NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(UNAUDITED)
In this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron,” and the “Company” refer to Itron, Inc.
Note 1: Summary of Significant Accounting Policies
Financial Statement Preparation
The condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q are unaudited and reflect entries necessary for the fair presentation of the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss) for the
three and six
months ended
June 30, 2017
and
2016
, the Consolidated Balance Sheets as of
June 30, 2017
and
December 31, 2016
, and the Consolidated Statements of Cash Flows for the
six
months ended
June 30, 2017
and
2016
of Itron, Inc. and its subsidiaries. All entries required for the fair presentation of the financial statements are of a normal recurring nature, except as disclosed. The results of operations for the
three and six
months ended
June 30, 2017
are not necessarily indicative of the results expected for the full year or for any other period.
Certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim results. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in our 2016 Annual Report on Form 10-K filed with the SEC on
March 1, 2017
. There have been no significant changes in financial statement preparation or significant accounting policies since December 31, 2016 with the exception of the adoption of Accounting Standards Update (ASU) 2016-09 as discussed below.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09,
Revenue from Contracts with Customers: Topic 606
(ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date
, which deferred the effective date for implementation of ASU 2014-09 by one year and is now effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted but not earlier than the original effective date. In March 2016, the FASB issued ASU 2016-08,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(ASU 2016-08), which clarifies the implementation guidance of principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,
Identifying Performance Obligations and Licensing
(ASU 2016-10), which clarifies the identification of performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
(ASU 2016-12), to improve guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The effective date and transition requirements in ASU 2016-08, ASU 2016-10, and ASU 2016-12 are the same as the effective date and transition requirements of ASU 2015-14.
The revenue guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard effective January 1, 2018 using the cumulative catch-up transition method, and therefore, will recognize the cumulative effect of initially applying the revenue standard as an adjustment to the opening balance of retained earnings in the period of initial application. We currently believe the most significant impact relates to our accounting for software and software-related elements, and the increased financial statement disclosures, but are continuing to evaluate the effect that the updated standard will have on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330) - Simplifying the Measurement of Inventory
(ASU 2015-11). The amendments in ASU 2015-11 apply to inventory measured using first-in, first-out (FIFO) or average cost and will require entities to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the normal course of business, minus the cost of completion, disposal and transportation. Replacement cost and net realizable value less a normal profit margin will no longer be considered. We adopted this standard on January 1, 2017 and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as
operating leases. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the impact of adoption on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting (Topic 718)
(ASU 2016-09), which simplifies several areas within Topic 718. These include income tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. The amendments in this ASU becomes effective on a modified retrospective basis for accounting for income tax benefits recognized and forfeitures, retrospectively for accounting related to the presentation of employee taxes paid, prospectively for accounting related to recognition of excess tax benefits, and either prospectively or retrospectively for accounting related to presentation of excess employee tax benefits for annual periods, and interim periods within those annual periods, beginning after December 15, 2016.
We adopted this standard effective January 1, 2017 using a modified retrospective transition method. We recognized a
$14.6 million
one-time reduction in accumulated deficit and increase in deferred tax assets related to cumulative unrecognized excess tax benefits. All future excess tax benefits and tax deficiencies will be recognized prospectively as income tax provision or benefit in the Consolidated Statement of Operations, and as an operating activity on the Consolidated Statement of Cash Flows. We also recognized a
$0.2 million
one-time increase in accumulated deficit and common stock related to our policy election to prospectively recognize forfeitures as they occur.
In January 2017, the FASB issued ASU 2017-01,
Clarifying the Definition of a Business
(ASU 2017-01), which narrows the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output. ASU 2017-01 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We adopted this standard on January 1, 2017, and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(ASU 2017-04), which simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test that requires the determination of the fair value of individual assets and liabilities of a reporting unit. ASU 2017-04 requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We adopted this standard on January 1, 2017, and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In March 2017, the FASB issued ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(ASU 2017-07), which provides additional guidance on the presentation of net benefit costs in the income statement. ASU 2017-07 requires an employer disaggregate the service cost component from the other components of net benefit cost and to disclose other components outside of a subtotal of income from operations. It also allows only the service cost component of net benefit costs to be eligible for capitalization. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. We are currently assessing the impact of adoption on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
Note 2: Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands, except per share data)
|
Net income available to common shareholders
|
$
|
14,097
|
|
|
$
|
19,917
|
|
|
$
|
29,942
|
|
|
$
|
30,006
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - Basic
|
38,683
|
|
|
38,236
|
|
|
38,579
|
|
|
38,147
|
|
Dilutive effect of stock-based awards
|
649
|
|
|
280
|
|
|
695
|
|
|
299
|
|
Weighted average common shares outstanding - Diluted
|
39,332
|
|
|
38,516
|
|
|
39,274
|
|
|
38,446
|
|
Earnings per common share - Basic
|
$
|
0.36
|
|
|
$
|
0.52
|
|
|
$
|
0.78
|
|
|
$
|
0.79
|
|
Earnings per common share - Diluted
|
$
|
0.36
|
|
|
$
|
0.52
|
|
|
$
|
0.76
|
|
|
$
|
0.78
|
|
Stock-based Awards
For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase common stock at the average market price during the period. Related proceeds include the amount the employee must pay upon exercise and the future compensation cost associated with the stock award. Approximately
0.2 million
stock-based awards were excluded from the calculation of diluted EPS for both the
three and six
months ended
June 30, 2017
because they were anti-dilutive. Approximately
0.9 million
and
1.0 million
stock-based awards were excluded from the calculation of diluted EPS for the
three and six
months ended
June 30, 2016
because they were anti-dilutive. These stock-based awards could be dilutive in future periods.
Note 3: Certain Balance Sheet Components
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Trade receivables (net of allowance of $3,502 and $3,320)
|
$
|
345,738
|
|
|
$
|
299,870
|
|
Unbilled receivables
|
28,442
|
|
|
51,636
|
|
Total accounts receivable, net
|
$
|
374,180
|
|
|
$
|
351,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts activity
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Beginning balance
|
$
|
3,424
|
|
|
$
|
4,541
|
|
|
$
|
3,320
|
|
|
$
|
5,949
|
|
Provision (release) for doubtful accounts, net
|
441
|
|
|
(80
|
)
|
|
744
|
|
|
(88
|
)
|
Accounts written-off
|
(475
|
)
|
|
(364
|
)
|
|
(805
|
)
|
|
(1,842
|
)
|
Effect of change in exchange rates
|
112
|
|
|
(158
|
)
|
|
243
|
|
|
(80
|
)
|
Ending balance
|
$
|
3,502
|
|
|
$
|
3,939
|
|
|
$
|
3,502
|
|
|
$
|
3,939
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Materials
|
$
|
124,363
|
|
|
$
|
103,274
|
|
Work in process
|
14,399
|
|
|
7,925
|
|
Finished goods
|
64,872
|
|
|
51,850
|
|
Total inventories
|
$
|
203,634
|
|
|
$
|
163,049
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Machinery and equipment
|
$
|
297,314
|
|
|
$
|
279,746
|
|
Computers and software
|
105,570
|
|
|
98,125
|
|
Buildings, furniture, and improvements
|
130,165
|
|
|
122,680
|
|
Land
|
18,161
|
|
|
17,179
|
|
Construction in progress, including purchased equipment
|
32,036
|
|
|
29,358
|
|
Total cost
|
583,246
|
|
|
547,088
|
|
Accumulated depreciation
|
(396,740
|
)
|
|
(370,630
|
)
|
Property, plant, and equipment, net
|
$
|
186,506
|
|
|
$
|
176,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Depreciation expense
|
$
|
10,120
|
|
|
$
|
11,011
|
|
|
$
|
19,949
|
|
|
$
|
21,475
|
|
Note 4: Intangible Assets
The gross carrying amount and accumulated amortization of our intangible assets, other than goodwill, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Gross Assets
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross Assets
|
|
Accumulated
Amortization
|
|
Net
|
|
(in thousands)
|
Core-developed technology
|
$
|
415,616
|
|
|
$
|
(382,015
|
)
|
|
$
|
33,601
|
|
|
$
|
372,568
|
|
|
$
|
(354,878
|
)
|
|
$
|
17,690
|
|
Customer contracts and relationships
|
250,683
|
|
|
(185,659
|
)
|
|
65,024
|
|
|
224,467
|
|
|
(170,056
|
)
|
|
54,411
|
|
Trademarks and trade names
|
68,626
|
|
|
(64,340
|
)
|
|
4,286
|
|
|
61,785
|
|
|
(61,766
|
)
|
|
19
|
|
Other
|
11,579
|
|
|
(11,056
|
)
|
|
523
|
|
|
11,076
|
|
|
(11,045
|
)
|
|
31
|
|
Total intangible assets subject to amortization
|
$
|
746,504
|
|
|
$
|
(643,070
|
)
|
|
$
|
103,434
|
|
|
$
|
669,896
|
|
|
$
|
(597,745
|
)
|
|
$
|
72,151
|
|
In-process research and development
|
710
|
|
|
—
|
|
|
710
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total intangible assets
|
$
|
747,214
|
|
|
$
|
(643,070
|
)
|
|
$
|
104,144
|
|
|
$
|
669,896
|
|
|
$
|
(597,745
|
)
|
|
$
|
72,151
|
|
A summary of intangible asset activity is as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Beginning balance, intangible assets, gross
|
$
|
669,896
|
|
|
$
|
702,507
|
|
Intangible assets acquired
|
36,500
|
|
|
—
|
|
Effect of change in exchange rates
|
40,818
|
|
|
(2,512
|
)
|
Ending balance, intangible assets, gross
|
$
|
747,214
|
|
|
$
|
699,995
|
|
On June 1, 2017, we completed the acquisition of Comverge Inc. by purchasing
100%
of the voting stock of Peak Holding Corp., its parent company (Comverge). Intangible assets acquired in 2017 are based on the preliminary purchase price allocation relating to this acquisition. Comverge's intangible assets include in-process research and development, which is not amortized until such time as the associated development projects are completed. These projects are expected to be completed in the next
six
months. Refer to Note 16 for additional information regarding this acquisition.
