Company Quick10K Filing
Quick10K
Itron
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$61.01 40 $2,430
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-16 Officers, Exhibits
8-K 2019-06-27 Regulation FD
8-K 2019-05-10 Shareholder Vote
8-K 2019-05-06 Exhibits
8-K 2019-03-18 Other Events
8-K 2019-02-21 Other Events, Exhibits
8-K 2019-01-21 Officers, Regulation FD, Exhibits
8-K 2018-11-05 Exhibits
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-07-02 Officers
8-K 2018-05-15 Shareholder Vote
8-K 2018-05-14 Exhibits
8-K 2018-02-22
8-K 2018-01-19 Off-BS Arrangement
8-K 2018-01-17 Other Events, Exhibits
8-K 2018-01-05 Off-BS Arrangement, Exhibits
8-K 2018-01-03 M&A, Other Events, Exhibits
TBPH Theravance Biopharma 1,230
TCPC Blackrock Tcp Capital 861
MGNX Macrogenics 851
INS Intelligent Systems 399
ALAC Alberton Acquisition 147
HFBC Hopfed Bancorp 130
SNSS Sunesis Pharmaceuticals 95
VLRX Valeritas Holdings 37
MATR Mattersight 0
BLYQ Bally 0
ITRI 2019-03-31
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Note 1: Summary of Significant Accounting Policies
Note 2: Earnings per Share
Note 3: Certain Balance Sheet Components
Note 4: Intangible Assets and Liabilities
Note 5: Goodwill
Note 6: Debt
Note 7: Derivative Financial Instruments
Note 8: Defined Benefit Pension Plans
Note 9: Stock-Based Compensation
Note 10: Income Taxes
Note 11: Commitments and Contingencies
Note 12: Restructuring
Note 13: Shareholders' Equity
Note 14: Fair Values of Financial Instruments
Note 15: Segment Information
Note 16: Revenues
Note 17: Leases
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
Part Ii: Other Information
Item 1: Legal Proceedings
Item 1A: Risk Factors
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Item 5: Other Information
Item 6: Exhibits
EX-31.1 itriex-31103312019.htm
EX-31.2 itriex-31203312019.htm
EX-32.1 itriex-32103312019.htm

Itron Earnings 2019-03-31

ITRI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 itri10q03312019.htm 10-Q Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 000-22418
ITRON, INC.
(Exact name of registrant as specified in its charter)
Washington
 
91-1011792
(State of Incorporation)
 
(I.R.S. Employer Identification Number)
2111 N Molter Road, Liberty Lake, Washington 99019
(509) 924-9900
(Address and telephone number of registrant's principal executive offices) 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
 
Accelerated filer
¨
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
Emerging growth company
¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, no par value
 
ITRI
 
NASDAQ Global Select Market
As of April 30, 2019, there were outstanding 39,349,003 shares of the registrant's common stock, no par value, which is the only class of common stock of the registrant.
 



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



PART I: FINANCIAL INFORMATION
Item 1:    Financial Statements (Unaudited)
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three Months Ended March 31,
In thousands, except per share data
2019
 
2018
Revenues
 
 
 
Product revenues
$
544,850

 
$
537,110

Service revenues
69,726

 
70,111

Total revenues
614,576

 
607,221

Cost of revenues
 
 
 
Product cost of revenues
386,102

 
382,850

Service cost of revenues
41,211

 
44,516

Total cost of revenues
427,313

 
427,366

Gross profit
187,263

 
179,855

 
 
 
 
Operating expenses
 
 
 
Sales, general and administrative
92,715

 
154,414

Research and development
50,490

 
60,284

Amortization of intangible assets
15,973

 
17,740

Restructuring
7,262

 
87,865

Total operating expenses
166,440

 
320,303

 
 
 
 
Operating income (loss)
20,823

 
(140,448
)
Other income (expense)
 
 
 
Interest income
328

 
661

Interest expense
(13,535
)
 
(15,504
)
Other income (expense), net
(1,644
)
 
(1,167
)
Total other income (expense)
(14,851
)
 
(16,010
)
 
 
 
 
Income (loss) before income taxes
5,972

 
(156,458
)
Income tax benefit (provision)
(6,121
)
 
11,188

Net loss
(149
)
 
(145,270
)
Net income attributable to noncontrolling interests
1,758

 
396

Net loss attributable to Itron, Inc.
$
(1,907
)
 
$
(145,666
)
 
 
 
 
Net income (loss) per common share - Basic
$
(0.05
)
 
$
(3.74
)
Net income (loss) per common share - Diluted
$
(0.05
)
 
$
(3.74
)
 
 
 
 
Weighted average common shares outstanding - Basic
39,658

 
38,945

Weighted average common shares outstanding - Diluted
39,658

 
38,945

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

1


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

 
Three Months Ended March 31,
In thousands
2019
 
2018
Net loss
$
(149
)
 
$
(145,270
)
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
(2,386
)
 
16,300

Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges
135

 
1,169

Pension benefit obligation adjustment
471

 
414

Total other comprehensive income (loss), net of tax
(1,780
)
 
17,883

 
 
 
 
Total comprehensive income (loss), net of tax
(1,929
)
 
(127,387
)
 
 
 
 
Comprehensive income attributable to noncontrolling interests, net of tax
1,758

 
396

 
 
 
 
Comprehensive income (loss) attributable to Itron, Inc.
$
(3,687
)
 
