Itron, Inc.
ITRON INC /WA/ (Form: 10-Q, Received: 08/03/2017 06:03:07)

 
 
 
 
 
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 June 30, 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 June 30, 2017 , there were outstanding 38,700,680 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except per share data)
Revenues
$
503,082

 
$
513,024

 
$
980,674

 
$
1,010,614

Cost of revenues
325,222

 
343,319

 
645,589

 
677,706

Gross profit
177,860

 
169,705

 
335,085

 
332,908

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Sales and marketing
44,753

 
39,376

 
86,221

 
80,143

Product development
43,111

 
43,354

 
83,979

 
88,700

General and administrative
43,161

 
45,328

 
80,407

 
90,397

Amortization of intangible assets
4,970

 
7,796

 
9,519

 
14,006

Restructuring
5,043

 
(1,622
)
 
8,095

 
615

Total operating expenses
141,038

 
134,232

 
268,221

 
273,861

 
 
 
 
 
 
 
 
Operating income
36,822

 
35,473

 
66,864

 
59,047

Other income (expense)
 
 
 
 
 
 
 
Interest income
470

 
221

 
739

 
492

Interest expense
(2,876
)
 
(2,735
)
 
(5,550
)
 
(5,653
)
Other income (expense), net
(2,849
)
 
(264
)
 
(5,425
)
 
(1,781
)
Total other income (expense)
(5,255
)
 
(2,778
)
 
(10,236
)
 
(6,942
)
 
 
 
 
 
 
 
 
Income before income taxes
31,567

 
32,695

 
56,628

 
52,105

Income tax provision
(16,560
)
 
(12,193
)
 
(25,607
)
 
(20,819
)
Net income
15,007

 
20,502

 
31,021

 
31,286

Net income attributable to noncontrolling interests
910

 
585

 
1,079

 
1,280

Net income attributable to Itron, Inc.
$
14,097

 
$
19,917

 
$
29,942

 
$
30,006

 
 
 
 
 
 
 
 
Earnings per common share - Basic
$
0.36

 
$
0.52

 
$
0.78

 
$
0.79

Earnings per common share - Diluted
$
0.36

 
$
0.52

 
$
0.76

 
$
0.78

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - Basic
38,683

 
38,236

 
38,579

 
38,147

Weighted average common shares outstanding - Diluted
39,332

 
38,516

 
39,274

 
38,446

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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Net income
$
15,007

 
$
20,502

 
$
31,021

 
$
31,286

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
20,447

 
(8,380
)
 
35,463

 
1,726

Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges
(231
)
 
(1,126
)
 
61

 
(3,732
)
Pension benefit obligation adjustment
193

 
(291
)
 
594

 
(609
)
Total other comprehensive income (loss), net of tax
20,409

 
(9,797
)
 
36,118

 
(2,615
)
 
 
 
 
 
 
 
 
Total comprehensive income, net of tax
35,416

 
10,705

 
67,139

 
28,671

 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests, net of tax
910

 
585

 
1,079

 
1,280

 
 
 
 
 
 
 
 
Comprehensive income attributable to
Itron, Inc.
$
34,506

 
$
10,120

 
$
66,060

 
$
27,391

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

2

Table of Contents

ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
June 30, 2017
 
December 31, 2016
 
(in thousands)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
127,880

 
$
133,565

Accounts receivable, net
374,180

 
351,506

Inventories
203,634

 
163,049

Other current assets
93,266

 
84,346

Total current assets
798,960

 
732,466

 
 
 
 
Property, plant, and equipment, net
186,506

 
176,458

Deferred tax assets, net
96,062

 
94,113

Other long-term assets
52,881

 
50,129

Intangible assets, net
104,144

 
72,151

Goodwill
541,071

 
452,494

Total assets
$
1,779,624

 
$
1,577,811

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
208,379

 
$
172,711

Other current liabilities
60,124

 
43,625

Wages and benefits payable
99,318

 
82,346

Taxes payable
15,395

 
10,451

Current portion of debt
16,875

 
14,063

Current portion of warranty
25,584

 
24,874

Unearned revenue
79,112

 
64,976

Total current liabilities
504,787

 
413,046

 
 
