Itron, Inc.
ITRON INC /WA/ (Form: 10-K, Received: 03/01/2017 06:02:47)

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 000-22418
ITRON, INC.
(Exact name of registrant as specified in its charter)
Washington
 
91-1011792
(State of Incorporation)
 
(I.R.S. Employer Identification Number)
2111 N Molter Road, Liberty Lake, Washington 99019
(509) 924-9900
(Address and telephone number of registrant’s principal executive offices)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock, no par value
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   ¨   No   x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   ¨   No   x
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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
x
Accelerated filer
¨
 
 
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   ¨   No   x
As of June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of common stock held by non-affiliates of the registrant (based on the closing price for the common stock on the NASDAQ Global Select Market) was $1,632,121,446 .
As of January 31, 2017 there were outstanding 38,327,719 shares of the registrant’s common stock, no par value, which is the only class of common stock of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Shareholders of the Company to be held on May 12, 2017.
 



Itron, Inc.
Table of Contents
 
 
 
Page
PART I
 
 
 
ITEM 1:
 
ITEM 1A:
 
ITEM 1B:
 
ITEM 2:
 
ITEM 3:
 
ITEM 4:
 
 
 
 
PART II
 
 
 
ITEM 5:
 
ITEM 6:
 
ITEM 7:
 
ITEM 7A:
 
ITEM 8:
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 9:
 
ITEM 9A:
 
ITEM 9B:
 
 
 
 
PART III
 
 
 
ITEM 10:
 
ITEM 11:
 
ITEM 12: 
 
ITEM 13:
 
ITEM 14:
 
 
 
 
PART IV
 
 
 
ITEM 15:
 
 
 
 
 
 
 
 
 
SCHEDULE II: 




In this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “Itron,” and the “Company” refer to Itron, Inc.
Certain Forward-Looking Statements
This document contains forward-looking statements concerning our operations, financial performance, revenues, earnings growth, liquidity, and other items. This document reflects our current plans and expectations and is based on information currently available as of the date of this Annual Report on Form 10-K. When we use the words “expect,” “intend,” “anticipate,” “believe,” “plan,” “project,” “estimate,” “future,” “objective,” “may,” “will,” “will continue,” and similar expressions, they are intended to identify forward-looking statements. Forward-looking statements rely on a number of assumptions and estimates. These assumptions and estimates could be inaccurate and cause our actual results to vary materially from expected results. Risks and uncertainties include 1) the rate and timing of customer demand for our products, 2) rescheduling or cancellations of current customer orders and commitments, 3) changes in estimated liabilities for product warranties, litigation, and costs to deliver and implement network solutions, 4) our dependence on customers’ acceptance of new products and their performance, 5) competition, 6) changes in domestic and international laws and regulations, 7) changes in foreign currency exchange rates and interest rates, 8) international business risks, 9) our own and our customers’ or suppliers’ access to and cost of capital, 10) future business combinations, 11) implementation of restructuring projects, and 12) other factors. You should not solely rely on these forward-looking statements as they are only valid as of the date of this Annual Report on Form 10-K. We do not have any obligation to publicly update or revise any forward-looking statement in this document. For a more complete description of these and other risks, refer to Item 1A: “Risk Factors” included in this Annual Report on Form 10-K.
PART I
ITEM 1:    BUSINESS
Available Information

Documents we provide to the Securities and Exchange Commission (SEC) are available free of charge under the Investors section of our website at www.itron.com as soon as practicable after they are filed with or furnished to the SEC. In addition, these documents are available at the SEC’s website ( http://www.sec.gov ) and at the SEC’s Headquarters at 100 F Street, NE, Washington, DC 20549, or by calling 1-800-SEC-0330.

General

Itron is among the leading technology and services companies dedicated to the resourceful use of electricity, natural gas, and water. We provide comprehensive solutions that measure, manage, and analyze energy and water use. Our broad product portfolio helps utilities responsibly and efficiently manage resources.

With increasing populations and resource consumption, there continues to be growing demand for electricity, natural gas, and water. This demand comes at a time when utilities are challenged by cost constraints, regulatory requirements, and environmental concerns. Our solution is to provide utilities with the knowledge they need to optimize their resources and to better understand and serve their customers - knowledge that gives their customers control over their energy and water needs and allows for better management and conservation of valuable resources.

We were incorporated in 1977 with a focus on meter reading technology. In 2004, we entered the electricity meter manufacturing business with the acquisition of Schlumberger Electricity Metering. In 2007, we expanded our presence in global meter manufacturing and systems with the acquisition of Actaris Metering Systems SA.

The following is a discussion of our major products, our markets, and our operating segments. Refer to Item 8: “Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K for specific segment results.
Our Business

We offer solutions that enable electric and natural gas utilities to build smart grids to manage assets, secure revenue, lower operational costs, improve customer service, and enable demand response. Our solutions include standard meters and next-generation smart metering products, metering systems, and services, which ultimately empower and benefit consumers.

We supply comprehensive solutions to address the unique challenges facing the water industry, including increasing demand and resource scarcity. We offer a complete product portfolio, including standard meters and smart metering products, systems, and services, for applications in the residential and commercial industrial markets for water and heat.

1



We offer a portfolio of services to our customers from standalone services to end-to-end solutions. These include licensing meter data management and analytics software, managed services, software-as-a-service (hosted software), technical support services, licensing hardware technology, and consulting services.

We classify metering systems into two categories: standard metering systems and smart metering solutions. These categories are described in more detail below:
Standard Metering Systems
Standard metering systems employ a standard meter, which measures electricity, natural gas, water, or thermal energy by mechanical, electromechanical, or electronic means, with no built-in remote-reading communication capability. Standard meters require manual reading, which is typically performed by a utility representative or meter reading service provider. Worldwide, we produce standard residential, commercial and industrial (C&I), and transmission and distribution (T&D) electricity, natural gas, water, and heat meters.

Smart Metering Solutions
Smart metering solutions employ meters or modules with one-way or two-way communication capability embedded in or attached to a meter to collect and store meter data, which is transmitted to handheld computers, mobile units, telephone, radio frequency (RF), cellular, power line carrier (PLC), fixed networks, or through adaptive communication technology (ACT). ACT enables dynamic selection of the optimal communications path, utilizing RF or PLC, based on network operating conditions, data attributes and application requirements. This allows utilities to collect and analyze meter data to optimize operations,, store interval data, remotely connect and disconnect service to the meter, send data, receive commands, and interface with other devices, such as in-home displays, smart thermostats and appliances, home area networks, and advanced control systems.

Bookings and Backlog of Orders

Bookings for a reported period represent customer contracts and purchase orders received during the period for hardware, software, and services that have met certain conditions, such as regulatory and/or contractual approval. Total backlog represents committed but undelivered contracts and purchase orders at period-end. Twelve-month backlog represents the portion of total backlog that we estimate will be recognized as revenue over the next 12 months. Backlog is not a complete measure of our future revenues as we also receive significant book-and-ship orders. Bookings and backlog may fluctuate significantly due to the timing of large project awards. In addition, annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. Beginning total backlog, plus bookings, minus revenues, will not equal ending total backlog due to miscellaneous contract adjustments, foreign currency fluctuations, and other factors.

Year Ended
 
Annual Bookings
 
Total Backlog
 
12-Month Backlog
 
 
(in millions)
December 31, 2016
 
$
2,066

 
$
1,652

 
$
761

December 31, 2015
 
1,981

 
1,575

 
836

December 31, 2014
 
2,385

 
1,516

 
737


Information on bookings by our operating segments is as follows:
Year Ended
 
Total Bookings
 
Electricity
 
Gas
 
Water
 
 
(in millions)
December 31, 2016
 
$
2,066

 
$
1,013

 
$
567

 
$
486

December 31, 2015
 
1,981

 
958

 
577

 
446

December 31, 2014
 
2,385

 
1,074

 
753

 
558


Our Operating Segments

We operate under the Itron brand worldwide and manage and report under three operating segments, Electricity, Gas, and Water. Our Water operating segment includes both our global water and heat solutions. This structure allows each segment to develop its own go-to-market strategy, prioritize its marketing and product development requirements, and focus on its strategic investments. Our sales, marketing, and delivery functions are managed under each segment. Our product development and manufacturing operations are managed on a worldwide basis to promote a global perspective in our operations and processes and yet still maintain alignment with the segments.

2


Sales and Distribution

We use a combination of direct and indirect sales channels in our operating segments. A direct sales force is utilized for large electric, natural gas, and water utilities, with which we have long-established relationships. For smaller utilities, we typically use an indirect sales force that consists of distributors, sales representatives, partners, and meter manufacturer representatives.
No single customer represented more than 10% of total revenues for the years ended December 31, 2016 , 2015 , and 2014 . Our 10 largest customers in each of the years ended December 31, 2016 , 2015 , and 2014 , accounted for approximately 31% , 22% , and 19% of total revenues, respectively.
Raw Materials

Our products require a wide variety of components and materials, which are subject to price and supply fluctuations. We enter into standard purchase orders in the ordinary course of business, which can include purchase orders for specific quantities based on market prices, as well as open-ended agreements that provide for estimated quantities over an extended shipment period, typically up to one year at an established unit cost. Although we have multiple sources of supply for most of our material requirements, certain components and raw materials are supplied by sole-source vendors, and our ability to perform certain contracts depends on the availability of these materials. Refer to Item 1A: “Risk Factors”, included in this Annual Report on Form 10-K, for further discussion related to supply risks.
Partners

In connection with delivering products and systems to our customers, we may partner with third party vendors to provide hardware, software, or services, e.g., meter installation and communication network equipment and infrastructure. Our ability to perform on our contractual obligations with our customers is dependent on these partners meeting their obligations to us.
Product Development

Our product development is focused on both improving existing technology and developing innovative new technology for electricity, natural gas, water and heat meters, sensing and control devices, data collection software, communication technologies, data warehousing, and software applications. We invested approximately $168 million , $162 million , and $176 million in product development in 2016 , 2015 and 2014 , which represented 8% of total revenues for 2016, and 9% of total revenues in 2015 and 2014.

Workforce

As of December 31, 2016 , we had approximately 7,300 people in our workforce, including 6,200 permanent employees. We have not experienced significant work stoppages and consider our employee relations to be good.
Competition

We provide a broad portfolio of products, solutions, software, and services to electric, gas, and water utility customers globally. Consequently, we operate within a large and complex competitive landscape. Some of our competitors have diversified product portfolios and participate in multiple geographic markets, while others focus on specific regional markets and/or certain types of products, including some low-cost suppliers based in China and India. Our competitors in China have an increasing presence in other markets around the world, however, this does not represent a major market share in any one of our global operating regions. Our competitors range from small to large established companies. Our primary competitors for each operating segment are discussed below.

We believe that our competitive advantage is based on our in-depth knowledge of the utility industries, our capacity to innovate, our ability to provide complete end-to-end integrated solutions (including metering, network communications, data collection systems, meter data management software, and other metering software applications), our established customer relationships, and our track record of delivering reliable, accurate, and long-lived products and services. Refer to Item 1A: “Risk Factors” included in this Annual Report on Form 10-K for a discussion of the competitive pressures we face.


3


Electricity
We are among the leading global suppliers of electricity metering solutions, including standard meters and smart metering solutions. Within the electricity business line, our primary global competitors include Aclara (Sun Capital Partners), Elster (Honeywell International Inc.), Landis+Gyr (Toshiba Corporation), and Silver Spring Networks. On a regional basis, other major competitors include OSAKI Group, Sagemcom Energy & Telecom (Charterhouse Capital Partners), Sensus (Xylem, Inc.), and Trilliant Networks.

