Annual Statements Open main menu
  1. Annual Statements
  2. » Companies
  3. » ITRON, INC.
  4. » Quarter Report: 2016 June (Form 10-Q)

ITRON, INC. - Quarter Report: 2016 June (Form 10-Q)


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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
x
Accelerated filer
¨
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of July 31, 2016 there were outstanding 38,242,461 shares of the registrant’s common stock, no par value, which is the only class of common stock of the registrant.
 

Table of Contents

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

Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per share data)
Revenues
$
513,024

 
$
470,811

 
$
1,010,614

 
$
917,557

Cost of revenues
343,319

 
352,257

 
677,706

 
660,581

Gross profit
169,705

 
118,554

 
332,908

 
256,976

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Sales and marketing
39,376

 
43,058

 
80,143

 
84,085

Product development
43,354

 
43,318

 
88,700

 
84,840

General and administrative
45,328

 
32,492

 
90,397

 
72,077

Amortization of intangible assets
7,796

 
7,888

 
14,006

 
15,861

Restructuring
(1,622
)
 
(4,234
)
 
615

 
(9,415
)
Total operating expenses
134,232

 
122,522

 
273,861

 
247,448

 
 
 
 
 
 
 
 
Operating income (loss)
35,473

 
(3,968
)
 
59,047

 
9,528

Other income (expense)
 
 
 
 
 
 
 
Interest income
221

 
212

 
492

 
260

Interest expense
(2,735
)
 
(3,855
)
 
(5,653
)
 
(6,537
)
Other income (expense), net
(264
)
 
(1,905
)
 
(1,781
)
 
(1,884
)
Total other income (expense)
(2,778
)
 
(5,548
)
 
(6,942
)
 
(8,161
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
32,695

 
(9,516
)
 
52,105

 
1,367

Income tax provision
(12,193
)
 
(4,098
)
 
(20,819
)
 
(9,128
)
Net income (loss)
20,502

 
(13,614
)
 
31,286

 
(7,761
)
Net income attributable to noncontrolling interests
585

 
732

 
1,280

 
1,187

Net income (loss) attributable to Itron, Inc.
$
19,917

 
$
(14,346
)
 
$
30,006

 
$
(8,948
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share - Basic
$
0.52

 
$
(0.37
)
 
$
0.79

 
$
(0.23
)
Earnings (loss) per common share - Diluted
$
0.52

 
$
(0.37
)
 
$
0.78

 
$
(0.23
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - Basic
38,236

 
38,434

 
38,147

 
38,438

Weighted average common shares outstanding - Diluted
38,516

 
38,434

 
38,446

 
38,438

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


1
Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net income (loss)
$
20,502

 
$
(13,614
)
 
$
31,286

 
$
(7,761
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(8,380
)
 
13,757

 
1,726

 
(46,562
)
Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges
(1,126
)
 
123

 
(3,732
)
 
9

Pension benefit obligation adjustment
(291
)
 
493

 
(609
)
 
997

Total other comprehensive income (loss), net of tax
(9,797
)
 
14,373

 
(2,615
)
 
(45,556
)
 
 
 
 
 
 
 
 
Total comprehensive income (loss), net of tax
10,705

 
759

 
28,671

 
(53,317
)
 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests, net of tax
585

 
732

 
1,280

 
1,187

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Itron, Inc.
$
10,120

 
$
27

 
$
27,391

 
$
(54,504
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

2
Table of Contents

ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
132,014

 
$
131,018

Accounts receivable, net
369,251

 
330,895

Inventories
188,181

 
190,465

Other current assets
115,302

 
106,562

Total current assets
804,748

 
758,940

 
 
 
 
Property, plant, and equipment, net
187,699

 
190,256

Deferred tax assets noncurrent, net
102,411

 
109,387

Other long-term assets
48,324

 
51,679

Intangible assets, net
87,105

 
101,932

Goodwill
471,746

 
468,122

Total assets
$
1,702,033

 
$
1,680,316

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
192,169

 
$
185,827

Other current liabilities
66,401

 
78,630

Wages and benefits payable
91,801

 
76,980

Taxes payable
16,184

 
14,859

Current portion of debt
11,250

 
11,250

Current portion of warranty
26,825

 
36,927

Unearned revenue
89,508

 
73,301

Total current liabilities
494,138

 
477,774

 
 
 
 
Long-term debt
333,535

 
358,915

Long-term warranty
18,632

 
17,585

Pension benefit obligation
87,669

 
85,971

Deferred tax liabilities noncurrent, net
1,650

 
1,723

Other long-term obligations
108,435

 
115,645

Total liabilities
1,044,059

 
1,057,613

 
 
 
 
Commitments and contingencies (Note 11)

 

 
 
 
 
Equity
 
 
 
Common stock
1,255,313

 
1,246,671

Accumulated other comprehensive loss, net
(203,222
)
 
(200,607
)
Accumulated deficit
(411,300
)
 
(441,306
)
Total Itron, Inc. shareholders' equity
640,791

 
604,758

Noncontrolling interests
17,183

 
17,945

Total equity
657,974

 
622,703

Total liabilities and equity
$
1,702,033

 
$
1,680,316

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

3
Table of Contents

ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended June 30,
 
2016
 
2015
 
(in thousands)
Operating activities
 
 
 
Net income (loss)
$
31,286

 
$
(7,761
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
35,481

 
38,792

Stock-based compensation
7,878

 
7,997

Amortization of prepaid debt fees
534

 
1,579

Deferred taxes, net
9,706

 
1,885

Restructuring, non-cash
(131
)
 
(110
)
Other adjustments, net
(366
)
 
919

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(35,283
)
 
(8,641
)
Inventories
2,882

 
(49,928
)
Other current assets
(10,549
)
 
(6,254
)
Other long-term assets
2,667

 
(3,185
)
Accounts payable, other current liabilities, and taxes payable
(735
)
 
23,965

Wages and benefits payable
14,709

 
(5,846
)
Unearned revenue
5,513

 
10,649

Warranty
(9,065
)
 
23,046

Other operating, net
(3,400
)
 
(9,540
)
Net cash provided by operating activities
51,127

 
17,567

 
 
 
 
Investing activities
 
 
 
Acquisitions of property, plant, and equipment
(19,884
)
 
(20,992
)
Business acquisitions, net of cash and cash equivalents acquired
(951
)
 
—

Other investing, net
(974
)
 
693

Net cash used in investing activities
(21,809
)
 
(20,299
)
 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings
—


74,183

Payments on debt
(26,218
)
 
(22,373
)
Issuance of common stock
1,956

 
1,864

Repurchase of common stock
—

 
(23,185
)
Other financing, net
(4,679
)
 
(3,942
)
Net cash provided by (used in) financing activities
(28,941
)
 
26,547

 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
619

 
(7,372
)
Increase in cash and cash equivalents
996

 
16,443

Cash and cash equivalents at beginning of period
131,018

 
112,371

Cash and cash equivalents at end of period
$
132,014

 
$
128,814

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net
$
10,545

 
$
21,233

Interest, net of amounts capitalized
5,064

 
4,998

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

4
Table of Contents

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

Note 1:    Summary of Significant Accounting Policies

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

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

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

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

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

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

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

5
Table of Contents

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

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

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

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

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

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

6
Table of Contents


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

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

Note 2:    Earnings Per Share

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per share data)
Net income (loss) available to common shareholders
$
19,917

 
$
(14,346
)
 
$
30,006

 
$
(8,948
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - Basic
38,236

 
38,434

 
38,147

 
38,438

Dilutive effect of stock-based awards
280

 
—

 
299

 
—

Weighted average common shares outstanding - Diluted
38,516

 
38,434

 
38,446

 
38,438

Earnings (loss) per common share - Basic
$
0.52

 
$
(0.37
)
 
$
0.79

 
$
(0.23
)
Earnings (loss) per common share - Diluted
$
0.52

 
$
(0.37
)
 
$
0.78

 
$
(0.23
)

Stock-based Awards
For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase common stock at the average market price during the period. Related proceeds include the amount the employee must pay upon exercise, future compensation cost associated with the stock award, and the amount of excess tax benefits, if any. Approximately 0.9 million and 1.0 million stock-based awards were excluded from the calculation of diluted EPS for the three and six months ended June 30, 2016 because they were anti-dilutive. Approximately 1.2 million stock-based awards were excluded from the calculation of diluted EPS for both the three and six months ended June 30, 2015 because they were anti-dilutive. These stock-based awards could be dilutive in future periods.

Note 3:    Certain Balance Sheet Components

Accounts receivable, net
June 30, 2016
 
December 31, 2015
 
(in thousands)
Trade receivables (net of allowance of $3,939 and $5,949)
$
317,510

 
$
298,550

Unbilled receivables
51,741

 
32,345

Total accounts receivable, net
$
369,251

 
$
330,895


At June 30, 2016 and December 31, 2015, $3.1 million and $0.7 million, respectively, were recorded as contract retainage receivables within trade receivables, in accordance with contract retainage provisions. At June 30, 2016 and December 31, 2015, contract retainage receivables that were unbilled and classified as unbilled receivables were $5.6 million and $3.5 million, respectively. These contract retainage receivables within trade receivables and unbilled receivables are expected to be collected within the following 12 months.


7
Table of Contents

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

Allowance for doubtful accounts activity
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Beginning balance
$
4,541

 
$
5,939

 
$
5,949

 
$
6,195

Provision (release) for doubtful accounts, net
(80
)
 
(239
)
 
(88
)
 
30

Accounts written-off
(364
)
 
(325
)
 
(1,842
)
 
(341
)
Effect of change in exchange rates
(158
)
 
47

 
(80
)
 
(462
)
Ending balance
$
3,939

 
$
5,422

 
$
3,939

 
$
5,422


Inventories
June 30, 2016
 
December 31, 2015
 
(in thousands)
Materials
$
109,857

 
$
111,191

Work in process
13,145

 
9,400

Finished goods
65,179

 
69,874

Total inventories
$
188,181

 
$
190,465


Consigned inventory is held at third party locations; however, we retain title to the inventory until it is purchased by the third party. Consigned inventory, consisting of raw materials and finished goods, was $1.9 million and $2.6 million at June 30, 2016 and December 31, 2015, respectively.

Property, plant, and equipment, net
June 30, 2016
 
December 31, 2015
 
(in thousands)
Machinery and equipment
$
292,822

 
$
289,015

Computers and software
104,055

 
104,310

Buildings, furniture, and improvements
128,148

 
127,531

Land
19,753

 
19,882

Construction in progress, including purchased equipment
27,725

 
32,639

Total cost
572,503

 
573,377

Accumulated depreciation
(384,804
)
 
(383,121
)
Property, plant, and equipment, net
$
187,699

 
$
190,256


Depreciation expense
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Depreciation expense
$
11,011

 
$
11,549

 
$
21,475

 
$
22,931



8
Table of Contents

Note 4:    Intangible Assets

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

 
June 30, 2016
 
December 31, 2015
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
(in thousands)
Core-developed technology
$
389,613

 
$
(366,189
)
 
$
23,424

 
$
388,981

 
$
(358,092
)
 
$
30,889

Customer contracts and relationships
235,572

 
(172,689
)
 
62,883

 
238,379

 
(168,885
)
 
69,494

Trademarks and trade names
63,731

 
(62,975
)
 
756

 
64,069

 
(62,571
)
 
1,498

Other
11,079

 
(11,037
)
 
42

 
11,078

 
(11,027
)
 
51

Total intangible assets
$
699,995

 
$
(612,890
)
 
$
87,105

 
$
702,507

 
$
(600,575
)
 
$
101,932


A summary of intangible asset activity is as follows:

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

 
$
748,148

Intangible assets impaired
—

 
(497
)
Effect of change in exchange rates
(2,512
)
 
(29,247
)
Ending balance, intangible assets, gross
$
699,995

 
$
718,404


Intangible assets impaired during the six months ended June 30, 2015 includes purchased software licenses to be sold to others. This amount was expensed as part of cost of revenues in the Consolidated Statement of Operations.

