Itron, Inc.
ITRON INC /WA/ (Form: 10-Q, Received: 11/03/2016 13:59:23)

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016

OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 000-22418
ITRON, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
91-1011792
(State of Incorporation)
 
(I.R.S. Employer Identification Number)
2111 N Molter Road, Liberty Lake, Washington 99019
(509) 924-9900
(Address and telephone number of registrant’s principal executive offices)
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
x
Accelerated filer
¨
 
 
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
As of September 30, 2016 there were outstanding 38,258,576 shares of the registrant’s common stock, no par value, which is the only class of common stock of the registrant.
 


Table of Contents

Itron, Inc.
Table of Contents
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A: Risk Factors
 
 
 
 
 
 
Item 6: Exhibits
 
 
 
 


Table of Contents

PART I: FINANCIAL INFORMATION
Item 1:     Financial Statements (Unaudited)
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per share data)
Revenues
$
506,859

 
$
469,528

 
$
1,517,473

 
$
1,387,085

Cost of revenues
336,110

 
322,238

 
1,013,816

 
982,819

Gross profit
170,749

 
147,290

 
503,657

 
404,266

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Sales and marketing
38,894

 
39,217

 
119,037

 
123,302

Product development
39,386

 
41,559

 
128,086

 
126,399

General and administrative
40,384

 
31,118

 
130,781

 
103,195

Amortization of intangible assets
4,996

 
7,869

 
19,002

 
23,730

Restructuring
40,679

 
587

 
41,294

 
(8,828
)
Total operating expenses
164,339

 
120,350

 
438,200

 
367,798

 
 
 
 
 
 
 
 
Operating income
6,410

 
26,940

 
65,457

 
36,468

Other income (expense)
 
 
 
 
 
 
 
Interest income
102

 
180

 
594

 
440

Interest expense
(2,691
)
 
(2,799
)
 
(8,344
)
 
(9,336
)
Other income (expense), net
707

 
(1,119
)
 
(1,074
)
 
(3,003
)
Total other income (expense)
(1,882
)
 
(3,738
)
 
(8,824
)
 
(11,899
)
 
 
 
 
 
 
 
 
Income before income taxes
4,528

 
23,202

 
56,633

 
24,569

Income tax provision
(13,430
)
 
(9,932
)
 
(34,249
)
 
(19,060
)
Net income (loss)
(8,902
)
 
13,270

 
22,384

 
5,509

Net income attributable to noncontrolling interests
983

 
630

 
2,263

 
1,817

Net income (loss) attributable to Itron, Inc.
$
(9,885
)
 
$
12,640

 
$
20,121

 
$
3,692

 
 
 
 
 
 
 
 
Earnings (loss) per common share - Basic
$
(0.26
)
 
$
0.33

 
$
0.53

 
$
0.10

Earnings (loss) per common share - Diluted
$
(0.26
)
 
$
0.33

 
$
0.52

 
$
0.10

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - Basic
38,248

 
38,114

 
38,181

 
38,329

Weighted average common shares outstanding - Diluted
38,248

 
38,358

 
38,515

 
38,591

The accompanying notes are an integral part of these condensed consolidated financial statements.


1

Table of Contents

ITRON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net income (loss)
$
(8,902
)
 
$
13,270

 
$
22,384

 
$
5,509

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
9,184

 
(14,241
)
 
10,910

 
(60,803
)
Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges
542

 
71

 
(3,190
)
 
80

Pension benefit obligation adjustment
(1,198
)
 
866

 
(1,807
)
 
1,863

Total other comprehensive income (loss), net of tax
8,528

 
(13,304
)
 
5,913

 
(58,860
)
 
 
 
 
 
 
 
 
Total comprehensive income (loss), net of tax
(374
)
 
(34
)
 
28,297

 
(53,351
)
 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests, net of tax
983

 
630

 
2,263

 
1,817

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Itron, Inc.
$
(1,357
)
 
$
(664
)
 
$
26,034

 
$
(55,168
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents

ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
September 30, 2016
 
December 31, 2015
 
(in thousands)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
151,380

 
$
131,018

Accounts receivable, net
368,710

 
330,895

Inventories
189,553

 
190,465

Other current assets
122,037

 
106,562

Total current assets
831,680

 
758,940

 
 
 
 
Property, plant, and equipment, net
180,867

 
190,256

Deferred tax assets noncurrent, net
91,808

 
109,387

Other long-term assets
45,332

 
51,679

Intangible assets, net
82,733

 
101,932

Goodwill
475,705

 
468,122

Total assets
$
1,708,125

 
$
1,680,316

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
203,986

 
$
185,827

Other current liabilities
49,340

 
78,630

Wages and benefits payable
88,519

 
76,980

Taxes payable
18,295

 
14,859

Current portion of debt
12,656

 
11,250

Current portion of warranty
26,084

 
36,927

Unearned revenue
80,342

 
73,301

Total current liabilities
479,222

 
477,774

 
 
 
 
Long-term debt
330,042

 
358,915

Long-term warranty
18,702

 
17,585

Pension benefit obligation
86,310

 
85,971

Deferred tax liabilities noncurrent, net
1,680

 
1,723

Other long-term obligations
130,177

 
115,645

Total liabilities
1,046,133

 
1,057,613

 
 
 
 
Commitments and contingencies (Note 11)

 

 
 
 
 
Equity
 
 
 
Preferred stock, no par value, 10 million shares authorized, no shares issued or outstanding

 

Common stock, no par value, 75 million shares authorized, 38,259 and 37,906 shares issued and outstanding
1,259,704

 
1,246,671

Accumulated other comprehensive loss, net
(194,694
)
 
(200,607
)
Accumulated deficit
(421,185
)
 
(441,306
)
Total Itron, Inc. shareholders' equity
643,825

 
604,758

Noncontrolling interests
18,167

 
17,945

Total equity
661,992

 
622,703

Total liabilities and equity
$
1,708,125

 
$
1,680,316

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended
September 30,
 
2016
 
2015
 
(in thousands)
Operating activities
 
 
 
Net income
$
22,384

 
$
5,509

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
51,563

 
57,790

Stock-based compensation
13,300

 
10,879

Amortization of prepaid debt fees
806

 
1,851

Deferred taxes, net
17,772

 
14,744

Restructuring, non-cash
5,153

 
1,018

Other adjustments, net
(734
)
 
1,877

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(32,652
)
 
(14,193
)
Inventories
3,207

 
(73,464
)
Other current assets
(15,591
)
 