$
(127,783
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

2


ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
110,828

 
$
120,221

Accounts receivable, net
473,077

 
437,161

Inventories
221,097

 
220,674

Other current assets
129,975

 
118,085

Total current assets
934,977

 
896,141

 
 
 
 
Property, plant, and equipment, net
224,938

 
226,551

Deferred tax assets, net
63,493

 
64,830

Restricted cash
2,086

 
2,056

Other long-term assets
46,944

 
45,288

Operating lease right-of-use assets, net
77,888

 

Intangible assets, net
239,988

 
257,583

Goodwill
1,106,305

 
1,116,533

Total assets
$
2,696,619

 
$
2,608,982

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
331,441

 
$
309,951

Other current liabilities
70,876

 
70,136

Wages and benefits payable
96,802

 
88,603

Taxes payable
16,585

 
14,753

Current portion of debt
22,500

 
28,438

Current portion of warranty
39,737

 
47,205

Unearned revenue
87,937

 
93,621

Total current liabilities
665,878

 
652,707

 
 
 
 
Long-term debt
980,979

 
988,185

Long-term warranty
17,795

 
13,238

Pension benefit obligation
90,925

 
91,522

Deferred tax liabilities, net
1,509

 
1,543

Operating lease liabilities
66,865

 

Other long-term obligations
140,637

 
127,739

Total liabilities
1,964,588

 
1,874,934

 
 
 
 
Commitments and contingencies (Note 11)

 

 
 
 
 
Equity
 
 
 
Preferred stock, no par value, 10,000 shares authorized, no shares issued or outstanding

 

Common stock, no par value, 75,000 shares authorized, 39,693 and 39,498 shares issued and outstanding
1,334,793

 
1,334,364

Accumulated other comprehensive loss, net
(198,085
)
 
(196,305
)
Accumulated deficit
(427,303
)
 
(425,396
)
Total Itron, Inc. shareholders' equity
709,405

 
712,663

Noncontrolling interests
22,626

 
21,385

Total equity
732,031

 
734,048

Total liabilities and equity
$
2,696,619

 
$
2,608,982

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

3


ITRON, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
 
Common Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Itron, Inc. Shareholders' Equity
 
Noncontrolling Interests
 
Total Equity
In thousands
Shares
 
Amount
 
 
 
 
 
Balances at January 1, 2019
39,498

 
$1,334,364
 
$
(196,305
)
 
$
(425,396
)
 
$
712,663

 
$
21,385

 
$
734,048

Net loss
 
 
 
 
 
 
(1,907
)
 
(1,907
)
 
1,758

 
(149
)
Other comprehensive income (loss), net of tax
 
 
 
 
(1,780
)
 
 
 
(1,780
)
 
 
 
(1,780
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 

 
(517
)
 
(517
)
Stock issues and repurchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Options exercised
20

 
889

 
 
 
 
 
889

 
 
 
889

Restricted stock awards released net of repurchased shares for taxes
319

 
(720
)
 
 
 
 
 
(720
)
 
 
 
(720
)
Issuance of stock-based compensation awards
2

 
157

 
 
 
 
 
157

 
 
 
157

Employee stock purchase plan
19

 
869

 
 
 
 
 
869

 
 
 
869

Stock-based compensation expense
 
 
7,048

 
 
 
 
 
7,048

 
 
 
7,048

Shares repurchased
(165
)
 
(7,814
)
 
 
 
 
 
(7,814
)
 
 
 
(7,814
)
Balances at March 31, 2019
39,693

 
$
1,334,793

 
$
(198,085
)
 
$
(427,303
)
 
$
709,405

 
$
22,626

 
$
732,031

 
Common Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Itron, Inc. Shareholders' Equity
 
Noncontrolling Interests
 
Total Equity
In thousands
Shares
 
Amount
 
 
 
 
 
Balances at January 1, 2018
38,771

 
$1,294,767
 
$
(170,478
)
 
$
(337,873
)
 
$
786,416

 
$
19,216

 
$
805,632

Net loss
 
 
 
 
 
 
(145,666
)
 
(145,666
)
 
396

 
(145,270
)
Cumulative effect of accounting change
 
 
 
 
 
 
11,727

 
11,727

 
 
 
11,727

Other comprehensive income (loss), net of tax
 
 
 
 
17,883

 
 
 
17,883

 
 
 
17,883

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 

 
(981
)
 
(981
)
Stock issues and repurchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
Options exercised
62

 
2,883

 
 
 
 
 
2,883

 
 
 
2,883

Restricted stock awards released
338

 

 
 
 
 
 

 
 
 

Issuance of stock-based compensation awards
2

 
207

 
 
 
 
 
207

 
 
 
207

Employee stock purchase plan
8

 
501

 
 
 
 
 
501

 
 
 
501

Stock-based compensation expense
 
 
7,888

 
 
 
 
 
7,888

 
 
 
7,888

Registration fee
 
 
(7
)
 
 
 
 
 
(7
)
 
 
 
(7
)
SSNI acquisition adjustments, net
 
 
4,140

 
 
 
 
 
4,140

 
 
 
4,140

Balances at March 31, 2018
39,181

 
$
1,310,379

 
$
(152,595
)
 
$
(471,812
)
 
$
685,972

 
$
18,631

 
$
704,603

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


4


ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended March 31,
In thousands
2019
 
2018
Operating activities
 
 
 
Net loss
$
(149
)
 
$
(145,270
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization of intangible assets
28,427

 
31,072

Amortization of operating lease right-of-use assets
4,910

 

