Itron, Inc.
ITRON INC /WA/ (Form: 10-Q, Received: 11/02/2017 06:02:53)

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 2017 , there were outstanding 38,725,212 shares of the registrant’s common stock, no par value, which is the only class of common stock of the registrant.
 


Table of Contents

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


Table of Contents

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

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except per share data)
Revenues
$
486,747

 
$
506,859

 
$
1,467,421

 
$
1,517,473

Cost of revenues
321,429

 
336,110

 
967,018

 
1,013,816

Gross profit
165,318

 
170,749

 
500,403

 
503,657

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Sales and marketing
40,780

 
38,894

 
127,001

 
119,037

Product development
42,560

 
39,386

 
126,539

 
128,086

General and administrative
39,667

 
40,384

 
120,074

 
130,781

Amortization of intangible assets
5,625

 
4,996

 
15,144

 
19,002

Restructuring
(678
)
 
40,679

 
7,417

 
41,294

Total operating expenses
127,954

 
164,339

 
396,175

 
438,200

 
 
 
 
 
 
 
 
Operating income
37,364

 
6,410

 
104,228

 
65,457

Other income (expense)
 
 
 
 
 
 
 
Interest income
729

 
102

 
1,468

 
594

Interest expense
(2,898
)
 
(2,691
)
 
(8,448
)
 
(8,344
)
Other income (expense), net
(1,701
)
 
707

 
(7,126
)
 
(1,074
)
Total other income (expense)
(3,870
)
 
(1,882
)
 
(14,106
)
 
(8,824
)
 
 
 
 
 
 
 
 
Income before income taxes
33,494

 
4,528

 
90,122

 
56,633

Income tax provision
(6,640
)
 
(13,430
)
 
(32,247
)
 
(34,249
)
Net income (loss)
26,854

 
(8,902
)
 
57,875

 
22,384

Net income attributable to noncontrolling interests
1,278

 
983

 
2,357

 
2,263

Net income (loss) attributable to Itron, Inc.
$
25,576

 
$
(9,885
)
 
$
55,518

 
$
20,121

 
 
 
 
 
 
 
 
Earnings (loss) per common share - Basic
$
0.66

 
$
(0.26
)
 
$
1.44

 
$
0.53

Earnings (loss) per common share - Diluted
$
0.65

 
$
(0.26
)
 
$
1.41

 
$
0.52

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - Basic
38,713

 
38,248

 
38,624

 
38,181

Weighted average common shares outstanding - Diluted
39,467

 
38,248

 
39,339

 
38,515

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


1

Table of Contents

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

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Net income (loss)
$
26,854

 
$
(8,902
)
 
$
57,875

 
$
22,384

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
14,930

 
9,184

 
50,393

 
10,910

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

 
542

 
187

 
(3,190
)
Pension benefit obligation adjustment
410

 
(1,198
)
 
1,004

 
(1,807
)
Total other comprehensive income (loss), net of tax
15,466

 
8,528

 
51,584

 
5,913

 
 
 
 
 
 
 
 
Total comprehensive income (loss), net of tax
42,320

 
(374
)
 
109,459

 
28,297

 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests, net of tax
1,278

 
983

 
2,357

 
2,263

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to
Itron, Inc.
$
41,042

 
$
(1,357
)
 
$
107,102

 
$
26,034

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

2

Table of Contents

ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
September 30, 2017
 
December 31, 2016
 
(in thousands)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
137,584

 
$
133,565

Accounts receivable, net
376,149

 
351,506

Inventories
207,703

 
163,049

Other current assets
112,959

 
84,346

Total current assets
834,395

 
732,466

 
 
 
 
Property, plant, and equipment, net
192,784

 
176,458

Deferred tax assets, net
95,666

 
94,113

Other long-term assets
44,072

 
50,129

Intangible assets, net
100,289

 
72,151

Goodwill
550,732

 
452,494

Total assets
$
1,817,938

 
$
1,577,811

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
212,564

 
$
172,711

Other current liabilities
55,305

 
43,625

Wages and benefits payable
94,867

 
82,346

Taxes payable
21,082

 
10,451

Current portion of debt
18,281

 
14,063

Current portion of warranty
21,697

 
24,874

Unearned revenue
74,598

 
64,976

Total current liabilities
498,394

 
413,046

 
 
 
 
Long-term debt
303,949

 
290,460

Long-term warranty
13,225

 
18,428

Pension benefit obligation
96,849

 
84,498

Deferred tax liabilities, net
3,447

 
3,073

Other long-term obligations
111,553

 
117,953

Total liabilities
1,027,417

 
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, 38,725 and 38,317 shares issued and outstanding
1,287,803

