NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
In this Annual Report, the terms “we,” “us,” “our,” “Itron,” and the “Company” refer to Itron, Inc.
Note 1: Summary of Significant Accounting Policies
We were incorporated in the state of Washington in 1977. We provide a portfolio of solutions to utilities for the electricity, gas, and water markets throughout the world.
Financial Statement Preparation
The consolidated financial statements presented in this Annual Report include the Consolidated Statements of Operations, Comprehensive Income (Loss), Equity, and Cash Flows for the years ended
December 31, 2016
,
2015
, and
2014
and the Consolidated Balance Sheets as of
December 31, 2016
and
2015
of Itron, Inc. and its subsidiaries.
Basis of Consolidation
We consolidate all entities in which we have a greater than
50%
ownership interest or in which we exercise control over the operations. We use the equity method of accounting for entities in which we have a
50%
or less investment and exercise significant influence. Entities in which we have less than a
20%
investment and where we do not exercise significant influence are accounted for under the cost method. Intercompany transactions and balances are eliminated upon consolidation.
Noncontrolling Interests
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, we consolidate them because we have a greater than
50%
ownership interest or because we exercise control over the operations. The noncontrolling interest balance is adjusted each period to reflect the allocation of net income (loss) and other comprehensive income (loss) attributable to the noncontrolling interests, as shown in our Consolidated Statements of Operations and our Consolidated Statements of Comprehensive Income (Loss) as well as contributions from and distributions to the owners. 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.
Cash and Cash Equivalents
We consider all highly liquid instruments with remaining maturities of three months or less at the date of acquisition to be cash equivalents.
Accounts Receivable,net
Accounts receivable are recognized for invoices issued to customers in accordance with our contractual arrangements. Interest and late payment fees are minimal. Unbilled receivables are recognized when revenues are recognized upon product shipment or service delivery and invoicing occurs at a later date. We recognize an allowance for doubtful accounts representing our estimate of the probable losses in accounts receivable at the date of the balance sheet based on our historical experience of bad debts and our specific review of outstanding receivables. Accounts receivable are written-off against the allowance when we believe an account, or a portion thereof, is no longer collectible.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out method. Cost includes raw materials and labor, plus applied direct and indirect costs.
Derivative Instruments
All derivative instruments, whether designated in hedging relationships or not, are recognized on the Consolidated Balance Sheets at fair value as either assets or liabilities. The components and fair values of our derivative instruments are determined using the fair value measurements of significant other observable inputs (Level 2), as defined by GAAP. The fair value of our derivative instruments may switch between an asset and a liability depending on market circumstances at the end of the period. We include the effect of our counterparty credit risk based on current published credit default swap rates when the net fair value of our derivative instruments are in a net asset position and the effect of our own nonperformance risk when the net fair value of our derivative instruments are in a net liability position.
For any derivative designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. For any derivative designated as a cash flow hedge, the effective portions of changes
in the fair value of the derivative are recognized as a component of other comprehensive income (loss) (OCI) and are recognized in earnings when the hedged item affects earnings. Ineffective portions of cash flow hedges are recognized in other income (expense) in the Consolidated Statements of Operations. For a hedge of a net investment, the effective portion of any unrealized gain or loss from the foreign currency revaluation of the hedging instrument is reported in OCI as a net unrealized gain or loss on derivative instruments. Upon termination of a net investment hedge, the net derivative gain/loss will remain in accumulated other comprehensive income (loss) (AOCI) until such time when earnings are impacted by a sale or liquidation of the associated operations. Ineffective portions of fair value changes or the changes in fair value of derivative instruments that do not qualify for hedging activities are recognized in other income (expense) in the Consolidated Statements of Operations. We classify cash flows from our derivative programs as cash flows from operating activities in the Consolidated Statements of Cash Flows.
Derivatives are not used for trading or speculative purposes. Our derivatives are with credit worthy multinational commercial banks, with whom we have master netting agreements; however, our derivative positions are not recognized on a net basis in the Consolidated Balance Sheets. There are no credit-risk-related contingent features within our derivative instruments. Refer to Note 7 and Note 14 for further disclosures of our derivative instruments and their impact on OCI.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally
30
years for buildings and improvements and
three
to
ten
years for machinery and equipment, computers and software, and furniture. Leasehold improvements are capitalized and depreciated over the term of the applicable lease, including renewable periods if reasonably assured, or over the useful lives, whichever is shorter. Construction in process represents capital expenditures incurred for assets not yet placed in service. Costs related to internally developed software and software purchased for internal uses are capitalized and are amortized over the estimated useful lives of the assets. Repair and maintenance costs are recognized as incurred. We have no major planned maintenance activities.
We review long-lived assets for impairment whenever events or circumstances indicate the carrying amount of an asset group may not be recoverable. Assets held for sale are classified within other current assets in the Consolidated Balance Sheets, are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Gains and losses from asset disposals and impairment losses are classified within the Consolidated Statement of Operations according to the use of the asset, except those gains and losses recognized in conjunction with our restructuring activities, which are classified within restructuring expense.
Prepaid Debt Fees
Prepaid debt fees for term debt represent the capitalized direct costs incurred related to the issuance of debt and are recognized 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.
Business Combinations
On the date of acquisition, the assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree are recognized at their fair values. The acquiree's results of operations are also included as of the date of acquisition in our consolidated results. Intangible assets that arise from contractual/legal rights, or are capable of being separated, as well as in-process research and development (IPR&D), are measured and recognized at fair value, and amortized over the estimated useful life. IPR&D is not amortized until such time as the associated development projects are completed or terminated. If a development project is completed, the IPR&D is reclassified as a core technology intangible asset and amortized over its estimated useful life. If the development project is terminated, the recorded value of the associated IPR&D is immediately recognized. If practicable, assets acquired and liabilities assumed arising from contingencies are measured and recognized at fair value. If not practicable, such assets and liabilities are measured and recognized when it is probable that a gain or loss has occurred and the amount can be reasonably estimated. The residual balance of the purchase price, after fair value allocations to all identified assets and liabilities, represents goodwill. Acquisition-related costs are recognized as incurred. Restructuring costs associated with an acquisition are generally recognized in periods subsequent to the acquisition date, and changes in deferred tax asset valuation allowances and acquired income tax uncertainties, including penalties and interest, after the measurement period are recognized as a component of the provision for income taxes. Our acquisitions may include contingent consideration, which require us to recognize the fair value of the estimated liability at the time of the acquisition. Subsequent changes in the estimate of the amount to be paid under the contingent consideration arrangement are recognized in the Consolidated Statements of Operations.
Goodwill and Intangible Assets
Goodwill and intangible assets may result from our business acquisitions. Intangible assets may also result from the purchase of assets and intellectual property in a transaction that does not qualify as a business combination. We use estimates, including estimates of useful lives of intangible assets, the amount and timing of related future cash flows, and fair values of the related operations, in determining the value assigned to goodwill and intangible assets. Our finite-lived intangible assets are amortized over their estimated useful lives based on estimated discounted cash flows, generally
three
years to
seven
years for core-developed technology and customer contracts and relationships. Finite-lived intangible assets are tested for impairment at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable. Indefinite-lived intangible assets are tested for impairment annually, when events or changes in circumstances indicate the asset may be impaired, or at the time when their useful lives are determined to be no longer indefinite.
Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics, including the forecasted discounted cash flows associated with each reporting unit. Each reporting unit corresponds with its respective operating segment.
We test goodwill for impairment each year as of October 1, or more frequently should a significant impairment indicator occur. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the two-step impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss amount. This second step determines the current fair values of all assets and liabilities of the reporting unit and then compares the implied fair value of the reporting unit's goodwill to the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We forecast discounted future cash flows at the reporting unit level using risk-adjusted discount rates and estimated future revenues and operating costs, which take into consideration factors such as existing backlog, expected future orders, supplier contracts, and expectations of competitive and economic environments. We also identify similar publicly traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. These combined fair values are then reconciled to the aggregate market value of our common stock on the date of valuation, while considering a reasonable control premium.
Contingencies
A loss contingency is recognized if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of the ultimate loss. Loss contingencies that we determine to be reasonably possible, but not probable, are disclosed but not recognized. Changes in these factors and related estimates could materially affect our financial position and results of operations. Legal costs to defend against contingent liabilities are recognized as incurred.
Bonus and Profit Sharing
We have various employee bonus and profit sharing plans, which provide award amounts for the achievement of financial and nonfinancial targets. If management determines it is probable that the targets will be achieved, and the amounts can be reasonably estimated, a compensation accrual is recognized based on the proportional achievement of the financial and nonfinancial targets. Although we monitor and accrue expenses quarterly based on our progress toward the achievement of the targets, the actual results may result in awards that are significantly greater or less than the estimates made in earlier quarters.
Warranty
We offer standard warranties on our hardware products and large application software products. We accrue the estimated cost of new product warranties based on historical and projected product performance trends and costs during the warranty period. Testing of new products in the development stage helps identify and correct potential warranty issues prior to manufacturing. Quality control efforts during manufacturing reduce our exposure to warranty claims. When testing or quality control efforts fail to detect a fault in one of our products, we may experience an increase in warranty claims. We track warranty claims to identify potential warranty trends. If an unusual trend is noted, an additional warranty accrual would be recognized if a failure event is probable and the cost can be reasonably estimated. When new products are introduced, our process relies on historical averages of similar products until sufficient data is available. As actual experience on new products becomes available, it is used to modify the historical averages to ensure the expected warranty costs are within a range of likely outcomes. Management regularly evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. The warranty allowances may fluctuate due to
changes in estimates for material, labor, and other costs we may incur to repair or replace projected product failures, and we may incur additional warranty and related expenses in the future with respect to new or established products, which could adversely affect our financial position and results of operations. The long-term warranty balance includes estimated warranty claims beyond one year. Warranty expense is classified within cost of revenues.
Restructuring
We recognize a liability for costs associated with an exit or disposal activity under a restructuring project in the period in which the liability is incurred. Employee termination benefits considered postemployment benefits are accrued when the obligation is probable and estimable, such as benefits stipulated by human resource policies and practices or statutory requirements. One-time termination benefits are recognized at the date the employee is notified. If the employee must provide future service greater than 60 days, such benefits are recognized ratably over the future service period. For contract termination costs, we recognize a liability upon the termination of a contract in accordance with the contract terms or the cessation of the use of the rights conveyed by the contract, whichever occurs later.
Asset impairments associated with a restructuring project are determined at the asset group level. An impairment may be recognized for assets that are to be abandoned, are to be sold for less than net book value, or are held for sale in which the estimated proceeds less costs to sell are less than the net book value. We may also recognize impairment on an asset group, which is held and used, when the carrying value is not recoverable and exceeds the asset group's fair value. If an asset group is considered a business, a portion of our goodwill balance is allocated to it based on relative fair value. If the sale of an asset group under a restructuring project results in proceeds that exceed the net book value of the asset group, the resulting gain is recognized within restructuring expense in the Consolidated Statements of Operations.
Defined Benefit Pension Plans
We sponsor both funded and unfunded defined benefit pension plans for certain international employees. We recognize a liability for the projected benefit obligation in excess of plan assets or an asset for plan assets in excess of the projected benefit obligation. We also recognize the funded status of our defined benefit pension plans on our Consolidated Balance Sheets and recognize as a component of OCI, net of tax, the actuarial gains or losses and prior service costs or credits, if any, that arise during the period but that are not recognized as components of net periodic benefit cost. If actuarial gains and losses exceed ten percent of the greater of plan assets or plan liabilities, we amortize them over the employees' average future service period.
Share Repurchase Plan
From time to time, we may repurchase shares of Itron common stock under programs authorized by our Board of Directors. Share repurchases are made in the open market or in privately negotiated transactions and in accordance with applicable securities laws. Under applicable Washington State law, shares repurchased are retired and not displayed separately as treasury stock on the financial statements; the value of the repurchased shares is deducted from common stock.
Revenue Recognition
Revenues consist primarily of hardware sales, software license fees, software implementation, project management services, installation, consulting, and post-sale maintenance support. Revenues are recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.
Many of our revenue arrangements involve multiple deliverables, which combine two or more of the following: hardware, meter reading system software, installation, and/or project management services. Separate contracts entered into with the same customer that meet certain criteria such as those that are entered into at or near the same time are evaluated as one single arrangement for purposes of applying multiple element arrangement revenue recognition. Revenue arrangements with multiple deliverables are divided into separate units of accounting at the inception of the arrangement and as each item in the arrangement is delivered. If the delivered item(s) has value to the customer on a standalone basis and delivery/performance of the undelivered item(s) is probable. The total arrangement consideration is allocated among the separate units of accounting based on their relative fair values and the applicable revenue recognition criteria are then considered for each unit of accounting. The amount allocable to a delivered item is limited to the amount that we are entitled to collect and that is not contingent upon the delivery/performance of additional items. Revenues for each deliverable are then recognized based on the type of deliverable, such as 1) when the products are shipped, 2) services are delivered, 3) percentage-of-completion for implementation services, 4) upon receipt of customer acceptance, or 5) transfer of title and risk of loss. The majority of our revenue is recognized when products are shipped to or received by a customer or when services are provided.