Gas
We are among the leading global suppliers of gas metering solutions, including standard meters and smart metering solutions. Our primary global competitor is Elster. On a regional basis, other major competitors include Aclara, Apator, Landis+Gyr, LAO Industria, and Sensus.

Water
We are among the leading global suppliers of standard and smart water meters and communication modules. Our primary global competitors include Apator, Diehl Metering (Diehl Stiftung & Co. KG), Elster, Sensus, and Zenner Performance (Zenner International GmbH & Co. KG). On a regional basis, other major competitors include Badger Meter, LAO Industria, Kamstrup Water Metering L.L.C., and Neptune Technologies (Roper Technologies, Inc.).

Strategic Alliances

We pursue strategic alliances with other companies in areas where collaboration can produce product advancement and acceleration of entry into new markets. The objectives and goals of a strategic alliance can include one or more of the following: technology exchange, product development, joint sales and marketing, or access to new geographic markets. Refer to Item 1A: “Risk Factors” included in this Annual Report on Form 10-K for a discussion of risks associated with strategic alliances.

Intellectual Property

Our patents and patent applications cover a range of technologies, which relate to standard metering, smart metering solutions and technology, meter data management software, and knowledge application solutions. We also rely on a combination of copyrights, patents, and trade secrets to protect our products and technologies. Disputes over the ownership, registration, and enforcement of intellectual property rights arise in the ordinary course of our business. While we believe patents and trademarks are important to our operations and, in aggregate, constitute valuable assets, no single patent or trademark, or group of patents or trademarks, is critical to the success of our business. We license some of our technology to other companies, some of which are our competitors.
Environmental Regulations

In the ordinary course of our business we use metals, solvents, and similar materials that are stored on-site. We believe we are in compliance with environmental laws, rules, and regulations applicable to the operation of our business.

4


EXECUTIVE OFFICERS

Set forth below are the names, ages, and titles of our executive officers as of February 28, 2017 .

Name
 
Age
 
Position
Philip C. Mezey
 
57
 
President and Chief Executive Officer
W. Mark Schmitz
 
65
 
Executive Vice President and Chief Financial Officer
Thomas L. Deitrich
 
50
 
Executive Vice President and Chief Operating Officer
Michel C. Cadieux
 
59
 
Senior Vice President, Human Resources
Shannon M. Votava
 
56
 
Senior Vice President, General Counsel and Corporate Secretary

Philip C. Mezey is President and Chief Executive Officer and a member of our Board of Directors. Mr. Mezey was appointed to his current position and to the Board of Directors in January 2013. Mr. Mezey joined Itron in March 2003, and in 2007 Mr. Mezey became Senior Vice President and Chief Operating Officer, Itron North America. Mr. Mezey served as President and Chief Operating Officer, Energy from March 2011 through December 2012.

W. Mark Schmitz is Executive Vice President and Chief Financial Officer. Mr. Schmitz was appointed to this role in September 2014. Prior to joining Itron, Mr. Schmitz was Chief Financial Officer of Alghanim Industries from 2009 to 2013. Mr. Schmitz served as the Executive Vice President and Chief Financial Officer of The Goodyear Tire and Rubber Company from 2007 to 2008 and as Vice President and Chief Financial Officer of Tyco International Limited's Fire and Security Segment from 2003 to 2007.

Thomas L. Deitrich is Executive Vice President and Chief Operating Officer. Mr. Deitrich joined Itron in October 2015. From 2012 to September 2015, Mr. Deitrich was Senior Vice President and General Manager for Digital Networking at Freescale Semiconductor, Inc. (Freescale), and he served as the Senior Vice President and General Manager of Freescale's RF, Analog, Sensor, and Cellular Products Group from 2009 to 2012. Mr. Deitrich had other roles of increasing responsibility at Freescale from 2006 to 2009. Prior to Freescale, Mr. Deitrich worked for Flextronics, Sony-Ericsson/Ericsson, and GE.

Michel C. Cadieux is Senior Vice President, Human Resources and has been so since joining Itron in February 2014. From 2008 to 2012, Mr. Cadieux was Senior Vice President of Human Resources and Security at Freescale Semiconductor, Inc.

Shannon M. Votava is Senior Vice President, General Counsel and Corporate Secretary. Ms. Votava was promoted to this role in March 2016. Ms. Votava joined Itron in May 2010 as Assistant General Counsel and was promoted to Vice President and General Counsel in January 2012. She assumed the responsibilities of Corporate Secretary in January 2013. Before joining Itron, Ms. Votava served as Associate General Counsel, Commercial at Cooper Industries plc from October 2008 to April 2010, and as General Counsel for Honeywell's Electronic Materials business from 2003 to 2008.

5


ITEM 1A:    RISK FACTORS

We are dependent on the utility industry, which has experienced volatility in capital spending.

We derive the majority of our revenues from sales of products and services to utilities. Purchases of our products may be deferred as a result of many factors, including economic downturns, slowdowns in new residential and commercial construction, customers’ access to capital upon acceptable terms, the timing and availability of government subsidies or other incentives, utility specific financial circumstances, mergers and acquisitions, regulatory decisions, weather conditions, and fluctuating interest rates. We have experienced, and may in the future experience, variability in operating results on an annual and a quarterly basis as a result of these factors.

We depend on our ability to develop new competitive products.

Our future success will depend, in part, on our ability to continue to design and manufacture new competitive products, and to enhance and sustain our existing products, keep pace with technological advances and changing customer requirements, gain international market acceptance, and manage other factors in the markets in which we sell our products. Product development will require continued investment in order to maintain our competitive position, and the periods in which we incur significant product development costs may drive variability in our quarterly results. We may not have the necessary capital, or access to capital at acceptable terms, to make these investments. We have made, and expect to continue to make, substantial investments in technology development. However, we may experience unforeseen problems in the development or performance of our technologies or products, which can prevent us from meeting our product development schedules. New products often require certifications or regulatory approvals before the products can be used and we cannot be certain that our new products will be approved in a timely manner. Finally, we may not achieve market acceptance of our new products and services.

Utility industry sales cycles can be lengthy and unpredictable.

The utility industry is subject to substantial government regulation. Regulations have often influenced the frequency of meter replacements. Sales cycles for standalone meter products have typically been based on annual or biennial bid-based agreements. Utilities place purchase orders against these agreements as their inventories decline, which can create fluctuations in our sales volumes.

Sales cycles for smart metering solutions are generally long and unpredictable due to several factors, including budgeting, purchasing, and regulatory approval processes that can take several years to complete. Our utility customers typically issue requests for quotes and proposals, establish evaluation processes, review different technical options with vendors, analyze performance and cost/benefit justifications, and perform a regulatory review, in addition to applying the normal budget approval process. Today, governments around the world are implementing new laws and regulations to promote increased energy efficiency, slow or reverse growth in the consumption of scarce resources, reduce carbon dioxide emissions, and protect the environment. Many of the legislative and regulatory initiatives encourage utilities to develop a smart grid infrastructure, and some of these initiatives provide for government subsidies, grants, or other incentives to utilities and other participants in their industry to promote transition to smart grid technologies. If government regulations regarding the smart grid and smart metering are delayed, revised to permit lower or different investment levels in metering infrastructure, or terminated altogether, this could have a material adverse effect on our results of operation, cash flow, and financial condition.

Our quarterly results may fluctuate substantially due to several factors.

We have experienced variability in quarterly results, including losses, and believe our quarterly results will continue to fluctuate as a result of many factors, including those risks and events included throughout this section. Additional factors that may cause our results to vary include:

a higher proportion of products sold with fewer features and functionality, resulting in lower revenues and gross margins;
a shift in sales channel mix, which could impact the revenue received and commissions paid;
a decrease in sales volumes, which could result in lower gross margins as driven by lower absorption of manufacturing costs;
a change in accounting standards or practices that may impact us to a greater degree than other companies;
a change in existing taxation rules or practices due to our specific operating structure that may not be comparable to other companies; and
a shortfall in sales without a proportional decrease in expenses.


6


Our customer contracts are complex and contain provisions that could cause us to incur penalties, be liable for damages, and/or incur unanticipated expenses with respect to the functionality, deployment, operation, and availability of our products and services.

In addition to the risk of unanticipated warranty or recall expenses, our customer contracts may contain provisions that could cause us to incur penalties, be liable for damages, including liquidated damages, or incur other expenses if we experience difficulties with respect to the functionality, deployment, operation, and availability of our products and services. Some of these contracts contain long-term commitments to a set schedule of delivery or performance. If we failed in our estimated schedule or we fail in our management of the project, this may cause delays in completion. In the event of late deliveries, late or improper installations or operations, failure to meet product or performance specifications or other product defects, or interruptions or delays in our managed service offerings, our customer contracts may expose us to penalties, liquidated damages, and other liabilities. In the event we were to incur contractual penalties, such as liquidated damages or other related costs that exceed our expectations, our business, financial condition, and operating results could be materially and adversely affected. Further, we could be required to recognize a current-period reduction of revenue related to a specific component of a customer contract at the time we determine the products and/or services to be delivered under that component would result in a loss due to expected revenues estimated to be less than expected costs. Depending on the amounts of the associated revenues (if any) and the costs, this charge could be material to our results of operations in the period it is recognized.

We face increasing competition.

We face competitive pressures from a variety of companies in each of the markets we serve. Some of our present and potential future competitors have, or may have, substantially greater financial, marketing, technical, or manufacturing resources and, in some cases, have greater name recognition, customer relationships, and experience. Some competitors may enter markets we serve and sell products at lower prices in order to gain or grow market share. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the development, promotion, and sale of their products and services than we can. Some competitors have made, and others may make, strategic acquisitions or establish cooperative relationships among themselves or with third parties that enhance their ability to address the needs of our prospective customers. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Other companies may also drive technological innovation and develop products that are equal in quality and performance or superior to our products, which could put pressure on our market position, reduce our overall sales, and require us to invest additional funds in new technology development. In addition, there is a risk that low-cost providers will expand their presence in our markets, improve their quality, or form alliances or cooperative relationships with our competitors, thereby contributing to future price erosion. Some of our products and services may become commoditized, and we may have to adjust the prices of some of our products to stay competitive. Further, some utilities may purchase meters separately from the communication devices. The specifications for such meters may require interchangeability, which could lead to further commoditization of the meter, driving prices lower and reducing margins. Should we fail to compete successfully with current or future competitors, we could experience material adverse effects on our business, financial condition, results of operations, and cash flows.

We may face adverse publicity, consumer or political opposition, or liability associated with our products.

The safety and security of the power grid and natural gas and water supply systems, the accuracy and protection of the data collected by meters and transmitted via the smart grid, concerns about the safety and perceived health risks of using radio frequency communications, and privacy concerns of monitoring home appliance energy usage have been the focus of recent adverse publicity. Negative publicity and consumer opposition may cause utilities or their regulators to delay or modify planned smart grid initiatives. Smart grid projects may be, or may be perceived as, unsuccessful.

Our products are complex and may contain defects or experience failures due to any number of issues in design, materials, deployment, and/or use. If any of our products contain a defect, a compatibility or interoperability issue, or other types of errors, we may have to devote significant time and resources to identify and correct the issue. We provide product warranties for varying lengths of time and establish allowances in anticipation of warranty expenses. In addition, we recognize contingent liabilities for additional product-failure related costs. These warranty and related product-failure allowances may be inadequate due to product defects and unanticipated component failures, as well as higher than anticipated material, labor, and other costs we may incur to replace projected product failures. A product recall or a significant number of product returns could be expensive; damage our reputation and relationships with utilities, meter and communication vendors, and other third-party vendors; result in the loss of business to competitors; or result in litigation. We may incur additional warranty expenses in the future with respect to new or established products, which could materially and adversely affect our operations and financial position.