Estimated future annual amortization expense is as follows:

Year Ending December 31,
 
Estimated Annual Amortization
 
 
(in thousands)
2016 (amount remaining at June 30, 2016)
 
$
11,210

2017
 
18,608

2018
 
12,939

2019
 
10,159

2020
 
8,275

Beyond 2020
 
25,914

Total intangible assets subject to amortization
 
$
87,105



9
Table of Contents

Note 5:    Goodwill

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

 
$
331,436

 
$
350,314

 
$
1,096,660

Accumulated impairment losses
(362,177
)
 
—

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

 
331,436

 
83,953

 
468,122

 
 
 
 
 
 
 
 
Effect of change in exchange rates
49

 
2,869

 
706

 
3,624

 
 
 
 
 
 
 
 
Balances at June 30, 2016
 
 
 
 
 
 
 
Goodwill before impairment
418,137

 
334,305

 
353,964

 
1,106,406

Accumulated impairment losses
(365,355
)
 
—

 
(269,305
)
 
(634,660
)
Goodwill, net
$
52,782

 
$
334,305

 
$
84,659

 
$
471,746


Note 6:    Debt

The components of our borrowings were as follows:
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Credit facility:
 
 
 
USD denominated term loan
$
213,750

 
$
219,375

Multicurrency revolving line of credit
131,939

 
151,837

Total debt
345,689

 
371,212

Less: current portion of debt
11,250

 
11,250

Less: unamortized prepaid debt fees - term loan
904

 
1,047

Long-term debt less unamortized prepaid debt fees - term loan
$
333,535


$
358,915


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

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


10
Table of Contents

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

Under the 2015 credit facility, we elect applicable market interest rates for both the term loan and any outstanding revolving loans. We also pay an applicable margin, which is based on our total leverage ratio (as defined in the credit agreement). The applicable rates per annum may be based on either: (1) the LIBOR rate or EURIBOR rate (floor of 0%), plus an applicable margin, or (2) the Alternate Base Rate, plus an applicable margin. The Alternate Base Rate election is equal to the greatest of three rates: (i) the prime rate, (ii) the Federal Reserve effective rate plus 1/2 of 1%, or (iii) one month LIBOR plus 1%. At June 30, 2016, the interest rate for both the term loan and the USD revolver was 2.22% (the LIBOR rate plus a margin of 1.75%), and the interest rate for the EUR revolver was 1.75% (the EURIBOR floor rate plus a margin of 1.75%).

Total credit facility repayments were as follows:
 
Six Months Ended June 30,
 
2016
 
2015
 
(in thousands)
Term loan
$
5,625

 
$
7,500

Multicurrency revolving line of credit
20,593

 
14,873

Total credit facility repayments
$
26,218

 
$
22,373


At June 30, 2016, $131.9 million was outstanding under the credit facility revolver, and $322.6 million was available for additional borrowings or standby letters of credit. At June 30, 2016, $45.5 million was utilized by outstanding standby letters of credit, resulting in $204.5 million available for additional standby letters of credit. No amounts were outstanding under the swingline sub-facility.

Upon entering into the 2015 credit facility, a portion of our unamortized prepaid debt fees, totaling $0.8 million, were written-off to interest expense. Prepaid debt fees of approximately $3.9 million were capitalized associated with the 2015 credit facility. Unamortized prepaid debt fees were as follows:
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Unamortized prepaid debt fees - revolver
$
2,775

 
$
3,128

Unamortized prepaid debt fees - term loan
904

 
1,047



11
Table of Contents

Note 7:    Derivative Financial Instruments

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

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

The fair values of our derivative instruments were as follows:

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

 
$
1,632

Interest rate cap contracts
 
Other long-term assets
 
333

 
1,423

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current assets
 
213

 
27

Total asset derivatives
 
 
 
$
546

 
$
3,082

 
 
 
 
 
 
 
Liability Derivatives
 
 
 
 
 
 
Derivatives designated as hedging instruments under ASC 815-20
 
 
 
 
Interest rate swap contracts
 
Other current liabilities
 
$
1,729

 
$
868

Interest rate swap contracts
 
Other long-term obligations
 
2,492

 
—

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current liabilities
 
189

 
99

Total liability derivatives
 
 
 
$
4,410

 
$
967


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

 
2016
 
2015
 
(in thousands)
Net unrealized loss on hedging instruments at January 1,
$
(14,062
)
 
$
(15,148
)
Unrealized loss on hedging instruments
(4,080
)
 
(499
)
Realized losses reclassified into net income (loss)
348

 
508

Net unrealized loss on hedging instruments at June 30,
$
(17,794
)
 
$
(15,139
)

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


12
Table of Contents

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

Offsetting of Derivative Assets
Gross Amounts of Recognized Assets Presented in
the Consolidated
Balance Sheets
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
Derivative Financial Instruments
 
Cash Collateral Received
 
Net Amount
 
(in thousands)
June 30, 2016
$
546

 
$
(230
)
 
$
—

 
$
316

 
 
 
 
 
 
 
 
December 31, 2015
$
3,082

 
$
(565
)
 
$
—

 
$
2,517


Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
Derivative Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
 
(in thousands)
June 30, 2016
$
4,410

 
$
(230
)
 
$
—

 
$
4,180

 
 
 
 
 
 
 
 
December 31, 2015
$
967

 
$
(565
)
 
$
—

 
$
402


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

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

In May 2012, we entered into six interest rate swaps, which were effective July 31, 2013 to August 8, 2016, to convert $200 million of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of 1.00% (excluding the applicable margin on the debt). The cash flow hedges are expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swaps are recorded as a component of other comprehensive income (loss) (OCI) and will be recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedges will be recognized as adjustments to interest expense. The amount of net losses expected to be reclassified into earnings in the next 12 months is $0.1 million.

In October 2015, we entered into an interest rate swap, which is effective from August 31, 2016 to June 23, 2020, and converts $214 million of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of 1.42% (excluding the applicable margin on the debt). The notional balance will amortize to maturity at the same rate as required minimum payments on our term loan. The cash flow hedge is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swap is recorded as a component of OCI and will be recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedge will be recognized as an adjustment to interest expense. The amount of net losses expected to be reclassified into earnings in the next 12 months is $1.6 million. At June 30, 2016, our LIBOR based debt balance was $293.8 million.

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

13
Table of Contents

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

At June 30, 2016, our LIBOR based debt balance was $293.8 million. The amount of cash flow hedge ineffectiveness was insignificant for the three and six months ended June 30, 2016 and 2015.

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

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

Derivatives in ASC 815-20
Cash Flow
Hedging Relationships
 
Amount of Gain (Loss)
Recognized in OCI on
Derivative (Effective
Portion)
 
Gain (Loss) Reclassified from Accumulated
OCI into Income (Effective Portion)
 
Gain (Loss) Recognized in Income on
Derivative (Ineffective Portion)
Location
 
Amount
 
Location
 
Amount
 
 
2016
 
2015
 
 
 
2016
 
2015
 
 
 
2016
 
2015
 
 
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
(1,771
)
 
$
(211
)
 
Interest expense
 
$
(280
)
 
$
(411
)
 
Interest expense
 
$
—

 
$
—

Interest rate cap contracts
 
(357
)
 
—

 
Interest expense
 
—

 
—

 
Interest expense
 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
(5,551
)
 
$
(808
)
 
Interest expense
 
$
(566
)
 
$
(823
)
 
Interest expense
 
$
—

 
$
—

Interest rate cap contracts
 
(1,090
)
 
—

 
Interest expense
 
—

 
—

 
Interest expense
 
—

 
—


Derivatives Not Designated as Hedging Relationships
We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recorded to other income and expense. We enter into monthly foreign exchange forward contracts (a total of 268 contracts were entered into during the six months ended June 30, 2016), which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with currency exposures. The notional amounts of the contracts ranged from less than $10,000 to $31.0 million, offsetting our exposures from the euro, British pound, Canadian dollar, Australian dollar, Mexican peso, and various other currencies.

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

Derivatives Not Designated as Hedging Instrument under ASC 815-20
 
Gain (Loss) Recognized on Derivatives in Other Income (Expense)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Foreign exchange forward contracts
 
$
856

 
$
1,070

 
$
1

 
$
(1,726
)


14
Table of Contents

Note 8:    Defined Benefit Pension Plans

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

Amounts recognized on the Consolidated Balance Sheets consist of:

 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Assets
 
 
 
Plan assets in other long-term assets
$
580

 
$
359

 
 
 
 
Liabilities
 
 
 
Current portion of pension benefit obligation in wages and benefits payable
3,256

 
3,493

Long-term portion of pension benefit obligation
87,669

 
85,971

 
 
 
 
Pension benefit obligation, net
$
90,345

 
$
89,105


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

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Service cost
$
941

 
$
1,169

 
$
1,927

 
$
2,258

Interest cost
650

 
605

 
1,283

 
1,225

Expected return on plan assets
(133
)
 
(129
)
 
(259
)
 
(265
)
Settlements and other
(4
)
 
—

 
(7
)
 
(1
)
Amortization of actuarial net loss
334

 
485

 
661

 
982

Amortization of unrecognized prior service costs
16

 
14

 
31

 
29

Net periodic benefit cost
$
1,804

 
$
2,144

 
$
3,636

 
$
4,228



15
Table of Contents

Note 9:    Stock-Based Compensation

We record stock-based compensation expense for awards of stock options, restricted stock units, unrestricted stock, and phantom stock units. We expense stock-based compensation primarily using the straight-line method over the requisite service period. Stock-based compensation expense and the related tax benefit were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Stock options
$
585

 
$
643

 
$
1,139

 
$
1,292

Restricted stock units
3,143

 
3,079

 
6,239

 
6,405

Unrestricted stock awards
250

 
167

 
500

 
300

Phantom stock units
211

 
—

 
287

 
—

Total stock-based compensation
$
4,189

 
$
3,889

 
$
8,165

 
$
7,997

 
 
 
 
 
 
 
 
Related tax benefit
$
1,296

 
$
1,225

 
$
2,504

 
$
2,374


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

Subject to stock splits, dividends, and other similar events, 7,473,956 shares of common stock are reserved and authorized for issuance under our Amended and Restated 2010 Stock Incentive Plan (Stock Incentive Plan). Awards consist of stock options, restricted stock units, and unrestricted stock awards. At June 30, 2016, 2,159,014 shares were available for grant under the Stock Incentive Plan. The Stock Incentive Plan shares are subject to a fungible share provision such that the authorized share reserve is reduced by (i) one share for every one share subject to a stock option or share appreciation right granted under the Plan and (ii) 1.7 shares for every one share of common stock that was subject to an award other than an option or share appreciation right.

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

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Dividend yield(1)
—
%
 
—
%
 
—
%
 
—
%
Expected volatility(1)
—
%
 
33.9
%
 
33.5
%
 
34.5
%
Risk-free interest rate(1)
—
%
 
1.6
%
 
1.3
%
 
1.7
%
Expected term (years)(1)
—

 
5.5

 
5.5

 
5.5


(1)
There were no employee stock options granted for the three months ended June 30, 2016.

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


16
Table of Contents

A summary of our stock option activity is as follows:

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

 
$
51.90

 
4.4
 
$
1,676

 
 
Granted
207

 
35.30

 
 
 
 
 
$
12.15

Exercised
(23
)
 
36.05

 
 
 
26

 
 
Forfeited
(17
)
 
37.47

 
 
 
 
 
 
Expired
(158
)
 
54.25

 
 
 
 
 
 
Outstanding, June 30, 2015
1,132

 
$
49.12

 
5.7
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2016
1,180

 
$
48.31

 

 


 
 
Granted
185

 
40.04

 
 
 
 
 
$
13.15

Exercised
(34
)
 
35.29

 
 
 
195

 
 
Forfeited
(36
)
 
35.29

 
 
 
 
 
 
Expired
(147
)
 
62.50

 
 
 
 
 
 
Outstanding, June 30, 2016
1,148

 
$
45.95

 
6.0
 
$
3,700

 
 
 
 
 
 
 
 
 
 
 
 
Exercisable June 30, 2016
725

 
$
50.92

 
4.2
 
$
1,303

 
 
 
 
 
 
 
 
 
 
 
 
Expected to vest, June 30, 2016
406

 
$
37.43

 
9.2
 
$
2,303

 
 

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

At June 30, 2016, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $4.3 million, which is expected to be recognized over a weighted average period of approximately 2.2 years.

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

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

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

17
Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Dividend yield(1)
—
%
 
—
%
 
—
%
 
—
%
Expected volatility(1)
—
%
 
28.4
%
 
30.0
%
 
30.1
%
Risk-free interest rate(1)
—
%
 
0.9
%
 
0.7
%
 
0.7
%
Expected term (years)(1)
—

 
2.7

 
1.8

 
2.1

 
 
 
 
 
 
 
 
Weighted average fair value(1)
$
—

 
$
36.65

 
$
44.77

 
$
33.48


(1) 
There were no long-term performance restricted stock units granted for the three months ended June 30, 2016.

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

The following table summarizes restricted stock unit activity:

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

 
 
 
 
Granted(2)
319

 
$
35.30

 
 
Released
(282
)
 
 
 
$
11,593

Forfeited
(36
)
 
 
 
 
Outstanding, June 30, 2015
683

 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2016
756

 
 
 
 
Granted(2)
172

 
$
40.02

 
 
Released
(270
)
 
 
 
$
10,429

Forfeited
(42
)
 
 
 
 
Outstanding, June 30, 2016
616

 
 
 
 
 
 
 
 
 
 
Vested but not released, June 30, 2016
11

 
 
 
$
463

 
 
 
 
 
 
Expected to vest, June 30, 2016
490

 
 
 
$
21,110


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

At June 30, 2016, total unrecognized compensation expense on restricted stock units was $25.8 million, which is expected to be recognized over a weighted average period of approximately 2.1 years.