(998
)
Other long-term assets
8,499

 
(2,529
)
Accounts payable, other current liabilities, and taxes payable
(5,830
)
 
(11,119
)
Wages and benefits payable
11,516

 
3,787

Unearned revenue
(8,684
)
 
6,536

Warranty
(9,900
)
 
20,207

Other operating, net
21,072

 
(1,741
)
Net cash provided by operating activities
81,881

 
20,154

 
 
 
 
Investing activities
 
 
 
Acquisitions of property, plant, and equipment
(30,563
)
 
(33,324
)
Business acquisitions, net of cash and cash equivalents acquired
(951
)
 
(5,754
)
Other investing, net
(1,258
)
 
545

Net cash used in investing activities
(32,772
)
 
(38,533
)
 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings


89,709

Payments on debt
(29,031
)
 
(30,186
)
Issuance of common stock
1,993

 
2,229

Repurchase of common stock

 
(35,278
)
Other financing, net
(3,658
)
 
1,881

Net cash provided by (used in) financing activities
(30,696
)
 
28,355

 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
1,949

 
(12,889
)
Increase (decrease) in cash and cash equivalents
20,362

 
(2,913
)
Cash and cash equivalents at beginning of period
131,018

 
112,371

Cash and cash equivalents at end of period
$
151,380

 
$
109,458

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net
$
17,207

 
$
22,578

Interest, net of amounts capitalized
7,592

 
7,549

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

ITRON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(UNAUDITED)
In this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron,” and the “Company” refer to Itron, Inc.

Note 1:    Summary of Significant Accounting Policies

Financial Statement Preparation
The condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q are unaudited and reflect entries necessary for the fair presentation of the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015 , the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 , and the Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 of Itron, Inc. and its subsidiaries. All entries required for the fair presentation of the financial statements are of a normal recurring nature, except as disclosed. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.

Certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim results. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in our 2015 Annual Report on Form 10-K filed with the SEC on June 30, 2016 . There have been no significant changes in financial statement preparation or significant accounting policies since December 31, 2015, with the following exceptions.

Revision of Prior Period Financial Statements
We revised our previously reported consolidated financial statements for the first three quarters of fiscal 2015 as reported in our 2015 Annual Report on Form 10-K filed with the SEC on June 30, 2016 . These revisions primarily impacted the timing of revenue and cost recognition associated with contracts involving certain software products that we were unable to demonstrate vendor specific objective evidence (VSOE) of fair value for certain undelivered elements or determine whether software was essential to the functionality of certain hardware. All impacted financial statement line items and related notes to condensed consolidated financial statements reflect these revisions.

Prepaid Debt Fees
Prepaid debt fees for term debt represent the capitalized direct costs incurred related to the issuance of debt and are recorded as a direct deduction from the carrying amount of the corresponding debt liability. We have elected to present prepaid debt fees for revolving debt within other long-term assets in the Consolidated Balance Sheets. These costs are amortized to interest expense over the terms of the respective borrowings, including contingent maturity or call features, using the effective interest method, or straight-line method when associated with a revolving credit facility. When debt is repaid early, the related portion of unamortized prepaid debt fees is written off and included in interest expense.

Stock-Based Compensation
We grant various stock-based compensation awards to our officers, employees and Board of Directors with service, market, and/or performance vesting conditions. Beginning with the fiscal quarter ended March 31, 2016, we granted phantom stock units, which are settled in cash upon vesting and accounted for as liability-based awards.

We measure and recognize compensation expense for all stock-based compensation based on estimated fair values. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model, which includes assumptions for the dividend yield, expected volatility, risk-free interest rate, and expected term. For unrestricted stock awards with no market conditions, the fair value is the market close price of our common stock on the date of grant. For restricted stock units with market conditions, the fair value is estimated at the date of award using a Monte Carlo simulation model, which includes assumptions for dividend yield and expected volatility for our common stock and the common stock for companies within the Russell 3000 index, as well as the risk-free interest rate and expected term of the awards. For phantom stock units, fair value is the market close price of our common stock at the end of each reporting period.

We expense stock-based compensation at the date of grant for unrestricted stock awards. For awards with only a service condition, we expense stock-based compensation, adjusted for estimated forfeitures, using the straight-line method over the requisite service period for the entire award. For awards with performance and service conditions, if vesting is probable, we expense the stock-based compensation, adjusted for estimated forfeitures, on a straight-line basis over the requisite service period for each separately

5


vesting portion of the award. For awards with a market condition, we expense the fair value over the requisite service period. Excess tax benefits are credited to common stock when the deduction reduces cash taxes payable. When we have tax deductions in excess of the compensation cost, they are classified as financing cash inflows in the Consolidated Statements of Cash Flows.

Certain of our employees are eligible to participate in our Employee Stock Purchase Plan (ESPP). The discount provided for ESPP purchases is 5% from the fair market value of the stock at the end of each fiscal quarter and is not considered compensatory.

New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date , which deferred the effective date for implementation of ASU 2014-09 by one year and are now effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted but not earlier than the original effective date. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08), which clarifies the implementation guidance of principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing (ASU 2016-10), which clarifies the identification of performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients (ASU 2016-12), to improve guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The effective date and transition requirements in ASU 2016-08, ASU 2016-10, and ASU 2016-12 are the same as the effective date and transition requirements of ASU 2015-14. We have not yet selected a transition method, and we are currently evaluating the effect that the updated standard will have on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interes t (ASU 2015-03). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability. In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15). ASU 2015-15 provides additional guidance on the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. ASU 2015-03 and ASU 2015-15 are effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted, and is to be applied on a retrospective basis. We adopted this standard on January 1, 2016, and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05), which provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for us on January 1, 2016. We adopted this standard on January 1, 2016, and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory (ASU 2015-11). The amendments in ASU 2015-11 apply to inventory measured using first-in, first-out (FIFO) or average cost and will require entities to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the normal course of business, minus the cost of completion, disposal and transportation. Replacement cost and net realizable value less a normal profit margin will no longer be considered. ASU 2015-11 is effective for us on January 1, 2017. We are currently assessing the impact of adoption on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the impact of adoption on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

6



In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323) (ASU 2016-07), which simplified the accounting for equity method investments by eliminating the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. ASU 2016-07 is effective for us on January 1, 2017. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718) (ASU 2016-09), which simplifies several areas within Topic 718. These include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for us on January 1, 2017, with early adoption permitted. We are currently assessing the basis of adoption and evaluating the impact of the adoption of the update on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

