Itron, Inc.
ITRON INC /WA/ (Form: 10-Q, Received: 05/04/2017 06:03:14)

 
 
 
 
 
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 March 31, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
 
Accelerated filer
 
 
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
 
 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 March 31, 2017 there were outstanding 38,648,567 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 March 31,
 
2017
 
2016
 
(in thousands, except per share data)
Revenues
$
477,592

 
$
497,590

Cost of revenues
320,367

 
334,387

Gross profit
157,225

 
163,203

 
 
 
 
Operating expenses
 
 
 
Sales and marketing
41,468

 
40,767

Product development
40,868

 
45,346

General and administrative
37,246

 
45,069

Amortization of intangible assets
4,549

 
6,210

Restructuring
3,052

 
2,237

Total operating expenses
127,183

 
139,629

 
 
 
 
Operating income
30,042

 
23,574

Other income (expense)
 
 
 
Interest income
269

 
271

Interest expense
(2,674
)
 
(2,918
)
Other income (expense), net
(2,576
)
 
(1,517
)
Total other income (expense)
(4,981
)
 
(4,164
)
 
 
 
 
Income before income taxes
25,061

 
19,410

Income tax provision
(9,047
)
 
(8,626
)
Net income
16,014

 
10,784

Net income attributable to noncontrolling interests
169

 
695

Net income attributable to Itron, Inc.
$
15,845

 
$
10,089

 
 
 
 
Earnings per common share - Basic
$
0.41

 
$
0.27

Earnings per common share - Diluted
$
0.40

 
$
0.26

 
 
 
 
Weighted average common shares outstanding - Basic
38,474

 
38,059

Weighted average common shares outstanding - Diluted
39,215

 
38,376

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


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Table of Contents

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

 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Net income
$
16,014

 
$
10,784

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment
15,016

 
10,106

Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges
292

 
(2,606
)
Pension benefit obligation adjustment
401

 
(318
)
Total other comprehensive income (loss), net of tax
15,709

 
7,182

 
 
 
 
Total comprehensive income, net of tax
31,723

 
17,966

 
 
 
 
Comprehensive income attributable to noncontrolling interests, net of tax
169

 
695

 
 
 
 
Comprehensive income attributable to Itron, Inc.
$
31,554

 
$
17,271

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

2

Table of Contents

ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
March 31, 2017
 
December 31, 2016
 
(in thousands)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
187,928

 
$
133,565

Accounts receivable, net
344,411

 
351,506

Inventories
178,060

 
163,049

Other current assets
95,424

 
84,346

Total current assets
805,823

 
732,466

 
 
 
 
Property, plant, and equipment, net
178,647

 
176,458

Deferred tax assets, net
106,896

 
94,113

Other long-term assets
50,166

 
50,129

Intangible assets, net
69,485

 
72,151

Goodwill
462,906

 
452,494

Total assets
$
1,673,923

 
$
1,577,811

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
194,012

 
$
172,711

Other current liabilities
46,359

 
43,625

Wages and benefits payable
82,010

 
82,346

Taxes payable
18,736

 
10,451

Current portion of debt
15,469

 
14,063

Current portion of warranty
23,500

 
24,874

Unearned revenue
84,705

 
64,976

Total current liabilities
464,791

 
413,046

 
 
 
 
Long-term debt
288,266

 
290,460

Long-term warranty
18,036

 
18,428

Pension benefit obligation
87,663

 
84,498

Deferred tax liabilities, net
3,214

 
3,073

Other long-term obligations
109,346

 
117,953

Total liabilities
971,316

 
927,458

 
 
 
 
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, 38,649 and 38,317 shares issued and outstanding
1,276,298

 
1,270,467

Accumulated other comprehensive loss, net
(213,618
)
 
(229,327
)
Accumulated deficit
(379,326
)
 
(409,536
)
Total Itron, Inc. shareholders' equity
683,354

 
631,604

Noncontrolling interests
19,253

 
18,749

Total equity
702,607

 
650,353

Total liabilities and equity
$
1,673,923

 
$
1,577,811

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

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Table of Contents

ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Operating activities
 
 
 
Net income
$
16,014

 
$
10,784

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,378

 
16,674

Stock-based compensation
5,211

 
3,900

Amortization of prepaid debt fees
266

 
276

Deferred taxes, net
882

 
4,507

Restructuring, non-cash

 
1,114

Other adjustments, net
946

 
66

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
13,119

 
(33,308
)
Inventories
(11,274
)
 
3,244

Other current assets
(11,169
)
 
(5,457
)
Other long-term assets
646

 
2,945

Accounts payable, other current liabilities, and taxes payable
28,277

 
10,161

Wages and benefits payable
(1,796
)
 
9,349

Unearned revenue
14,020

 
14,343

Warranty
(2,303
)
 
(4,045
)
Other operating, net
(3,960
)
 