 
1,270,467

Accumulated other comprehensive loss, net
(177,743
)
 
(229,327
)
Accumulated deficit
(339,654
)
 
(409,536
)
Total Itron, Inc. shareholders' equity
770,406

 
631,604

Noncontrolling interests
20,115

 
18,749

Total equity
790,521

 
650,353

Total liabilities and equity
$
1,817,938

 
$
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)
 
Nine Months Ended
September 30,
 
2017
 
2016
 
(in thousands)
Operating activities
 
 
 
Net income
$
57,875

 
$
22,384

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
46,000

 
51,563

Stock-based compensation
15,254

 
13,300

Amortization of prepaid debt fees
800

 
806

Deferred taxes, net
7,615

 
17,772

Restructuring, non-cash
(720
)
 
5,153

Other adjustments, net
3,111

 
(734
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,537

 
(32,652
)
Inventories
(30,843
)
 
3,207

Other current assets
(23,492
)
 
(15,591
)
Other long-term assets
10,460

 
8,499

Accounts payable, other current liabilities, and taxes payable
34,987

 
(5,830
)
Wages and benefits payable
6,218

 
11,516

Unearned revenue
(5,679
)
 
(8,684
)
Warranty
(10,285
)
 
(9,900
)
Other operating, net
663

 
21,072

Net cash provided by operating activities
114,501

 
81,881

 
 
 
 
Investing activities
 
 
 
Acquisitions of property, plant, and equipment
(33,493
)
 
(30,563
)
Business acquisitions, net of cash and cash equivalents acquired
(98,848
)
 
(951
)
Other investing, net
10

 
(1,258
)
Net cash used in investing activities
(132,331
)
 
(32,772
)
 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings
35,000



Payments on debt
(24,844
)
 
(29,031
)
Issuance of common stock
2,797

 
1,993

Other financing, net
1,216

 
(3,658
)
Net cash provided by (used in) financing activities
14,169

 
(30,696
)
 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
7,680

 
1,949

Increase in cash and cash equivalents
4,019

 
20,362

Cash and cash equivalents at beginning of period
133,565

 
131,018

Cash and cash equivalents at end of period
$
137,584

 
$
151,380

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net
$
25,423

 
$
17,207

Interest, net of amounts capitalized
7,629

 
7,592

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

4

Table of Contents

ITRON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 nine months ended September 30, 2017 and 2016 , the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 , and the Consolidated Statements of Cash Flows for the nine months ended September 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 nine months ended September 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, 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 (Loss) Per Share

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except per share data)
Net income (loss) available to common shareholders
$
25,576

 
$
(9,885
)
 
$
55,518

 
$
20,121

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - Basic
38,713

 
38,248

 
38,624

 
38,181

Dilutive effect of stock-based awards
754

 

 
715

 
334

Weighted average common shares outstanding - Diluted
39,467

 
38,248

 
39,339

 
38,515

Earnings (loss) per common share - Basic
$
0.66

 
$
(0.26
)
 
$
1.44

 
$
0.53

Earnings (loss) per common share - Diluted
$
0.65

 
$
(0.26
)
 
$
1.41

 
$
0.52


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 nine months ended September 30, 2017 because they were anti-dilutive. Approximately 0.9 million and 0.8 million stock-based awards were excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2016 because they were anti-dilutive. These stock-based awards could be dilutive in future periods.

Note 3:    Certain Balance Sheet Components

Accounts receivable, net
September 30, 2017
 
December 31, 2016
 
(in thousands)
Trade receivables (net of allowance of $3,991 and $3,320)
$
351,255

 
$
299,870

Unbilled receivables
24,894

 
51,636

Total accounts receivable, net
$
376,149

 
$
351,506


Allowance for doubtful accounts activity
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Beginning balance
$
3,502

 
$
3,939

 
$
3,320

 
$
5,949

Provision for doubtful accounts, net
769

 
353

 
1,513

 
265

Accounts written-off
(310
)
 
(77
)
 
(1,115
)
 
(1,919
)
Effect of change in exchange rates
30

 
39

 
273

 
(41
)
Ending balance
$
3,991

 
$
4,254

 
$
3,991

 
$
4,254


Inventories
September 30, 2017
 
December 31, 2016
 
(in thousands)
Materials
$
131,616

 
$
103,274

Work in process
9,158

 
7,925

Finished goods
66,929

 
51,850

Total inventories
$
207,703

 
$
163,049



7


Property, plant, and equipment, net
September 30, 2017
 
December 31, 2016
 
(in thousands)
Machinery and equipment
$
292,330

 
$
279,746

Computers and software
106,287

 
98,125

Buildings, furniture, and improvements
134,536

 
122,680

Land
18,596

 
17,179

Construction in progress, including purchased equipment
37,846

 
29,358

Total cost
589,595

 
547,088

Accumulated depreciation
(396,811
)
 