Stock-based compensation
7,205

 
8,095

Amortization of prepaid debt fees
1,200

 
3,386

Deferred taxes, net
(430
)
 
(16,508
)
Restructuring, non-cash
96

 
47

Other adjustments, net
44

 
(106
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(37,977
)
 
(7,768
)
Inventories
(1,659
)
 
(253
)
Other current assets
(11,030
)
 
(8,849
)
Other long-term assets
334

 
4,509

Accounts payable, other current liabilities, and taxes payable
12,312

 
7,826

Wages and benefits payable
8,465

 
16,438

Unearned revenue
8,235

 
23,317

Warranty
(2,569
)
 
663

Other operating, net
7,510

 
58,953

Net cash provided by (used in) operating activities
24,924

 
(24,448
)
 
 
 
 
Investing activities
 
 
 
Acquisitions of property, plant, and equipment
(11,415
)
 
(17,433
)
Business acquisitions, net of cash equivalents acquired

 
(802,488
)
Other investing, net
299

 
100

Net cash used in investing activities
(11,116
)
 
(819,821
)
 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings
30,000


705,938

Payments on debt
(44,063
)
 
(182,395
)
Issuance of common stock
1,758

 
3,384

Repurchase of common stock
(8,534
)
 

Prepaid debt fees
(175
)
 
(24,042
)
Other financing, net
(2,229
)
 
(1,046
)
Net cash provided by (used in) financing activities
(23,243
)
 
501,839

 
 
 
 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
72

 
563

Decrease in cash, cash equivalents, and restricted cash
(9,363
)
 
(341,867
)
Cash, cash equivalents, and restricted cash at beginning of period
122,328

 
487,335

Cash, cash equivalents, and restricted cash at end of period
$
112,965

 
$
145,468

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net
$
3,241

 
$
1,498

Interest
16,628

 
6,878


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

5


ITRON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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, the Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Equity, and Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018, and the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, 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 months ended March 31, 2019 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 2018 Annual Report on Form 10-K filed with the SEC on February 28, 2019. There have been no significant changes in financial statement preparation or significant accounting policies since December 31, 2018 other than the adoption of Accounting Standards Codification (ASC) 842, Leases.

Restricted Cash and Cash Equivalents
Cash and cash equivalents that are contractually restricted from operating use are classified as restricted cash and cash equivalents.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows:
In thousands
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Cash and cash equivalents
$
110,828

 
$
120,221

 
$
143,951

Current restricted cash included in other current assets
51

 
51

 
51

Long-term restricted cash
2,086

 
2,056

 
1,466

Total cash, cash equivalents, and restricted cash
$
112,965

 
$
122,328

 
$
145,468


Subsequent to the issuance of our March 31, 2018 consolidated financial statements, we determined $150 million of proceeds from borrowings and payments on debt, originally transacted during the first quarter of 2018, had been improperly netted within the financing activities section of the Consolidated Statements of Cash Flows for the first three quarters of 2018. We corrected this presentation for the 2018 Annual Report on Form 10‑K. The accompanying Consolidated Statement of Cash Flows for the three months ended March 31, 2018 has been revised from amounts previously reported to separately present the $150 million of proceeds from borrowings and the payments on debt. We assessed the significance of the misstatement and concluded that it was not material to any prior periods. There were no changes to net cash flows from operating, investing, or financing activities as a result of this change.

Leases
We determine if an arrangement is a lease at inception. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment), and (2) the customer has the right to control the use of the identified asset.

Operating leases are included in operating lease right-of-use ("ROU") assets, other current liabilities, and operating lease liabilities on our Consolidated Balance Sheets. Finance leases are included in property, plant, and equipment, other current liabilities, and other long-term liabilities on our Consolidated Balance Sheets.


6


ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use the implicit rate when readily determinable. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Operating ROU asset also includes any lease payments made and excludes lease incentives received and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements, which include lease and nonlease components. For each of our existing asset classes, we have elected the practical expedient to account for the lease and nonlease components as a single lease component when the nonlease components are fixed.

We have not elected to utilize the short-term lease exemption for any leased asset class. All leases with a lease term that is greater than one month will be subject to recognition and measurement on the balance sheet.

Lease expense for variable lease payments, where the timing or amount of the payment is not fixed, are recognized when the obligation is incurred. Variable lease payments generally arise in our net lease arrangements where executory and other lease-related costs are billed to Itron when incurred by the lessor.

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) (ASU 2016-02), which required substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases previously accounted for as operating leases. The new standard also resulted 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 required modified retrospective adoption and was effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases (ASU 2018-10), to clarify, improve, and correct various aspects of ASU 2016-02, and also issued ASU 2018-11, Targeted Improvements to Topic 842, Leases (ASU 2018-11), to simplify transition requirements and, for lessors, provide a practical expedient for the separation of nonlease components from lease components. In March 2019, the FASB issued a second Codification Improvements to Topic 842, Leases (ASU 2019-01) to provide further guidance and clarity on several topics of ASU 2016-02. The effective date and transition requirements in ASU 2018-10, ASU 2018-11, and ASU 2019-01 are the same as the effective date and transition requirements of ASU 2016-02. We adopted Accounting Standards Codification (ASC) 842 on January 1, 2019 and it resulted in an increase to operating lease right-of-use assets, other current liabilities, and operating lease liabilities of $74.6 million, $14.5 million, and $61.5 million, respectively, and a decrease in other current assets and other long-term obligations of $1.5 million and $2.9 million, respectively.