(748
)
Net cash provided by operating activities
63,257

 
33,805

 
 
 
 
Investing activities
 
 
 
Acquisitions of property, plant, and equipment
(9,122
)
 
(8,791
)
Other investing, net
(78
)
 
558

Net cash used in investing activities
(9,200
)
 
(8,233
)
 
 
 
 
Financing activities
 
 
 
Payments on debt
(2,813
)
 
(23,406
)
Issuance of common stock
405

 
660

Other financing, net
155

 
(2,289
)
Net cash provided used in financing activities
(2,253
)
 
(25,035
)
 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
2,559

 
1,060

Increase in cash and cash equivalents
54,363

 
1,597

Cash and cash equivalents at beginning of period
133,565

 
131,018

Cash and cash equivalents at end of period
$
187,928

 
$
132,615

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net
$
1,224

 
$
3,680

Interest, net of amounts capitalized
2,422

 
2,624

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

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Table of Contents

ITRON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(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 months ended March 31, 2017 and 2016 , the Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 , and the Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 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 months ended March 31, 2017 are not necessarily indicative of the results expected for the full year or for any other 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 2016 Annual Report on Form 10-K filed with the SEC on March 1, 2017 . There have been no significant changes in financial statement preparation or significant accounting policies since December 31, 2016 with the exception of the adoption of Accounting Standards Update (ASU) 2016-09 as discussed below.

New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued 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 is 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.

The revenue guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard effective January 1, 2018 using the cumulative catch-up transition method, and therefore, will recognize the cumulative effect of initially applying the revenue standard as an adjustment to the opening balance of retained earnings in the period of initial application. We currently believe the most significant impact relates to our accounting for software and software-related elements, and the increased financial statement disclosures, but are continuing to evaluate the effect that the updated standard will have on 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. We adopted this standard on January 1, 2017 and it did not materially impact 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

5


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.

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 income tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. The amendments in this ASU becomes effective on a modified retrospective basis for accounting for income tax benefits recognized and forfeitures, retrospectively for accounting related to the presentation of employee taxes paid, prospectively for accounting related to recognition of excess tax benefits, and either prospectively or retrospectively for accounting related to presentation of excess employee tax benefits for annual periods, and interim periods within those annual periods, beginning after December 15, 2016.

We adopted this standard effective January 1, 2017 using a modified retrospective transition method. We recognized a $14.6 million one-time reduction in accumulated deficit and increase in deferred tax assets related to cumulative unrecognized excess tax benefits . All future excess tax benefits and tax deficiencies will be recognized prospectively as income tax provision or benefit in the Consolidated Statement of Operations, and as an operating activity on the Consolidated Statement of Cash Flows. We also recognized a $0.2 million one-time increase in accumulated deficit and common stock related to our policy election to prospectively recognize forfeitures as they occur.

In January 2017, the FASB issued ASU 2017-01,  Clarifying the Definition of a Business  (ASU 2017-01), which narrows the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output. ASU 2017-01 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We adopted this standard on January 1, 2017, and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In January 2017, the FASB issued ASU 2017-04,  Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test that requires the determination of the fair value of individual assets and liabilities of a reporting unit. ASU 2017-04 requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We adopted this standard on January 1, 2017, and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In March 2017, the FASB issued ASU 2017-07,  Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), which provides additional guidance on the presentation of net benefit costs in the income statement. ASU 2017-07 requires an employer disaggregate the service cost component from the other components of net benefit cost and to disclose other components outside of a subtotal of income from operations. It also allows only the service cost component of net benefit costs to be eligible for capitalization. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017 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


Note 2:    Earnings Per Share

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

 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands, except per share data)
Net income available to common shareholders
$
15,845

 
$
10,089

 
 
 
 
Weighted average common shares outstanding - Basic
38,474

 
38,059

Dilutive effect of stock-based awards
741

 
317

Weighted average common shares outstanding - Diluted
39,215

 
38,376

Earnings per common share - Basic
$
0.41

 
$
0.27

Earnings per common share - Diluted
$
0.40

 
$
0.26


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 and the future compensation cost associated with the stock award. Approximately 0.2 million and 1.2 million stock-based awards were excluded from the calculation of diluted EPS for the three months ended March 31, 2017 and 2016 because they were anti-dilutive. These stock-based awards could be dilutive in future periods.

