Ituran Location and trol .(ITRN) - 2019 Q4 - Annual Report

Part I Item 3. Key Information This section presents five-year financial data showing revenue growth but a sharp 2019 net income drop, alongside key business and operational risks Selected Financial Data Five-year data shows consistent revenue and subscriber growth, but a sharp drop in 2019 net income due to significant impairment charges Consolidated Statements of Income Data (2015-2019) | Year Ended December 31, | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $279,332 | $253,335 | $234,636 | $199,574 | $175,628 | | Gross profit | $130,518 | $127,328 | $119,384 | $102,031 | $89,881 | | Operating Income | $22,654 | $62,378 | $56,535 | $47,998 | $40,644 | | Net income attributable to Company stockholders | $6,889 | $60,675 | $43,794 | $32,139 | $24,971 | | Diluted Earnings per share | $0.33 | $2.88 | $2.09 | $1.53 | $1.19 | Consolidated Balance Sheets Data (2015-2019) | Year Ended December 31, | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $339,235 | $373,792 | $215,159 | $178,019 | $142,003 | | Total Liabilities | $203,321 | $213,592 | $81,930 | $69,848 | $54,182 | | Stockholders' Equity | $129,330 | $153,693 | $125,790 | $102,229 | $83,698 | Telematics Subscribers (2015-2019) | Year Ended December 31, | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Subscribers of telematics services | 1,781,000 | 1,770,000 | 1,160,000 | 1,057,000 | 948,000 | Risk Factors The company faces significant risks from its dependency on insurance partners, acquisition integration, customer concentration, and legal challenges - Revenues from Stolen Vehicle Recovery (SVR) services are highly dependent on relationships with insurance companies, which often mandate or incentivize the use of such systems[38][39] - The company faces risks associated with the integration of Road Track Holding S.L., acquired in September 2018[47] - In 2019, a single global vehicle manufacturer accounted for 15.8% of total sales, creating a significant customer concentration risk[52] - The COVID-19 pandemic poses a risk to business operations, with potential negative effects on new car purchases, new installations, and product sales[67][68] - The company is subject to a purported class action lawsuit in Israel, alleging abuse of its monopoly status, with a claimed amount of approximately NIS 300 million (USD 87 million)[69] - The company has been declared a monopoly in Israel for vehicle location systems, subjecting it to restrictions under the Israeli Antitrust Law[78] Item 4. Information on the Company This section details the company's telematics services and products, its history including the Road Track acquisition, and its global operational structure History and Development of the Company The company was founded in 1994, went public on Nasdaq, and significantly expanded its Latin American presence with the 2018 Road Track acquisition - On September 13, 2018, the company acquired 81.3% of Road Track Holding S.L. for $91.7 million, valuing the company at approximately $113 million[96][97] Principal Capital Expenditures (2017-2019) | Year | Capital Expenditures (in millions) | | :--- | :--- | | 2019 | $18.3 | | 2018 | $21.4 | | 2017 | $16.3 | Business Overview The business is divided into telematics services and products, serving nearly 1.8 million subscribers across Israel, Brazil, and other Latin American countries Revenue and Subscriber Breakdown (2019) | Metric | Value | | :--- | :--- | | Revenue from Telematics Services | 73% | | Revenue from Telematics Products | 27% | | Total Subscribers (Dec 31, 2019) | 1,781,000 | | - Israel Subscribers | 610,000 | | - Brazil Subscribers | 489,000 | | - Other Countries Subscribers | 682,000 | - The company offers a 'Connected Car' service platform and a Usage-Based Insurance (UBI) product that analyzes driving behavior for personalized insurance policies[108][109] - The company faces strong competition in its key markets from competitors including Pointer, Sascar, LoJack, and OnStar[140][141] - The company outsources the manufacturing of its telematics products to a limited number of manufacturers in Israel and China[148] - The company operates under various governmental licenses for radio frequencies, which are typically 'secondary' or 'joint', potentially causing interference[156][159] Organizational Structure Ituran Location and Control Ltd. is the parent company with a network of subsidiaries primarily in the USA, Latin America, Israel, and Spain List of Significant Subsidiaries | Name of Subsidiary | Country of Incorporation | Ownership Interest | | :--- | :--- | :--- | | Ituran USA Holdings Inc | USA | 100% | | Ituran de Argentina S.A | Argentina | 100% | | Ituran Sistemas de Monitoramento Ltda | Brazil | 98% | | E.R.M. Electronic Systems Limited | Israel | 51% | | Ituran Spain Holding S.L | Spain | 81.3% | | Road Track De Colombia S.A.S | Colombia | 81.3% | | Road Track Ecuador, S.A. | Ecuador | 81.3% | | Road Track Mexico S.A. De C.V | Mexico | 81.3% | Property, Plants and Equipment The company owns limited real estate and primarily leases its operational facilities, including its headquarters and network of base stations - The company owns an 8-floor office building in Sao Paulo, Brazil, and operating centers in Mexico City, Quito (Ecuador), and Tirat Ha'Carmel (Israel)[177] - The company leases its primary executive offices in Azour, Israel, with annual lease payments of approximately $1,065,000 in 2019[179] - Ituran operates a network of leased base station sites: 98 in Israel, 147 in Brazil, and 44 in Argentina[186] Item 5: Operating and Financial Review and Prospects This section analyzes financial performance, highlighting a revenue increase but a sharp drop in operating income due to significant impairment charges Operating Results Revenues rose 10.3% in 2019, but operating income plummeted 63.7% due to a $26.2 million impairment charge related to the Road Track acquisition - In 2019, the company recorded a combined impairment of $26.2 million for goodwill and intangible assets related to the decline in results from the Road Track acquisition[192][255][256] - In 2018, the company recorded a one-time, non-operational gain of approximately $14.7 million from re-measuring its previous investment in affiliated companies[260][278] Telematics Services Subscriber Base by Geography | Region | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Israel | 610,000 | 551,000 | 501,000 | | Brazil | 489,000 | 555,000 | 438,000 | | Others | 682,000 | 664,000 | 221,000 | | Total | 1,781,000 | 1,770,000 | 1,160,000 | Year-over-Year Performance Comparison (2019 vs. 2018) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $279.3M | $253.3M | +10.3% | | Operating Income | $22.7M | $62.4M | -63.7% | | Income Tax Expenses | $12.2M | $17.3M | -29.2% | Liquidity and Capital Resources The company maintains a strong liquidity position with $59.7 million in operating cash flow, funding dividends and a share repurchase program Key Liquidity and Capital Metrics (as of Dec 31, 2019) | Metric | Amount (in millions) | | :--- | :--- | | Cash and marketable securities | $54.3 | | Working Capital | $73.1 | | Long-term loan | $49.8 | | Short-term loans | $18.1 | Historical Cash Flows (2017-2019) | (In thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $59,679 | $53,264 | $43,907 | | Net cash used in investing activities | ($18,287) | ($84,854) | ($14,685) | | Net cash provided by (used in) financing activities | ($38,927) | $49,769 | ($24,266) | - The company has a dividend policy to distribute at least $5 million quarterly, paying four such dividends in 2019[296][299] - Under a $25 million share repurchase program, the company purchased 227,828 of its shares for approximately $6 million in 2019[300][301] Research and Development, Patents and Licenses R&D activities focus on upgrading service infrastructure and developing new platforms, with expenditures increasing significantly in 2019 R&D Expenditures (2017-2019) | Year | R&D Expenditures (in millions) | | :--- | :--- | | 2019 | $13.9 | | 2018 | $6.2 | | 2017 | $3.2 | Trend Information The company identifies the COVID-19 pandemic as a significant forward-looking trend that may negatively affect its business operations - The COVID-19 pandemic is expected to have a negative effect on business in forthcoming quarters, potentially causing a decrease in new car purchases and a slowdown in the insurance sector[313] Tabular Disclosure of Contractual Obligations As of year-end 2019, the company had total contractual obligations of $95.1 million, primarily consisting of long-term debt Contractual Obligations as of December 31, 2019 (In USD thousands) | Contractual obligations | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | 12,777 | 4,179 | 3,731 | 2,471 | 2,396 | | Purchase Obligations | 2,695 | 2,695 | - | - | - | | Obligation to purchase non-controlling interests | 11,743 | - | 11,743 | - | - | | Long – term debt obligations | 67,913 | 18,110 | 36,220 | 13,583 | - | | Total | 95,128 | 24,984 | 51,694 | 16,054 | 2,396 | Item 6. Directors, Senior Management and Employees This section details the company's leadership, performance-based compensation structure, board practices, and global employee base of 2,908 people Directors and Senior Management The company's leadership includes members of the Sheratzky family as President and Co-CEOs, with a staggered board structure in place Key Directors and Senior Management | Name | Position | | :--- | :--- | | Izzy Sheratzky | President and director | | Ze'ev Koren | Chairman of the Board of Directors | | Eyal Sheratzky | Co-Chief Executive Officer and Director | | Nir Sheratzky | Co-Chief Executive Officer and Director | | Eli Kamer | Executive Vice President, Finance; Chief Financial Officer | - The company's articles of association provide for a staggered board with three classes of directors, which may delay or prevent a change of control[337] Compensation Executive compensation is heavily performance-based, with the five highest-paid officers receiving a total of $6.2 million in 2019 Compensation of 5 Highest Paid Officers (2019, in thousand USD) | Officer | Management fees/Wage | Bonus (results based) | Total | | :--- | :--- | :--- | :--- | | Izzy Sheratzky (President) | 756 | 1,086 | 1,842 | | Eyal Sheratzky (Co-CEO) | 588 | 884 | 1,472 | | Nir