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, 2009
Accounting Basis: U.S. GAAP
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 is headquartered in Azour, Israel.

Key Financial Metrics (Year Ended Dec 31, 2009)

Note: The filing indicates no outstanding long-term borrowings from banks for 2007, 2008, or 2009. Short-term credit utilization was minimal ($6,000 in 2009).

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 8.4% to $121.4 million. This was driven by a 36% drop in wireless communications products revenue ($29.8M vs $46.6M), partially offset by a 6.4% increase in location-based services revenue ($91.6M vs $86.1M). The decline in product sales was attributed to a shift from selling to leasing products in Brazil and reduced sales in Israel.
• Profitability Increase: Despite lower revenue, Net Income attributable to shareholders increased 22.9% to $18.2 million. This was due to cost reductions in the wireless products segment and a tax refund of approximately $2.7 million related to prior years.
• Subscriber Growth: The subscriber base for location-based services grew to 562,000 (up from 511,000 in 2008), with significant growth in Brazil and Argentina.
• Cash Position: Cash and cash equivalents surged to $60.8 million from $12.5 million, driven by strong operating cash flow ($37.7 million) and the sale of trading marketable securities.

Guidance, Outlook, Risks, and Contingencies

Outlook and Management Commentary

Management expects growth in the location-based services segment over the next 12 months, driven by increased demand from insurance companies in Brazil and Argentina and direct sales to self-insured subscribers. The company anticipates continued growth in the Brazilian market due to high vehicle theft rates and new regulations requiring immobilizing systems in new vehicles.

Dividend Policy

In November 2009, the Board revised the dividend policy to distribute not less than 50% of net profits (increased from 25%). A dividend of approximately $32.8 million was declared in February 2010 for the 2009 fiscal year.

Material Risks

• Regulatory & Permitting: Many base sites in Israel and Brazil operate without local building permits. Enforcement could lead to fines, closure, or demolition of sites, impacting network coverage.
• Insurance Dependency: Revenue is heavily dependent on relationships with insurance companies that mandate or incentivize the use of SVR services. Changes in insurance practices could reduce demand.
• Competition: The market is highly competitive with technologies including GPS, cellular triangulation, and homing systems. Competitors include LoJack, OnStar, and local providers.
• Monopoly Status: Ituran is declared a monopoly in Israel for vehicle location systems, subjecting it to restrictions on pricing and discounts.

Legal Contingencies

• Leonardo L.P. Litigation: Ongoing litigation regarding convertible notes from 2000. Leonardo seeks damages up to $9.6 million (cash or shares). Ituran believes its liability is limited to issuing approximately 8,406 shares.
• ST (Infocomm) Arbitration: Dispute regarding the sale of the Telematics Wireless subsidiary. ST claims a purchase price reduction of ~$10 million and indemnification claims of ~$4.3 million. Ituran intends to vigorously defend these claims.
• Class Action: A class action in Pennsylvania regarding fax advertisements alleges violations of the Telephone Consumer Protection Act. Potential damages are estimated between $500,000 and $750,000.

Investor Verification Checklist

• Subscriber Churn: Verify the stability of the 2.1% monthly churn rate and the sustainability of subscriber growth in Brazil and Argentina.
• Regulatory Compliance: Assess the risk and potential cost of obtaining missing building permits for base sites in Israel and Brazil.
• Legal Exposure: Monitor the status of the Leonardo L.P. litigation and ST (Infocomm) arbitration, as adverse outcomes could result in significant cash outflows or dilution.
• Product Mix Shift: Analyze the long-term margin impact of the strategic shift from selling wireless products to leasing them in key markets like Brazil.
• Currency Risk: Evaluate exposure to fluctuations in the Brazilian Real and Argentine Peso, which constitute a significant portion of revenues and expenses.