18
Table of Contents

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

The following table summarizes phantom stock unit activity:

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

 
 
Granted
63

 
$
40.11

Forfeited
(1
)
 
 
Outstanding, June 30, 2016
62

 


 
 
 
 
Expected to vest, June 30, 2016
55

 



At June 30, 2016, total unrecognized compensation expense on phantom stock units was $2.4 million, which is expected to be recognized over a weighted average period of approximately 2.7 years. We have recorded a phantom stock liability of $0.3 million within wages and benefits payable in the Consolidated Balance Sheets as of June 30, 2016.

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

The following table summarizes unrestricted stock award activity:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per share data)
Shares of unrestricted stock granted
6

 
5

 
13

 
8

 
 
 
 
 
 
 
 
Weighted average grant date fair value per share
$
41.86

 
$
36.31

 
$
38.48

 
$
38.47


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

The following table summarizes ESPP activity:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Shares of stock sold to employees(1)
9

 
18

 
20

 
28


(1) 
Stock sold to employees during each fiscal quarter under the ESPP is associated with the offering period ending on the last day of the previous fiscal quarter.

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


19
Table of Contents

Note 10: Income Taxes

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

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

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

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net interest and penalties expense
$
233

 
$
174

 
$
332

 
$
475


Accrued interest and penalties recorded were as follows:

 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Accrued interest
$
2,406

 
$
2,105

Accrued penalties
2,737

 
2,577


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

 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Unrecognized tax benefits related to uncertain tax positions
$
55,177

 
$
54,880

The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate
53,885

 
53,602


At June 30, 2016, we are under examination by certain tax authorities for the 2000 to 2013 tax years. The material jurisdictions where we are subject to examination for the 2000 to 2013 tax years include, among others, the United States, France, Germany, Italy, Brazil and the United Kingdom. No material changes have occurred to previously disclosed assessments. We believe we have appropriately accrued for the expected outcome of all tax matters and do not currently anticipate that the ultimate resolution of these examinations will have a material adverse effect on our financial condition, future results of operations, or liquidity.

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


20
Table of Contents

Note 11:    Commitments and Contingencies

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

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

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

 
$
500,000

Long-term borrowings
(131,939
)
 
(151,837
)
Standby LOCs issued and outstanding
(45,472
)
 
(46,574
)
 
 
 
 
Net available for additional borrowings under the multi-currency revolving line of credit
$
322,589

 
$
301,589

Net available for additional standby LOCs under sub-facility(2)
204,528

 
253,426

 
 
 
 
Unsecured multicurrency revolving lines of credit with various financial institutions
 
 
 
Multicurrency revolving lines of credit
$
102,809

 
$
97,989

Standby LOCs issued and outstanding
(23,636
)
 
(31,122
)
Short-term borrowings(3)
(1,167
)
 
(3,884
)
Net available for additional borrowings and LOCs
$
78,006

 
$
62,983

 
 
 
 
Unsecured surety bonds in force
$
131,935

 
$
87,558


(1)
Refer to Note 6 for details regarding our secured credit facilities.
(2) 
During the three months ended June 30, 2016, as a result of entering into the first and second amendments to the 2015 credit facility, the maximum limit available for additional standby LOCs under sub-facility was reduced from $300 million to $250 million.
(3) 
Short-term borrowings are included in “Other current liabilities” on the Consolidated Balance Sheets.

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

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

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

On July 14, 2016, we entered into a confidential settlement agreement with Transdata Incorporated (Transdata) under which Transdata agreed to dismiss with prejudice all pending litigation in various United States District Courts against us and certain of

21
Table of Contents

our customers. As a part of the settlement, we will receive a patent license from Transdata for the use of the patents in future meter production and sales.

In Brazil, the Conselha Administravo de Defensa Economica commenced an investigation of water meter suppliers, including our subsidiary, to determine whether such suppliers participated in agreements or concerted practices to coordinate their commercial policy in Brazil. Although we are unable to determine the final amount of any fine at this time, we believe that we have made adequate provisions based on information available to us. Consequently, we do not believe that the actual fine and ultimate outcome of this matter will have a material adverse effect on our operations or financial condition.

Itron and its subsidiaries are parties to various employment-related proceedings in jurisdictions where it does business. None of the proceedings are individually material to Itron, and we believe that we have made adequate provision such that the ultimate disposition of the proceedings will not materially affect Itron's business or financial condition.

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Beginning balance
$
50,742

 
$
37,065

 
$
54,512

 
$
36,548

New product warranties
1,501

 
1,207

 
3,905

 
3,007

Other changes/adjustments to warranties
1,001

 
23,652

 
2,035

 
27,097

Claims activity
(7,613
)
 
(3,893
)
 
(15,003
)
 
(6,666
)
Effect of change in exchange rates
(174
)
 
108

 
8

 
(1,847
)
Ending balance
45,457

 
58,139

 
45,457

 
58,139

Less: current portion of warranty
26,825

 
35,589

 
26,825

 
35,589

Long-term warranty
$
18,632

 
$
22,550

 
$
18,632

 
$
22,550


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Total warranty expense
$
2,502

 
$
24,859

 
$
5,940

 
$
30,104


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Beginning balance
$
33,498

 
$
33,900

 
$
33,654

 
$
34,138

Unearned revenue for new extended warranties
433

 
820

 
1,014

 
1,425

Unearned revenue recognized
(878
)
 
(664
)
 
(1,735
)
 
(1,313
)
Effect of change in exchange rates
15

 
28

 
135

 
(166
)
Ending balance
33,068

 
34,084

 
33,068

 
34,084

Less: current portion of unearned revenue for extended warranty
3,951

 
3,216

 
3,951

 
3,216

Long-term unearned revenue for extended warranty within other long-term obligations
$
29,117

 
$
30,868

 
$
29,117

 
$
30,868


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


22
Table of Contents

Plan costs were as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Plan costs
$
6,859

 
$
6,388

 
$
13,633

 
$
12,901


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

 
June 30, 2016
 
December 31, 2015
 
(in thousands)
IBNR accrual
$
2,098

 
$
2,051


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

Note 12:    Restructuring

2014 Projects
In November 2014, our management approved restructuring projects (2014 Projects) to restructure our Electricity business and related general and administrative activities, along with certain Gas and Water activities, to improve operational efficiencies and reduce expenses. The 2014 Projects include consolidation of certain facilities and reduction of our global workforce. The improved structure will position us to meet our long-term profitability goals by better aligning global operations with markets where we can serve our customers profitably.

We began implementing these projects in the fourth quarter of 2014, and we expect to substantially complete these projects by the fourth quarter of 2016. Certain aspects of the projects are subject to a variety of labor and employment laws, rules, and regulations, which could result in a delay in completing the projects at some locations.

The total expected restructuring costs, the restructuring costs recognized in prior periods, the restructuring costs recognized during the six months ended June 30, 2016, and the remaining expected restructuring costs as of June 30, 2016 related to the 2014 Projects were as follows:

 
Total Expected Costs at June 30, 2016
 
Costs Recognized in Prior Periods
 
Costs Recognized During the Six Months Ended June 30, 2016
 
Remaining Costs to be Recognized at June 30, 2016
 
(in thousands)
Employee severance costs
$
34,250

 
$
34,373

 
$
(123
)
 
$
—

Asset impairments & net loss on sale or disposal
8,749

 
8,880

 
(131
)
 
—

Other restructuring costs
6,176

 
3,929

 
869

 
1,378

Total
$
49,175

 
$
47,182

 
$
615

 
$
1,378

 
 
 
 
 
 
 
 
Segments:
 
 
 
 
 
 
 
Electricity
$
21,937

 
$
21,743

 
$
(1,032
)
 
$
1,226

Gas
13,184

 
11,855

 
1,252

 
77

Water
2,005

 
1,940

 
51

 
14

Corporate unallocated
12,049

 
11,644

 
344

 
61

Total
$
49,175

 
$
47,182

 
$
615

 
$
1,378


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


23
Table of Contents

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

2013 Projects
In September 2013, our management approved projects (the 2013 Projects) to restructure our operations to improve profitability and increase efficiencies. We began implementing these projects in the third quarter of 2013, and we expect to substantially complete project activities by the fourth quarter of 2016 and begin recognizing full savings in 2017. While project activities are expected to continue through September 2016, no further costs are expected to be recognized.

The 2013 Projects resulted in approximately $26.2 million of restructuring expense, which was recognized from the third quarter of 2013 through the fourth quarter of 2014.

The following table summarizes the activity within the restructuring related balance sheet accounts for the 2014 and 2013 Projects during the six months ended June 30, 2016:

 
Accrued Employee Severance
 
Asset Impairments & Net Loss on Sale or Disposal
 
Other Accrued Costs
 
Total
 
(in thousands)
Beginning balance, January 1, 2016
$
26,533

 
$
—

 
$
3,048

 
$
29,581

Costs charged to expense
(123
)
 
(131
)
 
869

 
615

Cash payments
(9,321
)
 
—

 
(927
)
 
(10,248
)
Non-cash items
—

 
131

 
—

 
131

Effect of change in exchange rates
(136
)
 
—

 
(9
)
 
(145
)
Ending balance, June 30, 2016
$
16,953

 
$
—

 
$
2,981

 
$
19,934


The current portions of the restructuring related liability balances were $16.2 million and $25.2 million as of June 30, 2016 and December 31, 2015. The current portion of the liability is classified within other current liabilities on the Consolidated Balance Sheets. The long-term portions of the restructuring related liability balances were $3.7 million and $4.4 million as of June 30, 2016 and December 31, 2015. The long-term portion of the restructuring liability is classified within other long-term obligations on the Consolidated Balance Sheets, and includes facility exit costs and severance accruals.

Note 13:    Shareholders' Equity

Preferred Stock
We have authorized the issuance of 10 million shares of preferred stock with no par value. In the event of a liquidation, dissolution, or winding up of the affairs of the corporation, whether voluntary or involuntary, the holders of any outstanding preferred stock would be entitled to be paid a preferential amount per share to be determined by the Board of Directors prior to any payment to holders of common stock. There was no preferred stock issued or outstanding at June 30, 2016 and December 31, 2015.


24
Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Before-tax amount
 
 
 
 
 
 
 
Foreign currency translation adjustment
$
(6,730
)
 
$
13,840

 
$
3,728

 
$
(46,933
)
Foreign currency translation adjustment reclassified into net income on disposal
(1,407
)

—

 
(1,407
)
 
—

Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
(2,128
)
 
(211
)
 
(6,641
)
 
(808
)
Net hedging loss reclassified into net income
280

 
411

 
566

 
823

Pension benefit obligation adjustment
(340
)
 
499

 
(795
)
 
1,010

Total other comprehensive income (loss), before tax
(10,325
)
 
14,539

 
(4,549
)
 
(45,908
)
 
 
 
 
 
 
 
 
Tax (provision) benefit
 
 
 
 
 
 
 
Foreign currency translation adjustment
(243
)
 
(83
)
 
(595
)
 
371

Foreign currency translation adjustment reclassified into net income on disposal
—

 
—

 
—

 
—

Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
830

 
81

 
2,561

 
309

Net hedging loss reclassified into net income
(108
)
 
(158
)
 
(218
)
 
(315
)
Pension benefit obligation adjustment
49

 
(6
)
 
186

 
(13
)
Total other comprehensive income (loss) tax (provision) benefit
528

 
(166
)
 
1,934

 
352

 
 
 
 
 
 
 
 
Net-of-tax amount
 
 
 
 
 
 
 
Foreign currency translation adjustment
(6,973
)
 
13,757

 
3,133

 
(46,562
)
Foreign currency translation adjustment reclassified into net income on disposal
(1,407
)
 
—

 
(1,407
)
 
—

Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
(1,298
)
 
(130
)
 
(4,080
)
 
(499
)
Net hedging loss reclassified into net income
172

 
253

 
348

 
508

Pension benefit obligation adjustment
(291
)
 
493

 
(609
)
 
997

Total other comprehensive income (loss), net of tax
$
(9,797
)
 
$
14,373

 
$
(2,615
)
 
$
(45,556
)

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

 
Foreign Currency Translation Adjustments
 
Net Unrealized Gain (Loss) on Derivative Instruments
 
Net Unrealized Gain (Loss) on Nonderivative Instruments
 
Pension Benefit Obligation Adjustments
 
Total
 
(in thousands)
Balances at January 1, 2015
$
(85,080
)
 
$
(768
)
 
$
(14,380
)
 
$
(34,832
)
 
$
(135,060
)
OCI before reclassifications
(46,562
)
 
(499
)
 
—

 
(1
)
 
(47,062
)
Amounts reclassified from AOCI
—

 
508

 
—

 
998

 
1,506

Total other comprehensive income (loss)
(46,562
)

9


—

 
997

 
(45,556
)
Balances at June 30, 2015
$
(131,642
)
 
$
(759
)
 
$
(14,380
)
 
$
(33,835
)
 
$
(180,616
)
 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2016
$
(158,009
)
 
$
318

 
$
(14,380
)
 
$
(28,536
)
 
$
(200,607
)
OCI before reclassifications
3,133

 
(4,080
)
 
—

 
(87
)
 
(1,034
)
Amounts reclassified from AOCI
(1,407
)
 
348

 
—

 
(522
)
 
(1,581
)
Total other comprehensive income (loss)
1,726


(3,732
)
 
—

 
(609
)
 
(2,615
)
Balances at June 30, 2016
$
(156,283
)
 
$
(3,414
)
 
$
(14,380
)
 
$
(29,145
)
 
$
(203,222
)


25
Table of Contents

Details about the AOCI components reclassified to the Consolidated Statements of Operations are as follows:

 
Amount Reclassified from AOCI(1)
 
Affected Line Item in the Consolidated Statements of Operations
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
(in thousands)
 
 
Amortization of defined benefit pension items
 
 
 
 
 
 
 
 
 
Prior-service costs
$
16

 
$
(14
)
 
$
31

 
$
(29
)
 
(2) 
Actuarial losses
334

 
(485
)
 
661

 
(982
)
 
(2) 
Settlement and Other
(10
)
 
—

 
(10
)
 
—

 
(2) 
Total, before tax
340

 
(499
)
 
682

 
(1,011
)
 
Income before income taxes
Tax benefit (provision)
(80
)
 
6

 
(160
)
 
13

 
Income tax provision
Total, net of tax
260

 
(493
)
 
522

 
(998
)
 
Net income
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period, net of tax
$
260

 
$
(493
)
 
$
522

 
$
(998
)
 
Net income

(1) 
Amounts in parentheses indicate debits to the Consolidated Statements of Operations.
(2) 
These AOCI components are included in the computation of net periodic pension cost. Refer to Note 8 for additional details.