 
 
Long-term debt
307,484

 
290,460

Long-term warranty
14,226

 
18,428

Pension benefit obligation
93,263

 
84,498

Deferred tax liabilities, net
3,350

 
3,073

Other long-term obligations
113,017

 
117,953

Total liabilities
1,036,127

 
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, 38,701 and 38,317 shares issued and outstanding
1,282,085

 
1,270,467

Accumulated other comprehensive loss, net
(193,209
)
 
(229,327
)
Accumulated deficit
(365,229
)
 
(409,536
)
Total Itron, Inc. shareholders' equity
723,647

 
631,604

Noncontrolling interests
19,850

 
18,749

Total equity
743,497

 
650,353

Total liabilities and equity
$
1,779,624

 
$
1,577,811

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)
 
Six Months Ended June 30,
 
2017
 
2016
 
(in thousands)
Operating activities
 
 
 
Net income
$
31,021

 
$
31,286

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
29,468

 
35,481

Stock-based compensation
10,135

 
7,878

Amortization of prepaid debt fees
533

 
534

Deferred taxes, net
7,077

 
9,706

Restructuring, non-cash
80

 
(131
)
Other adjustments, net
2,395

 
(366
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,032
)
 
(35,283
)
Inventories
(29,470
)
 
2,882

Other current assets
(3,905
)
 
(10,549
)
Other long-term assets
2,186

 
2,667

Accounts payable, other current liabilities, and taxes payable
36,861

 
(735
)
Wages and benefits payable
12,299

 
14,709

Unearned revenue
6,701

 
5,513

Warranty
(4,825
)
 
(9,065
)
Other operating, net
(5,080
)
 
(3,400
)
Net cash provided by operating activities
93,444

 
51,127

 
 
 
 
Investing activities
 
 
 
Acquisitions of property, plant, and equipment
(21,898
)
 
(19,884
)
Business acquisitions, net of cash and cash equivalents acquired
(99,477
)
 
(951
)
Other investing, net
(456
)
 
(974
)
Net cash used in investing activities
(121,831
)
 
(21,809
)
 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings
35,000



Payments on debt
(20,625
)
 
(26,218
)
Issuance of common stock
2,198

 
1,956

Other financing, net
952

 
(4,679
)
Net cash provided provided by (used in) financing activities
17,525

 
(28,941
)
 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
5,177

 
619

Increase (decrease) in cash and cash equivalents
(5,685
)
 
996

Cash and cash equivalents at beginning of period
133,565

 
131,018

Cash and cash equivalents at end of period
$
127,880

 
$
132,014

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net
$
14,480

 
$
10,545

Interest, net of amounts capitalized
5,021

 
5,064

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
June 30, 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 and six months ended June 30, 2017 and 2016 , the Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 , and the Consolidated Statements of Cash Flows for the six months ended June 30, 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 and six months ended June 30, 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except per share data)
Net income available to common shareholders
$
14,097

 
$
19,917

 
$
29,942

 
$
30,006

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - Basic
38,683

 
38,236

 
38,579

 
38,147

Dilutive effect of stock-based awards
649

 
280

 
695

 
299

Weighted average common shares outstanding - Diluted
39,332

 
38,516

 
39,274

 
38,446

Earnings per common share - Basic
$
0.36

 
$
0.52

 
$
0.78

 
$
0.79

Earnings per common share - Diluted
$
0.36

 
$
0.52

 
$
0.76

 
$
0.78


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 stock-based awards were excluded from the calculation of diluted EPS for both the three and six months ended June 30, 2017 because they were anti-dilutive. Approximately 0.9 million and 1.0 million stock-based awards were excluded from the calculation of diluted EPS for the three and six months ended June 30, 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
June 30, 2017
 
December 31, 2016
 
(in thousands)
Trade receivables (net of allowance of $3,502 and $3,320)
$
345,738