Note 2:    Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (EPS):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per share data)
Net income (loss) available to common shareholders
$
(9,885
)
 
$
12,640

 
$
20,121

 
$
3,692

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - Basic
38,248

 
38,114

 
38,181

 
38,329

Dilutive effect of stock-based awards

 
244

 
334

 
262

Weighted average common shares outstanding - Diluted
38,248

 
38,358

 
38,515

 
38,591

Earnings (loss) per common share - Basic
$
(0.26
)
 
$
0.33

 
$
0.53

 
$
0.10

Earnings (loss) per common share - Diluted
$
(0.26
)
 
$
0.33

 
$
0.52

 
$
0.10


Stock-based Awards
For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase common stock at the average market price during the period. Related proceeds include the amount the employee must pay upon exercise, future compensation cost associated with the stock award, and the amount of excess tax benefits, if any. Approximately 0.9 million and 0.8 million stock-based awards were excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2016 because they were anti-dilutive. Approximately 1.1 million and 1.2 million stock-based awards were excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2015 because they were anti-dilutive. These stock-based awards could be dilutive in future periods.

Note 3:    Certain Balance Sheet Components

Accounts receivable, net
September 30, 2016
 
December 31, 2015
 
(in thousands)
Trade receivables (net of allowance of $4,254 and $5,949)
$
319,929

 
$
298,550

Unbilled receivables
48,781

 
32,345

Total accounts receivable, net
$
368,710

 
$
330,895


At September 30, 2016 and December 31, 2015 , $4.6 million and $0.7 million , respectively, were recorded as contract retainage receivables within trade receivables, in accordance with contract retainage provisions. At September 30, 2016 and December 31, 2015 , contract retainage receivables that were unbilled and classified as unbilled receivables were $5.4 million and $3.5 million , respectively. These contract retainage receivables within trade receivables and unbilled receivables are expected to be collected within the following 12 months.


7


At September 30, 2016 and December 31, 2015 , long-term billed contract retainage receivables were $0.4 million . At September 30, 2016 and December 31, 2015 , long-term unbilled contract retainage receivables were $3.8 million and $3.6 million , respectively. These long-term billed and unbilled contract retainage receivables are classified within other long-term assets, as collection is not anticipated within the following 12 months. We consider whether collectability of such retainage is reasonably assured in connection with our overall assessment of the collectability of amounts due or that will become due under our contracts.

Allowance for doubtful accounts activity
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Beginning balance
$
3,939

 
$
5,422

 
$
5,949

 
$
6,195

Provision (release) for doubtful accounts, net
353

 
(141
)
 
265

 
(111
)
Accounts written-off
(77
)
 
(162
)
 
(1,919
)
 
(503
)
Effect of change in exchange rates
39

 
(160
)
 
(41
)
 
(622
)
Ending balance
$
4,254

 
$
4,959

 
$
4,254

 
$
4,959


Inventories
September 30, 2016
 
December 31, 2015
 
(in thousands)
Materials
$
112,507

 
$
111,191

Work in process
9,919

 
9,400

Finished goods
67,127

 
69,874

Total inventories
$
189,553

 
$
190,465


Consigned inventory is held at third party locations; however, we retain title to the inventory until it is purchased by the third party. Consigned inventory, consisting of raw materials and finished goods, was $2.1 million and $2.6 million at September 30, 2016 and December 31, 2015 , respectively.

Property, plant, and equipment, net
September 30, 2016
 
December 31, 2015
 
(in thousands)
Machinery and equipment
$
290,395

 
$
289,015

Computers and software
105,791

 
104,310

Buildings, furniture, and improvements
127,297

 
127,531

Land
18,069

 
19,882

Construction in progress, including purchased equipment
26,956

 
32,639

Total cost
568,508

 
573,377

Accumulated depreciation
(387,641
)
 
(383,121
)
Property, plant, and equipment, net
$
180,867

 
$
190,256


Depreciation expense
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Depreciation expense
$
11,086

 
$
11,129

 
$
32,561

 
$
34,060



8


Note 4:    Intangible Assets

The gross carrying amount and accumulated amortization of our intangible assets, other than goodwill, were as follows:

 
September 30, 2016
 
December 31, 2015
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
(in thousands)
Core-developed technology
$
392,752

 
$
(370,894
)
 
$
21,858

 
$
388,981

 
$
(358,092
)
 
$
30,889

Customer contracts and relationships
236,974

 
(176,528
)
 
60,446

 
238,379

 
(168,885
)
 
69,494

Trademarks and trade names
64,010

 
(63,619
)
 
391

 
64,069

 
(62,571
)
 
1,498

Other
11,080

 
(11,042
)
 
38

 
11,078

 
(11,027
)
 
51

Total intangible assets
$
704,816

 
$
(622,083
)
 
$
82,733

 
$
702,507

 
$
(600,575
)
 
$
101,932


A summary of intangible asset activity is as follows:

 
Nine Months Ended September 30,
 
2016
 
2015
 
(in thousands)
Beginning balance, intangible assets, gross
$
702,507

 
$
748,148

Intangible assets acquired

 
4,827

Intangible assets impaired

 
(497
)
Effect of change in exchange rates
2,309

 
(41,245
)
Ending balance, intangible assets, gross
$
704,816

 
$
711,233


Intangible assets acquired during the nine months ended September 30, 2015 were related to the Temetra Limited acquisition on August 26, 2015. Intangible assets impaired during the nine months ended September 30, 2015 includes purchased software licenses to be sold to others. This amount was expensed as part of cost of revenues in the Consolidated Statement of Operations.