7


We may be subject to claims that there are adverse health effects from the radio frequencies utilized in connection with our products. If these claims prevail, our customers could suspend implementation or purchase substitute products, which could cause a loss of sales.

Changes in tax laws, valuation allowances, and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.

We are subject to income tax in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves may be established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered appropriate, as well as valuation allowances when we determine it is more likely than not that a deferred tax asset cannot be realized. In addition, future changes in tax laws in the jurisdictions in which we operate could have a material impact on our effective income tax rate and profitability. We regularly assess all of these matters to determine the adequacy of our tax provision, which is subject to significant judgment.

The Organization for Economic Cooperation and Development guidance under the Base Erosion and Profit Shifting (BEPS) initiatives aim to minimize perceived tax abuses and modernize global tax policy. More countries are beginning to implement legislative changes based on these BEPS recommendations. Additionally, proposed U.S. tax legislative reforms are wide ranging and include potential changes to the corporate income tax rate, altering the deductibility or timing of financing costs or capitalized assets, taxation of non-U.S. activities, as well as the impacts of proposed border adjusted destination based tax proposals. While it is not possible to predict what changes, if any, will become law, the uncertainty around these proposals and the impact to Itron’s effective tax rate could be material though at this time it is not possible to determine if it would be a benefit or detriment. 

Disruption and turmoil in global credit and financial markets, which may be exacerbated by the inability of certain countries to continue to service their sovereign debt obligations, and the possible negative implications of such events for the global economy, may negatively impact our business, liquidity, operating results, and financial condition.

The current economic conditions, including volatility in the availability of credit and foreign exchange rates and extended economic slowdowns, have contributed to the instability in some global credit and financial markets. Additionally, at-risk financial institutions in certain countries may, without forewarning, seize a portion of depositors' account balances. The seized funds would be used to recapitalize the at-risk financial institution and would no longer be available for the depositors' use. If such seizure were to occur at financial institutions where we have funds on deposit, it could have a significant impact on our overall liquidity. While the ultimate outcome of these events cannot be predicted, it is possible that such events may have a negative impact on the global economy and our business, liquidity, operating results, and financial condition.

We are subject to international business uncertainties, obstacles to the repatriation of earnings, and foreign currency fluctuations.

A substantial portion of our revenues is derived from operations conducted outside the United States. International sales and operations may be subjected to risks such as the imposition of government controls, government expropriation of facilities, lack of a well-established system of laws and enforcement of those laws, access to a legal system free of undue influence or corruption, political instability, terrorist activities, restrictions on the import or export of critical technology, currency exchange rate fluctuations, and adverse tax burdens. Lack of availability of qualified third-party financing, generally longer receivable collection periods than those commonly practiced in the United States, trade restrictions, changes in tariffs, labor disruptions, difficulties in staffing and managing international operations, difficulties in imposing and enforcing operational and financial controls at international locations, potential insolvency of international distributors, preference for local vendors, burdens of complying with different permitting standards and a wide variety of foreign laws, and obstacles to the repatriation of earnings and cash all present additional risk to our international operations. Fluctuations in the value of international currencies may impact our operating results due to the translation to the U.S. dollar as well as our ability to compete in international markets. International expansion and market acceptance depend on our ability to modify our technology to take into account such factors as the applicable regulatory and business environment, labor costs, and other economic conditions. In addition, the laws of certain countries do not protect our products or technologies in the same manner as the laws of the United States. Further, foreign regulations or restrictions, e.g., opposition from unions or works councils, could delay, limit, or disallow significant operating decisions made by our management, including decisions to exit certain businesses, close certain manufacturing locations, or other restructuring actions. There can be no assurance that these factors will not have a material adverse effect on our future international sales and, consequently, on our business, financial condition, and results of operations.


8


We depend on certain key vendors and components.

Certain of our products, subassemblies, and system components are procured from limited sources. Our reliance on such limited sources involves certain risks, including the possibility of shortages and reduced control over delivery schedules, quality, costs, and our vendors’ access to capital upon acceptable terms. Any adverse change in the supply, or price, of these components could adversely affect our business, financial condition, and results of operations. In addition, we depend on a small number of contract manufacturing vendors for a large portion of our low-volume manufacturing business and all of our repair services for our domestic handheld meter reading units. Should any of these vendors become unable to perform up to their responsibilities, our operations could be materially disrupted.

We may engage in future restructuring activities and incur additional charges in our efforts to improve profitability. We also may not achieve the anticipated savings and benefits from current or any future restructuring projects.

We have implemented multiple restructuring projects to adjust our cost structure, and we may engage in similar restructuring activities in the future. These restructuring activities reduce our available employee talent, assets, and other resources, which could slow product development, impact ability to respond to customers, increase quality issues, temporarily reduce manufacturing efficiencies, and limit our ability to increase production quickly. In addition, delays in implementing restructuring projects, unexpected costs, unfavorable negotiations with works councils, changes in governmental policies, or failure to meet targeted improvements could change the timing or reduce the overall savings realized from the restructuring project.

Business interruptions could adversely affect our business.

Our worldwide operations could be subject to hurricanes, tornadoes, earthquakes, floods, fires, extreme weather conditions, medical epidemics or pandemics, or other natural or man-made disasters or business interruptions. The occurrence of any of these business disruptions could seriously harm our business, financial condition, and results of operations.

Our key manufacturing facilities are concentrated, and, in the event of a significant interruption in production at any of our manufacturing facilities, considerable expense, time, and effort could be required to establish alternative production lines to meet contractual obligations, which would have a material adverse effect on our business, financial condition, and results of operations.

We may encounter strikes or other labor disruptions that could adversely affect our financial condition and results of operations.

We have significant operations throughout the world. In a number of countries outside the U.S., our employees are covered by collective bargaining agreements. As the result of various corporate or operational actions, which our management has undertaken or may be made in the future, we could encounter labor disruptions. These disruptions may be subject to local media coverage, which could damage our reputation. Additionally, the disruptions could delay our ability to meet customer orders and could adversely affect our results of operations. Any labor disruptions could also have an impact on our other employees. Employee morale and productivity could suffer, and we may lose valued employees whom we wish to retain.

Asset impairment could result in significant changes that would adversely impact our future operating results.

We have significant intangible assets, long-lived assets, and goodwill that are susceptible to valuation adjustments as a result of changes in various factors or conditions, which could impact our results of operations or and financial condition.

Factors that could trigger an impairment of such assets include the following:
 
underperformance relative to projected future operating results;
changes in the manner or use of the acquired assets or the strategy for our overall business;
negative industry or economic trends;
decline in our stock price for a sustained period or decline in our market capitalization below net book value; and
changes in our organization or management reporting structure, which could result in additional reporting units, requiring greater aggregation or disaggregation in our analysis by reporting unit and potentially alternative methods/assumptions of estimating fair values.


9


We are subject to a variety of litigation that could adversely affect our results of operations, financial condition, and cash flows.

From time to time, we are involved in litigation that arises from our business. In addition, these entities may bring claims against our customers, which, in some instances, could result in an indemnification of the customer. Litigation may also relate to, among other things, product failure or product liability claims, contractual disputes, employment matters, or securities litigation. Litigation can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. We may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our financial condition and results of operations. While we currently maintain insurance coverage, such insurance may not provide adequate coverage against potential claims.

We may face losses associated with alleged unauthorized use of third party intellectual property.

We may be subject to claims or inquiries regarding alleged unauthorized use of a third party’s intellectual property. An adverse outcome in any intellectual property litigation or negotiation could subject us to significant liabilities to third parties, require us to license technology or other intellectual property rights from others, require us to comply with injunctions to cease marketing or the use of certain products or brands, or require us to redesign, re-engineer, or rebrand certain products or packaging, any of which could affect our business, financial condition, and results of operations. If we are required to seek licenses under patents or other intellectual property rights of others, we may not be able to acquire these licenses at acceptable terms, if at all. In addition, the cost of responding to an intellectual property infringement claim, in terms of legal fees, expenses, and the diversion of management resources, whether or not the claim is valid, could have a material adverse effect on our business, financial condition, and results of operations.

If our products infringe the intellectual property rights of others, we may be required to indemnify our customers for any damages they suffer. We generally indemnify our customers with respect to infringement by our products of the proprietary rights of third parties. Third parties may assert infringement claims against our customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.

We are affected by the availability and regulation of radio spectrum and interference with the radio spectrum that we use.

A significant number of our products use radio spectrum, which are subject to regulation by the Federal Communications Commission (FCC) in the United States. The FCC may adopt changes to the rules for our licensed and unlicensed frequency bands that are incompatible with our business. In the past, the FCC has adopted changes to the requirements for equipment using radio spectrum, and it is possible that the FCC or the U.S. Congress will adopt additional changes.

Although radio licenses are generally required for radio stations, Part 15 of the FCC’s rules permits certain low-power radio devices (Part 15 devices) to operate on an unlicensed basis. Part 15 devices are designed for use on frequencies used by others. These other users may include licensed users, which have priority over Part 15 users. Part 15 devices cannot cause harmful interference to licensed users and must be designed to accept interference from licensed radio devices. In the United States, our smart metering solutions are typically Part 15 devices that transmit information to (and receive information from, if applicable) handheld, mobile, or fixed network systems pursuant to these rules.

We depend upon sufficient radio spectrum to be allocated by the FCC for our intended uses. As to the licensed frequencies, there is some risk that there may be insufficient available frequencies in some markets to sustain our planned operations. The unlicensed frequencies are available for a wide variety of uses and may not be entitled to protection from interference by other users who operate in accordance with FCC rules. The unlicensed frequencies are also often the subject of proposals to the FCC requesting a change in the rules under which such frequencies may be used. If the unlicensed frequencies become crowded to unacceptable levels, restrictive, or subject to changed rules governing their use, our business could be materially adversely affected.

We have committed, and will continue to commit, significant resources to the development of products that use particular radio frequencies. Action by the FCC could require modifications to our products. The inability to modify our products to meet such requirements, the possible delays in completing such modifications, and the cost of such modifications all could have a material adverse effect on our future business, financial condition, and results of operations.

Outside of the United States, certain of our products require the use of RF and are subject to regulations in those jurisdictions where we have deployed such equipment. In some jurisdictions, radio station licensees are generally required to operate a radio transmitter and such licenses may be granted for a fixed term and must be periodically renewed. In other jurisdictions, the rules permit certain low power devices to operate on an unlicensed basis. Our smart metering solutions typically transmit to (and receive

10


information from, if applicable) handheld, mobile, or fixed network reading devices in license-exempt bands pursuant to rules regulating such use. In Europe, we generally use the 169 megahertz (MHz), 433 MHz, and 868 MHz bands. In the rest of the world, we primarily use the 433 MHz and 2.4000-2.4835 gigahertz (GHz) bands, as well as other local license-exempt bands. To the extent we introduce new products designed for use in the United States or another country into a new market, such products may require significant modification or redesign in order to meet frequency requirements and other regulatory specifications. In some countries, limitations on frequency availability or the cost of making necessary modifications may preclude us from selling our products in those countries. In addition, new consumer products may create interference with the performance of our products, which could lead to claims against us.

We may be unable to adequately protect our intellectual property.