Estimated future annual amortization expense is as follows:
|
|
|
|
|
|
Year Ending December 31,
|
|
Estimated Annual Amortization
|
|
|
(in thousands)
|
2017 (amount remaining at June 30, 2017)
|
|
$
|
11,103
|
|
2018
|
|
18,761
|
|
2019
|
|
16,050
|
|
2020
|
|
13,698
|
|
2021
|
|
11,799
|
|
Beyond 2021
|
|
32,023
|
|
Total intangible assets subject to amortization
|
|
$
|
103,434
|
|
Note 5: Goodwill
The following table reflects goodwill allocated to each reporting unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
|
|
Gas
|
|
Water
|
|
Total Company
|
|
(in thousands)
|
Balances at January 1, 2017
|
|
|
|
|
|
|
|
Goodwill before impairment
|
$
|
400,299
|
|
|
$
|
319,913
|
|
|
$
|
334,505
|
|
|
$
|
1,054,717
|
|
Accumulated impairment losses
|
(348,926
|
)
|
|
—
|
|
|
(253,297
|
)
|
|
(602,223
|
)
|
Goodwill, net
|
51,373
|
|
|
319,913
|
|
|
81,208
|
|
|
452,494
|
|
|
|
|
|
|
|
|
|
Goodwill acquired
|
60,286
|
|
|
—
|
|
|
—
|
|
|
60,286
|
|
Effect of change in exchange rates
|
2,065
|
|
|
21,158
|
|
|
5,068
|
|
|
28,291
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2017
|
|
|
|
|
|
|
|
Goodwill before impairment
|
486,834
|
|
|
341,071
|
|
|
363,185
|
|
|
1,191,090
|
|
Accumulated impairment losses
|
(373,110
|
)
|
|
—
|
|
|
(276,909
|
)
|
|
(650,019
|
)
|
Goodwill, net
|
$
|
113,724
|
|
|
$
|
341,071
|
|
|
$
|
86,276
|
|
|
$
|
541,071
|
|
Note 6: Debt
The components of our borrowings were as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Credit facility:
|
|
|
|
USD denominated term loan
|
$
|
202,500
|
|
|
$
|
208,125
|
|
Multicurrency revolving line of credit
|
122,497
|
|
|
97,167
|
|
Total debt
|
324,997
|
|
|
305,292
|
|
Less: current portion of debt
|
16,875
|
|
|
14,063
|
|
Less: unamortized prepaid debt fees - term loan
|
638
|
|
|
769
|
|
Long-term debt less unamortized prepaid debt fees - term loan
|
$
|
307,484
|
|
|
$
|
290,460
|
|
Credit Facility
On June 23, 2015, we entered into an amended and restated credit agreement providing for committed credit facilities in the amount of
$725 million
U.S. dollars (the 2015 credit facility). The 2015 credit facility consists of a
$225 million
U.S. dollar term loan (the term loan) and a multicurrency revolving line of credit (the revolver) with a principal amount of up to
$500 million
. The revolver also contains a
$250 million
standby letter of credit sub-facility and a
$50 million
swingline sub-facility (available for immediate cash needs at a higher interest rate). Both the term loan and the revolver mature on June 23, 2020, and amounts borrowed under the revolver are classified as long-term and, during the credit facility term, may be repaid and reborrowed until the revolver's maturity, at which time the revolver will terminate, and all outstanding loans, together with all accrued and unpaid interest, must be repaid. Amounts not borrowed under the revolver are subject to a commitment fee, which is paid in arrears on the last day of each fiscal quarter, ranging from
0.18%
to
0.30%
per annum depending on our total leverage ratio as of the most recently ended fiscal quarter. Amounts repaid on the term loan may not be reborrowed. The 2015 credit facility permits us and certain of our
foreign subsidiaries to borrow in U.S. dollars, euros, British pounds, or, with lender approval, other currencies readily convertible into U.S. dollars.
All obligations under the 2015 credit facility are guaranteed by Itron, Inc. and material U.S. domestic subsidiaries and are secured by a pledge of substantially all of the assets of Itron, Inc. and material U.S. domestic subsidiaries, including a pledge of 100% of the capital stock of material U.S. domestic subsidiaries and up to 66% of the voting stock (100% of the non-voting stock) of their first-tier foreign subsidiaries. In addition, the obligations of any foreign subsidiary who is a foreign borrower, as defined by the 2015 credit facility, are guaranteed by the foreign subsidiary and by its direct and indirect foreign parents.
Under the 2015 credit facility, we elect applicable market interest rates for both the term loan and any outstanding revolving loans. We also pay an applicable margin, which is based on our total leverage ratio (as defined in the credit agreement). The applicable rates per annum may be based on either: (1)
the LIBOR rate
or
EURIBOR rate
(floor of 0%), plus an applicable margin, or (2) the
Alternate Base Rate
, plus an applicable margin. The Alternate Base Rate election is equal to the greatest of three rates: (i)
the prime rate
, (ii)
the Federal Reserve effective rate
plus 1/2 of 1%, or (iii)
one month LIBOR
plus
1%
. At
June 30, 2017
and
December 31, 2016
, the interest rate for both the term loan and the USD revolver was
2.48%
and
2.02%
, respectively, which includes the LIBOR rate plus a margin of
1.25%
. At
June 30, 2017
and
December 31, 2016
, the interest rate for the EUR revolver was
1.25%
(the EURIBOR floor rate plus a margin of
1.25%
).
At
June 30, 2017
,
$122.5 million
was outstanding under the 2015 credit facility revolver, and
$28.7 million
was utilized by outstanding standby letters of credit, resulting in
$348.8 million
available for additional borrowings or standby letters of credit. At
June 30, 2017
,
$221.3 million
was available for additional standby letters of credit under the letter of credit sub-facility and no amounts were outstanding under the swingline sub-facility.
Note 7: Derivative Financial Instruments
As part of our risk management strategy, we use derivative instruments to hedge certain foreign currency and interest rate exposures. Refer to Note 13 and Note 14 for additional disclosures on our derivative instruments.