Estimated future annual amortization expense is as follows:

Year Ending December 31,
 
Estimated Annual Amortization
 
 
(in thousands)
2016 (amount remaining at September 30, 2016)
 
$
6,304

2017
 
18,706

2018
 
13,015

2019
 
10,220

2020
 
8,328

Beyond 2020
 
26,160

Total intangible assets subject to amortization
 
$
82,733



9


Note 5:    Goodwill

The following table reflects goodwill allocated to each reporting unit:
 
Electricity
 
Gas
 
Water
 
Total Company
 
(in thousands)
Balances at January 1, 2016
 
 
 
 
 
 
 
Goodwill before impairment
$
414,910

 
$
331,436

 
$
350,314

 
$
1,096,660

Accumulated impairment losses
(362,177
)
 

 
(266,361
)
 
(628,538
)
Goodwill, net
52,733

 
331,436

 
83,953

 
468,122

 
 
 
 
 
 
 
 
Effect of change in exchange rates
329

 
5,843

 
1,411

 
7,583

 
 
 
 
 
 
 
 
Balances at September 30, 2016
 
 
 
 
 
 
 
Goodwill before impairment
421,852

 
337,279

 
358,081

 
1,117,212

Accumulated impairment losses
(368,790
)
 

 
(272,717
)
 
(641,507
)
Goodwill, net
$
53,062

 
$
337,279

 
$
85,364

 
$
475,705


Note 6:    Debt

The components of our borrowings were as follows:
 
September 30, 2016
 
December 31, 2015
 
(in thousands)
Credit facility:
 
 
 
USD denominated term loan
$
210,938

 
$
219,375

Multicurrency revolving line of credit
132,597

 
151,837

Total debt
343,535

 
371,212

Less: current portion of debt
12,656

 
11,250

Less: unamortized prepaid debt fees - term loan
837

 
1,047

Long-term debt less unamortized prepaid debt fees - term loan
$
330,042


$
358,915


Credit Facility
On June 23, 2015, we entered into an amended and restated credit agreement providing for committed credit facilities in the amount of $725 million U.S. dollars (the 2015 credit facility). The 2015 credit facility consists of a $225 million U.S. dollar term loan (the term loan) and a multicurrency revolving line of credit (the revolver) with a principal amount of up to $500 million . The revolver also contains a $250 million standby letter of credit sub-facility and a $50 million swingline sub-facility (available for immediate cash needs at a higher interest rate). Both the term loan and the revolver mature on June 23, 2020, and amounts borrowed under the revolver are classified as long-term and, during the credit facility term, may be repaid and reborrowed until the revolver's maturity, at which time the revolver will terminate, and all outstanding loans, together with all accrued and unpaid interest, must be repaid. Amounts not borrowed under the revolver are subject to a commitment fee, which is paid in arrears on the last day of each fiscal quarter, ranging from 0.175% to 0.30% per annum depending on our total leverage ratio as of the most recently ended fiscal quarter. Amounts repaid on the term loan may not be reborrowed. The 2015 credit facility permits us and certain of our foreign subsidiaries to borrow in U.S. dollars, euros, British pounds, or, with lender approval, other currencies readily convertible into U.S. dollars. All obligations under the 2015 credit facility are guaranteed by Itron, Inc. and material U.S. domestic subsidiaries and are secured by a pledge of substantially all of the assets of Itron, Inc. and material U.S. domestic subsidiaries, including a pledge of 100% of the capital stock of material U.S. domestic subsidiaries and up to 66% of the voting stock (100% of the non-voting stock) of their first-tier foreign subsidiaries. In addition, the obligations of any foreign subsidiary who is a foreign borrower, as defined by the 2015 credit facility, are guaranteed by the foreign subsidiary and by its direct and indirect foreign parents.

The 2015 credit facility includes debt covenants, which contain certain financial ratio thresholds, place certain restrictions on the incurrence of debt, investments, and the issuance of dividends, and require quarterly unaudited and annual audited financial reporting. We were not in compliance with the financial reporting portion of these covenants under the 2015 credit facility at June 30, 2016. On April 1, 2016 and June 13, 2016, we entered into the first and second amendments to the 2015 credit facility. As a result of these amendments, we were granted waivers that extended the due dates for annual audited financial statements for the year ended December 31, 2015 and quarterly unaudited financial statements for the periods ended March 31, 2016 and June 30, 2016 through September 12, 2016, and our $300 million standby letter of credit sub-facility was reduced to $250 million . We regained compliance with all financial reporting covenants upon filing our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2016 on September 2, 2016.

10



Scheduled principal repayments for the term loan are due quarterly in the amount of $2.8 million through June 2017, $4.2 million from September 2017 through June 2018, $5.6 million from September 2018 through March 2020, and the remainder due at maturity on June 23, 2020. The term loan may be repaid early in whole or in part, subject to certain minimum thresholds, without penalty.

Under the 2015 credit facility, we elect applicable market interest rates for both the term loan and any outstanding revolving loans. We also pay an applicable margin, which is based on our total leverage ratio (as defined in the credit agreement). The applicable rates per annum may be based on either: (1) the LIBOR rate or EURIBOR rate (floor of 0%), plus an applicable margin, or (2) the Alternate Base Rate , plus an applicable margin. The Alternate Base Rate election is equal to the greatest of three rates: (i) the prime rate , (ii) the Federal Reserve effective rate plus 1/2 of 1%, or (iii) one month LIBOR plus 1% . At September 30, 2016 , the interest rate for both the term loan and the USD revolver was 1.78% (the LIBOR rate plus a margin of 1.25% ), and the interest rate for the EUR revolver was 1.25% (the EURIBOR floor rate plus a margin of 1.25% ).

Credit facility repayments were as follows:
 
Nine Months Ended September 30,
 
2016
 
2015
 
(in thousands)
USD denominated term loan
$
8,438

 
$
10,313

Multicurrency revolving line of credit
20,593

 
19,873

Total credit facility repayments
$
29,031

 
$
30,186


At September 30, 2016 , $132.6 million was outstanding under the credit facility revolver, and $321.3 million was available for additional borrowings or standby letters of credit. At September 30, 2016 , $46.1 million was utilized by outstanding standby letters of credit, resulting in $203.9 million available for additional standby letters of credit. No amounts were outstanding under the swingline sub-facility.

Upon entering into the 2015 credit facility, a portion of our unamortized prepaid debt fees, totaling $0.8 million , wer e w ritten-off to interest expense. Prepaid debt fees of approximately $3.9 million were capitalized associated with the 2015 credit facility. Unamortized prepaid debt fees were as follows:
 
September 30, 2016
 
December 31, 2015
 
(in thousands)
Unamortized prepaid debt fees - revolver
$
2,596

 
$
3,128

Unamortized prepaid debt fees - term loan
837

 
1,047



11


Note 7:    Derivative Financial Instruments

As part of our risk management strategy, we use derivative instruments to hedge certain foreign currency and interest rate exposures. Refer to Note 13 and Note 14 for additional disclosures on our derivative instruments.