 
$
299,870

Unbilled receivables
28,442

 
51,636

Total accounts receivable, net
$
374,180

 
$
351,506


Allowance for doubtful accounts activity
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Beginning balance
$
3,424

 
$
4,541

 
$
3,320

 
$
5,949

Provision (release) for doubtful accounts, net
441

 
(80
)
 
744

 
(88
)
Accounts written-off
(475
)
 
(364
)
 
(805
)
 
(1,842
)
Effect of change in exchange rates
112

 
(158
)
 
243

 
(80
)
Ending balance
$
3,502

 
$
3,939

 
$
3,502

 
$
3,939


Inventories
June 30, 2017
 
December 31, 2016
 
(in thousands)
Materials
$
124,363

 
$
103,274

Work in process
14,399

 
7,925

Finished goods
64,872

 
51,850

Total inventories
$
203,634

 
$
163,049



7


Property, plant, and equipment, net
June 30, 2017
 
December 31, 2016
 
(in thousands)
Machinery and equipment
$
297,314

 
$
279,746

Computers and software
105,570

 
98,125

Buildings, furniture, and improvements
130,165

 
122,680

Land
18,161

 
17,179

Construction in progress, including purchased equipment
32,036

 
29,358

Total cost
583,246

 
547,088

Accumulated depreciation
(396,740
)
 
(370,630
)
Property, plant, and equipment, net
$
186,506

 
$
176,458


Depreciation expense
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Depreciation expense
$
10,120

 
$
11,011

 
$
19,949

 
$
21,475


Note 4:    Intangible Assets

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

 
June 30, 2017
 
December 31, 2016
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
(in thousands)
Core-developed technology
$
415,616

 
$
(382,015
)
 
$
33,601

 
$
372,568

 
$
(354,878
)
 
$
17,690

Customer contracts and relationships
250,683

 
(185,659
)
 
65,024

 
224,467

 
(170,056
)
 
54,411

Trademarks and trade names
68,626

 
(64,340
)
 
4,286

 
61,785

 
(61,766
)
 
19

Other
11,579

 
(11,056
)
 
523

 
11,076

 
(11,045
)
 
31

Total intangible assets subject to amortization
$
746,504

 
$
(643,070
)
 
$
103,434

 
$
669,896

 
$
(597,745
)
 
$
72,151

In-process research and development
710

 

 
710

 

 

 

Total intangible assets
$
747,214

 
$
(643,070
)
 
$
104,144

 
$
669,896

 
$
(597,745
)
 
$
72,151


A summary of intangible asset activity is as follows:

 
Six Months Ended June 30,
 
2017
 
2016
 
(in thousands)
Beginning balance, intangible assets, gross
$
669,896

 
$
702,507

Intangible assets acquired
36,500

 

Effect of change in exchange rates
40,818

 
(2,512
)
Ending balance, intangible assets, gross
$
747,214

 
$
699,995


On June 1, 2017, we completed the acquisition of Comverge Inc. by purchasing 100% of the voting stock of Peak Holding Corp., its parent company (Comverge). Intangible assets acquired in 2017 are based on the preliminary purchase price allocation relating to this acquisition. Comverge's intangible assets include in-process research and development, which is not amortized until such time as the associated development projects are completed. These projects are expected to be completed in the next six months. Refer to Note 16 for additional information regarding this acquisition.