The fair values of our derivative instruments are determined using the income approach and significant other observable inputs (also known as “Level 2”). We have used observable market inputs based on the type of derivative and the nature of the underlying instrument. The key inputs include interest rate yield curves (swap rates and futures) and foreign exchange spot and forward rates, all of which are available in an active market. We have utilized the mid-market pricing convention for these inputs. We include, as a discount to the derivative asset, the effect of our counterparty credit risk based on current published credit default swap rates when the net fair value of our derivative instruments is in a net asset position. We consider our own nonperformance risk when the net fair value of our derivative instruments is in a net liability position by discounting our derivative liabilities to reflect the potential credit risk to our counterparty through applying a current market indicative credit spread to all cash flows.
The fair values of our derivative instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
Asset Derivatives
|
|
Balance Sheet Location
|
|
June 30, 2017
|
|
December 31, 2016
|
Derivatives designated as hedging instruments under ASC 815-20
|
|
(in thousands)
|
Interest rate cap contracts
|
|
Other current assets
|
|
$
|
5
|
|
|
$
|
3
|
|
Interest rate swap contracts
|
|
Other long-term assets
|
|
1,219
|
|
|
1,830
|
|
Interest rate cap contracts
|
|
Other long-term assets
|
|
173
|
|
|
376
|
|
Derivatives not designated as hedging instruments under ASC 815-20
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
62
|
|
|
169
|
|
Interest rate cap contracts
|
|
Other current assets
|
|
7
|
|
|
4
|
|
Interest rate cap contracts
|
|
Other long-term assets
|
|
259
|
|
|
563
|
|
Total asset derivatives
|
|
|
|
$
|
1,725
|
|
|
$
|
2,945
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
Derivatives designated as hedging instruments under ASC 815-20
|
|
|
|
|
Interest rate swap contracts
|
|
Other current liabilities
|
|
$
|
114
|
|
|
$
|
934
|
|
Derivatives not designated as hedging instruments under ASC 815-20
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current liabilities
|
|
382
|
|
|
449
|
|
Total liability derivatives
|
|
|
|
$
|
496
|
|
|
$
|
1,383
|
|
The changes in accumulated other comprehensive income (loss) (AOCI), net of tax, for our derivative and nonderivative hedging instruments, were as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
(in thousands)
|
Net unrealized loss on hedging instruments at January 1,
|
$
|
(14,337
|
)
|
|
$
|
(14,062
|
)
|
Unrealized loss on hedging instruments
|
(330
|
)
|
|
(4,080
|
)
|
Realized losses reclassified into net income
|
391
|
|
|
348
|
|
Net unrealized loss on hedging instruments at June 30,
|
$
|
(14,276
|
)
|
|
$
|
(17,794
|
)
|
Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations for the periods ended
June 30, 2017
and
2016
. Included in the net unrealized loss on hedging instruments at
June 30, 2017
and
2016
is a loss of
$14.4 million
, net of tax, related to our nonderivative net investment hedge, which terminated in 2011. This loss on our net investment hedge will remain in AOCI until such time when earnings are impacted by a sale or liquidation of the associated foreign operation.
A summary of the effect of netting arrangements on our financial position related to the offsetting of our recognized derivative assets and liabilities under master netting arrangements or similar agreements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Assets
|
Gross Amounts of Recognized Assets Presented in
the Consolidated
Balance Sheets
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
|
Derivative Financial Instruments
|
|
Cash Collateral Received
|
|
Net Amount
|
|
(in thousands)
|
June 30, 2017
|
$
|
1,725
|
|
|
$
|
(302
|
)
|
|
$
|
—
|
|
|
$
|
1,423
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
$
|
2,945
|
|
|
$
|
(1,322
|
)
|
|
$
|
—
|
|
|
$
|
1,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Liabilities
|
Gross Amounts of Recognized Liabilities Presented in the Consolidated Balance Sheets
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
|
Derivative Financial Instruments
|
|
Cash Collateral Pledged
|
|
Net Amount
|
|
(in thousands)
|
June 30, 2017
|
$
|
496
|
|
|
$
|
(302
|
)
|
|
$
|
—
|
|
|
$
|
194
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
$
|
1,383
|
|
|
$
|
(1,322
|
)
|
|
$
|
—
|
|
|
$
|
61
|
|
Our derivative assets and liabilities subject to netting arrangements consist of foreign exchange forward and interest rate contracts with
three
counterparties at
June 30, 2017
and
December 31, 2016
. No derivative asset or liability balance with any of our counterparties was individually significant at
June 30, 2017
or
December 31, 2016
. Our derivative contracts with each of these counterparties exist under agreements that provide for the net settlement of all contracts through a single payment in a single currency in the event of default. We have no pledges of cash collateral against our obligations nor have we received pledges of cash collateral from our counterparties under the associated derivative contracts.
Cash Flow Hedges
As a result of our floating rate debt, we are exposed to variability in our cash flows from changes in the applicable interest rate index. We enter into swaps to achieve a fixed rate of interest on a portion of our debt in order to increase our ability to forecast interest expense. The objective of these swaps is to reduce the variability of cash flows from increases in the LIBOR based borrowing rates on our floating rate credit facility. The swaps do not protect us from changes to the applicable margin under our credit facility.
In May 2012, we entered into
six
interest rate swaps, which were effective July 31, 2013 and expired on August 8, 2016, to convert
$200 million
of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of
1.00%
(excluding the applicable margin on the debt). The cash flow hedges were expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swaps were
recognized as a component of other comprehensive income (loss) (OCI) and recognized in earnings when the hedged item affected earnings. The amounts paid on the hedges were recognized as adjustments to interest expense.
In October 2015, we entered into an interest rate swap, which is effective from August 31, 2016 to June 23, 2020, and converts
$214 million
of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of
1.42%
(excluding the applicable margin on the debt). The notional balance will amortize to maturity at the same rate as required minimum payments on our term loan. The cash flow hedge is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swap is recognized as a component of OCI and will be recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedge will be recognized as an adjustment to interest expense. The amount of net losses expected to be reclassified into earnings in the next 12 months is
$0.1 million
. At
June 30, 2017
, our LIBOR-based debt balance was
$262.5 million
.
In November 2015, we entered into three interest rate cap contracts with a total notional amount of
$100 million
at a cost of
$1.7 million
. The interest rate cap contracts expire on June 23, 2020 and were entered into in order to limit our interest rate exposure on
$100 million
of our variable LIBOR based debt up to
2.00%
. In the event LIBOR is higher than
2.00%
, we will pay interest at the capped rate of
2.00%
with respect to the
$100 million
notional amount of such agreements. The interest rate cap contracts do not include the effect of the applicable margin. As of December 31, 2016, due to the accelerated revolver payments from surplus cash, we elected to de-designate two of the interest rate cap contracts as cash flow hedges and discontinued the use of cash flow hedge accounting. The amounts recognized in AOCI from de-designated interest rate cap contracts will continue to be reported in AOCI unless it is not probable that the forecasted transactions will occur. As a result of the discontinuance of cash flow hedge accounting, all subsequent changes in fair value of the de-designated derivative instruments are recognized within interest expense instead of OCI. The amount of net losses expected to be reclassified into earnings for all interest rate cap contracts in the next 12 months is
$0.3 million
.
The before-tax effects of our derivative instruments designated as hedges on the Consolidated Balance Sheets and the Consolidated Statements of Operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815-20
Cash Flow
Hedging Relationships
|
|
Amount of Gain (Loss)
Recognized in OCI on
Derivative (Effective
Portion)
|
|
Gain (Loss) Reclassified from Accumulated
OCI into Income (Effective Portion)
|
|
Gain (Loss) Recognized in Income on
Derivative (Ineffective Portion)
|
Location
|
|
Amount
|
|
Location
|
|
Amount
|
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
(517
|
)
|
|
$
|
(1,771
|
)
|
|
Interest expense
|
|
$
|
(210
|
)
|
|
$
|
(280
|
)
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate cap contracts
|
|
(117
|
)
|
|
(357
|
)
|
|
Interest expense
|
|
(50
|
)
|
|
—
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
(336
|
)
|
|
$
|
(5,551
|
)
|
|
Interest expense
|
|
$
|
(545
|
)
|
|
$
|
(566
|
)
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate cap contracts
|
|
(201
|
)
|
|
(1,090
|
)
|
|
Interest expense
|
|
(93
|
)
|
|
—
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
Derivatives Not Designated as Hedging Relationships
We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recognized to other income and expense. We enter into monthly foreign exchange forward contracts, which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with currency exposures. As of
June 30, 2017
, a total of
53
contracts were offsetting our exposures from the
euro, Saudi Riyal, Indian Rupee, Chinese Yuan, Indonesian Rupiah, and various other currencies
, with notional amounts ranging from
$118,000
to
$45.5 million
.