The fair values of our derivative instruments are determined using the income approach and significant other observable inputs (also known as “Level 2”). We have used observable market inputs based on the type of derivative and the nature of the underlying instrument. The key inputs include interest rate yield curves (swap rates and futures) and foreign exchange spot and forward rates, all of which are available in an active market. We have utilized the mid-market pricing convention for these inputs. We include, as a discount to the derivative asset, the effect of our counterparty credit risk based on current published credit default swap rates when the net fair value of our derivative instruments is in a net asset position. We consider our own nonperformance risk when the net fair value of our derivative instruments is in a net liability position by discounting our derivative liabilities to reflect the potential credit risk to our counterparty through applying a current market indicative credit spread to all cash flows.

The fair values of our derivative instruments were as follows:

 
 
 
 
Fair Value
Asset Derivatives
 
Balance Sheet Location
 
September 30, 2016
 
December 31, 2015
Derivatives designated as hedging instruments under ASC 815-20
 
(in thousands)
Interest rate swap contracts
 
Other long-term assets
 
$

 
$
1,632

Interest rate cap contracts
 
Other long-term assets
 
240

 
1,423

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current assets
 
119

 
27

Interest rate cap contracts
 
Other long-term assets
 
60

 

Total asset derivatives
 
 
 
$
419

 
$
3,082

 
 
 
 
 
 
 
Liability Derivatives
 
 
 
 
 
 
Derivatives designated as hedging instruments under ASC 815-20
 
 
 
 
Interest rate swap contracts
 
Other current liabilities
 
$
1,532

 
$
868

Interest rate swap contracts
 
Other long-term obligations
 
1,776

 

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current liabilities
 
294

 
99

Total liability derivatives
 
 
 
$
3,602

 
$
967


The changes in accumulated other comprehensive income (loss) (AOCI), net of tax, for our derivative and nonderivative hedging instruments, were as follows:

 
2016
 
2015
 
(in thousands)
Net unrealized loss on hedging instruments at January 1,
$
(14,062
)
 
$
(15,148
)
Unrealized loss on hedging instruments
(3,709
)
 
(681
)
Realized losses reclassified into net income
519

 
761

Net unrealized loss on hedging instruments at September 30,
$
(17,252
)
 
$
(15,068
)

Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations for the periods ended September 30, 2016 and 2015 . Included in the net unrealized loss on hedging instruments at September 30, 2016 and 2015 is a loss of $14.4 million , net of tax, related to our nonderivative net investment hedge, which terminated in 2011. This loss on our net investment hedge will remain in AOCI until such time when earnings are impacted by a sale or liquidation of the associated foreign operation.


12


A summary of the effect of netting arrangements on our financial position related to the offsetting of our recognized derivative assets and liabilities under master netting arrangements or similar agreements is as follows:

Offsetting of Derivative Assets
Gross Amounts of Recognized Assets Presented in
the Consolidated
Balance Sheets
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
Derivative Financial Instruments
 
Cash Collateral Received
 
Net Amount
 
(in thousands)
September 30, 2016
$
419

 
$
(119
)
 
$

 
$
300

 
 
 
 
 
 
 
 
December 31, 2015
$
3,082

 
$
(565
)
 
$

 
$
2,517


Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
Derivative Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
 
(in thousands)
September 30, 2016
$
3,602

 
$
(119
)
 
$

 
$
3,483

 
 
 
 
 
 
 
 
December 31, 2015
$
967

 
$
(565
)
 
$

 
$
402


Our derivative assets and liabilities subject to netting arrangements consist of foreign exchange forward and interest rate contracts with three and nine counterparties at September 30, 2016 and December 31, 2015 , respectively. No derivative asset or liability balance with any of our counterparties was individually significant at September 30, 2016 or December 31, 2015 . Our derivative contracts with each of these counterparties exist under agreements that provide for the net settlement of all contracts through a single payment in a single currency in the event of default. We have no pledges of cash collateral against our obligations nor have we received pledges of cash collateral from our counterparties under the associated derivative contracts.

Cash Flow Hedges
As a result of our floating rate debt, we are exposed to variability in our cash flows from changes in the applicable interest rate index. We enter into swaps to achieve a fixed rate of interest on a portion of our debt in order to increase our ability to forecast interest expense. The objective of these swaps is to reduce the variability of cash flows from increases in the LIBOR based borrowing rates on our floating rate credit facility. The swaps do not protect us from changes to the applicable margin under our credit facility.

In May 2012, we entered into six interest rate swaps, which were effective July 31, 2013 and expired on August 8, 2016, to convert $200 million of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of 1.00% (excluding the applicable margin on the debt). The cash flow hedges were expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swaps were recorded as a component of other comprehensive income (loss) (OCI) and recognized in earnings when the hedged item affected earnings. The amounts paid on the hedges were recognized as adjustments to interest expense.

In October 2015, we entered into an interest rate swap, which is effective from August 31, 2016 to June 23, 2020, and converts $214 million of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of 1.42% (excluding the applicable margin on the debt). The notional balance will amortize to maturity at the same rate as required minimum payments on our term loan. The cash flow hedge is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swap is recorded as a component of OCI and will be recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedge will be recognized as an adjustment to interest expense. The amount of net losses expected to be reclassified into earnings in the next 12 months is $1.5 million .

In November 2015, we entered into three interest rate cap contracts with a total notional amount of $100 million at a cost of $1.7 million . The interest rate cap contracts expire on June 23, 2020 and were entered into in order to limit our interest rate exposure on $100 million of our variable LIBOR based debt up to 2.00% . In the event LIBOR is higher than 2.00% , we will pay interest at the capped rate of 2.00% with respect to the $100 million notional amount of such agreements. The interest rate cap contracts

13


do not include the effect of the applicable margin. The amount of net losses expected to be reclassified into earnings in the next 12 months is insignificant.

At September 30, 2016 , our LIBOR based debt balance was $290.9 million . The amount of cash flow hedge ineffectiveness for derivative contracts not designated as hedging instruments was insignificant for the three and nine months ended September 30, 2016 and 2015.

We will continue to monitor and assess our interest rate risk and may institute additional interest rate swaps or other derivative instruments to manage such risk in the future.