Hardware revenues are generally recognized at the time of shipment, receipt by the customer, or, if applicable, upon completion of customer acceptance provisions.
Under contract accounting where revenue is recognized using percentage of completion, the cost to cost method is used to measure progress to completion. Revenue from certain OpenWay network software and services arrangements is recognized using the units-of-delivery method of contract accounting, as network design services and network software are essential to the functionality of the related hardware (network). This methodology results in the deferral of costs and revenues as professional services and software implementation commence prior to deployment of hardware.
In the unusual instances when we are unable to reliably estimate the cost to complete a contract at its inception, we use the completed contract method of contract accounting. Revenues and costs are recognized upon substantial completion when remaining costs are insignificant and potential risks are minimal.
Change orders and contract modifications entered into after inception of the original contract are analyzed to determine if change orders or modifications are extensions of an existing agreement or are accounted for as a separate arrangement for purposes of applying contract accounting.
If we estimate that the completion of a contract component (unit of accounting) will result in a loss, the loss is recognized in the period in which the loss becomes evident. We reevaluate the estimated loss through the completion of the contract component and adjust the estimated loss for changes in facts and circumstances.
Many of our customer arrangements contain clauses for liquidated damages, related to the timing of delivery or milestone accomplishments, which could become material in an event of failure to meet the contractual deadlines. At the inception of the arrangement and on an ongoing basis, we evaluate if the liquidated damages represent contingent revenue and, if so, we reduce the amount of consideration allocated to the delivered products and services and recognize it as a reduction in revenue in the period of default. If the arrangement is subject to contract accounting, liquidated damages resulting from anticipated events of default are estimated and are accounted for as a reduction of revenue in the period in which the liquidated damages are deemed probable of occurrence and are reasonably estimable.
Our software customers often purchase a combination of software, service, and post contract customer support. For these types of arrangement, revenue recognition is dependent upon the availability of vendor specific objective evidence (VSOE) of fair value for any undelivered element. We determine VSOE by reference to the range of comparable standalone sales or stated renewals. We review these standalone sales or renewals on at least an annual basis. If VSOE is established for all undelivered elements in the contract, revenue is recognized for delivered elements when all other revenue recognition criteria are met. Arrangements in which VSOE for all undelivered elements is not established, we recognize revenue under the combined services approach where revenue for software and software related elements is deferred until all software products have been delivered, all software related services have commenced, and undelivered services do not include significant production, customization or modification. Revenue would be recognized over the longest period that services would be provided.
Cloud services and software as a service (“SaaS”) arrangements where customers have access to certain of our software within a cloud-based IT environment that we manage, host and support are offered to customers on a subscription basis. Revenue for the cloud services and SaaS offerings are generally recognized ratably over the contact term commencing with the date the services is made available to customers and all other revenue recognition criteria have been satisfied. For arrangements where cloud services and SaaS is provided on a per meter basis, revenue is recognized based on actual meters read during the period.
Certain of our revenue arrangements include an extended or noncustomary warranty provision that covers all or a portion of a customer's replacement or repair costs beyond the standard or customary warranty period. Whether or not the extended warranty is separately priced in the arrangement, a portion of the arrangement's total consideration is allocated to this extended warranty deliverable. This revenue is deferred and recognized over the extended warranty coverage period. Extended or noncustomary warranties do not represent a significant portion of our revenue.
We allocate consideration to each deliverable in an arrangement based on its relative selling price. We determine selling price using VSOE, if it exists, otherwise we use third-party evidence (TPE). We define VSOE as a median price of recent standalone transactions that are priced within a narrow range. TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately. If neither VSOE nor TPE of selling price exists for a unit of accounting, we use estimated selling price (ESP) to determine the price at which we would transact if the product or service were regularly sold by us on a standalone basis. Our determination of ESP involves a weighting of several factors based on the specific facts and circumstances of the arrangement. The factors considered include, historical sales, the cost to produce the deliverable, the anticipated margin on that deliverable, our ongoing pricing strategy and policies, and the characteristics of the varying markets in which the deliverable is sold.
We analyze the selling prices used in our allocation of arrangement consideration on an annual basis. Selling prices are analyzed on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.
Unearned revenue is recognized when a customer pays for products or services, but the criteria for revenue recognition have not been met as of the balance sheet date. Unearned revenue of
$114.3 million
and
$139.5 million
at
December 31, 2016
and
2015
related primarily to professional services and software associated with our smart metering contracts, extended or noncustomary warranty, and prepaid post-contract support. Deferred costs are recognized for products or services for which ownership (typically defined as title and risk of loss) has transferred to the customer, but the criteria for revenue recognition have not been met as of the balance sheet date. Deferred costs were
$34.4 million
and
$56.6 million
at
December 31, 2016
and
2015
and are recognized within other assets in the Consolidated Balance Sheets.
Hardware and software post-sale maintenance support fees are recognized ratably over the life of the related service contract. Shipping and handling costs and incidental expenses billed to customers are recognized as revenue, with the associated cost charged to cost of revenues. We recognize sales, use, and value added taxes billed to our customers on a net basis.
Product and Software Development Costs
Product and software development costs primarily include employee compensation and third party contracting fees. We do not capitalize product development costs, and we do not generally capitalize software development expenses as the costs incurred are immaterial for the relatively short period of time between technological feasibility and the completion of software development.
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. We also grant 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.
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.
Income Taxes
We account for income taxes using the asset and liability method of accounting. Deferred tax assets and liabilities are recognized based upon anticipated future tax consequences, in each of the jurisdictions that we operate, attributable to: (1) the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases; and (2) net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured annually using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The calculation of our tax liabilities involves applying complex tax regulations in different tax jurisdictions to our tax positions. The effect on deferred tax assets and liabilities of a change in tax legislation and/or rates is recognized in the period that includes the enactment date. A valuation allowance is recognized to reduce the carrying amounts of deferred tax assets if it is not more likely than not that such assets will be realized. We do not recognize tax liabilities on undistributed earnings of international subsidiaries that are permanently reinvested.
Foreign Exchange
Our consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries with non-U.S. dollar functional currencies are translated to U.S. dollars at the exchange rates in effect on the balance sheet date, or the last business day of the period, if applicable. Revenues and expenses for each subsidiary are translated to U.S. dollars using a weighted average rate for the relevant reporting period. Translation adjustments resulting from this process are included, net of tax, in OCI. Gains and losses that arise from exchange rate fluctuations for monetary asset and liability balances that are not denominated in an entity’s functional currency are included within other income (expense), net in the Consolidated Statements of Operations. Currency gains and losses of intercompany balances deemed to be long-term in nature or designated as a hedge of the net investment in international subsidiaries are included, net of tax, in OCI. Foreign currency losses, net of hedging, of
$0.3 million
,
$3.0 million
, and
$5.1 million
were included in other expenses, net, for the years ended December 31,
2016
,
2015
and
2014
, respectively.
Fair Value Measurements
For assets and liabilities measured at fair value, the GAAP fair value hierarchy prioritizes the inputs used in different valuation methodologies, assigning the highest priority to unadjusted quoted prices for identical assets and liabilities in actively traded markets (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 inputs consist of quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in non-active markets; and model-derived valuations in which significant inputs are corroborated by observable market data either directly or indirectly through correlation or other means. Inputs may include yield curves, volatility, credit risks, and default rates.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples of significant estimates include revenue recognition, warranty, restructuring, income taxes, goodwill and intangible assets, defined benefit pension plans, contingencies, and stock-based compensation. Due to various factors affecting future costs and operations, actual results could differ materially from these estimates.
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 is now effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted but not earlier than the original effective date. In March 2016, the FASB issued ASU 2016-08,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(ASU 2016-08), which clarifies the implementation guidance of principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,
Identifying Performance Obligations and Licensing
(ASU 2016-10), which clarifies the identification of performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
(ASU 2016-12), to improve guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The effective date and transition requirements in ASU 2016-08, ASU 2016-10, and ASU 2016-12 are the same as the effective date and transition requirements of ASU 2015-14.
The revenue guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard effectively January 1, 2018 using the cumulative catch-up transition method, and therefore, will recognize the cumulative effect of initially applying the revenue standard as an adjustment to the opening balance of retained earnings in the period of initial application. We currently believe the most significant impact relates to our accounting for software license revenue, but are continuing to evaluate the effect that the updated standard will have on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In April 2015, the FASB issued ASU 2015-03,
Interest - Imputation of Interes
t (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 ESP in the normal course of business, minus the cost of completion, disposal and transportation. Replacement cost and net realizable value less a normal profit margin will no longer be considered. We adopted this standard on January 1, 2017 and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the impact of adoption on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting (Topic 718)
(ASU 2016-09), which simplifies several areas within Topic 718. These include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendment in this ASU becomes effective on a modified retrospective basis for accounting in tax benefits recognized, retrospectively for accounting related to the presentation of employee taxes paid, prospectively for accounting related to recognition of excess tax benefits, and either prospectively or retrospectively for accounting related to presentation of excess employee tax benefits for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. We adopted this standard effective January 1, 2017 and the most significant impact relates to the recognition of excess tax benefits which resulted in an approximately
$15 million
one-time adjustment to retained earnings and deferred tax assets related to cumulative excess tax benefits previously unrecognized. This amendment was adopted on a prospective basis, which does not require the restatement of prior years.
In January 2017, the FASB issued ASU 2017-01,
Clarifying the Definition of a Business
(ASU 2017-01), which narrows the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output. ASU 2017-01 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We adopted this standard on January 1, 2017 and it will not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(ASU 2017-04), which simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test that requires the determination of the fair value of individual assets and liabilities of a reporting unit. ASU 2017-04 requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We are currently assessing the impact of adoption on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
Note 2: Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands, except per share data)
|
|
Net income (loss) available to common shareholders
|
$
|
31,770
|
|
|
$
|
12,678
|
|
|
$
|
(23,670
|
)
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - Basic
|
38,207
|
|
|
38,224
|
|
|
39,184
|
|
|
Dilutive effect of stock-based awards
|
436
|
|
|
282
|
|
|
—
|
|
|
Weighted average common shares outstanding - Diluted
|
38,643
|
|
|
38,506
|
|
|
39,184
|
|
|
Earnings (loss) per common share - Basic
|
$
|
0.83
|
|
|
$
|
0.33
|
|
|
$
|
(0.60
|
)
|
|
Earnings (loss) per common share - Diluted
|
$
|
0.82
|
|
|
$
|
0.33
|
|
|
$
|
(0.60
|
)
|
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. As a result of our net losses for 2014, there was
no
dilutive effect to the weighted average common shares outstanding for that year. Approximately
0.7 million
,
1.2 million
, and
1.4 million
stock-based awards were excluded from the calculation of diluted EPS for the years ended
December 31, 2016
,
2015
, and
2014
, respectively, because they were anti-dilutive. These stock-based awards could be dilutive in future periods.