Refer to Note 7 for additional details related to derivative activities that resulted in reclassification of AOCI to the Consolidated Statements of Operations.

Note 14:    Fair Values of Financial Instruments

The fair values at June 30, 2016 and December 31, 2015 do not reflect subsequent changes in the economy, interest rates, and other variables that may affect the determination of fair value. The following table presents the fair values of our financial instruments:

 
June 30, 2016
 
December 31, 2015
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
(in thousands)
 
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
132,014

 
$
132,014

 
$
131,018

 
$
131,018

Foreign exchange forwards
213

 
213

 
27

 
27

Interest rate swaps
—

 
—

 
1,632

 
1,632

Interest rate caps
333

 
333

 
1,423

 
1,423

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Credit facility
 
 
 
 
 
 
 
USD denominated term loan
$
213,750

 
$
212,374

 
$
219,375

 
$
217,830

Multicurrency revolving line of credit
131,939

 
131,064

 
151,837

 
150,570

Interest rate swaps
4,221

 
4,221

 
868

 
868

Foreign exchange forwards
189

 
189

 
99

 
99


The following methods and assumptions were used in estimating fair values:

Cash and cash equivalents: Due to the liquid nature of these instruments, the carrying amount approximates fair value (Level 1).

Credit facility - term loan and multicurrency revolving line of credit: The term loan and revolver are not traded publicly. The fair values, which are valued based upon a hypothetical market participant, are calculated using a discounted cash flow model with Level 2 inputs, including estimates of incremental borrowing rates for debt with similar terms, maturities, and credit profiles. Refer to Note 6 for a further discussion of our debt.

Derivatives: See Note 7 for a description of our methods and assumptions in determining the fair value of our derivatives, which were determined using Level 2 inputs.

26
Table of Contents


Note 15:    Segment Information

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.

We have three GAAP measures of segment performance: revenue, gross profit (margin), and operating income (margin). Our operating segments have distinct products, and, therefore, intersegment revenues are minimal. Certain operating expenses are allocated to the operating segments based upon internally established allocation methodologies. Corporate operating expenses, interest income, interest expense, other income (expense), and income tax provision are not allocated to the segments, nor included in the measure of segment profit or loss. In addition, we allocate only certain production assets and intangible assets to our operating segments. We do not manage the performance of the segments on a balance sheet basis.

Segment Products
Electricity
Standard electricity (electromechanical and electronic) meters; advanced electricity meters and communication modules; smart electricity meters; smart electricity communication modules; prepayment systems, including smart key, keypad, and smart card communication technologies; advanced systems including handheld, mobile, and fixed network collection technologies; smart network technologies; meter data management software; knowledge application solutions; installation; implementation; and professional services including consulting and analysis.
 
 
Gas
Standard gas meters; advanced gas meters and communication modules; smart gas meters; smart gas communication modules; prepayment systems, including smart key, keypad, and smart card communication technologies; advanced systems, including handheld, mobile, and fixed network collection technologies; smart network technologies; meter data management software; knowledge application solutions; installation; implementation; and professional services including consulting and analysis.
 
 
Water
Standard water and heat meters; advanced and smart water meters and communication modules; smart heat meters; advanced systems including handheld, mobile, and fixed network collection technologies; meter data management software; knowledge application solutions; installation; implementation; and professional services including consulting and analysis.


27
Table of Contents

Revenues, gross profit, and operating income associated with our segments were as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Revenues
 
 
 
 
 
 
 
Electricity
$
232,823

 
$
204,349

 
$
450,118

 
$
396,189

Gas
150,266

 
139,292

 
289,522

 
264,373

Water
129,935

 
127,170

 
270,974

 
256,995

Total Company
$
513,024

 
$
470,811

 
$
1,010,614

 
$
917,557

 
 
 
 
 
 
 
 
Gross profit
 
 
 
 
 
 
 
Electricity
$
70,892

 
$
52,741

 
$
135,478

 
$
106,945

Gas
53,483

 
44,027

 
102,060

 
88,064

Water
45,330

 
21,786

 
95,370

 
61,967

Total Company
$
169,705

 
$
118,554

 
$
332,908

 
$
256,976

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
Electricity
$
20,008

 
$
4,025

 
$
30,640

 
$
5,139

Gas
25,376

 
14,659

 
41,675

 
29,150

Water
14,177

 
(11,565
)
 
32,253

 
(2,850
)
Corporate unallocated
(24,088
)
 
(11,087
)
 
(45,521
)
 
(21,911
)
Total Company
35,473

 
(3,968
)
 
59,047

 
9,528

Total other income (expense)
(2,778
)
 
(5,548
)
 
(6,942
)
 
(8,161
)
Income before income taxes
$
32,695

 
$
(9,516
)
 
$
52,105

 
$
1,367


For the three and six months ended June 30, 2016, one customer represented 12% and 13%, respectively, of total Electricity segment revenues. For the three and six months ended June 30, 2016, no single customer represented more than 10% of the Gas and Water operating segment revenues or total Company revenues. For the three and six months ended June 30, 2015, no single customer represented more than 10% of total Company or the Electricity, Gas, or Water operating segment revenues.

Revenues by region were as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
United States and Canada
$
278,314

 
$
252,712

 
$
540,352

 
$
480,150

Europe, Middle East, and Africa
187,847

 
170,291

 
383,558

 
346,477

Other(1)
46,863

 
47,808

 
86,704

 
90,930

Total revenues
$
513,024

 
$
470,811

 
$
1,010,614

 
$
917,557


(1) 
The Other region includes our operations in Latin America and Asia Pacific.

Depreciation and amortization expense associated with our segments was as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Electricity
$
7,771

 
$
9,400

 
$
15,033

 
$
18,549

Gas
4,968

 
5,232

 
9,889

 
10,573

Water
4,636

 
4,734

 
9,018

 
9,526

Corporate Unallocated
1,432

 
71

 
1,541

 
144

Total Company
$
18,807

 
$
19,437

 
$
35,481

 
$
38,792



28
Table of Contents

Note 16:    Subsequent Events

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

The 2016 Projects will begin immediately, and we expect to substantially complete the 2016 Projects by the end of 2018. Many of our 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 and planned savings in certain jurisdictions.

We estimate pre-tax restructuring charges related to the 2016 Projects of $55 million to $65 million.


29
Table of Contents

Item 2:    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes included in this report and with our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (SEC) on June 30, 2016.

Documents we provide to the 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), at the SEC’s Headquarters at 100 F Street, NE, Washington, DC 20549, or by calling 1-800-SEC-0330.

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 Quarterly Report on Form 10-Q. 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. Although we believe that these assumptions and estimates are reasonable, any of these assumptions and estimates could prove to be inaccurate and the forward looking statements based on them could be incorrect and cause our actual results to vary materially from expected results. Our operations involve risks and uncertainties which could materially affect our results of operations and whether the forward looking statements ultimately prove to be correct. These risks and uncertainties include 1) the rate and timing of customer demand for our products, 2) failure to meet performance or delivery milestones in customer contracts, 3) changes in estimated liabilities for product warranties and/or litigation, 4) changes in foreign currency exchange rates and interest rates, 5) rescheduling or cancellations of current customer orders and commitments, 6) our dependence on customers' acceptance of new products and their performance, 7) competition, 8) changes in domestic and international laws and regulations, 9) international business risks, 10) our own and our customers' or suppliers' access to and cost of capital, 11) future business combinations, and 12) other factors. For a more complete description of these and other risks, refer to Item 1A: “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the SEC on June 30, 2016 and our other reports on file with the SEC. We do not have any obligation to update or revise any forward looking statement in this document.


Overview

We are a technology company, offering end-to-end smart metering solutions to electric, natural gas, and water utilities around the world. Our smart metering solutions, meter data management software, and knowledge application solutions bring additional value to a utility’s metering and grid systems. 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 still maintain alignment with the segments.

We have three measures of segment performance: revenue, 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 expense, 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.


30
Table of Contents

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 44-46 for the detailed reconciliation of items that impacted free cash flow, non-GAAP operating expense, non-GAAP operating income, non-GAAP net income, adjusted EBITDA, and non-GAAP diluted EPS in the presented periods.

Total Company Highlights and Unit Shipments

Highlights and significant developments for the three months ended June 30, 2016

•
Revenues were $513.0 million, compared with $470.8 million in the same period last year, an increase of $42.2 million, or 9%. All segments had improved revenues in the second quarter of 2016 as compared with the same period in 2015.

•
Gross margin was 33.1% compared with 25.2% in the same period last year. Second quarter 2016 gross margin improved 790 basis points and includes increased margins in all segments.

•
Operating expenses were $11.7 million higher compared with the same period last year.

•
Net income attributable to Itron, Inc. for the second quarter of 2016 was $19.9 million compared with a net loss of $14.3 million in the same period last year.

•
Adjusted EBITDA improved to $51.8 million, an increase of $47.8 million compared with the same period last year.

•
GAAP diluted EPS improved $0.89 to $0.52 as compared with the same period last year.

•
Non-GAAP diluted EPS improved $1.04 to $0.65 as compared with the same period last year.

Highlights and significant developments for the six months ended June 30, 2016

•
Revenues were $1.0 billion, compared with $917.6 million for the first half of 2015, an increase of $93.1 million, or 10%.

•
Gross margin was 32.9% compared with 28.0% in the same period last year. The gross margin improvement of 490 basis points included improvements in all segments.

•
Operating expenses were $26.4 million higher compared with the same period last year.

•
Net income attributable to Itron, Inc. was $30.0 million compared with a loss of $8.9 million for the same period in 2015.

•
Adjusted EBITDA increased $58.5 million, or 174% as compared with the same period in 2015.

•
GAAP diluted EPS was $0.78, a $1.01 improvement compared with the same period in 2015.

•
Non-GAAP diluted EPS improved $1.26 to $1.09 for the six months ended June 30, 2016.

•
Total backlog was $1.3 billion and twelve-month backlog was $688 million at June 30, 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 restructuring.

The 2016 Projects will begin immediately, and we expect to substantially complete the 2016 Projects by the end of 2018. Many of our 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 and planned savings in certain jurisdictions.

31
Table of Contents


We estimate pre-tax restructuring charges of $55 million to $65 million, with expected annualized savings of approximately $40 million upon completion. We are currently evaluating the effect the charges will have on the effective tax rate as certain international jurisdictions will be subject to restructuring charges where a tax benefit may not be able to be realized.