The before-tax effects of our cash flow derivative instruments on the Consolidated Balance Sheets and the Consolidated Statements of Operations were as follows:

Derivatives in ASC 815-20
Cash Flow
Hedging Relationships
 
Amount of Gain (Loss)
Recognized in OCI on
Derivative (Effective
Portion)
 
Gain (Loss) Reclassified from Accumulated
OCI into Income (Effective Portion)
 
Gain (Loss) Recognized in Income on
Derivative (Ineffective Portion)
Location
 
Amount
 
Location
 
Amount
 
 
2016
 
2015
 
 
 
2016
 
2015
 
 
 
2016
 
2015
 
 
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
641

 
$
(296
)
 
Interest expense
 
$
(273
)
 
$
(412
)
 
Interest expense
 
$

 
$

Interest rate cap contracts
 
(31
)
 

 
Interest expense
 
(6
)
 

 
Interest expense
 
(1
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
(4,910
)
 
$
(1,104
)
 
Interest expense
 
$
(839
)
 
$
(1,235
)
 
Interest expense
 
$

 
$

Interest rate cap contracts
 
(1,121
)
 

 
Interest expense
 
(6
)
 

 
Interest expense
 
(1
)
 


Derivatives Not Designated as Hedging Relationships
We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recorded to other income and expense. We enter into monthly foreign exchange forward contracts (a total of 402 contracts were entered into during the nine months ended September 30, 2016 ), which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with currency exposures. The notional amounts of the contracts ranged from less than $10,000 to $37.9 million , offsetting our exposures from the euro, British pound, Canadian dollar, Australian dollar, Mexican peso, and various other currencies.

The effect of our foreign exchange forward derivative instruments on the Consolidated Statements of Operations was as follows:

Derivatives Not Designated as Hedging Instrument under ASC 815-20
 
Gain (Loss) Recognized on Derivatives in Other Income (Expense)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Foreign exchange forward contracts
 
$
(559
)
 
$
(1,278
)
 
$
(558
)
 
$
(3,004
)


14


Note 8:    Defined Benefit Pension Plans

We sponsor both funded and unfunded defined benefit pension plans for our international employees, primarily in Germany, France, Italy, Indonesia, Brazil, and Spain, offering death and disability, retirement, and special termination benefits. The defined benefit obligation is calculated annually by using the projected unit credit method. The measurement date for the pension plans was December 31, 2015 .

Amounts recognized on the Consolidated Balance Sheets consist of:

 
September 30, 2016
 
December 31, 2015
 
(in thousands)
Assets
 
 
 
Plan assets in other long-term assets
$
609

 
$
359

 
 
 
 
Liabilities
 
 
 
Current portion of pension benefit obligation in wages and benefits payable
2,581

 
3,493

Long-term portion of pension benefit obligation
86,310

 
85,971

 
 
 
 
Pension benefit obligation, net
$
88,282

 
$
89,105


Our asset investment strategy focuses on maintaining a portfolio using primarily insurance funds, which are accounted for as investments and measured at fair value, in order to achieve our long-term investment objectives on a risk adjusted basis. Our general funding policy for these qualified pension plans is to contribute amounts sufficient to satisfy regulatory funding standards of the respective countries for each plan.

Net periodic pension benefit costs for our plans include the following components:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Service cost
$
1,003

 
$
904

 
$
2,930

 
$
3,162

Interest cost
649

 
595

 
1,932

 
1,820

Expected return on plan assets
(139
)
 
(122
)
 
(398
)
 
(387
)
Settlements and other
506

 
375

 
499

 
374

Amortization of actuarial net loss
330

 
488

 
991

 
1,470

Amortization of unrecognized prior service costs
16

 
14

 
47

 
43

Net periodic benefit cost
$
2,365

 
$
2,254

 
$
6,001

 
$
6,482



15


Note 9:    Stock-Based Compensation

We record stock-based compensation expense for awards of stock options, restricted stock units, unrestricted stock, and phantom stock units. We expense stock-based compensation primarily using the straight-line method over the requisite service period. Stock-based compensation expense and the related tax benefit were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Stock options
$
602

 
$
713

 
$
1,741

 
$
2,005

Restricted stock units
4,595

 
1,969

 
10,834

 
8,374

Unrestricted stock awards
225

 
200

 
725

 
500

Phantom stock units
371

 

 
658

 

Total stock-based compensation
$
5,793

 
$
2,882

 
$
13,958

 
$
10,879

 
 
 
 
 
 
 
 
Related tax benefit
$
1,289

 
$
809

 
$
3,793

 
$
3,189


We issue new shares of common stock upon the exercise of stock options or when vesting conditions on restricted stock units are fully satisfied.

Subject to stock splits, dividends, and other similar events, 7,473,956 shares of common stock are reserved and authorized for issuance under our Amended and Restated 2010 Stock Incentive Plan (Stock Incentive Plan). Awards consist of stock options, restricted stock units, and unrestricted stock awards. At September 30, 2016 , 2,111,769 shares were available for grant under the Stock Incentive Plan. The Stock Incentive Plan shares are subject to a fungible share provision such that the authorized share reserve is reduced by (i) one share for every one share subject to a stock option or share appreciation right granted under the Plan and (ii)  1.7  shares for every one share of common stock that was subject to an award other than an option or share appreciation right.

Stock Options
Options to purchase our common stock are granted to certain employees, senior management, and members of the Board of Directors with an exercise price equal to the market close price of the stock on the date the Board of Directors approves the grant. Options generally become exercisable in three equal annual installments beginning one year from the date of grant and generally expire 10 years from the date of grant. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated based on our historical experience and future expectations.

The fair values of stock options granted were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Dividend yield (1)
%
 
%
 
%
 
%
Expected volatility (1)
33.7
%
 
%
 
33.5
%
 
34.5
%
Risk-free interest rate (1)
1.3
%
 
%
 
1.3
%
 
1.7
%
Expected term (years) (1)
5.5

 

 
5.5

 
5.5


(1)
There were no employee stock options granted for the three months ended September 30, 2015.

Expected volatility is based on a combination of the historical volatility of our common stock and the implied volatility of our traded options for the related expected term. We believe this combined approach is reflective of current and historical market conditions and is an appropriate indicator of expected volatility. The risk-free interest rate is the rate available as of the award date on zero-coupon U.S. government issues with a term equal to the expected life of the award. The expected life is the weighted average expected life of an award based on the period of time between the date the award is granted and the estimated date the award will be fully exercised. Factors considered in estimating the expected life include historical experience of similar awards, contractual terms, vesting schedules, and expectations of future employee behavior. We have not paid dividends in the past and do not plan to pay dividends in the foreseeable future.