8


Estimated future annual amortization expense is as follows:

Year Ending December 31,
 
Estimated Annual Amortization
 
 
(in thousands)
2017 (amount remaining at June 30, 2017)
 
$
11,103

2018
 
18,761

2019
 
16,050

2020
 
13,698

2021
 
11,799

Beyond 2021
 
32,023

Total intangible assets subject to amortization
 
$
103,434


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

 
 
 
 
 
 
 
 
Goodwill acquired
60,286

 

 

 
60,286

Effect of change in exchange rates
2,065

 
21,158

 
5,068

 
28,291

 
 
 
 
 
 
 
 
Balances at June 30, 2017
 
 
 
 
 
 
 
Goodwill before impairment
486,834

 
341,071

 
363,185

 
1,191,090

Accumulated impairment losses
(373,110
)
 

 
(276,909
)
 
(650,019
)
Goodwill, net
$
113,724

 
$
341,071

 
$
86,276

 
$
541,071


Note 6:    Debt

The components of our borrowings were as follows:
 
June 30, 2017
 
December 31, 2016
 
(in thousands)
Credit facility:
 
 
 
USD denominated term loan
$
202,500

 
$
208,125

Multicurrency revolving line of credit
122,497

 
97,167

Total debt
324,997

 
305,292

Less: current portion of debt
16,875

 
14,063

Less: unamortized prepaid debt fees - term loan
638

 
769

Long-term debt less unamortized prepaid debt fees - term loan
$
307,484


$
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

9


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 June 30, 2017 and December 31, 2016 , the interest rate for both the term loan and the USD revolver was 2.48% and 2.02% , respectively, which includes the LIBOR rate plus a margin of 1.25% . At June 30, 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% ).

At June 30, 2017 , $122.5 million was outstanding under the 2015 credit facility revolver, and $28.7 million was utilized by outstanding standby letters of credit, resulting in $348.8 million available for additional borrowings or standby letters of credit. At June 30, 2017 , $221.3 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
 
June 30, 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
 
1,219

 
1,830

Interest rate cap contracts
 
Other long-term assets
 
173

 
376

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current assets
 
62

 
169

Interest rate cap contracts
 
Other current assets
 
7

 
4

Interest rate cap contracts
 
Other long-term assets
 
259

 
563

Total asset derivatives
 
 
 
$
1,725

 
$
2,945

 
 
 
 
 
 
 
Liability Derivatives
 
 
 
 
 
 
Derivatives designated as hedging instruments under ASC 815-20
 
 
 
 
Interest rate swap contracts
 
Other current liabilities
 
$
114

 
$
934

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current liabilities
 
382

 
449

Total liability derivatives
 
 
 
$
496

 
$
1,383



10


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 loss on hedging instruments
(330
)
 
(4,080
)
Realized losses reclassified into net income
391

 
348

Net unrealized loss on hedging instruments at June 30,
$
(14,276
)
 
$
(17,794
)

Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations for the periods ended June 30, 2017 and 2016 . Included in the net unrealized loss on hedging instruments at June 30, 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.

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)
June 30, 2017
$
1,725

 
$
(302
)
 
$

 
$
1,423

 
 
 
 
 
 
 
 
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)
June 30, 2017
$
496

 
$
(302
)
 
$

 
$
194

 
 
 
 
 
 
 
 
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 June 30, 2017 and December 31, 2016 . No derivative asset or liability balance with any of our counterparties was individually significant at June 30, 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

11


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 $0.1 million . At June 30, 2017 , our LIBOR-based debt balance was $262.5 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 do not include the effect of the applicable margin. As of December 31, 2016, due to the accelerated revolver payments from surplus 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  $0.3 million .

The before-tax effects of our derivative instruments designated as hedges 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 June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
(517
)
 
$
(1,771
)
 
Interest expense
 
$
(210
)
 
$
(280
)
 
Interest expense
 
$

 
$

Interest rate cap contracts
 
(117
)
 
(357
)
 
Interest expense
 
(50
)
 

 
Interest expense
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
(336
)
 
$
(5,551
)
 
Interest expense
 
$
(545
)
 
$
(566
)
 
Interest expense
 
$

 
$

Interest rate cap contracts
 
(201
)
 
(1,090
)
 
Interest expense
 
(93
)
 

 
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 June 30, 2017 , a total of 53  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  $118,000 to $45.5 million .


