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Filed Pursuant to Rule 424(b)(1)
Registration No: 333-169347
 
ELSTER GROUP SE
 
(ELSTER GROUP SE LOGO)
 
16,200,000 American Depositary Shares
Representing 4,050,000 Ordinary Shares
 
 
This is an initial public offering of 16,200,000 American Depositary Shares, or ADSs, of Elster Group SE, a European public limited liability company (Societas Europaea, or SE) with its registered office in the Federal Republic of Germany. Each ADS represents one-fourth of an ordinary share, nominal value €1.00 per share. We are offering 13,461,540 ADSs. Rembrandt Holdings S.A., which we refer to as Rembrandt, is offering 2,412,048 ADSs and Nachtwache Metering Management Vermögensverwaltungs GmbH & Co. KG, which we refer to as the Management KG, is offering 326,412 ADSs. We will not receive any proceeds from the sale of the ADSs by Rembrandt or the Management KG, which we collectively refer to as the selling shareholders.
 
Prior to this offering, there has been no public market for our ADSs or our ordinary shares. The ADSs have been approved for listing on the New York Stock Exchange, or NYSE, under the symbol “ELT.” The initial public offering price per ADS is $13.
 
See “Risk Factors” beginning on page 14 to read about factors you should consider before buying ADSs.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
                 
    Per ADS     Total  
 
Initial public offering price
  $ 13.00     $ 210,600,000  
Underwriting discount (1)
  $ 0.585     $ 9,477,000  
Proceeds, before expenses, to Elster Group SE
  $ 12.415     $ 167,125,019  
Proceeds, before expenses, to Rembrandt
  $ 12.415     $ 29,945,576  
Proceeds, before expenses, to the Management KG
  $ 12.415     $ 4,052,405  
 
 
(1)      See “Underwriting” for a description of additional compensation payable to the underwriters.
 
To the extent that the underwriters sell more than 16,200,000 ADSs, the underwriters have the option to purchase up to an additional 2,430,000 ADSs from Rembrandt at the initial public offering price, less the underwriting discount.
 
Deutsche Bank Securities  
  Goldman, Sachs & Co.  
  J.P. Morgan
Baird  
   Canaccord Genuity  
   Piper Jaffray  
   RBC Capital Markets  
  Stephens Inc.
 
The date of this prospectus is September 30, 2010.


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We are responsible for the information contained in this prospectus and in any related free-writing prospectus we prepare or authorize. We have not authorized anyone to give you any other information, and we take no responsibility for any other information that others may give you. We are offering to sell, and are seeking offers to buy, the ADSs in jurisdictions where the offer and sale of these securities is legally permitted. The information in this prospectus or in any filed free writing prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or of any sale of the ADSs.
 
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In this prospectus, references to:
 
  •  “we,” “us,” “our company,” “our group” and “Elster” refer to Elster Group SE (formerly known as Elster Group S.A.) and, unless the context otherwise requires, to our subsidiaries;
 
  •  “Rembrandt” refers to Rembrandt Holdings S.A., a Luxembourg stock corporation; and
 
  •  “Management KG” refers to Nachtwache Metering Management Vermögensverwaltungs GmbH & Co. KG, a limited partnership organized under German law.
 
Until October 25, 2010 (25 days after the date of this prospectus), all dealers that buy, sell or track the ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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PROSPECTUS SUMMARY
 
This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our ADSs. You should carefully read the entire prospectus, including “Risk Factors” and the financial statements, before making an investment decision.
 
We are one of the world’s largest providers of gas, electricity and water meters and related communications, networking and software solutions. Our products and solutions are used to accurately and reliably measure gas, electricity and water consumption as well as enable energy efficiency and conservation. We believe that we have one of the most extensive installed meter bases in the world, with more than 200 million meters deployed over the course of the last ten years. We sell our products and solutions in more than 130 countries for use in a variety of settings.
 
L.E.K. Consulting GmbH, or L.E.K., estimates that in 2009 we had the largest global market share by revenues in the gas meter market, were one of the three largest water meter providers in the world by revenues and had the third largest share by revenues in the electricity meter market. We attribute these leading positions to the quality, breadth and flexibility of our portfolio of products and solutions. Demand for our products and solutions is driven by natural replacement cycles, urbanization, increased meter penetration and infrastructure developments. We believe that these trends, along with the movement towards energy conservation and the promotion of cleaner fuels and technologies, will continue to play an important role in our future growth.
 
While we expect manual-read meters to remain an important part of our industry, in recent years, issues including energy and natural resource scarcity, shortcomings in grid reliability and concerns about global climate change, among others, have moved to the forefront of the agendas of governments and utilities. We believe that these and other imperatives, taken together, are driving the adoption of the Smart Grid. The term Smart Grid is commonly used to refer to any gas, electricity or water network that allows utilities to measure and control production, transmission and distribution more efficiently through the use of communications technology. The Smart Grid can also enable consumers to monitor and manage their gas, electric and water consumption more efficiently and frequently and, in some cases, in near real time. We believe that the Smart Grid will continue to evolve and deliver substantial economic and societal benefits to utilities and consumers.
 
We refer to meters that are equipped with communications capabilities, communications networks and related software solutions as Smart Grid solutions. We believe that the meter is the gateway to the Smart Grid through which utilities and consumers are able to effectively measure, monitor and control the distribution of gas, electricity and water. In our view, it is difficult to quantify or otherwise measure with certainty the proliferation of Smart Grids around the world, due largely to the early stage of the development of the market and the different rates of adoption from one market to the next. However, we believe that there is a significant growth opportunity for our industry in the coming years. The Scott Report estimates that as of December 31, 2009, smart metering systems comprised over 13% of all electric meters installed in the United States and will increase to over 50% within the next few years. L.E.K. estimates that there will be between 400 and 500 million advanced metering infrastructure, or AMI, meters and the same number of automated meter reading, or AMR, meters sold between 2010 and 2019. AMI is a technology that allows two-way communication between the meter and the utility or other parties, while AMR typically enables one-way communication of periodic consumption data from the meter to the utility. In addition, many of our own customers have indicated to us that they intend to upgrade their infrastructure to incorporate Smart Grid solutions and many governments around the world are promoting regulatory initiatives that support Smart Grid adoption. We believe our industry experience, despite the risk of increased competition from traditional metering companies as well as new entrants from outside the metering business, positions us well to capitalize on this emerging opportunity.
 
In 2009, AMR, AMI and Smart Grid solutions and individual products, components and services for use in the Smart Grid, which we refer to as Smart Offerings, accounted for approximately 26% of


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our revenues compared to 19% of our revenues in 2008. Our product portfolio includes EnergyAxis, our comprehensive portfolio of Smart Grid solutions, which can be customized by incorporating meters, meter and network communications technologies, meter data management software and advanced applications that help customers to cost-effectively generate, deliver and manage gas, electricity and water.
 
Our customers are utilities, distributors and industrial companies and buy our manual read meters, Smart Offerings and other products for use in the following settings:
 
  •  Residential settings, which include dwellings and elements of local gas, electricity and water distribution networks;
 
  •  Commercial settings, which include retail facilities, offices and light industrial facilities;
 
  •  Industrial settings, which comprise general industry and public infrastructure;
 
  •  Transmission and distribution settings, which include the facilities and networks that utilities rely on to transport gas, electricity and water from their points of generation or extraction to consumers and to manage their flows along the way.
 
Due to the similarities among many of the products and services we offer for use in commercial, industrial, transmission and distribution settings, we refer internally to these settings collectively as “C&I” and the products and services we offer for use in these settings as our C&I products and services.
 
We also sell process-heating equipment and heat control systems for boilers, which we refer to as our gas utilization products. Our customers for our utilization products are industrial concerns, furnace builders and boiler manufacturers.
 
We divide our operations into three business segments: gas, electricity and water.
 
Our Strengths
 
We believe that we are well positioned to maintain and expand our strong market positions in the gas, electricity and water markets and to benefit from the expected industry growth that will arise from the trend towards Smart Grid installations. In particular, we believe that the following key strengths will enable us to achieve these goals:
 
  •  We are a leading global provider of gas, electricity and water meters and metering solutions.  We are one of the world’s largest providers of meters and metering solutions to utilities and had worldwide revenue market share in 2009 of approximately 16% across the gas, electricity and water metering markets, as estimated by L.E.K. We believe our large installed base and strong customer relationships provide us with significant opportunities to benefit from regular meter replacement and upgrade cycles.
 
  •  We are a leading enabler of Smart Grid solutions, which are already proven at scale in complex environments and across diverse utility settings.  As of June 30, 2010, we have delivered over eleven million of our two-way communication endpoints for metering applications. This total includes over 4.5 million AMI smart meters deployed in over 80 EnergyAxis systems worldwide, including what we believe to be one of the world’s largest AMI networks, located in Ontario, Canada. This network, which consists of over 1.6 million endpoints, supports time of use pricing for more than 600,000 residential and C&I customers. We believe that these extensive deployments demonstrate our systems’ market readiness in terms of performance, reliability, flexibility, and scalability.
 
  •  We maintain strong customer relationships worldwide that provide us with diverse opportunities for global growth and competitive advantage.  Our customers operate in more than 130 countries and include many of the world’s largest gas, electricity and water utilities. Given the importance of the meter to the Smart Grid, we believe that our industry


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  experience of over 170 years, coupled with our ability to innovate, positions us well to benefit from the developing market, even as existing and new competitors seek to gain market share.
 
  •  We have a capable and experienced global management team.  Our managers have been instrumental in establishing our business strategy and securing our leading positions in our industry. We believe that our management’s in-depth understanding of our industry and our customers’ needs is a result of many years of combined industry experience across the metering and many other markets.
 
Our Strategy
 
Our mission is to support energy and natural resource conservation with a comprehensive portfolio of innovative and trusted metering and technology solutions that help gas, electricity and water utilities around the world to improve efficiency through accurate measurement of consumption and deployment of Smart Grid solutions that create value for utilities, consumers and shareholders.
 
Key elements of our strategy to deliver on that mission include:
 
  •  Continue to build upon our global leadership.  As a global leader in metering, we intend to take advantage of the significant opportunities in the gas, electricity and water utility markets that we believe will arise to provide Smart Grid solutions and of the substantial organic growth that we anticipate will occur over the coming years.
 
  •  Capitalize on the expected ongoing growth in metering and related infrastructure in gas, electricity and water.  We believe that we are well positioned to take advantage of the expansion of natural gas infrastructure and the increase in gas meter penetration worldwide as well as opportunities we perceive in onshore gas investment, including industrial gas flow control equipment. We intend to take advantage of potential future opportunities for expansion where water meter penetration rates remain low, and of similar opportunities for growth in the electricity market given electrification trends in developing countries.
 
  •  Build on our history of innovation and engineering expertise.  We intend to continue the focus of our research and development organization on providing innovative metering and Smart Grid solutions across our business.
 
  •  Use our understanding of evolving customer business models and deploy our key account management teams to capture Smart Grid solutions opportunities.  We intend to further strengthen our account management teams further to leverage and broaden our customer relationships to deliver metering and Smart Grid solutions and to further increase the percentage of our revenues from Smart Offerings.
 
  •  Focus on operational efficiency to drive consistent competitive advantage.  We believe that our strong focus on operational efficiency has provided us with a scalable business platform. We plan to further develop our mixed production model to efficiently manage the significant volatility in volumes and delivery requirements often associated with large Smart Grid installations.
 
Our Recent Results and Financial Position
 
In the year ended December 31, 2009, we had revenues of $1,695.1 million and net income of $52.3 million, while in the six months ended June 30, 2010, we had revenues of $831.3 million and net income of $19.1 million. Our gas segment is our largest segment, accounting for 53.0% of our revenues in 2009 and 52.9% of our revenues in the six months ended June 30, 2010. We rely on our Senior Facilities Agreement as our main source of financing. As of June 30, 2010, $900.4 million in aggregate principal amount was outstanding under the Senior Facilities Agreement, with $11.3 million that is due in one year or less, comprising 1.2% of our outstanding debt as of that date.


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Our Risks and Challenges
 
Our business is subject to many material risks and challenges that we describe in “Risk Factors” and elsewhere in this prospectus. If any of these risks materialize or we are unable to overcome these challenges, we may fail to achieve our strategic goals, and our business, financial condition or results of operations could suffer. Our key risks and challenges include the following:
 
  •  Negative worldwide economic conditions and ongoing instability in the worldwide financial markets.  Our results may be affected by the difficult economic environment, as the pace of new construction and infrastructure investment has slowed. Ongoing instability in the worldwide financial markets may reduce our or our customers’ access to financing or reduce their ability to purchase from us.
 
  •  Changes or delays in governmental regulations and initiatives.  Our industry depends substantially on regulation. It is possible that governments may delay initiatives that encourage the development of Smart Grid infrastructure. Some of our utility customers, while awaiting clarity on the laws and regulations and the timing of the receipt of stimulus funds, have been deferring their upgrades of installed meter bases that will be part of their response to Smart Grid-related regulation.
 
  •  Our reliance on third parties to supply raw materials and components used in our business and to manufacture a substantial portion of the components we use in our products.  We rely on third-party suppliers to provide us with components and raw materials and thus are subject to delivery delays and volatility in the prices of components and raw materials. Our third-party manufacturers likewise may fail to deliver quality products (particularly electronics) in a timely manner, especially as demand for them increases in connection with the ongoing economic recovery.
 
  •  The transition to more advanced technology in the industry, including increasing competition from industries we previously viewed as distinct from ours. Our results and future revenues may be affected by the changing demands for advanced meters and Smart Grid solutions. We may fail to design solutions and products that meet the demands of our customers, and our competitive position may suffer as a result. New players from high technology industries may enter the market and work individually or together with our existing competitors to develop superior products.
 
  •  We have global operations, which expose us to various risks.  We are exposed to economic, political and other risks and uncertainties due to our global operations. We do business and borrow funds in a number of currencies, which exposes us to fluctuations in exchange rates and may affect our results of operations. In addition, we sell some products in countries that are subject to sanctions in the European Union and the United States, which may have a negative effect on our reputation and the price of our ADSs.
 
  •  Our shareholder structure following the offering could increase the likelihood that we must repay our credit facility.   Following the offering, our shareholders Rembrandt and Management KG will continue to hold a majority of our shares and will be able to exercise a direct or controlling influence on us. If our shareholders, Rembrandt and the Management KG, together cease to beneficially own at least 30.1% of our equity share capital following our listing, or if any holder or group of holders beneficially owns more than Rembrandt and the Management KG in the aggregate, we may be required to repay all amounts outstanding under our Senior Facilities Agreement, which may have an adverse effect on our financial position.
 
You should refer to the section entitled “Risk Factors” beginning on page 14 for a more complete discussion of these and a number of other risks and challenges.


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Company Information
 
We were registered in the commercial register of the local court (Amtsgericht) of Essen on February 23, 2010 under number HRB 22030. Our principal executive offices are located at Frankenstrasse 362, 45133 Essen, Germany, and our telephone number is +49 201 54 58 0. Our website is www.elster.com. This website address is included in this prospectus as an inactive textual reference only. The information and other content appearing on our website are not part of this prospectus. Our agent for service of process in the United States is John D. Bluth, Elster Solutions, LLC, 208 South Rogers Lane, Raleigh, NC 27610.


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The Offering
 
ADSs Offered by Elster: 13,461,540 ADSs representing 3,365,385 ordinary shares.
 
ADSs Offered by Rembrandt: 2,412,048 ADSs representing 603,012 ordinary shares.
 
ADSs Offered by the Management KG: 326,412 ADSs representing 81,603 ordinary shares.
 
Public Offering Price: The initial public offering price per ADS is $13.
 
American Depositary Shares: The underwriters will deliver our shares in the form of ADSs. Each ADS, which may be evidenced by an American Depositary Receipt, or ADR, represents an ownership interest in one-fourth of one of our ordinary shares. As an ADS holder, we will not treat you as one of our shareholders. The depositary, Deutsche Bank Trust Company Americas, will be the holder of the ordinary shares underlying your ADSs. You will have ADS holder rights as provided in the deposit agreement. Under the deposit agreement, you may only vote the ordinary shares underlying your ADSs if we ask the depositary to request voting instructions from you. The depositary will pay you the cash dividends or other distributions, if any, it receives on shares after deducting its fees and expenses and applicable withholding taxes. You may need to pay a fee for certain services, as provided in the deposit agreement. You are entitled to the delivery of shares underlying your ADSs upon the surrender of such ADSs at the depositary’s office, the payment of applicable fees and expenses and the satisfaction of applicable conditions set forth in the deposit agreement.
 
To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, the form of which is attached as an exhibit to the registration statement of which this prospectus forms a part. We are offering ADSs so that our company can be quoted on the NYSE and investors will be


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able to trade our securities and receive dividends on them in U.S. dollars.
 
Depositary: Deutsche Bank Trust Company Americas.
 
Custodian: Deutsche Bank AG, Frankfurt Branch.
 
Over-Allotment Option: Rembrandt has granted the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 2,430,000 additional ADSs from Rembrandt at the public offering price, less underwriting discount, solely to cover over-allotments. See “Underwriting.” Unless otherwise indicated, all information in this prospectus assumes the over-allotment option has not been exercised.
 
Shares Outstanding After the Offering: 28,220,041 ordinary shares. Upon completion of this offering, Rembrandt will hold an 80.2% equity interest in our company and the Management KG, which is affiliated with Rembrandt, will hold a 5.5% equity interest in our company. Rembrandt has advised us that it does not anticipate owning a majority of our shares over the long term. Although we expect that at some point Rembrandt will cease to be a major shareholder in our company, for so long as Rembrandt continues to own a significant percentage of our shares, its equity shareholding give it the power to control actions that require shareholder approval, including the election of members on our Administrative Board. See “Risk Factors—Risks Related to the Offering and Our Shareholder Structure.”
 
Use of Proceeds: We expect our net proceeds from this offering, after expenses, to be approximately $152.1 million. We currently intend to use the net proceeds we expect to receive from this offering to pay a portion of our outstanding debt under our credit facility agreement and to repay a loan made to us by one of our shareholders. We expect to return any remaining net proceeds in liquid assets over the medium term to support our liquidity position. We will not receive any proceeds from the sale of ADSs by Rembrandt or the Management KG. See “Use of Proceeds.”
 
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180 days from the effective date of the registration statement of which this prospectus forms a part, we and they will not, without the prior written consent of each of Deutsche Bank Securities Inc., Goldman Sachs International and J.P. Morgan Securities LLC, dispose of any of our shares or ADSs or securities which are convertible or exchangeable into these securities. Deutsche Bank Securities Inc., Goldman Sachs International and J.P. Morgan Securities LLC in their sole discretion may release any of the securities subject to these lock-up agreements at any time without notice. The release of any lock-up will be considered on a case-by-case basis.
 
Dividend Policy: We have not declared any cash dividends on our ordinary shares and have no present intention to pay dividends in the foreseeable future. See “Dividend Policy” for a discussion of the factors that will affect the determination by our Administrative Board to recommend dividends, as well as other matters concerning our dividend policy.
 
Risk Factors: See “Risk Factors” and the other information included in this prospectus for a discussion of risks you should carefully consider before deciding to invest in our ADSs.
 
Proposed NYSE Symbol: ELT
 
ADS CUSIP 290348 101


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Summary Financial and Other Data
 
The following table presents summary consolidated financial and other data for the periods indicated. We derived the financial data as of and for the years ended December 31, 2009, 2008 and 2007 from our consolidated financial statements for these years. Our consolidated financial statements, which we have prepared in accordance with U.S. GAAP, have been audited and are included elsewhere in this prospectus. For a further discussion of our financial data for those years, see “Presentation of Financial and Other Information.”
 
We derived the financial data as of and for the six months ended June 30, 2010 and 2009 from our unaudited interim consolidated financial statements for those periods, which are included elsewhere in this prospectus.
 
                                         
          As of and for the Six Months Ended June 30,
 
    As of and for the Year Ended December 31,     (unaudited)  
    2009     2008     2007     2010     2009  
    (in $ millions except for per share and share data)  
 
Summary Consolidated Statement of Operations Data:                                        
Revenues
    1,695.1       1,904.5       1,735.6       831.3       837.2  
Cost of revenues
    1,191.3       1,306.3       1,207.6       574.6       585.4  
                                         
Gross profit
    503.8       598.2       528.0       256.7       251.8  
Selling expenses
    159.4       183.4       166.5       80.8       76.9  
General and administrative expenses
    137.0       246.5       183.9       69.9       68.4  
Research and development expenses
    78.4       70.7       60.3       41.4       36.7  
Other operating income (expense), net
    14.8       -39.5       -2.9       -0.4       21.2  
                                         
Operating income
    143.8       58.2       114.4       64.3       90.9  
Interest expense, net
    55.4       117.3       126.9       38.4       25.3  
Other income, net
    3.3       2.9       2.9       1.7       1.4  
                                         
Total non-operating expenses
    52.1       114.4       124.0       36.6       23.9  
Income (loss) from continuing operations before income tax
    91.7       -56.2       -9.6       27.7       66.9  
Income tax expense
    39.3       30.9       28.0       11.1       25.1  
Net income (loss) from continuing operations
    52.3       -87.1       -37.6       16.5       41.8  
Net income from discontinued operations (1)
                114.5       2.6        
                                         
Net income (loss)
    52.3       -87.1       76.9       19.1       41.8  
Net income (loss) attributable to Elster Group SE
    48.9       -91.7       72.3       17.9       40.7  
                                         
Basic and diluted earnings (loss) per share from continuing operations (2)
    1.42       -5.68       -2.58       0.20       1.72  
Basic and diluted earnings (loss) per share (2)
    1.42       -5.68       4.44       0.36       1.72  
Weighted average number of shares outstanding (3)
    16,320,750       16,320,750       16,320,750       16,320,750       16,320,750  
Unaudited pro forma earnings (loss) from continuing operations per share (4)
    1.97                   0.62        


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          As of and for the Six Months Ended June 30,
 
    As of and for the Year Ended December 31,     (unaudited)  
    2009     2008     2007     2010     2009  
    (in $ millions except for per share and share data)  
 
Unaudited pro forma weighted average shares outstanding (4)
    24,854,656                   24,854,656        
Basic and diluted earnings (loss) per ADS from continuing operations (5)
    0.36       -1.42       -0.65       0.05       0.43  
Basic and diluted earnings (loss) per ADS (5)
    0.36       -1.42       1.11       0.09       0.43  
Weighted average number of ADSs outstanding (5)
    65,283,000       65,283,000       65,283,000       65,283,000       65,283,000  
Unaudited pro forma earnings (loss) from continuing operations per ADS (4)(5)
    0.49                   0.16        
Unaudited pro forma weighted average ADSs outstanding (4)(5)
    99,418,624                   99,418,624        
                                         
Selected Cash Flow Data:
                                       
Net cash provided by operating activities
    119.6       114.1       110.9       37.0       76.0  
Net cash from (used in) investing activities
    -43.0       -79.0       46.0       -16.6       -18.9  
Net cash from (used in) financing activities
    -77.4       -8.7       -274.7       7.1       -56.4  
                                         
Selected Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
    75.4       74.3       53.0       99.0       74.7  
Total assets
    2,141.4       2,181.5       2,223.3       2,018.0       2,168.9  
Short term debt and current portion of long-term debt
    39.0       27.1       68.9       25.9       61.3  
Long-term debt, less current portion
    971.4       1,024.1       1,053.6       893.8       950.1  
                                         
Total debt
    1,010.4       1,051.2       1,122.5       919.7       1,011.4  
Shareholder loan
    6.8       6.2       408.3 (6)     6.0       6.4  
Total equity attributable to Elster Group SE
    416.6       412.9       -36.1       418.9       426.5  
Total equity
    422.7       418.8       -29.1       426.7       431.8  
                                         
Selected Operating and Other Data:
                                       
Backlog (7)
    445.3       542.1       383.5       508.7       424.0  
Capital expenditures
    30.5       81.8       53.5 (8)     18.1       22.0  
                                         
Reconciliation of Net Income Before Amortization of PPA to Net Income:
                                       
Net income (loss)
    52.3       -87.1       76.9       19.1       41.8  
Amortization of intangible assets on PPA, net of tax effect
    22.7       23.6       23.8       11.2       10.9  
                                         
Net income before amortization of PPA (9)
    75.0       -63.5       100.7       30.3       52.7  
                                         

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          As of and for the Six Months Ended June 30,
 
    As of and for the Year Ended December 31,     (unaudited)  
    2009     2008     2007     2010     2009  
    (in $ millions except for per share and share data)  
 
Reconciliation of Adjusted EBITDA to Net Income:
                                       
Net income (loss)
    52.3       -87.1       76.9       19.1       41.8  
Net income from discontinued operations
                114.5       2.6       0.0  
                                         
Net income (loss) from continuing operations
    52.3       -87.1       -37.6       16.5       41.8  
Income tax expense
    39.3       30.9       28.0       11.1       25.1  
Interest expense, net
    55.4       117.3       126.9       38.4       25.3  
Depreciation and amortization
    85.4       85.3       85.8       42.6       42.0  
Foreign currency exchange effects
    -14.4       45.2       5.7       0.6       -17.7  
Management equity program
    -33.3       90.7       31.1       1.4       -10.6  
Expenses for preparation to become a public company
    23.0       7.0       0.0       6.6       7.5  
Strategy development costs
    3.6       7.8       4.6       0.3       0.4  
Employee termination and exit costs
    25.4       10.5       15.2       2.1       5.0  
Business process reengineering and reorganization costs
    16.8       3.2       13.3       2.1       5.4  
IT project costs
    8.6       3.6       4.2       0.9       1.0  
Gain from sales of real estate
    -2.5       -0.8       -3.4       0.0       -0.8  
Effects of termination of a distributor
                      9.0        
Pension curtailments
    0.0       0.0       -3.6       0.0       0.0  
Insurance recovery
    0.0       0.0       -2.6       0.0       0.0  
Business combination costs
    1.7       0.0       0.0       0.0       0.0  
Impairment of intangible assets
    2.3       1.3       0.0       0.0       0.0  
Other
    0.3       -0.2       0.2       -0.7       0.0  
                                         
Adjusted EBITDA (10)
    264.1       314.6       267.7       130.9       124.6  
                                         
                                         
Reconciliation of Free Cash Flow to Cash Flows From Operating Activities:
                                       
Cash flows from operating activities
    119.6       114.1       110.9       37.0       76.0  
Purchases of property, plant and equipment and intangible assets
    30.5       81.8       53.5       18.1       22.0  
                                         
Free cash flow (11)
    89.1       32.3       57.4       18.9       54.0  
                                         
 
 
(1) We disposed of the Ipsen Group, a manufacturer of industrial furnaces, as well as NGT Neue Gebäudetechnik GmbH, or NGT, in 2007 as part of our plan to focus on our core competencies. We included these businesses in discontinued operations. In the second quarter of 2010, we recorded a gain from the release of a provision in connection with a disposal as described in Note 3 to the unaudited condensed consolidated interim financial statements contained elsewhere in this prospectus.

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(2) For more information on the calculation of our earnings (loss) per share, see Note 8 to the audited consolidated financial statements and Note 5 to the unaudited condensed consolidated interim financial statements contained elsewhere in this prospectus.
 
(3) Equal to the number of ordinary shares outstanding immediately prior to this offering. See “Our History and Recent Corporate Transactions—Our Current Capital Structure.”
 