(370,630
)
Property, plant, and equipment, net
$
192,784

 
$
176,458


Depreciation expense
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Depreciation expense
$
10,907

 
$
11,086

 
$
30,856

 
$
32,561


Note 4:    Intangible Assets

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

 
September 30, 2017
 
December 31, 2016
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
(in thousands)
Core-developed technology
$
425,198

 
$
(393,831
)
 
$
31,367

 
$
372,568

 
$
(354,878
)
 
$
17,690

Customer contracts and relationships
256,840

 
(193,317
)
 
63,523

 
224,467

 
(170,056
)
 
54,411

Trademarks and trade names
69,706

 
(65,537
)
 
4,169

 
61,785

 
(61,766
)
 
19

Other
11,582

 
(11,062
)
 
520

 
11,076

 
(11,045
)
 
31

Total intangible assets subject to amortization
$
763,326

 
$
(663,747
)
 
$
99,579

 
$
669,896

 
$
(597,745
)
 
$
72,151

In-process research and development
710

 

 
710

 

 

 

Total intangible assets
$
764,036

 
$
(663,747
)
 
$
100,289

 
$
669,896

 
$
(597,745
)
 
$
72,151


A summary of intangible asset activity is as follows:

 
Nine Months Ended September 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
57,640

 
2,309

Ending balance, intangible assets, gross
$
764,036

 
$
704,816


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 three 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 September 30, 2017)
 
$
5,605

2018
 
19,065

2019
 
16,302

2020
 
14,003

2021
 
11,995

Beyond 2021
 
32,609

Total intangible assets subject to amortization
 
$
99,579


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
59,137

 

 

 
59,137

Effect of change in exchange rates
2,900

 
29,390

 
6,811

 
39,101

 
 
 
 
 
 
 
 
Balances at September 30, 2017
 
 
 
 
 
 
 
Goodwill before impairment
495,848

 
349,303

 
374,151

 
1,219,302

Accumulated impairment losses
(382,438
)
 

 
(286,132
)
 
(668,570
)
Goodwill, net
$
113,410

 
$
349,303

 
$
88,019

 
$
550,732


Note 6:    Debt

The components of our borrowings were as follows:
 
September 30, 2017
 
December 31, 2016
 
(in thousands)
Credit facility:
 
 
 
USD denominated term loan
$
198,281

 
$
208,125

Multicurrency revolving line of credit
124,523

 
97,167

Total debt
322,804

 
305,292

Less: current portion of debt
18,281

 
14,063

Less: unamortized prepaid debt fees - term loan
574

 
769

Long-term debt less unamortized prepaid debt fees - term loan
$
303,949


$
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 September 30, 2017 and December 31, 2016 , the interest rate for both the term loan and the USD revolver was 2.49% and 2.02% , respectively, which includes the LIBOR rate plus a margin of 1.25% . At September 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 September 30, 2017 , $124.5 million was outstanding under the 2015 credit facility revolver, and $29.1 million was utilized by outstanding standby letters of credit, resulting in $346.4 million available for additional borrowings or standby letters of credit. At September 30, 2017 , $220.9 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
 
September 30, 2017
 
December 31, 2016
Derivatives designated as hedging instruments under ASC 815-20
 
(in thousands)
Interest rate swap contracts
 
Other current assets
 
$
68

 
$

Interest rate cap contracts
 
Other current assets
 
7

 
3

Interest rate swap contracts
 
Other long-term assets
 
1,209

 
1,830

Interest rate cap contracts
 
Other long-term assets
 
147

 
376

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current assets
 
96

 
169

Interest rate cap contracts
 
Other current assets
 
10

 
4

Interest rate cap contracts
 
Other long-term assets
 
220

 
563

Total asset derivatives
 
 
 
$
1,757

 
$
2,945

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

 
$
934

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current liabilities
 
554

 
449

Total liability derivatives
 
 
 
$
554

 
$
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
(295
)
 
(3,709
)
Realized losses reclassified into net income
482

 
519

Net unrealized loss on hedging instruments at September 30,
$
(14,150
)
 
$
(17,252
)

Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations for the periods ended September 30, 2017 and 2016 . Included in the net unrealized loss on hedging instruments at September 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)
September 30, 2017
$
1,757