The effect of our derivative instruments not designated as hedges on the Consolidated Statements of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instrument under ASC 815-20
|
|
Location
|
|
Gain (Loss) Recognized on Derivatives in Other Income (Expense)
|
|
|
|
|
2017
|
|
2016
|
Three Months Ended June 30,
|
|
|
|
(in thousands)
|
Foreign exchange forward contracts
|
|
Other income (expense), net
|
|
$
|
(2,063
|
)
|
|
$
|
856
|
|
Interest rate cap contracts
|
|
Interest expense
|
|
(175
|
)
|
|
—
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other income (expense), net
|
|
$
|
(3,805
|
)
|
|
$
|
1
|
|
Interest rate cap contracts
|
|
Interest expense
|
|
(301
|
)
|
|
—
|
|
Note 8: Defined Benefit Pension Plans
We sponsor both funded and unfunded defined benefit pension plans offering death and disability, retirement, and special termination benefits for our international employees, primarily in Germany, France, Italy, Indonesia, Brazil, and Spain. The defined benefit obligation is calculated annually by using the projected unit credit method. The measurement date for the pension plans was
December 31, 2016
.
Amounts recognized on the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Assets
|
|
|
|
Plan assets in other long-term assets
|
$
|
702
|
|
|
$
|
654
|
|
|
|
|
|
Liabilities
|
|
|
|
Current portion of pension benefit obligation in wages and benefits payable
|
3,340
|
|
|
3,202
|
|
Long-term portion of pension benefit obligation
|
93,263
|
|
|
84,498
|
|
|
|
|
|
Pension benefit obligation, net
|
$
|
95,901
|
|
|
$
|
87,046
|
|
Our asset investment strategy focuses on maintaining a portfolio using primarily insurance funds, which are accounted for as investments and measured at fair value, in order to achieve our long-term investment objectives on a risk adjusted basis. Our general funding policy for these qualified pension plans is to contribute amounts sufficient to satisfy regulatory funding standards of the respective countries for each plan.
Net periodic pension benefit costs for our plans include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Service cost
|
$
|
924
|
|
|
$
|
941
|
|
|
$
|
1,852
|
|
|
$
|
1,927
|
|
Interest cost
|
535
|
|
|
650
|
|
|
1,060
|
|
|
1,283
|
|
Expected return on plan assets
|
(147
|
)
|
|
(133
|
)
|
|
(293
|
)
|
|
(259
|
)
|
Settlements and other
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(7
|
)
|
Amortization of actuarial net loss
|
403
|
|
|
334
|
|
|
794
|
|
|
661
|
|
Amortization of unrecognized prior service costs
|
15
|
|
|
16
|
|
|
30
|
|
|
31
|
|
Net periodic benefit cost
|
$
|
1,730
|
|
|
$
|
1,804
|
|
|
$
|
3,443
|
|
|
$
|
3,636
|
|
Note 9: Stock-Based Compensation
We maintain the Second Amended and Restated 2010 Stock Incentive Plan (Stock Incentive Plan), which allows us to grant equity-based compensation awards, including stock options, restricted stock units, phantom stock, and unrestricted stock units. Under
the Stock Incentive Plan, we have
10,473,956
shares of common stock reserved and authorized for issuance subject to stock splits, dividends, and other similar events. At
June 30, 2017
,
4,647,815
shares were available for grant under the Stock Incentive Plan. We issue new shares of common stock upon the exercise of stock options or when vesting conditions on restricted stock units are fully satisfied. These shares are subject to a fungible share provision such that the authorized share reserve is reduced by (i)
one
share for every one share subject to a stock option or share appreciation right granted under the Plan and (ii)
1.7
shares for every one share of common stock that was subject to an award other than an option or share appreciation right.
We also periodically award phantom stock units, which are settled in cash upon vesting and accounted for as liability-based awards with no impact to the shares available for grant.
In addition, we maintain the Employee Stock Purchase Plan (ESPP), for which approximately
355,000
shares of common stock were available for future issuance at June 30, 2017.
Unrestricted stock and ESPP activity for the
three and six
months ended June 30, 2017 and 2016 was not significant.
Stock-Based Compensation Expense
Total stock-based compensation expense and the related tax benefit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Stock options
|
$
|
598
|
|
|
$
|
585
|
|
|
$
|
1,257
|
|
|
$
|
1,139
|
|
Restricted stock units
|
4,071
|
|
|
3,143
|
|
|
8,368
|
|
|
6,239
|
|
Unrestricted stock awards
|
255
|
|
|
250
|
|
|
510
|
|
|
500
|
|
Phantom stock units
|
492
|
|
|
211
|
|
|
884
|
|
|
287
|
|
Total stock-based compensation
|
$
|
5,416
|
|
|
$
|
4,189
|
|
|
$
|
11,019
|
|
|
$
|
8,165
|
|
|
|
|
|
|
|
|
|
Related tax benefit
|
$
|
1,100
|
|
|
$
|
1,296
|
|
|
$
|
2,328
|
|
|
$
|
2,504
|
|
Stock Options
A summary of our stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average Exercise
Price per Share
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
|
|
Weighted
Average Grant
Date Fair Value
|
|
(in thousands)
|
|
|
|
(years)
|
|
(in thousands)
|
|
|
Outstanding, January 1, 2016
|
1,180
|
|
|
$
|
48.31
|
|
|
5.7
|
|
$
|
405
|
|
|
|
Granted
|
185
|
|
|
40.04
|
|
|
|
|
|
|
$
|
13.15
|
|
Exercised
|
(34
|
)
|
|
35.29
|
|
|
|
|
195
|
|
|
|
Forfeited
|
(36
|
)
|
|
35.29
|
|
|
|
|
|
|
|
Expired
|
(147
|
)
|
|
62.50
|
|
|
|
|
|
|
|
Outstanding, June 30, 2016
|
1,148
|
|
|
$
|
45.95
|
|
|
6.0
|
|
$
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2017
|
959
|
|
|
$
|
45.64
|
|
|
6.6
|
|
$
|
19,125
|
|
|
|
Granted
|
132
|
|
|
65.80
|
|
|
|
|
|
|
$
|
21.99
|
|
Exercised
|
(34
|
)
|
|
37.58
|
|
|
|
|
933
|
|
|
|
Forfeited
|
(35
|
)
|
|
47.38
|
|
|
|
|
|
|
|
Expired
|
(47
|
)
|
|
67.43
|
|
|
|
|
|
|
|
Outstanding, June 30, 2017
|
975
|
|
|
$
|
47.54
|
|
|
6.7
|
|
$
|
21,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable June 30, 2017
|
632
|
|
|
$
|
47.38
|
|
|
5.5
|
|
$
|
14,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest, June 30, 2017
|
343
|
|
|
$
|
47.85
|
|
|
8.8
|
|
$
|
6,834
|
|
|
|
At
June 30, 2017
, total unrecognized stock-based compensation expense related to nonvested stock options was
$4.2 million
, which is expected to be recognized over a weighted average period of approximately
1.8 years
.