16


A summary of our stock option activity is as follows:

 
Shares
 
Weighted
Average Exercise
Price per Share
 
Weighted Average
Remaining
Contractual Life
 
Aggregate
Intrinsic Value (1)
 
Weighted
Average Grant
Date Fair Value
 
(in thousands)
 
 
 
(years)
 
(in thousands)
 
 
Outstanding, January 1, 2015
1,123

 
$
51.90

 
4.4
 
$
1,676

 
 
Granted
207

 
35.30

 
 
 
 
 
$
12.15

Exercised
(23
)
 
36.05

 
 
 
26

 
 
Forfeited
(17
)
 
37.47

 
 
 
 
 
 
Expired
(167
)
 
53.95

 
 
 
 
 
 
Outstanding, September 30, 2015
1,123

 
$
49.12

 
5.4
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2016
1,180

 
$
48.31

 
5.7
 
$
405

 
 
Granted
191

 
40.40

 
 
 
 
 
$
13.27

Exercised
(35
)
 
35.31

 
 
 
214

 
 
Forfeited
(36
)
 
35.29

 
 
 
 
 
 
Expired
(312
)
 
55.11

 
 
 
 
 
 
Outstanding, September 30, 2016
988

 
$
45.57

 
6.8
 
$
13,732

 
 
 
 
 
 
 
 
 
 
 
 
Exercisable September 30, 2016
563

 
$
51.57

 
5.1
 
$
6,024

 
 
 
 
 
 
 
 
 
 
 
 
Expected to vest, September 30, 2016
410

 
$
37.58

 
8.9
 
$
7,448

 
 

(1)  
The aggregate intrinsic value of outstanding stock options represents amounts that would have been received by the optionees had all in- the-money options been exercised on that date. Specifically, it is the amount by which the market value of our stock exceeded the exercise price of the outstanding in-the-money options before applicable income taxes, based on our closing stock price on the last business day of the period. The aggregate intrinsic value of stock options exercised during the period is calculated based on our stock price at the date of exercise.

At September 30, 2016 , total unrecognized stock-based compensation expense related to nonvested stock options was approximately $3.8 million , which is expected to be recognized over a weighted average period of approximately 2.0 years .

Restricted Stock Units
Certain employees, senior management, and members of the Board of Directors receive restricted stock units as a component of their total compensation. The fair value of a restricted stock unit is the market close price of our common stock on the date of grant. Restricted stock units generally vest over a three year period. Compensation expense, net of forfeitures, is recognized over the vesting period.

Subsequent to vesting, the restricted stock units are converted into shares of our common stock on a one-for-one basis and issued to employees. We are entitled to an income tax deduction in an amount equal to the taxable income reported by the employees upon vesting of the restricted stock units.

Beginning in 2013, the performance-based restricted stock units to be issued under the Long-Term Performance Restricted Stock Unit Award Agreement (Performance Award Agreement) were determined based on (1) our achievement of specified non-GAAP EPS targets, as established by the Board at the beginning of each year for each of the three 1-year calendar years contained in the performance period (the performance condition) and (2) our total shareholder return (TSR) relative to the TSR attained by companies that are included in the Russell 3000 Index during the 3-year performance period (the market condition). Compensation expense, net of forfeitures, is recognized on a straight-line basis, and the restricted stock units vest upon achievement of the performance condition, provided participants are employed by Itron at the end of the respective performance periods. For U.S. participants who retire during the performance period, a pro-rated number of restricted stock units (based on the number of days of employment during the performance period) immediately vest based on the attainment of the performance goals as assessed after the end of the performance period.
Depending on the level of achievement of the performance condition, the actual number of shares to be earned ranges between 0% and 160% of the awards originally granted. At the end of the performance periods, if the performance conditions are achieved at or above threshold, the number of shares earned is further adjusted by a TSR multiplier payout percentage, which ranges between 75% and 125% , based on the market condition. Therefore, based on the attainment of the performance and market conditions, the actual number of shares that vest may range from 0% to 200% of the awards originally granted. Due to the presence of the TSR

17


multiplier market condition, we utilize a Monte Carlo valuation model to determine the fair value of the awards at the grant date. This pricing model uses multiple simulations to evaluate the probability of our achievement of various stock price levels to determine our expected TSR performance ranking. The weighted-average assumptions used to estimate the fair value of performance-based restricted stock units granted and the resulting weighted average fair value are as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Dividend yield (1)
%
 
%
 
%
 
%
Expected volatility (1)
28.8
%
 
%
 
30.0
%
 
30.1
%
Risk-free interest rate (1)
0.8
%
 
%
 
0.7
%
 
0.7
%
Expected term (years) (1)
2.3

 

 
1.8

 
2.1

 
 
 
 
 
 
 
 
Weighted average fair value (1)
$
63.10

 
$

 
$
44.92

 
$
33.48


(1)  
There were no long-term performance restricted stock units granted for the three months ended September 30, 2015.

Expected volatility is based on the historical volatility of our common stock for the related expected term. We believe this approach is reflective of current and historical market conditions and is an appropriate indicator of expected volatility. The risk-free interest rate is the rate available as of the award date on zero-coupon U.S. government issues with a term equal to the expected term of the award. The expected term is the term of an award based on the period of time between the date of the award and the date the award is expected to vest. The expected term assumption is based upon the plan's performance period as of the date of the award. We have not paid dividends in the past and do not plan to pay dividends in the foreseeable future.

The following table summarizes restricted stock unit activity:

 
Number of
Restricted Stock Units
 
Weighted
Average Grant
Date Fair Value
 
Aggregate
Intrinsic Value (1)
 
(in thousands)
 
 
 
(in thousands)
Outstanding, January 1, 2015
682

 
 
 
 
Granted (2)
319

 
$
35.30

 
 
Released
(288
)
 
 
 
$
11,852

Forfeited
(54
)
 
 
 
 
Outstanding, September 30, 2015
659

 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2016
756

 
 
 
 
Granted (2)
196

 
$
41.58

 
 
Released
(280
)
 
 
 
$
10,823

Forfeited
(50
)
 
 
 
 
Outstanding, September 30, 2016
622

 
 
 
 
 
 
 
 
 
 
Vested but not released, September 30, 2016
5

 
 
 
$
277

 
 
 
 
 
 
Expected to vest, September 30, 2016
500

 
 
 
$
27,894


(1)  
The aggregate intrinsic value is the market value of the stock, before applicable income taxes, based on the closing price on the stock release dates or at the end of the period for restricted stock units expected to vest.
(2)  
Restricted stock units granted in 2015 and 2016 do not include awards under the Performance Award Agreement for the respective years, as these awards are not granted until attainment of annual performance goals has been determined at the conclusion of the performance period, which had not occurred as of September 30, 2015 and 2016 , respectively.