(4) Unaudited pro forma earnings (loss) per share and unaudited pro forma weighted shares outstanding are based upon 24,854,656 shares issued and outstanding under the assumption that the preferred shares held by Rembrandt, our principal shareholder, are replaced immediately before the closing of this offering with ordinary shares. See “Our History and Recent Corporate Transactions—Capital Measures in Connection with the Offering.”
 
(5) Each ADS represents one-fourth of an ordinary share.
 
(6) In 2007, our shareholder loan reflects the value before our preferred equity certificates were contributed into our equity. See “Our History and Recent Corporate Transactions—Transactions Relating to Our Share Capital.”
 
(7) We define backlog as our total open purchase orders.
 
(8) Our capital expenditures for 2007 include $5.5 million that were attributable to discontinued operations.
 
(9) We define net income before amortization of PPA as net income (loss) excluding the expenses associated with the amortization of that portion of our intangible assets that comprises the allocation of the purchase price we paid in our business acquisitions in excess of the previous carrying amount of the intangible assets before the acquisition occurred. We refer to the adjusted expense as amortization before PPA. We also present this amortization measure net of the income tax effects. We believe that this non-GAAP financial measure is useful to management, investors and financial analysts in assessing our company’s operating performance because it excludes the effect of the non-cash expenses that are related solely to the allocation of purchase prices paid in business acquisitions to those intangible assets acquired in connection with these business acquisitions. Fair values for these balance sheet items are determined as of the time of an acquisition and then amortized over their respective useful lives, which generally cannot be changed or influenced by management after the acquisition. By excluding these amortization expenses and the related income tax effects, we believe that it is easier for our management, investors and financial analysts to compare our financial results over multiple periods and analyze trends in our operations. For example, expenses related to amortization of intangible assets are now decreasing, but the positive effect of this decrease on our net income is not necessarily reflective of the operations of our businesses.
 
We provide a reconciliation of net income before amortization of PPA to net income, which is the closest financial measure calculated in accordance with U.S. GAAP, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.
 
(10) Adjusted earnings before interest, tax expense, depreciation and amortization, or Adjusted EBITDA, reflects adjustments for certain gains and charges for which we believe adjustment is permitted under our Senior Facilities Agreement as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.
 
The definition of Adjusted EBITDA used in our Senior Facilities Agreement permits us to make adjustments to our net income for certain cash and non-cash charges and gains. This measure is used in our Senior Facilities Agreement to determine compliance with financial covenants. Because this credit agreement and the financing provided under it are material to our operations, we have and continue to manage our business and assess our performance and liquidity by reference to the requirements of the Senior Facilities Agreement. We also use Adjusted EBITDA for a number of additional purposes. We use Adjusted EBITDA on a consolidated basis to assess our operating performance. We believe this financial measure on a consolidated basis is helpful in highlighting trends in our overall business because the items excluded in calculating Adjusted EBITDA have little or no bearing on our day-to-day operating performance. Adjusted EBITDA is also an important metric in the formula we use to determine the value of our company in connection with our management equity program, or MEP, we describe below.
 
We also use segment profit, a measure equal to Adjusted EBITDA, as the primary measure used by our management to evaluate the ongoing performance of our business segments. On a segment basis, we define segment profit as earnings of a segment before taxes, interest and depreciation and amortization, as well as certain gains and losses, and other income and expense determined by our senior management to have little or no bearing on the day-to-day operating performance of our business segments. The adjustments made to earnings of a segment before taxes, interest and depreciation and amortization correlate with the adjustments to net income in calculating Adjusted EBITDA on a consolidated basis pursuant to the Senior Facilities Agreement.
 
“Consolidated EBITDA,” as defined in the Senior Facilities Agreement, differs from the measure of Adjusted EBITDA we have disclosed in a way we believe is immaterial. This difference is that the Senior Facilities Agreement excludes the modest amount of dividends we receive from companies in which we hold minority interests, including those we account for using the equity method. We do not exclude these dividends when we calculate the measure of Adjusted EBITDA we disclose in this prospectus. These dividends totaled $3.3 million in 2009 and $2.9 million in each of 2008 and 2007, and were $1.7 million in the first six months of 2010 and $1.4 million in the first six months of 2009.


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We provide a reconciliation of Adjusted EBITDA to net income, which is the closest financial measure calculated in accordance with U.S. GAAP, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.
 
(11) We define free cash flow as cash flows from operating activities less purchases of property, plant and equipment and intangible assets. Free cash flow is not defined under U.S. GAAP and may not be comparable with measures of the same or similar title that are reported by other companies. Under SEC rules, “free cash flow” is considered a non-GAAP financial measure. It should not be considered as a substitute for, or confused with, any U.S. GAAP financial measure. There are important limitations related to the use of free cash flow instead of cash flows from operating activities calculated in accordance with U.S. GAAP. We believe the most comparable U.S. GAAP measure to free cash flow is cash flows from operating activities. We report free cash flow to provide investors with a measure that can be used to evaluate changes in liquidity after taking capital expenditures into account. It is not intended to represent residual cash flow available for discretionary expenditures, since debt service requirements or other non-discretionary expenditures are not deducted. We urge you not to rely on any single financial measure to evaluate our business but instead to form your view on our business with reference to our audited annual consolidated financial statements included elsewhere in this prospectus and the other information we present in this prospectus. In 2007, free cash flow includes our discontinued operations. We describe free cash flow below under “Management’s Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources—Free Cash Flow.”


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RISK FACTORS
 
Investing in our ADSs involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus, including our financial statements and the related notes, before making an investment decision regarding our securities. The risks and uncertainties described below are those significant risk factors, currently known and specific to us, that we believe are relevant to an investment in our securities. If any of these risks materialize, our business, financial condition or results of operations could suffer, the price of our ADSs could decline and you could lose part or all of your investment. Additional risks and uncertainties not currently known to us or that we now deem immaterial may also harm us and adversely affect your investment in our ADSs.
 
Risks Related to Our Operations
 
Negative worldwide economic conditions, including related reduction in corporate and consumer spending, may have a material adverse effect on our results of operations, cash flows and financial condition.
 
The recent worldwide financial crisis and difficult economic environment have contributed to a reduction in corporate and consumer spending, which has adversely affected the level of demand for our products and services. We believe that macroeconomic developments may continue to have adverse effects on demand for our products and services. If the economies in North America and Europe, our most significant markets, resume the deterioration experienced in 2008 and 2009, or if growth remains at low levels, the demand for our products may not increase at the rates we expect and may even weaken.
 
In particular, we sell and distribute a significant portion of our manual-read meters and our Smart Offerings for use in new construction markets. Our level of sales activity in these markets depends to a significant extent on economic conditions, corporate profitability and interest rates. The continued weakness faced by the new construction markets worldwide poses a substantial risk to our business. The new construction market in the United States has in particular been in an extended period of contraction, and we are unable to predict whether this market will return to levels approaching those seen before the crisis began. Similar contractions have occurred in the new construction markets in other countries, including in the United Kingdom and Spain. If countries where we have significant operations continue to experience an overall contraction in new construction markets, or if these markets fail to grow, existing orders for our metering products and services may be delayed or cancelled, and new orders may not materialize. This could have a material adverse effect on our results of operations, cash flows and financial condition.
 
The length and severity of the economic downturn may continue to place pressure on our customers, which may have a material adverse effect on our results of operations, cash flows and financial condition.
 
We sell and distribute a significant portion of our manual-read meters and our Smart Grid components to utilities and utility contractors. Many utilities have announced plans or intentions to replace older meters with smart meters enabled for automated meter reading, or AMR, or with meters enabled for advanced metering infrastructure, or AMI, on a standalone basis or as components of Smart Grid solutions. However, some have delayed their investments due to economic uncertainty, a reduction in the consumption of energy resources as a result of the economic downturn or for other reasons, difficulty in obtaining financing or strains on their own or public financial resources. Such uncertainties and funding constraints may continue, leading some utilities to alter their budgeting and procurement priorities to focus on capital expenditures in areas other than metering, such as in energy or natural resource generation, which may result in delays in the installation of meters and Smart Grid solutions.
 
Furthermore, the economic downturn may slow the rate of “gasification,” which we define as the expansion of natural gas infrastructure and distribution to include regions and customers,


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particularly in the Middle East, North Africa and Asia, not previously connected to the gas grid. Similarly, the economic downturn has led to a decrease in demand for our meters and other products that we sell for transmission and distribution applications, as well as for gas utilization, which consists of safety devices for the control and use of natural gas and the related components and systems for the regulation of combustion processes. As a result of these developments, existing orders for our products and services may be delayed or cancelled and new orders may not materialize, which could have a material adverse effect on our results of operations, cash flows and financial condition.
 
Our products may not achieve or may lose market acceptance, and, as a result, we may fail to realize both the expected level of demand for our new products and services and the expected level or timing of revenues generated by those products and services.
 
We are exposed to the risk that new technologies, features and functionalities that we and other industry participants develop and market in connection with our manual-read meters, Smart Grid solutions and other products may not be accepted by the industry, regulators or end-users. This may occur as a result of technological developments or competing features or functionalities proving superior to our existing products, changes occurring in the regulatory landscape, including with respect to interoperability standards, perceptions that the new technologies are error-prone or because of present cyber-security risks or otherwise. There is a risk that competing technologies, features or functionalities will be favored by the industry, regulators or end-users if there is not sufficient awareness of, or interest in, our innovations. For example, the advantages that Smart Grid-enabled products can provide may fail to be effective if utility customers choose not to implement corresponding technology throughout their distribution and transmission networks, or if regulators mandate or encourage the deployment of another technology. Generally, if utilities in the United States or some European countries plan to invest additional amounts for capital improvements, including meters and AMI/AMR upgrades, the utility must present the proposed capital improvement to the relevant utility regulatory commission for approval. Many of our utility customers are required to obtain regulatory approval to pass through the costs of products and services to their customers because of the effect it may have on utility rates for consumers. Utility regulatory commissions have decided in the past, and may decide in the future, not to permit the pass-through of such costs onto consumers and this in turn could affect the products and services that our utility customers ultimately purchase. Any delay or failure to receive this approval, due to regulatory preference for another technology or otherwise, could reduce demand for the products we sell to our utility customers. Market and regulatory acceptance of Smart Grid technologies varies by country and industry based on factors, such as the regulatory and business environment, environmental concerns, labor costs and other economic conditions.
 
We also are exposed to the risk that consumers or other end-users will not welcome these new technologies, or view technologically advanced systems as responsible for higher utility bills, uncertainty in their relationships with their utilities, incursions on privacy or other real or perceived shortcomings. We believe that some utilities and their regulators are expressing concerns about the potential for near-term costs to customers of the installation of these new technologies. If our products or those of a competitor fall subject to perceptions of this nature, the resulting negative publicity for us or for the industry generally could adversely affect our business. Our industry is also exposed to the risk of, and to public concern about, an increased threat of “cyber attacks” on the power grid as Smart Grid infrastructure becomes more prevalent. Smart Grid privacy and security risks have attracted attention recently, as media reports have highlighted the dangers of potential instability, blackouts and economic disruption that could result from a Smart Grid cyber attack by hackers. Any cyber attack or other security breach on any component we or a competitor have provided, or on other similar technologies, could lead to a reduction in public acceptance of Smart Grid technologies and have a material adverse effect on our results of operations, cash flows and financial condition.


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We face increasing competition, which is broadly based and global in scope. Some of our competitors are well positioned in our areas of strategic focus, including Smart Grid technologies. If our competitors are more successful than we are at winning market share and developing their reputations in new technological or product areas, we could experience a material adverse effect on our results of operations, cash flows and financial condition.
 
We face competitive pressures from a variety of companies in each of the markets we serve. Some of our current or future competitors have or may have substantially greater financial, marketing, technical or manufacturing resources, and, in some cases, greater name recognition, market penetration and experience than we do. This may also be the case with respect to Smart Grid solutions. These competitors may also be able to devote greater resources to the development, promotion and sale of their products and services.
 
The competitive environment in which we operate has been strongly impacted by the movement towards Smart Grid solutions. While we are increasingly focusing our business plan on the development of Smart Grid product offerings and solutions in an attempt to maintain and expand our activities and increase our market share in this area, current or future competitors may be able to respond more quickly to new or emerging technologies and changes in customer or regulatory requirements. They may also be able to drive technological innovation and develop products that are equal in quality and performance or superior to our products, which could reduce our overall sales, require us to invest additional funds in new technology development and put pressure on our market position. Our competitors also have made or may make strategic acquisitions or establish alliances or cooperative relationships among themselves or with third parties that may enhance their ability to address the needs of customers, potentially giving them a significant increase in market share at our expense. Should we fail to compete successfully with current or future competitors, we could experience a material adverse effect on our results of operations, cash flows and financial condition.
 
In our industry, competition based on price can be intense, particularly during periods of economic decline or stagnation. We face varying levels of price erosion in the markets that we serve due to a variety of factors, including existing competitors lowering their prices, competition from manufacturers in low-cost countries and new entrants using off-the-shelf products or other low-priced strategies to gain market share. New entrants could also include competitors from industries we previously viewed as distinct from ours, such as the networking, telecommunications and systems integration industries. In addition, there is a risk that low-cost providers will enter, or form alliances or cooperative relationships with our competitors, thereby contributing to further price erosion in the market for manual-read meter and Smart Grid solutions. Some of our products and services may become commoditized and we may have to adjust the prices of some of our products to stay competitive.
 
Any inability to win or maintain contracts with existing customers may have a material adverse effect on our results of operations, cash flows and financial condition.
 
A significant number of our customers purchase products under master agreements with terms ranging from one year in many cases to two to five years for larger projects. As the market moves towards large contracts in connection with Smart Grid solutions, the proportion of such contracts in our business is likely to increase further. Individual orders of products under these master agreements are subject to cancellation or rescheduling due to many factors that may lead our customers to redeploy resources. They may also cease placing orders or cancel these agreements in their entirety, in which case our remedies may be limited. While we are currently participating in pilot projects with various utilities, large-scale projects may not result from these pilots. In addition to potential changes in their views regarding our products, they may also take such steps in response to changes in economic conditions generally or in the public procurement or regulatory environments. Cancellation or postponement of one or more of these significant contracts, or parts thereof, could have a material adverse effect on our results of operations, cash flows and financial condition.


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If our customers reduce the number of suppliers from which they purchase, we may lose business or face more restrictive terms in our agreements and our business may suffer as a result.
 
In an attempt to increase efficiency, some of our customers have informed us they are seeking to reduce the number of vendors from whom they purchase products and services, particularly as vendors, including us, increase the breadth of the products and solutions they offer. If we are not selected as a preferred provider in a significant number of cases, we may lose access to certain sections of the markets in which we compete or wish to compete. Failure to maintain access to important sections of the market could have a material adverse effect on our results of operations, cash flows and financial condition. Even if we are selected as a preferred provider, the possibility exists that increased competition will have an impact on the agreements customers are willing to enter into. As a result, the terms and conditions of agreements regarding testing, contractual penalties, bonding, warranties, performance and indemnities may be substantially more restrictive for us, or carry a greater risk of liability, than the terms and conditions associated with our standard products and services.
 
We may no longer be able to rely on our traditional contacts in the metering departments at our utility customers for more technologically advanced procurement, which may have a negative effect on our results of operations.
 
Many of our long-standing customer relationships have grown from our lengthy experience in the metering and meter automation businesses. As a result, many of our primary contacts tend to be employees in the metering or customer service departments of large utilities. As our industry becomes more dependent on technology, procurement decisions may be moved elsewhere within these organizations, which may reduce our contact with the decision makers at potential or existing customers and limit our ability to effectively promote our entire range of products along the value chain, thereby potentially decreasing our ability to win new contracts.
 
A change in current and proposed regulatory initiatives that are of key significance to our company could have a material adverse effect on our results of operations, cash flows and financial condition.
 
Our industry depends substantially on governmental regulation. Historically, a key driver in our industry has been the replacement cycle of existing meters, especially the length of that cycle. Local or national regulations often determine when meters are to be replaced, and manual-read meter replacement cycles have been between five and 30 years, depending on the specific geographic market and the type and usage of the meter. Likewise, much of the impetus for the growth we expect in our industry arises from regulatory initiatives. Today, governments around the world are considering and, in some cases, have already begun to implement new laws and regulations to promote increased energy efficiency, slow or reverse growth in the consumption of scarce resources, reduce carbon dioxide emissions and protect the environment more generally. In particular, intensified regulatory pressure relating to energy and natural resource consumption is being driven by these and a range of additional imperatives in the United States and the European Union and in other countries, including Australia, Brazil, Canada, China and Russia. Many of the legislative and regulatory initiatives encourage utilities to develop Smart Grid infrastructure, and some of these initiatives provide for government subsidies, grants or other incentives to utilities and other participants in their industry to promote transition to Smart Grid technologies.
 
If government regulations regarding the introduction of Smart Grid technologies and the related shortening of the replacement cycles for meters we expect are delayed, revised to permit lower or different investments in metering infrastructure or terminated altogether, this could have a material adverse effect on our results of operations, cash flows and financial condition.


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Lengthy or uncertain implementation of Smart Grid-related regulatory initiatives may result in our customers lowering or delaying their investments in the existing meter base and Smart Grid technologies, which could have a material adverse effect on our results of operations, cash flows and financial condition.
 
In many regions, Smart Grid-related legislation or regulation is being considered, drafted or negotiated, or general legislation is in place, but awaiting implementing rules or guidance. Legislatures and governmental agencies may prolong the law- and rule-making process, subject new technology to extensive reviews or fail to implement Smart Grid-related legislation or regulation on a timely basis, if at all. For example, some of the current legislative and regulatory initiatives in the European Union have clauses that may lead to deferral or dilution to the extent the Smart Grid initiatives are deemed economically non-viable. Some of our utility customers have been awaiting greater clarity on the scope and implementation of these laws and regulations and the timing of, and conditions related to, the receipt of related government grants, subsidies and other incentives. This effect has caused the revenues of our electricity segment to decline as utilities in the United States have been deferring their upgrades of installed meter bases and infrastructure expansions while the timing of their receipt of U.S. economic stimulus funding has remained uncertain. They have accordingly been deferring their commitments for the substantial upgrades of installed meter bases and infrastructure expansions that will be part of their response to Smart Grid related regulation. These deferrals continued through the end of 2009 and into 2010. Some utilities may eventually decline public subsidies or grants if they perceive conditions placed on their receipt to be too onerous or otherwise disadvantageous. If a significant number of utilities continue to delay their investments or opt not to participate altogether, this could lead to shortfalls in our sales and results of operations in the short to medium term.
 
Changes and developments in the regulations and policies of the countries we serve may affect demand for our products or cause us to incur significant costs.
 
We are subject to a range of laws, regulations and ordinances in all of the jurisdictions in which we conduct business, and we and our customers are regulated by various bodies at the supranational, national, state and local level. For example, in many U.S. states, public utility commissions regulate utilities in their states separately from other state regulators and federal agencies. The laws, regulations and ordinances to which we are subject, and the actions and attitudes of regulators, can change from time to time. Compliance with current or future laws and regulations may increase our expenses if their complexity or inconsistency increases, while failure to comply could result in the imposition of significant fines, suspension of our production, alteration of our production processes, cessation of our operations or other actions in the jurisdictions concerned, all of which could have a material adverse effect on our results of operations, cash flows and financial condition.
 
We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted. In particular, governmental agencies and state public utility commissions may promulgate regulations that mandate or encourage the use of a particular type of technology that is not readily compatible with the technology employed in our products or may otherwise establish standards that are more favorable to our competitors. For example, in the United States, the National Institute of Standards and Technology is statutorily required to define uniform interoperability standards for the implementation of Smart Grid solutions, and the U.S. Federal Energy Regulatory Commission is required to engage in a rulemaking process to consider making these interoperability standards mandatory for interstate electricity transmission and wholesale power markets. This process may favor one company’s technology over another’s. If this were to happen, particularly in the larger markets in which we sell our products, we could be forced to withdraw some of our products from the market, make substantial investments in a new technology or lose market share to our competitors, all of which could have a material adverse effect on our results of operations, cash flows and financial condition.


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Changes to data protection laws and regulations and their interpretation in Europe may lead to a delay in related Smart Grid solution initiatives, which could adversely affect the demand for our smart meters and Smart Grid solutions.
 
In Europe we are subject to data protection regulation that imposes a general regulatory framework for the collection, processing and use of personal data. Many of our Smart Grid and other technologies rely on the transfer of data relating to individuals and are accordingly affected by these regulations. Although the European Data Protection Directive (94/46/EC) has been implemented across the European Union, data protection laws across member states vary to a large degree, and authorities do not always apply existing laws in a consistent manner. While privacy issues in connection with AMR, AMI and Smart Grid solutions have been discussed within the European Union, it is unclear how regulation in connection with privacy requirements will further develop and to what extent it may affect technology in our industry relating to Smart Grid solutions. It may also lead to delay in other regulatory initiatives supporting the implementation of Smart Grid solutions. Our business could suffer a material adverse effect as a result.
 
Changes and developments in product certification and calibration requirements may adversely affect demand for our products, cause us to incur significant costs and have a material adverse effect on our business.
 
We are subject to various governmental certification requirements and similar regulations. Many of our new products and much of our equipment require certifications, calibrations or regulatory approvals before they may be sold or used. In some areas, each item we produce must be separately calibrated or certified by a governmental agency prior to deployment. We cannot be certain that any of our new products and equipment requiring approval will be approved in a timely manner, if at all. If certification, calibration or approval requirements become more stringent or cumbersome in the future, or differ materially on a regional or national level, our ability to market our products may be impaired.
 
In some cases, existing calibration requirements currently work to our benefit by driving service opportunities and meter replacement. Our water meter products in particular are subject to ongoing calibration requirements in a number of European countries and our gas meters are generally subject to exacting safety tests. In Germany, for example, federal regulations require cold water meters to be recalibrated and repaired every six years, while hot water meters must be recalibrated and repaired every five years. German and certain U.S. state regulations also require that gas meters be tested periodically and serviced when needed. Because of the relative expense involved in repairing water and gas meters, many customers install new meters at the time national regulations call for recalibration and repair. If these national regulations were changed to extend the time for recalibration and repair, our sales of water and gas meters could decrease, which could have a material adverse effect on our results of operations, cash flows and financial condition.
 
Limitations on the capacity of unlicensed frequencies or the inability of our company or our customers to obtain licenses where required may result in lower demand for our products, which could have a material adverse effect on our business.
 
Our communications technologies use particular radio frequencies and thus are subject to the regulation of various governmental bodies, such as the U.S. Federal Communications Commission and corresponding regulatory institutions of various U.S. states and European countries. With respect to the United States in particular, currently only our TRACE AMR products operate using licensed radio frequencies, but additional AMI and AMR products may operate in the United States using licensed radio frequencies in the future. To the extent that our products and solutions use licensed frequencies, there is a risk that there may be insufficient available licensed frequencies in some markets, that neither we nor our customers will be able to obtain licenses where required, even if sufficient frequencies are available, and that licenses that are granted to us or our customers may not be renewed on acceptable terms, if at all. Also, while unlicensed frequencies may currently be available for a wide variety of uses, including our RF mesh communications technology, we and our


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customers may not be entitled to protection from interference by others who operate on frequencies close to or the same as those on which our products operate. If currently unlicensed frequencies become unacceptably crowded, or subject to restrictive rules governing their use, our business could suffer a material adverse effect.
 
We may face volatility in the prices for, and availability of, components, raw materials and energy used in our business, which could adversely impact the competitive position of our products, decrease profit margins and negatively impact timely delivery to customers.
 
The manufacturing processes for all of our products, especially in our gas and water segments, require a wide variety of components, raw materials and energy, including gas and electricity. We use components such as brass castings, aluminum housings, sheet metal, plastics and printed circuit board assemblies and other electronics. Important raw materials include steel, resins, aluminum, brass and bronze. We rely on third-party suppliers to provide us with these manufactured components, raw materials and energy. Since we do not control the actual production of the components, raw materials and energy sources used in the manufacturing processes for our products, we are subject to delivery delays for reasons that are beyond our control. Supply curtailments or interruptions could arise from shortages of components, raw materials and energy, especially as demand for them (particularly electronics) increases in connection with any economic recovery, as well as from labor disputes, transportation disruptions, impaired financial condition of suppliers, extreme weather or other natural disasters. In addition, prices of components, raw materials or energy may increase or become more volatile. In many cases, especially for brass, steel and aluminum, we seek to manage our exposure to changing prices by executing procurement contracts for periods of up to one year with our suppliers of these materials or of components that include them. We may pay higher prices with this approach than we otherwise would have should market prices decline during the life of the contracts.
 
Any inability to obtain adequate supplies of component parts, raw materials and energy at favorable prices could decrease our profit margins and negatively impact timely deliveries to our customers. In addition, the loss of, or a substantial decrease in the availability of, products from some of our suppliers, or the loss of key supplier relationships and the need to find alternative sources on potentially disadvantageous terms, could lead to a reduction in our production and sales volumes and in our profit margins. Any of these events could have a material adverse effect on our results of operations, cash flows and financial condition.
 
We have contracted with third-party manufacturers to provide a substantial portion of our production capabilities. Our results of operations, cash flows and financial condition may be adversely affected if we are unable to manage our outsourcing arrangements effectively or if we are unable to project our demand accurately.
 
Our future operating results will depend on our ability to develop and manufacture products in a cost-effective manner. We outsource the manufacturing of some of our products and their sub-assemblies and components, especially for solid state meters used by gas, electricity and water utilities to maintain focus on our core competencies and streamline our operations, as well as to minimize our manufacturing costs. Solid state meters measure gas, electricity or water using electronic devices instead of mechanical components.
 
The outsourcing of manufacturing capabilities reduces the day-to-day control that we are able to exercise over the production process and could result in quality problems and increased product warranty costs. In addition, as we outsource additional production capacity, we will retain limited internal production capacity and will rely more on third-party manufacturers to fill orders on a timely basis. While our strategy calls for having more than one supplier for each important product and component, we rely on a single source for some key product lines, products and components that we purchase from third-party manufacturers. In some cases, our purchases account for a material portion of some of our suppliers’ respective businesses.


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The third-party manufacturers with whom we work often require us to provide accurate forecasts, sometimes months in advance. If we overestimate our requirements, we may be obligated to purchase quantities of products that exceed customer demand. If we underestimate our requirements, particularly in connection with large rollouts, we may have inadequate inventory from which to meet customer demand. From time to time, some of our suppliers may have difficulties keeping pace with our requirements if we increase our orders with little advance notice in response to demand for our products. While we are seeking to give our suppliers more advance notice of our peak requirements and holding more of the affected components in inventory where possible, we may fail to do so, or may, for reasons outside our control, not have access to sufficient supplies, which may cause even longer lead times. In any case where we must forecast our supply needs, our inability to forecast demand accurately may have a material adverse effect on our results of operations, cash flows and financial condition.
 
We have recently experienced significantly extended lead times at some of our suppliers of electronic components. These have negatively impacted our revenues, particularly in our electricity segment. If we are unable to ensure sufficient supplies to prevent these lead times from lengthening, our results of operations, cash flows and financial condition may be adversely affected.
 
Lead times for the electronic components we purchase from third-party manufacturers depend on a variety of factors, including the demand for each component and supplier capacity. If our third-party manufacturers or any of their sub-suppliers fail to deliver quality products and services in a timely manner, or if our ability to source from alternative suppliers cannot be maintained or if a supplier that is dependent on us is unable to cope with variations in our ordering patterns, the ensuing disruptions in our chain of supply could negatively affect our product portfolio, reputation, sales and ability to meet large orders, especially in the context of large rollouts.
 