The weighted-average assumptions used to estimate the fair value of stock options granted and the resulting weighted average fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Expected volatility
|
30.8
|
%
|
|
—
|
%
|
|
32.6
|
%
|
|
33.5
|
%
|
Risk-free interest rate
|
1.8
|
%
|
|
—
|
%
|
|
2.0
|
%
|
|
1.3
|
%
|
Expected term (years)
|
5.5
|
|
|
—
|
|
|
5.5
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
Weighted average fair value
|
$
|
21.71
|
|
|
$
|
—
|
|
|
$
|
21.99
|
|
|
$
|
13.15
|
|
Restricted Stock Units
The following table summarizes restricted stock unit activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Stock Units
|
|
Weighted
Average Grant
Date Fair Value
|
|
Aggregate
Intrinsic Value
|
|
(in thousands)
|
|
|
|
(in thousands)
|
Outstanding, January 1, 2016
|
756
|
|
|
|
|
|
Granted
|
172
|
|
|
$
|
40.02
|
|
|
|
Released
|
(270
|
)
|
|
|
|
$
|
10,429
|
|
Forfeited
|
(42
|
)
|
|
|
|
|
Outstanding, June 30, 2016
|
616
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2017
|
701
|
|
|
$
|
38.04
|
|
|
|
Granted
|
140
|
|
|
65.48
|
|
|
|
Released
|
(328
|
)
|
|
38.26
|
|
|
$
|
12,533
|
|
Forfeited
|
(19
|
)
|
|
43.60
|
|
|
|
Outstanding, June 30, 2017
|
494
|
|
|
45.58
|
|
|
|
|
|
|
|
|
|
Vested but not released, June 30, 2017
|
7
|
|
|
|
|
$
|
447
|
|
|
|
|
|
|
|
Expected to vest, June 30, 2017
|
403
|
|
|
|
|
$
|
27,332
|
|
At
June 30, 2017
, total unrecognized compensation expense on restricted stock units was
$30.2 million
, which is expected to be recognized over a weighted average period of approximately
1.9 years
.
The weighted-average assumptions used to estimate the fair value of performance-based restricted stock units granted and the resulting weighted average fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Expected volatility
|
28.0
|
%
|
|
—
|
%
|
|
28.0
|
%
|
|
30.0
|
%
|
Risk-free interest rate
|
1.4
|
%
|
|
—
|
%
|
|
1.1
|
%
|
|
0.7
|
%
|
Expected term (years)
|
2.5
|
|
|
—
|
|
|
1.7
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
Weighted average fair value
|
$
|
75.58
|
|
|
$
|
—
|
|
|
$
|
77.65
|
|
|
$
|
44.77
|
|
Phantom Stock Units
The following table summarizes phantom stock unit activity:
|
|
|
|
|
|
|
|
|
Number of Phantom Stock Units
|
|
Weighted
Average Grant
Date Fair Value
|
|
(in thousands)
|
|
|
Outstanding, January 1, 2016
|
—
|
|
|
|
Granted
|
63
|
|
|
$
|
40.11
|
|
Forfeited
|
(1
|
)
|
|
|
Outstanding, June 30, 2016
|
62
|
|
|
|
|
|
|
|
Expected to vest, June 30, 2016
|
55
|
|
|
|
|
|
|
|
Outstanding, January 1, 2017
|
62
|
|
|
$
|
40.11
|
|
Granted
|
32
|
|
|
65.55
|
|
Released
|
(20
|
)
|
|
40.11
|
|
Forfeited
|
(6
|
)
|
|
40.05
|
|
Outstanding, June 30, 2017
|
68
|
|
|
52.18
|
|
|
|
|
|
Expected to vest, June 30, 2017
|
68
|
|
|
|
|
At
June 30, 2017
, total unrecognized compensation expense on phantom stock units was
$3.9 million
, which is expected to be recognized over a weighted average period of approximately
2.0 years
. As of
June 30, 2017
and
December 31, 2016
, we have recognized a phantom stock liability of
$0.7 million
and
$1.0 million
, respectively, within wages and benefits payable in the Consolidated Balance Sheets.
Note 10: Income Taxes
Our tax provision as a percentage of income before tax typically differs from the federal statutory rate of
35%
, and may vary from period to period, due to fluctuations in the forecast mix of earnings in domestic and international jurisdictions, new or revised tax legislation and accounting pronouncements, tax credits, state income taxes, adjustments to valuation allowances, and uncertain tax positions, among other items.
Excess tax benefits and tax deficiencies resulting from employee share-based payments have been recognized as income tax provision or benefit in the 2017 Consolidated Statement of Operations pursuant to the adoption of ASU 2016-09 (see Note 1).
Our tax expense for the
three and six
months ended
June 30, 2017
differed from the federal statutory rate of
35%
due to the forecasted mix of earnings in domestic and international jurisdictions, a benefit related to excess tax benefits under ASU 2016-09, and losses experienced in jurisdictions with valuation allowances on deferred tax assets.
Our tax expense for the
three and six
months ended
June 30, 2016
differed from the federal statutory rate of
35%
due to the forecasted mix of earnings in domestic and international jurisdictions and losses experienced in jurisdictions with valuation allowances on deferred tax assets.
We classify interest expense and penalties related to unrecognized tax liabilities and interest income on tax overpayments as components of income tax expense. The net interest and penalties expense recognized were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Net interest and penalties expense
|
$
|
207
|
|
|
$
|
233
|
|
|
$
|
413
|
|
|
$
|
332
|
|
Accrued interest and penalties recognized were as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Accrued interest
|
$
|
3,435
|
|
|
$
|
2,473
|
|
Accrued penalties
|
2,509
|
|
|
2,329
|
|
Unrecognized tax benefits related to uncertain tax positions and the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate were as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Unrecognized tax benefits related to uncertain tax positions
|
$
|
64,396
|
|
|
$
|
57,626
|
|
The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate
|
63,067
|
|
|
56,411
|
|
At
June 30, 2017
, we are under examination by certain tax authorities for the
2000
to
2015
tax years. The material jurisdictions where we are subject to examination include, among others, the United States, France, Germany, Italy, Brazil and the United Kingdom. No material changes have occurred to previously disclosed assessments. We believe we have appropriately accrued for the expected outcome of all tax matters and do not currently anticipate that the ultimate resolution of these examinations will have a material adverse effect on our financial condition, future results of operations, or liquidity.
Based upon the timing and outcome of examinations, litigation, the impact of legislative, regulatory, and judicial developments, and the impact of these items on the statute of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those recognized within the next twelve months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.
Note 11: Commitments and Contingencies
Guarantees and Indemnifications
We are often required to obtain standby letters of credit (LOCs) or bonds in support of our obligations for customer contracts. These standby LOCs or bonds typically provide a guarantee to the customer for future performance, which usually covers the installation phase of a contract and may, on occasion, cover the operations and maintenance phase of outsourcing contracts.
Our available lines of credit, outstanding standby LOCs, and performance bonds were as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Credit facilities
|
|
|
|
Multicurrency revolving line of credit
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Long-term borrowings
|
(122,497
|
)
|
|
(97,167
|
)
|
Standby LOCs issued and outstanding
|
(28,723
|
)
|
|
(46,103
|
)
|
|
|
|
|
Net available for additional borrowings under the multi-currency revolving line of credit
|
$
|
348,780
|
|
|
$
|
356,730
|
|
Net available for additional standby LOCs under sub-facility
|
221,277
|
|
|
203,897
|
|
|
|
|
|
Unsecured multicurrency revolving lines of credit with various financial institutions
|
|
|
|
Multicurrency revolving lines of credit
|
$
|
106,113
|
|
|
$
|
91,809
|
|
Standby LOCs issued and outstanding
|
(22,838
|
)
|
|
(21,734
|
)
|
Short-term borrowings
|
(1,094
|
)
|
|
(69
|
)
|
Net available for additional borrowings and LOCs
|
$
|
82,181
|
|
|
$
|
70,006
|
|
|
|
|
|
Unsecured surety bonds in force
|
$
|
48,879
|
|
|
$
|
48,221
|
|
In the event any such standby LOC or bond is called, we would be obligated to reimburse the issuer of the standby LOC or bond; however, we do not believe that any outstanding LOC or bond will be called.
We generally provide an indemnification related to the infringement of any patent, copyright, trademark, or other intellectual property right on software or equipment within our sales contracts, which indemnifies the customer from and pays the resulting costs, damages, and attorney’s fees awarded against a customer with respect to such a claim provided that: 1) the customer promptly notifies us in writing of the claim and 2) we have the sole control of the defense and all related settlement negotiations. We may also provide an indemnification to our customers for third party claims resulting from damages caused by the negligence or willful misconduct of our employees/agents in connection with the performance of certain contracts. The terms of our indemnifications generally do not limit the maximum potential payments. It is not possible to predict the maximum potential amount of future payments under these or similar agreements.