In October 2018, the FASB issued ASU 2018-16, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. We adopted this standard on January 1, 2019, and it did not materially impact our consolidated financial statements. This update establishes OIS rates based on SOFR as an approved benchmark interest rate in addition to existing rates such as the LIBOR swap rate.

Recent Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASU 2016-13), which replaces the incurred loss impairment methodology in current GAAP with a methodology based on expected credit losses. This estimate of expected credit losses uses a broader range of reasonable and supportable information. This change will result in earlier recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which amends the disclosure requirements under ASC 820, Fair Value Measurements. ASU 2018-13 is effective for us beginning with our interim financial reports for the first quarter of 2020. We are currently evaluating the impact this standard will have on our consolidated financial statement disclosures related to assets and liabilities subject to fair value measurement.


7


In August 2018, the FASB issued ASU 2018-14, Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which amends the disclosure requirements under ASC 715-20, Compensation-Retirement Benefits-Defined Benefit Plans. ASU 2018-14 is effective for our financial reporting in 2020. We are currently evaluating the impact this standard will have on our financial statement disclosures for our defined benefit plan.

Note 2:    Earnings Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share (EPS):
 
Three Months Ended March 31,
In thousands, except per share data
2019
 
2018
Net loss available to common shareholders
$
(1,907
)
 
$
(145,666
)
 
 
 
 
Weighted average common shares outstanding - Basic
39,658

 
38,945

Dilutive effect of stock-based awards

 

Weighted average common shares outstanding - Diluted
39,658

 
38,945

Net loss per common share - Basic
$
(0.05
)
 
$
(3.74
)
Net loss per common share - Diluted
$
(0.05
)
 
$
(3.74
)

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 1.0 million and 1.0 million stock-based awards were excluded from the calculation of diluted EPS for the three months ended March 31, 2019 and 2018 because they were anti-dilutive. These stock-based awards could be dilutive in future periods.

Note 3:    Certain Balance Sheet Components

A summary of accounts receivable from contracts with customers is as follows:
Accounts receivable, net
 
 
 
In thousands
March 31, 2019
 
December 31, 2018
Trade receivables (net of allowance of $4,046 and $6,331)
$
438,692

 
$
416,503

Unbilled receivables
34,385

 
20,658

Total accounts receivable, net
$
473,077

 
$
437,161


Allowance for doubtful accounts activity
Three Months Ended March 31,
In thousands
2019
 
2018
Beginning balance
$
6,331

 
$
3,957

Provision for doubtful accounts, net
(2,103
)
 
920

Accounts written-off
(192
)
 
(258
)
Effect of change in exchange rates
10

 
155

Ending balance
$
4,046

 
$
4,774


Inventories
 
 
 
In thousands
March 31, 2019
 
December 31, 2018
Materials
$
132,050

 
$
133,398

Work in process
9,106

 
9,744

Finished goods
79,941

 
77,532

Total inventories
$
221,097

 
$
220,674



8


Property, plant, and equipment, net
 
 
 
In thousands
March 31, 2019
 
December 31, 2018
Machinery and equipment
$
318,695

 
$
315,974

Computers and software
107,703

 
104,290

Buildings, furniture, and improvements
147,320

 
146,071

Land
15,063

 
14,980

Construction in progress, including purchased equipment
45,237

 
49,682

Total cost
634,018

 
630,997

Accumulated depreciation
(409,080
)
 
(404,446
)
Property, plant, and equipment, net
$
224,938

 
$
226,551


Depreciation expense
Three Months Ended March 31,
In thousands
2019
 
2018
Depreciation expense
$
12,384

 
$
13,332


Subsequent to March 31, 2019, we entered into sales contracts for properties in Massy, France and Stretford, United Kingdom, which properties are classified as held-for-sale within other long-term assets. The estimated gains on sale are $1.5 million and $5.0 million, respectively. The Massy, France gain will be classified within operating expenses as a gain on sale of assets, and the Stretford, United Kingdom gain will offset restructuring expense as this property was included in a previous restructuring plan.

Note 4:    Intangible Assets and Liabilities

The gross carrying amount and accumulated amortization (accretion) of our intangible assets and liabilities, other than goodwill, were as follows:
 
March 31, 2019
 
December 31, 2018
In thousands
Gross
 
Accumulated
(Amortization) Accretion
 
Net
 
Gross
 
Accumulated
(Amortization) Accretion
 
Net
Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Core-developed technology
$
507,023

 
$
(436,829
)
 
$
70,194

 
$
507,100

 
$
(429,955
)
 
$
77,145

Customer contracts and relationships
382,504

 
(224,312
)
 
158,192

 
379,614

 
(212,538
)
 
167,076

Trademarks and trade names
79,071

 
(71,145
)
 
7,926

 
78,746

 
(69,879
)
 
8,867

Other
12,021

 
(11,245
)
 
776

 
12,600

 
(11,205
)
 
1,395

Total intangible assets subject to amortization
980,619

 
(743,531
)
 
237,088

 
978,060

 
(723,577
)
 
254,483

In-process research and development
2,900

 

 
2,900

 
3,100

 

 
3,100

Total intangible assets
$
983,519

 
$
(743,531
)
 
$
239,988

 
$
981,160

 
$
(723,577
)
 
$
257,583

 
 
 
 
 
 
 
 
 
 
 
 
Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
Customer contracts and relationships
$
(23,900
)
 
$
7,275

 
$
(16,625
)
 
$
(23,900
)
 