Note 3: Certain Balance Sheet Components
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
December 31, 2016
|
|
December 31, 2015
|
|
|
(in thousands)
|
|
Trade receivables (net of allowance of $3,320
and $5,949)
|
$
|
299,870
|
|
|
$
|
298,550
|
|
|
Unbilled receivables
|
51,636
|
|
|
32,345
|
|
|
Total accounts receivable, net
|
$
|
351,506
|
|
|
$
|
330,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful account activity
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Beginning balance
|
$
|
5,949
|
|
|
$
|
6,195
|
|
|
Provision for doubtful accounts, net
|
60
|
|
|
1,025
|
|
|
Accounts written-off
|
(2,422
|
)
|
|
(549
|
)
|
|
Effects of change in exchange rates
|
(267
|
)
|
|
(722
|
)
|
|
Ending balance
|
$
|
3,320
|
|
|
$
|
5,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
December 31, 2016
|
|
December 31, 2015
|
|
|
(in thousands)
|
|
Materials
|
$
|
103,274
|
|
|
$
|
111,191
|
|
|
Work in process
|
7,925
|
|
|
9,400
|
|
|
Finished goods
|
51,850
|
|
|
69,874
|
|
|
Total inventories
|
$
|
163,049
|
|
|
$
|
190,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
December 31, 2016
|
|
December 31, 2015
|
|
|
(in thousands)
|
|
Machinery and equipment
|
$
|
279,746
|
|
|
$
|
289,015
|
|
|
Computers and software
|
98,125
|
|
|
104,310
|
|
|
Buildings, furniture, and improvements
|
122,680
|
|
|
127,531
|
|
|
Land
|
17,179
|
|
|
19,882
|
|
|
Construction in progress, including purchased equipment
|
29,358
|
|
|
32,639
|
|
|
Total cost
|
547,088
|
|
|
573,377
|
|
|
Accumulated depreciation
|
(370,630
|
)
|
|
(383,121
|
)
|
|
Property, plant, and equipment, net
|
$
|
176,458
|
|
|
$
|
190,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Depreciation expense
|
$
|
43,206
|
|
|
$
|
44,320
|
|
|
$
|
54,435
|
|
Note 4: Intangible Assets
The gross carrying amount and accumulated amortization of our intangible assets, other than goodwill, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Gross Assets
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross Assets
|
|
Accumulated
Amortization
|
|
Net
|
|
|
(in thousands)
|
|
Core-developed technology
|
$
|
372,568
|
|
|
$
|
(354,878
|
)
|
|
$
|
17,690
|
|
|
$
|
388,981
|
|
|
$
|
(358,092
|
)
|
|
$
|
30,889
|
|
|
Customer contracts and relationships
|
224,467
|
|
|
(170,056
|
)
|
|
54,411
|
|
|
238,379
|
|
|
(168,885
|
)
|
|
69,494
|
|
|
Trademarks and trade names
|
61,785
|
|
|
(61,766
|
)
|
|
19
|
|
|
64,069
|
|
|
(62,571
|
)
|
|
1,498
|
|
|
Other
|
11,076
|
|
|
(11,045
|
)
|
|
31
|
|
|
11,078
|
|
|
(11,027
|
)
|
|
51
|
|
|
Total intangible assets
|
$
|
669,896
|
|
|
$
|
(597,745
|
)
|
|
$
|
72,151
|
|
|
$
|
702,507
|
|
|
$
|
(600,575
|
)
|
|
$
|
101,932
|
|
A summary of the intangible asset account activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Beginning balance, intangible assets, gross
|
$
|
702,507
|
|
|
$
|
748,148
|
|
|
Intangible assets acquired
|
—
|
|
|
4,827
|
|
|
Intangible assets impaired
|
—
|
|
|
(497
|
)
|
|
Effect of change in exchange rates
|
(32,611
|
)
|
|
(49,971
|
)
|
|
Ending balance, intangible assets, gross
|
$
|
669,896
|
|
|
$
|
702,507
|
|
Intangible assets impaired includes purchased software licenses to be sold to others. This amount was recognized as part of cost of revenues in the Consolidated Statement of Operations.
A summary of intangible asset amortization expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Amortization expense
|
$
|
25,112
|
|
|
$
|
31,673
|
|
|
$
|
43,619
|
|
Estimated future annual amortization expense is as follows:
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Estimated Annual Amortization
|
|
|
|
(in thousands)
|
|
2017
|
|
$
|
17,914
|
|
|
2018
|
|
12,383
|
|
|
2019
|
|
9,695
|
|
|
2020
|
|
7,866
|
|
|
2021
|
|
6,845
|
|
|
Beyond 2021
|
|
17,448
|
|
|
Total intangible assets subject to amortization
|
|
$
|
72,151
|
|
Note 5: Goodwill
The following table reflects goodwill allocated to each reporting segment at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
|
|
Gas
|
|
Water
|
|
Total Company
|
|
|
(in thousands)
|
|
Goodwill balance at January 1, 2015
|
|
|
|
|
|
|
|
|
Goodwill before impairment
|
$
|
449,668
|
|
|
$
|
359,485
|
|
|
$
|
382,655
|
|
|
$
|
1,191,808
|
|
|
Accumulated impairment losses
|
(393,981
|
)
|
|
—
|
|
|
(297,007
|
)
|
|
(690,988
|
)
|
|
Goodwill, net
|
55,687
|
|
|
359,485
|
|
|
85,648
|
|
|
500,820
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired
|
—
|
|
|
—
|
|
|
4,684
|
|
|
4,684
|
|
|
Effect of change in exchange rates
|
(2,954
|
)
|
|
(28,049
|
)
|
|
(6,379
|
)
|
|
(37,382
|
)
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance at December 31, 2015
|
|
|
|
|
|
|
|
|
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
|
(1,360
|
)
|
|
(11,523
|
)
|
|
(2,745
|
)
|
|
(15,628
|
)
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance at December 31, 2016
|
|
|
|
|
|
|
|
|
Goodwill before impairment
|
400,299
|
|
|
319,913
|
|
|
334,505
|
|
|
1,054,717
|
|
|
Accumulated impairment losses
|
(348,926
|
)
|
|
—
|
|
|
(253,297
|
)
|
|
(602,223
|
)
|
|
Goodwill, net
|
$
|
51,373
|
|
|
$
|
319,913
|
|
|
$
|
81,208
|
|
|
$
|
452,494
|
|
During our 2016 and 2015 annual goodwill impairment test, performed as of October 1, 2016 and 2015, respectively, we performed the first step of the quantitative impairment test for Electricity, Gas, and Water and determined that the fair value of each of the reporting units exceeded their carrying values. No goodwill impairment was required to be recognized as the result of this quantitative analysis.
Refer to Note 1 for a description of our reporting units and the methods used to determine the fair values of our reporting units and to determine the amount of any goodwill impairment.
Note 6: Debt
The components of our borrowings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
(in thousands)
|
|
Credit Facilities
|
|
|
|
|
USD denominated term loan
|
$
|
208,125
|
|
|
$
|
219,375
|
|
|
Multicurrency revolving line of credit
|
97,167
|
|
|
151,837
|
|
|
Total debt
|
305,292
|
|
|
371,212
|
|
|
Less: current portion of debt
|
14,063
|
|
|
11,250
|
|
|
Less: unamortized prepaid debt fees - term loan
|
769
|
|
|
1,047
|
|
|
Long-term debt
|
$
|
290,460
|
|
|
$
|
358,915
|
|
Credit Facilities
On June 23, 2015, we entered into an amended and restated credit agreement providing for committed credit facilities in the amount of
$725 million
U.S. dollars (the 2015 credit facility). The 2015 credit facility consists of a
$225 million
U.S. dollar term loan (the term loan) and a multicurrency revolving line of credit (the revolver) with a principal amount of up to
$500 million
. The revolver also contains a
$250 million
standby letter of credit sub-facility and a
$50 million
swingline sub-facility (available for immediate cash needs at a higher interest rate). Both the term loan and the revolver mature on June 23, 2020, and amounts borrowed under the revolver are classified as long-term and, during the credit facility term, may be repaid and reborrowed until the revolver's maturity, at which time the revolver will terminate, and all outstanding loans, together with all accrued and unpaid interest, must be repaid. Amounts not borrowed under the revolver are subject to a commitment fee, which is paid in arrears on the last day of each fiscal quarter, ranging from
0.18%
to
0.30%
per annum depending on our total leverage ratio as of the most recently ended fiscal quarter. Amounts repaid on the term loan may not be reborrowed. The 2015 credit facility permits us and certain of our foreign subsidiaries to borrow in U.S. dollars, euros, British pounds, or, with lender approval, other currencies readily convertible into U.S. dollars.
All obligations under the 2015 credit facility are guaranteed by Itron, Inc. and material U.S. domestic subsidiaries and are secured by a pledge of substantially all of the assets of Itron, Inc. and material U.S. domestic subsidiaries, including a pledge of 100% of the capital stock of material U.S. domestic subsidiaries and up to 66% of the voting stock (100% of the non-voting stock) of their first-tier foreign subsidiaries. In addition, the obligations of any foreign subsidiary who is a foreign borrower, as defined by the 2015 credit facility, are guaranteed by the foreign subsidiary and by its direct and indirect foreign parents.
On June 13, 2016, we entered into an amendment to the 2015 credit facility, which reduced our
$300 million
standby letter of credit sub-facility to
$250 million
.
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.
Required minimum principal payments on our outstanding credit facilities are as follows:
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Minimum Payments
|
|
|
|
(in thousands)
|
|
2017
|
|
$
|
14,063
|
|
|
2018
|
|
19,687
|
|
|
2019
|
|
22,500
|
|
|
2020
|
|
249,042
|
|
|
2021
|
|
—
|
|
|
Total minimum payments on debt
|
|
$
|
305,292
|
|
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
December 31, 2016
and
2015
,
the interest rates for both the term loan and the USD revolver was
2.02%
and
2.18%
, which includes the LIBOR rate plus a margin of
1.25%
and
1.75%
, respectively. At
December 31, 2016
and
2015
, the interest rates for the EUR revolver was
1.25%
and
1.75%
, which includes the EURIBOR floor rate plus a margin of
1.25%
and
1.75%
, respectively.
Total credit facility repayments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Term loan
|
$
|
11,250
|
|
|
$
|
13,125
|
|
|
$
|
26,250
|
|
|
Multicurrency revolving line of credit
|
67,869
|
|
|
49,873
|
|
|
76,188
|
|
|
Total credit facility repayments
|
$
|
79,119
|
|
|
$
|
62,998
|
|
|
$
|
102,438
|
|
At
December 31, 2016
,
$97.2 million
was outstanding under the 2015 credit facility revolver, and
$46.1 million
was utilized by outstanding standby letters of credit, resulting in
$356.7 million
available for additional borrowings or standby letters of credit. At December 31, 2016,
$203.9 million
was available for additional standby letters of credit under the letter of credit sub-facility and no amounts were outstanding under the swingline sub-facility.
Note 7: Derivative Financial Instruments
As part of our risk management strategy, we use derivative instruments to hedge certain foreign currency and interest rate exposures. Refer to Note 1, Note 14, and Note 15 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 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet Location
|
|
December 31,
2016
|
|
December 31,
2015
|
|
|
|
|
|
(in thousands)
|
|
Asset Derivatives
|
|
|
|
|
|
Derivatives designated as hedging instruments under ASC 815-20
|
|
|
|
|
|
Interest rate cap contracts
|
|
Other current assets
|
|
$
|
3
|
|
|
$
|
—
|
|
|
Interest rate swap contracts
|
|
Other long-term assets
|
|
1,830
|
|
|
1,632
|
|
|
Interest rate cap contracts
|
|
Other long-term assets
|
|
376
|
|
|
1,423
|
|
|
Derivatives not designated as hedging instruments under ASC 815-20
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
169
|
|
|
27
|
|
|
Interest rate cap contracts
|
|
Other current assets
|
|
4
|
|
|
—
|
|
|
Interest rate cap contracts
|
|
Other long-term assets
|
|
563
|
|
|
—
|
|
|
Total asset derivatives
|
|
|
|
$
|
2,945
|
|
|
$
|
3,082
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments under ASC 815-20
|
|
|
|
|
|
Interest rate swap contracts
|
|
Other current liabilities
|
|
$
|
934
|
|
|
$
|
868
|
|
|
Derivatives not designated as hedging instruments under ASC 815-20
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current liabilities
|
|
449
|
|
|
99
|
|
|
Total liability derivatives
|
|
|
|
$
|
1,383
|
|
|
$
|
967
|
|
OCI during the reporting period for our derivative and nonderivative instruments designated as hedging instruments, net of tax, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Net unrealized gain (loss) on hedging instruments at January 1,
|
$
|
(14,062
|
)
|
|
$
|
(15,148
|
)
|
|
$
|
(15,636
|
)
|
|
Unrealized gain (loss) on derivative instruments
|
(1,087
|
)
|
|
76
|
|
|
(566
|
)
|
|
Realized (gains) losses reclassified into net income (loss)
|
812
|
|
|
1,010
|
|
|
1,054
|
|
|
Net unrealized gain (loss) on hedging instruments at December 31,
|
$
|
(14,337
|
)
|
|
$
|
(14,062
|
)
|
|
$
|
(15,148
|
)
|
Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 2014. Included in the net unrealized loss on hedging instruments at
December 31, 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.