The following table summarizes the changes in GAAP and Non-GAAP financial measures:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
 
(in thousands, except margin and per share data)
GAAP
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
513,024

 
$
470,811

 
9%
 
$
1,010,614

 
$
917,557

 
10%
Gross profit
169,705

 
118,554

 
43%
 
332,908

 
256,976

 
30%
Operating expenses
134,232

 
122,522

 
10%
 
273,861

 
247,448

 
11%
Operating income (loss)
35,473

 
(3,968
)
 
N/A
 
59,047

 
9,528

 
520%
Other income (expense)
(2,778
)
 
(5,548
)
 
(50)%
 
(6,942
)
 
(8,161
)
 
(15)%
Income tax provision
(12,193
)
 
(4,098
)
 
198%
 
(20,819
)
 
(9,128
)
 
128%
Net income (loss) attributable to Itron, Inc.
19,917

 
(14,346
)
 
N/A
 
30,006

 
(8,948
)
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP(1)
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
$
128,083

 
$
123,475

 
4%
 
$
259,262

 
$
243,285

 
7%
Operating income (loss)
41,622

 
(4,921
)
 
N/A
 
73,646

 
13,691

 
438%
Net income (loss) attributable to Itron, Inc.
25,144

 
(14,908
)
 
N/A
 
41,975

 
(6,359
)
 
N/A
Adjusted EBITDA
51,784

 
3,991

 
1,198%
 
92,060

 
33,551

 
174%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Margins and Earnings Per Share
 
 
 
 
 
 
 
 
 
 
 
Gross margin
33.1
%
 
25.2
 %
 
 
 
32.9
%
 
28.0
%
 
 
Operating margin
6.9
%
 
(0.8
)%
 
 
 
5.8
%
 
1.0
%
 
 
Basic EPS
$
0.52

 
$
(0.37
)
 
 
 
$
0.79

 
$
(0.23
)
 
 
Diluted EPS
0.52

 
(0.37
)
 
 
 
0.78

 
(0.23
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Earnings Per Share(1)
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
$
0.65

 
$
(0.39
)
 
 
 
$
1.09

 
$
(0.17
)
 
 

(1) 
These measures exclude certain expenses that we do not believe are indicative of our core operating results. See pages 44-46 for information about these non-GAAP measures and reconciliations to the most comparable GAAP measures.

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

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


32
Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(units in thousands)
Meters
 
 
 
 
 
 
 
Standard
4,130

 
4,700

 
8,500

 
9,440

Advanced and smart
2,320

 
1,860

 
4,510

 
3,400

Total meters
6,450

 
6,560

 
13,010

 
12,840

 
 
 
 
 
 
 
 
Stand-alone communication modules
 
 
 
 
 
 
 
Advanced and smart
1,440

 
1,410

 
2,900

 
2,720


Results of Operations

Revenue 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
 
 
Three Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Total Company
 
 
 
 
 
 
 
 
 
 
Revenues
$
513,024

 
$
470,811

 
$
(6,530
)
 
$
48,743

 
$
42,213

 
Gross Profit
169,705

 
118,554

 
(1,299
)
 
52,450

 
51,151

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change(1)
 
Total Change
 
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Total Company
 
 
 
 
 
 
 
 
 
 
Revenues
$
1,010,614

 
$
917,557

 
$
(22,496
)
 
$
115,553

 
$
93,057

 
Gross Profit
332,908

 
256,976

 
(4,906
)
 
80,838

 
75,932


(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 $42.2 million and $93.1 million, or 9% and 10%, for the three and six months ended June 30, 2016, compared with the same periods in 2015. Revenues in the Electricity, Gas, and Water segments increased by $28.5 million, $11.0 million, and $2.8 million, respectively, for the three months ended June 30, 2016. Revenues in the Electricity, Gas, and Water segments increased by $53.9 million, $25.1 million, and $14.0 million, respectively, for the six months ended June 30, 2016. Total revenue for the three and six months ended June 30, 2016 was unfavorably impacted by $6.5 million and $22.5 million, respectively, due to changes in foreign exchange rates.

No single customer accounted for more than 10% of total Company revenues during the three and six months ended June 30, 2016 and 2015. Our 10 largest customers accounted for 32% and 30% of total revenues during the three and six months ended June 30, 2016 and 22% and 21% of total revenues during the three and six months ended June 30, 2015.

Gross Margin
Gross margin for the second quarter of 2016 was 33.1%, compared with 25.2% for the same period in 2015. The improvement in the second quarter gross margin was primarily driven by reduced warranty charges in our Water segment, improved revenue across all segments, and favorable product mix in our Electricity and Gas segments. Gross margin for the first six months of 2016 was

33
Table of Contents

32.9% compared with 28.0% for the same period in 2015. The improvement for the first six months was primarily driven by a significant warranty charge in our Water segment in 2015 that negatively impacted gross margin as well as improved revenues and product mix.

Operating Expenses

The actual results and effects of changes in foreign currency exchange rates in operating expenses were as follows:

 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change(1)
 
Total Change
 
 
Three Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Total Company
 
 
 
 
 
 
 
 
 
 
Sales and marketing
$
39,376

 
$
43,058

 
$
(475
)
 
$
(3,207
)
 
$
(3,682
)
 
Product development
43,354

 
43,318

 
(10
)
 
46

 
36

 
General and administrative
45,328

 
32,492

 
(415
)
 
13,251

 
12,836

 
Amortization of intangible assets
7,796

 
7,888

 
(69
)
 
(23
)
 
(92
)
 
Restructuring
(1,622
)
 
(4,234
)
 
(31
)
 
2,643

 
2,612

 
Total Operating Expenses
$
134,232

 
$
122,522

 
$
(1,000
)
 
$
12,710

 
$
11,710

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change(1)
 
Total Change
 
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Total Company
 
 
 
 
 
 
 
 
 
 
Sales and marketing
$
80,143

 
$
84,085

 
$
(1,995
)
 
$
(1,947
)
 
$
(3,942
)
 
Product development
88,700

 
84,840

 
(544
)
 
4,404

 
3,860

 
General and administrative
90,397

 
72,077

 
(1,744
)
 
20,064

 
18,320

 
Amortization of intangible assets
14,006

 
15,861

 
(339
)
 
(1,516
)
 
(1,855
)
 
Restructuring
615

 
(9,415
)
 
(178
)
 
10,208

 
10,030

 
Total Operating Expenses
$
273,861

 
$
247,448

 
$
(4,800
)
 
$
31,213

 
$
26,413


(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 $11.7 million for the three months ended June 30, 2016 as compared with the same period in 2015. The increase was primarily related to an increase in general and administrative expense of $12.8 million.

Operating expenses increased $26.4 million for the six months ended June 30, 2016 as compared with the same period in 2015. The increase was primarily related to an increase in general and administrative expense of $18.3 million, and an increase in restructuring of $10.0 million.

Other Income (Expense)

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

 
Three Months Ended June 30,
 
% Change
 
Six Months Ended June 30,
 
% Change
 
2016
 
2015
 
 
2016
 
2015
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Interest income
$
221

 
$
212

 
4%
 
$
492

 
$
260

 
89%
Interest expense
(2,477
)
 
(2,737
)
 
(9)%
 
(5,119
)
 
(4,959
)
 
3%
Amortization of prepaid debt fees
(258
)
 
(1,118
)
 
(77)%
 
(534
)
 
(1,578
)
 
(66)%
Other income (expense), net
(264
)
 
(1,905
)
 
(86)%
 
(1,781
)
 
(1,884
)
 
(5)%
Total other income (expense)
$
(2,778
)
 
$
(5,548
)
 
(50)%
 
$
(6,942
)
 
$
(8,161
)
 
(15)%


34
Table of Contents

Total other income (expense) for the three months ended June 30, 2016 was a net expense of $2.8 million compared with $5.5 million in the same period in 2015. Total other income (expense) for the six months ended June 30, 2016 was a net expense of $6.9 million compared with $8.2 million in the same period in 2015.

Income Tax Provision

For the three and six months ended June 30, 2016, the income tax provisions were $12.2 million and $20.8 million compared with income tax provisions of $4.1 million and $9.1 million for the same periods in 2015. Our tax rates for the three and six months ended June 30, 2016 of 37% and 40% differed from the federal statutory rate of 35% due to the forecasted mix of earnings in domestic and international jurisdictions and losses experienced in jurisdictions with valuation allowances on deferred tax assets. Our tax rates for the three and six months ended June 30, 2015 of (43)% and 668% differed from the federal statutory rate of 35% due to the forecasted mix of earnings in domestic and international jurisdictions, valuation allowances, and discrete tax items. The effective tax rates for the periods in 2015 were significantly different from the statutory rate due to pre-tax losses for the three months ended June 30, 2015 and only marginal pre-tax income for the six months ended June 30, 2015.

Operating Segment Results

For a description of our operating segments, refer to Item 1: “Financial Statements Note 15: Segment Information.”

 
Three Months Ended
June 30,
 
 
 
 
 
Six Months Ended June 30,


 
 
 
2016

2015
 
% Change
 
 
 
2016

2015

% Change
 
 
Segment Revenues
(in thousands)
 
 
 
 
 
(in thousands)
 
 
 
 
Electricity
$
232,823

 
$
204,349

 
14%
 
 
 
$
450,118

 
$
396,189

 
14%
 
 
Gas
150,266

 
139,292

 
8%
 
 
 
289,522

 
264,373

 
10%
 
 
Water
129,935

 
127,170

 
2%
 
 
 
270,974

 
256,995

 
5%
 
 
Total revenues
$
513,024

 
$
470,811

 
9%
 
 
 
$
1,010,614

 
$
917,557

 
10%
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
Gross
Profit
 
Gross
Margin
 
Gross
Profit
 
Gross
Margin
 
Gross
Profit
 
Gross
Margin
 
Gross
Profit
 
Gross
Margin
Segment Gross Profit and Margin
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Electricity
$
70,892

 
30.4%
 
$
52,741

 
25.8%
 
$
135,478

 
30.1%
 
$
106,945

 
27.0%
Gas
53,483

 
35.6%
 
44,027

 
31.6%
 
102,060

 
35.3%
 
88,064

 
33.3%
Water
45,330

 
34.9%
 
21,786

 
17.1%
 
95,370

 
35.2%
 
61,967

 
24.1%
Total gross profit and margin
$
169,705

 
33.1%
 
$
118,554

 
25.2%
 
$
332,908

 
32.9%
 
$
256,976

 
28.0%
 
 
 
 
 
 
 
 
 
Three Months Ended
June 30,
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
2016

2015
 
% Change
 
 
 
2016
 
2015
 
% Change
 
 
Segment Operating Expenses
(in thousands)
 
 
 
 
 
(in thousands)
 
 
 
 
Electricity
$
50,884

 
$
48,716

 
4%
 
 
 
$
104,838

 
$
101,806

 
3%
 
 
Gas
28,107

 
29,368

 
(4)%
 
 
 
60,385

 
58,914

 
2%
 
 
Water
31,153

 
33,351

 
(7)%
 
 
 
63,117

 
64,817

 
(3)%
 
 
Corporate unallocated
24,088

 
11,087

 
117%
 
 
 
45,521

 
21,911

 
108%
 
 
Total operating expenses
$
134,232

 
$
122,522

 
10%
 
 
 
$
273,861

 
$
247,448

 
11%
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016

2015
 
Operating
Income (Loss)
 
Operating
Margin
 
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)
 
 
 
(in thousands)
 
 
Electricity
$
20,008

 
8.6%
 
$
4,025

 
2.0%
 
$
30,640

 
6.8%
 
$
5,139

 
1.3%
Gas
25,376

 
16.9%
 
14,659

 
10.5%
 
41,675

 
14.4%
 
29,150

 
11.0%
Water
14,177

 
10.9%
 
(11,565
)
 
(9.1)%
 
32,253

 
11.9%
 
(2,850
)
 
(1.1)%
Corporate unallocated
(24,088
)
 
 
 
(11,087
)
 
 
 
(45,521
)
 
 
 
(21,911
)
 
 
Total Company
$
35,473

 
6.9%
 
$
(3,968
)
 
(0.8)%
 
$
59,047

 
5.8%
 
$
9,528

 
1.0%

35
Table of Contents


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
 
 
Three Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Electricity Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
232,823

 
$
204,349

 
$
(4,130
)
 
$
32,604

 
$
28,474

 
Gross Profit
70,892

 
52,741

 
(750
)
 
18,901

 
18,151

 
Operating Expenses
50,884

 
48,716

 
(557
)
 
2,725

 
2,168

 

 

 

 

 

 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change(1)
 
Total Change
 
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Electricity Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
450,118

 
$
396,189

 
$
(11,565
)
 
$
65,494

 
$
53,929

 
Gross Profit
135,478

 
106,945

 
(2,325
)
 
30,858

 
28,533

 
Operating Expenses
104,838

 
101,806

 
(2,110
)
 
5,142

 
3,032


(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 - Three months ended June 30, 2016 vs. Three months ended June 30, 2015
Revenues increased $28.5 million, or 14%, for the three months ended June 30, 2016, compared with the same period in 2015. This increase was primarily driven by increased product revenue in North America and Europe, Middle East, and Africa (EMEA). The increase in North America was driven by higher advanced meter sales, while EMEA increased due to higher volumes. These improvements were partially offset by declines in our standard meter volumes. Electricity revenues were unfavorably impacted by $4.1 million from changes in foreign currency exchange rates.

Revenues - Six months ended June 30, 2016 vs. Six months ended June 30, 2015
Revenues increased $53.9 million, or 14%, for the six months ended June 30, 2016, compared with the same period in 2015. Revenues were higher in 2016 primarily due to increased product revenues and professional services in North America. EMEA product revenues also contributed to the growth. Electricity revenues were unfavorably impacted by $11.6 million from changes in foreign currency exchange rates.