$
5,217

 
$
(18,683
)


9


A summary of intangible assets and liabilities activity is as follows:
 
Three Months Ended March 31,
In thousands
2019
 
2018
Beginning balance, intangible assets, gross
$
981,160

 
$
769,851

Intangible assets acquired

 
240,600

Effect of change in exchange rates
2,359

 
22,979

Ending balance, intangible assets, gross
$
983,519

 
$
1,033,430

 
 
 
 
Beginning balance, intangible liabilities, gross
$
(23,900
)
 
$

Intangible liabilities acquired

 
(23,900
)
Effect of change in exchange rates

 

Ending balance, intangible liabilities, gross
$
(23,900
)
 
$
(23,900
)

On January 5, 2018, we completed our acquisition of Silver Spring Networks, Inc. (SSNI) by purchasing 100% of the voting stock. Acquired intangible assets include in-process research and development (IPR&D), which is not amortized until such time as the associated development projects are completed. Of these projects, $0.2 million were completed during the three months ended March 31, 2019 and are included in core-developed technology. The remaining IPR&D is expected to be completed in 2019. Acquired intangible liabilities reflect the present value of the projected cash outflows for an existing contract where remaining costs are expected to exceed projected revenues.

Estimated future annual amortization (accretion) is as follows:
Year Ending December 31,
 
Amortization
 
Accretion
 
Estimated Annual Amortization, net
In thousands
 
 
2019 (amount remaining at March 31, 2019)
 
$
54,492

 
$
(6,175
)
 
$
48,317

2020
 
52,891

 
(8,028
)
 
44,863

2021
 
37,209

 
(1,963
)
 
35,246

2022
 
27,015

 
(459
)
 
26,556

2023
 
19,366

 

 
19,366

Beyond 2023
 
46,115

 

 
46,115

Total intangible assets subject to amortization (accretion)
 
$
237,088

 
$
(16,625
)
 
$
220,463


We have recognized $16.0 million and $17.7 million of net amortization of intangible assets for the three months ended March 31, 2019 and 2018, respectively, within operating expenses in the Consolidated Statement of Operations. These expenses relate to intangible assets and liabilities acquired as part of business combinations.

Note 5:    Goodwill

The following table reflects goodwill allocated to each reporting unit:
In thousands
Device Solutions
 
Networked Solutions
 
Outcomes
 
Total Company
Goodwill balance at January 1, 2019
$
55,259

 
$
918,495

 
$
142,779

 
$
1,116,533

 
 
 
 
 
 
 
 
Measurement period adjustments to goodwill acquired

 
(4,938
)
 
(1,040
)
 
(5,978
)
Effect of change in exchange rates
(210
)
 
(3,496
)
 
(544
)
 
(4,250
)
 
 
 
 
 
 
 
 
Goodwill balance at March 31, 2019
$
55,049

 
$
910,061

 
$
141,195

 
$
1,106,305


    

10


Silver Spring Networks, Inc. Acquisition
On January 5, 2018, we completed the acquisition of SSNI by purchasing 100% of SSNI's outstanding stock. The acquisition was financed through incremental borrowings and cash on hand. Refer to "Note 6: Debt" for further discussion of our debt. SSNI provided smart network and data platform solutions for electricity, gas, water and smart cities including advanced metering, distribution automation, demand-side management, and street lights.

The fair values for the identified trademarks and core-developed technology intangible assets were estimated using the relief from royalty method. The fair value of customer contract and relationship were estimated using the income approach. The IPR&D was valued utilizing the replacement cost method. These consolidated financial statements should be read in conjunction with the audited financial statements and notes included in our 2018 Annual Report on Form 10-K filed with the SEC on February 28, 2019.

The purchase price of SSNI was $809.2 million, which is net of $97.8 million of acquired cash and cash equivalents. Of the total consideration, $802.5 million was paid in cash. The remaining $6.7 million relates to the fair value of pre-acquisition service for replacement awards of unvested SSNI options and restricted stock unit awards with an Itron equivalent award. We allocated the purchase price to the assets acquired and liabilities assumed based on estimated fair value assessments. During the three months ended March 31, 2019, we recognized additional contract assets totaling $8.0 million and additional deferred tax liabilities of $2.0 million, for a net reduction in goodwill of $6.0 million. As of the first quarter of 2019, the measurement period for the acquisition of SSNI is complete, and any further adjustments to assets acquired or liabilities assumed will be recognized through the Consolidated Statement of Operations.

Note 6:    Debt

The components of our borrowings were as follows:
In thousands
March 31, 2019
 
December 31, 2018
Credit facility:
 
 
 
USD denominated term loan
$
623,750

 
$
637,813

Multicurrency revolving line of credit

 

Senior notes
400,000

 
400,000

Total debt
1,023,750

 
1,037,813

Less: current portion of debt
22,500

 
28,438

Less: unamortized prepaid debt fees - term loan
4,512

 
4,859

Less: unamortized prepaid debt fees - senior notes
15,759

 
16,331

Long-term debt
$
980,979


$
988,185


Credit Facility
On January 5, 2018, we entered into a credit agreement providing for committed credit facilities in the amount of $1.2 billion U.S. dollars (the 2018 credit facility), which amended and restated in its entirety our credit agreement dated June 23, 2015 and replaced committed facilities in the amount of $725 million. The 2018 credit facility consists of a $650 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 $300 million standby letter of credit sub-facility and a $50 million swingline sub-facility. Both the term loan and the revolver mature on January 5, 2023 and can be repaid without penalty. Amounts repaid on the term loan may not be reborrowed and amounts borrowed under the revolver may be repaid and reborrowed until the revolver's maturity, at which time 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 0.35% per annum depending on our total leverage ratio as of the most recently ended fiscal quarter.