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 Not Offset in the Consolidated Balance Sheets
|
|
|
|
|
Gross Amounts of Recognized Assets Presented in the Consolidated Balance Sheets
|
|
Derivative Financial Instruments
|
|
Cash Collateral Received
|
|
Net Amount
|
|
|
(in thousands)
|
|
December 31, 2016
|
$
|
2,945
|
|
|
$
|
(1,322
|
)
|
|
$
|
—
|
|
|
$
|
1,623
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
$
|
3,082
|
|
|
$
|
(565
|
)
|
|
$
|
—
|
|
|
$
|
2,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
|
Gross Amounts of Recognized Liabilities Presented in the Consolidated Balance Sheets
|
|
Derivative Financial Instruments
|
|
Cash Collateral Pledged
|
|
Net Amount
|
|
|
(in thousands)
|
|
December 31, 2016
|
$
|
1,383
|
|
|
$
|
(1,322
|
)
|
|
$
|
—
|
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
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
three
counterparties at December 31, 2016 and
nine
counterparties at December 31, 2015. No derivative asset or liability balance with any of our counterparties was individually significant at
December 31, 2016
or
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 the hedged portion of debt in order to decrease this variability in
our cash flows. The objective of these swaps is to reduce the variability of cash flows from increases in the LIBOR-based borrowing rates on our floating rate credit facility. The swaps do not protect us from changes to the applicable margin under our credit facility.
In May 2012, we entered into
six
interest rate swaps, which were effective July 31, 2013 and expired on August 8, 2016, to convert
$200 million
of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of
1.00%
(excluding the applicable margin on the debt). The cash flow hedges were expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swaps were recognized as a component of OCI and recognized in earnings when the hedged item affected earnings. The amounts paid on the hedges were recognized as adjustments to interest expense.
In October 2015, we entered into an interest rate swap, which is effective from August 31, 2016 to June 23, 2020, and converts
$214 million
of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of
1.42%
(excluding the applicable margin on the debt). The notional balance will amortize to maturity at the same rate as required minimum payments on our term loan. The cash flow hedge is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swap is recognized as a component of OCI and will be recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedge are recognized as an adjustment to interest expense. The amount of net losses expected to be reclassified into earnings in the next 12 months is
$0.9 million
. At
December 31, 2016
, our LIBOR-based debt balance was
$248.1 million
.
In November 2015, we entered into three interest rate cap contracts with a total notional amount of
$100 million
at a cost of
$1.7 million
. The interest rate cap contracts expire on June 23, 2020 and were entered into in order to limit our interest rate exposure on
$100 million
of our variable LIBOR based debt up to
2.00%
. In the event LIBOR is higher than
2.00%
, we will pay interest at the capped rate of
2.00%
with respect to the
$100 million
notional amount of such agreements. The interest rate cap contracts do not include the effect of the applicable margin. As of December 31, 2016, due to the accelerated revolver payments from surplus cash, we have elected to de-designate
two
of the interest rate cap contracts as cash flow hedges and discontinue the use of cash flow hedge accounting. The amounts recognized in AOCI from de-designated interest rate cap contracts will continue to be reported in AOCI unless it is not probable that the forecasted transactions will occur. As a result of the discontinuance of cash flow hedge accounting, all subsequent changes in fair value of the de-designated derivative instruments are recognized within interest expense instead of OCI. The amount of net losses expected to be reclassified into earnings for all interest rate cap contracts in the next 12 months is
$0.2 million
.
The before-tax effects of our cash flow derivative hedging instruments on the Consolidated Balance Sheets and the Consolidated Statements of Operations for the years ended
December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815 Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
|
|
Loss Reclassified from AOCI into Income (Effective Portion)
|
|
Loss Recognized in Income on Derivative (Ineffective Portion)
|
|
Location
|
|
Amount
|
|
Location
|
|
Amount
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
Interest rate swap contracts
|
|
$
|
(1,163
|
)
|
|
$
|
367
|
|
|
$
|
(915
|
)
|
|
Interest expense
|
|
$
|
(1,296
|
)
|
|
$
|
(1,639
|
)
|
|
$
|
(1,704
|
)
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest rate cap contracts
|
|
$
|
(605
|
)
|
|
$
|
(244
|
)
|
|
$
|
—
|
|
|
Interest expense
|
|
$
|
(27
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest expense
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives Not Designated as Hedging Relationships
We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third-party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recognized to other income and expense. We enter into monthly foreign exchange forward contracts, which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with currency exposures. As of December 31, 2016, a total of
49
contracts were offsetting our exposures from the euro, Canadian dollar, Indonesian Rupiah, South African rand, Indian Rupee, Chinese Yuan, and various other currencies, with notional amounts ranging from
$120,000
to
$42.3 million
.
The before-tax effects of our derivatives not designated as hedging instruments on the Consolidated Statements of Operations for the years ended
December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instrument under ASC 815
|
|
Location
|
|
Gain (Loss) Recognized in Income on Derivative
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
(in thousands)
|
|
Foreign exchange forward contracts
|
|
Other income (expense), net
|
|
$
|
537
|
|
|
$
|
(3,145
|
)
|
|
$
|
(5,248
|
)
|
|
Interest rate cap contracts
|
|
Interest expense
|
|
$
|
129
|
|
|
$
|
—
|
|
|
$
|
—
|
|
We will continue to monitor and assess our interest rate and foreign exchange risk and may institute additional derivative instruments to manage such risk in the future.
Note 8: Defined Benefit Pension Plans
We sponsor both funded and unfunded defined benefit pension plans offering death and disability, retirement, and special termination benefits for our international employees, primarily in Germany, France, Italy, Indonesia, Brazil, and Spain. The defined benefit obligation is calculated annually by using the projected unit credit method. The measurement date for the pension plans was
December 31, 2016
.
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. Our contributions for both funded and unfunded plans are paid from cash flows from our operations. The timing of when contributions are made can vary by plan and from year to year.
The following tables set forth the components of the changes in benefit obligations and fair value of plan assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at January 1,
|
$
|
98,767
|
|
|
$
|
116,178
|
|
|
Service cost
|
3,472
|
|
|
4,572
|
|
|
Interest cost
|
2,573
|
|
|
2,380
|
|
|
Actuarial (gain) loss
|
7,733
|
|
|
(5,211
|
)
|
|
Benefits paid
|
(9,481
|
)
|
|
(4,382
|
)
|
|
Foreign currency exchange rate changes
|
(4,386
|
)
|
|
(12,190
|
)
|
|
Curtailment
|
14
|
|
|
(1,683
|
)
|
|
Settlement
|
(1,431
|
)
|
|
—
|
|
|
Other
|
—
|
|
|
(897
|
)
|
|
Benefit obligation at December 31,
|
$
|
97,261
|
|
|
$
|
98,767
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at January 1,
|
$
|
9,662
|
|
|
$
|
10,761
|
|
|
Actual return on plan assets
|
604
|
|
|
159
|
|
|
Company contributions
|
348
|
|
|
671
|
|
|
Benefits paid
|
(370
|
)
|
|
(308
|
)
|
|
Foreign currency exchange rate changes
|
(29
|
)
|
|
(1,621
|
)
|
|
Fair value of plan assets at December 31,
|
10,215
|
|
|
9,662
|
|
|
Net pension benefit obligation at fair value
|
$
|
87,046
|
|
|
$
|
89,105
|
|
Amounts recognized on the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
Plan assets in other long-term assets
|
$
|
654
|
|
|
$
|
359
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current portion of pension benefit obligation in wages and benefits payable
|
3,202
|
|
|
3,493
|
|
|
Long-term portion of pension benefit obligation
|
84,498
|
|
|
85,971
|
|
|
|
|
|
|
|
Pension benefit obligation, net
|
$
|
87,046
|
|
|
$
|
89,105
|
|
Amounts in AOCI (pre-tax) that have not yet been recognized as components of net periodic benefit costs consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Net actuarial loss
|
$
|
26,767
|
|
|
$
|
24,687
|
|
|
Net prior service cost
|
619
|
|
|
706
|
|
|
Amount included in AOCI
|
$
|
27,386
|
|
|
$
|
25,393
|
|
Amounts recognized in OCI (pre-tax) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Net actuarial (gain) loss
|
$
|
6,316
|
|
|
$
|
(6,894
|
)
|
|
$
|
25,838
|
|
|
Settlement/curtailment loss
|
(1,343
|
)
|
|
(336
|
)
|
|
(55
|
)
|
|
Plan asset (gain) loss
|
(64
|
)
|
|
343
|
|
|
129
|
|
|
Amortization of net actuarial loss
|
(1,351
|
)
|
|
(1,979
|
)
|
|
(572
|
)
|
|
Amortization of prior service cost
|
(58
|
)
|
|
(59
|
)
|
|
(138
|
)
|
|
Other
|
4
|
|
|
(46
|
)
|
|
68
|
|
|
Other comprehensive (income) loss
|
$
|
3,504
|
|
|
$
|
(8,971
|
)
|
|
$
|
25,270
|
|
If actuarial gains and losses exceed ten percent of the greater of plan assets or plan liabilities, we amortize them over the employees' average future service period. The estimated net actuarial loss and prior service cost that will be amortized from AOCI into net periodic benefit cost during
2017
is
$1.6 million
.
Net periodic pension benefit costs for our plans include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Service cost
|
$
|
3,472
|
|
|
$
|
4,572
|
|
|
$
|
3,559
|
|
|
Interest cost
|
2,573
|
|
|
2,380
|
|
|
3,476
|
|
|
Expected return on plan assets
|
(540
|
)
|
|
(502
|
)
|
|
(619
|
)
|
|
Amortization of prior service costs
|
58
|
|
|
59
|
|
|
138
|
|
|
Amortization of actuarial net loss
|
1,351
|
|
|
1,979
|
|
|
572
|
|
|
Settlements and other
|
1,340
|
|
|
420
|
|
|
55
|
|
|
Net periodic pension benefit costs
|
$
|
8,254
|
|
|
$
|
8,908
|
|
|
$
|
7,181
|
|
The significant actuarial weighted average assumptions used in determining the benefit obligations and net periodic benefit cost for our benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and For The Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Actuarial assumptions used to determine benefit obligations at end of period:
|
|
|
|
|
|
|
Discount rate
|
2.18
|
%
|
|
2.59
|
%
|
|
2.36
|
%
|
|
Expected annual rate of compensation increase
|
3.65
|
%
|
|
3.60
|
%
|
|
3.37
|
%
|
|
Actuarial assumptions used to determine net periodic benefit cost for the period:
|
|
|
|
|
|
|
Discount rate
|
2.59
|
%
|
|
2.36
|
%
|
|
3.76
|
%
|
|
Expected rate of return on plan assets
|
5.29
|
%
|
|
5.45
|
%
|
|
5.40
|
%
|
|
Expected annual rate of compensation increase
|
3.60
|
%
|
|
3.37
|
%
|
|
3.33
|
%
|
We determine a discount rate for our plans based on the estimated duration of each plan’s liabilities. For our euro denominated defined benefit pension plans, which represent
94%
of our benefit obligation,
we use two discount rates, with consideration of the duration of the plans, using a hypothetical yield curve developed from euro-denominated AA-rated corporate bond issues, partially weighted for market value, with minimum amounts outstanding of €500 million for bonds with less than 10 years to maturity and €50 million for bonds with 10 or more years to maturity, and excluding the highest and lowest yielding 10% of bonds within each maturity group.
The discount rates used, depending on the duration of the plans, were
0.75%
and
1.75%
. The weighted average discount rate used to measure our benefit obligations, increased by
41 basis points
from
December 31, 2015
to
December 31, 2016
, driving a
$7.7 million
actuarial gain during
2016
, which is recognized in OCI.
Our expected rate of return on plan assets is derived from a study of actual historic returns achieved and anticipated future long-term performance of plan assets, specific to plan investment asset category. While the study primarily gives consideration to recent insurers’ performance and historical returns, the assumption represents a long-term prospective return.
The total accumulated benefit obligation for our defined benefit pension plans was
$87.2 million
and
$89.0 million
at
December 31, 2016
and
2015
, respectively.
The total obligations and fair value of plan assets for plans with projected benefit obligations and accumulated benefit obligations exceeding the fair value of plan assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Projected benefit obligation
|
$
|
94,110
|
|
|
$
|
95,814
|
|
|
Accumulated benefit obligation
|
84,448
|
|
|
86,534
|
|
|
Fair value of plan assets
|
6,410
|
|
|
6,502
|
|
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.