While we believe that our patents and other intellectual property have significant value, it is uncertain that this intellectual property or any intellectual property acquired or developed by us in the future will provide meaningful competitive advantages. There can be no assurance that our patents or pending applications will not be challenged, invalidated, or circumvented by competitors or that rights granted thereunder will provide meaningful proprietary protection. Moreover, competitors may infringe our patents or successfully avoid them through design innovation. To combat infringement or unauthorized use of our intellectual property, we may need to commence litigation, which can be expensive and time-consuming. In addition, in an infringement proceeding a court may decide that a patent or other intellectual property right of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology or other intellectual property right at issue on the grounds that it is non-infringing or the legal requirements for an injunction have not been met. Policing unauthorized use of our intellectual property is difficult and expensive, and we cannot provide assurance that we will be able to prevent misappropriation of our proprietary rights, particularly in countries that do not protect such rights in the same manner as in the United States.

We have pension benefit obligations, which could have a material impact on our earnings, liabilities, and shareholders' equity and could have significant adverse impacts in future periods.

We sponsor both funded and unfunded defined benefit pension plans for our international employees, primarily in Germany, France, Italy, Indonesia, Brazil, and Spain. 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.

The determination of pension plan expense, benefit obligation, and future contributions depends heavily on market factors such as the discount rate and the actual return on plan assets. We estimate pension plan expense, benefit obligation, and future contributions to these plans using assumptions with respect to these and other items. Changes to those assumptions could have a significant effect on future contributions as well as on our annual pension costs and/or result in a significant change to shareholders' equity.

A number of key personnel are critical to the success of our business.

Our success depends in large part on the efforts of our highly qualified technical and management personnel and highly skilled individuals in all disciplines. The loss of one or more of these employees and the inability to attract and retain qualified replacements could have a material adverse effect on our business.

If we are unable to protect our information technology infrastructure and network against data corruption, cyber-based attacks or network security breaches, we could be exposed to customer liability and reputational risk.

We rely on various information technology systems to capture, process, store, and report data and interact with customers, vendors, and employees. Despite security steps we have taken to secure all information and transactions, our information technology systems, and those of our third-party providers, may be subject to cyber attacks. Any data breaches could result in misappropriation of data or disruption of operations. In addition, hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture that could interfere with the operation of the systems. Misuse of internal applications; theft of intellectual property, trade secrets, or other corporate assets; and inappropriate disclosure of confidential information could stem from such incidents.

In addition, we have designed products and services that connect to and are part of the “Internet of Things.” While we attempt to provide adequate security measures to safeguard our products from cyber attacks, the potential for an attack remains. A successful attack may result in inappropriate access to information or an inability for our products to function properly.

Any such operational disruption and/or misappropriation of information could result in lost sales, negative publicity, or business delays and could have a material adverse effect on our business.

11



We may not realize the expected benefits from strategic alliances.

We have several strategic alliances with large and complex organizations and other companies with which we work to offer complementary products and services. There can be no assurance we will realize the expected benefits from these strategic alliances. If successful, these relationships may be mutually beneficial and result in shared growth. However, alliances carry an element of risk because, in most cases, we must both compete and collaborate with the same company from one market to the next. Should our strategic partnerships fail to perform, we could experience delays in product development or experience other operational difficulties.

We rely on information technology systems.

Our industry requires the continued operation of sophisticated information technology systems and network infrastructures, which may be subject to disruptions arising from events that are beyond our control. We are dependent on information technology systems, including, but not limited to, networks, applications, and outsourced services. We continually enhance and implement new systems and processes throughout our global operations.

We offer managed services and software utilizing several data center facilities located worldwide. Any damage to, or failure of, these systems could result in interruptions in the services we provide to our utility customers. As we continue to add capacity to our existing and future data centers, we may move or transfer data. Despite precautions taken during this process, any delayed or unsuccessful data transfers may impair the delivery of our services to our utility customers. We also sell vending and pre-payment systems with security features that, if compromised, may lead to claims against us.

We are completing a phased upgrade of our primary enterprise resource planning (ERP) systems to allow for greater depth and breadth of functionality worldwide. System conversions are expensive and time consuming undertakings that impact all areas of the Company. While successful implementations of each phase will provide many benefits to us, an unsuccessful or delayed implementation of any particular phase may cost us significant time and resources.

The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems due to computer viruses, hacking, acts of terrorism, and other causes could materially and adversely affect our business, financial condition, and results of operations by harming our ability to accurately forecast sales demand, manage our supply chain and production facilities, achieve accuracy in the conversion of electronic data and records, and report financial and management information on a timely and accurate basis. In addition, due to the systemic internal control features within ERP systems, we may experience difficulties that could affect our internal control over financial reporting.

Changes in environmental regulations, violations of such regulations, or future environmental liabilities could cause us to incur significant costs and could adversely affect our operations.

Our business and our facilities are subject to numerous laws, regulations, and ordinances governing, among other things, the storage, discharge, handling, emission, generation, manufacture, disposal, remediation of, and exposure to toxic or other hazardous substances, and certain waste products. Many of these environmental laws and regulations subject current or previous owners or operators of land to liability for the costs of investigation, removal, or remediation of hazardous materials. In addition, these laws and regulations typically impose liability regardless of whether the owner or operator knew of, or was responsible for, the presence of any hazardous materials and regardless of whether the actions that led to the presence were conducted in compliance with the law. In the ordinary course of our business, we use metals, solvents, and similar materials, which are stored on-site. The waste created by the use of these materials is transported off-site on a regular basis by unaffiliated waste haulers. Many environmental laws and regulations require generators of waste to take remedial actions at, or in relation to, the off-site disposal location even if the disposal was conducted in compliance with the law. The requirements of these laws and regulations are complex, change frequently, and could become more stringent in the future. Failure to comply with current or future environmental regulations could result in the imposition of substantial fines, suspension of production, alteration of our production processes, cessation of operations, or other actions, which could materially and adversely affect our business, financial condition, and results of operations. There can be no assurance that a claim, investigation, or liability will not arise with respect to these activities, or that the cost of complying with governmental regulations in the future will not have a material adverse effect on us.


12


Our credit facility limits our ability and the ability of many of our subsidiaries to take certain actions.

Our credit facility places restrictions on our ability, and the ability of many of our subsidiaries, dependent on meeting specified financial ratios, to, among other things:

•    incur more debt;
 
•    pay dividends, make distributions, and repurchase capital stock;
•    make certain investments;
 
•    create liens;
•    enter into transactions with affiliates;
 
•    enter into sale lease-back transactions;
•    merge or consolidate;
 
•    transfer or sell assets.


Our credit facility contains other customary covenants, including the requirement to meet specified financial ratios and provide periodic financial reporting. Our ability to borrow under our credit facility will depend on the satisfaction of these covenants. Events beyond our control can affect our ability to meet those covenants. Our failure to comply with obligations under our borrowing arrangements may result in declaration of an event of default. An event of default, if not cured or waived, may permit acceleration of required payments against such indebtedness. We cannot be certain we will be able to remedy any such defaults. If our required payments are accelerated, we cannot be certain that we will have sufficient funds available to pay the indebtedness or that we will have the ability to raise sufficient capital to replace the indebtedness on terms favorable to us or at all. In addition, in the case of an event of default under our secured indebtedness such as our credit facility, the lenders may be permitted to foreclose on our assets securing that indebtedness.

Our ability to service our indebtedness is dependent on our ability to generate cash, which is influenced by many factors beyond our control.

Our ability to make payments on or refinance our indebtedness, fund planned capital expenditures, and continue research and development will depend on our ability to generate cash in the future. This is dependent on the degree to which we succeed in executing our business plans, which is influenced, in part, by general economic, financial, competitive, legislative, regulatory, counterparty, and other risks that are beyond our control. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot provide assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Our acquisitions of and investments in third parties have risks.

We may complete additional acquisitions or make investments in the future, both within and outside of the United States. In order to finance future acquisitions, we may need to raise additional funds through public or private financings, and there are no assurances that such financing would be available at acceptable terms. Acquisitions and investments involve numerous risks such as the diversion of senior management’s attention; unsuccessful integration of the acquired entity’s personnel, operations, technologies, and products; incurrence of significant expenses to meet an acquiree's customer contractual commitments; lack of market acceptance of new services and technologies; or difficulties in operating businesses in international legal jurisdictions. Failure to properly or adequately address these issues could result in the diversion of management’s attention and resources and materially and adversely impact our ability to manage our business. In addition, acquisitions and investments in third parties may involve the assumption of obligations, significant write-offs, or other charges associated with the acquisition. Impairment of an investment, goodwill, or an intangible asset may result if these risks were to materialize. For investments in entities that are not wholly owned by Itron, such as joint ventures, a loss of control as defined by U.S. generally accepted accounting principles (GAAP) could result in a significant change in accounting treatment and a change in the carrying value of the entity. There can be no assurances that an acquired business will perform as expected, accomplish our strategic objectives, or generate significant revenues, profits, or cash flows.

We are exposed to counterparty default risks with our financial institutions and insurance providers.

If one or more of the depository institutions in which we maintain significant cash balances were to fail, our ability to access these funds might be temporarily or permanently limited, and we could face material liquidity problems and financial losses.

The lenders of our credit facility consist of several participating financial institutions. Our revolving line of credit allows us to provide letters of credit in support of our obligations for customer contracts and provides additional liquidity. If our lenders are not able to honor their line of credit commitments due to the loss of a participating financial institution or other circumstance, we would need to seek alternative financing, which may not be under acceptable terms, and therefore could adversely impact our ability to successfully bid on future sales contracts and adversely impact our liquidity and ability to fund some of our internal initiatives or future acquisitions.

13



Our international sales and operations are subject to complex laws relating to foreign corrupt practices and anti-bribery laws, among many others, and a violation of, or change in, these laws could adversely affect our operations.

The Foreign Corrupt Practices Act in the United States requires United States companies to comply with an extensive legal framework to prevent bribery of foreign officials. The laws are complex and require that we closely monitor local practices of our overseas offices. The United States Department of Justice has recently heightened enforcement of these laws. In addition, other countries continue to implement similar laws that may have extra-territorial effect. In the United Kingdom, where we have operations, the U.K. Bribery Act imposes significant oversight obligations on us and could impact our operations outside of the United Kingdom. The costs for complying with these and similar laws may be significant and could require significant management time and focus. Any violation of these or similar laws, intentional or unintentional, could have a material adverse effect on our business, financial condition, or results of operations.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, prevent fraud, or maintain investor confidence.

Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act. In addition, Section 404 under the Sarbanes-Oxley Act requires that our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our compliance with the annual internal control report requirement for each fiscal year will depend on the effectiveness of our financial reporting, data systems, and controls across our operating subsidiaries. Furthermore, an important part of our growth strategy has been, and will likely continue to be, the acquisition of complementary businesses, and we expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. Likewise, the complexity of our transactions, systems, and controls may become more difficult to manage. In addition, new accounting standards may have a significant impact on our financial statements in future periods, requiring new or enhanced controls. We cannot be certain that we will ensure that we design, implement, and maintain adequate controls over our financial processes and reporting in the future, especially for acquisition targets that may not have been required to be in compliance with Section 404 of the Sarbanes-Oxley Act at the date of acquisition.

Failure to implement new controls or enhancements to controls, difficulties encountered in control implementation or operation, or difficulties in the assimilation of acquired businesses into our control system could result in additional errors, material misstatements, or delays in our financial reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.

Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public markets to raise debt or equity capital.