Sheratzky (Co-CEO) | 588 | 884 | 1,472 | | Gil Sheratzky (CEO of Subsidiary) | 417 | 631 | 1,048 | | Ami Saranga (Deputy CEO) | 209 | 112 | 398 | - The aggregate compensation paid to all officers as a group during 2019 was approximately $10 million[343] - The company has a shareholder-approved compensation policy for office holders, which governs compensation structure in compliance with Israeli law[353][354] Board Practices The board includes two external directors as required by Israeli law and maintains independent Audit and Compensation Committees - The board of directors is required to include at least two external directors under Israeli law, who are elected for three-year terms[361] - The Audit Committee is comprised of three independent directors and is responsible for overseeing accounting, reporting, and financial control practices[369][371] - The Compensation Committee, also comprised of three independent directors, is responsible for recommending and reviewing the company's compensation policy[377][378] Employees As of year-end 2019, the company had 2,908 employees, with the largest concentrations in Brazil and Israel Employee Breakdown by Geographic Location (2017-2019) | Region | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Israel | 863 | 855 | 843 | | Brazil | 884 | 990 | 694 | | Argentina | 211 | 263 | 146 | | Mexico | 416 | 473 | --- | | Ecuador | 314 | 345 | --- | | Colombia | 182 | 212 | --- | | Total | 2,908 | 3,172 | 1,718 | Share Ownership Key insiders beneficially own a significant portion of the company's shares, with Izzy Sheratzky holding approximately 19.59% Beneficial Share Ownership of Key Directors (as of April 21, 2020) | Name of Director | Percentage of beneficial ownership | | :--- | :--- | | Izzy Sheratzky | 19.59% | | Professor Yehuda Kahane | 6.97% | | Efraim Sheratzky | 1.16% | | Yigal Shani | 1.18% | Item 7. Major Shareholders and Related Party Transactions This section identifies major institutional shareholders and details related party transactions, primarily service agreements with entities controlled by top executives Major Shareholders Moked Ituran Ltd. is the largest shareholder with 19.58% ownership, followed by several major institutional investors Major Shareholders (>5%) as of April 21, 2020 | Shareholder | % Voting | | :--- | :--- | | Moked Ituran Ltd. | 19.58% | | FMR LLC. | 8.86% | | Vulcan Value Partners | 8.01% | | Renaissance Technologies LLC. | 6.87% | Related Party Transactions The company engages in transactions with entities controlled by its executives, including service agreements and the procurement of insurance policies - The company purchases its insurance policies through an agency co-owned by two directors, which earned commissions of approximately $130,000 in 2019[409] - Service agreements are in place with entities controlled by Izzy Sheratzky, Eyal Sheratzky, and Nir Sheratzky for their roles as President and Co-CEOs[412][413][414] - The company purchases GPS/GPRS equipment from its 51%-owned subsidiary, E.R.M Electronic Systems Limited, amounting to approximately NIS 51.6 million (or $14.5 million) in 2019[435] Item 8. Financial Information This section details material legal proceedings, including significant tax assessments in Brazil and class action lawsuits in Israel Consolidated Statements and Other Financial Information The company is involved in several material legal proceedings, including tax disputes in Brazil and class action lawsuits in Israel - The company is contesting a tax assessment from the Brazilian Internal Revenue Service, with the claimed amount estimated at R$12.6 million (approx. US$ 3.15 million)[438] - The company is facing tax assessments from Brazil's Anatel for FUST and FUNTELL contributions, with aggregate claims of approximately R$22.1 million (US$5.49 million)[439][440] - A purported class action lawsuit was filed against the company in Israel, alleging abuse of its monopoly status, with an estimated claim of NIS 300 million (approximately USD 87 million)[442] - Two class action lawsuits were filed against the company in Israel related to a data security breach, with total claims estimated at NIS 600 million (approximately USD 170 million)[443] Item 10. Additional Information This section details the company's corporate governance, material contracts, and tax considerations for the company and its shareholders Memorandum and Articles of Association The company operates under Israeli Companies Law, which codifies fiduciary duties and mandates specific approval processes for related-party transactions - Israeli law codifies fiduciary duties for office holders, consisting of a duty of loyalty and a duty of care[453] - Extraordinary transactions with a controlling shareholder require approval from the audit committee, the board of directors, and a special majority of shareholders[460] - Under Israeli law, an acquisition of shares that would result in a holding of 25% or more, or over 45%, of the voting rights requires a special tender offer[464] Material Contracts The most significant material contract is the September 2018 acquisition of 81.3% of Road Track Holding S.L. for $91.7 million - The company