The fair values of our plan investments by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
(in thousands)
|
|
|
December 31, 2016
|
|
Cash
|
$
|
783
|
|
|
$
|
783
|
|
|
$
|
—
|
|
|
Insurance funds
|
7,011
|
|
|
—
|
|
|
7,011
|
|
|
Other securities
|
2,421
|
|
|
—
|
|
|
2,421
|
|
|
Total fair value of plan assets
|
$
|
10,215
|
|
|
$
|
783
|
|
|
$
|
9,432
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Cash
|
$
|
795
|
|
|
$
|
795
|
|
|
$
|
—
|
|
|
Insurance funds
|
7,089
|
|
|
—
|
|
|
7,089
|
|
|
Other securities
|
1,778
|
|
|
—
|
|
|
1,778
|
|
|
Total fair value of plan assets
|
$
|
9,662
|
|
|
$
|
795
|
|
|
$
|
8,867
|
|
The following tables present a reconciliation of Level 3 assets held during the years ended
December 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2016
|
|
Net Realized and Unrealized Gains
|
|
Net Purchases, Issuances, Settlements, and Other
|
|
Net Transfers Into Level 3
|
|
Effect of Foreign Currency
|
|
Balance at December 31, 2016
|
|
|
(in thousands)
|
|
Insurance funds
|
$
|
7,089
|
|
|
$
|
235
|
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
(367
|
)
|
|
$
|
7,011
|
|
|
Other securities
|
1,778
|
|
|
405
|
|
|
(84
|
)
|
|
—
|
|
|
322
|
|
|
2,421
|
|
|
Total
|
$
|
8,867
|
|
|
$
|
640
|
|
|
$
|
(30
|
)
|
|
$
|
—
|
|
|
$
|
(45
|
)
|
|
$
|
9,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
|
Net Realized and Unrealized Gains
|
|
Net Purchases, Issuances, Settlements, and Other
|
|
Net Transfers Into Level 3
|
|
Effect of Foreign Currency
|
|
Balance at December 31, 2015
|
|
|
(in thousands)
|
|
Insurance funds
|
$
|
7,440
|
|
|
$
|
49
|
|
|
$
|
372
|
|
|
$
|
—
|
|
|
$
|
(772
|
)
|
|
$
|
7,089
|
|
|
Other securities
|
2,595
|
|
|
44
|
|
|
(82
|
)
|
|
—
|
|
|
(779
|
)
|
|
1,778
|
|
|
Total
|
$
|
10,035
|
|
|
$
|
93
|
|
|
$
|
290
|
|
|
$
|
—
|
|
|
$
|
(1,551
|
)
|
|
$
|
8,867
|
|
As the plan assets and contributions are not significant to our total company assets, no further breakdown is provided.
Annual benefit payments for the next 10 years, including amounts to be paid from our assets for unfunded plans, and reflecting expected future service, as appropriate, are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Estimated Annual Benefit Payments
|
|
|
|
|
|
|
(in thousands)
|
|
|
2017
|
|
$
|
3,655
|
|
|
|
2018
|
|
2,662
|
|
|
|
2019
|
|
2,737
|
|
|
|
2020
|
|
3,285
|
|
|
|
2021
|
|
3,918
|
|
|
|
2022-2026
|
|
22,929
|
|
Note 9: Stock-Based Compensation
We recognize stock-based compensation expense for awards of stock options, and the issuance of restricted stock units and unrestricted stock awards. We expense stock-based compensation primarily using the straight-line method over the requisite service period. For the years ended
December 31
, stock-based compensation expense and the related tax benefit were as follows
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Stock options
|
$
|
2,357
|
|
|
$
|
2,648
|
|
|
$
|
2,333
|
|
|
Restricted stock units
|
14,723
|
|
|
10,735
|
|
|
14,591
|
|
|
Unrestricted stock awards
|
955
|
|
|
706
|
|
|
936
|
|
|
Phantom stock units
|
1,077
|
|
|
—
|
|
|
—
|
|
|
Total stock-based compensation
|
$
|
19,112
|
|
|
$
|
14,089
|
|
|
$
|
17,860
|
|
|
|
|
|
|
|
|
|
Related tax benefit
|
$
|
4,927
|
|
|
$
|
4,228
|
|
|
$
|
4,994
|
|
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 2010 Stock Incentive Plan (Stock Incentive Plan). Awards consist of stock options, restricted stock units, and unrestricted stock awards. At
December 31, 2016
,
2,092,602
shares were available for grant under the Stock Incentive Plan.
The Stock Incentive Plan shares are subject to a fungible share provision such that, with respect to grants made after December 31, 2009, 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 stock appreciation right.
Stock Options
Options to purchase our common stock are granted to certain employees, senior management, and members of our 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
|
Expected volatility
|
33.5
|
%
|
|
34.3
|
%
|
|
39.3
|
%
|
|
Risk-free interest rate
|
1.3
|
%
|
|
1.7
|
%
|
|
1.7
|
%
|
|
Expected term (years)
|
5.5
|
|
|
5.5
|
|
|
5.5
|
|
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.
A summary of our stock option activity for the years ended
December 31
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, 2014
|
1,180
|
|
|
$
|
54.79
|
|
|
4.6
|
|
$
|
1,300
|
|
|
|
|
Granted
|
160
|
|
|
35.65
|
|
|
|
|
|
|
$
|
13.65
|
|
|
Exercised
|
(67
|
)
|
|
28.03
|
|
|
|
|
826
|
|
|
|
|
Forfeited
|
(7
|
)
|
|
44.06
|
|
|
|
|
|
|
|
|
Expired
|
(143
|
)
|
|
68.97
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2014
|
1,123
|
|
|
$
|
51.90
|
|
|
4.4
|
|
$
|
1,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
291
|
|
|
$
|
35.25
|
|
|
|
|
|
|
$
|
12.09
|
|
|
Exercised
|
(24
|
)
|
|
36.05
|
|
|
|
|
$
|
26
|
|
|
|
|
Forfeited
|
(17
|
)
|
|
37.47
|
|
|
|
|
|
|
|
|
Expired
|
(193
|
)
|
|
52.17
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
1,180
|
|
|
$
|
48.31
|
|
|
5.7
|
|
$
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
191
|
|
|
$
|
40.40
|
|
|
|
|
|
|
$
|
13.27
|
|
|
Exercised
|
(58
|
)
|
|
37.00
|
|
|
|
|
$
|
742
|
|
|
|
|
Forfeited
|
(36
|
)
|
|
35.29
|
|
|
|
|
|
|
|
|
Expired
|
(318
|
)
|
|
55.13
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
959
|
|
|
$
|
45.64
|
|
|
6.6
|
|
$
|
19,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2016
|
562
|
|
|
$
|
51.18
|
|
|
5.1
|
|
$
|
9,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest, December 31, 2016
|
385
|
|
|
$
|
37.76
|
|
|
8.7
|
|
$
|
9,658
|
|
|
|
|
|
|
|
(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 Itron’s 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.
|
As of
December 31, 2016
, total unrecognized stock-based compensation expense related to nonvested stock options was
$3.2 million
, which is expected to be recognized over a weighted average period of approximately
1.9
years.
Restricted Stock Units
Certain employees, senior management, and members of our 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.
In 2013, the performance-based restricted stock units that were awarded under the Performance Award Agreement were determined based on (1) our achievement of specified non-GAAP EPS targets, as established at the beginning of each year for each of the calendar years contained in the performance periods (2-year and 3-year awards) (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 performance periods (the market condition). Compensation expense, net of forfeitures, was recognized on a straight-line basis, and the 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 2-year and 3-year 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. For the
2-year
awards granted under the 2013 performance award,
14,433
restricted stock units became eligible for distribution at
December 31, 2014
. For the 3-year awards granted under the 2013 performance award,
15,648
restricted stock units became eligible for distribution at December 31, 2015.
For years subsequent to 2013, the performance-based restricted stock units to be issued are determined based on the same performance and market conditions as the 2013 awards, but the performance period is 3-years. For the 3-year awards granted under the 2014 performance award,
110,259
restricted stock units became eligible for distribution at December 31, 2016. No awards became eligible for distribution under the 2015 and 2016 awards since the performance periods had not concluded as of December 31, 2016.
Due to the presence of the TSR 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
|
Expected volatility
|
30.0
|
%
|
|
30.1
|
%
|
|
32.3
|
%
|
|
Risk-free interest rate
|
0.7
|
%
|
|
0.7
|
%
|
|
0.4
|
%
|
|
Expected term (years)
|
1.8
|
|
|
2.1
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value
|
$
|
44.92
|
|
|
$
|
33.48
|
|
|
$
|
35.15
|
|
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 for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Units
|
|
Weighted Average Grant Date Fair Value
|
|
Aggregate Intrinsic Value
(1)
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
Outstanding, January 1, 2014
|
658
|
|
|
|
|
|
|
Granted
(2)
|
350
|
|
|
$
|
35.74
|
|
|
|
|
Released
|
(291
|
)
|
|
|
|
$
|
14,402
|
|
|
Forfeited
|
(35
|
)
|
|
|
|
|
|
Outstanding, December 31, 2014
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
(3)
|
434
|
|
|
$
|
35.09
|
|
|
|
|
Released
|
(296
|
)
|
|
|
|
$
|
12,204
|
|
|
Forfeited
|
(64
|
)
|
|
|
|
|
|
Outstanding, December 31, 2015
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
(4)
|
306
|
|
|
$
|
41.58
|
|
|
|
|
Released
|
(312
|
)
|
|
|
|
$
|
11,944
|
|
|
Forfeited
|
(82
|
)
|
|
|
|
|
|
Outstanding, December 31, 2016
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested but not released, December 31, 2016
|
115
|
|
|
|
|
$
|
7,242
|
|
|
|
|
|
|
|
|
|
Expected to vest, December 31, 2016
|
477
|
|
|
|
|
$
|
30,006
|
|
|
|
|
|
(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 include
14,433
shares for the 2-year award under the 2013 Performance Award Agreement, which are eligible for distribution at December 31, 2014.
|
|
|
|
|
(3)
|
Restricted stock units include
15,648
shares for the 3-year award under the 2013 Performance Award Agreement, which are eligible for distribution at December 31, 2015.
|
|
|
|
|
(4)
|
Restricted stock units include
110,259
shares for the 3-year award under the 2014 Performance Award Agreement, which are eligible for distribution at December 31, 2016.
|
At
December 31, 2016
, unrecognized compensation expense on restricted stock units was
$21.6 million
, which is expected to be recognized over a weighted average period of approximately
1.8
years.
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 recognized 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 for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands, except per share data)
|
|
Shares of unrestricted stock granted
|
21
|
|
|
20
|
|
|
24
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value per share
|
$
|
44.94
|
|
|
$
|
35.01
|
|
|
$
|
39.06
|
|
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, December 31, 2016
|
62
|
|
|
|
|
|
|
|
|
|
Expected to vest, December 31, 2016
|
57
|
|
|
|
At
December 31, 2016
, total unrecognized compensation expense on phantom stock units was
$2.8 million
, which is expected to be recognized over a weighted average period of approximately
2.2
years. We have recognized a phantom stock liability of
$1.0 million
within wages and benefits payable in the Consolidated Balance Sheets as of
December 31, 2016
.
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 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 following table summarizes ESPP activity for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Shares of stock sold to employees
(1)
|
20
|
|
|
54
|
|
|
61
|
|
|
|
|
|
(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
December 31, 2016
.
Note 10: Defined Contribution, Bonus, and Profit Sharing Plans
Defined Contribution Plans
In the United States, United Kingdom, and certain other countries, we make contributions to defined contribution plans. For our U.S. employee savings plan, which represents a majority of our contribution expense, we provide a
50%
match on the first
6%
of the employee salary deferral, subject to statutory limitations. For our international defined contribution plans, we provide various levels of contributions, based on salary, subject to stipulated or statutory limitations. The expense for our defined contribution plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Defined contribution plans expense
|
$
|
7,941
|
|
|
$
|
6,579
|
|
|
$
|
7,097
|
|
Bonus and Profit Sharing Plans and Awards
We have employee bonus and profit sharing plans in which many of our employees participate, as well as an award program, which allows for recognition of individual employees' achievements. The bonus and profit sharing plans provide award amounts for the achievement of performance and financial targets. As the bonuses are being earned during the year, we estimate a compensation accrual each quarter based on the progress towards achieving the goals, the estimated financial forecast for the year, and the probability of achieving results. Bonus and profit sharing plans and award expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Bonus and profit sharing plans and award expense
|
$
|
43,377
|
|
|
$
|
14,192
|
|
|
$
|
34,989
|
|
Note 11: Income Taxes
The following table summarizes the provision (benefit) for U.S. federal, state, and foreign taxes on income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
20,490
|
|
|
$
|
5,033
|
|
|
$
|
17,749
|
|
|
State and local
|
2,708
|
|
|
1,633
|
|
|
775
|
|
|
Foreign
|
12,586
|
|
|
13,945
|
|
|
20,269
|
|
|
Total current
|
35,784
|
|
|
20,611
|
|
|
38,793
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
10,805
|
|
|
3,951
|
|
|
(82,186
|
)
|
|
State and local
|
1,160
|
|
|
(972
|
)
|
|
(979
|
)
|
|
Foreign
|
(24,815
|
)
|
|
(41,893
|
)
|
|
(51,646
|
)
|
|
Total deferred
|
(12,850
|
)
|
|
(38,914
|
)
|
|
(134,811
|
)
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
26,640
|
|
|
40,402
|
|
|
100,053
|
|
|
Total provision for income taxes
|
$
|
49,574
|
|
|
$
|
22,099
|
|
|
$
|
4,035
|
|
The change in the valuation allowance does not include the impacts of currency translation adjustments or significant intercompany transactions.