For the three and six months ended June 30, 2016, one customer represented 12% and 13%, respectively, of total Electricity segment revenues. For the three and six months ended June 30, 2015, no single customer represented more than 10% of the Electricity segment revenues.

Gross Margin - Three months ended June 30, 2016 vs. Three months ended June 30, 2015
Gross margin was 30.4% for the three months ended June 30, 2016, compared with 25.8% for the same period in 2015. The 460 basis point increase over the prior year was primarily the result of an improved product mix as well as improved manufacturing efficiencies driven by restructuring activities and improved services margins.

Gross Margin - Six months ended June 30, 2016 vs. Six months ended June 30, 2015
For the six months ended June 30, 2016, gross margin was 30.1%, compared with 27.0% for the same period in 2015. The 310 basis point improvement over the prior year was primarily the result of increased revenue in North America and EMEA, including increased volumes of higher margin smart products.


36
Table of Contents

Operating Expenses - Three months ended June 30, 2016 vs. Three months ended June 30, 2015
Operating expenses increased $2.2 million, or 4%, for the three months ended June 30, 2016, compared with the same period in 2015. The increase was caused by a $4.0 million increase in general and administrative due to receiving a reimbursement of $4.6 million (classified as an acquisition-related cost recovery) in June 2015 related to the settlement of litigation arising from the SmartSynch acquisition. This increase was partially offset by decreases in sales and marketing expenditures.

Operating Expenses - Six months ended June 30, 2016 vs. Six months ended June 30, 2015
Operating expenses increased $3.0 million, or 3%, for the six months ended June 30, 2016, compared with the same period in 2015. The increase resulted primarily from receiving a reimbursement of $4.6 million (classified as an acquisition-related cost recovery within general and administrative expense) in June 2015 related to the settlement of litigation arising from the SmartSynch acquisition. In addition, restructuring increased $4.4 million in 2016. These increases were partially offset by decreases in sales and marketing, product development, and amortization expenses.

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
 
 
Three Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Gas Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
150,266

 
$
139,292

 
$
(1,005
)
 
$
11,979

 
$
10,974

 
Gross Profit
53,483

 
44,027

 
(293
)
 
9,749

 
9,456

 
Operating Expenses
28,107

 
29,368

 
(88
)
 
(1,173
)
 
(1,261
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change(1)
 
Total Change
 
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Gas Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
289,522

 
$
264,373

 
$
(3,692
)
 
$
28,841

 
$
25,149

 
Gross Profit
102,060

 
88,064

 
(505
)
 
14,501

 
13,996

 
Operating Expenses
60,385

 
58,914

 
(661
)
 
2,132

 
1,471


(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 - Three months ended June 30, 2016 vs. Three months ended June 30, 2015
Revenues increased $11.0 million, or 8%, for the three months ended June 30, 2016 compared with the same period in 2015. This was due an increase in sales of communication modules and smart meters in North America, as well as an increase in EMEA smart meter shipments.

Revenues - Six months ended June 30, 2016 vs. Six months ended June 30, 2015
Revenues increased $25.1 million, or 10%, for the six months ended June 30, 2016, compared with the same period in 2015. This was due an increase in sales of communication modules and smart meters in North America, as well as an increase in EMEA smart meter shipments. Gas revenues were unfavorably impacted by $3.7 million from changes in foreign currency exchange rates.

No single customer accounted for more than 10% of the Gas operating segment revenues during the three and six months ended June 30, 2016 and 2015.


37
Table of Contents

Gross Margin - Three months ended June 30, 2016 vs. Three months ended June 30, 2015
Gross margin was 35.6% for the three months ended June 30, 2016, compared with 31.6% for the same period in 2015. The 400 basis point increase was related to increased sales, improved product mix, and introduction of next generation smart meters in EMEA.

Gross Margin - Six months ended June 30, 2016 vs. Six months ended June 30, 2015
Gross margin was 35.3% for the six months ended June 30, 2016, compared with 33.3% for the same period in 2015. An increase of 200 basis points was related to increased sales, improved product mix, and introduction of next generation smart meters in EMEA.

Operating Expenses - Three months ended June 30, 2016 vs. Three months ended June 30, 2015
Operating expenses decreased $1.3 million, or 4%, for the three months ended June 30, 2016, compared with the same period in 2015. The decrease was primarily due to a decrease in general and administrative expense, partially offset by increased restructuring expense.

Operating Expenses - Six months ended June 30, 2016 vs. Six months ended June 30, 2015
Operating expenses increased $1.5 million, or 2%, for the six months ended June 30, 2016, compared with the same period in 2015. The increase was primarily due to increased investment in product development, which was partially offset by a decrease in general and administrative 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
 
 
Three Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Water Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
129,935

 
$
127,170

 
$
(1,395
)
 
$
4,160

 
$
2,765

 
Gross Profit
45,330

 
21,786

 
(256
)
 
23,800

 
23,544

 
Operating Expenses
31,153

 
33,351

 
(75
)
 
(2,123
)
 
(2,198
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Changes in Foreign Currency Exchange Rates
 
Constant Currency Change(1)
 
Total Change
 
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
 
 
 
 
(in thousands)
Water Segment
 
 
 
 
 
 
 
 
 
 
Revenues
$
270,974

 
$
256,995

 
$
(7,239
)
 
$
21,218

 
$
13,979

 
Gross Profit
95,370

 
61,967

 
(2,076
)
 
35,479

 
33,403

 
Operating Expenses
63,117

 
64,817

 
(967
)
 
(733
)
 
(1,700
)

(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 - Three months ended June 30, 2016 vs. Three months ended June 30, 2015
Revenues increased $2.8 million, or 2%, for the three months ended June 30, 2016, compared with the second quarter of 2015. This was due to higher revenues in EMEA, partially offset by lower revenues in North America and Latin America.

Revenues - Six months ended June 30, 2016 vs. Six months ended June 30, 2015
Revenues increased $14.0 million, or 5%, for the first six months of 2016, compared with the same period last year. This increase was primarily due to increased product revenue of $22.0 million combined in North America and EMEA. This was partially offset by lower revenues in Latin America. Water revenues were unfavorably impacted by $7.2 million from changes in foreign currency exchange rates.

No single customer represented more than 10% of the Water operating segment revenues during the three and six months ended June 30, 2016 and 2015.


38
Table of Contents

Gross Margin - Three months ended June 30, 2016 vs. Three months ended June 30, 2015
During the second quarter of 2016 gross margin increased to 34.9%, compared with 17.1% in 2015. The significantly higher gross margin was due to improved margins in North America, driven by reduced warranty charges in 2016. The second quarter of 2015 included a $23.6 million warranty accrual associated with our preliminary failure estimates for certain communication modules manufactured between July 2013 and December 2014. This additional warranty expense reduced gross margin by 18.6 percentage points during the three months ended June 30, 2015.

Gross Margin - Six months ended June 30, 2016 vs. Six months ended June 30, 2015
Gross margin increased to 35.2% for the six months ended June 30, 2016, compared with 24.1% for the same period last year, driven by reduced warranty charges in 2016. The first half of 2015 included a $26.8 million warranty accrual associated with our preliminary failure estimates for certain communication modules manufactured between July 2013 and December 2014. This additional warranty expense reduced gross margin by 10.4 percentage points during the six months ended June 30, 2015.

Operating Expenses - Three months ended June 30, 2016 vs. Three months ended June 30, 2015
Operating expenses for the three months ended June 30, 2016 decreased by $2.2 million, or 7%, compared with the second quarter of 2015. This decrease was primarily the result of decreased general and administrative expenses, partially offset by higher product development expenses.

Operating Expenses - Six months ended June 30, 2016 vs. Six months ended June 30, 2015
Operating expenses for the six months ended June 30, 2016 decreased by $1.7 million, or 3%, compared with the same period last year. This decrease was primarily the result of decreased general and administrative expenses, partially offset by higher product development expenses.

Corporate unallocated

Corporate Unallocated Expenses - Three months ended June 30, 2016 vs. Three months ended June 30, 2015
Operating expenses not directly associated with an operating segment are classified as “Corporate unallocated.” These expenses increased by $13.0 million, or 117%, for the three months ended June 30, 2016 compared with the same period in 2015. The increase was primarily due to increased professional service fees associated with the revision of previously issued financial statements, as discussed in our 2015 Annual Report on Form 10-K, along with increased legal costs.

Corporate Unallocated Expenses - Six months ended June 30, 2016 vs. Six months ended June 30, 2015
Corporate unallocated expenses increased by $23.6 million or 108%, for the six months ended June 30, 2016 compared with the same period in 2015. The increase was primarily due to increased professional service fees associated with the revision of previously issued financial statements, as discussed in our 2015 Annual Report on Form 10-K, along with increased legal costs.

Bookings and Backlog of Orders

Bookings for a reported period represent customer contracts and purchase orders received during the period that have met certain conditions, such as regulatory and/or contractual approval. Total backlog represents committed but undelivered products and services for 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, fluctuations in foreign currency exchange rates, and other factors.


39
Table of Contents

Quarter Ended
 
Quarterly
Bookings
 
Ending
Total
Backlog(1)
 
Ending
12-Month
Backlog
 
 
(in millions)
June 30, 2016
 
$
349

 
$
1,345

 
$
688

March 31, 2016
 
394

 
1,504

 
785

December 31, 2015
 
822

 
1,575

 
836

September 30, 2015
 
337

 
1,252

 
734

June 30, 2015
 
398

 
1,403

 
799

March 31, 2015
 
424

 
1,470

 
780


(1) 
The March 31, 2016 ending total backlog was adjusted for an error as the prior periods’ backlog did not reflect the deferral of 2011 and 2012 revenues as disclosed in our 2015 Annual Report on Form 10-K (2015 Form 10-K).  This revenue deferral was properly recorded as a beginning retained earnings balance adjustment for the year ended December 31, 2013 in the 2015 Form 10-K. The total backlog was adjusted upward by approximately $29 million, which is not considered material.

Information on bookings by our operating segments is as follows:

Quarter Ended
 
Total Bookings
 
Electricity
 
Gas
 
Water
 
 
(in millions)
June 30, 2016
 
$
349

 
$
109

 
$
114

 
$
126

March 31, 2016
 
394

 
145

 
137

 
112

December 31, 2015
 
822

 
441

 
251

 
130

September 30, 2015
 
337

 
151

 
100

 
86

June 30, 2015
 
398

 
175

 
116

 
107

March 31, 2015
 
424

 
191

 
109

 
124


Financial Condition

Cash Flow Information:

 
Six Months Ended June 30,
 
2016
 
2015
 
(in thousands)
Operating activities
$
51,127

 
$
17,567

Investing activities
(21,809
)
 
(20,299
)
Financing activities
(28,941
)
 
26,547

Effect of exchange rates on cash and cash equivalents
619

 
(7,372
)
Increase in cash and cash equivalents
$
996

 
$
16,443


Cash and cash equivalents was $132.0 million at June 30, 2016, compared with $131.0 million at December 31, 2015.

Operating activities
Cash provided by operating activities during the six months ended June 30, 2016 was $51.1 million compared with $17.6 million during the same period in 2015. The increase in cash provided was primarily due to a $39.0 million increase in net income (loss), $52.8 million of improved cash flow due to a prior year buildup of inventory for expected demand in North America and EMEA. Additionally, changes in wages and benefits payable resulted in a $20.6 million reduced use of cash due to lower variable compensation payments during the six months ended June 30, 2016 compared with the same period last year. These changes were partially offset by a $26.6 million larger increase in accounts receivable, caused by an overall increase in revenues and the timing of significant billings in both North America and EMEA, and a $43.5 million smaller increase in accounts payable caused by the timing of significant invoices in North America. Additionally, cash used for warranty related activities increased $32.1 million, as a $26.8 million warranty charge was recorded during the six months ended June 30, 2015 related to a product replacement notification to customers of our Water business line.

Investing activities
Cash used by investing activities during the six months ended June 30, 2016 was $1.5 million higher compared with the same period in 2015.

40
Table of Contents


Financing activities
Net cash used by financing activities during the six months ended June 30, 2016 was $28.9 million, compared with a cash source of $26.5 million for the same period in 2015. The increased use of cash by financing activities is primarily a result of utilizing no proceeds from borrowings in the six months ended June 30, 2016, compared to $74.2 million during the same period in 2015, as free cash flow was sufficient to fund operating and investing activities. This was partially offset by a $23.2 million reduction in cash used for repurchases of common stock during the six months ended June 30, 2016, compared with the same period in 2015.

Effect of exchange rates on cash and cash equivalents
The effect of exchange rates on the cash balances of currencies held in foreign denominations for the six months ended June 30, 2016 was an increase of $0.6 million, compared with a decrease of $7.4 million for the same period in 2015. The impact of exchange rates is the result of an increase in U.S. dollar value compared with most foreign currencies during the first six months in 2015.