Note 3:    Certain Balance Sheet Components

Accounts receivable, net
March 31, 2017
 
December 31, 2016
 
(in thousands)
Trade receivables (net of allowance of $3,424 and $3,320)
$
307,065

 
$
299,870

Unbilled receivables
37,346

 
51,636

Total accounts receivable, net
$
344,411

 
$
351,506


Allowance for doubtful accounts activity
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Beginning balance
$
3,320

 
$
5,949

Provision (release) for doubtful accounts, net
303

 
(8
)
Accounts written-off
(330
)
 
(1,478
)
Effect of change in exchange rates
131

 
78

Ending balance
$
3,424

 
$
4,541


Inventories
March 31, 2017
 
December 31, 2016
 
(in thousands)
Materials
$
111,832

 
$
103,274

Work in process
10,573

 
7,925

Finished goods
55,655

 
51,850

Total inventories
$
178,060

 
$
163,049



7


Property, plant, and equipment, net
March 31, 2017
 
December 31, 2016
 
(in thousands)
Machinery and equipment
$
287,378

 
$
279,746

Computers and software
101,648

 
98,125

Buildings, furniture, and improvements
125,383

 
122,680

Land
17,604

 
17,179

Construction in progress, including purchased equipment
29,612

 
29,358

Total cost
561,625

 
547,088

Accumulated depreciation
(382,978
)
 
(370,630
)
Property, plant, and equipment, net
$
178,647

 
$
176,458


Depreciation expense
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Depreciation expense
$
9,829

 
$
10,464


Note 4:    Intangible Assets

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

 
March 31, 2017
 
December 31, 2016
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
(in thousands)
Core-developed technology
$
381,788

 
$
(365,766
)
 
$
16,022

 
$
372,568

 
$
(354,878
)
 
$
17,690

Customer contracts and relationships
230,382

 
(176,960
)
 
53,422

 
224,467

 
(170,056
)
 
54,411

Trademarks and trade names
62,817

 
(62,802
)
 
15

 
61,785

 
(61,766
)
 
19

Other
11,077

 
(11,051
)
 
26

 
11,076

 
(11,045
)
 
31

Total intangible assets
$
686,064

 
$
(616,579
)
 
$
69,485

 
$
669,896

 
$
(597,745
)
 
$
72,151


A summary of intangible asset activity is as follows:

 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Beginning balance, intangible assets, gross
$
669,896

 
$
702,507

Effect of change in exchange rates
16,168

 
6,474

Ending balance, intangible assets, gross
$
686,064

 
$
708,981


Estimated future annual amortization expense is as follows:

Year Ending December 31,
 
Estimated Annual Amortization
 
 
(in thousands)
2017 (amount remaining at March 31, 2017)
 
$
13,709

2018
 
12,673

2019
 
9,935

2020
 
8,077

2021
 
7,031

Beyond 2021
 
18,060

Total intangible assets subject to amortization
 
$
69,485



8


Note 5:    Goodwill

The following table reflects goodwill allocated to each reporting unit:
 
Electricity
 
Gas
 
Water
 
Total Company
 
(in thousands)
Balances at January 1, 2017
 
 
 
 
 
 
 
Goodwill before impairment
$
400,299

 
$
319,913

 
$
334,505

 
$
1,054,717

Accumulated impairment losses
(348,926
)
 

 
(253,297
)
 
(602,223
)
Goodwill, net
51,373

 
319,913

 
81,208

 
452,494

 
 
 
 
 
 
 
 
Effect of change in exchange rates
776

 
7,774

 
1,862

 
10,412

 
 
 
 
 
 
 
 
Balances at March 31, 2017
 
 
 
 
 
 
 
Goodwill before impairment
409,960

 
327,687

 
345,042

 
1,082,689

Accumulated impairment losses
(357,811
)
 

 
(261,972
)
 
(619,783
)
Goodwill, net
$
52,149

 
$
327,687

 
$
83,070

 
$
462,906


Note 6:    Debt

The components of our borrowings were as follows:
 
March 31, 2017
 
December 31, 2016
 
(in thousands)
Credit facility:
 
 
 
USD denominated term loan
$
205,313

 
$
208,125

Multicurrency revolving line of credit
99,125

 
97,167

Total debt
304,438

 
305,292

Less: current portion of debt
15,469

 
14,063

Less: unamortized prepaid debt fees - term loan
703

 
769

Long-term debt less unamortized prepaid debt fees - term loan
$
288,266


$
290,460


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 0.18% 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.

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 March 31, 2017 and December 31, 2016 , the interest rate for both the term loan and the USD revolver was 2.24% and 2.02% , respectively, which includes the LIBOR rate plus a margin of 1.25% . At March 31, 2017 and December 31, 2016 , the interest rate for the EUR revolver was 1.25% (the EURIBOR floor rate plus a margin of 1.25% ).


9


At March 31, 2017 , $99.1 million was outstanding under the 2015 credit facility revolver, and $29.2 million was utilized by outstanding standby letters of credit, resulting in $371.7 million available for additional borrowings or standby letters of credit. At March 31, 2017 , $220.8 million was available for additional standby letters of credit under the letter of credit sub-facility and no amounts were outstanding under the swingline sub-facility.