During 2010, we have experienced significantly extended lead times at those of our suppliers that provide electronic components used in some of our products. We believe that the resumption of economic growth in some of the world’s economies, and the resulting demand for electronic components generally across a range of industrial sectors, has resulted in an increase in demand (after capacities had been reduced during the downturn) for commoditized electronic components that these suppliers use in producing circuit boards for us as well as for other customers, including customers in unrelated industries. This has been the case despite the overall lower levels of demand for our own products. We believe that some of our most important markets, including in particular the residential and commercial construction markets in many of the regions in which we operate, have remained weaker than some other markets that require similar components, such as the worldwide electronics and computer markets. In some cases, we have been required to place orders for electronics and electronic components six months or more in advance to ensure timely availability of these components. Some of our other suppliers have imposed limitations not only on purchases of their electronic components, but in other areas as well. We believe, based on discussions with our suppliers, that these circumstances have been relatively widespread, affecting participants in our industry as well as others. At our company, these circumstances have affected our electricity segment more than our other segments, although we have experienced scattered instances of shortages of electronic components in our other segments as well.
 
Shortages or interruptions in the supply of electronic components or communications modules could delay shipments of our products or increase our production costs. This in turn could have a material adverse effect on our results of operations, cash flows and financial condition. Any contractual penalties we negotiate for the event that a supplier does not meet its obligations with respect to timeliness and quality may fail to mitigate the harm to our business caused by any such contractual breaches.


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We rely on our information technology systems, including systems provided by third parties to conduct our business.
 
We rely on our own information technology, or IT, systems to manage our business data, communications, computing needs, production and supply chain effectively and efficiently. Our IT systems are used to conduct order entry, order fulfillment, inventory replenishment, e-commerce and other business processes. We also rely on the IT systems provided by third parties, including, in particular, for much of our networking and other IT infrastructure. For example, we agreed to outsource certain of our technical and communication infrastructure to a third party, but we terminated the contract in February 2010. They are under the obligation to continue to manage our IT infrastructure until the end of March 2011 and thereafter, over the course of an orderly transition period, properly to transfer the management of services to us or another third party. We are currently planning to reassume management of our IT infrastructure and/or outsource all or parts of it after the termination of the contract. If we are not able to find a suitable outsourcing partner or are not able to effectively manage our IT infrastructure internally, or if we experience disruptions in our IT systems during the transition period, it may have an adverse impact on our business.
 
Should these systems not operate as intended, our ability to transact business across our international company would be significantly impaired. In addition, our IT systems and those we outsource are vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power loss, hacker attacks, computer systems failure and viruses. The failure of our IT systems and our updated IT platform to perform as we anticipate, could disrupt our business and could result in decreased sales, increased overhead costs, excess inventory and product shortages, causing our business and results of operations to suffer. In addition, flaws in our security systems could result in potential data misuse, with a resulting damage to our reputation and an adverse effect on our business.
 
Through our global activities, we are exposed to economic, political and other risks and uncertainties, any of which could adversely affect our business and have a material adverse effect on our results of operations, cash flows and financial condition.
 
We are a global company with operations in more than 30 countries on five continents and sales in more than 130 countries. While most of our operations are located in developed countries, we have substantial operations in a number of developing countries and derive revenues from a broad range of countries. In 2009, our sales in Europe, North America and the rest of the world accounted for 45.2%, 33.0% and 21.8% of our revenues, respectively. This geographical diversity of both operations and sales exposes us to a range of risks relating to events that can occur in individual countries or regionally. Risks inherent to the global nature of our operations and which could negatively affect us include:
 
  •  local or regional economic downturns, some of which can be severe;
 
  •  withholding taxes imposed on dividends and other payments by subsidiaries;
 
  •  difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;
 
  •  restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in various jurisdictions;
 
  •  inability to develop successful relationships with local distributors;
 
  •  difficulty in staffing and managing our local operations around the world;
 
  •  changes in law, regulations or governmental policies in the individual jurisdictions in which we operate, including potentially negative consequences from changes in tax laws;
 
  •  the expense of complying with a wide variety of national and local laws, regulations, trade standards, treaties and technical standards and changes in them, and the risk of liability or the risk of being prohibited from doing business in a jurisdiction arising from any failures to comply with them;


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  •  challenges to our internal policies, compliance processes and information systems posed by our widely dispersed operations;
 
  •  different legal regimes controlling the protection of our intellectual property;
 
  •  exchange controls imposed by various countries and changed from time to time in ways that can be disadvantageous for us;
 
  •  nationalization of foreign assets;
 
  •  political instability, especially in some of the emerging markets in which we do business;
 
  •  local and regional conflicts and unrest;
 
  •  import and export duties, tariffs, quotas and other trade barriers, or other forms of government protectionism; and
 
  •  continued and/or repeated interruption of gas supply by one or more countries or companies producing natural gas.
 
The manifestation of any one or more of these risks could impair our current or future operations in the affected country or countries. While an event of this nature, if contained to one developing country, may not affect us significantly, such an event may trigger more widespread regional or global consequences, which could have a material adverse effect on our results of operations, cash flows and financial condition.
 
We derive most of our revenues from sales to or for the utility industry, which has been subject to long and unpredictable capital investment and related sales cycles, which could negatively affect our results of operations, cash flows and financial condition.
 
We derive most of our revenues from customers in the utility industry, either directly or through distributors. In our experience, the utility industry worldwide is often subject to long budgeting, purchasing and regulatory review processes that can take several years to complete and can result in unpredictable capital investment cycles. Generally, larger contracts with utilities are granted through competitive tender processes that involve large volumes, require lengthy and complex competitive procurement processes and lead to long and unpredictable sales cycles. Utilities are under increasing economic, political and regulatory pressure to seek bids for their higher-volume purchases in as competitive a process as possible, which can further delay the time necessary to complete the tender process. In some markets, utilities’ ability to recover the costs of purchasing our products and services is also subject to lengthy and uncertain regulatory proceedings. In addition, utilities’ purchasing decisions are sometimes delayed if they are considering or negotiating major transactions or changes in their businesses or operations that are unrelated to our products. Our revenue development may be materially and adversely affected if these sales cycles lead to delays that we did not anticipate, for which we were unable to plan adequately or that are otherwise disadvantageous to us. This could have a material adverse effect on our results of operations, cash flows and financial condition.
 
Ongoing instability and volatility in the worldwide financial markets have created uncertainty, which may reduce our customers’ access to financing or reduce their ability or slow their plans to purchase products and services from us.
 
The recent worldwide financial crisis and current weakness in the global economy have resulted in severe and prolonged volatility and disruption in the capital and credit markets in 2008 and 2009, leading to lower levels of liquidity and corresponding increases in the rates of default and bankruptcy. These market developments continue to pose a risk to the financial stability and reliability of companies and vendors in our industry. If financial conditions worsen and global credit markets fail to ease or tighten further, many of our customers, some of whom are substantially dependent on credit to finance their own operations, may delay or reduce purchases of our products or services. They also may limit their levels of capital expenditures in a manner that directly or indirectly leads to a reduction, deferral or cancellation of orders placed with us. This could have a material adverse effect on our results of operations, cash flows and financial condition.


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We may have difficulty raising capital to refinance our indebtedness or to obtain credit in support of our customer-related securities and bonding requirements.
 
All of our long-term debt is scheduled to mature between September 30, 2012, and September 30, 2014. We have incurred virtually all of our long-term debt under a credit facility agreement that we put in place in 2005 with a syndicate of banks and that we have modified since that time, most recently in January 2010. We refer to this agreement in its current form as our Senior Facilities Agreement. Any outstanding balances of our Senior Facilities Agreement’s multicurrency revolving facility are due on September 30, 2012 and any outstanding credit support under our bonding facility will expire on the same date, with any remaining amount outstanding under the Senior Facilities Agreement’s tranches maturing in 2013 and 2014. We therefore will be required to refinance our existing indebtedness in the next several years. However, if the recent uncertainty and weakness in worldwide financial markets continues, financing may not be available on terms we find attractive or at all. For example, banks may be unwilling to renew our credit facility or extend it on current or similar terms.
 
In addition, some of our customers and potential customers ask us for guarantees, including payment and advance payment guarantees and performance guarantees, or bonds, in each case to cover portions of their potential contract volumes. They may also or alternatively ask us to maintain a certain level of inventory. A continuation of the recent uncertainty in worldwide financial markets may lead customers to demand guarantees or bonds covering a larger portion of these contracts or for us to maintain larger amounts of inventory, while at the same time making it more difficult for us to obtain favorable terms on the credit necessary to fulfill these demands. If we are unable to obtain the necessary guarantees or bonds, or maintain or finance the necessary level of inventory, we may fail to win these contracts, which could have a material adverse effect on our results of operations, cash flows and financial condition.
 
Our exposure to counterparty default risk may increase as a result of the ongoing instability and volatility in the worldwide financial markets.
 
One characteristic of the recent financial crisis has been financial institution distress. Depending on the development of the markets, some or all of our current lenders (or any financial institutions from whom we borrow in the future) may be unable to honor their commitments under our Senior Facilities Agreement for draw-downs or bonds, particularly if they fail or if they are required to set lending limits imposed by their regulators. If this happens with respect to our current lenders, we could be required to seek financing in a credit market that has become less accessible. These developments may have an adverse effect on our ability to raise capital to refinance our indebtedness, which may in turn have a material adverse effect on our results of operations, cash flows and financial condition. The counterparties on our interest rate and foreign currency derivative contracts could also default on their obligations, which, to the extent that we are not in a liability position under these contracts, could have a material adverse effect on our results of operations, cash flows and financial condition.
 
We have undertaken, and may continue to undertake, business in countries subject to EU or U.S. sanctions and embargoes, and we may be unable to prevent possible sales or transfers of our products to countries, governments, entities or persons targeted by EU or U.S. sanctions.
 
The Council of the European Union has adopted restrictions on trade with entities associated with certain jurisdictions, including a council decision of July 26, 2010 concerning restrictive measures against Iran. These sanctions regulations, which vary depending on the jurisdiction in question, apply to EU nationals worldwide, including all EU companies. While these sanctions regulations do not apply to subsidiaries of EU companies that are organized under the laws of countries outside the European Union, EU parent companies are nonetheless expected to encourage their subsidiaries to follow these regulations. We have conducted, and continue to conduct, business with entities located in jurisdictions subject to EU sanctions regulations. If we are found to have violated any of these restrictions, we could be subject to fines, which could have a material adverse effect on our business and reputation.


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The U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, and the Office of Export Enforcement of the U.S. Department of Commerce, or OEE, administer certain laws and regulations, or U.S. Economic Sanctions Laws, that impose restrictions upon U.S. companies and persons, or U.S. persons, and, in some contexts, foreign entities and persons, with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of U.S. Economic Sanctions Laws, or Sanctions Targets. U.S. persons are also generally prohibited from facilitating such activities or transactions.
 
We have engaged and continue to engage in business with counterparties, including government-owned or controlled counterparties, in certain countries that are Sanctions Targets, including Iran, Syria and Cuba. In the three years ended December 31, 2009, we had sales of approximately $85.1 million to Sanctions Targets. Specifically, in the years ended December 31, 2009, 2008 and 2007, we generated revenues from products sold to customers in Iran of $21.8 million, $29.8 million and $24.1 million, respectively, which represent approximately 1.3%, 1.6% and 1.4%, respectively, of our total revenues for those years. Our business with Sanctions Targets consisted mostly of the sale of electricity meters for residential and C&I use until the second quarter of 2010, after which we have ceased selling electricity meters in Iran. We also sell gas metering and utilization products and, to a lesser extent, water meters in Sanctions Targets. In the first six months of 2010, we had sales of approximately $5.0 million, or 0.6% of our revenues, to Sanctions Targets, of which $3.8 million related to products sold to customers in Iran.
 
We recently concluded an investigation, assisted by external counsel, and submitted, on a voluntary basis, a disclosure report to OFAC and OEE in March 2010 regarding conduct in 2005 through 2007. The report concludes that a U.S. person employed by our U.S. affiliate participated in the settlement of a warranty claim made by one of our Iranian customers against two of our European operating units, which may implicate certain of the U.S. Economic Sanctions Laws. We also described in our voluntary disclosure to OFAC and OEE our sales of certain meters to counterparties in Iran and Syria with de minimis U.S.-origin content. On July 29, 2010, the OEE notified us that the file relating to our voluntary disclosure report was being closed and no further action would be taken. The OFAC review is still ongoing. While the report states our conclusion that these product sales either did not violate the relevant U.S. Economic Sanctions Laws or should not be penalized under such laws, OFAC may not concur with our assessments.
 
We may be subject to fines or other administrative action relating to the matters discussed in the voluntary disclosure report. We do not expect any fines or other action to have a direct material adverse effect on our results of operations, cash flows or financial condition. However, our disclosure of this conduct and any fines or other action relating to this conduct could harm our reputation and indirectly have a material adverse effect on our business.
 
In October 2007, we implemented enhancements to our compliance and training programs and procedures designed to ensure that, across all our operations globally, no sales to Sanctions Targets would occur of products containing more than a de minimis level of U.S. content (or any level of U.S. content in circumstances where no U.S. content is permissible) and that U.S. persons among our employees would have no involvement in business with Sanctions Targets. Despite these enhancements and our other efforts designed to ensure compliance with applicable sanctions laws and embargoes, it remains possible that our products could be sold or transferred to countries, governments, entities or persons targeted by EU or U.S. sanctions in a manner that violates such sanctions. For example, despite our procedures, one of our businesses may miscalculate the level of U.S.-origin content in a product or transfer a U.S.-origin product to a customer that we should have known was subject to U.S. or EU sanctions. Should such sales or transfers occur, we would bear the costs of any necessary investigative and remedial measures that may be necessary, and could be subject to fines or criminal penalties in respect of such sales or transfers.
 
In addition to the sanctions administered by OFAC and OEE described above, the U.S. government may impose (and has in the past imposed from time to time) restrictions and sanctions against other


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countries, including ones in which we do business. In addition, the U.S. government may impose new or expanded restrictions and sanctions against existing Sanctions Targets. Any such measures targeting countries in which we undertake business could have a material adverse effect on our business and reputation.
 
Certain U.S. state and municipal governments, universities and institutional investors have proposed or adopted divestment initiatives regarding investments in companies doing business with Iran and other Sanctions Targets. If our business activities regarding Iran or other Sanctions Targets were deemed to fall within the scope of such initiatives, then such investors holding interests in us may sell these interests. If significant, these sales could have adverse effects on our business or the price of our ADSs.
 
Our business depends on our ability to develop new products and technologies and a failure or delay in successful new product development could reduce our future revenues.
 
Our customers increasingly demand access to a broad range of products and technologies, and we must continue to develop our expertise to design, manufacture and market our products successfully. We believe that our customers rigorously evaluate their suppliers on the basis of a number of factors, including product quality, reliability and timeliness of delivery, accuracy, new product innovation, price competitiveness, technical expertise and development capability, product design capability, manufacturing expertise, operational flexibility, customer service and overall management. Our success therefore depends, to a significant extent, on our development of new products and technologies and our ability to continue to meet our customers’ changing requirements.
 
As a result, in addition to enhancing our current product and solutions portfolio, we continually strive to offer new products and design new technologies and software solutions. This requires continued investment in product and technology development to help us maintain or increase our current market position and to allow us to respond to changing customer needs. However, we may be unable to develop or commercialize technological advances and introduce new products in a manner and to an extent sufficient for us to remain competitive within our industry. For example, we may, among other things, lack capacity to invest the required level of human and financial resources necessary to develop these products, commit errors or misjudgments in our planning in these areas or experience difficulties in implementing rollouts. In addition, we may not be able to meet our product development and delivery schedules as a consequence of unforeseen problems during the design or development phases of new product and technology introductions. Some of our new products also require certification or regulatory approval and may not be approved in a timely manner or at all. Delays of this type, or failures to obtain regulatory approval, could negatively affect our reputation and relationship with our customers and lead to delayed or reduced revenues for our products.
 
If we fail to enhance existing products, develop new products or keep pace with developing technology, growth opportunities could be lost or we may lose existing customers. This is especially the case for our Smart Offerings, which we define to be AMR, AMI and Smart Grid solutions and individual products, components and services for use therein, which have experienced a rapid pace of development. In addition, we have made commitments within some existing contracts with customers, to develop and deliver new products. If we are unable to meet these commitments, we could be subject to contractual penalties or lose the orders altogether. Delays in product development may also lead to a need for greater investments in research, design and development. If we encounter increased costs associated with new product development and product enhancements for which we are unable to realize sufficient revenues, the costs of the related new product development may not be recoverable. Either increased costs of or decreased revenues from newly developed products, or both, could have a material adverse effect on our results of operations, cash flows and financial condition.


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A number of skilled personnel are critical to the success of our business, and any inability to attract and retain employees with skills in our areas of focus, or industrial action by our employees generally, could have a material adverse effect on our results of operations, cash flows and financial condition.
 
Our success depends on our continued ability to identify, attract, develop and retain skilled personnel throughout our company. Competition for highly qualified management and technical personnel is intensifying as our industry becomes more technologically advanced. In addition, many of our key management personnel have become eligible to receive the full economic benefits of their interests in our Management Equity Program, or MEP. These members of management may leave us after they are able to receive the cash value of their interests in the MEP. While we believe that we have a good relationship with our management and other key employees, and while we are also developing a long-term incentive compensation plan to be implemented shortly after the offering, we may not be able to retain key executives or other skilled personnel, or attract and retain replacements for those who may decide to leave our company. In certain strategic focus areas, such as Smart Grid technologies, we intend to make significant investments and further develop our product portfolio. The successful development of our business in these strategic areas depends in part on our continued ability to hire and retain qualified and skilled personnel. We are also dependent on the remainder of our workforce to respond effectively to customer requests, and industrial actions could negatively impact our ability to respond effectively, especially for larger, more complex rollouts that encompass a broad range of our products and services. Any such industrial actions, along with any inability to attract and retain key personnel could have a material adverse effect on our results of operations, cash flows and financial condition.
 
Failure to successfully identify attractive acquisition candidates or integrate current or future acquisitions could result in charges, cause disruption to the management of our business or otherwise have a material adverse effect on our results of operations, cash flows and financial condition.
 
We have pursued selected acquisitions in a number of countries to expand our business. We expect to continue to evaluate potential acquisitions, and may engage in discussions with acquisition targets and pursue selective acquisition opportunities, some of which may be material, if we believe they will be beneficial to our company and our shareholders. However, we may be unable to identify and acquire suitable acquisition targets, or our acquisition strategies may not be well received by the market. If we decide to pursue a strategic acquisition, we may need to raise additional private or public funds and we may be unable to finance the acquisition on satisfactory terms or at all.
 
Additionally, any acquisition will bring with it attendant risks, including a possible inability to integrate its operations into our business, failure to realize expected benefits or synergies, increases in operating costs, the diversion of management’s attention away from operating activities or other unanticipated problems, including, for example, relating to compliance or liability matters in the target. In addition, our capitalization and results of operations may change significantly as a result of an acquisition or a series of acquisitions, and the related financings, and we may be unable to accomplish our strategic objectives as planned or at all as a result of any such acquisition. Future acquisitions may result in our incurrence of additional debt and contingent liabilities, an increase in our interest expense and additions to our amortization expense, especially in connection with intangible assets. We may also incur significant charges relating to the integration of acquired businesses. Any of these factors could have a material adverse effect on our results of operations, cash flows and financial condition.
 
Our quarterly operating results may fluctuate substantially, which may cause the price of our ADSs to decline.
 
We have experienced variability in our quarterly operating results in the past. We may fail to achieve sustained profitability in the future and may experience operating or net losses. Our future operating results are subject to numerous risks, including the following:
 
  •  the size and timing of deployments may vary, as might the time at which we recognize the associated revenue, especially in the case of large and complex contracts for our Smart


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  Offerings. Equally, deployments under major rollouts may be concentrated in particular quarters, leading to the possibility of large quarterly revenue swings;
 
  •  exchange rates that impact our operating results could change suddenly and significantly;
 
  •  our mix of products and services in any one quarter may change significantly, especially if individual contract sizes are larger, even if the mix is less volatile over time;
 
  •  expenses relating to our stock-based compensation arrangements may be higher than expected in any given period;
 
  •  we may be subject to unexpected warranty liabilities that may, in turn, require us to accrue lump sum provisions;
 
  •  the timing and production levels of our new product developments may be delayed or overly optimistic;
 
  •  the timing and availability to our customers of government stimulus funding;
 
  •  components or raw materials that are material for us may quickly become less easily available in the quantities we need at attractive prices or may be subject to shortages. Moreover, prices for these components and raw materials can swing rapidly;
 
  •  we may experience other, potentially severe, interruptions in our supply chain; and
 
  •  general economic conditions affecting enterprise spending for the utility industry may change quickly and adversely.
 
Some of these factors are partially or wholly outside of our control. Any of the above factors, or others that are unforeseen or today seen as immaterial, may, individually or in the aggregate, have a material adverse effect on our results of operations, cash flows and financial condition, which may, in turn, cause the price of our ADSs to decline.
 
Our operating results have fluctuated significantly in the past due to the effect of exchange rates and are likely to continue to do so.
 
Our results of operations have been, and may continue to be, adversely affected by movements in exchange rates, especially among the euro, U.S. dollar and pound sterling, but also with other currencies. Adverse currency exchange rate movements may hinder our ability to procure important materials and services from vendors and suppliers, may affect the value of our level of indebtedness, and may have a significant adverse effect on our revenues and overall financial results. Currency movements affect our financial statements and results of operations in various ways, including:
 
  •  As part of our consolidation each period, we translate the balance sheet items in the financial statements of those entities in our group that have functional currencies other than the U.S. dollar into U.S. dollars at the period-end exchange rates. The translated values in respect of each entity fluctuate over time with the movement of the exchange rate for the entity’s functional currency against the dollar. We refer to this as the currency translation effect. It is not practicable to hedge against this risk.
 
  •  Most of our entities make their purchases and sales primarily in their respective functional currencies. However, sometimes entities within the group make purchases and sales denominated in currencies other than their functional currencies. To the extent that an entity makes purchases in a currency that appreciates against its functional currency, its cost basis expressed in its functional currency will increase, or decrease, if the other currency depreciates against its functional currency. Similarly, for sales in a currency other than the entity’s functional currency, its revenues will increase to the extent that the other currency appreciates against the entity’s functional currency and decrease to the extent that currency depreciates against the entity’s functional currency. These movements can have a material effect on the gross margin of the entity concerned and on our consolidated gross margin. We refer to this as the currency transaction effect.


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  •  After a purchase or sale is completed, the currency transaction effect continues to affect foreign currency accounts payable and accounts receivable on the books of those entities that made purchases or sales in a foreign currency. These entities are required to remeasure these balances at market exchange rates at the end of a period. In 2008, we incurred a foreign currency loss of $7.4 million resulting from these remeasurements; in 2009, we recognized a gain of $2.9 million and in the first six months of 2010, we incurred a loss of $0.9 million, as compared to a gain of $0.7 million in the first six months of 2009. We intend, through our group treasury function, to enter into foreign currency derivative financial products to mitigate exchange rate risks when the appropriate financial products are available on attractive terms. However, it is often economically disadvantageous to pay the costs associated with hedging against every possible currency movement, particularly between currencies that have traditionally been rather stable, and we will continue to be subject to this risk.
 
In addition to these exposures, we are also exposed to the risk of fluctuations in currency exchange rates in connection with our financing arrangements, in particular drawings by an entity under the multi-currency borrowing facilities provided under the terms of our Senior Facilities Agreement which are denominated in a foreign currency. In addition, inter-company borrowings by one Elster entity to another Elster entity with a different functional currency can cause gains or losses from remeasuring the inter-company financing at changing exchange rates.
 
Under our Senior Facilities Agreement, our U.K. subsidiary drew debt, including balances denominated in euros and pounds sterling. With respect to the U.K. subsidiary’s euro-denominated drawing, because the functional currency of the U.K. subsidiary is the pound sterling, that subsidiary is required to remeasure its euro-denominated liability to the banks at the end of each period as the exchange rate of euro for pounds sterling changes. Elster Holdings GmbH made an inter-company loan, denominated in pounds sterling, to its U.K. subsidiary, in an amount that permitted the U.K. subsidiary to repay all but £28.4 million of the pound-sterling denominated tranche of the Senior Facilities Agreement it had drawn. Elster Holdings GmbH is required to recognize changes in the value of its pound sterling-denominated loan to its U.K. subsidiary at the end of each period. The effect of exchange rate changes on our debt led us to recognize a foreign exchange rate gain of $11.5 million in 2009 and foreign exchange rate losses of $37.8 million in 2008 and $5.1 million in 2007. In the first six months of 2010, we incurred a foreign exchange rate gain of $0.3 million compared to a foreign exchange rate gain of $17.0 million in the prior year period.
 
We intend to use a portion of the proceeds of this offering to permit the U.K. subsidiary to repay the euro drawing on its books. We also intend for the U.K. subsidiary to sell further assets to the group holding company or another of its subsidiaries to permit it to extinguish its remaining pound sterling-denominated debt under the Senior Facilities Agreement using an additional portion of the proceeds of this offering.
 
In the past, we have experienced gains and losses from exchange rate fluctuations, including foreign exchange gains and losses from transaction risks associated with assets and liabilities denominated in foreign currencies, including inter-company financings. In 2009, we had a foreign exchange gain of $14.4 million, compared to foreign exchange losses of $45.2 million in 2008 and $5.7 million in 2007. Although we have introduced measures to improve our ability to respond to currency exchange rate risks, these measures may prove ineffective, and recent exchange rate volatility, particularly between currency pairs that have traditionally been rather stable, may continue at high levels. As a result, we may continue to suffer exchange rate losses, which could cause our operating results to fluctuate significantly and could have a material adverse effect on our results of operations, cash flows and financial condition.
 
Our business requires us to maintain investments in inventory. A decline in our customers’ purchases could result in obsolete inventory and lead to losses.
 
Our business requires us to maintain inventories in an effort to maintain a reliable source of supply for our customers. The market for many of our products is characterized by rapid change as a result of the development of new technologies, evolving industry standards and frequent new product


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introductions. Many of our product sales are made on a purchase order basis, which allows our customers to reduce or discontinue their purchases. Accordingly, we cannot predict the timing, frequency or size of our customer orders. In addition, as the range of products and solutions we offer becomes more complex, the risk increases that our inventory, including spare parts we need to carry, may increase or become obsolete more quickly. If we fail to anticipate the changing needs of our customers and accurately forecast demands, our customers may not continue to place orders with us, and we may accumulate significant inventories of products or components that we are unable to sell or return to vendors. This may result in a significant decline in the value of our inventory.
 
Restrictive covenants in our Senior Facilities Agreement limit our ability and the ability of most of our subsidiaries to take certain actions, which may restrict our ability to pursue our business strategies, incur additional indebtedness or make any future distributions to our shareholders.
 
Our Senior Facilities Agreement is our main source of financing. It contains a range of covenants that restrict our ability and the ability of our subsidiaries to take actions related to corporate matters, to incur indebtedness, to make investments and to undertake various other matters. In addition, the Senior Facilities Agreement contains covenants that require us to meet specified financial ratios including a leverage ratio, an interest coverage ratio and a cash flow to debt service ratio, as well as other customary covenants. Our ability to borrow under our credit facility and to maintain or increase these borrowings depends on our compliance with these covenants. Events beyond our control can affect our ability to meet these covenants.
 
