Subscriber Churn and Growth: Verify the sustainability of subscriber growth in Brazil and Argentina, which are key growth markets, against the backdrop of rising churn rates (2.8% in 2010 vs 2.1% in 2009).
• Permit Compliance: Assess the risk of enforcement actions regarding the lack of building permits for base sites in Israel and Brazil and the potential cost of remediation.
• Dividend Sustainability: Confirm that the 50% dividend payout policy remains sustainable given the reduced net income and potential cash outflows from litigation settlements.