We did not file our 2015 Annual Report on Form 10-K or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016 within the time frame required by SEC rules. As a result, we are currently ineligible to use SEC Form S-3, which is a short-form registration statement, to register our securities for public offer and sale, until we have timely filed all periodic reports under the Securities Exchange Act of 1934, as amended, for a period of twelve months from the due date of the last timely report. Our inability to use Form S-3 limits our ability to access the public capital markets rapidly, including in reaction to changing business needs or market conditions. While we may currently register an offering of our securities on Form S-1, doing so would likely increase transaction costs and adversely impact our ability to raise capital or complete any related transaction, such as an acquisition, in a timely manner. We filed our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 within the time frame required by SEC rules. We anticipate regaining eligibility to file SEC Form S-3 on November 9, 2017 assuming all periodic reports are filed within the time frames required by the SEC.

We are subject to regulatory compliance.

We are subject to various governmental regulations in all of the jurisdictions in which we conduct business. Failure to comply with current or future regulations could result in the imposition of substantial fines, suspension of production, alteration of our production processes, cessation of operations, or other actions, which could materially and adversely affect our business, financial condition, and results of operations.


14


Regulations related to “conflict minerals” may force us to incur additional expenses, may result in damage to our business reputation, and may adversely impact our ability to conduct our business.

In August 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted requirements for companies that use certain minerals and derivative metals (referred to as “conflict minerals,” regardless of their actual country of origin) in their products. Some of these metals are commonly used in electronic equipment and devices, including our products. These requirements require companies to investigate, disclose and report whether or not such metals originated from the Democratic Republic of Congo or adjoining countries and required due diligence efforts. There may be increased costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. Further interpretation and implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in our products.
ITEM 1B:    UNRESOLVED STAFF COMMENTS
None.
ITEM 2:    PROPERTIES
We own our headquarters facility, which is located in Liberty Lake, Washington.
Our Gas and Water manufacturing facilities are located throughout the world, while our Electricity manufacturing facilities are located primarily in Europe, Middle East, and Africa (EMEA) and North America. The following table lists our major manufacturing facilities by the location and product line.

 
Product Line
Region
Electricity
Gas
Water
Multiple Product Lines
North America
Oconee, SC (O)
Owenton, KY (O)
None
Waseca, MN - G,W (L)
EMEA
Chasseneuil, France (O)
Godollo, Hungary (O)
Argenteuil, France (L)
Reims, France (O)
Karlsruhe, Germany (O)

Massy, France (L)
Macon, France (O)
Haguenau, France (O)
Oldenburg, Germany (O)
Asti, Italy (O)
None
Asia/Pacific
None
Wujiang, China (L)
Suzhou, China (L)
Dehradun, India (L)
Bekasi, Indonesia - E,W (O)
Latin America
None
Buenos Aires, Argentina (O)
Americana, Brazil (O)
None


(O) - Manufacturing facility is owned
(L) - Manufacturing facility is leased
E - Electricity manufacturing facility, G - Gas manufacturing facility, W - Water manufacturing facility
Our principal properties are in good condition, and we believe our current facilities are sufficient to support our operations. Our major manufacturing facilities are owned, while smaller factories are typically leased.
In addition to our manufacturing facilities, we have numerous sales offices, product development facilities, and distribution centers, which are located throughout the world.
ITEM 3:    LEGAL PROCEEDINGS
Please refer to Item 8: “Financial Statements and Supplementary Data, Note 12: Commitments and Contingencies” included in this Annual Report on Form 10-K. Except as described therein, there were no material pending legal proceedings, as defined by Item 103 of Regulation S-K, at December 31, 2016 .

15


ITEM 4:    MINE SAFETY DISCLOSURES
Not applicable.


16


PART II
ITEM 5:
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for Common Stock
Our common stock is traded on the NASDAQ Global Select Market. The following table reflects the range of high and low common stock sales prices for the four quarters of 2016 and 2015 as reported by the NASDAQ Global Select Market.

 
2016
 
2015
 
High
 
Low
 
High
 
Low
First Quarter
$
43.00

 
$
30.31

 
$
41.86

 
$
35.05

Second Quarter
$
45.51

 
$
39.78

 
$
37.81

 
$
34.44

Third Quarter
$
56.23

 
$
42.34

 
$
33.91

 
$
28.30

Fourth Quarter
$
65.75

 
$
51.90

 
$
37.53

 
$
31.75


Performance Graph
The following graph compares the five-year cumulative total return to shareholders on our common stock with the five-year cumulative total return of our peer group of companies used for the year ended December 31, 2016 and the NASDAQ Composite Index.
ITRI10K123_CHART-33925A06.JPG
* $100 invested on 12/31/11 in stock or index, including reinvestment of dividends.
Fiscal years ending December 31.

17


The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any of our filings, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
The above presentation assumes $100 invested on December 31, 2011 in the common stock of Itron, Inc., the peer group, and the NASDAQ Composite Index, with all dividends reinvested. With respect to companies in the peer group, the returns of each such corporation have been weighted to reflect relative stock market capitalization at the beginning of each annual period plotted. The stock prices shown above for our common stock are historical and not necessarily indicative of future price performance.

Each year, we reassess our peer group to identify global companies that are either direct competitors or have similar industry and business operating characteristics. Our 2016 peer group includes the following publicly traded companies: Badger Meter, Inc., Echelon Corporation, National Instruments Corporation, Roper Technologies, Inc., and Silver Spring Networks, Inc.

Issuer Repurchase of Equity Securities
No shares of our common stock were repurchased during the quarter ended December 31, 2016 .

Holders
At January 31, 2017 , there were 218 holders of record of our common stock.

Dividends
Since the inception of the Company, we have not declared or paid cash dividends. We intend to retain future earnings for the development of our business and do not anticipate paying cash dividends in the foreseeable future.


18


ITEM 6:    SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data below is derived from our consolidated financial statements. Information included in the table below from fiscal years 2013 through 2016 Consolidated Statements of Operations and Consolidated Statements of Cash Flows, and the Consolidated Balance Sheets for 2014 through 2016, have been audited by an independent registered public accounting firm.
These selected consolidated financial and other data represent portions of our financial statements. You should read this information together with Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8: “Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of future performance.
 
Year Ended December 31,
 
2016 (5)
 
2015
 
2014 (4)
 
2013 (3)
 
2012 (2)
 
(in thousands, except per share data)
Consolidated Statements of Operations Data
 
 
 
 
 
 
 
 
 
Revenues
$
2,013,186

 
$
1,883,533

 
$
1,947,616

 
$
1,938,025

 
$
2,156,365

Cost of revenues
1,352,866

 
1,326,848

 
1,333,566

 
1,323,257

 
1,448,753

Gross profit
660,320

 
556,685

 
614,050

 
614,768

 
707,612

Operating income (loss)
96,211

 
52,846

 
480

 
(139,863
)
 
139,153

Net income (loss) attributable to Itron, Inc.
31,770

 
12,678

 
(23,670
)
 
(153,153
)
 
99,839

Earnings (loss) per common share - Basic
$
0.83

 
$
0.33

 
$
(0.60
)
 
$
(3.90
)
 
$
2.52

Earnings (loss) per common share - Diluted
$
0.82

 
$
0.33

 
$
(0.60
)
 
$
(3.90
)
 
$
2.50

Weighted average common shares outstanding - Basic
38,207

 
38,224

 
39,184

 
39,281

 
39,625

Weighted average common shares outstanding - Diluted
38,643

 
38,506

 
39,184

 
39,281

 
39,934

 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets Data
 
 
 
 
 
 
 
 
 
Working capital (1)
$
319,420

 
$
281,166

 
$
262,393

 
$
338,476

 
$
338,985

Total assets (6)
1,577,811

 
1,680,316

 
1,751,085

 
1,906,025

 
2,109,134

Total debt (6)
304,523

 
370,165

 
323,307

 
377,596

 
415,809

Total Itron, Inc. shareholders' equity
631,604

 
604,758

 
681,001

 
839,011

 
982,253

 
 
 
 
 
 
 
 
 
 
Other Financial Data
 
 
 
 
 
 
 
 
 
Cash provided by operating activities
$
115,842

 
$
73,350

 
$
132,973

 
$
105,421

 
$
205,090

Cash used in investing activities
(47,528
)
 
(48,951
)
 
(41,496
)
 
(56,771
)
 
(125,445
)
Cash provided by (used in) financing activities
(63,023
)
 
7,740

 
(91,877
)
 
(57,438
)
 
(77,528
)
Capital expenditures
(43,543
)
 
(43,918
)
 
(44,495
)
 
(60,020
)
 
(50,543
)

(1)  
Working capital represents current assets less current liabilities.
(2)  
On May 1, 2012, we completed our acquisition of SmartSynch, Inc. for $77.7 million in cash (net of $6.7 million of cash and cash equivalents acquired).
(3)  
During 2013, we incurred a goodwill impairment charge of $174.2 million. In addition, we incurred costs of $36.3 million in 2013 related to restructuring projects to increase efficiency.
(4)  
During 2014, we incurred costs of $49.5 million related to restructuring projects to improve operational efficiencies and reduce expenses. Refer to Item 8: “Financial Statements and Supplementary Data, Note 13: Restructuring” included in this Annual Report on Form 10-K for further disclosures regarding the restructuring charges.
(5)  
During 2016, we incurred costs of $49.1 million related to restructuring projects to restructure various company activities in order to improve operational efficiencies, reduce expenses and improve competiveness. Refer to Item 8: “Financial Statements and Supplementary Data, Note 13: Restructuring” included in this Annual Report on Form 10-K for further disclosures regarding the restructuring charges.
(6)  
Total assets and total debt for all periods presented were adjusted for the adoption of Accounting Standards Update 2015-03, Interest - Imputation of Interest . Refer to Item 8: “Financial Statements and Supplementary Data, Note 1: Summary of Significant Accounting Policies” included in this Annual Report on Form 10-K for further disclosures regarding accounting pronouncements.

19


ITEM 7:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Item 8: “Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K.

Overview

We are a technology company, offering end-to-end solutions to enhance productivity and efficiency, primarily focused on utilities and municipalities around to globe. Our solutions generally include robust industrial grade networks, smart meters, meter data management software, and knowledge application solutions, which bring additional value to the customer. Our professional services help our customers project-manage, install, implement, operate, and maintain their systems. We operate under the Itron brand worldwide and manage and report under three operating segments, Electricity, Gas, and Water. Our Water operating segment includes both our global water and heat solutions. This structure allows each segment to develop its own go-to-market strategy, prioritize its marketing and product development requirements, and focus on its strategic investments. Our sales, marketing, and delivery functions are managed under each segment. Our product development and manufacturing operations are managed on a worldwide basis to promote a global perspective in our operations and processes and yet maintain responsiveness to the market.

We have three measures of segment performance: revenues, gross profit (margin), and operating income (margin). Intersegment revenues are minimal. Certain operating expenses are allocated to the operating segments based upon internally established allocation methodologies. Interest income, interest expense, other income (expense), income tax provision, and certain corporate operating expenses are neither allocated to the segments nor included in the measures of segment performance.

The following discussion includes financial information prepared in accordance with accounting principles generally accepted in the United States (GAAP), as well as certain adjusted or non-GAAP financial measures such as constant currency, free cash flow, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, adjusted EBITDA, and non-GAAP diluted earnings per share (EPS). We believe that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors in evaluating current period performance and in assessing future performance. For these reasons, our internal management reporting also includes non-GAAP measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.