12


The effect of our derivative instruments not designated as hedges 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)
 
 
 
 
2017
 
2016
Three Months Ended June 30,
 
 
 
(in thousands)
Foreign exchange forward contracts
 
Other income (expense), net
 
$
(2,063
)
 
$
856

Interest rate cap contracts
 
Interest expense
 
(175
)
 

 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
Foreign exchange forward contracts
 
Other income (expense), net
 
$
(3,805
)
 
$
1

Interest rate cap contracts
 
Interest expense
 
(301
)
 


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:

 
June 30, 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
3,340

 
3,202

Long-term portion of pension benefit obligation
93,263

 
84,498

 
 
 
 
Pension benefit obligation, net
$
95,901

 
$
87,046


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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Service cost
$
924

 
$
941

 
$
1,852

 
$
1,927

Interest cost
535

 
650

 
1,060

 
1,283

Expected return on plan assets
(147
)
 
(133
)
 
(293
)
 
(259
)
Settlements and other

 
(4
)
 

 
(7
)
Amortization of actuarial net loss
403

 
334

 
794

 
661

Amortization of unrecognized prior service costs
15

 
16

 
30

 
31

Net periodic benefit cost
$
1,730

 
$
1,804

 
$
3,443

 
$
3,636


Note 9:    Stock-Based Compensation

We maintain the Second 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

13


the Stock Incentive Plan, we have 10,473,956 shares of common stock reserved and authorized for issuance subject to stock splits, dividends, and other similar events. At June 30, 2017 , 4,647,815 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 355,000 shares of common stock were available for future issuance at June 30, 2017.

Unrestricted stock and ESPP activity for the three and six months ended June 30, 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Stock options
$
598

 
$
585

 
$
1,257

 
$
1,139

Restricted stock units
4,071

 
3,143

 
8,368

 
6,239

Unrestricted stock awards
255

 
250

 
510

 
500

Phantom stock units
492

 
211

 
884

 
287

Total stock-based compensation
$
5,416

 
$
4,189

 
$
11,019

 
$
8,165

 
 
 
 
 
 
 
 
Related tax benefit
$
1,100

 
$
1,296

 
$
2,328

 
$
2,504


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
(34
)
 
35.29

 
 
 
195

 
 
Forfeited
(36
)
 
35.29

 
 
 
 
 
 
Expired
(147
)
 
62.50

 
 
 
 
 
 
Outstanding, June 30, 2016
1,148

 
$
45.95

 
6.0
 
$
3,700

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2017
959

 
$
45.64

 
6.6
 
$
19,125

 
 
Granted
132

 
65.80

 
 
 
 
 
$
21.99

Exercised
(34
)
 
37.58

 
 
 
933

 
 
Forfeited
(35
)
 
47.38

 
 
 
 
 
 
Expired
(47
)
 
67.43

 
 
 
 
 
 
Outstanding, June 30, 2017
975

 
$
47.54

 
6.7
 
$
21,680

 
 
 
 
 
 
 
 
 
 
 
 
Exercisable June 30, 2017
632

 
$
47.38

 
5.5
 
$
14,846

 
 
 
 
 
 
 
 
 
 
 
 
Expected to vest, June 30, 2017
343

 
$
47.85

 
8.8
 
$
6,834

 
 

At June 30, 2017 , total unrecognized stock-based compensation expense related to nonvested stock options was $4.2 million , which is expected to be recognized over a weighted average period of approximately 1.8 years .


14


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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Expected volatility
30.8
%
 
%
 
32.6
%
 
33.5
%
Risk-free interest rate
1.8
%
 
%
 
2.0
%
 
1.3
%
Expected term (years)
5.5

 

 
5.5

 
5.5

 
 
 
 
 
 
 
 
Weighted average fair value
$
21.71

 
$

 
$
21.99

 
$
13.15


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
(270
)
 
 
 
$
10,429

Forfeited
(42
)
 
 
 
 
Outstanding, June 30, 2016
616

 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2017
701

 
$
38.04

 
 
Granted
140

 
65.48

 
 
Released
(328
)
 
38.26

 
$
12,533

Forfeited
(19
)
 
43.60

 
 
Outstanding, June 30, 2017
494

 
45.58

 
 