The 2018 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 2018 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 their related assets. This includes 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 first-tier foreign subsidiaries. In addition, the obligations of any foreign subsidiary who is a foreign borrower, as defined by the 2018 credit facility, are guaranteed by the foreign subsidiary and by its direct and indirect foreign parents. The 2018 credit facility includes debt covenants, which contain certain financial thresholds and place certain restrictions on the incurrence of debt, investments, and the issuance of dividends. We were in compliance with the debt covenants under the 2018 credit facility at March 31, 2019.

11



Under the 2018 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 (subject to a 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 0.50%, or (iii) one-month LIBOR plus 1.00%. At March 31, 2019, the interest rate for both the term loan and revolver was 4.50%, which includes the LIBOR rate plus a margin of 2.00%.

Senior Notes
On December 22, 2017 and January 19, 2018, we issued $300 million and $100 million, respectively, of aggregate principal amount of 5.00% senior notes maturing January 15, 2026 (Notes). The proceeds were used to refinance existing indebtedness related to the acquisition of SSNI, pay related fees and expenses, and for general corporate purposes. Interest on the Notes is payable semi-annually in arrears on January 15 and July 15, commencing on July 15, 2018. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of our subsidiaries that guarantee the senior credit facilities.

Prior to maturity we may redeem some or all of the Notes, together with accrued and unpaid interest, if any, plus a "make-whole" premium. On or after January 15, 2021, we may redeem some or all of the Notes at any time at declining redemption prices equal to 102.50% beginning on January 15, 2021, 101.25% beginning on January 15, 2022 and 100.00% beginning on January15, 2023 and thereafter to the applicable redemption date. In addition, before January 15, 2021, and subject to certain conditions, we may redeem up to 35% of the aggregate principal amount of Notes with the net proceeds of certain equity offerings at 105.00% of the principal amount thereof to the date of redemption; provided that (i) at least 65% of the aggregate principal amount of Notes remains outstanding after such redemption and (ii) the redemption occurs within 60 days of the closing of any such equity offering.

Debt Maturities
The amount of required minimum principal payments on our long-term debt in aggregate over the next five years, are as follows:
Year Ending December 31,
 
Minimum Payments
In thousands
 
 
2019 (amount remaining at March 31, 2019)
 
$
14,375

2020
 
44,688

2021
 
60,937

2022
 
65,000

2023
 
438,750

2024
 

Total minimum payments on debt
 
$
623,750


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: Shareholder's Equity" and "Note 14: Fair Values of Financial Instruments" 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.

12



The fair values of our derivative instruments were as follows:
 
 
 
 
Fair Value
Derivative Assets
 
Balance Sheet Location
 
March 31, 2019
 
December 31, 2018
Derivatives designated as hedging instruments under Subtopic 815-20
 
(in thousands)
Interest rate swap contract
 
Other current assets
 
$
1,568

 
$
1,866

Interest rate cap contracts
 
Other current assets
 
420

 
535

Foreign exchange options
 
Other current assets
 
1,407

 

Cross currency swap contract
 
Other current assets
 
1,608

 
1,631

Interest rate swap contract
 
Other long-term assets
 
259

 
746

Interest rate cap contracts
 
Other long-term assets
 
67

 
251

Cross currency swap contract
 
Other long-term assets
 
2,587

 
1,339

Derivatives not designated as hedging instruments under Subtopic 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current assets
 
94

 
157

Total asset derivatives
 
 
 
$
8,010

 
$
6,525

 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
Derivatives not designated as hedging instruments under Subtopic 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current liabilities
 
$
127

 
$
337


The changes in accumulated other comprehensive income (loss) (AOCI), net of tax, for our derivative and nonderivative hedging instruments designated as hedging instruments, net of tax, were as follows:
In thousands
2019
 
2018
Net unrealized loss on hedging instruments at January 1,
$
(13,179
)
 
$
(13,414
)
Unrealized gain (loss) on hedging instruments
211

 
1,183

Realized (gains) losses reclassified into net income (loss)
(76
)
 
(14
)
Net unrealized loss on hedging instruments at March 31,
$
(13,044
)
 
$
(12,245
)

Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations for the periods ended March 31, 2019 and 2018. Included in the net unrealized gain (loss) on hedging instruments at March 31, 2019 and 2018 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
 
 
In thousands
 
Derivative Financial Instruments
 
Cash Collateral Received
 
Net Amount
March 31, 2019
$
8,010

 
$
(112
)
 
$

 
$
7,898

 
 
 
 
 
 
 
 
December 31, 2018
$
6,525

 
$
(103
)
 
$

 
$
6,422



13


Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
In thousands
 
Derivative Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
March 31, 2019
$
127

 
$
(112
)
 
$

 
$
15

 
 
 
 
 
 
 
 
December 31, 2018
$
337

 
$
(103
)
 
$

 
$
234


Our derivative assets and liabilities subject to netting arrangements consist of foreign exchange forwards and options and interest rate contracts with six counterparties at March 31, 2019 and five counterparties at December 31, 2018. No derivative asset or liability balance with any of our counterparties was individually significant at March 31, 2019 or December 31, 2018. 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 interest rate caps and swaps to reduce the variability of cash flows from increases in the LIBOR based borrowing rates on our floating rate credit facility. These instruments do not protect us from changes to the applicable margin under our credit facility. At March 31, 2019, our LIBOR-based debt balance was $623.8 million.