 
$
(223
)
 
$

 
$
1,534

 
 
 
 
 
 
 
 
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)
September 30, 2017
$
554

 
$
(223
)
 
$

 
$
331

 
 
 
 
 
 
 
 
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 September 30, 2017 and December 31, 2016 . No derivative asset or liability balance with any of our counterparties was individually significant at September 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 are 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 gains expected to be reclassified into earnings in the next 12 months is $0.1 million . At September 30, 2017 , our LIBOR-based debt balance was $258.3 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 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 September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
81

 
$
641

 
Interest expense
 
$
(92
)
 
$
(273
)
 
Interest expense
 
$

 
$

Interest rate cap contracts
 
(24
)
 
(31
)
 
Interest expense
 
(55
)
 
(6
)
 
Interest expense
 

 
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
(255
)
 
$
(4,910
)
 
Interest expense
 
$
(637
)
 
$
(839
)
 
Interest expense
 
$

 
$

Interest rate cap contracts
 
(225
)
 
(1,121
)
 
Interest expense
 
(148
)
 
(6
)
 
Interest expense
 

 
(1
)

Derivatives Not Designated as Hedging Relationships
We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change 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 September 30, 2017 , a total of 54  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  $0.1 million to $50.6 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 September 30,
 
 
 
(in thousands)
Foreign exchange forward contracts
 
Other income (expense), net
 
$
(1,760
)
 
$
(559
)
Interest rate cap contracts
 
Interest expense
 
(36
)
 

 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
Foreign exchange forward contracts
 
Other income (expense), net
 
$
(5,565
)
 
$
(558
)
Interest rate cap contracts
 
Interest expense
 
(337
)
 


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:

 
September 30, 2017
 
December 31, 2016
 
(in thousands)
Assets
 
 
 
Plan assets in other long-term assets
$
740

 
$
654

 
 
 
 
Liabilities
 
 
 
Current portion of pension benefit obligation in wages and benefits payable
3,497

 
3,202

Long-term portion of pension benefit obligation
96,849

 
84,498

 
 
 
 
Pension benefit obligation, net
$
99,606

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Service cost
$
994

 
$
1,003

 
$
2,846

 
$
2,930

Interest cost
568

 
649

 
1,628

 
1,932

Expected return on plan assets
(152
)
 
(139
)
 
(445
)
 
(398
)
Settlements and other

 
506

 

 
499

Amortization of actuarial net loss
431

 
330

 
1,225

 
991

Amortization of unrecognized prior service costs
16

 
16

 
46

 
47

Net periodic benefit cost
$
1,857

 
$
2,365

 
$
5,300

 
$
6,001


Note 9:    Stock-Based Compensation

We maintain the Second Amended and Restated 2010 Stock Incentive Plan (Stock Incentive Plan), which allows us to grant stock-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 September 30, 2017 , 4,641,890 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 348,000 shares of common stock were available for future issuance at September 30, 2017 .

Unrestricted stock and ESPP activity for the three and nine months ended September 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Stock options
$
717

 
$
602

 
$
1,974

 
$
1,741

Restricted stock units
4,170

 
4,595

 
12,538

 
10,834

Unrestricted stock awards
232

 
225

 
742

 
725

Phantom stock units
626

 
371

 
1,510

 
658

Total stock-based compensation
$
5,745

 
$
5,793

 
$
16,764

 
$
13,958

 
 
 
 
 
 
 
 
Related tax benefit
$
1,192

 
$
1,289

 
$
3,520

 
$
3,793


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
191

 
40.40

 
 
 
 
 
$
13.27

Exercised
(35
)
 
35.31

 
 
 
214

 
 
Forfeited
(36
)
 
35.29

 
 
 
 
 
 
Expired
(312
)
 
55.11

 
 
 
 
 
 
Outstanding, September 30, 2016
988

 
$
45.57

 
6.8
 
$
13,732

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2017
959

 
$
45.64

 
6.6
 
$
19,125

 
 
Granted
135

 
65.94

 
 
 
 
 
$
21.98

Exercised
(36
)
 
38.68

 
 
 
972

 
 
Forfeited
(35
)
 
47.38

 
 
 
 
 
 
Expired
(47
)
 
67.43

 
 
 
 
 
 
Outstanding, September 30, 2017
976

 
$
47.60

 
6.5
 
$
30,320

 
 
 
 
 
 
 
 
 
 
 
 
Exercisable September 30, 2017
631

 
$
47.36

 
5.3
 
$
20,197

 
 
 
 