At September 30, 2016 , total unrecognized compensation expense on restricted stock units was $25.3 million , which is expected to be recognized over a weighted average period of approximately 2.0 years .


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Phantom Stock Units
Phantom stock units are a form of share-based award that are indexed to our stock price and are settled in cash upon vesting. Since phantom stock units are settled in cash, compensation expense recognized over the vesting period will vary based on changes in fair value. Fair value is remeasured at the end of each reporting period based on the market close price of our common stock.

The following table summarizes phantom stock unit activity:

 
Number of Phantom Stock Units
 
Weighted
Average Grant
Date Fair Value
 
(in thousands)
 
 
Outstanding, January 1, 2016

 
 
Granted
63

 
$
40.11

Forfeited
(1
)
 
 
Outstanding, September 30, 2016
62

 


 
 
 
 
Expected to vest, September 30, 2016
56

 



At September 30, 2016 , total unrecognized compensation expense on phantom stock units was $2.8 million , which is expected to be recognized over a weighted average period of approximately 2.4 years . We have recorded a phantom stock liability of $0.7 million within wages and benefits payable in the Consolidated Balance Sheets as of September 30, 2016.

Unrestricted Stock Awards
We grant unrestricted stock awards to members of our Board of Directors as part of their compensation. Awards are fully vested and expensed when granted. The fair value of unrestricted stock awards is the market close price of our common stock on the date of grant.

The following table summarizes unrestricted stock award activity:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per share data)
Shares of unrestricted stock granted
4

 
6

 
17

 
14

 
 
 
 
 
 
 
 
Weighted average grant date fair value per share
$
53.96

 
$
33.91

 
$
42.24

 
$
36.51


Employee Stock Purchase Plan
Under the terms of the ESPP, employees can deduct up to 10% of their regular cash compensation to purchase our common stock at a 5% discount from the fair market value of the stock at the end of each fiscal quarter, subject to other limitations under the plan. The sale of the stock to the employees occurs at the beginning of the subsequent quarter. The ESPP is not considered compensatory, and no compensation expense is recognized for sales of our common stock to employees.

The following table summarizes ESPP activity:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Shares of stock sold to employees (1)

 
11

 
20

 
39


(1)  
Stock sold to employees during each fiscal quarter under the ESPP is associated with the offering period ending on the last day of the previous fiscal quarter. No stock was sold under the ESPP during the third quarter of 2016 because the ESPP had been suspended due to our delayed SEC filings. We became current with our SEC filings on September 2, 2016 and the ESPP is again active.

There were approximately 371,000 shares of common stock available for future issuance under the ESPP at September 30, 2016 .


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Note 10: Income Taxes

Our tax provision as a percentage of income before tax typically differs from the federal statutory rate of 35% , and may vary from period to period, due to fluctuations in the forecast mix of earnings in domestic and international jurisdictions, new or revised tax legislation and accounting pronouncements, tax credits, state income taxes, adjustments to valuation allowances, and uncertain tax positions, among other items.

Our tax expense for the three and nine months ended September 30, 2016 differed from the federal statutory rate of 35% due to the forecasted mix of earnings in domestic and international jurisdictions and losses experienced in jurisdictions with valuation allowances on deferred tax assets.

Our tax expense for the three and nine months ended September 30, 2015 differed from the federal statutory rate of 35% due to the forecasted mix of earnings in domestic and international jurisdictions, losses experienced in jurisdictions with valuation allowances, and discrete tax items.

We classify interest expense and penalties related to unrecognized tax liabilities and interest income on tax overpayments as components of income tax expense. The net interest and penalties expense recognized were as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net interest and penalties expense
$
591

 
$
170

 
$
923

 
$
645


Accrued interest and penalties recorded were as follows:

 
September 30, 2016
 
December 31, 2015
 
(in thousands)
Accrued interest
$
2,733

 
$
2,105

Accrued penalties
3,070

 
2,577


Unrecognized tax benefits related to uncertain tax positions and the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate were as follows:

 
September 30, 2016
 
December 31, 2015
 
(in thousands)
Unrecognized tax benefits related to uncertain tax positions
$
56,216

 
$
54,880

The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate
54,908

 
53,602


At September 30, 2016 , we are under examination by certain tax authorities for the 2000 to 2014 tax years. The material jurisdictions where we are subject to examination for the 2000 to 2014 tax years include, among others, the United States, France, Germany, Italy, Brazil and the United Kingdom. No material changes have occurred to previously disclosed assessments. We believe we have appropriately accrued for the expected outcome of all tax matters and do not currently anticipate that the ultimate resolution of these examinations will have a material adverse effect on our financial condition, future results of operations, or liquidity.

Based upon the timing and outcome of examinations, litigation, the impact of legislative, regulatory, and judicial developments, and the impact of these items on the statute of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those recorded within the next twelve months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.


20


Note 11:    Commitments and Contingencies

Guarantees and Indemnifications
We are often required to obtain standby letters of credit (LOCs) or bonds in support of our obligations for customer contracts. These standby LOCs or bonds typically provide a guarantee to the customer for future performance, which usually covers the installation phase of a contract and may, on occasion, cover the operations and maintenance phase of outsourcing contracts.

Our available lines of credit, outstanding standby LOCs, and performance bonds were as follows:

 
September 30, 2016
 
December 31, 2015
 
(in thousands)
Credit facilities (1)
 
 
 
Multicurrency revolving line of credit
$
500,000

 
$
500,000

Long-term borrowings
(132,597
)
 
(151,837
)
Standby LOCs issued and outstanding
(46,071
)
 
(46,574
)
 
 
 
 
Net available for additional borrowings under the multi-currency revolving line of credit
$
321,332

 
$
301,589

Net available for additional standby LOCs under sub-facility (2)
203,929

 
253,426

 
 
 
 
Unsecured multicurrency revolving lines of credit with various financial institutions
 
 
 
Multicurrency revolving lines of credit
$
98,655

 
$
97,989

Standby LOCs issued and outstanding
(23,818
)
 
(31,122
)
Short-term borrowings (3)
(2,205
)
 
(3,884
)
Net available for additional borrowings and LOCs
$
72,632

 
$
62,983

 
 
 
 
Unsecured surety bonds in force
$
85,883

 
$
87,558


(1)
Refer to Note 6 for details regarding our secured credit facilities.