Legal Matters
We are subject to various legal proceedings and claims of which the outcomes are subject to significant uncertainty. Our policy is to assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required, if any, for these contingencies is made after an analysis of each known issue. A liability is recognized and charged to operating expense when we determine that a loss is probable and the amount can be reasonably estimated. Additionally, we disclose contingencies for which a material loss is reasonably possible, but not probable.
Warranty
A summary of the warranty accrual account activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Beginning balance
|
$
|
41,536
|
|
|
$
|
50,742
|
|
|
$
|
43,302
|
|
|
$
|
54,512
|
|
New product warranties
|
1,568
|
|
|
1,501
|
|
|
3,929
|
|
|
3,905
|
|
Other adjustments and expirations
|
219
|
|
|
1,001
|
|
|
1,901
|
|
|
2,035
|
|
Claims activity
|
(4,248
|
)
|
|
(7,613
|
)
|
|
(10,599
|
)
|
|
(15,003
|
)
|
Effect of change in exchange rates
|
735
|
|
|
(174
|
)
|
|
1,277
|
|
|
8
|
|
Ending balance
|
39,810
|
|
|
45,457
|
|
|
39,810
|
|
|
45,457
|
|
Less: current portion of warranty
|
25,584
|
|
|
26,825
|
|
|
25,584
|
|
|
26,825
|
|
Long-term warranty
|
$
|
14,226
|
|
|
$
|
18,632
|
|
|
$
|
14,226
|
|
|
$
|
18,632
|
|
Total warranty expense is classified within cost of revenues and consists of new product warranties issued, costs related to extended warranty contracts, insurance recoveries, and other changes and adjustments to warranties. Warranty expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Total warranty expense
|
$
|
(6,213
|
)
|
|
$
|
2,502
|
|
|
$
|
(2,170
|
)
|
|
$
|
5,940
|
|
Warranty expense decreased during the three and six months ended June 30, 2017 compared with the same periods in 2016 primarily due to an insurance recovery in our Water segment of
$8.0 million
. This recovery is associated with warranty costs previously recognized as a result of our 2015 product replacement notification to customers who had purchased certain communication modules.
Unearned Revenue Related to Extended Warranty
A summary of changes to unearned revenue for extended warranty contracts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Beginning balance
|
$
|
30,898
|
|
|
$
|
33,498
|
|
|
$
|
31,549
|
|
|
$
|
33,654
|
|
Unearned revenue for new extended warranties
|
382
|
|
|
433
|
|
|
704
|
|
|
1,014
|
|
Unearned revenue recognized
|
(1,062
|
)
|
|
(878
|
)
|
|
(2,067
|
)
|
|
(1,735
|
)
|
Effect of change in exchange rates
|
53
|
|
|
15
|
|
|
85
|
|
|
135
|
|
Ending balance
|
30,271
|
|
|
33,068
|
|
|
30,271
|
|
|
33,068
|
|
Less: current portion of unearned revenue for extended warranty
|
4,325
|
|
|
3,951
|
|
|
4,325
|
|
|
3,951
|
|
Long-term unearned revenue for extended warranty within other long-term obligations
|
$
|
25,946
|
|
|
$
|
29,117
|
|
|
$
|
25,946
|
|
|
$
|
29,117
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Plan costs
|
$
|
6,742
|
|
|
$
|
6,859
|
|
|
$
|
15,496
|
|
|
$
|
13,633
|
|
The IBNR accrual, which is included in wages and benefits payable, was as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
IBNR accrual
|
$
|
2,650
|
|
|
$
|
2,441
|
|
Our IBNR accrual and expenses may fluctuate due to the number of plan participants, claims activity, and deductible limits. For our employees located outside of the United States, health benefits are provided primarily through governmental social plans, which are funded through employee and employer tax withholdings.
Note 12: Restructuring
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
six
months ended
June 30, 2017
, and the remaining expected restructuring costs as of
June 30, 2017
related to the 2016 Projects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expected Costs at June 30, 2017
|
|
Costs Recognized in Prior Periods
|
|
Costs Recognized During the Six Months Ended June 30, 2017
|
|
Expected Remaining Costs to be Recognized at June 30, 2017
|
|
(in thousands)
|
Employee severance costs
|
$
|
45,193
|
|
|
$
|
39,686
|
|
|
$
|
5,507
|
|
|
$
|
—
|
|
Asset impairments & net loss on sale or disposal
|
7,299
|
|
|
7,219
|
|
|
80
|
|
|
—
|
|
Other restructuring costs
|
15,397
|
|
|
889
|
|
|
2,508
|
|
|
12,000
|
|
Total
|
$
|
67,889
|
|
|
$
|
47,794
|
|
|
$
|
8,095
|
|
|
$
|
12,000
|
|
|
|
|
|
|
|
|
|
Segments:
|
|
|
|
|
|
|
|
Electricity
|
$
|
11,157
|
|
|
$
|
8,827
|
|
|
$
|
330
|
|
|
$
|
2,000
|
|
Gas
|
32,891
|
|
|
23,968
|
|
|
5,423
|
|
|
3,500
|
|
Water
|
21,074
|
|
|
13,061
|
|
|
2,013
|
|
|
6,000
|
|
Corporate unallocated
|
2,767
|
|
|
1,938
|
|
|
329
|
|
|
500
|
|
Total
|
$
|
67,889
|
|
|
$
|
47,794
|
|
|
$
|
8,095
|
|
|
$
|
12,000
|
|
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.
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 2014 Projects resulted in
$48.5 million
of restructuring expense, which was recognized from the fourth quarter of 2014 through the third quarter of 2016.
The following table summarizes the activity within the restructuring related balance sheet accounts for the 2016 and 2014 Projects during the
six
months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Employee Severance
|
|
Asset Impairments & Net Loss on Sale or Disposal
|
|
Other
Accrued Costs
|
|
Total
|
|
(in thousands)
|
Beginning balance, January 1, 2017
|
$
|
45,368
|
|
|
$
|
—
|
|
|
$
|
2,602
|
|
|
$
|
47,970
|
|
Costs charged to expense
|
5,507
|
|
|
80
|
|
|
2,508
|
|
|
8,095
|
|
Cash payments
|
(7,275
|
)
|
|
—
|
|
|
(2,330
|
)
|
|
(9,605
|
)
|
Non-cash items
|
—
|
|
|
(80
|
)
|
|
—
|
|
|
(80
|
)
|
Effect of change in exchange rates
|
2,963
|
|
|
—
|
|
|
4
|
|
|
2,967
|
|
Ending balance, June 30, 2017
|
$
|
46,563
|
|
|
$
|
—
|
|
|
$
|
2,784
|
|
|
$
|
49,347
|
|
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
$35.7 million
and
$26.2 million
as of
June 30, 2017
and
December 31, 2016
. The current restructuring liabilities are classified within other current liabilities on the Consolidated Balance Sheets. The long-term restructuring liabilities balances were
$13.6 million
and
$21.8 million
as of
June 30, 2017
and
December 31, 2016
. 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 13: Shareholders' Equity
Preferred Stock
We have authorized the issuance of
10 million
shares of preferred stock with no par value. In the event of a liquidation, dissolution, or winding up of the affairs of the corporation, whether voluntary or involuntary, the holders of any outstanding preferred stock would be entitled to be paid a preferential amount per share to be determined by the Board of Directors prior to any payment to holders of common stock. There was no preferred stock issued or outstanding at
June 30, 2017
and
December 31, 2016
.
Stock Repurchase Authorization
On February 23, 2017, Itron's Board of Directors authorized the Company to repurchase up to
$50 million
of our common stock over a 12-month period, beginning February 23, 2017. We did not repurchase any shares of common stock during the three and six months ended
June 30, 2017
.