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
 
March 31, 2017
 
December 31, 2016
Derivatives designated as hedging instruments under ASC 815-20
 
(in thousands)
Interest rate cap contracts
 
Other current assets
 
$
5

 
$
3

Interest rate swap contracts
 
Other long-term assets
 
1,922

 
1,830

Interest rate cap contracts
 
Other long-term assets
 
290

 
376

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current assets
 
137

 
169

Interest rate cap contracts
 
Other current assets
 
7

 
4

Interest rate cap contracts
 
Other long-term assets
 
434

 
563

Total asset derivatives
 
 
 
$
2,795

 
$
2,945

 
 
 
 
 
 
 
Liability Derivatives
 
 
 
 
 
 
Derivatives designated as hedging instruments under ASC 815-20
 
 
 
 
Interest rate swap contracts
 
Other current liabilities
 
$
509

 
$
934

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current liabilities
 
337

 
449

Total liability derivatives
 
 
 
$
846

 
$
1,383


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

 
2017
 
2016
 
(in thousands)
Net unrealized loss on hedging instruments at January 1,
$
(14,337
)
 
$
(14,062
)
Unrealized gain (loss) on hedging instruments
60

 
(2,782
)
Realized losses reclassified into net income
232

 
176

Net unrealized loss on hedging instruments at March 31,
$
(14,045
)
 
$
(16,668
)

Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations for the periods ended March 31, 2017 and 2016 . Included in the net unrealized loss on hedging instruments at March 31, 2017 and 2016 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.


10


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)
March 31, 2017
$
2,795

 
$
(687
)
 
$

 
$
2,108

 
 
 
 
 
 
 
 
December 31, 2016
$
2,945

 
$
(1,322
)
 
$

 
$
1,623


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)
March 31, 2017
$
846

 
$
(687
)
 
$

 
$
159

 
 
 
 
 
 
 
 
December 31, 2016
$
1,383

 
$
(1,322
)
 
$

 
$
61


Our derivative assets and liabilities subject to netting arrangements consist of foreign exchange forward and interest rate contracts with three counterparties at March 31, 2017 and December 31, 2016 . No derivative asset or liability balance with any of our counterparties was individually significant at March 31, 2017 or December 31, 2016 . 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 recognized 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 recognized 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 $0.5 million . At March 31, 2017 , our LIBOR-based debt balance was $245.3 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 do not include the effect of the applicable margin. As of December 31, 2016, due to the accelerated revolver payments from surplus

11


cash, we elected to de-designate two of the interest rate cap contracts as cash flow hedges and discontinued the use of cash flow hedge accounting. The amounts recognized in AOCI from de-designated interest rate cap contracts will continue to be reported in AOCI unless it is not probable that the forecasted transactions will occur. As a result of the discontinuance of cash flow hedge accounting, all subsequent changes in fair value of the de-designated derivative instruments are recognized within interest expense instead of OCI. The amount of net losses expected to be reclassified into earnings for all interest rate cap contracts in the next 12 months is  $0.2 million .

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
 
 
2017
 
2016
 
 
 
2017
 
2016
 
 
 
2017
 
2016
 
 
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
181

 
$
(3,779
)
 
Interest expense
 
$
(335
)
 
$
(286
)
 
Interest expense
 
$

 
$

Interest rate cap contracts
 
(84
)
 
(734
)
 
Interest expense
 
(43
)
 

 
Interest expense
 

 


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 recognized to other income and expense. We enter into monthly foreign exchange forward contracts, which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with currency exposures. As of March 31, 2017 , a total of 49  contracts were offsetting our exposures from the euro, Saudi Riyal, Indian Rupee, Chinese Yuan, Indonesian Rupiah, and various other currencies , with notional amounts ranging from  $167,000 to $45.3 million .

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
 
Location
 
Gain (Loss) Recognized on Derivatives in Other Income (Expense)
 
 
 
 
Three Months Ended March 31,
 
 
 
 
2017
 
2016
 
 
 
 
(in thousands)
Foreign exchange forward contracts
 
Other income (expense), net
 
$
(1,742
)
 
$
(855
)
Interest rate cap contracts
 
Interest expense
 
(126
)
 


Note 8:    Defined Benefit Pension Plans

We sponsor both funded and unfunded defined benefit pension plans offering death and disability, retirement, and special termination benefits for our international employees, primarily in Germany, France, Italy, Indonesia, Brazil, and Spain. The defined benefit obligation is calculated annually by using the projected unit credit method. The measurement date for the pension plans was December 31, 2016 .