Our failure to comply with covenants or other obligations under our borrowing arrangements may result in a declaration of an event of default. An event of default, if not cured or waived, may permit acceleration of such indebtedness. In addition, indebtedness under other instruments that contain cross-default or cross-acceleration provisions also may be accelerated and become due and payable. If an event of default were to be declared, we may not be able to remedy such default. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to borrow sufficient funds to replace the accelerated indebtedness on terms favorable to us or at all. In addition, in the case of an event of default under our secured indebtedness such as our Senior Facilities Agreement, the lenders may be permitted to foreclose on our assets securing that indebtedness.
 
We may be required to make a repayment offer under our Senior Facilities Agreement based on changes to the beneficial ownership of our Company. Our inability to finance a required repayment offer for any reason could result in the declaration of an event of default and the acceleration of all of our indebtedness under the Senior Facilities Agreement.
 
Our Senior Facilities Agreement requires us to make a mandatory repayment offer if specific changes to our beneficial ownership structure occur. For example, if, following this offering, Rembrandt and the Management KG together cease to beneficially own (directly or indirectly) at least 30.1% of our equity share capital or if any holder or group of holders beneficially owns more than Rembrandt and the Management KG collectively, we would be required to immediately prepay all outstanding advances and provide cash cover for all outstanding letters of credit, lender guarantees and advances under the revolving facility. Our inability to finance a required repayment offer for any reason, including an inability to raise the required amount of capital in a short period of time, could result in the declaration of an event of default and cross-default and the acceleration of all of our indebtedness under the Senior Facilities Agreement and other financing agreements. In the event an event of default or a cross-default were declared under our secured indebtedness, the lenders may be permitted to foreclose on our assets securing that indebtedness.
 
Although we do not expect Rembrandt and Management KG to sell below the 30.1% threshold before we have repaid or refinanced our indebtedness under the Senior Facilities Agreement, Rembrandt has advised us that it does not anticipate owning a majority of our shares over the long term.


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Impairment of our intangible assets, long-lived assets, goodwill or deferred tax assets could result in significant charges that would adversely impact our future operating results.
 
We have significant intangible assets, long-lived assets, goodwill and deferred tax assets that are susceptible to valuation adjustments as a result of changes in various factors or conditions. We assess impairment of amortizable intangible and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, many asset classes are subject to impairment testing on a periodic basis under applicable accounting rules. Factors that could trigger an impairment of such assets include the following:
 
  •  a significant underperformance relative to historical or projected future operating results;
 
  •  significant changes in the nature of or use of the acquired assets or the strategy for our overall business;
 
  •  significant negative industry or general economic trends;
 
  •  changes in our organization or management reporting structure could result in additional reporting units, which may require alternative methods of estimating fair values or greater aggregation or disaggregation in our analysis by reporting unit; and
 
  •  a sustained decline in our market capitalization below net book value.
 
We assess the potential impairment of goodwill as of December 31 of each year. We also assess the potential impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Adverse changes in our operations or other unforeseeable factors could result in an impairment charge in future periods that would impact our results of operations in that period.
 
The realization of our deferred tax assets related to net operating loss carry-forwards is supported by projections of future profitability. We provide a valuation allowance based on estimates of future taxable income in the respective taxing jurisdiction and the amount of deferred taxes that are expected to be realizable. If future taxable income is different from what we expected, we may not be able to realize some or all of the tax benefit, which may, in turn, have a material and adverse effect on our results of operations, cash flows and financial condition.
 
As a manufacturer and seller, we are exposed to risks related to warranties and product liability, and a failure to manufacture high-quality products may have a material adverse effect on our reputation and business.
 
Product quality and performance are a priority for us since our products are used in various industries where precise control of gas, electricity and water is essential. We also focus on technological platforms and systems to facilitate the proper functioning of many of our Smart Offerings as well as more advanced manual-read meters and services we sell. Our products and solutions will not meet performance standards if we fail to produce high-quality products that perform as their specifications demand or if the technology on which we depend for accurate metering, data storage and secure data transmission is defective. Any delivery of substandard products, or any failure of our meters to record accurate data or transmit recorded data in an accurate and secure manner, even if this failure results from a failure to use our meters according to their specifications, may seriously harm our reputation and lead to claims, resulting both in a loss of current customers to competitors and damage to our ability to attract new customers.
 
As is customary in our industry, our sales agreements typically contain product warranties that generally allow post-shipment obligations and returns over a period of one year or longer, depending on the particular product and market, and may provide for liquidated damages. Some warranties provide that if certain failure rates are exceeded among a production lot of meters, all the meters in the production lot may be returned. In some cases, the length of our warranties and guarantees may even exceed ten years. We may be exposed to substantial warranty claims as a result of our warranty undertakings. We have experienced warranty claims in the recent past relating to some of our meters and other products. Our accruals for warranty provisions totaled $34.8 million as of


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December 31, 2009 and $27.7 million as of June 30, 2010. Widespread product failures, or perceptions of such failures, may damage our market reputation, reduce our market share and cause our sales to decline. Our reputation and that of our industry may also suffer if a large or high-profile rollout, whether involving our products and solutions or those of a competitor, is impacted by serious technical or other failures.
 
Product defects may result in substantial replacement costs and in litigation, which could be costly and time consuming to defend and may have a material adverse effect on our results of operations, cash flows and financial condition.
 
If any of our products proves to be defective, we may be required to effect or participate in a recall involving those products. We may also be the subject of lawsuits seeking damages for products alleged to be defective, including in particular product liability claims in the event that the use of our products is alleged to have resulted in injury, a risk of injury or other adverse effects. Litigation, including litigation resulting from product liability claims, can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome of the litigation with respect to those claims. While we currently maintain product liability insurance coverage, such insurance may not provide adequate coverage against potential claims. A successful claim brought against us with respect to a defective product in excess of available insurance coverage, if our coverage is applicable, or a requirement to participate in a major product recall, could have a material adverse effect on our reputation, results of operations, cash flows and financial condition.
 
We may be unable to adequately protect our intellectual property, which may result in the appropriation by our competitors of, or the loss of our right to use, the intellectual property.
 
Our intellectual property rights include patents, copyrights, trade secrets, trademarks, utility models and designs covering a range of technologies we use in our business. We believe that our intellectual property is a valuable asset that protects our investment in technology and software, and supports our licensing efforts with third parties. We depend in part on our ability to obtain and maintain ownership of and rights of use in the intellectual property related to our product and solution portfolio.
 
However, some of the countries in which we operate, such as China, offer less effective copyright and trade secret protection than is available in Europe or the United States. In jurisdictions where effective copyright and trade secret protection is unavailable or limited, our trade secrets may be vulnerable to disclosure or misappropriation by employees, strategic partners, suppliers, customers and other persons. Patents may not be granted on our currently pending or future applications or may not be of sufficient scope or strength to provide us with meaningful protection or commercial advantage. Policing unauthorized use of our intellectual property is difficult and expensive, and we may not be able, or may lack the resources, to prevent misappropriation of our intellectual property, particularly in countries where the laws may not protect such rights as fully as do the laws of the United States.
 
Competitors or others may infringe our intellectual property rights or successfully avoid them through design innovation. To combat infringement or unauthorized use, we may need to litigate, which can be expensive and time-consuming. In addition, a court may decide in an infringement proceeding that an intellectual property right of ours is not valid or is unenforceable, or may refuse to enjoin the other party from using the technology or other intellectual property right at issue on the grounds that it is non-infringing or the legal requirements for an injunction have not been met. We may also be the subject of assertions that we infringe on the intellectual property rights of others. The loss or unavailability, or threat of loss, of our intellectual property or the economic exploitation of it could have a material adverse effect on our results of operations, cash flows and financial condition. The cost of defending against or settling intellectual property claims can be material, even when we believe that we own the associated intellectual property right and the existence or threat of such claims can damage our reputation and business.


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Environmental laws and regulations may expose us to liability and increased costs.
 
As with other companies engaged in similar activities, we face inherent risks of environmental liability in our manufacturing activities. For example, our former Ipsen Group furnace business has been subject to a number of claims relating to alleged asbestos exposure. Pursuant to the agreement under which we sold our Ipsen Group furnace business, we are required to indemnify the purchaser against present or future asbestos claims noticed to us by August 15, 2015, up to a maximum out-of-pocket amount for us of €15 million. The agreement under which we sold our Ipsen Group furnace business further provides that the amount of the indemnity be reduced by payments made to the purchaser under the Ipsen Group’s current or pre-existing insurance policies. We have covered the contingent liability arising out of this out-of-pocket maximum with an indemnity from our former owner, E.ON Ruhrgas AG, in an equal amount. In addition, according to our due diligence conducted at the time of the disposition, Ipsen’s current and pre-existing insurance coverage is in excess of the €15 million amount. At the time of the disposition, 14 cases were open, and 62 new claims have been subsequently notified. Of the 76 total claims notified, 37 have been dismissed. Additionally, there are currently three asbestos cases (filed in 1999, 2002 and 2003 by individual plaintiffs) in which Elster American Meter Company has been named as an additional defendant. All three cases have been included in the New York County Asbestos Litigation, or NYCAL, program and are currently classified as inactive. While on the inactive docket, all discovery in these matters has been stayed until further notice.
 
Furthermore, our operations and properties are subject to U.S., European and other foreign environmental laws and regulations governing, among other things, the generation, storage, emission, discharge, transportation, treatment and disposal of hazardous materials and the clean up of contaminated properties. Many of these environmental laws and regulations impose a form of strict liability on the owners and operators of land for the presence of any hazardous waste materials on the land and require generators of waste to take remedial actions at off-site disposal locations when necessary. In the ordinary course of our business, we have used and may continue to use metals such as mercury and cadmium, solvents and other materials on-site that create waste, which may expose us to liability under these regulations. Any failure to comply could result in the imposition of significant fines, suspension of production, alteration of product processes, cessation of operations or other actions detrimental to our business.
 
These environmental laws and regulations have complicated requirements, which are often changed or modified and could become stricter in the future. As such, we may incur increased costs associated with future environmental compliance, with remediation obligations or with litigation if claims are made with respect to damages resulting from our operations (including those arising under the indemnity agreement relating to our former Ipsen Group furnace business). These and any future costs associated with environmental issues currently unknown to us could have a material adverse effect on our results of operations, cash flows and financial condition.
 
We may be exposed to tax-related risks in connection with the acquisition of Ruhrgas Industries GmbH, the related financing, our subsequent reorganizations and the corporate transactions we have undertaken in preparation of this offering.
 
The acquisition of our company in 2005, in particular the financing of the acquisition of Ruhrgas Industries GmbH and the numerous transactions we have undertaken in connection with the restructurings of our group following our acquisition and in the preparation for this offering, may expose us to the risk of additional tax liability. These transactions included the change of our legal form and our relocation from Luxembourg to Germany. The tax issues that might arise could relate, among other things, to the realization of significant capital gains and to potential forfeitures of tax losses and interest expenses carried forward. We obtained tax rulings from the Luxembourg tax authorities regarding the tax treatment of the acquisition of Ruhrgas Industries GmbH, the changes to our capital structure in December 2008 (as described in more detail in “Our History and Recent Corporate Transactions—Transactions Relating to Our Share Capital—Our Recapitalization in 2008”) and the change of our legal form to a SE and relocation to Germany. We did not obtain any tax rulings


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in other countries or with respect to other issues. As the issues involved are complex and, in the case of the change in our legal form in connection with our move to Germany, novel, the relevant tax authorities may raise issues relating to the positions we have taken in connection with these transactions. If they ultimately disagree with our positions on these tax matters, we could be required to pay additional taxes in connection with these transactions. This could have a material adverse effect on our results of operations, cash flows and financial condition.
 
Tax rules limiting the deductibility of interest expenses could reduce our net income, especially in periods in which our net income is small or in which we incur a net loss.
 
We incur a substantial amount of interest on our Senior Facilities Agreement. In addition, some of our subsidiaries obtained inter-company financing and record interest expense on such financing. While interest expense is generally deductible for tax purposes, the tax laws of Germany and several other countries in which we have operations disallow the deduction of interest expenses for tax purposes either in full or in part.
 
Of particular relevance for us, in Germany, for fiscal years up to and including 2007, interest expenses on loans granted, secured or guaranteed by affiliated companies may not be deductible from taxable income due to the application of the German thin capitalization rules. Furthermore, in 2008 Germany adopted a limitation on the deductibility of interest expenses in excess of interest income, referred to as the “interest barrier” (Zinsschranke). Subject to qualifications and exceptions contained in the interest barrier rules, German law limits the deductibility of interest expenses in excess of interest income to an amount equal to 30% of the taxpayer’s earnings before interest, taxes, depreciation and amortization (EBITDA), as this earnings measure is defined in the tax law. Non-deductible interest expenses under the interest barrier rules may, subject to conditions, be carried forward to future tax years (at which time their deductibility continues to be limited by the interest barrier). Our German subsidiary Elster Holdings GmbH carried forward interest expenses of approximately $32.3 million as of December 31, 2009. In the future, we plan to manage our corporate group’s tax structure by creating a “fiscal unity” (Organschaft) that will include Elster Group SE and Elster Holdings GmbH and that treats the participating companies as if they were combined for tax purposes. If we were to create this fiscal unity, however, it will prevent us, among other things, from using these interest carryforwards while the fiscal unity exists. These amounts, as well as some interest expense we may incur in the future, may not be deductible to the extent that the interest barrier in Germany, or similar tax rules elsewhere, apply. In Germany, this risk would be higher in periods in which our earnings, on the EBITDA basis described above, are low or negative. The Company recorded valuation allowances for deferred tax assets relating to future interest deduction as of December 31, 2009 in Germany.
 
In the United Kingdom, the tax authorities have taken the position that the interest expense on bank loans and inter-company debt of our U.K. subsidiary are subject to deduction limitations due to U.K. tax rules limiting deductibility based on financial ratios, especially to the extent the terms of the indebtedness were not on an arms’ length basis. We are negotiating this issue with the U.K. tax authorities.
 
To the extent our interest expenses are not deductible, we may incur a reduction of our existing loss carryforwards and we may pay higher taxes. This could have a material adverse effect on our results of operations, cash flows and financial condition.
 
We are from time to time involved in disputes, regulatory actions and legal proceedings, the ultimate outcome of which is generally uncertain and which may have a material adverse effect on our results of operations, cash flows and financial condition.
 
In the ordinary course of our business, we are subject to risks relating to legal proceedings. The outcomes of legal proceedings, including regulatory actions, intellectual property disputes and employee lawsuits, are inherently unpredictable. If claims are asserted against us in the future or if we become subject to regulatory action or employee litigation, and if our opponents in these proceedings obtain judgments or awards against us or if we determine to settle any of these proceedings, we could be required to pay substantial damages, fines and related costs. These


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payments may have a material adverse effect on our results of operations, cash flows and financial condition.
 
The nature of our industry, which includes large contracts entered into with public or publicly-regulated utilities in many jurisdictions, presents greater risks of non-compliance with some forms of regulation than is the case in many other industries. These risks are accentuated by the global nature of our operations. We are, in particular, exposed to the risk that our employees or agents could engage in anti-competitive behavior or seek to influence the awarding of contracts in other impermissible ways. We maintain a compliance infrastructure including “whistleblower” hotlines and employee and agent education and training programs. Under this compliance infrastructure, we investigate cases of potentially non-compliant behavior and, if necessary, take specific steps to prevent such non-compliant conduct in the future. However, our compliance infrastructure may be insufficient to deter all misconduct. Moreover, if we become aware of allegations of non-compliant conduct, we may have difficulty investigating such conduct and gathering evidence. For example, shortly after our acquisition, we became aware through an employee tip of a potential case involving anti-competitive behavior. Our investigation of the matter did not provide actionable evidence. However, should evidence become available in this case in the future, or if other such cases were to arise, and misconduct were determined to have occurred, we could be subject to fines and to litigation, which could have a material adverse effect on our results of operations, cash flows and financial condition.
 
If we fail to fully establish and maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.
 
Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to enhance our internal controls over financial reporting in connection with our preparation to become a public company. Section 404 under the Sarbanes-Oxley Act of 2002 requires that our auditors attest to the effectiveness of our controls over financial reporting starting with our annual report for the year ending December 31, 2011. Beginning with this year, our compliance with the annual internal control report requirement for each fiscal year will depend on the effectiveness of our financial reporting and data systems and controls across our operating subsidiaries. Furthermore, an important part of our growth strategy has been, and will likely continue to be, the acquisition of complementary businesses, and we expect these systems and controls to become increasingly complex as our business grows and to the extent we integrate any future acquisitions. Likewise, the complexity of our transactions, systems and controls may become more difficult to manage. Additional complexity arises for our control environment from the fact that we operate in numerous countries around the world, in many of which our local staff is small. We cannot be certain that the measures we have taken will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, difficulties encountered in their implementation or operation, or difficulties in the assimilation of acquired businesses into our control system could harm our operating results or cause us to fail to meet our financial reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our ADSs and our future access to capital.
 
Risks Related to the Offering and Our Shareholder Structure
 
After the offering, share ownership will remain concentrated in the hands of the selling shareholders, who will continue to be able to exercise a direct or indirect controlling influence on us.
 
Upon completion of this offering, Rembrandt will hold an 80.2% equity interest in our company, and the Management KG, which is affiliated with Rembrandt, will hold a 5.5% equity interest in our company, in each case assuming that the underwriters’ over-allotment option is not exercised. Rembrandt has advised us that it does not anticipate owning a majority of our shares over the long term. While we are not aware of any specific plans for, or the potential timing of, future sales by


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Rembrandt, and expect that any decision by Rembrandt to sell more of our shares would depend on a range of potential factors, including the performance of our company, the price of our ADSs and general market conditions, we expect that at some point Rembrandt will cease to be a major shareholder in us. However, for so long as Rembrandt continues to own a significant percentage of our shares, its equity shareholding and its affiliation with the Management KG give it the power to control actions that require shareholder approval, including the election of members of our Administrative Board. Three of the Administrative Board members will, following the offering, be directly affiliated with Rembrandt and Rembrandt’s affiliated entities and two other members are limited partners in the Management KG.
 
Even if Rembrandt ceases to own or control more than 50% of our shares, for so long as it continues to have a substantial equity interest in our company it may, as a practical matter, be in a position to control many or all actions that require shareholder approval. Under German law, for so long as Rembrandt holds more than 25% of our shares, it will be in a position to block shareholder action on any capital increase or decrease, merger, consolidation, spin-off, sale or other transfer of all or substantially all of our assets, a change in the corporate form or business purpose (Unternehmensgegenstand) of our company or the dissolution of our company.
 
Significant corporate actions, including the issuance of a material amount of equity securities, may require the consent of our shareholders. Rembrandt might oppose any action that would dilute its equity interest in our company, and may be unable or unwilling to participate in a future financing of our company. Rembrandt, as our majority shareholder, could block any such action and thereby materially harm our business or prospects. In addition, this concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive shareholders of an opportunity to receive a premium for their ADSs as part of a sale of our company and might ultimately affect the market price of our ADSs.
 
We are controlled by Rembrandt, whose interests may not be aligned with yours.
 
Although our company is an independent entity, Rembrandt is our majority shareholder. Rembrandt or a person affiliated with Rembrandt, including funds advised by CVC Capital Partners, a private equity group, could in the future acquire and hold interests in businesses that compete directly or indirectly with us.
 
Rembrandt may from time to time also make strategic decisions that it believes are in the best interests of its business as a whole, including our company. These decisions may be different from the decisions that we would have made on our own. Rembrandt’s decisions with respect to us or our business may be resolved in ways that favor Rembrandt, which may not coincide with the interests of our other shareholders. We may not be able to resolve any potential conflicts and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.
 
As an example, Rembrandt may decide to sell all or a portion of the shares that it holds in us. Should it do so in capital markets transactions, the influx of additional shares into the public market could exert downward pressure on our share price. Should Rembrandt sell shares it holds to a third party, including to one of our competitors, that party could acquire substantial influence over our business and our affairs. Such a sale could be contrary to the interests of certain of our stakeholders, including our employees or our public shareholders.
 
Risks Related to the Securities Markets and Ownership of Shares and ADSs
 
Future sales of our ADSs by Rembrandt or the Management KG, the anticipation of future sales of our ADSs in the public market or speculation to this effect may adversely affect the trading price of our ADSs.
 
Upon completion of this offering, Rembrandt will hold an 80.2% equity interest in our company, and the Management KG will hold a 5.5% equity interest in our company, in each case assuming that the underwriters’ over-allotment option is not exercised. Rembrandt and the Management KG have agreed not to sell or transfer any of the remaining shares they hold without the consent of each of


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the Joint Bookrunners until 180 days after the date of our initial public offerings. However, Rembrandt has advised us that it does not anticipate owning a majority of our shares over the long term. Sales of a substantial number of the shares of our company by Rembrandt or the Management KG, either in the public market or in private transactions, or the perception that such sales may occur, could adversely affect the market price of the shares and ADSs and our ability to raise capital through subsequent offerings of equity or equity-related securities.
 
There has been no prior market for our ADSs and an active and liquid market for our securities may fail to develop, which could adversely affect the market price of our ADSs.
 
Our ADSs are a new issue of securities. Prior to the offering described in this prospectus, there has not been a public market for our ADSs. Although our ADSs will trade on the New York Stock Exchange, we cannot assure you that an active public market for our securities will develop or be sustained after this offering. If an active market for our ADSs does not develop after the offering, the market price and liquidity of our ADSs may be adversely affected.
 
The price of our ADSs may fluctuate significantly and our securities may trade below the initial public offering price, which may make it difficult for you to sell our ADSs when you want or at prices you find attractive.
 
The initial public offering price of our ADSs was determined by negotiations between Rembrandt, the Management KG, us and representatives of the underwriters, based on numerous factors that we discuss under “Underwriting.” This price may not be indicative of the market price of our securities after this offering. We cannot assure you that you will be able to resell your ADSs at or above the initial public offering price or our net asset value. Among the factors that could affect the price of our ADSs are the risk factors described in this section and other factors, including:
 
  •  the volatility of the prices for our products and therefore of our revenues;
 
  •  changes in demand for, and supply of, our products;
 
  •  changes in market valuations of companies in our industry in general, and metering companies in particular;
 
  •  variations in our operating results (actual or anticipated);
 
  •  technological changes that hurt our competitive position;
 
  •  manifestations of uninsured risks;
 
  •  unfavorable developments in litigation, governmental investigations or administrative proceedings in which we may be involved;
 
  •  developments in the regulatory landscape in countries in which we operate;
 
  •  strategic moves by us or our competitors including, for example, acquisitions, alliances or restructurings;
 
  •  failure or anticipated failure of our quarterly or annual operating results to meet market expectations;
 
  •  changes in expectations as to our future financial performance, including financial estimates by securities analysts;
 
  •  reviews of the long-term values of our assets, which could lead to impairment charges that negatively impact our earnings;
 
  •  release/expiration of the lock-up agreement or other restrictions on transfer of the ADSs;
 
  •  sales or anticipated sales of additional ADSs; and
 
  •  general market conditions.
 
Stock markets have experienced extreme volatility in recent years that has often been unrelated to the operating performance of a particular company or sector. These broad market fluctuations may adversely affect the trading price of our securities.


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Exchange rate fluctuations may reduce the amount of U.S. dollars you receive in respect of any dividends or other distributions we may pay in the future in connection with your ADSs.
 
Although our consolidated financial statements are denominated in U.S. dollars, under German law, the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of the unconsolidated annual financial statements of Elster Group SE prepared under the German commercial code in accordance with accounting principles generally accepted in Germany, which we refer to as German GAAP. Exchange rate fluctuations may affect the amount of euro that Elster Group SE is able to distribute, and the amount in U.S. dollars that our shareholders receive upon the payment of cash dividends or other distributions Elster Group SE declares and pays in euro, if any. Such fluctuations could adversely affect the value of our ADSs, and, in turn, the U.S. dollar proceeds that holders receive from the sale of our ADSs.
 
We have no present intention to pay dividends on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of our ADSs appreciates.
 
We have no present intention to pay dividends on our ordinary shares in the foreseeable future. Any recommendation by our Administrative Board to pay dividends will depend on many factors, including our financial condition, results of operations, legal requirements and other factors. In addition, our Senior Facilities Agreement limits our ability to pay dividends or make other distributions on our shares and we may also become subject to debt instruments or other agreements that limit our ability to pay dividends. Accordingly, if the price of our ADSs falls in the foreseeable future, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends.
 
You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.
 
Holders of ADSs may exercise voting rights with respect to the ordinary shares represented by our ADSs only in accordance with the provisions of the deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our ordinary shares, the depositary will, as soon as practicable thereafter, fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights. Upon timely receipt of notice from us, the depositary shall distribute to the holders as of the record date (i) the notice of the meeting or solicitation of consent or proxy sent by us, (ii) a statement that such holder will be entitled to give the depositary instructions and a statement that such holder may be deemed, if the depositary has appointed a proxy bank as set forth in the deposit agreement, to have instructed the depositary to give a proxy to the proxy bank to vote the ordinary shares underlying the ADSs in accordance with the recommendations of the proxy bank and (iii) a statement as to the manner in which instructions may be given by the holders.
 
You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs, but only if we ask the depositary to ask for your instructions. Otherwise, you will not be able to exercise your right to vote, unless you withdraw our ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot guarantee you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.
 
Under the deposit agreement for the ADSs, the depositary may choose to appoint a proxy bank. In this event, the depositary will receive a proxy which will be given to the proxy bank to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote in a timely fashion and in the manner specified by the depositary.


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The effect of this proxy is that you cannot prevent our ordinary shares representing your ADSs from being voted, and it may make it more difficult for shareholders to influence the management of our company, which could adversely affect your interests. Holders of our ordinary shares are not subject to this proxy.
 
You may not receive distributions on our ordinary shares represented by our ADSs or any value for them if it is illegal or impractical to make them available to holders of ADSs.
 
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our ordinary shares or any value from them if it is illegal or impractical for us to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.
 
You may be subject to limitations on the transfer of your ADSs.
 
Your ADSs, which may be evidenced by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason.
 
As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than a U.S. company. This may limit the information available to holders of our ADSs.
 
We are a “foreign private issuer,” as defined in the SEC’s rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, while we expect to submit quarterly interim consolidated financial data to the SEC under cover of the SEC’s Form 6-K, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less information concerning our company publicly available than there is for U.S. public companies.
 
As a foreign private issuer, we are not subject to certain NYSE corporate governance rules applicable to U.S. listed companies.
 
We are relying on a provision in the NYSE Listed Company Manual that allows us to follow German corporate law and the German Corporate Governance Code with regard to certain aspects of corporate governance. This allows us to follow certain corporate governance practices that differ in significant respects from the corporate governance requirements applicable to U.S. companies listed on the NYSE.


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For example, we are exempt from NYSE regulations that require a listed U.S. company, among other things, to:
 
  •  establish a nominating, compensation and audit committee composed entirely of independent directors;
 
  •  adopt and disclose a code of business conduct and ethics for directors, officers and employees; and
 
  •  promptly disclose any waivers of the code for directors or executive officers that should address certain specified items.
 
In accordance with our NYSE listing, our Audit Committee is required to comply with the provisions of Section 301 of the Sarbanes-Oxley Act of 2002 and Rule 10A-3 of the Exchange Act, both of which are also applicable to NYSE-listed U.S. companies. Because we are a foreign private issuer, however, our Audit Committee is not subject to additional NYSE requirements applicable to listed U.S. companies, including:
 
  •  an affirmative determination that all members of the Audit Committee are “independent,” using more stringent criteria than those applicable to us as a foreign private issuer;
 
  •  the adoption of a written charter specifying, among other things, the audit committee’s purpose and including an annual performance evaluation; and
 
  •  the review of an auditor’s report describing internal quality-control issues and procedures and all relationships between the auditor and us.
 