acquired 81.3% of Road Track Holding S.L. for $91.7 million, comprising cash, shares, and a management bonus[492][493] Taxation The company benefits from reduced tax rates in Israel, while the section outlines tax implications for both U.S. and Israeli shareholders - For US Holders, dividends paid by the company are generally subject to US federal income tax and may be eligible for reduced tax rates on 'qualified dividend income'[507][509] - The corporate tax rate in Israel was 23% from 2018 onwards, but the company may benefit from reduced rates under 'Preferred Enterprise' programs[521][524][528] - Non-residents of Israel are generally exempt from Israeli capital gains tax on the sale of shares of Israeli companies publicly traded outside of Israel[543] Item 11. Quantitative and Qualitative Disclosures About Market Risk The company's principal market risks are foreign exchange rate risk, particularly from the NIS and BRL, and interest rate risk Revenue and Expense Currency Breakdown (2019) | Currency | % of Revenues | % of Expenses | | :--- | :--- | :--- | | USD and other | 29.3% | 33.4% | | NIS | 40.0% | 42.5% | | BRL | 30.7% | 24.1% | - The company uses foreign currency forward transactions to hedge against exchange rate fluctuations, primarily for inventory purchases[553] Part II Item 15. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2019 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[556] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective[558][559] - The independent registered public accounting firm issued an unqualified opinion, stating that the company maintained effective internal control over financial reporting[564] Item 16. Other Information This section identifies the board's financial expert, details accountant fees, and outlines the company's $25 million share repurchase program - The board of directors has determined that Mr. Israel Baron qualifies as an 'audit committee financial expert'[591] - As a foreign private issuer, the company follows certain Israeli home country corporate governance practices in lieu of Nasdaq rules[599] Principal Accountant Fees (in thousands, USD) | Fee Type | 2019 | 2018 | | :--- | :--- | :--- | | Audit Fees | 546 | 381 | | Tax Fees | 106 | 6 | | Total | 652 | 387 | Share Repurchases in 2019 | Metric | Value | | :--- | :--- | | Total Number of Shares Repurchased | 227,828 | | Average Price Paid per Share | $26.33 | | Total Proceeds | $5,997,801 | | Max Value Remaining Under Program | $19,002,199 | Part III Item 18. Financial Statements The consolidated financial statements show 2019 revenues of $279.3 million but a sharp drop in net income to $6.9 million due to impairment charges Consolidated Balance Sheets Total assets decreased to $339.2 million in 2019, primarily due to a reduction in goodwill and intangible assets from impairment Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $339,235 | $373,792 | | Goodwill | $50,086 | $62,896 | | Intangible assets, net | $23,355 | $39,040 | | Total Liabilities | $203,321 | $213,592 | | Long-term loan from bank | $49,803 | $62,622 | | Total Equity | $135,914 | $160,200 | Consolidated Statements of Income Revenues increased in 2019, but significant impairment charges for goodwill and intangible assets drove operating income down sharply Consolidated Statement of Income Highlights (in thousands, except EPS) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total Revenues | $279,332 | $253,335 | $234,636 | | Gross profit | $130,518 | $127,328 | $119,384 | | Impairment of goodwill | $12,292 | - | - | | Impairment of intangible assets | $13,715 | - | - | | Operating income | $22,654 | $62,378 | $56,535 | | Net income attributable to the Company | $6,889 | $60,675 | $43,794 | | Diluted earnings per share | $0.33 | $2.88 | $2.09 | Consolidated Statements of Cash Flows The company generated $59.7 million in cash from operations, which funded capital expenditures, dividend payments, and share repurchases Consolidated Statement of Cash Flows Highlights (in thousands) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $59,679 | $53,264 | $43,907 | | Net cash used in investing activities | ($18,287) | ($84,854) | ($14,685) | | Net cash provided by (used in) financing activities | ($38,927) | $49,769 | ($24,266) | | Net increase in cash and cash equivalents | $2,566 | $14,492 | $5,819 | Notes to Consolidated Financial Statements The notes detail significant accounting policies, the Road Track acquisition and subsequent impairment, and segment performance - The company adopted ASC 606 (Revenue from Contracts with Customers) on January 1, 2018, using the modified retrospective method[724][725] - The company adopted ASC 842 (Leases) on January 1, 2019, resulting in the recognition of operating lease liabilities of $9 million[764][779] - The 2019 impairment charges included $12.3 million for goodwill and $13.9 million for intangible assets, primarily due to the underperformance of the acquired Road Track business[818][822] - The company operates in two reportable segments: Telematics services and Telematics products, with the latter reporting an operating loss in 2019 due to impairment charges[896][901]