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, 2007
Business Overview: Ituran is a leading provider of location-based services, primarily stolen vehicle recovery (SVR) and fleet management, as well as wireless communications products (AVL). Operations are conducted in Israel, Brazil, Argentina, and the United States. The company utilizes terrestrial network triangulation and GPS/GPRS technologies.

Key Financial Metrics (Year Ended Dec 31, 2007)

Note: Operating income for 2007 includes a significant non-recurring gain from the sale of a subsidiary (see Material Changes).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 20% to $124.8 million, driven by a 20% increase in wireless communications products sales and a 20% increase in location-based services. Subscriber base grew to 444,000 (up from 396,000 in 2006).
• Divestiture of Telematics Wireless: On December 31, 2007, the company sold its subsidiary, Telematics Wireless Ltd., for an enterprise value of approximately $90 million. This transaction resulted in a capital gain of approximately $50 million, which was recorded as "Other income, net," significantly boosting operating income and net income for the year.
• Acquisitions: The company acquired 100% of Mapa Group (a leading GIS provider in Israel) for approximately $13 million total consideration ($9.9 million purchase price + $3.1 million debt repayment). It also acquired 51% of ERM Electronic Systems Limited in late 2006, with results consolidated in 2007.
• Operating Expenses: Selling and marketing expenses increased 61% to $8.2 million, largely due to marketing efforts in Brazil/Argentina and the consolidation of Mapa. General and administrative expenses rose 28% to $22.6 million due to salary increases and compliance costs (Sarbanes-Oxley).
• Dividends: The company declared a dividend of approximately $30 million (NIS 108 million) in February 2008 based on 2007 results, consistent with its policy of distributing 25% of net profits.

Guidance, Outlook, Risks, and Contingencies

Outlook and Management Commentary

• Growth Drivers: Management expects continued growth in Brazil and Argentina due to high vehicle theft rates and insurance company mandates. The company plans to expand GPS/GPRS product penetration.
• Post-Sale Strategy: Following the sale of Telematics, Ituran entered into a 10-year supply agreement and a 5-year revenue-sharing agreement regarding Telematics' operations in China and South Korea.
• Capital Allocation: The company authorized a share repurchase program of up to $20 million (increased from $10 million in 2006).

Risks and Contingencies

• Leonardo L.P. Litigation: The company is involved in ongoing litigation with Leonardo L.P. regarding convertible notes issued in 2000. Leonardo seeks approximately $6.2 million in cash or shares, plus potential damages up to $9.6 million. Ituran believes its maximum liability is approximately $9.6 million but intends to vigorously defend the claim.
• Regulatory Compliance: Many base sites in Israel and Brazil operate without local building permits. While enforcement has been limited historically, authorities have recently begun seeking compliance, which could lead to fines or site closures.
• Monopoly Status: Ituran is declared a monopoly in Israel for vehicle location systems, subjecting it to restrictions on pricing and loyalty discounts under Israeli law.
• Internal Control Weaknesses: The company's internal control over financial reporting was deemed not effective as of December 31, 2007, due to material weaknesses in its Brazilian subsidiary (Teleran/Ituran Brazil) regarding accounts receivable reconciliation, inventory transfers, and segregation of duties.

Key Facts for Investor Verification

• Sustainability of Earnings: Verify the extent to which 2007 profitability relies on the one-time $50 million gain from the Telematics sale versus recurring operational cash flow.
• Internal Control Remediation: Monitor the progress of remediation efforts for the material weaknesses identified in the Brazilian subsidiary, as these resulted in audit adjustments.
• Legal Exposure: Track the status of the Leonardo L.P. litigation, as an adverse ruling could result in significant cash outflows or share dilution.
• Regulatory Risk: Assess the potential financial impact of enforcing building permit regulations on base sites in Israel and Brazil.
• Subscriber Churn: Review the trend in monthly churn rates (2.1% in 2007 vs. 1.8% in 2006) to ensure growth is not being offset by increased attrition.