In October 2015, we entered into an interest rate swap, which is effective from August 31, 2016 to June 23, 2020, and converts $214 million of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of 1.42% (excluding the applicable margin on the debt). The notional balance will amortize to maturity at the same rate as required minimum payments on our term loan. Changes in the fair value of the interest rate swap are recognized as a component of other comprehensive income (OCI) and are 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 along with the earnings effect of the hedged item. The amount of net gains expected to be reclassified into earnings in the next 12 months is $1.6 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. 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 were maintained in AOCI as the forecasted transactions were still probable to occur, and subsequent changes in fair value were recognized within interest expense. In April 2018, due to increases in our total LIBOR-based debt, we elected to re-designate the two interest rate cap contracts as cash flow hedges. Future changes in the fair value of these instruments will be recognized as a component of OCI, and these changes together with amounts previously maintained in AOCI 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 along with the earnings effect of the hedged item. 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.

In April 2018, we entered into a cross-currency swap, which converts $56.0 million of floating LIBOR-based U.S. Dollar denominated debt into 1.38% fixed rate euro denominated debt. This cross-currency swap matures on April 30, 2021 and mitigates the risk associated with fluctuations in currency rates impacting cash flows related to U.S. Dollar denominated debt in a euro functional currency entity. Changes in the fair value of the cross-currency swap are recognized as a component of OCI and will be recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedge are recognized as an adjustment to interest expense along with the earnings effect of the hedged item. The amount of net gains expected to be reclassified into earnings in the next 12 months is $1.6 million.

As a result of our forecasted purchases in non-functional currency, we are exposed to foreign exchange risk. We hedge portions of our forecasted foreign currency inventory purchases. During January 2019, we entered into foreign exchange option contracts for a total notional amount of $72 million at a cost of $1.3 million. The contracts will mature ratably through the year with final maturity in October 2019. Changes in the fair value of the option contracts are recognized as a component of OCI and will be recognized in product cost of revenues when the hedged item affects earnings.


14


The before-tax effects of our accounting for derivative instruments designated as hedges on AOCI were as follows:
Derivatives in Subtopic 815-20
Cash Flow
Hedging Relationships
 
Amount of Gain (Loss)
Recognized in OCI on
Derivative
 
Gain (Loss) Reclassified from 
AOCI into Income
Location
 
Amount
In thousands
 
2019
 
2018
 
In thousands
 
2019
 
2018
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
(318
)
 
$
1,247

 
Interest expense
 
$
466

 
$
88

Interest rate cap contracts
 
156

 
188

 
Interest expense
 
292

 
(70
)
Foreign exchange options
 
307

 

 
Product cost of revenues
 

 

Cross currency swap contract
 
2,008

 

 
Interest expense
 
494

 

Cross currency swap contract
 

 

 
Other income/(expense), net
 
892

 


These reclassification amounts presented above also represent the loss (gain) recognized in net income (loss) on hedging relationships under Subtopic 815-20 on the Consolidated Statements of Operations. For the three months ended March 31, 2019 and 2018, there were no amounts reclassified from AOCI as a result that a forecasted transaction is no longer probable of occurring, and no amounts excluded from effectiveness testing recognized in earnings based on changes in fair value.

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 March 31, 2019, a total of 51 contracts were offsetting our exposures from the Euro, Pound Sterling, Indonesian Rupiah, Chinese Yuan, Canadian Dollar, Indian Rupee and various other currencies, with notional amounts ranging from $109,000 to $7.6 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 Subtopic 815-20
 
Location
 
Gain (Loss) Recognized on Derivatives in Other Income (Expense)
 
 
In thousands
 
2019
 
2018
Three Months Ended March 31,
 
 
 
 
Foreign exchange forward contracts
 
Other income (expense), net
 
$
(790
)
 
$
(1,523
)
Interest rate cap contracts
 
Interest expense
 

 
282


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, 2018.

Amounts recognized on the Consolidated Balance Sheets consist of:
In thousands
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Plan assets in other long-term assets
$
576

 
$
572

 
 
 
 
Liabilities
 
 
 
Current portion of pension benefit obligation in wages and benefits payable
2,890

 
2,730

Long-term portion of pension benefit obligation
90,925

 
91,522

 
 
 
 
Pension benefit obligation, net
$
93,239

 
$
93,680


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

15


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 March 31,
In thousands
2019
 
2018
Service cost
$
1,079

 
$
1,049

Interest cost
582

 
609

Expected return on plan assets
(156
)
 
(181
)
Amortization of actuarial net loss
345

 
403

Amortization of unrecognized prior service costs
17

 
17

Net periodic benefit cost
$
1,867

 
$
1,897


The components of net periodic benefit cost, other than the service cost component, are included in total other income (expense) on the Consolidated Statements of Operations.

Note 9:    Stock-Based Compensation

We maintain the Second Amended and Restated 2010 Stock Incentive Plan (Stock Incentive Plan), which allows us to grant stock-based compensation awards, including stock options, restricted stock units, phantom stock, and unrestricted stock units. Under the Stock Incentive Plan, we have 12,623,538 shares of common stock reserved and authorized for issuance subject to stock splits, dividends, and other similar events. At March 31, 2019, 6,318,953 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.