 
 
 
 
 
 
Vested but not released, June 30, 2017
7

 
 
 
$
447

 
 
 
 
 
 
Expected to vest, June 30, 2017
403

 
 
 
$
27,332


At June 30, 2017 , total unrecognized compensation expense on restricted stock units was $30.2 million , which is expected to be recognized over a weighted average period of approximately 1.9 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Expected volatility
28.0
%
 
%
 
28.0
%
 
30.0
%
Risk-free interest rate
1.4
%
 
%
 
1.1
%
 
0.7
%
Expected term (years)
2.5

 

 
1.7

 
1.8

 
 
 
 
 
 
 
 
Weighted average fair value
$
75.58

 
$

 
$
77.65

 
$
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
63

 
$
40.11

Forfeited
(1
)
 
 
Outstanding, June 30, 2016
62

 
 
 
 
 
 
Expected to vest, June 30, 2016
55

 
 
 
 
 
 
Outstanding, January 1, 2017
62

 
$
40.11

Granted
32

 
65.55

Released
(20
)
 
40.11

Forfeited
(6
)
 
40.05

Outstanding, June 30, 2017
68

 
52.18

 
 
 
 
Expected to vest, June 30, 2017
68

 



At June 30, 2017 , total unrecognized compensation expense on phantom stock units was $3.9 million , which is expected to be recognized over a weighted average period of approximately 2.0 years . As of June 30, 2017 and December 31, 2016 , we have recognized a phantom stock liability of $0.7 million and $1.0 million , respectively, within wages and benefits payable in the Consolidated Balance Sheets.

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 the adoption of ASU 2016-09 (see Note 1).

Our tax expense for the three and six months ended June 30, 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 and six months ended June 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.

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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Net interest and penalties expense
$
207

 
$
233

 
$
413

 
$
332



16


Accrued interest and penalties recognized were as follows:

 
June 30, 2017
 
December 31, 2016
 
(in thousands)
Accrued interest
$
3,435

 
$
2,473

Accrued penalties
2,509

 
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:

 
June 30, 2017
 
December 31, 2016
 
(in thousands)
Unrecognized tax benefits related to uncertain tax positions
$
64,396

 
$
57,626

The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate
63,067

 
56,411


At June 30, 2017 , we are under examination by certain tax authorities for the 2000 to 2015 tax years. The material jurisdictions where we are subject to 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:

 
June 30, 2017
 
December 31, 2016
 
(in thousands)
Credit facilities
 
 
 
Multicurrency revolving line of credit
$
500,000

 
$
500,000

Long-term borrowings
(122,497
)
 
(97,167
)
Standby LOCs issued and outstanding
(28,723
)
 
(46,103
)
 
 
 
 
Net available for additional borrowings under the multi-currency revolving line of credit
$
348,780

 
$
356,730

Net available for additional standby LOCs under sub-facility
221,277

 
203,897

 
 
 
 
Unsecured multicurrency revolving lines of credit with various financial institutions
 
 
 
Multicurrency revolving lines of credit
$
106,113

 
$
91,809

Standby LOCs issued and outstanding
(22,838
)
 
(21,734
)
Short-term borrowings
(1,094
)
 
(69
)
Net available for additional borrowings and LOCs
$
82,181

 
$
70,006

 
 
 
 
Unsecured surety bonds in force
$
48,879

 
$
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Beginning balance
$
41,536

 
$
50,742

 
$
43,302

 
$
54,512

New product warranties
1,568

 
1,501

 
3,929

 
3,905

Other adjustments and expirations
219

 
1,001

 
1,901

 
2,035

Claims activity
(4,248
)
 
(7,613
)
 
(10,599
)
 
(15,003
)
Effect of change in exchange rates
735

 
(174
)
 
1,277

 
8

Ending balance
39,810

 
45,457

 
39,810

 
45,457

Less: current portion of warranty
25,584

 
26,825

 
25,584

 
26,825

Long-term warranty
$
14,226