Furthermore, the NYSE’s Listed Company Manual requires listed U.S. companies to, among other things, seek shareholder approval for the implementation of certain equity compensation plans and issuances of common stock. Under applicable German laws, shareholder approval is required for all amendments to our Articles of Association, for capital increases and decreases (including the creation of authorizations for management to issue shares in the future), for the exclusion of preemptive rights in connection with capital increases, for the issue of convertible bonds or bonds with warrants attached, for certain corporate measures (including the execution of inter-company agreements (Unternehmensverträge) and the merger with another company or other corporate transformations), for authorization to purchase our own shares (subject to certain statutory exceptions), and for other essential actions, such as the transfer of all or virtually all of our assets. However, we might not be required to seek shareholder approval for issuances of shares in some circumstances in which a listed U.S. company would be required to do so under the NYSE rules, such as an acquisition of another company in exchange for shares representing more than 20% of our shareholders’ voting power, if we use previously authorized capital for the acquisition.
 
U.S. investors may have difficulty enforcing civil liabilities against us, the members of our Administrative Board and senior management and the experts named in this prospectus.
 
We are a European public limited liability company (Societas Europaea, or SE), and our registered offices and most of our assets are located outside of the United States. In addition, most of the members of our Administrative Board, our senior management and the experts named in this prospectus are residents of Germany and other jurisdictions outside of the United States. As a result, it may not be possible for you to effect service of process within the United States upon these individuals or upon us or to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. securities laws against these individuals or us in the United States. In particular, judgments awarding punitive damages are generally not enforceable in Germany. In addition, actions brought in a German court against us or the members of our Administrative Board or our senior management to enforce liabilities based on the U.S. federal securities laws may be subject to certain restrictions; in particular, German courts generally do not award punitive damages. Litigation in Germany is also subject to rules of procedure that differ from the U.S. rules, including with respect to the taking and admissibility of evidence, the conduct of the proceedings and the allocation of costs. Proceedings in Germany would have to be conducted in the German language, and all documents


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submitted to the court would, in principle, have to be translated into German. For these reasons, it may be difficult for a U.S. investor to bring an original action in a German court predicated upon the civil liability provisions of the U.S. federal securities laws against us, the members of our Administrative Board and senior management and the experts named in this prospectus. In addition, even if a judgment against our company, the non-U.S. members of our Administrative Board, senior management or the experts named in this prospectus based on the civil liability provisions of the U.S. federal securities laws is obtained, a U.S. investor may not be able to enforce it in U.S. or German courts.
 
The rights of shareholders in companies subject to German corporate law differ in material respects from the rights of shareholders of corporations incorporated in the United States.
 
Our company is a European public limited liability company incorporated in Germany and organized under the laws of Germany and the European Union. We are treated to a large extent like a German stock corporation (Aktiengesellschaft) and the rights of our shareholders are governed by German law, which differs in many respects from the laws governing corporations incorporated in the United States. For example, individual shareholders in German companies do not have standing to initiate a shareholder derivative action, either in Germany or elsewhere, including the United States, unless they meet certain thresholds set forth under German corporate law. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.


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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
 
Our consolidated financial statements are prepared in accordance with U.S. GAAP and expressed in U.S. dollars. In this prospectus, references to “dollars,” “$” or “USD” are to U.S. dollars. References to “euro,” “€” or “EUR” are to euro, the single currency of the participating member states in the Third Stage of the European Economic and Monetary Union, or EMU, of the Treaty Establishing the European Community, as amended from time to time. References to “pounds sterling,” “£” or “GBP” are to the British pound sterling. The noon buying rate of the Federal Reserve Bank of New York for the euro on September 24, 2010 was €1.00 = $1.3476. Unless otherwise specified, we have used this rate for translations related to this offering that are calculated in this prospectus.
 
We have prepared our consolidated financial statements in accordance with U.S. GAAP and in U.S. dollars beginning with the year ended December 31, 2007. We have not prepared financial information in accordance with U.S. GAAP for periods prior to January 1, 2007 for the following reasons:
 
  •  For the year ended December 31, 2006 and for the period from its formation on May 20, 2005 to December 31, 2005, our parent company, Rembrandt Holdings S.A., prepared its consolidated financial statements in accordance with International Financial Reporting Standards, as adopted by the European Union, which we refer to as IFRS, and reported in euro. We were not required to prepare a complete set of consolidated financial statements for these periods and did not voluntarily prepare consolidated financial statements in accordance with IFRS or any other home-country GAAP for either of the years ended December 31, 2006 or December 31, 2005. However, we reported limited financial information in accordance with IFRS to Rembrandt for its consolidation purposes. We do not have the necessary data to convert the available financial information into consolidated financial information prepared in accordance with U.S. GAAP and reported in U.S. dollars for these periods without incurring unreasonable cost and effort, and we would be required to make assumptions and estimates to do so that would affect the meaningfulness of those financial statements; and
 
  •  Our company was originally formed in October 2004 but did not start operations until the acquisition of Ruhrgas Industries Group in September 2005. For that reason, the consolidated financial information we provided to Rembrandt for 2005 only includes information about operations for the period from the date of our acquisition in September 2005 through the end of the year. Prior to its acquisition by Rembrandt, our businesses consisted of individual components of a different corporate group; the various entities that were acquired prepared financial statements only according to their respective statutory requirements and some did not prepare financial statements at all.
 
We therefore have not prepared and do not present selected consolidated financial data in accordance with U.S. GAAP for 2006 or any period within 2005 because of the unreasonable cost and effort involved with properly preparing, collecting, compiling and verifying all the financial information needed to prepare consolidated financial statements on a basis comparable to the financial statements we include in this prospectus.
 
For the reasons described above, we also have not prepared and do not present selected consolidated financial data in accordance with IFRS or other home-country GAAP for the years 2009, 2008, 2007, 2006 or any period within 2005 because such information is not readily available for the years 2009, 2006 and 2005 and we would incur additional cost and effort involved with properly preparing, collecting, compiling and verifying all the financial information needed to prepare consolidated financial information on a comparable basis that did not exist in such form at that time.
 
Likewise, we do not present selected financial data for 2006 and 2005 in accordance with U.S. GAAP or any selected financial data in accordance with IFRS for any period. Even if we were able to prepare these financial statements, we do not believe they would provide useful information for investors because of the many extensive changes in our Group that have taken place since these years.


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Our financial year ends on December 31 of each year. References to any financial year refer to the year ended December 31 of the calendar year specified.
 
Figures presented in tabular format may not add up to the total or percentages presented due to rounding.
 
We also present financial information that we calculate by translating the results from our entities that have functional currencies other than the U.S. dollar into dollars using the exchange rates of the prior year. We refer to this presentation as “constant currency.” The most important of these other functional currencies is the euro and to a lesser extent the pound sterling. For the purposes of these constant currency presentations, we have used the average exchange rates of euros for dollars, which were €1 = $1.3216 in the first six months of 2010, €1 = $1.3330 in the first six months of 2009, €1 = $1.3902 in 2009, €1 = $1.4633 in 2008 and €1 = $1.3689 in 2007, and the average exchange rates of pounds sterling for dollars, which were £1 = $1.5326 in the first six months of 2010, £1 = $1.4928 in the first six months of 2009, £1 = $1.5603 in 2009, £1 = $1.8315 in 2008 and £1 = $2.0016 in 2007.
 
In addition, this document contains inactive textual addresses of Internet websites operated by us and third parties. Reference to such websites is made for informational purposes only, and information found at such websites is not incorporated by reference into this document.


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SPECIAL NOTE REGARDING MARKET DATA
 
There are a number of studies that address either specific market segments, or regional markets, within our worldwide industry, most notably the 2009 Multi-Utility Meter Report prepared by ABS Energy Research, which focuses on the worldwide metering industry (and which we refer to as the ABS Report), and The Scott Report: AMR Deployments in North America (second quarter 2010), which mainly focuses on North America and contains some information about Smart Grid offerings in the North American market (and which we refer to as the Scott Report). The ABS Report and the Scott Report each provide data relating to parts of our industry and participants in it. However, given the rapid changes in our industry in its development towards the Smart Grid, no industry research that is generally available has covered some of the trends we view as key to understanding our worldwide industry and our place in it, such as expectations of the breakdown of manual read, AMR and AMI meters in different regions and for gas, electricity and water. For example, while the ABS Report covers meters, it contains no breakdowns among manual read, AMR and AMI meters, and the Scott Report does not make forecasts regarding market developments in AMR and AMI meters.
 
To assist us in formulating our business plan, which is multi-utility and global in nature, and in anticipation of this offering, we believe that it is important that we maintain as broad a view on industry developments as possible. We have over time retained several consultants to prepare general industry and market studies for us, including individual analyses of the gas, electricity and water metering and Smart Grid markets. L.E.K. Consulting GmbH, or L.E.K., prepared this type of report for us in 2009, and L.E.K. has updated parts of this report relating to worldwide market share data and the North American and some European markets at our request in 2010. We make use of the data contained in the updated report (which we refer to as the L.E.K. Report) to assist us in giving you information on the nature of our industry and our position in it.
 
We retained L.E.K. to assist us in developing a view on how to prioritize and address the Smart Grid opportunities that have presented themselves globally, and asked L.E.K. to conduct a comprehensive study, across 19 countries we and L.E.K. view as representative of the overall market. These countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Italy, Mexico, The Netherlands, New Zealand, Russia, Saudi Arabia, South Africa, Spain, the United Arab Emirates, the United Kingdom and the United States. In connection with L.E.K.’s preparation of their report, we furnished certain information about our company and the competitive environment to L.E.K. Then, L.E.K. conducted extensive research on its own in preparation of the report, including study of the market reports prepared by other parties, the conducting of more than 400 interviews with market participants in North America, Europe, Asia Pacific and other regions, and study of a broad range of secondary sources including other market reports, association and trade press, other databases and other sources.
 
Although we retained L.E.K. and provided L.E.K. some information to assist it in preparing its reports, we believe that L.E.K. sought to present a report similar to one that might have been prepared by an organization knowledgeable in the industry but not retained by a market participant. We base this belief on the work L.E.K. performed as described above, the nature of our working relationship with L.E.K. and on their statements concerning the report they produced. L.E.K. offers its services as a consulting company focused on market research and market and corporate strategy. Our work with L.E.K. was characterized by what we believe to have been a thorough review and verification by L.E.K. of information we provided to it. In its materials publicly offering its report to third parties, L.E.K. states that while it was commissioned by a client to conduct the study, it acted with the brief of providing an objective view of the industry and its likely development.
 
Due to the evolving nature of our industry and the relative paucity of multi-utility, global competitors, we believe that it is difficult for any market participant, including us, to provide precise data on the market or our industry. However, we believe that the market and industry data we present in this prospectus provide accurate estimates of the market and our place in it.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus, including particularly the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Industry” and “Our Company,” contains forward-looking statements. These forward-looking statements include statements regarding our financial position, our expectations concerning future operations, margins, profitability, liquidity and capital resources, our business strategy and other plans and objectives for future operations, and all other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “thinks,” “estimates,” “seeks,” “predicts,” “views,” “potential” and similar expressions.
 
Examples of forward-looking statements include statements concerning:
 
  •  our prospective market shares for products and services and by region;
 
  •  the expected penetration rates of Smart Grid technologies in existing and new markets;
 
  •  plans, objectives and expectations relating to future operations and related revenue generation and expenditures;
 
  •  the impact of our cost-saving measures and exchange rate fluctuations; and
 
  •  impacts of existing and potential legislative and regulatory initiatives.
 
Although we believe that these statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected, including, but not limited to:
 
  •  negative worldwide economic conditions and ongoing instability and volatility in the worldwide financial markets, including our ability to raise capital to refinance our indebtedness;
 
  •  the extent of the revenues we derive from sales to the utility industry;
 
  •  possible changes in current and proposed legislation, regulations and governmental policies, including with respect to radio frequency licensing and certification requirements;
 
  •  the timing and availability to our customers of government stimulus funding;
 
  •  volatility in the prices for, and availability of, components, raw materials and energy used in our business;
 
  •  our ability to manage our outsourcing arrangements;
 
  •  the economic, political and other risks and uncertainties associated with our global activities, and the business our subsidiaries have undertaken, and may continue to undertake, in countries subject to EU or U.S. sanctions and embargoes;
 
  •  the dependency of our business on our ability to develop new products and technologies and the possible failure or delay in successful new product development;
 
  •  the possibility that our products would fail to achieve or lose market acceptance or fail to perform to specification, the increasing competition we face, particularly from competitors that are well positioned in our areas of strategic focus, and our ability to win regional, national and international contracts from existing or new customers;
 
  •  our ability to attract and retain employees with skills in our areas of focus, including in particular our skilled personnel who are critical to the success of our business;
 
  •  fluctuations of our operating results due to the effect of exchange rates or other factors;
 
  •  risks relating to the offering and our shareholder structure, including the concentration of share ownership in the hands of existing shareholders, who will continue to be able to exercise


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  controlling influence on us and whose interests may not be aligned with those of other shareholders; and
 
  •  the other factors listed under “Risk Factors” and elsewhere in this prospectus.
 
Those factors, among others, could cause our actual results and performance to differ materially from the results and performance projected in, or implied by, the forward-looking statements. As you read and consider this prospectus, you should understand that the forward-looking statements are not guarantees of performance or results.
 
These factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us. Except as required by law, we do not have any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.
 
In addition, this prospectus contains information concerning our industry generally, and the Smart Grid market in particular, that is forward-looking in nature and is based on a variety of assumptions regarding the ways in which the metering and Smart Grid markets will develop. These assumptions have to some extent been derived from market research and industry reports referred to in this prospectus. Some data are also based on our good faith estimates, derived from our review of internal surveys and the external sources we describe above.


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds from this offering of approximately $152.1 million, after deducting the underwriting discount and the estimated offering expenses payable by us.
 
We will not receive any of the proceeds from sales of ADSs by Rembrandt or the Management KG or from any exercise of the underwriters’ over-allotment option to purchase additional ADSs from Rembrandt.
 
We intend to use the net proceeds we receive from this offering for the following purposes:
 
  •  We intend to use $143.9 million to pay outstanding debt under our Senior Facilities Agreement;
 
  •  We intend to use approximately $6.7 million to repay a loan made to us by the Management KG of €3.9 million ($5.3 million) in principal amount plus accrued interest in an amount expected to be approximately €1.0 million ($1.4 million). This loan matures on December 31, 2025 and accrues interest at an annual rate of 6.8%; and
 
  •  We expect to retain the remaining $1.5 million of the net proceeds in liquid assets over the medium term to support our liquidity position.
 
The following table shows the tranches we have drawn under our Senior Facilities Agreement that we intend to repay using proceeds from this offering.
 
                                                 
    Amount in
                Original
    Current
       
    Contract
    Amount in
    Amount in
    Maturity
    Interest
       
Tranche   Currency     Euro     Dollars (1)     Date     Rate (2)        
    (in millions)     (in millions)     (in millions)                    
 
Tranche A GBP
    £6.0       €7.0 (3)     $9.5       Sept. 30, 2012       2.08 %        
Tranche B EUR
  16.2       €16.2       $22.1       Sept. 30, 2013       2.52 %        
Tranche B USD
  $ 22.1       €16.2 (1)     $22.1       Sept. 30, 2013       2.26 %        
Tranche B1 EUR
  16.9       €16.9       $23.0       Sept. 30, 2013       2.52 %        
Tranche C EUR
  16.2       €16.2       $22.1       Sept. 30, 2014       3.02 %        
Tranche C USD
  $ 22.1       €16.2 (1)     $22.1       Sept. 30, 2014       2.76 %        
Tranche C1 EUR
  16.9       €16.9       $23.0       Sept. 30, 2014       3.02 %        
                                                 
Total
            €105.7       $143.9                          
                                                 
 
 
(1) Translated between euro to dollars at a rate of €1.00=$1.3611, the European Central Bank foreign exchange reference rate of euros for dollars on September 29, 2010.
 
(2) As of September 30, 2010.
 
(3) Translated from pounds sterling to euro at a rate of €1.00 = £0.8618, the European Central Bank foreign exchange reference rate of euros for pounds sterling on September 29, 2010.
 
For further information on the Senior Facilities Agreement and its requirements relating to prepayments and our leverage ratio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Facilities Agreement.”
 
Despite our international operations, we will not direct any of the proceeds from the sale of any ADSs to fund any operations in, finance any investments or activities in, or make payments to any country, entity or person with whom a U.S. person is prohibited from dealing under U.S. economic sanctions laws.


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DIVIDEND POLICY
 
We have not declared any cash dividends on our ordinary shares and have no present intention to pay dividends in the foreseeable future. Any recommendation by our Administrative Board to pay dividends will depend on many factors, including our financial condition, results of operations, legal requirements and other factors. In addition, our Senior Facilities Agreement currently limits the ability of our subsidiaries that are borrowers under the Senior Facilities Agreement to extend loans, pay dividends or make distributions to us. These subsidiaries are only permitted to pay dividends out of 50% of accumulated and unspent excess cash flow (as defined in the agreement) after certain mandatory loan prepayments, and only to the extent that total leverage ratio (calculated pursuant to the agreement) following such payment would not be greater than 2.5 to 1. These subsidiaries accounted for almost all our equity as of June 30, 2010. As a result, our company is in practice currently unable to pay dividends due to these restrictions.
 
In preparation for this offering, we and our lenders have amended the Senior Facilities Agreement. Under this amendment, the conditions relating to the payment of dividends have been modified, and the restrictions relating to the payment of dividends or extension of loans or advances to us have been removed. Consequently, starting in 2011, the Senior Facilities Agreement will permit us to pay dividends for the preceding year in an amount of up to 50% of our unconsolidated net income for that preceding year, determined in accordance with German GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Facilities Agreement.” We may also become subject to debt instruments or other agreements that limit our ability to pay dividends.
 
All of the shares represented by the ADSs offered by this prospectus will have the same dividend rights as all of our other outstanding shares. Any distribution of dividends proposed by our Administrative Board requires the approval of our shareholders in a shareholders’ general meeting. See “Articles of Association,” which explains in more detail the procedures we must follow and the German law provisions that determine whether we are entitled to declare a dividend.
 
For information regarding the German withholding tax applicable to dividends and related United States refund procedures, see “Taxation—German Taxation of ADSs.


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EXCHANGE RATES
 
Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar amounts received by owners of our ADSs on conversion of dividends, if any, paid in euro on the ordinary shares and will affect the U.S. dollar price of our ADSs on the NYSE. The table below shows the average and high and low exchange rates of U.S. dollars per euro for the periods shown. Average rates are computed by using the noon buying rate of the Federal Reserve Bank of New York for the euro on the last business day of each month during the period indicated.
 
         
Year Ended December 31,   Average  
 
2005
    1.2400  
2006
    1.2661  
2007
    1.3797  
2008
    1.4705  
2009
    1.3956  
Three Months Ended
       
March 31, 2010
    1.3685  
June 30, 2010
    1.3170  
 
The table below shows the recent high and low exchange rate for the U.S. dollar per euro.
 
                 
Month of 2010
               
March
    1.3758       1.3344  
April
    1.3666       1.3130  
May
    1.3183       1.2224  
June
    1.2385       1.1959  
July
    1.3069       1.2464  
August
    1.3282       1.2652  
September (through September 24)
    1.3476       1.2708  
 
The noon buying rate on September 24, 2010 was €1.00 = $1.3476.


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CAPITALIZATION
 
The following table sets forth, as of June 30, 2010:
 
  •  our actual consolidated capitalization; and
 
  •  our consolidated capitalization, as adjusted to reflect the sale of the ADSs in this offering and the application of a portion of the net proceeds to reduce debt as described under “Use of Proceeds.” We make a further adjustment to show the effect of the replacement of the preferred shares Rembrandt, our principal shareholder, has previously held with ordinary shares. For further information on this replacement, see “Our History and Recent Corporate Transactions—Capital Measures in Connection with the Offering.
 
                 
    As of June 30, 2010  
    Actual     As Adjusted  
    (in $ millions)  
 
Short term debt (1)(2)
    25.9       16.4  
                 
Long-term debt (1)(2)
    893.8       759.4  
Shareholder loan
    6.0       0.0  
Shareholders’ equity:
               
Preferred share capital (3)
    448.6       0.0  
Ordinary share capital (3)
    20.0       36.2  
Additional paid-in capital
    71.5       663.0  
Accumulated deficit
    -131.1       -131.1  
Accumulated other comprehensive income
    9.9       9.9  
                 
Total equity attributable to Elster Group SE
    418.9       578.0  
Noncontrolling interests
    7.9       7.9  
                 
Total equity
    426.7       585.9  
                 
Total capitalization
    1,352.4       1,361.7  
                 
 
 
(1) No third party has guaranteed any of our debt.
 
(2) None of our short term debt and $57.2 million of our long-term debt are related to our revolving credit facility under our Senior Facilities Agreement, which is secured.
 
(3) We had 16,320,750 ordinary shares authorized, issued and outstanding as of June 30, 2010 and 308,931,920 preferred shares authorized, issued and outstanding as of June 30, 2010. As adjusted for the offering and the replacement of the preferred shares, we will have 28,220,041 ordinary shares authorized and outstanding, and no preferred shares authorized and outstanding. See “Our History and Recent Corporate Transactions” for more information.


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DILUTION
 
If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and the net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ADS is substantially in excess of the net tangible book value per ADS attributable to our existing shareholders for our ordinary shares that will be outstanding immediately prior to the closing of this offering. We calculate net tangible book value per ordinary share by dividing the net tangible book value (total assets less intangible assets, total liabilities and noncontrolling interests) by the number of outstanding ordinary shares. Each ADS represents one-fourth of an ordinary share. For purposes of illustration, the following discussion assumes that all of our outstanding shares both before and after the offering are in the form of ADSs, each representing one-fourth of an ordinary share. Dilution is determined by subtracting net tangible book value per ADS from the initial public offering price per ADS.
 
Our net tangible book value as of June 30, 2010 was a negative $697.1 million, or negative $28.05 per ordinary share (equivalent to negative $7.01 per ADS). After giving effect to the sale of 16,200,000 ADS, which represent 4,050,000 of our ordinary shares, in this offering, less the underwriting discount and the estimated offering expenses payable by us and without taking into account any other changes in our net tangible book value after June 30, 2010, our pro forma as adjusted net tangible book value at June 30, 2010 would have been negative $538.0 million, or negative $19.06 per ordinary share (negative $4.77 per ADS). This represents an immediate increase in net tangible book value of $8.99 per ordinary share ($2.25 per ADS) to the existing shareholders and an immediate dilution in net tangible book value of negative $71.06 per ordinary share (negative $17.77 per ADS) to investors purchasing our ADSs in this offering. The following table illustrates this dilution per ordinary share and per ADS:
 
                 
    Per Share     Per ADS  
    (in $)  
 
Initial public offering price
    52.00       13.00  
Net tangible book value before the change attributable to new investors
    (28.05 )     (7.01 )
Increase in net tangible book value attributable to new investors
    8.99       2.25  
Pro forma net tangible book value after this offering
    (19.06 )     (4.77 )
Dilution to new investors
    (71.06 )     (17.77 )
 
The following table summarizes, on a pro forma basis to give effect to the replacement of preferred shares and the offering as of June 30, 2010, the number of our ADSs purchased during the past five years, the total consideration paid for those ADSs and the average price per ADS paid (before deducting the underwriting discount and our estimated offering expenses):
 
                                 
    ADSs Purchased During Past Five Years              
                Total Consideration
    Average Price per
 
    Number     Percent     in $ Millions     ADS in $  
 
Existing Shareholders (1)
    34,135,624       30.2       443.8       13.00  
New Shareholders
    16,200,000       14.4       210.6       13.00  
                                 
Total
    50,335,624       44.6       654.4       13.00  
                                 
 
 
(1) Our existing shareholders acquired the equivalent of 62,544,540 ADSs more than five years ago, representing 55.4% of our total number of ADSs on a pro forma basis as indicated above. They acquired these ADSs at an average price per ADS of $0.03.
 
The tables and discussions above assume that the underwriters’ over-allotment option has not been exercised.


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If the underwriters were to fully exercise the underwriters’ option to purchase 2,430,000 additional ADSs from the selling shareholders, the percentage of our ADSs held by existing shareholders would be 83.5%, and the percentage of our ADSs held by new investors would be 16.5%.
 
One of our existing shareholders is the Management KG. Some of the members of our Administrative Board, our Managing Directors and some of our other employees, as well as Rembrandt, hold interests in the Management KG. See “Related Party Transactions—The Management KG and Our Management Equity Program—The Management KG.
 
To the extent that we grant options or other equity awards to our employees or directors in the future, and those options or other equity awards are exercised or become vested or other issuances of shares of our ordinary shares are made, there will be further dilution to new investors.


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SELECTED FINANCIAL AND OTHER DATA
 
The following table presents selected consolidated financial and other data for the periods indicated. We derived the financial data as of and for the years ended December 31, 2009, 2008 and 2007 from our consolidated financial statements for these years. Our consolidated financial statements, which we have prepared in accordance with U.S. GAAP, have been audited and are included elsewhere in this prospectus. We derived the financial data as of and for the six months ended June 30, 2010 and 2009 from our unaudited interim consolidated financial statements for those periods, which are included elsewhere in this prospectus.
 
We have not provided selected financial data for 2006 and 2005 because to do so would have entailed unreasonable cost and effort. We do not believe that selected financial data for those years would have provided you with useful information. For a further discussion of our financial data for those years, see “Presentation of Financial and Other Information.”
 