Amounts recognized on the Consolidated Balance Sheets consist of:

 
March 31, 2017
 
December 31, 2016
 
(in thousands)
Assets
 
 
 
Plan assets in other long-term assets
$
702

 
$
654

 
 
 
 
Liabilities
 
 
 
Current portion of pension benefit obligation in wages and benefits payable
3,281

 
3,202

Long-term portion of pension benefit obligation
87,663

 
84,498

 
 
 
 
Pension benefit obligation, net
$
90,242

 
$
87,046


12



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 March 31,
 
2017
 
2016
 
(in thousands)
Service cost
$
928

 
$
986

Interest cost
525

 
633

Expected return on plan assets
(146
)
 
(126
)
Settlements and other

 
(3
)
Amortization of actuarial net loss
391

 
327

Amortization of unrecognized prior service costs
15

 
15

Net periodic benefit cost
$
1,713

 
$
1,832


Note 9:    Stock-Based Compensation

We maintain the Amended and Restated 2010 Stock Incentive Plan (Stock Incentive Plan), which allows us to grant equity-based compensation awards, including stock options, restricted stock units, phantom stock, and unrestricted stock units. Under the Stock Incentive Plan, we have 7,473,956 shares of common stock reserved and authorized for issuance subject to stock splits, dividends, and other similar events. At March 31, 2017 , 1,608,588 shares were available for grant under the Stock Incentive Plan. We issue new shares of common stock upon the exercise of stock options or when vesting conditions on restricted stock units are fully satisfied. These 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.

We also periodically award phantom stock units, which are settled in cash upon vesting and accounted for as liability-based awards with no impact to the shares available for grant.

In addition, we maintain the Employee Stock Purchase Plan (ESPP), for which approximately 365,000 shares of common stock were available for future issuance at March 31, 2017.

Unrestricted stock and ESPP activity for the quarters ended March 31, 2017 and 2016 was not significant.

Stock-Based Compensation Expense
Total stock-based compensation expense and the related tax benefit were as follows:

 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Stock options
$
659

 
$
554

Restricted stock units
4,297

 
3,096

Unrestricted stock awards
255

 
250

Phantom stock units
392

 
76

Total stock-based compensation
$
5,603

 
$
3,976

 
 
 
 
Related tax benefit
$
1,228

 
$
1,208



13


Stock Options
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
 
Weighted
Average Grant
Date Fair Value
 
(in thousands)
 
 
 
(years)
 
(in thousands)
 
 
Outstanding, January 1, 2016
1,180

 
$
48.31

 
5.7
 
$
405

 
 
Granted
185

 
40.04

 
 
 
 
 
$
13.15

Exercised
(12
)
 
35.29

 
 
 
73

 
 
Forfeited
(35
)
 
35.29

 
 
 
 
 
 
Expired
(1
)
 
48.51

 
 
 
 
 
 
Outstanding, March 31, 2016
1,317

 
$
47.61

 
5.5
 
$
2,859

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2017
959

 
$
45.64

 
6.6
 
$
19,125

 
 
Granted
121

 
65.55

 
 
 
 
 
$
22.01

Exercised
(5
)
 
35.29

 
 
 
120

 
 
Forfeited

 

 
 
 
 
 
 
Expired

 

 
 
 
 
 
 
Outstanding, March 31, 2017
1,075

 
$
47.92

 
6.7
 
$
17,236

 
 
 
 
 
 
 
 
 
 
 
 
Exercisable March 31, 2017
707

 
$
48.34

 
5.5
 
$
11,657

 
 
 
 
 
 
 
 
 
 
 
 
Expected to vest, March 31, 2017
368

 
$
47.13

 
9.0
 
$
5,579

 
 

At March 31, 2017 , total unrecognized stock-based compensation expense related to nonvested stock options was $5.1 million , which is expected to be recognized over a weighted average period of approximately 2.0 years .

The weighted-average assumptions used to estimate the fair value of stock options granted and the resulting weighted average fair value are as follows:

 
Three Months Ended March 31,
 
2017
 
2016
Expected volatility
32.7
%
 
33.5
%
Risk-free interest rate
2.0
%
 
1.3
%
Expected term (years)
5.5

 
5.5

 
 
 
 
Weighted average fair value
$
22.01

 
$
13.15



14


Restricted Stock Units
The following table summarizes restricted stock unit activity:

 
Number of
Restricted Stock Units
 
Weighted
Average Grant
Date Fair Value
 
Aggregate
Intrinsic Value
 
(in thousands)
 
 
 
(in thousands)
Outstanding, January 1, 2016
756

 
 
 
 
Granted
172

 
$
40.02

 
 
Released
(262
)
 
 
 
$
10,098

Forfeited
(30
)
 
 
 
 
Outstanding, March 31, 2016
636

 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2017
701

 
$
38.04

 
 
Granted
131

 
63.12

 
 
Released
(317
)
 
38.13

 
$
12,066

Forfeited
(3
)
 
35.68

 
 
Outstanding, March 31, 2017
512

 
44.45

 
 
 
 
 
 
 
 
Vested but not released, March 31, 2017
6

 
 
 
$
374

 
 
 
 
 
 
Expected to vest, March 31, 2017
410

 
 
 
$
24,894


At March 31, 2017 , total unrecognized compensation expense on restricted stock units was $35.5 million , which is expected to be recognized over a weighted average period of approximately 2.1 years .