In our discussions of the operating results below, we sometimes refer to the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert operating results from local currencies into U.S. dollars for reporting purposes. We also use the term constant currency, which represents results adjusted to exclude foreign currency exchange rate impacts. We calculate the constant currency change as the difference between the current period results translated using the current period currency exchange rates and the comparable prior period’s results restated using current period currency exchange rates. We believe the reconciliations of changes in constant currency provide useful supplementary information to investors in light of fluctuations in foreign currency exchange rates.

Refer to the  Non-GAAP Measures section below on pages 38-40 for information about these non-GAAP measures and the detailed reconciliation of items that impacted free cash flow, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, adjusted EBITDA, and non-GAAP diluted EPS in the presented periods.


20


Total Company Highlights

Highlights and significant developments for the twelve months ended December 31, 2016

Revenues were $2.0 billion compared with $1.9 billion in the same period last year, an increase of $129.7 million , or 7% .

Gross margin was 32.8% compared with 29.6% in the same period last year. The increase of 320 basis points included improvements in all segments.

Operating expenses were $60.3 million higher compared with the same period last year, primarily due to increased restructuring expense.

Net income attributable to Itron, Inc. was $31.8 million compared with $12.7 million for the same period in 2015.

Adjusted EBITDA increased $99.1 million , or 91% compared with the same period in 2015.

GAAP diluted EPS was $0.82 , a $0.49 improvement compared with the same period in 2015.

Non-GAAP diluted EPS improved $1.81 to $2.54 compared with the same period last year.

Total backlog was $1.7 billion and twelve-month backlog was $761 million at December 31, 2016 .

On September 1, 2016, we announced projects (2016 Projects) to restructure various company activities in order to improve operational efficiencies, reduce expenses and improve competiveness. We expect to close or consolidate several facilities and reduce our global workforce as a result of the 2016 Projects. We recognized $47.8 million of restructuring expense related to the 2016 Projects during the year ended December 31, 2016.

We expect to substantially complete the 2016 Projects by the end of 2018. Many of the affected employees are represented by unions or works councils, which requires consultation, and potential restructuring projects may be subject to regulatory approval, both of which could impact the timing of charges, total expected charges, costs recognized, and planned savings in certain jurisdictions. We estimate pre-tax restructuring charges of approximately $68 million , with expected annualized savings of approximately $40 million upon completion.

21


Total Company GAAP and Non-GAAP Highlights and Unit Shipments

 
Year Ended December 31,
 
2016
 
% Change
 
2015
 
% Change
 
2014
 
(in thousands, except margin and per share data)
GAAP
 
 
 
 
 
 
 
 
 
Revenues
$
2,013,186

 
7
 %
 
$
1,883,533

 
(3
)%
 
$
1,947,616

Gross profit
660,320

 
19
 %
 
556,685

 
(9
)%
 
614,050

Operating expenses
564,109

 
12
 %
 
503,839

 
(18
)%
 
613,570

Operating income
96,211

 
82
 %
 
52,846

 
10,910
 %
 
480

Other income (expense)
(11,584
)
 
(26
)%
 
(15,744
)
 
(16
)%
 
(18,745
)
Income tax provision
(49,574
)
 
124
 %
 
(22,099
)
 
448
 %
 
(4,035
)
Net income (loss) attributable to Itron, Inc.
31,770

 
151
 %
 
12,678

 
N/A

 
(23,670
)
 
 
 


 
 
 


 
 
Non-GAAP (1)
 
 


 
 
 


 
 
Non-GAAP operating expenses
$
490,104

 
1
 %
 
$
484,967

 
(4
)%
 
$
504,931

Non-GAAP operating income
170,216

 
137
 %
 
71,718

 
(34
)%
 
109,119

Non-GAAP net income attributable to Itron, Inc.
98,284

 
251
 %
 
27,981

 
(54
)%
 
60,621

Adjusted EBITDA
208,638

 
91
 %
 
109,497

 
(29
)%
 
154,632

 
 
 
 
 
 
 

 
 
GAAP Margins and Earnings Per Share
 
 
 
 
 
 

 
 
Gross margin
32.8
%
 
 
 
29.6
%
 

 
31.5
%
Operating margin
4.8
%
 
 
 
2.8
%
 

 
%
Basic EPS
$
0.83

 
 
 
$
0.33

 

 
$
(0.60
)
Diluted EPS
$
0.82

 
 
 
$
0.33

 

 
$
(0.60
)
 
 
 
 
 
 
 
 
 
 
Non-GAAP Earnings Per Share (1)
 
 
 
 
 
 

 
 
Non-GAAP diluted EPS
$
2.54

 
 
 
$
0.73

 

 
$
1.54


(1)  
These measures exclude certain expenses that we do not believe are indicative of our core operating results. See pages 38-40 for information about these non-GAAP measures and reconciliations to the most comparable GAAP measures.

22


Meter and Communication Module Summary
We classify meters into two categories:
 
Standard metering – no built-in remote reading communication technology
Smart metering – one-way communication of meter data or two-way communication including remote meter configuration and upgrade (consisting primarily of our OpenWay technology)

In addition, smart meter communication modules can be sold separately from the meter.

Our revenue is driven significantly by sales of meters and communication modules. A summary of our meter and communication module shipments is as follows:

 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(units in thousands)
Meters
 
 
 
Standard
15,540

 
17,560

 
18,740

Smart
9,340

 
7,290

 
6,090

Total meters
24,880

 
24,850

 
24,830

 
 
 
 
 
 
Stand-alone communication modules
 
 
 
 
 
Smart
5,980

 
5,840

 
5,770


Results of Operations

Revenues and Gross Margin

The actual results and effects of changes in foreign currency exchange rates in revenues and gross profit were as follows:

 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change (1)
 
Total Change
 
 
Year Ended December 31,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Total Company
 
 
 
 
 
 
 
 
 
 
Revenues
$
2,013,186

 
$
1,883,533

 
$
(34,781
)
 
$
164,434

 
$
129,653

 
Gross Profit
660,320

 
556,685

 
(9,381
)
 
113,016

 
103,635

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change (1)
 
Total Change
 
 
Year Ended December 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
(in thousands)
Total Company
 
 
 
 
 
 
 
 
 
 
Revenues
$
1,883,533

 
$
1,947,616

 
$
(178,250
)
 
$
114,167

 
$
(64,083
)
 
Gross Profit
556,685

 
614,050

 
(51,264
)
 
(6,101
)
 
(57,365
)

(1)  
Constant currency change is a non-GAAP financial measure and represents the total change between periods excluding the effect of changes in foreign currency exchange rates.

Revenues
Revenues increased $129.7 million , or 7% , in 2016 , compared with 2015 . Changes in currency exchange rates unfavorably impacted revenues by $34.8 million across all segments. Revenues decreased $64.1 million , or 3%, in 2015 , compared with 2014. Changes in currency exchange rates unfavorably impacted revenues by $178.3 million across all segments. A more detailed analysis of these fluctuations is provided in Operating Segment Results.


23


No single customer represented more than 10% of total revenues for the years ended December 31, 2016 , 2015 , and 2014 . Our 10 largest customers accounted for 31% , 22% , and 19% of total revenues in 2016 , 2015 , and 2014 .

Gross Margin
Gross margin was 32.8% for 2016 , compared with 29.6% in 2015 . The improvement was primarily driven by a $29.4 million warranty charge that unfavorably impacted gross margin in 2015 related to the premature failure of certain communication modules that necessitated a product replacement notification in our Water segment, as well as improved revenues and product mix in our Electricity and Gas segments. Gross margin was 29.6% in 2015 , compared with 31.5% in 2014 . The decrease was primarily driven by the warranty charge previously discussed.

Operating Expenses

The following table shows the components of operating expense:

 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change (1)
 
Total Change
 
 
Year Ended December 31,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Total Company
 
 
 
 
 
 
 
 
 
 
Sales and marketing
$
158,883

 
$
161,380

 
$
(2,883
)
 
$
386

 
$
(2,497
)
 
Product development
168,209

 
162,334

 
(1,273
)
 
7,148

 
5,875

 
General and administrative
162,815

 
155,715

 
(2,047
)
 
9,147

 
7,100

 
Amortization of intangible assets
25,112

 
31,673

 
(705
)
 
(5,856
)
 
(6,561
)
 
Restructuring
49,090

 
(7,263
)
 
(412
)
 
56,765

 
56,353

 
Total Operating expenses
$
564,109

 
$
503,839

 
$
(7,320
)
 
$
67,590

 
$
60,270

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change (1)
 
Total Change
 
 
Year Ended December 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
(in thousands)
Total Company
 
 
 
 
 
 
 
 
 
 
Sales and marketing
$
161,380

 
$
182,503

 
$
(18,985
)
 
$
(2,138
)
 
$
(21,123
)
 
Product development
162,334

 
175,500

 
(10,267
)
 
(2,899
)
 
(13,166
)
 
General and administrative
155,715

 
162,466

 
(14,356
)
 
7,605

 
(6,751
)
 
Amortization of intangible assets
31,673

 
43,619

 
(4,121
)
 
(7,825
)
 
(11,946
)
 
Restructuring
(7,263
)
 
49,482

 
(6,164
)
 
(50,581
)
 
(56,745
)
 
Total Operating expenses
$
503,839

 
$
613,570

 
$
(53,893
)
 
$
(55,838
)
 
$
(109,731
)

(1)  
Constant currency change is a non-GAAP financial measure and represents the total change between periods excluding the effect of changes in foreign currency exchange rates.

Operating expenses increased $60.3 million for the year ended December 31, 2016 as compared with the same period in 2015 . This was primarily related to increased restructuring expense related to the 2016 Projects. The increases in general and administrative and product development were related to variable compensation, professional service, and temporary worker expenses. This was partially offset by a decrease in amortization of intangible assets.

For the year ended December 31, 2015 , operating expenses decreased $109.7 million as compared with the same period in 2014 . The decrease was primarily related to a reduction in restructuring expense, variable compensation, acquisition related expense, and favorable foreign exchange impact of $53.9 million . These decreases were partially offset by increased litigation, professional service, and temporary worker expenses.


24


Other Income (Expense)

The following table shows the components of other income (expense):

 
Year Ended December 31,
 
2016
 
% Change
 
2015
 
% Change
 
2014
 
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
Interest income
$
865

 
14%
 
$
761

 
54%
 
$
494

Interest expense
(9,872
)
 
(3)%
 
(10,161
)
 
2%
 
(9,990
)
Amortization of prepaid debt fees
(1,076
)
 
(49)%
 
(2,128
)
 
32%
 
(1,612
)
Other income (expense), net
(1,501
)
 
(64)%
 
(4,216
)
 
(45)%
 
(7,637
)
Total other income (expense)
$
(11,584
)
 
(26)%
 
$
(15,744
)
 
(16)%
 
$
(18,745
)

Total other income (expense) for the year ended December 31, 2016 was a net expense of  $11.6 million compared with  $15.7 million  in 2015. The change for the year ended December 31, 2016 as compared with 2015 was due to fluctuations in the recognized foreign currency exchange gains and losses due to transactions denominated in a currency other than the reporting entity's functional currency. The decreased expense in 2016 was also due to the write off of unamortized prepaid debt fees in 2015.

Total other income (expense) for the year ended December 31, 2015 was a net expense of  $15.7 million compared with  $18.7 million  in 2014. The decreased expense was primarily due to reduced losses in the recognized foreign currency exchange losses due to transactions denominated in a currency other than the reporting entity's functional currency.