 
 
 
 
 
 
 
 
Expected to vest, September 30, 2017
344

 
$
48.03

 
8.6
 
$
10,123

 
 

At September 30, 2017 , total unrecognized stock-based compensation expense related to nonvested stock options was $3.6 million , which is expected to be recognized over a weighted average period of approximately 1.6 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Expected volatility
29.0
%
 
33.7
%
 
32.5
%
 
33.5
%
Risk-free interest rate
1.8
%
 
1.3
%
 
2.0
%
 
1.3
%
Expected term (years)
5.5

 
5.5

 
5.5

 
5.5

 
 
 
 
 
 
 
 
Weighted average fair value
$
21.84

 
$
17.37

 
$
21.98

 
$
13.27


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
196

 
$
41.58

 
 
Released
(280
)
 
 
 
$
10,823

Forfeited
(50
)
 
 
 
 
Outstanding, September 30, 2016
622

 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2017
701

 
$
38.04

 
 
Granted
141

 
65.54

 
 
Released
(340
)
 
38.51

 
$
13,097

Forfeited
(23
)
 
45.27

 
 
Outstanding, September 30, 2017
479

 
45.64

 
 
 
 
 
 
 
 
Vested but not released, September 30, 2017
9

 
 
 
$
660

 
 
 
 
 
 
Expected to vest, September 30, 2017
388

 
 
 
$
30,013


At September 30, 2017 , total unrecognized compensation expense on restricted stock units was $25.6 million , which is expected to be recognized over a weighted average period of approximately 1.8 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Expected volatility
27.9
%
 
28.8
%
 
28.0
%
 
30.0
%
Risk-free interest rate
1.4
%
 
0.8
%
 
1.0
%
 
0.7
%
Expected term (years)
2.3

 
2.3

 
1.7

 
1.8

 
 
 
 
 
 
 
 
Weighted average fair value
$
80.64

 
$
63.10

 
$
77.75

 
$
44.92



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, September 30, 2016
62

 
 
 
 
 
 
Expected to vest, September 30, 2016
56

 
 
 
 
 
 
Outstanding, January 1, 2017
62

 
$
40.11

Granted
32

 
65.55

Released
(20
)
 
40.11

Forfeited
(7
)
 
41.61

Outstanding, September 30, 2017
67

 
52.24

 
 
 
 
Expected to vest, September 30, 2017
67

 



At September 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 1.8 years . As of September 30, 2017 and December 31, 2016 , we have recognized a phantom stock liability of $1.4 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 Statements of Operations pursuant to the adoption of ASU 2016-09 (see Note 1).

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

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Net interest and penalties expense (benefit)
$
(746
)
 
$
591

 
$
(334
)
 
$
923



16


Accrued interest and penalties recognized were as follows:

 
September 30, 2017
 
December 31, 2016
 
(in thousands)
Accrued interest
$
2,879

 
$
2,473

Accrued penalties
2,412

 
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:

 
September 30, 2017
 
December 31, 2016
 
(in thousands)
Unrecognized tax benefits related to uncertain tax positions
$
63,707

 
$
57,626

The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate
62,335

 
56,411


At September 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:

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

 
$
500,000

Long-term borrowings
(124,523
)
 
(97,167
)
Standby LOCs issued and outstanding
(29,095
)
 
(46,103
)
 
 
 
 
Net available for additional borrowings under the multi-currency revolving line of credit
$
346,382

 
$
356,730

Net available for additional standby LOCs under sub-facility
220,905

 
203,897

 
 
 
 
Unsecured multicurrency revolving lines of credit with various financial institutions
 
 
 
Multicurrency revolving lines of credit
$
110,055

 
$
91,809

Standby LOCs issued and outstanding
(20,859
)
 
(21,734
)
Short-term borrowings
(2,423
)
 
(69
)
Net available for additional borrowings and LOCs
$
86,773

 
$
70,006

 
 
 
 
Unsecured surety bonds in force
$
52,278

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Beginning balance
$
39,810

 
$
45,457

 
$
43,302

 
$
54,512

New product warranties
2,708

 
1,976

 
6,637

 
5,881

Other adjustments and expirations
(4,346
)
 
1,662

 
(2,445
)
 
3,697

Claims activity
(3,773
)
 
(4,485
)
 
(14,372
)
 
(19,488
)
Effect of change in exchange rates
523

 
176

 
1,800

 
184

Ending balance
34,922

 
44,786

 
34,922

 
44,786

Less: current portion of warranty
21,697

 
26,084

 
21,697

 
26,084

Long-term warranty
$
13,225