Our tax provision as a percentage of income before tax was
58.6%
,
59.6%
, and
(22.1)%
for
2016
, 2015, and 2014, respectively. Our actual tax rate differed from the
35%
U.S. federal statutory tax rate due to various items. A reconciliation of income taxes at the U.S. federal statutory rate of
35%
to the consolidated actual tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
Domestic
|
$
|
196,750
|
|
|
$
|
115,526
|
|
|
$
|
86,605
|
|
|
Foreign
|
(112,123
|
)
|
|
(78,424
|
)
|
|
(104,870
|
)
|
|
Total income (loss) before income taxes
|
$
|
84,627
|
|
|
$
|
37,102
|
|
|
$
|
(18,265
|
)
|
|
|
|
|
|
|
|
|
Expected federal income tax provision (benefit)
|
$
|
29,619
|
|
|
$
|
12,986
|
|
|
$
|
(6,393
|
)
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
119
|
|
|
Change in valuation allowance
|
26,640
|
|
|
40,402
|
|
|
100,053
|
|
|
Stock-based compensation
|
2,762
|
|
|
939
|
|
|
1,255
|
|
|
Foreign earnings
|
(12,584
|
)
|
|
(33,364
|
)
|
|
(31,544
|
)
|
|
Tax credits
|
(7,471
|
)
|
|
(5,257
|
)
|
|
(91,148
|
)
|
|
Uncertain tax positions, including interest and penalties
|
3,817
|
|
|
4,274
|
|
|
1,519
|
|
|
Change in tax rates
|
67
|
|
|
312
|
|
|
(20
|
)
|
|
State income tax provision (benefit), net of federal effect
|
2,806
|
|
|
(14
|
)
|
|
(1,235
|
)
|
|
U.S. tax provision on foreign earnings
|
997
|
|
|
203
|
|
|
31,309
|
|
|
Domestic production activities deduction
|
(2,424
|
)
|
|
(1,100
|
)
|
|
(2,312
|
)
|
|
Local foreign taxes
|
2,914
|
|
|
1,450
|
|
|
2,295
|
|
|
Other, net
|
2,431
|
|
|
1,268
|
|
|
137
|
|
|
Total provision for income taxes
|
$
|
49,574
|
|
|
$
|
22,099
|
|
|
$
|
4,035
|
|
Deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Deferred tax assets
|
|
|
|
|
Loss carryforwards
(1)
|
$
|
194,381
|
|
|
$
|
190,545
|
|
|
Tax credits
(2)
|
53,323
|
|
|
52,131
|
|
|
Accrued expenses
|
36,336
|
|
|
33,546
|
|
|
Pension plan benefits expense
|
16,822
|
|
|
16,232
|
|
|
Warranty reserves
|
21,306
|
|
|
25,129
|
|
|
Depreciation and amortization
|
15,698
|
|
|
21,499
|
|
|
Equity compensation
|
6,924
|
|
|
9,303
|
|
|
Inventory valuation
|
3,086
|
|
|
4,068
|
|
|
Deferred revenue
|
4,896
|
|
|
9,097
|
|
|
Tax effect of accumulated translation
|
—
|
|
|
291
|
|
|
Other deferred tax assets, net
|
13,621
|
|
|
11,770
|
|
|
Total deferred tax assets
|
366,393
|
|
|
373,611
|
|
|
Valuation allowance
|
(249,560
|
)
|
|
(235,339
|
)
|
|
Total deferred tax assets, net of valuation allowance
|
116,833
|
|
|
138,272
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
Depreciation and amortization
|
(19,995
|
)
|
|
(27,000
|
)
|
|
Tax effect of accumulated translation
|
(100
|
)
|
|
—
|
|
|
Other deferred tax liabilities, net
|
(5,698
|
)
|
|
(3,608
|
)
|
|
Total deferred tax liabilities
|
(25,793
|
)
|
|
(30,608
|
)
|
|
Net deferred tax assets
|
$
|
91,040
|
|
|
$
|
107,664
|
|
|
|
|
|
(1)
|
For tax return purposes at December 31, 2016, we had U.S. federal loss carryforwards of
$13.2 million
that expire during the years 2020 and 2021. At December 31, 2016, we have net operating loss carryforwards in Luxembourg of
$483.5 million
that can be carried forward indefinitely, offset by a full valuation allowance. The remaining portion of the loss carryforwards are composed primarily of losses in various other state and foreign jurisdictions. The majority of these losses can be carried forward indefinitely. At December 31, 2016, there was a valuation allowance of
$249.6 million
primarily associated with foreign loss carryforwards and foreign tax credit carryforwards (discussed below).
|
|
|
|
|
(2)
|
For tax return purposes at December 31, 2016, we had: (1) U.S. general business credits of
$15.3 million
, which begin to expire in 2022; (2) U.S. alternative minimum tax credits of
$2.5 million
that can be carried forward indefinitely; (3) U.S. foreign tax credits of
$49.4 million
, which begin to expire in 2024; and (4) state tax credits of
$10.0 million
, which begin to expire in 2017. At December 31, 2016, there was a valuation allowance of
$32.3 million
associated with foreign tax credit carryforwards, and
$6.0 million
associated with state tax credit carryforwards.
|
We recognize valuation allowances to reduce deferred tax assets to the extent we believe it is more likely than not that a portion of such assets will not be realized. In making such determinations, we consider all available favorable and unfavorable evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and our ability to carry back losses to prior years. We are required to make assumptions and judgments about potential outcomes that lie outside management’s control. Our most sensitive and critical factors are the projection, source, and character of future taxable income. Although realization is not assured, management believes it is more likely than not that deferred tax assets, net of valuation allowance, will be realized. The amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced or current tax planning strategies are not implemented.
Our deferred tax assets at
December 31, 2016
do not include the tax effect on
$40.9 million
of excess tax benefits from employee stock plan exercises. Common stock will be increased by approximately
$15 million
when such excess tax benefits reduce cash taxes payable. See Note 1 for further discussion regarding the impact of adopting ASU 2016-09.
We do not provide U.S. deferred taxes on temporary differences related to our foreign investments that are considered permanent in duration. These temporary differences consist primarily of undistributed foreign earnings of
$4.9 million
and
$8.7 million
at December 31, 2016 and 2015, respectively. Foreign taxes have been provided on these undistributed foreign earnings. We have
not computed the unrecognized deferred income tax liability on these temporary differences. There are many assumptions that must be considered to calculate the liability, thereby making it impractical to compute at this time.
We are subject to income tax in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered appropriate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Unrecognized tax benefits at January 1, 2014
|
$
|
28,615
|
|
|
Gross increase to positions in prior years
|
2,749
|
|
|
Gross decrease to positions in prior years
|
(1,641
|
)
|
|
Gross increases to current period tax positions
|
3,008
|
|
|
Audit settlements
|
—
|
|
|
Decrease related to lapsing of statute of limitations
|
(1,715
|
)
|
|
Effect of change in exchange rates
|
(2,870
|
)
|
|
Unrecognized tax benefits at December 31, 2014
|
$
|
28,146
|
|
|
|
|
|
Gross increase to positions in prior years
|
6,461
|
|
|
Gross decrease to positions in prior years
|
(2,512
|
)
|
|
Gross increases to current period tax positions
|
25,741
|
|
|
Audit settlements
|
—
|
|
|
Decrease related to lapsing of statute of limitations
|
(908
|
)
|
|
Effect of change in exchange rates
|
(2,048
|
)
|
|
Unrecognized tax benefits at December 31, 2015
|
$
|
54,880
|
|
|
|
|
|
Gross increase to positions in prior years
|
1,164
|
|
|
Gross decrease to positions in prior years
|
(612
|
)
|
|
Gross increases to current period tax positions
|
5,071
|
|
|
Audit settlements
|
(1,116
|
)
|
|
Decrease related to lapsing of statute of limitations
|
(860
|
)
|
|
Effect of change in exchange rates
|
(901
|
)
|
|
Unrecognized tax benefits at December 31, 2016
|
$
|
57,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate
|
$
|
56,411
|
|
|
$
|
53,602
|
|
|
$
|
26,980
|
|
If certain unrecognized tax benefits are recognized they would create additional deferred tax assets. These assets would require a full valuation in certain locations based upon present circumstances.
We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. The net interest and penalties expense recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Net interest and penalties expense
|
$
|
193
|
|
|
$
|
880
|
|
|
$
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Accrued interest
|
$
|
2,473
|
|
|
$
|
2,105
|
|
|
Accrued penalties
|
2,329
|
|
|
2,577
|
|
At December 31, 2016, we are under examination by certain tax authorities for the 2000 to 2015 tax years. The material jurisdictions where we are subject to examination for the 2000 to 2015 tax years include, among others, the U.S., France, Germany, Italy, Brazil and the United Kingdom. No material changes have occurred to previously disclosed assessments. In December 2016, we filed a formal protest letter with the Internal Revenue Service requesting an Appeals hearing regarding the 2011-2013 tax audit assessment received earlier this year relating to research and development tax credits. 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 cash flows.
Based upon the timing and outcome of examinations, litigation, the impact of legislative, regulatory, and judicial developments, and the impact of these items on the statute of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those recognized within the next twelve months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.
We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are subject to income tax examination by tax authorities in our major tax jurisdictions as follows:
|
|
|
|
|
|
|
Tax Jurisdiction
|
|
Years Subject to Audit
|
|
U.S. federal
|
|
Subsequent to 1999
|
|
France
|
|
Subsequent to 2009
|
|
Germany
|
|
Subsequent to 2010
|
|
Brazil
|
|
Subsequent to 2010
|
|
United Kingdom
|
|
Subsequent to 2012
|
|
Italy
|
|
Subsequent to 2007
|
Note 12: Commitments and Contingencies
Commitments
Operating lease rental expense for factories, service and distribution locations, offices, and equipment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Rental expense
|
$
|
14,232
|
|
|
$
|
15,524
|
|
|
$
|
19,178
|
|
Future minimum lease payments at
December 31, 2016
, under noncancelable operating leases with initial or remaining terms in excess of one year are as follows:
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Minimum Payments
|
|
|
|
(in thousands)
|
|
2017
|
|
$
|
13,128
|
|
|
2018
|
|
12,238
|
|
|
2019
|
|
9,152
|
|
|
2020
|
|
6,026
|
|
|
2021
|
|
5,363
|
|
|
Beyond 2021
|
|
8,510
|
|
|
Future minimum lease payments
|
|
$
|
54,417
|
|
Rent expense is recognized straight-line over the lease term, including renewal periods if reasonably assured. We lease most of our sales and distribution locations and administrative offices. Our leases typically contain renewal options similar to the original terms with lease payments that increase based on the consumer price index.
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 bonds are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Credit facilities
(1)
|
|
|
|
|
Multicurrency revolving line of credit
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
Long-term borrowings
|
(97,167
|
)
|
|
(151,837
|
)
|
|
Standby LOCs issued and outstanding
|
(46,103
|
)
|
|
(46,574
|
)
|
|
|
|
|
|
|
Net available for additional borrowings under the multi-currency revolving line of credit
|
$
|
356,730
|
|
|
$
|
301,589
|
|
|
Net available for additional standby LOCs under sub-facility
(2)
|
203,897
|
|
|
253,426
|
|
|
|
|
|
|
|
Unsecured multicurrency revolving lines of credit with various financial institutions
|
|
|
|
|
Multicurrency revolving line of credit
|
$
|
91,809
|
|
|
$
|
97,989
|
|
|
Standby LOCs issued and outstanding
|
(21,734
|
)
|
|
(31,122
|
)
|
|
Short-term borrowings
(3)
|
(69
|
)
|
|
(3,884
|
)
|
|
Net available for additional borrowings and LOCs
|
$
|
70,006
|
|
|
$
|
62,983
|
|
|
|
|
|
|
|
Unsecured surety bonds in force
|
$
|
48,221
|
|
|
$
|
87,558
|
|
|
|
|
|
(1)
|
Refer to Note 6 for details regarding our secured credit facilities.
|
|
|
|
|
(2)
|
During the year ended December 31, 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 (a) the customer promptly notifies us in writing of the claim and (b) we have the sole control of the defense and all related settlement negotiations. We may also provide an indemnification to our customers for third party claims resulting from damages caused by the negligence or willful misconduct of our employees/agents in connection with the performance of certain contracts. The terms of our indemnifications
generally do not limit the maximum potential payments. It is not possible to predict the maximum potential amount of future payments under these or similar agreements.