                                         
          As of and for the Six Months Ended June 30,
 
    As of and for the Year Ended December 31,     (unaudited)  
    2009     2008     2007     2010     2009  
    (in $ millions except for per share and share data)  
 
Selected Consolidated Statement of Operations Data:
                                       
Revenues
    1,695.1       1,904.5       1,735.6         831.3       837.2  
Cost of revenues
    1,191.3       1,306.3       1,207.6       574.6       585.4  
                                         
Gross profit
    503.8       598.2       528.0       256.7       251.8  
Selling expenses
    159.4       183.4       166.5       80.8       76.9  
General and administrative expenses
    137.0       246.5       183.9       69.9       68.4  
Research and development expenses
    78.4       70.7       60.3       41.4       36.7  
Other operating income (expense), net
    14.8       -39.5       -2.9       -0.4       21.2  
                                         
Operating income
    143.8       58.2       114.4       64.3       90.9  
Interest expense, net
    55.4       117.3       126.9       38.4       25.3  
Other income, net
    3.3       2.9       2.9       1.7       1.4  
                                         
Total non-operating expenses
    52.1       114.4       124.0       36.6       23.9  
Income (loss) from continuing operations before income tax
    91.7       -56.2       -9.6       27.7       66.9  
Income tax expense
    39.3       30.9       28.0       11.1       25.1  
Net income (loss) from continuing operations
    52.3       -87.1       -37.6       16.5       41.8  
Net income from discontinued operations (1)
                114.5       2.6        
                                         
Net income (loss)
    52.3       -87.1       76.9       19.1       41.8  
Net income (loss) attributable to Elster Group SE
    48.9       -91.7       72.3       17.9       40.7  
Basic and diluted earnings (loss) per share from continuing operations (2)
    1.42       -5.68       -2.58       0.20       1.72  
Basic and diluted earnings (loss) per share (2)
    1.42       -5.68       4.44       0.36       1.72  
Weighted average number of shares Outstanding (3)
    16,320,750       16,320,750       16,320,750       16,320,750       16,320,750  
Unaudited pro forma earnings (loss) from continuing operations per share (4)
    1.97                   0.62        
Unaudited pro forma weighted average shares outstanding (4)
    24,854,656                   24,854,656        


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          As of and for the Six Months Ended June 30,
 
    As of and for the Year Ended December 31,     (unaudited)  
    2009     2008     2007     2010     2009  
    (in $ millions except for per share and share data)  
 
Basic and diluted earnings (loss) per ADS from continuing operations (5)
    0.36       -1.42       -0.65       0.05       0.43  
Basic and diluted earnings (loss) per ADS (5)
    0.36       -1.42       1.11       0.09       0.43  
Weighted average number of ADSs outstanding (5)
    65,283,000       65,283,000       65,283,000       65,283,000       65,283,000  
Unaudited pro forma earnings (loss) from continuing operations per ADS (4)(5)
    0.49                   0.16        
Unaudited pro forma weighted average ADSs outstanding(4)(5)
    99,418,624                   99,418,624        
                                         
Selected Cash Flow Data:
                                       
Net cash provided by operating activities
    119.6       114.1       110.9       37.0       76.0  
Net cash from (used in) investing activities
    -43.0       -79.0       46.0       -16.6       -18.9  
Net cash from (used in) financing activities
    -77.4       -8.7       -274.7       7.1       -56.4  
Selected Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
    75.4       74.3       53.0       99.0       74.7  
Total assets
    2,141.4       2,181.5       2,223.3       2,018.0       2,168.9  
Short term debt and current portion of long-term debt
    39.0       27.1       68.9       25.9       61.3  
Long-term debt, less current portion
    971.4       1,024.1       1,053.6       893.8       950.1  
                                         
Total debt
    1,010.4       1,051.2       1,122.5       919.7       1,011.4  
Shareholder loan
    6.8       6.2       408.3 (6)     6.0       6.4  
Total equity attributable to Elster Group SE
    416.6       412.9       -36.1       418.9       426.5  
Total equity
    422.7       418.8       -29.1       426.7       431.8  
                                         
Selected Operating and Other Data:
                                       
Backlog (7)
    445.3       542.1       383.5       508.7       424.0  
Capital expenditures
    30.5       81.8       53.5 (8)     18.1       22.0  
                                         
Reconciliation of Net Income Before Amortization of PPA to Net Income:
                                       
Net income (loss)
    52.3       -87.1       76.9       19.1       41.8  
Amortization of intangible assets on PPA, net of tax effect
    22.7       23.6       23.8       11.2       10.9  
                                         
Net income before amortization of PPA (9)
    75.0       -63.5       100.7       30.3       52.7  
                                         
                                         
Reconciliation of Adjusted EBITDA to Net Income:
                                       
Net income (loss)
    52.3       -87.1       76.9       19.1       41.8  
Net income from discontinued operations
                -114.5       2.6       0.0  
                                         
Net income (loss) from continuing operations
    52.3       -87.1       -37.6       16.5       41.8  

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          As of and for the Six Months Ended June 30,
 
    As of and for the Year Ended December 31,     (unaudited)  
    2009     2008     2007     2010     2009  
    (in $ millions except for per share and share data)  
 
Income tax expense
    39.3       30.9       28.0       11.1       25.1  
Interest expense, net
    55.4       117.3       126.9       38.4       25.3  
Depreciation and amortization
    85.4       85.3       85.8       42.6       42.0  
Foreign currency exchange effects
    -14.4       45.2       5.7       0.6       -17.7  
Management equity program
    -33.3       90.7       31.1       1.4       -10.6  
Expenses for preparation to become a public company
    23.0       7.0       0.0       6.6       7.5  
Strategy development costs
    3.6       7.8       4.6       0.3       0.4  
Employee termination and exit costs
    25.4       10.5       15.2       2.1       5.0  
Business process reengineering and reorganization costs
    16.8       3.2       13.3       2.1       5.4  
IT project costs
    8.6       3.6       4.2       0.9       1.0  
Gain from sales of real estate
    -2.5       -0.8       -3.4       0.0       -0.8  
Effects of termination of a distributor
                      9.0        
Pension curtailments
    0.0       0.0       -3.6       0.0       0.0  
Insurance recovery
    0.0       0.0       -2.6       0.0       0.0  
Business combination costs
    1.7       0.0       0.0       0.0       0.0  
Impairment of intangible assets
    2.3       1.3       0.0       0.0       0.0  
Other
    0.3       -0.2       0.2       -0.7       0.0  
                                         
Adjusted EBITDA (10)
    264.1       314.6       267.7       130.9       124.6  
                                         
                                         
Reconciliation of Free Cash Flow to Cash Flows From Operating Activities:
                                       
Cash flows from operating activities
    119.6       114.1       110.9       37.0       76.0  
Purchases of property, plant and equipment and intangible assets
    30.5       81.8       53.5       18.1       22.0  
                                         
Free cash flow (11)
    89.1       32.3       57.4       18.9       54.0  
                                         
 
 
(1) We disposed of the Ipsen Group, a manufacturer of industrial furnaces, as well as NGT Neue Gebäudetechnik GmbH, or NGT, in 2007 as part of our plan to focus on our core competencies. We included these businesses in discontinued operations. In the second quarter of 2010, we recorded a gain from the release of a provision in connection with a disposal as described in Note 3 to the unaudited condensed consolidated interim financial statements contained elsewhere in this prospectus.
 
(2) For more information on the calculation of our earnings (loss) per share, see Note 8 to the audited consolidated financial statements and Note 5 to the unaudited condensed consolidated interim financial statements contained elsewhere in this prospectus.
 
(3) Equal to the number of ordinary shares outstanding immediately prior to this offering. See “Our History and Recent Corporate Transactions—Our Current Capital Structure.”
 
(4) Unaudited pro forma earnings (loss) per share and unaudited pro forma weighted shares outstanding are based upon 24,854,656 shares issued and outstanding under the assumption that the preferred shares held by Rembrandt, our principal shareholder, are replaced immediately before the closing of this offering with ordinary shares. See “Our History and Recent Corporate Transactions—Capital Measures in Connection with the Offering.”
 
(5) Each ADS represents one-fourth of an ordinary share.
 
(6) In 2007, our shareholder loan reflects the value before our preferred equity certificates were contributed into our equity. See “Our History and Recent Corporate Transactions—Transactions Relating to Our Share Capital.”
 
(7) We define backlog as our total open purchase orders.

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(8) Our capital expenditures for 2007 include $5.5 million that were attributable to discontinued operations.
 
(9) We define net income before amortization of PPA as net income (loss) excluding the expenses associated with the amortization of that portion of our intangible assets that comprises the allocation of the purchase price we paid in our business acquisitions in excess of the previous carrying amount of the intangible assets before the acquisition occurred. We refer to the adjusted expense as amortization before PPA. We also present this amortization measure net of the income tax effects. We believe that this non-GAAP financial measure is useful to management, investors and financial analysts in assessing our company’s operating performance because it excludes the effect of the non-cash expenses that are related solely to the allocation of purchase prices paid in business acquisitions to those intangible assets acquired in connection with these business acquisitions. Fair values for these balance sheet items are determined as of the time of an acquisition and then amortized over their respective useful lives, which generally cannot be changed or influenced by management after the acquisition. By excluding these amortization expenses and the related income tax effects, we believe that it is easier for our management, investors and financial analysts to compare our financial results over multiple periods and analyze trends in our operations. For example, expenses related to amortization of intangible assets are now decreasing, but the positive effect of this decrease on our net income is not necessarily reflective of the operations of our businesses.
 
We provide a reconciliation of net income before amortization of PPA to net income, which is the closest financial measure calculated in accordance with U.S. GAAP, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.
 
(10) Adjusted earnings before interest, tax expense, depreciation and amortization, or Adjusted EBITDA, reflects adjustments for certain gains and charges for which we believe adjustment is permitted under our Senior Facilities Agreement as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.
 
The definition of Adjusted EBITDA used in our Senior Facilities Agreement permits us to make adjustments to our net income for certain cash and non-cash charges and gains. This measure is used in our Senior Facilities Agreement to determine compliance with financial covenants. Because this credit agreement and the financing provided under it are material to our operations, we have and continue to manage our business and assess our performance and liquidity by reference to the requirements of the Senior Facilities Agreement. We also use Adjusted EBITDA for a number of additional purposes. We use Adjusted EBITDA on a consolidated basis to assess our operating performance. We believe this financial measure on a consolidated basis is helpful in highlighting trends in our overall business because the items excluded in calculating Adjusted EBITDA have little or no bearing on our day-to-day operating performance. Adjusted EBITDA is also an important metric in the formula we use to determine the value of our company in connection with our management equity program, or MEP, we describe below.
We also use segment profit, a measure equal to Adjusted EBITDA, as the primary measure used by our management to evaluate the ongoing performance of our business segments. On a segment basis, we define segment profits as earnings of a segment before taxes, interest and depreciation and amortization, as well as certain gains and losses, and other income and expense determined by our senior management to have little or no bearing on the day-to-day operating performance of our business segments. The adjustments made to earnings of a segment before taxes, interest and depreciation and amortization correlate with the adjustments to net income in calculating Adjusted EBITDA on a consolidated basis pursuant to the Senior Facilities Agreement.
“Consolidated EBITDA,” as defined in the Senior Facilities Agreement, differs from the measure of Adjusted EBITDA we have disclosed in a way we believe is immaterial. This difference is that the Senior Facilities Agreement excludes the modest amount of dividends we receive from companies in which we hold minority interests, including those we account for using the equity method. We do not exclude these dividends when we calculate the measure of Adjusted EBITDA we disclose in this prospectus. These dividends totaled $3.3 million in 2009 and $2.9 million in each of 2008 and 2007, and were $1.7 million in the first six months of 2010 and $1.4 million in the first six months of 2009.
We provide a reconciliation of Adjusted EBITDA to net income, which is the closest financial measure calculated in accordance with U.S. GAAP, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.
(11) We define free cash flow as cash flows from operating activities less purchases of property, plant and equipment and intangible assets. Free cash flow is not defined under U.S. GAAP and may not be comparable with measures of the same or similar title that are reported by other companies. Under SEC rules, “free cash flow” is considered a non-GAAP financial measure. It should not be considered as a substitute for, or confused with, any U.S. GAAP financial measure. There are important limitations related to the use of free cash flow instead of cash flows from operating activities calculated in accordance with U.S. GAAP. We believe the most comparable U.S. GAAP measure to free cash flow is cash flows from operating activities. We report free cash flow to provide investors with a measure that can be used to evaluate changes in liquidity after taking capital expenditures into account. It is not intended to represent residual cash flow available for discretionary expenditures, since debt service requirements or other non-discretionary expenditures are not deducted. We urge you not to rely on any single financial measure to evaluate our business but instead to form your view on our business with reference to our audited annual consolidated financial statements included elsewhere in this prospectus and the other information we present in this prospectus. In 2007, free cash flow includes our discontinued operations. We describe free cash flow below under “Management’s Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources—Free Cash Flow.”


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with, our audited annual and unaudited interim consolidated financial statements and the accompanying notes and other financial information included elsewhere in this prospectus. We have prepared our consolidated financial statements in accordance with U.S. GAAP.
 
This discussion contains forward-looking statements. Statements that are not statements of historical fact, including expressions of our beliefs and expectations, are forward-looking in nature and are based on current plans, estimates and projections. Forward-looking statements are applicable only as of the date they are made. Except for any ongoing obligation to disclose material information as required by the U.S. federal securities laws, we do not have any intention or obligation to update forward-looking statements after we distribute this prospectus. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause our actual results or outcomes to differ materially from those expressed in any forward-looking statement. These factors include those identified under the headings “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
 
Executive Summary
 
In the first six months of 2010 and the 2009 financial year, worldwide economic conditions were the main factor that impacted our revenue development. Weak residential and commercial construction markets and a decline in utility investments in many of the regions in which we operate decreased demand for our gas, electricity and water products. Our utilization products faced an ongoing decline in demand due to a reduction in capital expenditures by our furnace builder customers and our customers in the metal and ceramics industries. By the end of the second quarter of 2010, our revenues, particularly in our water segment, began to reflect the early stages of an economic recovery in many regions in which we operate, and our new order intake expanded significantly across all three of our segments. These developments contributed to an aggregate decline of 0.7% in our revenues in the first six months of 2010 compared to the first six months of 2009 and a revenue decline of 11.0% in 2009 from 2008.
 
Exchange rates also played an important role in our results in 2009, although much less so in the first six months of 2010. In 2009, changes in foreign exchange rates, primarily through the strengthening of the U.S. dollar against many foreign currencies over the course of the year, had an adverse impact on our results. Had we translated our 2009 revenues from our entities that have functional currencies other than the U.S. dollar into dollars using the exchange rates of 2008 (which we refer to as a constant currency basis), we would have recorded revenues of $1,786.8 million in 2009, 6.2% lower than in 2008 compared to a reported decline of 11.0%. On a constant currency basis, our revenues in the first six months of 2010 would have been 2.7% lower than in the first six months of 2009.
 
Despite the overall decline in revenues from 2008 to 2009, revenues from Smart Offerings increased to approximately 26% of revenues in 2009 compared to approximately 19% in 2008. We define Smart Offerings to include AMR, AMI and Smart Grid solutions and individual products, components and services for use in the Smart Grid. We believe the ongoing investment in metering infrastructure combined with the changes now driving the implementation of new technologies, including Smart Grid solutions, present a growth opportunity for our company despite increasing competition from traditional metering companies and new entrants from outside the metering business. Accordingly, we expect the share of revenues derived from Smart Offerings to continue to increase over the full year 2010, even though it may vary on a quarter to quarter basis due largely to timing effects in our fulfillments of orders.
 
The increase in the portion of our revenues attributable to Smart Offerings in 2009 was largely a result of EnergyAxis deployments in the electricity segment, primarily in North America. We attribute


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this, in part, to a stronger and more effective sales focus on Smart Offerings. In the United States, we deployed EnergyAxis solutions for a range of large and mid-sized electricity and multi-utilities, including the Arizona Public Service Company, Salt River Project in Arizona and Black Hills. In 2009 and the first six months of 2010, we continued to deploy our Smart Offerings in several regions in Canada, Central America and Oceania. In 2009, we increased sales of smart water meters in Western Europe compared to 2008. In the first quarter of 2010, we booked a significant order for smart water meters with a customer in Kuwait.
 
In our gas segment, we recorded growth in 2009 in the Middle East and North Africa across a range of gasification related areas, including distribution stations and advanced C&I products associated with gas transmission and distribution projects. We define gasification as the expansion of natural gas infrastructure not previously connected to the gas grid. Distribution stations enable gas to be moved from transmission to distribution networks.
 
In the first six months of 2010, new orders entered into backlog, which we refer to as new order intake, increased when compared to the first six months of 2009. Our new order intake was $889.0 million in the six months ended June 30, 2010, up 24.1% from $716.5 million in the six months ended June 30, 2009. New order intake increased in all three segments.
 
As at December 31, 2009, total contracted future revenues, which we define as our total order backlog plus additional contract revenues under awarded contracts with an initial value of $500,000 or more, was more than $730 million. Additional contract revenues represent contracted deliverables for which orders have not yet been placed (and therefore do not include any items that we categorize as backlog). Total contracted future revenues were more than $800 million as at June 30, 2010. We describe our backlog and total contracted future revenues in more detail in “Our Company—Projects and Backlog.”
 
Our net income was $19.1 million in the six months ended June 30, 2010, compared to a net income of $41.8 million for the first six months of 2009. Our net income for 2009 was $52.3 million. This compares with a net loss of $87.1 million in 2008. The net loss in 2008 was largely attributable to the recognition of $90.7 million in non-cash expenses related to our management equity program, or MEP, the costs of which will terminate as a result of this offering, and $37.8 million in foreign exchange losses from the remeasurement of financial indebtedness at year-end exchange rates. While we incurred a charge related to the MEP in 2008, we recognized an MEP-related gain of $33.3 million in 2009 (of which $10.6 million related to the first six months of 2009). The MEP accounted for a non-cash charge of $1.4 million in the six months ended June 30, 2010. In 2009, we also recognized foreign exchange gains of $11.5 million from the remeasurement of financial indebtedness at year-end exchange rates. In the first six months of 2010, we incurred a gain of $0.3 million from the remeasurement of financial indebtedness compared to a gain of $17.0 million in the first six months of 2009.
 
Our management monitors our operating performance by analyzing Adjusted EBITDA, which is a non-GAAP financial measure. For a description and reconciliation of Adjusted EBITDA to net income, the closest U.S. GAAP financial measure, see “—Special Note Regarding Non-GAAP Financial Measures.” Our Adjusted EBITDA increased by $6.3 million, or 5.0%, from $124.6 million in the six months ended June 30, 2009 to $130.9 million in the six months ended June 30, 2010. On a constant currency basis, our Adjusted EBITDA increased by 5.7% to $131.7 million in the first six months of 2010. This increase was primarily driven by the higher gross profit, which resulted from the more favorable product mix in our gas segment and by an increase in the revenues in our water segment, offset by a decline in profitability in our electricity segment driven by the lower level of revenues in North America. Our Adjusted EBITDA decreased by 16.1% to $264.1 million in 2009 due to lower revenues. On a constant currency basis, Adjusted EBITDA decreased by 12.3% to $275.9 million in 2009.


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Key Factors Affecting Our Revenues and Expenses
 
A number of factors have contributed to our results of operations during recent periods. We summarize three of these key factors in the following text. We summarize additional factors, many of which are less related to our day-to-day operating activities than are the following key factors, below under “—Historical Factors Affecting Our Recent Results.
 
The Increasing Share of Smart Offerings in Our Revenues
 
We earn most of our revenues in each of our segments from the sale of meters, and expect this to continue to be the case in the coming periods. However, we expect an increasing portion of our revenues to be attributable to Smart Offerings, which we expect will include an increased, if comparatively modest, component of revenues from services and products other than meters. In addition, we expect average unit prices of meters to increase as technological complexity and functionality increases to support and complement other Smart Grid technologies. Furthermore, we believe that the pace of such technological improvements will shorten average meter life leading to more opportunities for revenue growth from regular replacement and upgrade cycles.
 
The Effects of Prices for Raw Materials and Components on Our Operations
 
The majority of the $1,191.3 million cost of revenues we incurred in 2009 and of the $574.6 million cost of revenues we incurred in the six months ended June 30, 2010 related to direct production materials, including commodities such as brass, steel and aluminum and other supplies for our products, such as brass castings, aluminum housings, sheet metal, plastics and printed circuit board assemblies and other electronics. Commodity prices can vary significantly from period to period and are affected by changes in global economic conditions, supply and demand trends, technological changes and related industrial cycles. For example, we have experienced substantial swings in the price of brass, copper, steel, aluminum and resins, and in components that include them, which are important materials for the manufacture of accurate and durable meters. We have been seeking to counter this price volatility that we have experienced by entering into supply contracts for some of our raw materials and components, with terms from about one month to about one year, in an effort to lock in prices when we perceive that price increases may occur and to manage the risk of supply shortages. For example, we entered into contracts covering our forecasted requirements for brass at prices we believe will, on average, prove to be competitive through the end of 2010. We intend to monitor market trends closely and adapt our supply contracts accordingly.
 
During 2010, we have experienced significantly extended lead times at those of our suppliers that provide electronic components used in some of our products. We believe that the resumption of economic growth in some of the world’s economies, and the resulting demand for electronic components generally across a range of industrial sectors, has resulted in an increase in demand (after capacities had been reduced during the downturn) for commoditized electronic components that those suppliers use in producing circuit boards for us as well as for other customers, including customers in unrelated industries. This has been the case despite the overall lower levels of demand for our own products. We believe that some of our most important markets, including in particular the residential and commercial construction markets in many of the regions in which we operate, have remained weaker than some other markets that require similar components, such as the worldwide electronics and computer markets. In some cases, we have been required to place orders for electronics and electronic components six months or more in advance to ensure timely availability of these components. Some of our other suppliers have imposed limitations not only on purchases of their electronic components, but in other areas as well.
 
Focus on Efficiency in Our Global Manufacturing and Supply Functions
 
Following our acquisition in September 2005, our management team initiated a Profit Improvement Program, or PIP. This program was designed to transform the operations that had been acquired


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into a single group focused on metering solutions by identifying manufacturing, supply chain and procurement processes within our company that could be made more efficient. Despite the beneficial effects of these programs, the impact of the financial crisis and economic downturn that began in 2008 led us to adopt a further program of efficiency improvements. These initiatives were intended to further rationalize our business and operations in the light of the macroeconomic conditions. In seeking to optimize our cost structure, we have also, through our PIP and other initiatives, focused on our sourcing, manufacturing footprint, overhead, indirect personnel and non-personnel related expense, capital expenditures and cash-related inventory control.
 
As part of our PIP, we are continuing to consolidate our production facilities, improve our production process, concentrate our production capacities in a reduced number of designated competence centers and transfer selected manufacturing activities to lower cost countries in order to gain efficiencies and manage costs. Our largest production centers are now concentrated in the United States, Germany and Slovakia. We were able to decrease our headcount by more than 10% from December 31, 2008 to December 31, 2009, despite having increased our R&D personnel and our sales force for Smart Offerings. In addition, as part of our current initiatives in the area of procurement, we have reduced the number of suppliers of direct production-related materials from approximately 4,000 in 2007 to approximately 3,500 by the end of 2009 with a strategic focus on a core group of companies that provide high quality supplies for our products. Furthermore, we intend to renegotiate terms and conditions with a number of suppliers and will continue to actively manage supplier risks.
 
Results of Operations
 
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
 
Revenues.  The following table presents data on our revenues for the periods indicated:
 
                 
    Six Months Ended June 30,
    2010   2009
    (in $ millions)
 
Revenues
    831.3       837.2  
                 
 
In the six months ended June 30, 2010, our revenues decreased by $5.9 million, or 0.7%, to $831.3 million compared to revenues of $837.2 million in the six months ended June 30, 2009. On a constant currency basis, our revenues decreased by 2.7%.
 
Our business has typically been impacted by the level of regional economic growth in the markets in which we operate. The economic downturn has resulted in decreased demand generally for goods and services worldwide. In particular, the decline of the new construction markets in the United States, the United Kingdom and Spain and a decline in utility investments in infrastructure have negatively affected demand for our products and services across all segments. The downturn in some of our important markets for C&I sales, especially in certain Eastern European countries, also had negative effects, including decreased demand for our electricity and gas products. By the end of the second quarter of 2010, our revenues, particularly in our water segment, began to reflect the early stages of an economic recovery in many regions in which we operate, and our new order intake expanded significantly across all three of our segments. Our order backlog increased by 14.2% in the first six months of 2010 as compared to December 31, 2009, as we booked new orders totaling $889.0 million during the first six months of 2010. This new order intake represented an increase of 24.1% over new order intake of $716.5 million we received during the first six months of 2009. The new order intake increased in all three segments. Late in the first quarter of 2010, our sales forces reported a resumption in the activity and requests for proposals in our electricity segment in the United States as the stimulus fund disbursement situation was clarified. By the end of the second quarter of 2010, we began to recognize an increase in demand in the electricity segment, which is reflected in an increase in order backlog in that segment.


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In the second quarter of 2010, we decided to adopt early an accounting policy related to revenue recognition in sales involving the delivery of multiple elements that include software. As a result, our revenues for the six months ended June 30, 2010 were approximately $3.9 million higher than revenues would have been using the previous accounting policies for revenue recognition. For more information, see “—Critical Accounting Policies—Revenue Recognition—Early Adoption of Accounting Pronouncement.”
 
In our gas segment, our revenues declined by $17.8 million, or 3.9%, in the six months ended June 30, 2010 as compared to the first six months of 2009. Demand for our gas utilization and for our C&I products, particularly in Europe, has declined as customers delayed their capital expenditures and scheduled grid maintenance and upgrades in anticipation of an economic recovery. In the second quarter of 2010, we began to record revenues from new gas infrastructure projects we started in Asia. However, these revenues did not compensate for the absence of revenues from our gas infrastructure projects in the Middle East and North Africa that we had started at the beginning of 2009 and completed later that year. In addition, the weak construction markets in the United States negatively impacted our gas segment, resulting in lower sales volumes for both residential and C&I gas meters. However, we experienced increased demand for our gas distribution products and gas regulators in the United States, and the demand for residential gas meters recovered in some major markets outside North America in the first six months of 2010.
 
In the six months ended June 30, 2010, the revenues in our electricity segment declined by $1.1 million, or 0.5%, as compared to the first six months of 2009. In the first six months of 2010, the delay in orders and contracts associated with uncertainty about the availability of stimulus funds in the United States negatively affected our revenues. An additional effect contributing to the decline was that in the first quarter of 2009, the revenues in our electricity segment were very high compared to previous quarters due to significant shipments of smart metering products as we ramped up our production capabilities for components of our EnergyAxis solutions at the end of 2008. However, by the end of the second quarter of 2010, our electricity segment’s order backlog had increased compared to the end of the second quarter of 2009. In addition, as described in “Risk Factors—Risks Related to Our Operations—We have recently experienced significantly extended lead times at some of our suppliers of electronic components. These have negatively impacted our revenues, particularly in our electricity segment. If we are unable to ensure sufficient supplies to prevent these lead times from lengthening, our results of operations, cash flows and financial condition may be adversely affected,” a further negative impact on our revenues from our electricity segment in the six months ended June 30, 2010 was attributable to significantly extended lead times at our suppliers that provide electronic components used in some of our electricity segment’s products.
 
The overall decline in revenues in our electricity segment was offset in part by an increase in revenues in our electricity segment in Western Europe as sales increased, due substantially to our larger portfolio of Smart Offerings. In addition, as a result of the change in accounting policy described above, the revenues of our electricity segment for the three and six months ended June 30, 2010 were approximately $3.9 million higher than revenues would have been in such periods using the previous accounting policies for revenue recognition.
 
Revenues in our water segment increased by $17.0 million, or 9.6%, as the demand recovered in North America supported by new product launches for our Smart Offerings. Furthermore, we experienced sales increases in Asia, where we won a large contract with a customer in Hong Kong, and in the Middle East. In Western Europe, demand for our water metering products was negatively affected by the continued weak construction market in certain countries such as the United Kingdom and Spain.
 
For more information on our revenue development and trends, see “—Results of Operations by Segment in the Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009.”


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Revenues by region.  The following table sets forth our revenues by region for the periods indicated. We categorize our revenues geographically based on the location to which we ship products or in which we provide services to our customers.
 
                 
    Six Months Ended June 30,
    2010   2009
    (in $ millions)
North America
               
United States
    227.8       225.1  
Other North America
    52.5       62.0  
                 
Total
    280.3       287.1  
Rest of the world
               
Germany
    119.2       132.1  
Europe outside Germany
    265.7       259.2  
Other
    166.1       158.8  
                 
Total
    551.0       550.1  
                 
Total
    831.3       837.2  
                 
 
Cost of revenues.  Our cost of revenues consists principally of expenses relating to:
 
  •  direct and indirect costs of raw materials and components;
 
  •  salaries, wages and indirect costs of labor, including the employer portion of social security and other payroll taxes;
 
  •  temporary employees;
 
  •  warranty expenses;
 
  •  other overhead and infrastructure expenses to the extent these relate to our manufacturing;
 
  •  related depreciation and amortization; and
 
  •  restructuring charges to the extent they relate to our manufacturing.
 