Other Comprehensive Income (Loss)
The before-tax amount, income tax (provision) benefit, and net-of-tax amount related to each component of OCI were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Before-tax amount
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
$
|
20,520
|
|
|
$
|
(6,730
|
)
|
|
$
|
35,586
|
|
|
$
|
3,728
|
|
Foreign currency translation adjustment reclassified into net income
|
—
|
|
|
(1,407
|
)
|
|
—
|
|
|
(1,407
|
)
|
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
|
(634
|
)
|
|
(2,128
|
)
|
|
(537
|
)
|
|
(6,641
|
)
|
Net hedging loss reclassified into net income
|
259
|
|
|
280
|
|
|
637
|
|
|
566
|
|
Net defined benefit plan gain (loss) reclassified to net income
|
418
|
|
|
(340
|
)
|
|
824
|
|
|
(795
|
)
|
Total other comprehensive income (loss), before tax
|
20,563
|
|
|
(10,325
|
)
|
|
36,510
|
|
|
(4,549
|
)
|
|
|
|
|
|
|
|
|
Tax (provision) benefit
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
(73
|
)
|
|
(243
|
)
|
|
(123
|
)
|
|
(595
|
)
|
Foreign currency translation adjustment reclassified into net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
|
244
|
|
|
830
|
|
|
207
|
|
|
2,561
|
|
Net hedging loss reclassified into net income
|
(100
|
)
|
|
(108
|
)
|
|
(246
|
)
|
|
(218
|
)
|
Net defined benefit plan gain (loss) reclassified to net income
|
(225
|
)
|
|
49
|
|
|
(230
|
)
|
|
186
|
|
Total other comprehensive income (loss) tax benefit
|
(154
|
)
|
|
528
|
|
|
(392
|
)
|
|
1,934
|
|
|
|
|
|
|
|
|
|
Net-of-tax amount
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
20,447
|
|
|
(6,973
|
)
|
|
35,463
|
|
|
3,133
|
|
Foreign currency translation adjustment reclassified into net income
|
—
|
|
|
(1,407
|
)
|
|
—
|
|
|
(1,407
|
)
|
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
|
(390
|
)
|
|
(1,298
|
)
|
|
(330
|
)
|
|
(4,080
|
)
|
Net hedging loss reclassified into net income
|
159
|
|
|
172
|
|
|
391
|
|
|
348
|
|
Net defined benefit plan gain (loss) reclassified to net income
|
193
|
|
|
(291
|
)
|
|
594
|
|
|
(609
|
)
|
Total other comprehensive income (loss), net of tax
|
$
|
20,409
|
|
|
$
|
(9,797
|
)
|
|
$
|
36,118
|
|
|
$
|
(2,615
|
)
|
The changes in the components of AOCI, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Net Unrealized Gain (Loss) on Derivative Instruments
|
|
Net Unrealized Gain (Loss) on Nonderivative Instruments
|
|
Pension Benefit Obligation Adjustments
|
|
Total
|
|
(in thousands)
|
Balances at January 1, 2016
|
$
|
(158,009
|
)
|
|
$
|
318
|
|
|
$
|
(14,380
|
)
|
|
$
|
(28,536
|
)
|
|
$
|
(200,607
|
)
|
OCI before reclassifications
|
3,133
|
|
|
(4,080
|
)
|
|
—
|
|
|
(87
|
)
|
|
(1,034
|
)
|
Amounts reclassified from AOCI
|
(1,407
|
)
|
|
348
|
|
|
—
|
|
|
(522
|
)
|
|
(1,581
|
)
|
Total other comprehensive income (loss)
|
1,726
|
|
|
(3,732
|
)
|
|
—
|
|
|
(609
|
)
|
|
(2,615
|
)
|
Balances at June 30, 2016
|
$
|
(156,283
|
)
|
|
$
|
(3,414
|
)
|
|
$
|
(14,380
|
)
|
|
$
|
(29,145
|
)
|
|
$
|
(203,222
|
)
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2017
|
$
|
(182,986
|
)
|
|
$
|
43
|
|
|
$
|
(14,380
|
)
|
|
$
|
(32,004
|
)
|
|
$
|
(229,327
|
)
|
OCI before reclassifications
|
35,463
|
|
|
(330
|
)
|
|
—
|
|
|
—
|
|
|
35,133
|
|
Amounts reclassified from AOCI
|
—
|
|
|
391
|
|
|
—
|
|
|
594
|
|
|
985
|
|
Total other comprehensive income (loss)
|
35,463
|
|
|
61
|
|
|
—
|
|
|
594
|
|
|
36,118
|
|
Balances at June 30, 2017
|
$
|
(147,523
|
)
|
|
$
|
104
|
|
|
$
|
(14,380
|
)
|
|
$
|
(31,410
|
)
|
|
$
|
(193,209
|
)
|
Note 14: Fair Values of Financial Instruments
The following table presents the fair values of our financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
127,880
|
|
|
$
|
127,880
|
|
|
$
|
133,565
|
|
|
$
|
133,565
|
|
Foreign exchange forwards
|
62
|
|
|
62
|
|
|
169
|
|
|
169
|
|
Interest rate swaps
|
1,219
|
|
|
1,219
|
|
|
1,830
|
|
|
1,830
|
|
Interest rate caps
|
444
|
|
|
444
|
|
|
946
|
|
|
946
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Credit facility
|
|
|
|
|
|
|
|
USD denominated term loan
|
$
|
202,500
|
|
|
$
|
200,309
|
|
|
$
|
208,125
|
|
|
$
|
205,676
|
|
Multicurrency revolving line of credit
|
122,497
|
|
|
120,688
|
|
|
97,167
|
|
|
95,906
|
|
Interest rate swaps
|
114
|
|
|
114
|
|
|
934
|
|
|
934
|
|
Foreign exchange forwards
|
382
|
|
|
382
|
|
|
449
|
|
|
449
|
|
The following methods and assumptions were used in estimating fair values:
Cash and cash equivalents:
Due to the liquid nature of these instruments, the carrying amount approximates fair value (Level 1).
Credit facility - term loan and multicurrency revolving line of credit:
The term loan and revolver are not traded publicly. The fair values, which are valued based upon a hypothetical market participant, are calculated using a discounted cash flow model with Level 2 inputs, including estimates of incremental borrowing rates for debt with similar terms, maturities, and credit profiles. Refer to Note 6 for a further discussion of our debt.
Derivatives:
See Note 7 for a description of our methods and assumptions in determining the fair value of our derivatives, which were determined using Level 2 inputs.
The fair values at
June 30, 2017
and
December 31, 2016
do not reflect subsequent changes in the economy, interest rates, tax rates, and other variables that may affect the determination of fair value.
Note 15: Segment Information
We operate under the Itron brand worldwide and manage and report under
three
operating segments: Electricity, Gas, and Water. Our Water operating segment includes both our global water and heat solutions. This structure allows each segment to develop its own go-to-market strategy, prioritize its marketing and product development requirements, and focus on its strategic investments. Our sales, marketing, and delivery functions are managed under each segment. Our product development and manufacturing operations are managed on a worldwide basis to promote a global perspective in our operations and processes and yet still maintain alignment with the segments.
We have three GAAP measures of segment performance: revenue, gross profit (margin), and operating income (margin). Our operating segments have distinct products, and, therefore, intersegment revenues are minimal. Certain operating expenses are allocated to the operating segments based upon internally established allocation methodologies. Corporate operating expenses, interest income, interest expense, other income (expense), and income tax provision are not allocated to the segments, nor included in the measure of segment profit or loss. In addition, we allocate only certain production assets and intangible assets to our operating segments. We do not manage the performance of the segments on a balance sheet basis.