Legal Matters
We are subject to various legal proceedings and claims of which the outcomes are subject to significant uncertainty. Our policy is to assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required, if any, for these contingencies is made after an analysis of each known issue. A liability is recognized and charged to operating expense when we determine that a loss is probable and the amount can be reasonably estimated. Additionally, we disclose contingencies for which a material loss is reasonably possible, but not probable.
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 our customers. As a part of the settlement, we received a patent license from Transdata for the use of the patents in future meter production and sales.
In Brazil, the Conselho Administravo de Defesa 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. On October 18, 2016, we settled with the Conselho Administravo de Defesa Economica. The settlement was not material to our results of 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Beginning balance
|
$
|
54,512
|
|
|
$
|
36,548
|
|
|
New product warranties
|
7,987
|
|
|
8,380
|
|
|
Other adjustments and expirations
|
5,933
|
|
|
37,604
|
|
|
Claims activity
|
(24,364
|
)
|
|
(25,955
|
)
|
|
Effect of change in exchange rates
|
(766
|
)
|
|
(2,065
|
)
|
|
Ending balance
|
43,302
|
|
|
54,512
|
|
|
Less: current portion of warranty
|
24,874
|
|
|
36,927
|
|
|
Long-term warranty
|
$
|
18,428
|
|
|
$
|
17,585
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Total warranty expense
|
$
|
13,920
|
|
|
$
|
45,984
|
|
|
$
|
9,238
|
|
Extended Warranty
A summary of changes to unearned revenue for extended warranty contracts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Beginning balance
|
$
|
33,654
|
|
|
$
|
34,138
|
|
|
Unearned revenue for new extended warranties
|
1,437
|
|
|
2,792
|
|
|
Unearned revenue recognized
|
(3,594
|
)
|
|
(2,832
|
)
|
|
Effect of change in exchange rates
|
52
|
|
|
(444
|
)
|
|
Ending balance
|
31,549
|
|
|
33,654
|
|
|
Less: current portion of unearned revenue for extended warranty
|
4,226
|
|
|
3,565
|
|
|
Long-term unearned revenue for extended warranty within other long-term obligations
|
$
|
27,323
|
|
|
$
|
30,089
|
|
Health Benefits
We are self insured for a substantial portion of the cost of our U.S. employee group health insurance. We purchase insurance from a third party, which provides individual and aggregate stop loss protection for these costs. Each reporting period, we expense the costs of our health insurance plan including paid claims, the change in the estimate of incurred but not reported (IBNR) claims, taxes, and administrative fees (collectively, the plan costs).
Plan costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Plan costs
|
$
|
27,276
|
|
|
$
|
25,355
|
|
|
$
|
23,206
|
|
IBNR accrual, which is included in wages and benefits payable, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
IBNR accrual
|
$
|
2,441
|
|
|
$
|
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 13: Restructuring
2016 Projects
On September 1, 2016, we announced projects (2016 Projects) to restructure various company activities in order to improve operational efficiencies, reduce expenses and improve competiveness. We expect to close or consolidate several facilities and reduce our global workforce as a result of the restructuring.
The 2016 Projects began during the three months ended September 30, 2016, and we expect to substantially complete the 2016 Projects by the end of 2018. Many of the affected employees are represented by unions or works councils, which require consultation, and potential restructuring projects may be subject to regulatory approval, both of which could impact the timing of charges, total expected charges, cost recognized, and planned savings in certain jurisdictions.
The total expected restructuring costs, the restructuring costs recognized during the year ended
December 31, 2016
, and the remaining expected restructuring costs as of
December 31, 2016
related to the 2016 Projects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expected Costs at December 31, 2016
|
|
Costs Recognized During the Year Ended December 31, 2016
|
|
Remaining Costs to be Recognized at December 31, 2016
|
|
|
(in thousands)
|
|
Employee severance costs
|
$
|
44,186
|
|
|
$
|
39,686
|
|
|
$
|
4,500
|
|
|
Asset impairments & net loss on sale or disposal
|
7,219
|
|
|
7,219
|
|
|
—
|
|
|
Other restructuring costs
|
16,389
|
|
|
889
|
|
|
15,500
|
|
|
Total
|
$
|
67,794
|
|
|
$
|
47,794
|
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
Segments:
|
|
|
|
|
|
|
Electricity
|
$
|
10,827
|
|
|
$
|
8,827
|
|
|
$
|
2,000
|
|
|
Gas
|
34,468
|
|
|
23,968
|
|
|
10,500
|
|
|
Water
|
20,061
|
|
|
13,061
|
|
|
7,000
|
|
|
Corporate unallocated
|
2,438
|
|
|
1,938
|
|
|
500
|
|
|
Total
|
$
|
67,794
|
|
|
$
|
47,794
|
|
|
$
|
20,000
|
|
2014 Projects
In November 2014, our management approved restructuring projects (2014 Projects) to restructure our Electricity business and related general and administrative activities, along with certain Gas and Water activities, to improve operational efficiencies and reduce expenses. The 2014 Projects include consolidation of certain facilities and reduction of our global workforce. The improved structure positions 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 substantially completed them in the third quarter of 2016. Project activities will continue through the fourth quarter of 2017, however,
no
further costs are expected to be recognized related to the 2014 Projects.
The total expected restructuring costs, the restructuring costs recognized in prior periods, the restructuring costs recognized during the year ended
December 31, 2016
, and the remaining expected restructuring costs as of
December 31, 2016
related to the 2014 Projects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expected Costs at December 31, 2016
|
|
Costs Recognized in Prior Periods
|
|
Costs Recognized During the Year Ended December 31, 2016
|
|
Remaining Costs to be Recognized at December 31, 2016
|
|
|
(in thousands)
|
|
Employee severance costs
|
$
|
34,630
|
|
|
$
|
34,373
|
|
|
$
|
257
|
|
|
$
|
—
|
|
|
Asset impairments & net loss on sale or disposal
|
8,849
|
|
|
8,880
|
|
|
(31
|
)
|
|
—
|
|
|
Other restructuring costs
|
4,999
|
|
|
3,929
|
|
|
1,070
|
|
|
—
|
|
|
Total
|
$
|
48,478
|
|
|
$
|
47,182
|
|
|
$
|
1,296
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Segments:
|
|
|
|
|
|
|
|
|
Electricity
|
$
|
20,610
|
|
|
$
|
21,743
|
|
|
$
|
(1,133
|
)
|
|
$
|
—
|
|
|
Gas
|
13,631
|
|
|
11,855
|
|
|
1,776
|
|
|
—
|
|
|
Water
|
1,995
|
|
|
1,940
|
|
|
55
|
|
|
—
|
|
|
Corporate unallocated
|
12,242
|
|
|
11,644
|
|
|
598
|
|
|
—
|
|
|
Total
|
$
|
48,478
|
|
|
$
|
47,182
|
|
|
$
|
1,296
|
|
|
$
|
—
|
|
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 completed the projects during the third quarter of 2016.
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 2016, 2014 and 2013 Projects during the year ended
December 31, 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 incurred and charged to expense
|
39,943
|
|
|
7,188
|
|
|
1,959
|
|
|
49,090
|
|
|
Cash payments
|
(18,452
|
)
|
|
—
|
|
|
(2,389
|
)
|
|
(20,841
|
)
|
|
Non-cash items
|
—
|
|
|
(7,188
|
)
|
|
—
|
|
|
(7,188
|
)
|
|
Effect of change in exchange rates
|
(2,656
|
)
|
|
—
|
|
|
(16
|
)
|
|
(2,672
|
)
|
|
Ending balance, December 31, 2016
|
$
|
45,368
|
|
|
$
|
—
|
|
|
$
|
2,602
|
|
|
$
|
47,970
|
|
Asset impairments are determined at the asset group level. Revenues and net operating income from the activities we have exited or will exit under the restructuring projects are not material to our operating segments or consolidated results.
Other restructuring costs include expenses for employee relocation, professional fees associated with employee severance, and costs to exit the facilities once the operations in those facilities have ceased. Costs associated with restructuring activities are generally presented in the Consolidated Statements of Operations as restructuring, except for certain costs associated with inventory write-downs, which are classified within cost of revenues, and accelerated depreciation expense, which is recognized according to the use of the asset.
The current restructuring liabilities were
$26.2 million
and
$25.2 million
as of
December 31, 2016
and
2015
, respectively. The current restructuring liabilities are classified within other current liabilities on the Consolidated Balance Sheets. The long-term restructuring liabilities balances were
$21.8 million
and
$4.4 million
as of
December 31, 2016
and
2015
, respectively. The long-term restructuring liabilities are classified within other long-term obligations on the Consolidated Balance Sheets, and include facility exit costs and severance accruals.
Note 14: 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 will be entitled to be paid a preferential amount per share to be determined by our Board of Directors prior to any payment to holders of common stock. There was no preferred stock issued or outstanding at
December 31, 2016
,
2015
, and
2014
.
Stock Repurchase Plan
On February 19, 2015, our Board authorized a new repurchase program of up to
$50 million
of our common stock over a 12-month period, beginning February 19, 2015. From February 19, 2015 through December 31, 2015, we repurchased
743,444
shares of our common stock, totaling
$25.0 million
. This program expired on February 19, 2016 with no share repurchases made subsequent to December 31, 2015.