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 provided by (used in) operating activities as a measure of liquidity. We calculate free cash flows, using amounts from our Consolidated Statements of Cash Flows, as follows:

 
Six Months Ended June 30,
 
2016
 
2015
 
(in thousands)
Net cash provided by operating activities
$
51,127

 
$
17,567

Acquisitions of property, plant, and equipment
(19,884
)
 
(20,992
)
Free cash flow
$
31,243

 
$
(3,425
)

Free cash flow (non-GAAP) increased almost exclusively as a result of higher 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 June 30, 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.

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 $310.6 million at June 30, 2016, compared with $281.2 million at December 31, 2015.

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 June 30, 2016, $131.9 million was outstanding under the revolver, and $322.6 million was available for additional borrowings or standby letters of credit. At June 30, 2016, $45.5 million was utilized by outstanding standby letters of credit, resulting in $204.5 million available for additional letters of credit.

The 2015 credit facility includes debt covenants, which contain certain financial ratio thresholds, place certain restrictions on the incurrence of debt, investments, and the issuance of dividends, and require quarterly unaudited and annual audited financial reporting. We were not in compliance with the financial reporting portion of these covenants under the 2015 credit facility at June 30, 2016. On April 1, 2016 and June 13, 2016, we entered into the first and second amendments to the 2015 credit facility. As a result of these amendments, we have been granted waivers which extend the due dates for annual audited financial statements

41
Table of Contents

for the year ended December 31, 2015 and quarterly unaudited financial statements for the periods ended March 31, 2016 and June 30, 2016 through September 12, 2016, and our $300 million standby letter of credit sub-facility was reduced to $250 million.

For further description of the term loan and the revolver under our 2015 credit facility, refer to Item 1: “Financial Statements, Note 6: Debt.”

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 1: “Financial Statements, Note 11: Commitments and Contingencies.”

Restructuring
In November 2014, our management approved restructuring projects to restructure our Electricity business and related general and administrative activities, along with certain Gas and Water activities, to improve operational efficiencies and reduce expenses. The 2014 Projects include consolidation of certain facilities and reduction of our global workforce. The improved structure will position us to meet our long-term profitability goals by better aligning global operations with markets where we can serve our customers profitably.

As of June 30, 2016, $19.9 million was accrued for the restructuring projects, of which $16.2 million is expected to be paid over the next 12 months. Certain aspects of the projects are subject to a variety of labor and employment laws, rules, and regulations, which could result in a delay in completing the projects at some locations.

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

The 2016 Projects will begin immediately, and we expect to substantially complete the 2016 Projects by the end of 2018. Many of our 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 and planned savings in certain jurisdictions.

We estimate pre-tax restructuring charges of $55 million to $65 million, with expected annualized savings of approximately $40 million upon completion. We are currently evaluating the effect the charges will have on the effective tax rate as certain international jurisdictions will be subject to restructuring charges where a tax benefit may not be able to be realized. Of the total estimated charge, more than 90% is expected to result in cash expenditures.

For further details regarding our restructuring activities, refer to Item 1: “Financial Statements, Note 12: Restructuring.”

Other Liquidity Considerations
We have tax credits and net operating loss carryforwards in various jurisdictions that are available to reduce cash taxes. However, utilization of tax credits and net operating losses are limited in certain jurisdictions. Based on current projections, we expect to pay, net of refunds, approximately $6.8 million in state taxes, $12.0 million in U.S federal taxes, and $15.3 million in local and foreign taxes during 2016. For a discussion of our tax provision and unrecognized tax benefits, see Item 1: “Financial Statements, Note 10: Income Taxes.”

At June 30, 2016, we are under examination by certain tax authorities for the 2000 to 2013 tax years. The material jurisdictions where we are subject to examination include, among others, the United States, France, Germany, Italy, Brazil, and the United Kingdom. No material changes have occurred to previously disclosed assessments. We believe we have appropriately accrued for the expected outcome of all tax matters and do not currently anticipate that the ultimate resolution of these examinations will have a material adverse effect on our financial condition, future results of operations, or liquidity.

We have not provided U.S. deferred taxes related to the cash in certain foreign subsidiaries because our investment is considered permanent in duration. As of June 30, 2016, there was $41.5 million of cash and short-term investments held by certain foreign subsidiaries in which we are permanently reinvested for tax purposes. If this cash were repatriated to fund U.S. operations, additional tax costs may be required. Tax is one of the many factors that we consider in the management of global cash. Included in the determination of the tax costs in repatriating foreign cash into the United States are the amount of earnings and profits in a particular jurisdiction, withholding taxes that would be imposed, and available foreign tax credits. Accordingly, the amount of taxes that we would need to accrue and pay to repatriate foreign cash could vary significantly.

In several of our consolidated international subsidiaries, we have joint venture partners, who are minority shareholders. Although these entities are not wholly-owned by Itron, Inc., we consolidate them because we have a greater than 50% ownership interest

42
Table of Contents

and/or because we exercise control over the operations. The noncontrolling interest balance in our Consolidated Balance Sheets represents the proportional share of the equity of the joint venture entities, which is attributable to the minority shareholders. Approximately $21.0 million of our consolidated cash balance at June 30, 2016 is held in our joint venture entities. As a result, the minority shareholders of these entities have rights to their proportional share of this cash balance, and there may be limitations on our ability to repatriate cash to the United States from these entities.

At June 30, 2016, we have accrued $26.3 million of bonus and profit sharing plans expense for the expected achievement of annual financial and nonfinancial targets, which will be paid in cash during the third quarter of 2016 and first quarter of 2017.

General Liquidity Overview
We expect to grow through a combination of internal new product development, licensing technology from and to others, distribution agreements, partnering arrangements, and acquisitions of technology or other companies. We expect these activities to be funded with existing cash, cash flow from operations, borrowings, or the sale of common stock or other securities. We believe existing sources of liquidity will be sufficient to fund our existing operations and obligations for the next 12 months and into the foreseeable future, but offer no assurances. Our liquidity could be affected by the stability of the electricity, gas, and water industries, competitive pressures, changes in estimated liabilities for product warranties and/or litigation, future business combinations, capital market fluctuations, international risks, and other factors described under “Risk Factors” within Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the SEC on June 30, 2016, as well as “Quantitative and Qualitative Disclosures About Market Risk” within Item 3 of Part I included in this Quarterly Report on Form 10-Q.

Contingencies

Refer to Item 1: “Financial Statements, Note 11: Commitments and Contingencies.”

Critical Accounting Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on our consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. Our critical accounting policies that require the use of estimates and assumptions were discussed in detail in the 2015 Annual Report on Form 10-K and have not changed materially from that discussion, with the following exception.

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

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

We expense stock-based compensation at the date of grant for unrestricted stock awards. For awards with only a service condition, we expense stock-based compensation, adjusted for estimated forfeitures, using the straight-line method over the requisite service period for the entire award. For awards with performance and service conditions, if vesting is probable, we expense the stock-based compensation, adjusted for estimated forfeitures, on a straight-line basis over the requisite service period for each separately vesting portion of the award. For awards with a market condition, we expense the fair value over the requisite service period. Excess tax benefits are credited to common stock when the deduction reduces cash taxes payable. When we have tax deductions in excess of the compensation cost, they are classified as financing cash inflows in the Consolidated Statements of Cash Flows.

43
Table of Contents

Non-GAAP Measures

Our consolidated financial statements are prepared in accordance with GAAP, which we supplement with certain non-GAAP financial information. These non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define such measures differently. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. These non-GAAP measures exclude the impact of certain expenses that we do not believe are indicative of our core operating results. We use these non-GAAP financial measures for financial and operational decision making and as a means for determining executive compensation. These non-GAAP financial measures facilitate management's internal comparisons to our historical performance.

Non-GAAP operating expenses and non-GAAP operating income – We define non-GAAP operating expenses as operating expenses excluding certain expenses related to the amortization of intangible assets, restructuring, acquisitions and goodwill impairment. We define non-GAAP operating income as operating income excluding the expenses related to the amortization of intangible assets, restructuring, acquisitions and goodwill impairment. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of expenses that are related to previous acquisitions and restructuring projects. By excluding these expenses, we believe that it is easier for management and investors to compare our financial results over multiple periods and analyze trends in our operations. For example, in certain periods expenses related to amortization of intangible assets may decrease, which would improve GAAP operating margins, yet the improvement in GAAP operating margins due to this lower expense is not necessarily reflective of an improvement in our core business. There are some limitations related to the use of non-GAAP operating expense and non-GAAP operating income versus operating expense and operating income calculated in accordance with GAAP. Non-GAAP operating expense and non-GAAP operating income exclude some costs that are recurring.

Non-GAAP net income and non-GAAP diluted EPS – We define non-GAAP net income as net income (loss) attributable to Itron, Inc. excluding the expenses associated with amortization of intangible assets, restructuring, acquisitions, goodwill impairment, amortization of debt placement fees, and the tax effect of excluding these expenses. We define non-GAAP diluted EPS as non-GAAP net income divided by the weighted average shares, on a diluted basis, outstanding during each period. We consider these financial measures to be useful metrics for management and investors for the same reasons that we use non-GAAP operating income. The same limitations described above regarding our use of non-GAAP operating income apply to our use of non-GAAP net income and non-GAAP diluted EPS. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP measures and evaluating non-GAAP net income and non-GAAP diluted EPS together with GAAP net income (loss) attributable to Itron, Inc. and GAAP diluted EPS.

Adjusted EBITDA – We define adjusted EBITDA as net income (a) minus interest income, (b) plus interest expense, depreciation, amortization of intangible assets, restructuring, acquisition related expense, goodwill impairment and (c) exclude the tax expense or benefit. We believe that providing this financial measure is important for management and investors to understand our ability to service our debt as it is a measure of the cash generated by our core business. Management uses adjusted EBITDA as a performance measure for executive compensation. A limitation to using adjusted EBITDA is that it does not represent the total increase or decrease in the cash balance for the period and the measure includes some non-cash items and excludes other non-cash items. Additionally, the items that we exclude in our calculation of adjusted EBITDA may differ from the items that our peer companies exclude when they report their results. We compensate for these limitations by providing a reconciliation of this measure to GAAP net income.

Free cash flow - We define free cash flow as net cash provided by operating activities less cash used for acquisitions of property, plant and equipment. We believe free cash flow provides investors with a relevant measure of liquidity and a useful basis for assessing our ability to fund our operations and repay our debt. The same limitations described above regarding our use of adjusted EBITDA apply to our use of free cash flow. We compensate for these limitations by providing specific information regarding the GAAP amounts and reconciling to free cash flow.

Constant currency - We may refer to the impact of foreign currency exchange rate fluctuations in our discussions of financial results, which references the differences between the foreign currency exchange rates used to translate operating results from local currencies into U.S. dollars for financial reporting purposes. We also use the term “constant currency,” which represents financial results adjusted to exclude changes in foreign currency exchange rates as compared with the rates in the comparable prior year period. We calculate the constant currency change as the difference between the current period results and the comparable prior period’s results restated using current period foreign currency exchange rates.


44
Table of Contents

Reconciliation of GAAP Measures to Non-GAAP Measures

The table below reconciles the non-GAAP financial measures of operating expenses, operating income, net income, diluted EPS, adjusted EBITDA, free cash flow, and operating income by segment with the most directly comparable GAAP financial measures.