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 March 31,
 
2017
 
2016
Expected volatility
28.0
%
 
30.0
%
Risk-free interest rate
1.0
%
 
0.7
%
Expected term (years)
1.7

 
1.8

 
 
 
 
Weighted average fair value
$
77.78

 
$
44.77



15


Phantom Stock Units
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
61

 
$
41.72

Forfeited

 
 
Outstanding, March 31, 2016
61

 
 
 
 
 
 
Expected to vest, March 31, 2016
53

 
 
 
 
 
 
Outstanding, January 1, 2017
62

 
$
40.11

Granted
32

 
65.55

Released
(19
)
 
40.05

Forfeited
(2
)
 
40.05

Outstanding, March 31, 2017
73

 
51.40

 
 
 
 
Expected to vest, March 31, 2017
73

 



At March 31, 2017 , total unrecognized compensation expense on phantom stock units was $4.2 million , which is expected to be recognized over a weighted average period of approximately 2.4 years . We have recognized a phantom stock liability of $0.2 million within wages and benefits payable in the Consolidated Balance Sheets as of March 31, 2017 .

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.

Excess tax benefits and tax deficiencies resulting from employee share-based payments have been recognized as income tax provision or benefit in the 2017 Consolidated Statement of Operations pursuant to implementing ASU 2016-09 (see Note 1).

Our tax expense for the three months ended March 31, 2017 differed from the federal statutory rate of 35% due to the forecasted mix of earnings in domestic and international jurisdictions, a benefit related to excess tax benefits under ASU 2016-09, and losses experienced in jurisdictions with valuation allowances on deferred tax assets.

Our tax expense for the three months ended March 31, 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.

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 March 31,
 
2017
 
2016
 
(in thousands)
Net interest and penalties expense
$
206

 
$
99



16


Accrued interest and penalties recognized were as follows:

 
March 31, 2017
 
December 31, 2016
 
(in thousands)
Accrued interest
$
2,730

 
$
2,473

Accrued penalties
2,432

 
2,329


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:

 
March 31, 2017
 
December 31, 2016
 
(in thousands)
Unrecognized tax benefits related to uncertain tax positions
$
59,358

 
$
57,626

The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate
58,101

 
56,411


At March 31, 2017 , we are under examination by certain tax authorities for the 2000 to 2015 tax years. The material jurisdictions under examination 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 recognized 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.


17


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:

 
March 31, 2017
 
December 31, 2016
 
(in thousands)
Credit facilities
 
 
 
Multicurrency revolving line of credit
$
500,000

 
$
500,000

Long-term borrowings
(99,125
)
 
(97,167
)
Standby LOCs issued and outstanding
(29,205
)
 
(46,103
)
 
 
 
 
Net available for additional borrowings under the multi-currency revolving line of credit
$
371,670

 
$
356,730

Net available for additional standby LOCs under sub-facility
220,795

 
203,897

 
 
 
 
Unsecured multicurrency revolving lines of credit with various financial institutions
 
 
 
Multicurrency revolving lines of credit
$
93,230

 
$
91,809

Standby LOCs issued and outstanding
(21,332
)
 
(21,734
)
Short-term borrowings
(235
)
 
(69
)
Net available for additional borrowings and LOCs
$
71,663

 
$
70,006

 
 
 
 
Unsecured surety bonds in force
$
48,080

 
$
48,221


In the event any such standby LOC or bond is called, we would be obligated to reimburse the issuer of the standby LOC or bond; however, we do not believe that any outstanding LOC or bond will be called.

We generally provide an indemnification related to the infringement of any patent, copyright, trademark, or other intellectual property right on software or equipment within our sales contracts, which indemnifies the customer from and pays the resulting costs, damages, and attorney’s fees awarded against a customer with respect to such a claim provided that: 1) the customer promptly notifies us in writing of the claim and 2) we have the sole control of the defense and all related settlement negotiations. We may also provide an indemnification to our customers for third party claims resulting from damages caused by the negligence or willful misconduct of our employees/agents in connection with the performance of certain contracts. The terms of our indemnifications generally do not limit the maximum potential payments. It is not possible to predict the maximum potential amount of future payments under these or similar agreements.

Legal Matters
We are subject to various legal proceedings and claims of which the outcomes are subject to significant uncertainty. Our policy is to assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required, if any, for these contingencies is made after an analysis of each known issue. A liability is recognized and charged to operating expense when we determine that a loss is probable and the amount can be reasonably estimated. Additionally, we disclose contingencies for which a material loss is reasonably possible, but not probable.