Other Comprehensive Income (Loss)
OCI is reflected as a net increase (decrease) to shareholders’ equity and is not reflected in our results of operations. 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
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
(in thousands)
|
|
Balances at January 1, 2014
|
$
|
4,217
|
|
|
$
|
(1,256
|
)
|
|
$
|
(14,380
|
)
|
|
$
|
(9,885
|
)
|
|
$
|
(21,304
|
)
|
|
OCI before reclassifications
|
(89,297
|
)
|
|
(566
|
)
|
|
—
|
|
|
(25,702
|
)
|
|
(115,565
|
)
|
|
Amounts reclassified from AOCI
|
—
|
|
|
1,054
|
|
|
—
|
|
|
755
|
|
|
1,809
|
|
|
Total other comprehensive income (loss)
|
(89,297
|
)
|
|
488
|
|
|
—
|
|
|
(24,947
|
)
|
|
(113,756
|
)
|
|
Balances at December 31, 2014
|
$
|
(85,080
|
)
|
|
$
|
(768
|
)
|
|
$
|
(14,380
|
)
|
|
$
|
(34,832
|
)
|
|
$
|
(135,060
|
)
|
|
OCI before reclassifications
|
(73,891
|
)
|
|
76
|
|
|
—
|
|
|
4,570
|
|
|
(69,245
|
)
|
|
Amounts reclassified from AOCI
|
962
|
|
|
1,010
|
|
|
—
|
|
|
1,726
|
|
|
3,698
|
|
|
Total other comprehensive income (loss)
|
(72,929
|
)
|
|
1,086
|
|
|
—
|
|
|
6,296
|
|
|
(65,547
|
)
|
|
Balances at December 31, 2015
|
$
|
(158,009
|
)
|
|
$
|
318
|
|
|
$
|
(14,380
|
)
|
|
$
|
(28,536
|
)
|
|
$
|
(200,607
|
)
|
|
OCI before reclassifications
|
(23,570
|
)
|
|
(1,087
|
)
|
|
—
|
|
|
(6,191
|
)
|
|
(30,848
|
)
|
|
Amounts reclassified from AOCI
|
(1,407
|
)
|
|
812
|
|
|
—
|
|
|
2,723
|
|
|
2,128
|
|
|
Total other comprehensive income (loss)
|
(24,977
|
)
|
|
(275
|
)
|
|
—
|
|
|
(3,468
|
)
|
|
(28,720
|
)
|
|
Balances at December 31, 2016
|
$
|
(182,986
|
)
|
|
$
|
43
|
|
|
$
|
(14,380
|
)
|
|
$
|
(32,004
|
)
|
|
$
|
(229,327
|
)
|
The before-tax amount, income tax (provision) benefit, and net-of-tax amount related to each component of OCI during the reporting periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Before-tax amount
|
|
|
Foreign currency translation adjustment
|
$
|
(23,280
|
)
|
|
$
|
(74,219
|
)
|
|
$
|
(89,329
|
)
|
|
Foreign currency translation adjustment reclassified into net income on disposal
|
(1,407
|
)
|
|
962
|
|
|
—
|
|
|
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
|
(1,768
|
)
|
|
123
|
|
|
(915
|
)
|
|
Net hedging (gain) loss reclassified into net income (loss)
|
1,322
|
|
|
1,639
|
|
|
1,704
|
|
|
Pension benefit obligation adjustment
|
(3,504
|
)
|
|
8,971
|
|
|
(25,270
|
)
|
|
Total other comprehensive income (loss), before tax
|
(28,637
|
)
|
|
(62,524
|
)
|
|
(113,810
|
)
|
|
|
|
|
|
|
|
|
Tax (provision) benefit
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
(290
|
)
|
|
328
|
|
|
32
|
|
|
Foreign currency translation adjustment reclassified into net income on disposal
|
—
|
|
|
—
|
|
|
—
|
|
|
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
|
681
|
|
|
(47
|
)
|
|
349
|
|
|
Net hedging (gain) loss reclassified into net income (loss)
|
(510
|
)
|
|
(629
|
)
|
|
(650
|
)
|
|
Pension benefit obligation adjustment
|
36
|
|
|
(2,675
|
)
|
|
323
|
|
|
Total other comprehensive income (loss) tax (provision) benefit
|
(83
|
)
|
|
(3,023
|
)
|
|
54
|
|
|
|
|
|
|
|
|
|
Net-of-tax amount
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
(23,570
|
)
|
|
(73,891
|
)
|
|
(89,297
|
)
|
|
Foreign currency translation adjustment reclassified into net income on disposal
|
(1,407
|
)
|
|
962
|
|
|
—
|
|
|
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
|
(1,087
|
)
|
|
76
|
|
|
(566
|
)
|
|
Net hedging (gain) loss reclassified into net income (loss)
|
812
|
|
|
1,010
|
|
|
1,054
|
|
|
Pension benefit obligation adjustment
|
(3,468
|
)
|
|
6,296
|
|
|
(24,947
|
)
|
|
Total other comprehensive income (loss), net of tax
|
$
|
(28,720
|
)
|
|
$
|
(65,547
|
)
|
|
$
|
(113,756
|
)
|
Details about the AOCI components reclassified to the Consolidated Statements of Operations during the reporting periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from AOCI
(1)
|
|
|
|
|
|
Year Ended December 31,
|
|
Affected Line Item in the Income Statement
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
(in thousands)
|
|
|
|
Amortization of defined benefit pension items
|
|
|
|
|
|
|
|
|
|
Prior-service costs
|
|
$
|
(58
|
)
|
|
$
|
(59
|
)
|
|
$
|
(138
|
)
|
|
(2)
|
|
Actuarial losses
|
|
(1,351
|
)
|
|
(1,979
|
)
|
|
(572
|
)
|
|
(2)
|
|
Loss on settlement
|
|
(1,343
|
)
|
|
(375
|
)
|
|
(55
|
)
|
|
(2)
|
|
Other
|
|
—
|
|
|
(46
|
)
|
|
—
|
|
|
(2)
|
|
Total, before tax
|
|
(2,752
|
)
|
|
(2,459
|
)
|
|
(765
|
)
|
|
Income (loss) before income taxes
|
|
Tax benefit
|
|
29
|
|
|
733
|
|
|
10
|
|
|
Income tax provision
|
|
Total, net of tax
|
|
$
|
(2,723
|
)
|
|
$
|
(1,726
|
)
|
|
$
|
(755
|
)
|
|
Net income (loss)
|
|
|
|
|
(1)
|
Amounts in parenthesis 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.
|
Reclassification of amounts related to foreign currency translation adjustment relate to the sale of a subsidiary and are included in restructuring expense in the Consolidated Statements of Operations for the years ended December 31, 2016 and 2015.
Refer to Note 7 for additional details related to derivative activities that resulted in reclassification of AOCI to the Consolidated Statements of Operations.
Note 15: Fair Values of Financial Instruments
The fair values at
December 31, 2016
and
2015
do not reflect subsequent changes in the economy, interest rates, tax rates, and other variables that may affect the determination of fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
|
|
|
(in thousands)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
133,565
|
|
|
$
|
133,565
|
|
|
$
|
131,018
|
|
|
$
|
131,018
|
|
|
Foreign exchange forwards
|
169
|
|
|
169
|
|
|
27
|
|
|
27
|
|
|
Interest rate swaps
|
1,830
|
|
|
1,830
|
|
|
1,632
|
|
|
1,632
|
|
|
Interest rate caps
|
946
|
|
|
946
|
|
|
1,423
|
|
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Credit facility
|
|
|
|
|
|
|
|
|
USD denominated term loan
|
$
|
208,125
|
|
|
$
|
205,676
|
|
|
$
|
219,375
|
|
|
$
|
217,830
|
|
|
Multicurrency revolving line of credit
|
97,167
|
|
|
95,906
|
|
|
151,837
|
|
|
150,570
|
|
|
Interest rate swaps
|
934
|
|
|
934
|
|
|
868
|
|
|
868
|
|
|
Foreign exchange forwards
|
449
|
|
|
449
|
|
|
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 value 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 determined 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.
Note 16: 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: revenues, 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 are 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; smart metering solutions that include one or several of the following: smart electricity meters; smart electricity communication modules; prepayment systems, including smart key, keypad, and smart card communication technologies; smart 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; smart metering solutions that include one or several of the following: smart gas meters; smart gas communication modules; prepayment systems, including smart key, keypad, and smart card communication technologies; smart 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; smart metering solutions that include one or several of the following: smart water meters and communication modules; smart heat meters; smart 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.
|
Revenues, gross profit, and operating income associated with our segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Revenues
|
|
|
|
|
|
|
Electricity
|
$
|
938,374
|
|
|
$
|
820,306
|
|
|
$
|
771,857
|
|
|
Gas
|
569,476
|
|
|
543,805
|
|
|
599,091
|
|
|
Water
|
505,336
|
|
|
519,422
|
|
|
576,668
|
|
|
Total Company
|
$
|
2,013,186
|
|
|
$
|
1,883,533
|
|
|
$
|
1,947,616
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
Electricity
|
$
|
282,677
|
|
|
$
|
225,446
|
|
|
$
|
200,249
|
|
|
Gas
|
205,063
|
|
|
185,559
|
|
|
211,623
|
|
|
Water
|
172,580
|
|
|
145,680
|
|
|
202,178
|
|
|
Total Company
|
$
|
660,320
|
|
|
$
|
556,685
|
|
|
$
|
614,050
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
Electricity
|
$
|
68,287
|
|
|
$
|
31,104
|
|
|
$
|
(77,751
|
)
|
|
Gas
|
66,813
|
|
|
67,471
|
|
|
76,101
|
|
|
Water
|
37,266
|
|
|
19,864
|
|
|
71,356
|
|
|
Corporate unallocated
|
(76,155
|
)
|
|
(65,593
|
)
|
|
(69,226
|
)
|
|
Total Company
|
96,211
|
|
|
52,846
|
|
|
480
|
|
|
Total other income (expense)
|
(11,584
|
)
|
|
(15,744
|
)
|
|
(18,745
|
)
|
|
Income (loss) before income taxes
|
$
|
84,627
|
|
|
$
|
37,102
|
|
|
$
|
(18,265
|
)
|
During the second quarter of 2015, we concluded it was necessary to issue a product replacement notification to customers of our Water segment who had purchased certain communication modules manufactured between July 2013 and December 2014. We determined that a component of the modules was failing prematurely. This resulted in a decrease to gross profit of
$29.4 million
for the year ended December 31, 2015. After adjusting for the tax impact, this charge resulted in a decrease to basic and diluted EPS of
$0.47
for the year ended December 31, 2015.
During 2014, in our Electricity segment, we revised our estimate of the cost to complete an OpenWay project in North America. This resulted in a decrease to gross profit of
$15.9 million
, which decreased basic and diluted EPS by $0.25 for the year ended December 31, 2014.
For the years ended
December 31, 2016
, 2015, and 2014, no single customer represented more than 10% of total Company or the Gas or Water operating segment revenues. Two customers represented 12% and 10% of total Electricity revenue, respectively, for the year ended
December 31, 2016
. No customer represented more than 10% of Electricity revenue for the years ended December 31, 2015 and 2014.
Revenues by region were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
United States and Canada
|
$
|
1,126,787
|
|
|
$
|
997,293
|
|
|
$
|
875,796
|
|
|
Europe, Middle East, and Africa (EMEA)
|
698,106
|
|
|
701,301
|
|
|
849,841
|
|
|
Other
|
188,293
|
|
|
184,939
|
|
|
221,979
|
|
|
Total Company
|
$
|
2,013,186
|
|
|
$
|
1,883,533
|
|
|
$
|
1,947,616
|
|
Revenues are allocated to countries and regions based on the location of the selling entity.
Property, plant, and equipment, net, by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
United States
|
$
|
70,435
|
|
|
$
|
72,179
|
|
|
Outside United States
|
106,023
|
|
|
118,077
|
|
|
Total Company
|
$
|
176,458
|
|
|
$
|
190,256
|
|
Depreciation and amortization expense associated with our segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
|
Electricity
|
$
|
28,468
|
|
|
$
|
35,896
|
|
|
$
|
47,889
|
|
|
Gas
|
20,714
|
|
|
20,288
|
|
|
25,706
|
|
|
Water
|
18,675
|
|
|
19,459
|
|
|
24,257
|
|
|
Corporate Unallocated
|
461
|
|
|
350
|
|
|
287
|
|
|
Total Company
|
$
|
68,318
|
|
|
$
|
75,993
|
|
|
$
|
98,139
|
|
Note 17: Quarterly Results (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Total Year
|
|
|
(in thousands, except per share data)
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Statement of operations data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
497,590
|
|
|
$
|
513,024
|
|
|
$
|
506,859
|
|
|
$
|
495,713
|
|
|
$
|
2,013,186
|
|
|
Gross profit
|
163,203
|
|
|
169,705
|
|
|
170,749
|
|
|
156,663
|
|
|
660,320
|
|
|
Net income (loss) attributable to Itron, Inc.
|
10,089
|
|
|
19,917
|
|
|
(9,885
|
)
|
|
11,649
|
|
|
31,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - Basic
(1)
|
$
|
0.27
|
|
|
$
|
0.52
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.30
|
|
|
$
|
0.83
|
|
|
Earnings (loss) per common share - Diluted
(1)
|
$
|
0.26
|
|
|
$
|
0.52
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.30
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Total Year
|
|
|
(in thousands, except per share data)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Statement of operations data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
446,746
|
|
|
$
|
470,811
|
|
|
$
|
469,528
|
|
|
$
|
496,448
|
|
|
$
|
1,883,533
|
|
|
Gross profit
|
138,422
|
|
|
118,554
|
|
|
147,290
|
|
|
152,419
|
|
|
556,685
|
|
|
Net income (loss) attributable to Itron, Inc.
|
5,398
|
|
|
(14,346
|
)
|
|
12,640
|
|
|
8,986
|
|
|
12,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - Basic
(1)
|
$
|
0.14
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.33
|
|
|
$
|
0.23
|
|
|
$
|
0.33
|
|
|
Earnings (loss) per common share - Diluted
(1)
|
$
|
0.14
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.33
|
|
|
$
|
0.23
|
|
|
$
|
0.33
|
|
|
|
|
|
(1)
|
The sum of the quarterly EPS data presented in the table may not equal the annual results due to rounding and the impact of dilutive securities on the annual versus the quarterly EPS calculations.
|
During the third quarter of 2016, we announced the 2016 Projects to restructure various company activities in order to improve operational efficiencies, reduce expenses and improve competiveness. As a result, we recognized
$40.0 million
and
$7.8 million
in restructuring costs during the third and fourth quarters of 2016, respectively, related to the 2016 Projects.
For the year ended December 31, 2015, management concluded earnings fell below the threshold at which incentive compensation was appropriate. As a result,
$13.3 million
of previously accrued compensation expense was reversed in the fourth quarter of 2015.
During the second quarter of 2015, we concluded it was necessary to issue a product replacement notification to customers of our Water segment who had purchased certain communication modules manufactured between July 2013 and December 2014. We determined that a component of the modules was failing prematurely. As a result, we recognized a warranty charge of
$23.6 million
during the second quarter of 2015.
Note 18: Subsequent Events
Stock Repurchases
On February 23, 2017, Itron's Board of Directors authorized a new repurchase program of up to
$50 million
of our common stock over a 12-month period, beginning February 23, 2017. Repurchases are made in the open market or in privately negotiated transactions and in accordance with applicable securities laws. Repurchases are subject to the Company's alternative uses of capital as well as financial, market, and industry conditions.