Income Tax Provision

Our income tax provision was $49.6 million , $22.1 million , and $4.0 million for the years ended December 31, 2016 , 2015 , and 2014 , respectively. Our tax rates of 59% , 60% , and (22)% for the years ended December 31, 2016 , 2015, and 2014 differ from the 35% U.S. federal statutory tax rate due to the level of profit or losses in domestic and foreign jurisdictions, tax credits (including research and development and foreign tax), state income taxes, adjustments to valuation allowances, and uncertain tax positions, among other items. For additional discussion related to income taxes, see Item 8: “Financial Statements and Supplementary Data, Note 11: Income Taxes.”

In December 2016, we filed a formal protest letter with the Internal Revenue Service requesting an Appeals hearing regarding the 2011-2013 tax audit assessment received earlier this year relating to research and development tax credits.


25


Operating Segment Results

For a description of our operating segments, refer to Item 8: “Financial Statements and Supplementary Data, Note 16: Segment Information” in this Annual Report on Form 10-K. The following tables and discussion highlight significant changes in trends or components of each operating segment.
 
Year Ended December 31,
 
 
 
2016
 
% Change
 
2015
 
% Change
 
2014
 
 
Segment Revenues
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Electricity
$
938,374

 
14%
 
$
820,306

 
6%
 
$
771,857

 
 
Gas
569,476

 
5%
 
543,805

 
(9)%
 
599,091

 
 
Water
505,336

 
(3)%
 
519,422

 
(10)%
 
576,668

 
 
Total revenues
$
2,013,186

 
7%
 
$
1,883,533

 
(3)%
 
$
1,947,616

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
Gross
Profit
 
Gross
Margin
 
Gross
Profit
 
Gross
Margin
 
Gross
Profit
 
Gross
Margin
Segment Gross Profit and Margin
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Electricity
$
282,677

 
30.1%
 
$
225,446

 
27.5%
 
$
200,249

 
25.9%
Gas
205,063

 
36.0%
 
185,559

 
34.1%
 
211,623

 
35.3%
Water
172,580

 
34.2%
 
145,680

 
28.0%
 
202,178

 
35.1%
Total gross profit and margin
$
660,320

 
32.8%
 
$
556,685

 
29.6%
 
$
614,050

 
31.5%
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
 
 
2016
 
% Change
 
2015
 
% Change
 
2014
 
 
Segment Operating Expenses
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Electricity
$
214,390

 
10%
 
$
194,342

 
(30)%
 
$
278,000

 
 
Gas
138,250

 
17%
 
118,088

 
(13)%
 
135,522

 
 
Water
135,314

 
8%
 
125,816

 
(4)%
 
130,822

 
 
Corporate unallocated
76,155

 
16%
 
65,593

 
(5)%
 
69,226

 
 
Total operating expenses
$
564,109

 
12%
 
$
503,839

 
(18)%
 
$
613,570

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
Operating
Income
(Loss)
 
Operating
Margin
 
Operating
Income
(Loss)
 
Operating
Margin
 
Operating
Income
(Loss)
 
Operating
Margin
Segment Operating Income (Loss) and Operating Margin
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Electricity
$
68,287

 
7.3%
 
$
31,104

 
3.8%
 
$
(77,751
)
 
(10.1)%
Gas
66,813

 
11.7%
 
67,471

 
12.4%
 
76,101

 
12.7%
Water
37,266

 
7.4%
 
19,864

 
3.8%
 
71,356

 
12.4%
Corporate unallocated
(76,155
)
 

 
(65,593
)
 
 
 
(69,226
)
 
 
Total operating income
$
96,211

 
4.8%
 
$
52,846

 
2.8%
 
$
480

 
—%

26


Electricity:

The effects of changes in foreign currency exchange rates and the constant currency changes in certain Electricity segment financial results were as follows:

 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change (1)
 
Total Change
 
 
Year Ended December 31,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Electricity Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
938,374

 
$
820,306

 
$
(17,643
)
 
$
135,711

 
$
118,068

 
Gross Profit
282,677

 
225,446

 
(5,606
)
 
62,837

 
57,231

 
Operating Expenses
214,390

 
194,342

 
(3,368
)
 
23,416

 
20,048

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change (1)
 
Total Change
 
 
Year Ended December 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
(in thousands)
Electricity Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
820,306

 
$
771,857

 
$
(55,440
)
 
$
103,889

 
$
48,449

 
Gross Profit
225,446

 
200,249

 
(14,322
)
 
39,519

 
25,197

 
Operating Expenses
194,342

 
278,000

 
(20,234
)
 
(63,424
)
 
(83,658
)

(1)  
Constant currency change is a non-GAAP financial measure and represents the total change between periods excluding the effect of changes in foreign currency exchange rates.

Revenues - 2016 vs. 2015
Electricity revenues for 2016 increased by $118.1 million , or 14%, compared with 2015 . This increase was primarily driven by increased smart metering revenues in North America and Europe, Middle East, and Africa (EMEA), higher volumes of prepaid smart metering solutions in our Asia Pacific region, and improved service revenue in North America. These improvements were partially offset by a decline in EMEA service revenue and declines in product revenue in our Latin America region. The total change in Electricity revenues was unfavorably impacted by $17.6 million due to the effect of changes in foreign currency exchange rates.

Revenues - 2015 vs. 2014
Revenues for 2015 increased by $48.4 million , or 6%, compared with 2014 . The increase was primarily driven by increases in product revenue from North America smart metering solutions and service revenues, and improved service revenue in EMEA. The improvements were partially offset by lower product revenue in EMEA due to the planned exit of certain markets and products under our restructuring plan. The total change in Electricity revenues was unfavorably impacted by $55.4 million due to the effect of changes in foreign currency exchange rates.

Two customers represented 12% and 10% of total Electricity operating segment revenues, respectively, for the year ended December 31, 2016. No customer represented more than 10% of total Electricity operating segment revenues in 2015 or 2014 .

Gross Margin - 2016 vs. 2015
Gross margin was 30.1% in 2016 , compared with 27.5% in 2015 . The 260 basis point improvement over the prior year was primarily the result of increased sales of higher margin smart metering solutions in North America and planned reductions in lower margin product sales.

Gross Margin - 2015 vs. 2014
Gross margin was 27.5% in 2015 , compared with 25.9% in 2014 . The margin improvement was driven by net charges for an OpenWay project in North America of $15.9 million, which unfavorably impacted 2014 gross margin by 220 basis points. In addition, we had lower variable compensation expense in 2015. These improvements were partially offset by decreased product revenue in EMEA.


27


Operating Expenses - 2016 vs. 2015
Operating expenses increased $20.0 million , or 10%. The increase was primarily due to increased restructuring charges. In addition, general and administrative expenses for the year ended December 31, 2015 included a recovery of $8.2 million related to the settlement of litigation arising from the SmartSynch acquisition. These increases were partially offset by a decrease in amortization of intangible assets expense.

Operating Expenses - 2015 vs. 2014
Operating expenses decreased by $83.7 million , or 30%, in 2015 compared with 2014 , primarily due to reduced restructuring charges. In addition, general and administrative expenses decreased due to an $8.2 million litigation expense reimbursement related to a $14.7 million charge in 2014, which is included in general and administrative expense. Variable compensation expense included in the sales and marketing, product development, and general and administrative expenses were all lower when comparing 2015 to 2014, while amortization expense also decreased year over year.

Gas:

The effects of changes in foreign currency exchange rates and the constant currency changes in certain Gas segment financial results were as follows:

 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change (1)
 
Total Change
 
 
Year Ended December 31,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Gas Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
569,476

 
$
543,805

 
$
(6,990
)
 
$
32,661

 
$
25,671

 
Gross Profit
205,063

 
185,559

 
(982
)
 
20,486

 
19,504

 
Operating Expenses
138,250

 
118,088

 
(1,336
)
 
21,498

 
20,162

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change (1)
 
Total Change
 
 
Year Ended December 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
(in thousands)
Gas Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
543,805

 
$
599,091

 
$
(49,908
)
 
$
(5,378
)
 
$
(55,286
)
 
Gross Profit
185,559

 
211,623

 
(11,786
)
 
(14,278
)
 
(26,064
)
 
Operating Expenses
118,088

 
135,522

 
(14,054
)
 
(3,380
)
 
(17,434
)

(1)  
Constant currency change is a non-GAAP financial measure and represents the total change between periods excluding the effect of changes in foreign currency exchange rates.

Revenues - 2016 vs. 2015
Revenues increased by $25.7 million , or 5%, in 2016 compared with 2015 . This was due to an increase in product revenue in North America, EMEA, and Asia Pacific. The total change in Gas revenues was unfavorably impacted by  $7.0 million  due to the effect of changes in foreign currency exchange rates.

Revenues - 2015 vs. 2014
Revenues decreased by $55.3 million , or 9%, in 2015 compared with 2014. This decrease was primarily due to the effects of changes in foreign currency exchange rates, as well as a decrease in EMEA revenues due to the phase out of a large project and a planned reduction in standard meter volumes as we shift our focus to smart meters, which did show increased sales during 2015.

No single customer represented more than 10% of the Gas operating segment revenues in 2016 , 2015 , or 2014 .

Gross Margin - 2016 vs. 2015
Gross margin was 36.0% in 2016 , compared with 34.1% in 2015 . The increase of 190 basis points was related to improved product mix and increased volumes.


28


Gross Margin - 2015 vs. 2014
Gross margin was 34.1% in 2015 , compared with 35.3% in 2014 . The decrease in gross margin was driven by lower standard meter volumes and lower margins associated with sales of first generation smart meters in EMEA. In addition, EMEA experienced higher inventory costs associated with the closure of our Naples manufacturing facility as part of our restructuring activities. This decline more than offset improvements in Latin America and Asia Pacific due to higher overall sales as well as improved sales in North America of our higher margin communication modules.

Operating Expenses - 2016 vs. 2015
Operating expenses increased by $20.2 million , or 17%, in 2016 . The increase resulted primarily due to increased restructuring charges as a result of the announcement of the 2016 Projects, partially offset by a decrease in general and administrative expense.

Operating Expenses - 2015 vs. 2014
Operating expenses decreased by $17.4 million , or 13% in 2015 . This decrease was primarily due to the effects of changes in foreign currency exchange rates, along with lower restructuring expense.

Water:

The effects of changes in foreign currency exchange rates and the constant currency changes in certain Water segment financial results were as follows:

 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change (1)
 
Total Change
 
 
Year Ended December 31,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Water Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
505,336

 
$
519,422

 
$
(10,148
)
 
$
(3,938
)
 
$
(14,086
)
 
Gross Profit
172,580

 
145,680

 
(2,793
)
 
29,693

 
26,900

 
Operating Expenses
135,314

 
125,816

 
(1,003
)
 
10,501

 
9,498

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change (1)
 
Total Change
 
 
Year Ended December 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
(in thousands)
Water Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
519,422

 
$
576,668

 
$
(72,902
)
 
$
15,656

 
$
(57,246
)
 
Gross Profit
145,680

 
202,178

 
(25,156
)
 
(31,342
)
 
(56,498
)
 
Operating Expenses
125,816

 
130,822

 
(16,723
)
 
11,717

 
(5,006
)

(1)  
Constant currency change is a non-GAAP financial measure and represents the total change between periods excluding the effect of changes in foreign currency exchange rates.

Revenues - 2016 vs. 2015
Revenues decreased $14.1 million , or 3%, in 2016 . This decrease was primarily due to the effects of changes in foreign currency exchange rates, along with lower meter volumes in EMEA. This was partially offset by improved product sales and services revenues in North America and Asia Pacific.