18


Warranty
A summary of the warranty accrual account activity is as follows:

 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Beginning balance
$
43,302

 
$
54,512

New product warranties
2,361

 
2,404

Other adjustments and expirations
1,682

 
1,034

Claims activity
(6,351
)
 
(7,390
)
Effect of change in exchange rates
542

 
182

Ending balance
41,536

 
50,742

Less: current portion of warranty
23,500

 
32,244

Long-term warranty
$
18,036

 
$
18,498


Total warranty expense is classified within cost of revenues and consists of new product warranties issued, costs related to extended warranty contracts, and other changes and adjustments to warranties. Warranty expense was as follows:

 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Total warranty expense
$
4,043

 
$
3,438


Unearned Revenue Related to Extended Warranty
A summary of changes to unearned revenue for extended warranty contracts is as follows:

 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Beginning balance
$
31,549

 
$
33,654

Unearned revenue for new extended warranties
322

 
581

Unearned revenue recognized
(1,005
)
 
(857
)
Effect of change in exchange rates
32

 
120

Ending balance
30,898

 
33,498

Less: current portion of unearned revenue for extended warranty
4,304

 
3,750

Long-term unearned revenue for extended warranty within other long-term obligations
$
26,594

 
$
29,748


Health Benefits
We are self insured for a substantial portion of the cost of our U.S. employee group health insurance. We purchase insurance from a third party, which provides individual and aggregate stop-loss protection for these costs. Each reporting period, we expense the costs of our health insurance plan including paid claims, the change in the estimate of incurred but not reported (IBNR) claims, taxes, and administrative fees (collectively, the plan costs).

Plan costs were as follows:

 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Plan costs
$
8,754

 
$
6,774



19


The IBNR accrual, which is included in wages and benefits payable, was as follows:

 
March 31, 2017
 
December 31, 2016
 
(in thousands)
IBNR accrual
$
2,488

 
$
2,441


Our IBNR accrual and expenses may fluctuate due to the number of plan participants, claims activity, and deductible limits. For our employees located outside of the United States, health benefits are provided primarily through governmental social plans, which are funded through employee and employer tax withholdings.

Note 12:    Restructuring

2016 Projects
On September 1, 2016, we announced projects (2016 Projects) to restructure various company activities in order to improve operational efficiencies, reduce expenses and improve competiveness. We expect to close or consolidate several facilities and reduce our global workforce as a result of the restructuring.

The 2016 Projects began during the three months ended September 30, 2016, and we expect to substantially complete the 2016 Projects by the end of 2018. Many of the affected employees are represented by unions or works councils, which requires consultation, and potential restructuring projects may be subject to regulatory approval, both of which could impact the timing of charges, total expected charges, cost recognized, and planned savings in certain jurisdictions.

The total expected restructuring costs, the restructuring costs recognized during the three months ended March 31, 2017 , and the remaining expected restructuring costs as of March 31, 2017 related to the 2016 Projects are as follows:

 
Total Expected Costs at March 31, 2017
 
Costs Recognized in Prior Periods
 
Costs Recognized During the Three Months Ended March 31, 2017
 
Expected Remaining Costs to be Recognized at March 31, 2017
 
(in thousands)
Employee severance costs
$
45,502

 
$
39,686

 
$
1,316

 
$
4,500

Asset impairments & net loss on sale or disposal
7,219

 
7,219

 

 

Other restructuring costs
15,125

 
889

 
1,736

 
12,500

Total
$
67,846

 
$
47,794

 
$
3,052

 
$
17,000

 
 
 
 
 
 
 
 
Segments:
 
 
 
 
 
 
 
Electricity
$
10,151

 
$
8,827

 
$
(176
)
 
$
1,500

Gas
33,552

 
23,968

 
1,084

 
8,500

Water
20,579

 
13,061

 
1,018

 
6,500

Corporate unallocated
3,564

 
1,938

 
1,126

 
500

Total
$
67,846

 
$
47,794

 
$
3,052

 
$
17,000


2014 Projects
In November 2014, our management approved restructuring projects (2014 Projects) to restructure our Electricity business and related general and administrative activities, along with certain Gas and Water activities, to improve operational efficiencies and reduce expenses. We began implementing these projects in the fourth quarter of 2014, and substantially completed them in the third quarter of 2016. Project activities will continue through the fourth quarter of 2017; however, no further costs are expected to be recognized related to the 2014 Projects.

The 2014 Projects resulted in $48.5 million of restructuring expense, which was recognized from the fourth quarter of 2014 through the third quarter of 2016.


20


The following table summarizes the activity within the restructuring related balance sheet accounts for the 2016 and 2014 Projects during the three months ended March 31, 2017 :

 
Accrued Employee Severance
 
Asset Impairments & Net Loss on Sale or Disposal
 
Other Accrued Costs
 
Total
 
(in thousands)
Beginning balance, January 1, 2017
$
45,368

 
$

 
$
2,602

 
$
47,970

Costs charged to expense
1,316

 

 
1,736

 
3,052

Cash payments
(3,291
)
 

 
(1,558
)
 
(4,849
)
Non-cash items

 

 

 

Effect of change in exchange rates
1,193

 

 
2

 
1,195

Ending balance, March 31, 2017
$
44,586

 
$

 
$
2,782

 
$
47,368


Asset impairments are determined at the asset group level. Revenues and net operating income from the activities we have exited or will exit under the restructuring projects are not material to our operating segments or consolidated results.

