ITRN

Business Context and Reporting Period

Company: Ituran Location & Control Ltd.
Filing Type: Form 20-F (Annual Report)
Period Ended: December 31, 2008
Reporting Currency: U.S. Dollars (USD)
Accounting Basis: U.S. GAAP

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 sells wireless communications products used for automatic vehicle location (AVL). In 2008, the company fully consolidated the results of its acquisition of Mapa (a geographic information provider) and excluded the results of Telematics Wireless Ltd., which was sold in December 2007.

Key Financial Metrics

Segment Performance (2008):
- Location-based services revenue: $86.1 million (65% of total).
- Wireless communications products revenue: $46.6 million (35% of total).
- Subscriber base: 511,000 (Israel: 214k, Brazil: 174k, Argentina: 111k, US: 12k).

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 6.2% to $132.6 million, driven by a 33% increase in location-based services revenue ($86.1M vs $64.6M). This was offset by a 22.7% decline in wireless communications products revenue ($46.6M vs $60.2M), primarily due to the sale of the Telematics subsidiary in late 2007.
• Profitability Decline: Operating income dropped 64.6% to $25.7 million. The 2007 figure was anomalously high due to a $49.1 million one-time gain from the sale of Telematics. Excluding this gain, underlying operating performance remained relatively stable.
• Net Income: Net income fell to $14.9 million from $51.5 million, largely reflecting the absence of the Telematics sale gain and a $1.6 million write-off of an investment in a Korean company (KLIC).
• Cash Flow: Operating cash flow improved significantly to $27.3 million (from $12.8 million in 2007), aided by a $9.8 million decrease in accounts receivable. However, financing activities used $53.3 million, primarily for a $29.1 million dividend and $24.2 million in share repurchases.
• Balance Sheet: Total assets decreased by $58.7 million, reflecting the cash outflow from dividends and buybacks, as well as the removal of Telematics assets. Cash and cash equivalents declined to $12.5 million.

Guidance, Outlook, Risks, and Contingencies

Outlook: Management expects growth in location-based services to be driven by increased demand in Brazil and Argentina, where high vehicle theft rates and insurance company partnerships create opportunities. The company anticipates continued expansion of its subscriber base in these regions.

Key Risks:

• Regulatory & Legal: The company is declared a "monopoly" in Israel, subjecting it to restrictions on pricing and discounts. Additionally, many base sites in Israel and Brazil operate without full building permits, creating a risk of enforcement actions or fines.
• Customer Concentration: Revenue is heavily dependent on relationships with insurance companies in Israel, Brazil, and Argentina. Changes in insurance practices or a reduction in vehicle theft rates could adversely affect demand.
• Technology & Competition: The company relies on licensed technology from Teletrac. Competition is intense, particularly from GPS-based systems and other tracking technologies.
• Geopolitical: As an Israeli company, operations are exposed to regional political and military instability.

Contingencies & Litigation:

• Leonardo L.P. Litigation: A dispute regarding convertible notes from 2000. Leonardo seeks up to $9.6 million in damages or shares. Ituran believes its liability is limited to issuing approximately 8,406 shares, but the outcome is uncertain.
• Telematics Sale Arbitration: The purchaser (ST Infocomm) claims a $10 million reduction in the purchase price based on performance parameters. Ituran has rejected this claim, and arbitration is ongoing.
• Class Action: A pending class action in Pennsylvania regarding fax advertisements, with potential damages estimated between $500,000 and $750,000.

Investor Verification Checklist

• Telematics Arbitration Outcome: Verify the status of the arbitration regarding the $10 million purchase price adjustment claim, as a loss could significantly impact future earnings.
• Leonardo Litigation Resolution: Monitor the legal proceedings with Leonardo L.P. to assess the potential for a $9.6 million liability or significant share dilution.
• Regulatory Compliance in Israel/Brazil: Confirm progress on obtaining building permits for base sites to mitigate the risk of operational disruption or fines.
• Subscriber Churn & Growth: Validate the reported subscriber growth in Brazil and Argentina against the stated churn rate of 2.0% to ensure revenue sustainability.
• Currency Exposure: Assess the impact of NIS and Brazilian Real fluctuations on future margins, given the significant portion of expenses incurred in these currencies.