Revenues - 2015 vs. 2014
Revenues decreased $57.2 million , or 10%, in 2015 . This decrease was primarily due to the effects of changes in foreign currency exchange rates. Excluding those impacts, there was an increase of $15.7 million , driven primarily by growth in product sales of smart meters and modules in North America and EMEA, partially offset by lower product sales in Latin America.

No single customer represented more than 10% of the Water operating segment revenues in 2016 , 2015 , or 2014 .

Gross Margin - 2016 vs. 2015
Gross margin increased to 34.2% in 2016 , compared with 28.0% in 2015 , driven by reduced warranty charges in 2016. Gross margin in 2015 was unfavorably impacted 570 basis points by a warranty charge.

29



Gross Margin - 2015 vs. 2014
Gross margin decreased to 28.0% in 2015 , compared with 35.1% in 2014 , primarily as the result of a warranty charge of $29.4 million . This warranty charge unfavorably impacted 2015 gross margin by 570 basis points.

Operating Expenses - 2016 vs. 2015
Operating expenses increased $9.5 million , or 8%, in 2016 . The increase was primarily due to increased restructuring charges as a result of the commencement of the 2016 Projects.

Operating Expenses - 2015 vs. 2014
Operating expenses decreased by $5.0 million , or 4% in 2015 . This decrease was primarily due to decreases in sales and marketing and amortization expenses. Operating expenses were favorably impacted by $16.7 million in foreign currency exchange rate impacts.

Corporate unallocated:

Operating expenses not directly associated with an operating segment are classified as “Corporate unallocated.” These expenses increased $10.6 million , or 16% , in 2016. The increase was primarily in general and administrative expense due to higher professional service fees and variable compensation.

Corporate unallocated expenses decreased $3.6 million, or 5%, in 2015. This decrease was primarily due to reduced restructuring expense and a decrease in variable compensation. These decreases were partially offset by higher litigation expense.
Financial Condition

Cash Flow Information:

 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(in thousands)
Operating activities
$
115,842

 
$
73,350

 
$
132,973

Investing activities
(47,528
)
 
(48,951
)
 
(41,496
)
Financing activities
(63,023
)
 
7,740

 
(91,877
)
Effect of exchange rates on cash and cash equivalents
(2,744
)
 
(13,492
)
 
(12,034
)
Increase (decrease) in cash and cash equivalents
$
2,547

 
$
18,647

 
$
(12,434
)

Cash and cash equivalents at December 31, 2016 were $133.6 million , compared with $131.0 million at December 31, 2015 . The moderate increase in cash and cash equivalents was primarily the result of an increase in cash flow provided by operating activities, which was substantially offset by an increase in cash used in financing activities. Cash and cash equivalents at December 31, 2015 were higher compared with the prior year primarily due to an increase in cash provided by financing activities, partially offset by a decrease in cash flow provided by operating activities.

Operating activities
Net cash provided by operating activities in 2016 was $42.5 million higher than in 2015 . This increase was primarily due to an improvement in net income (loss) adjusted for non-cash items and changes in operating asset and liabilities. These adjustments include a $75.1 million decreased use of cash for inventory caused by a prior year buildup for expected demand. In addition, $49.1 million of restructuring expense was recognized related to the 2016 Projects, much of which will be paid in future periods or relates to non-cash items. These improvements were partially offset by the $29.4 million warranty charge recognized during the year ended December 31, 2015 related to a product replacement notification to customers of our Water business line for which many replacements have been processed during 2016. In addition, there was a $37.8 million net reduction for unearned revenue recognized during the year for which cash was collected in previous years.

Net cash provided by operating activities in 2015 was $59.6 million lower than 2014 . This decrease was primarily due to a $52.7 million increase in inventory in 2015 for expected demand, and a $57.4 million increased use of cash in other current liabilities due to payments and releases of significant restructuring accruals in 2015, compared with a substantial increase in restructuring liabilities in 2014. Additionally, while warranty liabilities increased $18.0 million in 2015, cash paid for claims activity was lower compared with 2014, resulting in a $27.5 million decreased use of cash. A year over year increase of $37.3 million

30


in net income (loss) and a $36.2 million increase in deferred income taxes also increased cash provided by operating activities as compared with 2014.

Investing activities
Net cash used in investing activities in 2016 was $1.4 million lower than in 2015 .

Net cash used in investing activities in 2015 was $7.5 million higher than in 2014 . This increase was primarily the result of an immaterial acquisition.

Financing activities
Net cash used by financing activities in 2016 was $70.8 million greater than in 2015 , primarily a result of the net repayment of $63.2 million of borrowings in 2016, compared to utilizing $50.5 million of net proceeds during the same period in 2015. This was partially offset by a $38.3 million reduction in cash used for repurchases of common stock during the year ended December 31, 2016, compared with the same period in 2015.

Net cash provided by financing activities in 2015 was $99.6 million higher than in 2014 , primarily as a result of $65.8 million of additional proceeds from borrowings and a $39.4 million decrease in debt repayments.

Effect of exchange rates on cash and cash equivalents
Changes in exchange rates on the cash balances of currencies held in foreign denominations resulted in a decrease of $2.7 million , a decrease of $13.5 million , and a decrease of $12.0 million in 2016 , 2015 , and 2014 , respectively. Our foreign currency exposure relates to non-U.S. dollar denominated balances in our international subsidiary operations, the most significant of which is the euro.

Free cash flow (Non-GAAP)
To supplement our Consolidated Statements of Cash Flows presented on a GAAP basis, we use the non-GAAP measure of free cash flow to analyze cash flows generated from our operations. The presentation of non-GAAP free cash flow is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity. We calculate free cash flows, using amounts from our Consolidated Statements of Cash Flows, as follows:
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
 
(in thousands)
Net cash provided by operating activities
 
$
115,842

 
$
73,350

 
$
132,973

Acquisitions of property, plant, and equipment
 
(43,543
)
 
(43,918
)
 
(44,495
)
Free cash flow
 
$
72,299

 
$
29,432

 
$
88,478


Free cash flow fluctuated primarily as a result of changes in cash provided by operating activities. See the cash flow discussion of operating activities above.

Off-balance sheet arrangements:

We have no off-balance sheet financing agreements or guarantees as defined by Item 303 of Regulation S-K at December 31, 2016 and December 31, 2015 that we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.


31


Disclosures about contractual obligations and commitments:

The following table summarizes our known obligations to make future payments pursuant to certain contracts as of December 31, 2016 , as well as an estimate of the timing in which these obligations are expected to be satisfied.
 
 
Total
 
Less than
1 year
 
1-3
years
 
3-5
years
 
Beyond
5 years
 
 
(in thousands)
Credit Facilities (1)
 
 
 
 
 
 
 
 
 
 
USD denominated term loan
 
$
225,877

 
$
18,625

 
$
52,923

 
$
154,329

 
$

Multicurrency revolving line of credit
 
103,790

 
1,653

 
3,951

 
98,186

 

Operating lease obligations (2)
 
54,417

 
13,128

 
21,390

 
11,389

 
8,510

Purchase and service commitments (3)
 
171,793

 
171,251

 
526

 
16

 

Other long-term liabilities reflected on the balance sheet under generally accepted accounting principles (4)
 
94,060

 

 
55,653

 
13,003

 
25,404

Total
 
$
649,937

 
$
204,657

 
$
134,443

 
$
276,923

 
$
33,914


(1)  
Borrowings are disclosed within Item 8: “Financial Statements and Supplementary Data, Note 6: Debt” included in this Annual Report on Form 10-K, with the addition of estimated interest expense but not including the amortization of prepaid debt fees.

(2)  
Operating lease obligations are disclosed in Item 8: “Financial Statements and Supplementary Data, Note 12: Commitments and Contingencies” included in this Annual Report on Form 10-K and do not include common area maintenance charges, real estate taxes, and insurance charges for which we are obligated.

(3)  
We enter into standard purchase orders in the ordinary course of business that typically obligate us to purchase materials and other items. Purchase orders can include open-ended agreements that provide for estimated quantities over an extended shipment period, typically up to one year at an established unit cost. Our long-term executory purchase agreements that contain termination clauses have been classified as less than one year, as the commitments are the estimated amounts we would be required to pay at December 31, 2016 if the commitments were canceled.

(4)  
Other long-term liabilities consist of warranty obligations, estimated pension benefit payments, and other obligations. Estimated pension benefit payments include amounts from 2018-2026. Long-term unrecognized tax benefits totaling $28.5 million (net of pre-payments), which include accrued interest and penalties, are not included in the above contractual obligations and commitments table as we cannot reliably estimate the period of cash settlement with the respective taxing authorities. Additionally, because the amount and timing of the future cash outflows are uncertain, deferred revenue totaling $49.3 million, which includes deferred revenue related to extended warranty guarantees, is not included in the table. For further information on defined benefit pension plans, income taxes, and warranty obligations and deferred revenue for extended warranties, see Item 8: Financial Statements and Supplementary Data, Notes 8, 11, and 12, respectively, included in this Annual Report on Form 10-K.

Liquidity and Capital Resources:

Our principal sources of liquidity are cash flows from operations, borrowings, and sales of common stock. Cash flows may fluctuate and are sensitive to many factors including changes in working capital and the timing and magnitude of capital expenditures and payments of debt. Working capital, which represents current assets less current liabilities, was $319.4 million at December 31, 2016 .

Borrowings
Our credit facility consists of a $225 million U.S. dollar 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 letter of credit sub-facility and a $50 million swingline sub-facility (available for immediate cash needs at a higher interest rate). At December 31, 2016 , $97.2 million was outstanding under the revolver, and $356.7 million was available for additional borrowings or standby letters of credit. At December 31, 2016 , $46.1 million was utilized by outstanding standby letters of credit, resulting in $203.9 million available for additional letters of credit.

For further description of the term loan and the revolver under our 2015 credit facility, refer to Item 8: “Financial Statements and Supplementary Data, Note 6: Debt” included in this Annual Report on Form 10-K.

For a description of our letters of credit and performance bonds, and the amounts available for additional borrowings or letters of credit under our lines of credit, including the revolver that is part of our credit facility, refer to Item 8: “Financial Statements and Supplementary Data, Note 12: Commitments and Contingencies” included in this Annual Report on Form 10-K.

32



Restructuring
We expect pre-tax restructuring charges associated with the 2016 Projects of approximately  $68 million , with expected annualized savings of approximately $40 million upon completion. Of the total estimated charge, more than 90% is expected to result in cash expenditures.

As of December 31, 2016, $48.0 million was accrued for the restructuring projects, of which $26.2 million is expected to be paid over the next 12 months.

For further details regarding our restructuring activities, refer to Item 8: “Financial Statements and Supplementary Data, Note 13: Restructuring.”

Stock Repurchases
On February 23, 2017, Itron's Board of Directors authorized a new repurchase program of up to $50 million of our common stock over a 12-month period, beginning February 23, 2017. Repurchases are made in the open market or in privately negotiated transactions and in accordance with applicable securities laws. Repurchases are subject to the Company's alternative uses of capital as well as financial, market, and industry conditions.

Income Tax
Our tax provision as a percentage of income (loss) before tax typically differs from the U.S. federal statutory rate of 35%. Changes in our actual tax rate are subject to several factors, including fluctuations in operating results, new or revised tax legislation and accounting pronouncements, changes in the level of business in domestic and foreign jurisdictions, tax credits (including research and development and foreign tax), state income taxes, adjustments to valuation allowances, and uncertain tax positions, among other items. Changes in tax laws, valuation allowances, and unanticipated tax liabilities could significantly impact our tax rate.

Our cash income tax payments were as follows:

 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(in thousands)
U.S. federal taxes paid
$
9,000

 
$
15,700