The following table sets forth our cost of revenues, gross profit and related data for the periods indicated.
 
                                 
    Six Months Ended June 30,
    2010   2009
        % of
      % of
    in $ millions   revenues   in $ millions   revenues
 
Cost of revenues
    574.6       69.1       585.4       69.9  
Gross profit
    256.7       30.9       251.8       30.1  
                                 
 
Our cost of revenues decreased by $10.8 million in the first six months of 2010, or 1.8%, compared to the six months of 2009. This decrease was primarily due to lower revenues. Our gross profit as a percentage of revenues decreased to 30.9% in the first six months of 2010 from 30.1% in the prior year period. Several factors combined to drive this development in gross margin:
 
  •  Our gas segment experienced a shift toward higher margin products in the first six months of 2010 compared to the prior year period. As part of several gas infrastructure projects, we delivered components during the first six months of 2009 that we purchased from third parties, which reduced our own profit margin.
 
  •  We wrote down inventory of $8.4 million in connection with our decision to terminate our relationship with one of our distributors of our electricity segment. We decided to cease doing


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  business with the distributor when we became aware that the distributor may have engaged in conduct on behalf of other parties that, if engaged in on our behalf, could have violated our compliance policies. When we terminated the relationship, we were unable to recover the value of inventory already in the possession of the distributor.
 
Selling expenses.  Selling expenses consist primarily of:
 
  •  salaries for personnel engaged in sales and marketing activities and the employer portion of social security and other payroll taxes;
 
  •  shipping and handling costs;
 
  •  commissions;
 
  •  marketing and advertising expenses;
 
  •  external services;
 
  •  overhead and infrastructure expenses; and
 
  •  related depreciation and amortization.
 
The following table sets forth information on our selling expenses for the periods indicated.
 
                                 
    Six Months Ended June 30,  
    2010     2009  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
Selling expenses
    80.8       9.7       76.9       9.2  
 
Selling expenses increased by $3.9 million in the first six months of 2010, or 5.0%, compared to the prior year period. The main reason for the increase was the expansion of our sales force that supports our key account and opportunity management teams in marketing our Smart Offerings, particularly in the United States and the European Union.
 
General and administrative expenses.  General and administrative expenses consist primarily of:
 
  •  salaries, including the employer portion of social security and other payroll taxes, not allocated to other functional costs;
 
  •  expenses for our Management Equity Program, or MEP, an incentive program sponsored by our principal shareholder for some of our key management personnel;
 
  •  expenses relating to our preparation to become a public company;
 
  •  other overhead costs not allocated to manufacturing, R&D and selling;
 
  •  IT costs not allocated to other functional costs;
 
  •  external services, professional services and consultancy fees;
 
  •  banking fees; and
 
  •  related depreciation and amortization.


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The following table sets forth information on our general and administrative expenses for the periods indicated.
 
                                 
    Six Months Ended June 30,  
    2010     2009  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Management Equity Program
    1.4       0.2       -10.6       -1.3  
Other general and administrative expenses
    68.5       8.2       79.0       9.4  
                                 
Total general and administrative expenses
    69.9       8.4       68.4       8.2  
                                 
 
Our general and administrative expenses increased by $1.5 million, or 2.2%, in the first six months of 2010. The increase in general and administrative expenses was primarily due to the shift to a non-cash expense of $1.4 million in the six months ended June 30, 2010 compared to the non-cash $10.6 million gain related to the MEP in the first six months of 2009. In compensation expense, we recognize amounts determined by reference to a formula-based valuation of the shares in our company under the MEP. After this offering, we will no longer be required to recognize any charges or income related to the MEP. For more information relating to the MEP, see “Related Party Transactions.”
 
Our general and administrative expenses other than those relating to the MEP decreased by $10.5 million, or 13.3%, in the first six months of 2010 as compared to the first six months of 2009. In the first six months of 2009, we recorded higher reorganization expenses than in the first six months of 2010, largely in respect of severance payments. The decline was partly offset by additional costs that we began to incur in anticipation of becoming a public company especially in respect of legal advice and other external services. We built up additional functions and hired personnel for departments such as investor relations and internal control necessary for a public company. For more information relating to these expenses, see “—Historical Factors Affecting Our Recent Results—Expenses for Preparation to Become a Public Company.”
 
Research and development expenses.  Research and development, or R&D, expenses consist primarily of:
 
  •  salaries for R&D personnel, including the employer portion of social security and other payroll taxes;
 
  •  external services;
 
  •  consulting expenses associated with R&D activities;
 
  •  depreciation and amortization of our R&D assets; and
 
  •  other overhead and infrastructure cost associated with our R&D activities.
 
The following table sets forth information on our R&D expenses for the periods indicated.
 
                                 
    Six Months Ended June 30,  
    2010     2009  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Research and development expenses
    41.4       5.0       36.7       4.4  
 
Our research and development expenses increased by $4.7 million, or 12.8%, in the first six months of 2010 as compared to the prior year period. We have increased our R&D headcount, as well as our use of external services, including engineering consultants and research institutes, particularly in connection with our development of Smart Offerings.


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Other operating income (expense), net.  Other operating income (expense), net mainly includes currency gains and losses. The following table sets forth information on other operating income (expense), net for the periods indicated.
 
                                 
    Six Months Ended June 30,  
    2010     2009  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Other operating income (expense), net
    - 0.4       0.0       21.2       2.5  
 
The decrease in other operating income is mainly due to lower currency gains of $−0.6 million in the six months ended June 30, 2010 compared to $17.7 million in the prior year period.
 
Interest expense, net.  The following table sets forth information on interest expense, net for the periods indicated.
 
                                 
    Six Months Ended June 30,  
    2010     2009  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Interest expense, net
    38.4       4.6       25.3       3.0  
 
Interest expense, net increased by $13.1 million, or 51.8%, from $25.3 million in the first six months of 2009 to $38.4 million in the first six months of 2010. This increase resulted mainly from higher negative fair value of our interest rate swaps.
 
Other income, net.  The following table sets forth information on other income, net for the periods indicated.
 
                                 
    Six Months Ended June 30  
    2010     2009  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Other income, net
    1.7       0.2       1.4       0.2  
 
Other income, net includes miscellaneous income, such as income from equity accounted investees and dividends from investments, and expenses not associated with other functional areas.
 
Income tax expense.  The following tables set forth information on our income tax expense for the periods indicated.
 
                                 
    Six Months Ended June 30,  
    2010     2009  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Income tax expense
    11.1       1.3       25.1       3.0  
 
Our income tax expense decreased by $14.0 million, or 55.7%, to $11.1 million in the six months ended June 30, 2010 based on estimated tax rates for the year, primarily a result of lower income from continuing operations.
 
Net income from discontinued operations.  The following table sets forth information on net income from discontinued operations for the periods indicated.
 
                                 
    Six Months Ended June 30,  
    2010     2009  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Net income from discontinued operations
    2.6       0.3              


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In the second quarter of 2010, we recorded a gain from the release of a provision in connection with a disposal as described in Note 3 to the unaudited condensed consolidated interim financial statements.
 
Net income.  The following table sets forth information on net income for the periods indicated.
 
                                 
    Six Months Ended June 30,  
    2010     2009  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Net income
    19.1       2.3       41.8       5.0  
 
We recognized net income of $19.1 million in the six months ended June 30, 2010 compared to net income of $41.8 million in the prior year period.
 
Adjusted EBITDA.  The following table sets forth information on our Adjusted EBITDA for the periods indicated. Adjusted EBITDA is a non-GAAP financial measure. It is based on the profitability measure defined in our Senior Facilities Agreement, and we use this measure for many purposes in managing and directing our company. It is not, however, a substitute for net income or any other measure calculated in accordance with U.S. GAAP. We present a reconciliation of Adjusted EBITDA to net income, together with other important disclosure, below under “—Special Note Regarding Non-GAAP Financial Measures.”
 
                                 
    Six Months Ended June 30,  
    2010     2009  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Adjusted EBITDA
    130.9       15.7       124.6       14.9  
 
Our Adjusted EBITDA increased by $6.3 million, or 5.0%, from $124.6 million in the six months ended June 30, 2009 to $130.9 million in the six months ended June 30, 2010. On a constant currency basis, our Adjusted EBITDA increased by 5.7% to $131.7 million in the first six months of 2010. This increase was primarily driven by the higher gross profit, which resulted from the more favorable product mix in our gas segment and an increase in revenues in our water segment. Adjusted EBITDA was negatively impacted as we built up additional functions, including investor relations and internal control, in anticipation of our becoming a public company.
 
Our Adjusted EBITDA is equal to our consolidated segment profit as shown in our segment results appearing below.
 
Results of Operations by Segment in the Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009.
 
The following table sets forth operating data and segment profit for each of our three segments, gas, electricity and water.
 
                                                 
    Gas     Electricity     Water  
    Six Months Ended June 30,  
    2010     2009     2010     2009     2010     2009  
    in $ millions  
 
Total revenues
    442.1       459.9       206.5       207.6       193.9       176.9  
                                                 
thereof to external customers
    439.8       459.0       199.0       203.4       192.5       174.8  
thereof to other segments
    2.4       0.9       7.5       4.2       1.4       2.1  
Segment profit
    105.6       99.7       19.5       20.3       19.3       15.5  
                                                 


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We prepare our segment reporting in accordance with U.S. GAAP and report our segment profitability based on our internal reporting methodology for managing our segments, assessing their results internally and allocating our internal resources. This methodology may be different than those of other companies, and you should consider this in making any comparisons with other companies. For further information regarding our segment results, see Note 22 to our consolidated financial statements and Note 14 to our condensed consolidated interim financial statements included elsewhere in this prospectus.
 
We assess the performance of our segments using the measure “segment profit.” In determining segment profit, our management either adjusts for a number of items that it believes have little or no bearing on the day-to-day operating performance of our business segments or does not allocate those items to the segments. These include the categories of items that we describe in more detail below under “—Historical Factors Affecting Our Recent Results.
 
The adjustments made to determine segment profit correlate to the adjustments we make to net income when we calculate Adjusted EBITDA on a consolidated basis based on the definition in the Senior Facilities Agreement. We have used this measure of segment profitability due to the importance to our company of the financial covenants in the Senior Facilities Agreement. Our group management has therefore required the segments to manage their operating businesses with the financial covenants in mind. In addition, group management assumes the responsibility from an initial accountability point of view for those non-operating and other matters that it believes are more appropriately attributable to the group function. We believe this has assisted us in achieving consistency across our Group on these matters while simplifying the monitoring of their effects on our financial covenants.
 
Gas
 
Revenues.  In the six months ended June 30, 2010, the revenues of our gas segment decreased by $17.8 million, or 3.9%, from $459.9 million in the first six months of 2009 to $442.1 million in 2010. On a constant currency basis, our revenues in the gas segment decreased by 4.0% as compared to the first six months of 2009. In the second quarter of 2010, we began to record revenues from new gas infrastructure projects we started in Asia. However, these revenues did not compensate for the absence of revenues from our gas infrastructure projects in the Middle East and North Africa that we started at the beginning of 2009 and completed later that year. The decline in our revenues was also caused by the reduction of sales of our metering products in North America. The continuing weakness in the construction market of the United States impacted the demand for both our residential and C&I meters and we also experienced weaker demand for C&I products in Europe. However, we experienced increased demand for our gas distribution products and gas regulators in the United States, and the demand for residential gas meters recovered in some major markets outside North America in the first six months of 2010. In addition, the worldwide economic downturn negatively affected the demand for our gas utilization products as industrial end-users, particularly furnace builders and the metal and ceramics industries, kept capital expenditures at a low level. This impacted our business in Europe, where the majority of our customers for gas utilization products are located.
 
Segment profit.  Our segment profit in our gas segment increased by $5.9 million, or 5.9%, from $99.7 million in the first six months of 2009 to $105.6 million in the first six months of 2010 despite the reduction in the revenues. The segment profit margin increased by 2.2 percentage points from 21.7% in 2009 to 23.9% in 2010.
 
The segment profit of our gas segment was higher in the first six months of 2010 mainly due to a shift away from lower margin meters and equipment delivered in the context of several gas infrastructure projects in the first six months of 2009. These projects included a larger proportion of components that we purchased from third parties, reducing our own profit margin in the first quarter of 2009. In addition, we further improved our cost base in the gas segment through our restructuring


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initiatives at two sites in Germany and reducing headcount at our sites in the Unites States and in Slovakia which we did in 2009. This was partly offset by an increase in variable selling expenses due to the customer and product mix. In addition, we continued to increase our R&D activities and retained external engineering consultants and research institutes in connection with the development of new products, particularly for our Smart Offerings. During the first six months of 2010, we introduced a new residential gas regulator in North America, and in Europe, we introduced a smart gas meter index and expanded our two-stage regulator. We also continued our development of a new generation of ultrasonic flow meters for C&I gas applications and delivered the first units during the second quarter of 2010.
 
Electricity
 
Revenues.  In the six months ended June 30, 2010, the revenues of our electricity segment decreased by $1.1 million, or 0.5%, from $207.6 million in the six months ended June 30, 2009 to $206.5 million. On a constant currency basis, our revenues decreased by 4.1%.
 
The decrease in revenues in the first six months of 2010 was mainly driven by delays in contracts to be supported by stimulus funds in the United States due to uncertainty surrounding the tax status of the public funds, asset ownership, and local commission funding support. Utilities remained cautious, delaying their purchasing decisions until these issues were clarified. Meanwhile, the stimulus funds are now being granted to the utilities and we are seeing an increase in the activities of our sales pipeline. Revenues were also negatively affected by our termination of the distributor relationship we describe below. A further negative impact on our revenues from our electricity segment in the six months ended June 30, 2010 was significantly extended lead times at some of our suppliers of our electronic component products during 2010. We believe that the increase in demand for commoditized electronic components that some of our suppliers use in producing circuit boards for us during the recent economic growth has affected their ability to deliver as rapidly as required. See “Risk Factors—Risks Related to Our Operations—We have recently experienced significantly extended lead times at some of our suppliers of electronic components. These have negatively impacted our revenues, particularly in our electricity segment. If we are unable to ensure sufficient supplies to prevent these lead times from lengthening, our results of operations, cash flows and financial condition may be adversely affected.” For instance, in one project where we supply the meters but complement them with a third-party communication module, the producer of the module has not met its obligations to deliver the requisite quantities as scheduled. These developments resulted in lower revenues for our meters compared to the six months ended June 30, 2009. Delayed investments of utilities led to lower revenues in Asia. An additional effect contributing to the decline was that in the first quarter of 2009, the revenues in our electricity segment were very high compared to previous quarters due to significant shipments of smart metering products as we ramped up our production capabilities for components of our EnergyAxis solutions at the end of 2008.
 
This decrease was partly offset by higher revenues mainly in Western Europe resulting in part from increased sales of our Smart Offerings. In addition, by the end of the second quarter of 2010, we experienced an increase in the order intake of our electricity segment. In the second quarter of 2010, we decided to adopt early an accounting policy related to revenue recognition in sales involving the delivery of multiple elements that included software. As a result, the revenues in our electricity segment for the three and six months ended June 30, 2010 were approximately $3.9 million higher than revenues would have been using the previous accounting policies for revenue recognition. For more information, see “—Critical Accounting Policies—Revenue Recognition—Early Adoption of Accounting Pronouncement.”
 
Segment profit.  Our segment profit in electricity decreased by $0.8 million, or 3.9%, from $20.3 million in the first six months of 2009 to $19.5 million in the six months ended June 30, 2010. The segment profit margin decreased by 0.3 percentage points from 9.8% in the six months ended June 30, 2009 to 9.5% in the six months ended June 30, 2010. On a constant currency basis, our


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segment profit was $18.9 million in the six months ended June 30, 2010, a decrease of 7.2% compared to the six months ended June 30, 2009.
 
The decrease in segment profit was mainly driven by the lower level of revenues in North America, whereas the decrease in segment profit margin is a result of fixed structure costs associated with partial ramping of resources for expected future revenues. In addition, the increased interest many customers have shown in considering our Smart Offerings, especially in the United States as the stimulus funds have become available and in Europe, has led to increased expenditure for our efforts to win this business. These expenditures include responding to requests for qualifications and related origination activities, while we have not begun to generate the revenues that would be associated with these contract wins. The decrease in margin in the electricity segment was partly offset by the fact that we generated higher revenues in Western Europe through increased sales of higher margin products from our expanded Smart Offerings portfolio.
 
As a result of our ongoing investments in new products, we incurred higher R&D expenses in the six months ended June 30, 2010. We further upgraded our EnergyAxis system and launched new product variants of our residential and C&I electric meters. We also increased our sales force focused on marketing our Smart Offerings.
 
Water
 
Revenues.  In the six months ended June 30, 2010, the revenues of the water segment increased by $17.0 million, or 9.6%, to $193.9 million from $176.9 million in the first six months of 2009. On a constant currency basis, our revenues in the water segment increased by 4.7%.
 
We recorded higher sales in North America, where demand for our volumetric residential and C&I related meter products increased. This was supported by new product launches in our Smart Offerings and other C&I portfolios. We increased our sales in the Middle East and Asia, where we predominantly sold more residential products. In Western Europe, demand for our water metering products was negatively impacted by the weak construction markets in certain countries, such as the United Kingdom and Spain.
 
Segment profit.  The segment profit in our water segment increased by $3.8 million, or 24.3%, from $15.5 million in the first six months of 2009 to $19.3 million in the six months ended June 30, 2010. The segment profit margin increased by 1.1 percentage points, from 8.8% in the first six months of 2009 to 9.9% in the six months ended June 30, 2010. On a constant currency basis, our water segment profit increased by 18.4% to $18.4 million in the six months ended June 30, 2010 compared to the six months ended June 30, 2009.
 
The increase in segment profit was largely a result of higher revenues in product groups with higher margins, such as our volumetric residential and C&I related products. We further invested in R&D activities, enhancing our smart meter water solutions for the United States and our residential metering product offering, mainly for European markets.
 
Financial Year Ended December 31, 2009 Compared to Financial Year Ended December 31, 2008
 
Revenues.  The following table presents data on our revenues for the periods indicated:
 
                 
    Year Ended December 31,  
    2009     2008  
    (in $ millions)  
 
Revenues
    1,695.1       1,904.5  
                 
 
In 2009, our revenues decreased by $209.4 million, or 11.0%, to $1,695.1 million compared to revenues of $1,904.5 million in 2008. On a constant currency basis, our revenues declined by 6.2%.


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The decrease in revenues was mainly driven by worldwide economic conditions, which have negatively affected the demand for our meters and other products, as our customers decreased investments and deferred decisions relating to new capital expenditures.
 
In our gas segment, our revenues declined by $229.6 million, or 20.3% as construction of new homes in North America slowed and demand for our C&I and utilization products by industrial customers also declined. The decline was offset in part by project related investments for distribution stations and advanced C&I meters in connection with ongoing gasification projects in the Middle East and North Africa.
 
Revenues in our electricity segment grew by $49.0 million, or 12.1%, as we recorded increased revenues from EnergyAxis systems we are deploying in North America and higher unit sales of both our residential and C&I meters.
 
Revenues in our water segment decreased by $28.1 million, or 7.3%, as reduced levels of new construction in certain markets, such as in the United Kingdom, led to lower overall demand for our meters. The declines were offset in part by higher revenues in North America and in Western Europe mainly due to increased sales of our submetering products and our Smart Offerings.
 
For more information on our revenue development and trends, see “—Results of Operations—Financial Year Ended December 31, 2009 Compared to Financial Year Ended December 31, 2008.”
 
Revenues by region.  The following table sets forth our revenues by region for the periods indicated. We categorize our revenues geographically based on the location to which we ship products or in which we provide services to our customers.
 
                 
    Year Ended December 31,  
    2009     2008  
    (in $ millions)  
North America
               
United States
    448.0       440.9  
Other North America
    111.2       92.0  
                 
Total
    559.2       532.9  
Rest of the world
               
Germany
    256.0       309.0  
Europe outside Germany
    510.5       641.3  
Other
    369.4       421.3  
                 
Total
    1,135.9       1,371.6  
                 
Total
    1,695.1       1,904.5  
                 
 
Cost of revenues.
 
The following table sets forth our cost of revenues, gross profit and related data for the periods indicated.
 
                                 
    Year Ended December 31,  
    2009     2008  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Cost of revenues
    1,191.3       70.3       1,306.3       68.6  
Gross profit
    503.8       29.7       598.2       31.4  
                                 
 
Our cost of revenues decreased by $115.0 million in 2009, or 8.8%, compared to 2008. This decrease was primarily due to lower revenues in our gas segment and to a lesser extent in our water segment, which reduced the direct costs of materials and related costs. Currency effects also contributed to the decrease in cost of revenues.


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Our gross profit as a percentage of revenues decreased to 29.7% in 2009 from 31.4% in 2008. Several factors combined to drive this decrease in gross margin:
 
  •  As a consequence of the Smart Offering driven growth in our electricity segment, coupled with revenue declines in our gas segment due to macroeconomic conditions, we experienced a shift in our mix of products towards our electricity segment during 2009. Our electricity segment products, particularly during the design, development and expansion phases of new technologies, have been characterized by lower margins than those of our gas business.
 
  •  Volatile prices for raw materials also negatively affected our gross margin. The prices we paid for raw materials, including brass, steel and aluminum, fell significantly during the second half of 2008 as a result of the global economic downturn. In an effort to reduce our exposure to commodity price fluctuations, we entered into supply contracts with some of our suppliers at fixed prices, in some cases before the price for these materials declined. These contracts locked us into fixed prices in early 2009 as market prices decreased. We entered into replacements for most of these contracts during the course of 2009, fixing lower supply costs for many of these raw materials. We expect to benefit from these lower contract prices if raw material prices become volatile and increase in 2010.
 
  •  We incurred restructuring and employee termination expenses in 2009. As part of our initiative to improve the efficiency of our supply chain, including the outsourcing of sub-assemblies, we restructured some of our facilities, most of which were in Europe and North America. As these initiatives occurred during 2009, our gross profit does not reflect the full-year impact of the results of these restructuring activities.
 
  •  Manufacturing costs represented a higher percentage of revenues in 2009 than in 2008 as a result of the decline in capacity utilization in our manufacturing facilities.
 
  •  In 2008 we made significant investments in technical equipment and machinery at our sites in connection with our improvement initiatives. As a result, depreciation on manufacturing equipment increased in 2009 compared to 2008.
 
Selling expenses.
 
The following table sets forth information on our selling expenses for the periods indicated.
 
                                 
    Year Ended December 31,  
    2009     2008  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
Selling expenses
    159.4       9.4       183.4       9.6  
 
Selling expenses decreased by $24.0 million in 2009, or 13.1%, compared to 2008. This decrease was primarily due to lower variable selling expenses, such as commissions and shipping expenses mainly driven by lower overall sales volumes as well as currency effects. In addition, average freight costs declined. Cost control initiatives we implemented in early 2009, relating mostly to advertising, supplies and other miscellaneous expenses also contributed to the decline.
 
Offsetting this decline in part were increased expenses relating to our sales organization. While our overall sales headcount decreased, we have expanded the portion of our sales force, which supports our key account management organization and the opportunity management teams which we continue to build up to market our Smart Offerings and related solutions, particularly in the United States and the European Union.


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General and administrative expenses.
 
The following table sets forth information on our general and administrative expenses for the periods indicated.
 
                                 
    Year Ended December 31,  
    2009     2008  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
Management Equity Program
    -33.3       -2.0       90.7       4.8  
Other general and administrative expenses
    170.3       10.1       155.8       8.1  
                                 
Total general and administrative expenses
    137.0       8.1       246.5       12.9  
                                 
 
Our general and administrative expenses decreased by $109.5 million, or 44.4%, in 2009. Our lower general and administrative expenses were primarily due to the non-cash $33.3 million gain related to the MEP. The MEP accounted for general and administrative expenses of $90.7 million in 2008. In compensation expense, we recognize amounts determined by reference to a formula-based valuation of the shares in our company under the MEP. That formula is based on our Adjusted EBITDA. Because, as discussed below, our Adjusted EBITDA declined in 2009, the valuation of the company used for the MEP also declined. After this offering, we will no longer be required to recognize any charges or income related to the MEP. For more information relating to the MEP, see “Related Party Transactions.”
 
Our general and administrative expenses other than those relating to the MEP increased by $14.5 million, or 9.3%, in 2009 as compared to 2008. This increase related mainly to expenses of $23.0 million that we incurred in our preparation to become a public company, as compared to expenses of $7.0 million in 2008. For more information relating to these expenses, see “—Historical Factors Affecting Our Recent Results—Expenses For Preparation to Become a Public Company.
 
Research and development expenses.
 
The following table sets forth information on our R&D expenses for the periods indicated.
 
                                 
    Year Ended December 31,  
    2009     2008  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Research and development expenses
    78.4       4.6       70.7       3.7  
 
Our research and development expenses increased by $7.7 million, or 10.9%, in 2009 as compared to 2008.
 
We increased our R&D activities as we intensified our focus on our Smart Offerings, particularly in developing enhancements to EnergyAxis and additional functionalities for our smart meters for both use in residential and C&I context. In our electricity segment, we completed development work on a polyphase modular smart electricity meter that accommodates all existing communication modules. In our gas segment, we invested in the development of a new generation of ultrasonic flow meters for C&I gas applications. In our water segment, we continued to enhance and extend our product offering for volumetric water meters with polymer bodies. In addition, we launched a single jet water meter that is designed to deliver improved measuring performance and comes pre-equipped for communication. In connection with these activities, we increased our R&D headcount and contracted for external services, including engineering consultants and research institutes. The increase in R&D expenses was partially offset by currency effects.


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Other operating income (expense), net.  Other operating income (expense), net mainly includes currency gains and losses. The following table sets forth information on other operating income (expense), net for the periods indicated.
 
                                 
    Year Ended December 31,  
    2009     2008  
          % of
    in $
    % of
 
    in $ millions     revenues     millions     revenues  
Other operating income (expense), net
    14.8       0.9       -39.5       -2.1  
 
Most of our other operating income (expense), net was comprised of currency gains of $14.4 million in 2009 and currency losses of $45.2 million in 2008. We describe these currency gains and losses below in “—Historical Factors Affecting Our Recent Results—Foreign Exchange Effects.
 
Interest expense, net.  The following table sets forth information on interest expense, net for the periods indicated.
 
                                 
    Year Ended December 31,  
    2009     2008  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Interest expense, net
    55.4       3.3       117.3       6.2  
 
Interest expense, net decreased in 2009 by $61.9 million, or 52.8%, from $117.3 million in 2008 to $55.4 million in 2009. This decrease resulted mainly from lower interest rates on outstanding euro-denominated floating rate amounts under our Senior Facilities Agreement as market rates declined substantially, and the repayment of debt. In addition, we exchanged most of the mandatorily redeemable preferred equity certificates into equity in December 2008. This was partially offset by increased amounts we were required to pay on interest rate swaps due to the declining interest rate environment.
 
We incurred non-cash interest expense of $0.4 million in 2009 and of $26.4 million in 2008 in connection with our mandatorily redeemable preferred equity certificates and shareholder loan.
 
Other income, net.  The following table sets forth information on other income, net for the periods indicated.
 