Other restructuring costs include expenses for employee relocation, professional fees associated with employee severance, and costs to exit the facilities once the operations in those facilities have ceased. Costs associated with restructuring activities are generally presented in the Consolidated Statements of Operations as restructuring, except for certain costs associated with inventory write-downs, which are classified within cost of revenues, and accelerated depreciation expense, which is recognized according to the use of the asset.

The current restructuring liabilities were $31.0 million and $26.2 million as of March 31, 2017 and December 31, 2016 . The current restructuring liabilities are classified within other current liabilities on the Consolidated Balance Sheets. The long-term restructuring liabilities balances were $16.4 million and $21.8 million as of March 31, 2017 and December 31, 2016 . The long-term restructuring liabilities are classified within other long-term obligations on the Consolidated Balance Sheets, and include facility exit costs and severance accruals.

Note 13:    Shareholders' Equity

Preferred Stock
We have authorized the issuance of 10 million shares of preferred stock with no par value. In the event of a liquidation, dissolution, or winding up of the affairs of the corporation, whether voluntary or involuntary, the holders of any outstanding preferred stock would be entitled to be paid a preferential amount per share to be determined by the Board of Directors prior to any payment to holders of common stock. There was no preferred stock issued or outstanding at March 31, 2017 and December 31, 2016 .

Stock Repurchase Authorization
On February 23, 2017, Itron's Board of Directors authorized the Company to repurchase up to $50 million of our common stock over a 12-month period, beginning February 23, 2017. We repurchased no shares of common stock during the three months ended March 31, 2017 .

21



Other Comprehensive Income (Loss)
The before-tax amount, income tax (provision) benefit, and net-of-tax amount related to each component of OCI were as follows:

 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Before-tax amount
 
 
 
Foreign currency translation adjustment
$
15,066

 
$
10,458

Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
97

 
(4,513
)
Net hedging loss reclassified into net income
378

 
286

Net unrealized gain (loss) on defined benefit plans

 
(113
)
Net defined benefit plan gain (loss) reclassified to net income
406

 
(342
)
Total other comprehensive income (loss), before tax
15,947

 
5,776

 
 
 
 
Tax (provision) benefit
 
 
 
Foreign currency translation adjustment
(50
)
 
(352
)
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
(37
)
 
1,731

Net hedging loss reclassified into net income
(146
)
 
(110
)
Net unrealized gain (loss) on defined benefit plans

 
34

Net defined benefit plan gain (loss) reclassified to net income
(5
)
 
103

Total other comprehensive income (loss) tax benefit
(238
)
 
1,406

 
 
 
 
Net-of-tax amount
 
 
 
Foreign currency translation adjustment
15,016

 
10,106

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

 
(2,782
)
Net hedging loss reclassified into net income
232

 
176

Net unrealized gain (loss) on defined benefit plans

 
(79
)
Net defined benefit plan gain (loss) reclassified to net income
401

 
(239
)
Total other comprehensive income (loss), net of tax
$
15,709

 
$
7,182


The changes in the components of AOCI, net of tax, were as follows:

 
Foreign Currency Translation Adjustments
 
Net Unrealized Gain (Loss) on Derivative Instruments
 
Net Unrealized Gain (Loss) on Nonderivative Instruments
 
Pension Benefit Obligation Adjustments
 
Total
 
(in thousands)
Balances at January 1, 2016
$
(158,009
)
 
$
318

 
$
(14,380
)
 
$
(28,536
)
 
$
(200,607
)
OCI before reclassifications
10,106

 
(2,782
)
 

 
(79
)
 
7,245

Amounts reclassified from AOCI

 
176

 

 
(239
)
 
(63
)
Total other comprehensive income (loss)
10,106


(2,606
)


 
(318
)
 
7,182

Balances at March 31, 2016
$
(147,903
)
 
$
(2,288
)
 
$
(14,380
)
 
$
(28,854
)
 
$
(193,425
)
 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2017
$
(182,986
)
 
$
43

 
$
(14,380
)
 
$
(32,004
)
 
$
(229,327
)
OCI before reclassifications
15,016

 
60

 

 

 
15,076

Amounts reclassified from AOCI

 
232

 

 
401

 
633

Total other comprehensive income (loss)
15,016


292

 

 
401

 
15,709

Balances at March 31, 2017
$
(167,970
)
 
$
335

 
$
(14,380
)
 
$
(31,603
)
 
$
(213,618
)


22


Note 14:    Fair Values of Financial Instruments

The following table presents the fair values of our financial instruments:

 
March 31, 2017
 
December 31, 2016
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
(in thousands)
 
 
Assets