Segment Products
|
|
|
Electricity
|
Standard electricity (electromechanical and electronic) meters; 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Revenues
|
|
|
|
|
|
|
|
Electricity
|
$
|
250,332
|
|
|
$
|
232,823
|
|
|
$
|
489,083
|
|
|
$
|
450,118
|
|
Gas
|
138,700
|
|
|
150,266
|
|
|
262,911
|
|
|
289,522
|
|
Water
|
114,050
|
|
|
129,935
|
|
|
228,680
|
|
|
270,974
|
|
Total Company
|
$
|
503,082
|
|
|
$
|
513,024
|
|
|
$
|
980,674
|
|
|
$
|
1,010,614
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
Electricity
|
$
|
78,595
|
|
|
$
|
70,892
|
|
|
$
|
145,787
|
|
|
$
|
135,478
|
|
Gas
|
50,272
|
|
|
53,483
|
|
|
100,776
|
|
|
102,060
|
|
Water
|
48,993
|
|
|
45,330
|
|
|
88,522
|
|
|
95,370
|
|
Total Company
|
$
|
177,860
|
|
|
$
|
169,705
|
|
|
$
|
335,085
|
|
|
$
|
332,908
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
Electricity
|
$
|
17,653
|
|
|
$
|
20,008
|
|
|
$
|
34,515
|
|
|
$
|
30,640
|
|
Gas
|
16,563
|
|
|
25,376
|
|
|
37,819
|
|
|
41,675
|
|
Water
|
16,686
|
|
|
14,177
|
|
|
25,421
|
|
|
32,253
|
|
Corporate unallocated
|
(14,080
|
)
|
|
(24,088
|
)
|
|
(30,891
|
)
|
|
(45,521
|
)
|
Total Company
|
36,822
|
|
|
35,473
|
|
|
66,864
|
|
|
59,047
|
|
Total other income (expense)
|
(5,255
|
)
|
|
(2,778
|
)
|
|
(10,236
|
)
|
|
(6,942
|
)
|
Income before income taxes
|
$
|
31,567
|
|
|
$
|
32,695
|
|
|
$
|
56,628
|
|
|
$
|
52,105
|
|
For the
three and six
months ended
June 30, 2017
, one customer represented
22%
and
20%
, respectively, of total Electricity segment revenues. For the three months ended
June 30, 2017
, one customer represented 11% of total company revenues. For the six months ended
June 30, 2017
, no single customer represented more than 10% of total company revenues. For the
three and six
months ended
June 30, 2017
,
no
single customer represented more than
10%
of the Gas or Water operating segment revenues.
For the
three and six
months ended
June 30, 2016
, one customer represented 12% and 13%, respectively, of total Electricity segment revenues. For the
three and six
months ended
June 30, 2016
,
no
single customer represented more than
10%
of the Gas or Water operating segment revenues, or total company revenues.
During the
three
months ended
June 30, 2017
, we recognized an insurance recovery in our Water segment associated with warranty costs recognized as a result of our 2015 product replacement notification to customers who had purchased certain communication modules. As a result, gross profit increased
$8.0 million
for the
three and six
months ended
June 30, 2017
. After adjusting for the tax impact, the recovery resulted in an increase of
$0.13
and
$0.12
to basic and diluted earnings per share, respectively, for the
three
months ended
June 30, 2017
, and
$0.13
for both basic and diluted earnings per share for the
six
months ended June 30, 2017.
Revenues by region were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
United States and Canada
|
$
|
295,737
|
|
|
$
|
278,315
|
|
|
$
|
564,834
|
|
|
$
|
540,352
|
|
Europe, Middle East, and Africa
|
158,766
|
|
|
187,848
|
|
|
321,581
|
|
|
383,558
|
|
Other
(1)
|
48,579
|
|
|
46,861
|
|
|
94,259
|
|
|
86,704
|
|
Total revenues
|
$
|
503,082
|
|
|
$
|
513,024
|
|
|
$
|
980,674
|
|
|
$
|
1,010,614
|
|
|
|
(1)
|
The Other region includes our operations in Latin America and Asia Pacific.
|
Depreciation and amortization expense associated with our segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Electricity
|
$
|
5,774
|
|
|
$
|
7,771
|
|
|
$
|
11,085
|
|
|
$
|
15,033
|
|
Gas
|
4,503
|
|
|
4,968
|
|
|
8,747
|
|
|
9,889
|
|
Water
|
3,887
|
|
|
4,636
|
|
|
7,846
|
|
|
9,018
|
|
Corporate unallocated
|
926
|
|
|
1,432
|
|
|
1,790
|
|
|
1,541
|
|
Total Company
|
$
|
15,090
|
|
|
$
|
18,807
|
|
|
$
|
29,468
|
|
|
$
|
35,481
|
|
Note 16: Business Combinations
On June 1, 2017, we completed the acquisition of Comverge, which was financed through borrowings on our multicurrency revolving line of credit and cash on hand. Comverge is a leading provider of integrated demand response, and customer engagement solutions that enable electric utilities to ensure grid reliability, lower energy costs for consumers, meet regulatory demands, and enhance the customer experience. Comverge's technologies are complementary to our Electricity segment's growing software and services offerings, and will help optimize grid performance and reliability.
The preliminary purchase price of Comverge is
$99.5 million
in cash, net of
$18.2 million
of cash and cash equivalents acquired. We have made a preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on estimated fair value assessments. We are continuing to collect information to determine the fair values of intangible assets, working capital, and deferred income taxes, all of which would affect goodwill. The fair values of these assets and liabilities are provisional until we are able to complete our assessment. The following reflects our preliminary allocation of purchase price as of June 1, 2017:
|
|
|
|
|
|
|
|
Fair Value
|
|
Weighted Average Useful Life
|
|
(in thousands)
|
|
(in years)
|
Current assets
|
$
|
15,118
|
|
|
|
Property, plant, and equipment
|
2,275
|
|
|
|
Other long-term assets
|
832
|
|
|
|
|
|
|
|
Identified intangible assets
|
|
|
|
Core-developed technology
|
19,250
|
|
|
8
|
Customer contracts and relationships
|
12,230
|
|
|
10
|
Trademarks and trade names
|
4,310
|
|
|
15
|
Total identified intangible assets subject to amortization
|
35,790
|
|
|
10
|
In-process research and development (IPR&D)
|
710
|
|
|
|
Total identified intangible assets
|
36,500
|
|
|
|
|
|
|
|
Goodwill
|
60,286
|
|
|
|
Current liabilities
|
(10,787
|
)
|
|
|
Long-term liabilities
|
(4,747
|
)
|
|
|
Total net assets acquired
|
$
|
99,477
|
|
|
|
The fair values for the identified core-developed technology, trademarks, and IPR&D intangible assets were estimated using the income approach. Under the income approach, the fair value reflects the present value of the projected cash flows that are expected to be generated. Core-developed technology represents the fair values of Comverge products that have reached technological feasibility and were part of Comverge's product offerings at the date of the acquisition. Customer contracts and relationships represent the fair value of the relationships developed with its customers, including the backlog, and these were valued utilizing the replacement cost method, which measures the value of an asset based on the cost to replace the existing asset. The core-developed technology, trademarks, and IPR&D intangible assets valued using the income approach will be amortized using the estimated discounted cash flows assumed in the valuation models. Customer contracts and relationships will be amortized using the straight-line method.
IPR&D assets acquired represent the fair value of Comverge research and development projects that have not yet reached technological feasibility. These projects are expected to be completed in the next
six
months. Incremental costs to be incurred for these projects, currently estimated at
$0.8 million
, will be recognized as incurred in the product development line item of the Statement of Operations.
Goodwill of
$60.3 million
arising from the acquisition consists largely of the synergies expected from combining the operations of Itron and Comverge, as well as certain intangible assets that do not qualify for separate recognition. All of the goodwill balance was assigned to the Electricity reporting unit and segment. We will not be able to deduct any of the goodwill balance for income tax purposes.
The following table presents the revenues and net income from Comverge's operations that are included in our Consolidated Statements of Operations:
|
|
|
|
|
|
June 1, 2017 - June 30, 2017
|
|
(in thousands)
|
Revenues
|
$
|
4,796
|
|
Net income (loss)
|
(1,786
|
)
|
The following supplemental pro forma results are based on the individual historical results of Itron and Comverge, with adjustments to give effect to the combined operations as if the acquisition had been consummated on January 1, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
( in thousands)
|
Revenues
|
$
|
511,024
|
|
|
$
|
527,754
|
|
|
$
|
1,002,786
|
|
|
$
|
1,038,934
|
|
Net income
|
18,954
|
|
|
19,639
|
|
|
34,061
|
|
|
24,755
|
|
The significant nonrecurring adjustments reflected in the proforma schedule above are not considered material and include the following:
|
|
•
|
Elimination of transaction costs incurred by Comverge and Itron prior to the acquisition completion
|
|
|
•
|
Reclassification of acquisition and integration related expenses incurred after the acquisition to the appropriate periods assuming the acquisition closed on January 1, 2016
|
The supplemental pro forma results are intended for information purposes only and do not purport to represent what the combined companies' results of operations would actually have been had the transaction in fact occurred at an earlier date or project the results for any future date or period.