TOTAL COMPANY RECONCILIATIONS
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
(in thousands, except per share data)
 
NON-GAAP OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
GAAP operating expenses
$
134,232

 
$
122,522

 
$
273,861

 
$
247,448

 
 
 
Amortization of intangible assets
(7,796
)
 
(7,888
)
 
(14,006
)
 
(15,861
)
 
 
 
Restructuring
1,622

 
4,234

 
(615
)
 
9,415

 
 
 
Acquisition-related expenses
25

 
4,607

 
22

 
2,283

 
 
Non-GAAP operating expenses
$
128,083


$
123,475

 
$
259,262


$
243,285

 
 
 
 
 
 
 
 
 
 
 
 
NON-GAAP OPERATING INCOME
 
 
 
 
 
 
 
 
 
GAAP operating income (loss)
$
35,473

 
$
(3,968
)
 
$
59,047

 
$
9,528

 
 
 
Amortization of intangible assets
7,796

 
7,888

 
14,006

 
15,861

 
 
 
Restructuring
(1,622
)
 
(4,234
)
 
615

 
(9,415
)
 
 
 
Acquisition-related expenses
(25
)
 
(4,607
)
 
(22
)
 
(2,283
)
 
 
Non-GAAP operating income (loss)
$
41,622


$
(4,921
)
 
$
73,646


$
13,691

 
 
 
 
 
 
 
 
 
 
 
 
NON-GAAP NET INCOME & DILUTED EPS
 
 
 
 
 
 
 
 
 
GAAP net income (loss) attributable to Itron, Inc.
$
19,917

 
$
(14,346
)
 
$
30,006

 
$
(8,948
)
 
 
 
Amortization of intangible assets
7,796

 
7,888

 
14,006

 
15,861

 
 
 
Amortization of debt placement fees
248

 
1,164

 
495

 
1,529

 
 
 
Restructuring
(1,622
)
 
(4,234
)
 
615

 
(9,415
)
 
 
 
Acquisition-related expenses
(25
)
 
(4,607
)
 
(22
)
 
(2,283
)
 
 
 
Income tax effect of non-GAAP adjustments(1)
(1,170
)
 
(773
)
 
(3,125
)
 
(3,103
)
 
 
Non-GAAP net income (loss) attributable to Itron, Inc.
$
25,144


$
(14,908
)
 
$
41,975


$
(6,359
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP diluted EPS
$
0.65

 
$
(0.39
)
 
$
1.09

 
$
(0.17
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - Diluted
38,516

 
38,434

 
38,446

 
38,438

 
 
 
 
 
 
 
 
 
 
 
 
ADJUSTED EBITDA
 
 
 
 
 
 
 
 
 
GAAP net income (loss) attributable to Itron, Inc.
$
19,917

 
$
(14,346
)
 
$
30,006

 
$
(8,948
)
 
 
 
Interest income
(221
)
 
(212
)
 
(492
)
 
(260
)
 
 
 
Interest expense
2,735

 
3,855

 
5,653

 
6,537

 
 
 
Income tax provision
12,193

 
4,098

 
20,819

 
9,128

 
 
 
Depreciation and amortization
18,807

 
19,437

 
35,481

 
38,792

 
 
 
Restructuring
(1,622
)
 
(4,234
)
 
615

 
(9,415
)
 
 
 
Acquisition-related expenses
(25
)
 
(4,607
)
 
(22
)
 
(2,283
)
 
 
Adjusted EBITDA
$
51,784

 
$
3,991

 
$
92,060

 
$
33,551

 
 
 
 
 
 
 
 
 
 
 
 
FREE CASH FLOW
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
17,322

 
$
21,522

 
$
51,127

 
$
17,567

 
 
 
Acquisitions of property, plant, and equipment
(11,093
)
 
(11,520
)
 
(19,884
)
 
(20,992
)
 
 
Free Cash Flow
$
6,229

 
$
10,002

 
$
31,243

 
$
(3,425
)

(1) 
The income tax effect of non-GAAP adjustments is calculated using the statutory tax rates for the relevant jurisdictions if no valuation allowance exists. If a valuation allowance exists, there is no tax impact to the non-GAAP adjustment.

45
Table of Contents

SEGMENT RECONCILIATIONS
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
(in thousands)
 
NON-GAAP OPERATING INCOME - ELECTRICITY
 
 
 
 
 
 
 
 
 
Electricity - GAAP operating income
$
20,008

 
$
4,025

 
$
30,640

 
$
5,139

 
 
 
Amortization of intangible assets
4,617

 
4,428

 
7,867

 
8,883

 
 
 
Restructuring
(1,560
)
 
(2,703
)
 
(1,032
)
 
(5,465
)
 
 
 
Acquisition-related expenses
(25
)
 
(4,607
)
 
(22
)
 
(2,283
)
 
 
Electricity - Non-GAAP operating income
$
23,040

 
$
1,143

 
$
37,453

 
$
6,274

 
 
 
 
 
 
 
 
 
 
 
 
NON-GAAP OPERATING INCOME - GAS
 
 
 
 
 
 
 
 
 
Gas - GAAP operating income
$
25,376

 
$
14,659

 
$
41,675

 
$
29,150

 
 
 
Amortization of intangible assets
1,756

 
1,945

 
3,375

 
3,915

 
 
 
Restructuring
(12
)
 
(1,186
)
 
1,252

 
(1,061
)
 
 
Gas - Non-GAAP operating income
$
27,120

 
$
15,418

 
$
46,302

 
$
32,004

 
 
 
 
 
 
 
 
 
 
 
 
NON-GAAP OPERATING INCOME - WATER
 
 
 
 
 
 
 
 
 
Water - GAAP operating income (loss)
$
14,177

 
$
(11,565
)
 
$
32,253

 
$
(2,850
)
 
 
 
Amortization of intangible assets
1,423

 
1,515

 
2,764

 
3,063

 
 
 
Restructuring
115

 
156

 
51

 
273

 
 
Water - Non-GAAP operating income (loss)
$
15,715

 
$
(9,894
)
 
$
35,068

 
$
486

 
 
 
 
 
 
 
 
 
 
 
 
NON-GAAP OPERATING INCOME - CORPORATE UNALLOCATED
 
 
 
 
 
 
 
 
 
Corporate unallocated - GAAP operating loss
$
(24,088
)
 
$
(11,087
)
 
$
(45,521
)
 
$
(21,911
)
 
 
 
Restructuring
(165
)
 
(501
)
 
344

 
(3,162
)
 
 
Corporate unallocated - Non-GAAP operating loss
$
(24,253
)
 
$
(11,588
)
 
$
(45,177
)
 
$
(25,073
)

46
Table of Contents

Item 3:    Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, we are exposed to interest rate and foreign currency exchange rate risks that could impact our financial position and results of operations. As part of our risk management strategy, we may use derivative financial instruments to hedge certain foreign currency and interest rate exposures. Our objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, therefore reducing the impact of volatility on earnings or protecting the fair values of assets and liabilities. We use derivative contracts only to manage existing underlying exposures. Accordingly, we do not use derivative contracts for trading or speculative purposes.

Interest Rate Risk
We are exposed to interest rate risk through our variable rate debt instruments. In May 2012, we entered into six forward starting pay-fixed, receive one-month LIBOR interest rate swaps. The interest rate swaps convert $200 million of our LIBOR-based debt from a floating LIBOR interest rate to a fixed interest rate of 1.00% (excluding the applicable margin on the debt) and were effective from July 31, 2013 to August 8, 2016.

In October 2015, we entered into an interest rate swap, which is effective from August 31, 2016 to June 23, 2020, and converts $214 million of our LIBOR-based debt from a floating LIBOR interest rate to a fixed interest rate of 1.42% (excluding the applicable margin on the debt). The notional balance will amortize to maturity at the same rate as required minimum payments on our term loan. At June 30, 2016, our LIBOR-based debt balance was $293.8 million.

In November 2015, we entered into three interest rate cap contracts with a total notional amount of $100 million at a cost of $1.7 million. The interest rate cap contracts expire on June 23, 2020 and were entered into in order to limit our interest rate exposure on $100 million of our variable LIBOR-based debt up to 2.00%. In the event LIBOR is higher than 2.00%, we will pay interest at the capped rate of 2.00% with respect to the $100 million notional amount of such agreements. The interest rate cap contracts do not include the effect of the applicable margin.

The table below provides information about our financial instruments that are sensitive to changes in interest rates and the scheduled minimum repayment of principal and the weighted average interest rates at June 30, 2016. Weighted average variable rates in the table are based on implied forward rates in the Reuters U.S. dollar yield curve as of June 30, 2016 and our estimated leverage ratio, which determines our additional interest rate margin at June 30, 2016.

 
2016
 
2017
 
2018
 
2019
 
2020
 
Total
 
Fair Value
 
(in thousands)
Variable Rate Debt
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal: U.S. dollar term loan
$
5,625

 
$
14,063

 
$
19,688

 
$
22,500

 
$
151,874

 
$
213,750

 
$
212,374

Average interest rate
2.23
 %
 
2.31
 %
 
2.48
 %
 
2.67
 %
 
2.82
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal: Multicurrency revolving line of credit
$
—

 
$
—

 
$
—

 
$
—

 
$
131,939

 
$
131,939

 
$
131,064

Average interest rate
2.04
 %
 
2.09
 %
 
2.19
 %
 
2.32
 %
 
2.44
 %
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap on LIBOR-based debt
 
 
 
 
 
 
 
 
 
 
 
 
 
Average interest rate (pay)
1.28
 %
 
1.42
 %
 
1.42
 %
 
1.42
 %
 
1.42
 %
 
 
 
 
Average interest rate (receive)
0.49
 %
 
0.56
 %
 
0.73
 %
 
0.93
 %
 
1.07
 %
 
 
 
 
Net/Spread
(0.79
)%
 
(0.86
)%
 
(0.69
)%
 
(0.49
)%
 
(0.35
)%
 
 
 
 

Based on a sensitivity analysis as of June 30, 2016, we estimate that, if market interest rates average one percentage point higher in 2016 than in the table above, our financial results in 2016 would not be materially impacted.

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

Foreign Currency Exchange Rate Risk
We conduct business in a number of countries. As a result, approximately half of our revenues and operating expenses are denominated in foreign currencies, which expose our account balances to movements in foreign currency exchange rates that could have a material effect on our financial results. Our primary foreign currency exposure relates to non-U.S. dollar denominated transactions in our international subsidiary operations, the most significant of which is the euro. Revenues denominated in functional

47
Table of Contents

currencies other than the U.S. dollar were 48% and 49% of total revenues for the three and six months ended June 30, 2016 compared with 51% and 52% for the same respective periods in 2015.

We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third party. At each period-end, non-functional currency monetary assets and liabilities are revalued, with the change recorded to other income and expense. We enter into monthly foreign exchange forward contracts (a total of 268 contracts were entered into during the six months ended June 30, 2016), which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with currency exposures. The notional amounts of the contracts ranged from less than $10,000 to $31.0 million, offsetting our exposures from the euro, British pound, Canadian dollar, Australian dollar, Mexican peso, and various other currencies.

In future periods, we may use additional derivative contracts to protect against foreign currency exchange rate risks.

48
Table of Contents

Item 4:    Controls and Procedures

(a)
Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended. These disclosure controls and procedures ensure the information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of June 30, 2016, the Company’s disclosure controls and procedures were not effective as a result of a material weakness in our internal control over financial reporting identified during the year ended December 31, 2015, as disclosed in our 2015 Annual Report on Form 10-K. Management has concluded that the deficiencies identified in our revenue processes and controls, the combination of which represents a material weakness, were also present as of June 30, 2016, as our remediation efforts have not yet been completed. Specifically, we did not design and maintain effective controls to determine whether vendor specific objective evidence (VSOE) of fair value could be demonstrated for substantially all maintenance contracts associated with certain software solutions and whether software was essential to the functionality of certain hardware.

(b)
Changes in internal controls over financial reporting. In the ordinary course of business, we review our system of internal control over financial reporting and make changes to our applications and processes to improve such controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient applications and automating manual processes. We are currently upgrading our global enterprise resource software applications at our locations outside of the United States. We will continue to upgrade our financial applications in stages, and we believe the related changes to processes and internal controls will allow us to be more efficient and further enhance our internal control over financial reporting.

Additionally, we have established a shared services center in Europe, and we are currently transitioning certain finance and accounting activities within our EMEA locations to the shared services center in a staged approach. The transition to shared services is ongoing, and we believe the related changes to processes and internal controls will allow us to be more efficient and further enhance our internal control over financial reporting.
Except for these changes and the remediation efforts related to the material weakness noted below, there have been no other changes in our internal control over financial reporting during the three months ended June 30, 2016 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

(c)
Remediation of Material Weakness in Internal Control over Financial Reporting. To remediate the material weakness in our internal control over financial reporting described above, we are implementing and/or plan to implement the following:

•
Continue to engage outside consultants to advise on changes in the design of controls and procedures to determine whether VSOE of fair value exists for certain software elements;
•
Implement enhancements to revenue processes and systems to identify transactions warranting additional review and automate certain manual processes;
•
Expand mandatory revenue recognition training for employees directly responsible for executing control activities related to our sales contracts;
•
Expand our revenue recognition policies and procedures to provide detailed explanations specific to Itron’s sales contracts; and
•
Continue to engage outside consultants to advise on technical matters related to significant sales contracts or revenue streams.

When fully implemented and operational, we believe the measures described above will remediate the material weakness we have identified and strengthen our internal control over financial reporting.

49
Table of Contents

PART II: OTHER INFORMATION


Item 1:
Legal Proceedings
Refer to Item 1: “Financial Statements, Note 11: Commitments and Contingencies.”

Item 1A:
Risk Factors
There were no material changes to risk factors during the second quarter of 2016 from those previously disclosed in Item 1A: “Risk Factors” of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the SEC on June 30, 2016.

Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

(c) Not applicable.

Item 5:
Other Information

(a) No information was required to be disclosed in a report on Form 8-K during the second quarter of 2016 that was not reported.

(b) Not applicable.


50
Table of Contents

Item 6:
Exhibits
 

 
 
 
Exhibit
Number
 
Description of Exhibits
 
 
12.1
 
Computation of Ratio of Earnings to Fixed Charges. (filed with this report)
 
 
 
31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
 
XBRL Instance Document.
 
 
101.SCH
 
XBRL Taxonomy Extension Schema.
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.

51
Table of Contents

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
ITRON, INC.
 
 
 
 
September 2, 2016
 
By:
/s/ W. MARK SCHMITZ
Date
 
 
W. Mark Schmitz
 
 
 
Executive Vice President and Chief Financial Officer

52