                                 
    Year Ended December 31,  
    2009     2008  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Other income, net
    3.3       0.2       2.9       0.2  
 
Other income, net includes miscellaneous income, such as dividends from investments, and expenses not associated with other functional areas. Other income, net increased by $0.4 million in 2009 compared to 2008.
 
Income tax expense.  The following tables set forth information on our income tax expense for the periods indicated.
 
                                 
    Year Ended December 31,  
    2009     2008  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Income tax expense
    39.3       2.3       30.9       1.6  
 


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    Year Ended December 31,  
    2009
    2008
 
    %     %  
Effective tax rate
    42.9       -55.0 (1)
 
 
(1) The negative tax rate in 2008 refers to the fact that we recorded income taxes despite having incurred a loss from continuing operations before taxes. The $30.9 million in income taxes for 2008 was equal to -55.0% of our income from continuing operations before income taxes. For the calculation of our effective tax rates, see Note 7 to our audited consolidated financial statements included elsewhere in this prospectus.
 
Our income tax expense increased by $8.4 million, or 27.2%, to $39.3 million in 2009. This amount is equal to 42.9% of income from continuing operations before income tax for 2009. In 2009, our income from continuing operations before income tax was also affected by the gain recorded in general and administrative expense as a consequence of the reduction in the MEP valuation. Our tax expenses include changes in valuation allowances on deferred tax assets of $12.6 million in 2009 as compared to $11.4 million in 2008 and expenses for uncertain tax positions of $8.2 million in 2009 as compared to $2.9 million in 2008. We expect, assuming other conditions do not change, that our marginal tax rate will trend towards 36% to 39%, taking into consideration the current level of earnings, the distribution of those earnings among various taxing jurisdictions, our business development based on our mid-term business plan and assuming no changes in tax laws.
 
Net income (loss).  The following table sets forth information on net income (loss) from continuing operations for the periods indicated.
 
                                 
    Year Ended December 31,  
    2009     2008  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Net income (loss)
    52.3       3.1       -87.1       -4.6  
 
We recognized net income of $52.3 million in 2009 after having incurred a net loss of $87.1 million in 2008.
 
Adjusted EBITDA.  The following table sets forth information on our Adjusted EBITDA for the periods indicated.
 
                                 
    Year Ended December 31,  
    2009     2008  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Adjusted EBITDA
    264.1       15.6       314.6       16.5  
 
Our Adjusted EBITDA declined by $50.5 million, or 16.1%, from $314.6 million in 2008 to $264.1 million in 2009. On a constant currency basis, our Adjusted EBITDA decreased by 12.3% to $275.9 million in 2009. This decrease was primarily driven by overall revenue decline as well as the shift in our product mix described above from our relatively higher margin gas segment to our relatively lower margin electricity segment. The revenue driven increase in gross profit in our electricity segment was not sufficient to compensate for the decline in revenues in our gas segment. As a result, Adjusted EBITDA declined slightly as a percentage of sales by 0.9 percentage points.

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Our Adjusted EBITDA is equal to our consolidated segment profit as shown in our segment results appearing below.
 
Results of Operations by Segment in the Financial Year Ended December 31, 2009 Compared to Financial Year Ended December 31, 2008
 
The following table sets forth operating data and segment profit for each of our three segments, gas, electricity and water.
 
                                                 
    Gas     Electricity     Water  
    Year Ended December 31,  
    2009     2008     2009     2008     2009     2008  
    in $ millions  
Total revenues
    899.8       1,129.4       453.1       404.1       355.9       384.0  
                                                 
thereof to external customers
    898.1       1,127.4       445.1       395.4       352.0       381.7  
thereof to other segments
    1.7       2.0       8.0       8.7       3.9       2.3  
Segment profit
    204.0       264.1       60.4       35.0       30.4       32.3  
                                                 
 
Gas
 
Revenues.  In 2009, the revenues of our gas segment decreased by $229.6 million, or 20.3%, from $1,129.4 million in 2008 to $899.8 million in 2009. On a constant currency basis, our revenues decreased by 15.8%.
 
The decline in our revenues was caused mainly by the worldwide economic downturn. The weak construction market in the United States during 2009 contributed to lower demand for both our residential and C&I meters, our gas distribution products and our gas regulators. The decline in our revenues was also due in part to a reduction in inventory levels, as some of our utility and distributor customers sought to reduce inventory in the face of weak demand in construction. This effect was partly offset by higher average prices for our residential meters in the United States.
 
In addition, the worldwide economic downturn negatively affected the demand for our gas utilization products as our industrial customers in the furnace engineering and machine tool industries decreased their capital expenditures in light of the economic downturn, resulting in significant volume reductions. This effect mainly impacted our revenues in Europe and Asia, where the majority of our customers for gas utilization products are located.
 
In Western Europe, demand for our gas metering products was negatively impacted by the weak construction markets in certain countries and deferred investment decisions by utilities as they wait on adopting new technologies and wait on responding to changing regulations. In Central and Eastern Europe, demand for our residential and C&I meters also suffered as a result of declining investments by utilities in response to the economic downturn. Increased investment by our customers in gas infrastructure projects in the Middle East and North Africa partially offset this revenue decline, as distribution stations and other advanced C&I meters with communication capabilities were delivered.
 
Segment profit.  Our segment profit in gas decreased by $60.1 million, or 22.8%, from $264.1 million in 2008 to $204.0 million in 2009. The segment profit margin slightly decreased by 0.7 percentage points from 23.4% in 2008 to 22.7% in 2009. On a constant currency basis, our gas segment profit decreased to $212.3 million, or 19.6%, in 2009 compared to 2008.
 
The segment profit of our gas segment was lower in 2009 mainly due to a shift to lower margin products. These products comprised lower margin meters and equipment delivered in the context of several distribution station projects containing a larger proportion of components that we purchased from third parties thereby reducing our own profit margin. In addition, capacity utilization was lower in 2009 than in 2008. These effects were offset in part by the results of our cost-saving initiatives in the segment and lower market prices for some raw materials for which we had not entered into fixed


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contracts. We improved our cost base in the gas segment through cost-saving initiatives at two sites in Germany and reducing headcount at our sites in the Unites States and in Slovakia. Our distribution and selling expenses also declined due to lower sales commissions and lower variable shipping and handling costs.
 
In our gas segment, we increased R&D activities and retained external engineering consultants and research institutes in connection with our introduction of new products. In North America, we introduced a gas module for EnergyAxis and new types of gas regulators. Elsewhere, we introduced a new encoder for gas meters with wired communication and worked on a new generation of ultrasonic flow meters for C&I gas applications.
 
Electricity
 
Revenues.  In 2009, the revenues of our electricity segment increased by $49.0 million, or 12.1%, from $404.1 million in 2008 to $453.1 million. On a constant currency basis, our revenues increased by 16.4%.
 
The increase in revenues in our electricity segment was primarily driven by the increase in our Smart Offerings, mainly from deployments in North America. In the United States, we deployed EnergyAxis systems, including residential and C&I smart meters for electricity utilities and multi-utilities, under contracts with, among others, Arizona Public Service Company, Salt River Project in Arizona, Black Hills and several mid-sized utilities. We also deployed EnergyAxis systems in several regions in Canada and Central America. Outside North America, we recorded higher revenues in the Middle East, mainly due to one large order of smart meters. Our revenues also increased in Western Europe, in part due to investments in the energy infrastructure. To that end, we are engaged in more than a dozen Smart Offering pilot projects in the European Union.
 
The increase in our revenues was offset in part by lower sales in Eastern and Central Europe, which were negatively affected by the economic downturn. In these regions, demand for our C&I meters declined as utilities decreased investment and deferred decisions relating to new capital expenditures. In Latin America, our revenues declined largely due to decreased sales of manual-read meters in response to the economic downturn.
 
Segment profit.  Our segment profit in electricity increased by $25.4 million, or 72.6%, from $35.0 million in 2008 to $60.4 million in 2009. The segment profit margin increased by 4.6 percentage points from 8.7% in 2008 to 13.3% in 2009. On a constant currency basis, our segment profit was $62 million in 2009, an increase of 77.1% compared to 2008.
 
The increase in our segment profit reflected higher margins, due in large part to a more favorable product mix among our electricity products year to year, particularly in North America. In addition, we improved utilization of capacity at our Raleigh, North Carolina site where we ramped up production of our new REX 2 residential meter. We also introduced various improvements to our design production and engineering and implemented several procurement initiatives. These positive impacts were offset in part by a reduction in volumes of our higher margin C&I meters in Eastern and Central Europe. In addition, we incurred higher costs, as a substantial portion of the sales force expansion we describe above took place in the electricity segment. We also incurred higher R&D expense in our electricity segment in connection with the R&D initiatives previously described.
 
Water
 
Revenues.  In 2009, the revenues of the water segment decreased by $28.1 million, or 7.3%, from $384.0 million in 2008 to $355.9 million in 2009. On a constant currency basis, our revenues in water decreased by 1.2%.
 
Our revenues were mainly affected by the worldwide economic downturn, as we recorded lower sales due to weaker construction demand in our key markets, such as the United Kingdom. In addition, we experienced lower sales volume in the Middle East. This decrease was partially offset by


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increased sales in North America despite challenging market conditions, mainly driven by the reorganization of our sales activities, our modified product offering and to a lesser degree various pilots of our Smart Offerings for water, including our Evolution product line. We also partially offset the decline in revenues in Western Europe with increased sales of our submetering products and Smart Offerings.
 
Segment profit.  The segment profit in our water segment decreased by $1.9 million, or 5.9%, from $32.3 million in 2008 to $30.4 million in 2009. The segment profit margin increased by 0.1 percentage points from 8.4% in 2008 to 8.5% in 2009. On a constant currency basis, our water segment profit was $33.0 million, an increase of 2.2% in 2009 compared to 2008.
 
The slight decrease in segment profit was largely a result of lower revenues. In addition, although we were not able to benefit from the full effect of the decrease of average raw material prices for brass and bronze in 2009 due to fixed-price contracts we had entered into earlier, we reduced our dependence on these raw materials with the introduction of our latest generation of polymer meters, which reduces cost and limits exposure to market price volatility. Our structural costs benefited from several restructuring projects including the rationalization of our operations in Latin America and in United Kingdom. We centralized our manufacturing lines in Central Europe and continued outsourcing certain non-core processes.
 
Our R&D expenses declined slightly between 2008 and 2009. We invested in enhancing our smart meter water solution for the United States and other markets. In addition we introduced a new residential volumetric meter that incorporates polymer materials. In 2009, we also launched a new single jet meter with improved measuring performance that is pre-equipped for AMR functionality.
 
Financial Year Ended December 31, 2008 Compared to Financial Year Ended December 31, 2007
 
Revenues.  The following table presents data on our revenues for the periods indicated:
 
                 
    Year Ended December 31,  
    2008     2007  
    (in $ millions)  
Revenues
    1,904.5       1,735.6  
 
In 2008, our revenues increased by $168.9 million, or 9.7%, to $1,904.5 million compared with revenues of $1,735.6 million in 2007. We experienced the highest rate of growth in our electricity segment, where revenues increased by 19.1%. Our gas segment grew at a strong rate as well, increasing by 8.6% and accounting for more than half of our overall revenue increase. On a constant currency basis, we recorded revenues that were 7.5% higher than in 2007.
 
The growth in our electricity segment reflected both an increase in the volume of unit sales and an increase in unit price due to a shift in product mix towards higher-value residential and C&I smart meters. The increase in revenues of our electricity segment occurred primarily in the fourth quarter of 2008 as a result of increased sales following the introduction of our REX 2 residential smart meters.
 
Revenues of our gas segment increased by $89.7 million, mainly due to increases in sales of our metering products, with gains in Europe and Asia offsetting a decline in sales in North America. Gas infrastructure projects in China, the Middle East and North Africa contributed to this increase. In the United States, the decline in housing starts negatively impacted sales of our meters, our gas regulators and our gas distribution products. In addition, higher revenues from sales of our gas utilization products contributed to the revenue increase.
 
Revenues of our water segment also increased by $16.1 million in 2008 compared to 2007 primarily as a result of increased unit sales in the Middle East, Eastern Europe and South America. This increase was partially offset by a decline in sales in Western Europe. In addition, demand in our North American markets remained soft as a result of the economic downturn and decline in the new residential and C&I construction markets.


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For more information on our revenue development and trends, see “—Results of Operations.”
 
Revenues by region.  The following table sets forth our revenues by region for the periods indicated. We categorize our revenues geographically based on the location to which we ship products or in which we provide services to our customers.
 
                 
    Year Ended December 31,  
    2008     2007  
    (in $ millions)  
North America
               
United States
    440.9       426.2  
Other North America
    92.0       94.1  
                 
Total
    532.9       520.3  
                 
Rest of the world
               
Germany
    309.0       291.0  
Europe outside Germany
    641.3       578.4  
Other
    421.3       345.9  
                 
Total
    1,371.6       1,215.4  
                 
Total
    1,904.5       1,735.6  
                 
 
Cost of revenues.  The following table sets forth our cost of revenues, gross profit and related data for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Cost of revenues
    1,306.3       68.6       1,207.6       69.6  
Gross profit
    598.2       31.4       528.0       30.4  
                                 
 
Cost of revenues increased by $98.7 million in 2008, or 8.2%, compared to 2007. This increase was primarily attributable to the increase in manufacturing expenses, primarily driven by our increased sales volume. In addition, higher expenses for raw materials, supplies and personnel contributed to this increase.
 
We improved our gross profit in 2008 compared to 2007 primarily as a result of an increase in product margins due to a favorable product mix, particularly in Europe and North America. This positive development was offset in part by lower volumes in North America in each of the gas and water segments. We also increased our capacity utilization throughout our facilities in 2008, which had a positive effect on our gross profit margin. In addition, prices for raw materials were extremely volatile in 2008. The prices we paid for brass, aluminum and steel fell significantly in the second half of 2008 on the back of reduced demand due largely to the worldwide financial crisis. Overall, however, our results of operations were negatively impacted in 2008 compared to 2007 by the higher average prices of these materials.
 
Selling expenses.  The following table sets forth information on our selling expenses for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Selling expenses
    183.4       9.6       166.5       9.6  


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Selling expenses increased in 2008 by $16.9 million, or 10.2%, compared to 2007. This increase was primarily due to higher fixed selling expenses, in particular compensation expense for our sales and marketing forces, as well as higher shipping and handling costs. Both fixed and variable compensation expenses increased as we expanded our key account management organization and opportunity management teams to market our Smart Offerings and related solutions, a process that continued in 2009. Shipping and handling costs increased due to higher volumes and increased average freight rates.
 
General and administrative expenses.  The following table sets forth information on our general and administrative expenses for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
Management Equity Program
    90.7       4.8       31.1       1.8  
Other general and administrative expenses
    155.8       8.1       152.8       8.8  
                                 
Total
    246.5       12.9       183.9       10.6  
                                 
 
Our general and administrative expenses increased in 2008 by $62.6 million, or 34.0%, compared to 2007. This was primarily due to increased non-cash compensation expenses relating to the MEP. The MEP accounted for $90.7 million of our general and administrative expenses in 2008 and $31.1 million in 2007.
 
In addition, expenses of $7.0 million related to our preparation to become a public company contributed to this increase in 2008. There were no such expenses in 2007. For more information relating to these expenses, see “—Historical Factors Affecting Our Recent Results—Expenses for Preparation to Become a Public Company.” The remaining other general and administrative expenses decreased slightly.
 
Research and development expenses.  The following table sets forth information on our R&D expenses for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Research and development expenses
    70.7       3.7       60.3       3.5  
 
Research and development expenses increased in 2008 by $10.4 million, or 17.3%, compared to 2007. This was primarily due to an increase in the R&D headcount and, to a lesser extent, increases in external services costs and indirect materials costs.
 
We have increased our R&D efforts in connection with our expanding product and solutions portfolio, particularly as it relates to the Smart Grid. In 2008, we focused especially on enhancing EnergyAxis and developing further functionality in both smart and manual-read electricity meters for residential and C&I purposes. In addition, we invested in the development of a new generation of ultrasonic flow meters for C&I gas applications, introduced a new generation of gas distribution products and invested in the further development of our polymer meters for our water segment.
 
Other operating expense, net.  The following table sets forth information on other operating expense, net for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Other operating expense, net
    39.5       2.1       2.9       0.2  


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In 2008, other operating expense, net consisted primarily of the $45.2 million currency loss we describe below in “—Historical Factors Affecting Our Recent Results—Foreign Exchange Effects.” In 2007, currency losses totaled $5.7 million.
 
Interest expense, net.  The following table sets forth information on the interest expense (net) for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
Interest expense, net
    117.3       6.2       126.9       7.3  
 
Interest expense, net decreased in 2008 by $9.6 million, or 7.6%, from $126.9 million in 2007 to $117.3 million in 2008 as a result of a reduction in outstanding liabilities combined with more favorable interest margins under the Senior Facilities Agreement as our leverage decreased. This reduction was partly offset by a higher decrease in fair value of the interest rate swaps compared to 2007.
 
In 2008 and 2007, interest expense, net mainly included the interest payable to the lenders under our Senior Facilities Agreement. In addition, we incurred non-cash interest expense of $26.4 million in 2008 and $25.6 million in 2007 in connection with our mandatorily redeemable preferred equity certificates due to our shareholders. Most of the mandatorily redeemable preferred equity certificates were exchanged for preferred shares included in our equity in December 2008.
 
Other income, net.  The following table sets forth information on other income, net for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Other income, net
    2.9       0.2       2.9       0.2  
 
Other income, net included miscellaneous income and expenses not associated with other functional areas. Other income, net increased by less than $0.1 million in 2008 compared to 2007.
 
Income tax expense.  The following tables set forth information on our income tax expense for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Income tax expense
    30.9       1.6       28.0       1.6  
 
         
    Year Ended December 31,
    2008
  2007
    %   %
 
Effective tax rate
  -55.0 (1)   -289.8 (1)
 
 
(1) The negative tax rate refers to the fact that we recorded income taxes despite having incurred a loss from continuing operations before taxes. For example, the $30.9 million in income taxes for 2008 was equal to -55.0% of our loss from continuing operations before taxes. For the calculation of our effective tax rates, see Note 7 to our audited consolidated financial statements included elsewhere in this prospectus.
 
Our income tax expense in 2008 increased by $2.9 million, or 10.4% compared to 2007. We reported income tax expense in 2008 and 2007 despite a loss before income taxes for a number of reasons, including the non-cash expenses relating to the MEP, which are not deductible for tax purposes.


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Net loss from continuing operations.  The following table sets forth information on net loss from continuing operations for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
Net loss from continuing operations
    87.1       4.6       37.6       2.2  
 
Net loss from continuing operations was $87.1 million in 2008 compared to a net loss from continuing operations of $37.6 million in 2007. The increased losses in 2008 over 2007 were primarily due to the strong increase of compensation expenses for the MEP and foreign currency losses from the remeasurement of our foreign currency denominated indebtedness.
 
Net income from discontinued operations.  The following table sets forth information on net income from discontinued operations for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Net income from discontinued operations
                114.5       6.6  
 
We disposed of the Ipsen Group, a manufacturer of industrial furnaces, as well as NGT in 2007, as part of the plan we adopted in 2005 to focus on our key competencies. We included these businesses in discontinued operations.
 
Net income (loss).  The following table sets forth information on net income (loss) for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Net income (loss)
    -87.1       -4.6       76.9       4.4  
 
Our net loss of $87.1 million in 2008 represented a decline from our net income of $76.9 million in 2007.
 
Adjusted EBITDA.  The following table sets forth information on our Adjusted EBITDA for the periods indicated.
 
                                 
    Year Ended December 31,  
    2008     2007  
          % of
          % of
 
    in $ millions     revenues     in $ millions     revenues  
 
Adjusted EBITDA
    314.6       16.5       267.7       15.4  
 
Our Adjusted EBITDA increased by $46.9 million, or 17.5%, from 2007 to 2008. On a constant currency basis, our Adjusted EBITDA increased by 12.8% to $301.9 million in 2008. The primary driver of this increase was our increase in revenues. We were able to increase our Adjusted EBITDA as a percentage of sales by 1.1 percentage points largely as a result of our focus on costs. Our total costs have increased substantially mainly due to the extraordinary cost items not reflected in Adjusted EBITDA, primarily the MEP and the impact of exchange rate fluctuations, resulting in a net loss for 2008.


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Results of Operations by Segment in the Financial Year Ended December 31, 2008 Compared to Financial Year Ended December 31, 2007
 
The following table sets forth operating data and segment profit for each of our three segments, gas, electricity and water.
 
                                                 
    Gas     Electricity     Water  
    Year Ended December 31,  
    2008     2007     2008     2007     2008     2007  
    in $ millions  
Total revenues
    1,129.4       1,039.7       404.1       339.3       384.0       367.9  
                                                 
thereof to external customers
    1,127.4       1,032.5       395.4       336.4       381.7       366.7  
thereof to other segments
    2.0       7.2       8.7       2.9       2.3       1.2  
Segment profit
    264.1       233.3       35.0       43.4       32.3       21.0  
                                                 
 
Gas
 
Revenues.  In 2008, the revenues of the gas segment increased by $89.7 million, or 8.6%, from $1,039.7 million in 2007 to $1,129.4 million in 2008. On a constant currency basis, our gas segment revenues increased by 5.0%.
 
In 2008, increased demand from Europe and the rest of the world was partially offset by decreased sales in North America. Infrastructure investments in certain regions such as the Middle East and Asia, focused particularly on our C&I products and distribution stations, also drove the increase in segment revenues. In addition, following a strong start, the economic downturn that took hold in 2008 increasingly affected our gas utilization products later in the year as order intake softened.
 
Segment profit.  The segment profit in our gas segment increased by $30.8 million, or 13.2%, from $233.3 million in 2007 to $264.1 million in 2008. The segment profit margin increased by 1.0 percentage points from 22.4% in 2007 to 23.4% in 2008. On a constant currency basis, segment profit increased by 8.1% in 2008 compared to 2007.
 
Our segment profit increase was mainly due to a favorable product mix, as we sold a larger percentage of relatively higher priced C&I and gas utilization products. This development was support by restructuring initiatives, including at one of our sites in the United Kingdom. The increase in our segment profit was offset by higher average prices for raw materials, an increase in shipping and handling costs and the increased personnel costs in research and development.
 
Electricity
 
Revenues.  In 2008, the revenues of the electricity segment increased by $64.8 million, or 19.1%, from $339.3 million in 2007 to $404.1 million in 2008. On a constant currency basis, the revenues in our electricity segment in 2008 only increased by $58.8 million or 17.3%.
 
The revenue growth in our electricity segment reflected both an increase in the volume of unit sales and an increase in unit price due to a shift in product mix towards higher-value residential and C&I smart meters. The increase in revenues occurred primarily in the fourth quarter of 2008 and in particular in North America, as our sales increased when our REX 2 residential smart meters were introduced to the market.
 
We increased our revenues in Europe during the beginning of the year. Later in the year, our business was affected by the first impact of the economic downturn, particularly among demand for our higher-priced C&I meters in Russia, where we saw utilities cut back their investments into infrastructure. In addition, we increased our revenues in Latin America, in part due to sales of several EnergyAxis systems in Central America, higher sales of manual-read meters in certain countries and increased investments into the energy infrastructure.


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Segment profit.  The segment profit in our electricity segment decreased by $8.4 million, or 19.4%, from $43.4 million in 2007 to $35.0 million in 2008. The segment profit margin decreased by 4.2 percentage points from 12.8% in 2007 to 8.6% in 2008. On a constant currency basis, our segment profit for the electricity segment decreased by 19.4%.
 
Segment profit declined despite an increase in our electricity segment revenues. This was in large part due to the decline of our traditional high margin business in a number of countries that were significantly affected by the economic downturn. In addition, our capacity utilization in our Raleigh, North Carolina facility was not consistent throughout the year, as a disproportionate level of production at that site occurred late in the year when the production of the REX 2 meter was introduced. On the expense side, we incurred substantial costs to increase our sales force as we built infrastructure to market and sell our Smart Offerings. This increase also required that we increase our segmental support services. In addition, we expanded our R&D headcount to support our push into Smart Grid solutions. We offset some of these costs with profit improvement initiatives, including a cost reduction program in the procurement process for our C&I meter business in North America.
 
Water
 
Revenues.  In 2008, the revenues of our water segment increased by $16.1 million, or 4.4%, from $367.9 million in 2007 to $384.0 million in 2008. On a constant currency basis, our revenues increased by 2.7%.
 
The increase in our revenues was mainly the result of higher volumes in the Middle East. In addition, increased sales of water meters with AMR functionalities in Europe, despite the difficult economic conditions, also contributed to this increase. Overall, however, operations in Europe remained behind our expectations due to the lower sales volumes in the United Kingdom, where the slowdown in the residential housing market had a significant negative impact on our business. Due to the weak housing market in the United States, we also recorded lower sales volumes in North America.
 
Segment profit.  The segment profit in our water segment increased by $11.3 million, or 53.8%, from $21.0 million in 2007 to $32.3 million in 2008. The segment profit margin increased by 2.7 percentage points from 5.7% in 2007 to 8.4% in 2008. On a constant currency basis, segment profit increased by 54.8% in 2008 compared to 2007.
 
We completed several reorganization and outsourcing projects designed to reduce our cost base mainly at our sites in Western Europe. These initiatives positively impacted our segment profit. Despite a higher sales volume, the cost of goods sold for our water segment remained relatively stable in 2008 on a constant currency basis despite higher average raw material prices. In 2008, our structural costs increased slightly, particularly due to an increase in R&D expenses as we increased our headcount in this area. Additionally, our personnel expenses increased as we grew our sales force and added additional key management positions.
 
Historical Factors Affecting Our Recent Results
 
Our results in the six months ended June 30, 2010 and 2009 and each of 2009, 2008 and 2007 were significantly affected by a number of factors relating to our corporate history, measures we have taken to transform our company and our preparation to become a public company. The factors we describe below are those that we have taken into account in calculating our Adjusted EBITDA, which we describe in more detail below, and are the items that our management does not allocate to the segments in calculating segment profit. These factors are:
 
  •  foreign currency exchange effects;
 
  •  the management equity program, or MEP;


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  •  expenses for our preparation to become a public company;
 
  •  employee termination and exit costs;
 
  •  business process reengineering and reorganization costs;
 
  •  IT project costs;
 
  •  gain from sales of real estate;
 
  •  strategy development costs;
 
  •  effects of the termination of a distributor;
 
  •  business combination costs;
 
  •  pension curtailments;
 
  •  impairment of intangible assets;
 
  •  insurance recovery; and
 
  •  other items.
 
In addition, we disposed of Ipsen Group, a manufacturer of industrial furnaces, as well as NGT Neue Gebäudetechnik GmbH, or NGT, in 2007, as part of our plan to focus on our core competencies. As we included these businesses in discontinued operations in 2007, they did not have an effect on our continuing operations, but did have a significant impact on our net income in 2007 due to the gain we realized from their sale.
 
Foreign Exchange Effects
 
As a result of our international operations, we are subject to risks associated with the fluctuations of foreign currencies against other foreign currencies. This affects our financial statements and results of operations in various ways.
 
  •  As part of our consolidation each period, we translate the financial statements of those entities in our group that have functional currencies other than the dollar into dollars at the period-end exchange rates (in the case of balance sheet items) and the average exchange rates for the period (in the case of statement of operations items). The translated values in respect of each entity fluctuate over time with the movement of the exchange rate for the entity’s functional currency against the dollar. We refer to this as the currency translation effect. It is not practicable to hedge against this risk.