As part of the acquisition of SSNI, we reserved and authorized 2,880,039 shares, collectively, of Itron common stock to be issued under the Stock Incentive Plan for certain SSNI common stock awards that were converted to Itron common stock awards on January 5, 2018 (Acquisition Date) pursuant to the Agreement and Plan of Merger or were available for issuance pursuant to future awards under the Silver Spring Networks, Inc. 2012 Equity Incentive Plan (SSNI Plan). New stock-based compensation awards originally from the SSNI Plan may only be made to individuals who were not employees of Itron as of the Acquisition Date. Notwithstanding the foregoing, there is no fungible share provision for shares originally from the SSNI Plan. 

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 272,602 shares of common stock were available for future issuance at March 31, 2019.

Unrestricted stock and ESPP activity for the three months ended March 31, 2019 and 2018 was not significant.

Stock-Based Compensation Expense
Total stock-based compensation expense and the related tax benefit were as follows:
 
Three Months Ended March 31,
In thousands
2019
 
2018
Stock options
$
581

 
$
831

Restricted stock units
6,467

 
7,057

Unrestricted stock awards
157

 
207

Phantom stock units
918

 
690

Total stock-based compensation
$
8,123

 
$
8,785

 
 
 
 
Related tax benefit
$
1,443

 
$
1,534



16


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, 2018
956

 
$
47.10

 
6.3
 
$
21,965

 
 
Converted upon acquisition
42

 
51.86

 
 
 
 
 
$
14.86

Granted
101

 
69.30

 
 
 
 
 
$
24.83

Exercised
(62
)
 
40.31

 
 
 
2,104

 
 
Forfeited
(3
)
 
72.25

 
 
 
 
 
 
Expired
(7
)
 
95.96

 
 
 
 
 
 
Outstanding, March 31, 2018
1,027

 
$
49.49

 
6.5
 
$
24,051

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2019
895

 
$
47.93

 
6.2
 
$
4,806

 
 
Exercised
(20
)
 
44.99

 
 
 
211

 
 
Forfeited
(7
)
 
67.53

 
 
 
 
 
 
Outstanding, March 31, 2019
868

 
$
47.83

 
6.0
 
$
4,402

 
 
 
 
 
 
 
 
 
 
 
 
Exercisable, March 31, 2019
734

 
$
44.46

 
5.5
 
$
4,402

 
 
 
 
 
 
 
 
 
 
 
 
Expected to vest, March 31, 2019
134

 
$
66.25

 
8.6
 
$

 
 

At March 31, 2019, total unrecognized stock-based compensation expense related to nonvested stock options was $1.8 million, which is expected to be recognized over a weighted average period of approximately 1.6 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 March 31,
 
2019
 
2018
Expected volatility
%
 
30.9
%
Risk-free interest rate
%
 
2.8
%
Expected term (years)
N/A

 
6.1

There were no employee stock options granted for the three months ended March 31, 2019.


17


Restricted Stock Units
The following table summarizes restricted stock unit activity:
In thousands
Number of
Restricted Stock Units
 
Weighted
Average Grant
Date Fair Value
 
Aggregate
Intrinsic Value
Outstanding, January 1, 2018
556

 

 
 
Converted upon acquisition
579

 
 
 
 
Granted
136

 
$
69.30

 
 
Released (1)
(352
)
 

 
$
17,231

Forfeited
(28
)
 

 
 
Outstanding, March 31, 2018
891

 

 
 
 
 
 
 
 
 
Outstanding, January 1, 2019
817

 
$
59.70

 
 
Granted
107

 
56.04

 
 
Released (1)
(316
)
 
60.29

 
$
19,074

Forfeited
(17
)
 
66.17

 
 
Outstanding, March 31, 2019
591

 
64.51

 
 
 
 
 
 
 
 
Vested but not released, March 31, 2019
8

 
 
 
$
361

 
 
 
 
 
 
Expected to vest, March 31, 2019
579

 
 
 
$
27,018

(1)     Shares released is presented gross of shares netted for employee payroll tax obligations.

At March 31, 2019, total unrecognized compensation expense on restricted stock units was $36.2 million, which is expected to be recognized over a weighted average period of approximately 2.0 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 March 31,
 
2019
 
2018
Expected volatility
31.3
%
 
28.0
%
Risk-free interest rate
2.5
%
 
2.2
%
Expected term (years)
1.6

 
2.1

 
 
 
 
Weighted average fair value
$
60.91

 
$
78.56




18


Phantom Stock Units
The following table summarizes phantom stock unit activity:
In thousands
Number of Phantom Stock Units
 
Weighted
Average Grant
Date Fair Value
Outstanding, January 1, 2018
63

 


Converted upon acquisition
21

 
 
Granted
31

 
$
69.30

Released
(27
)
 


Forfeited
(1
)
 


Outstanding, March 31, 2018
87

 


 
 
 
 
Expected to vest, March 31, 2018
85

 
 
 
 
 
 
Outstanding, January 1, 2019
83

 
$
61.80

Granted
12

 
49.39

Released
(35
)
 
55.99

Forfeited
(2
)
 
63.88

Outstanding, March 31, 2019
58

 
62.56

 
 
 
 
Expected to vest, March 31, 2019
58

 



At March 31, 2019, total unrecognized compensation expense on phantom stock units was $2.5 million, which is expected to be recognized over a weighted average period of approximately 2.1 years. As of both March 31, 2019 and December 31, 2018, we have recognized a phantom stock liability of $0.3 million and $1.5 million, respectively, within wages and benefits payable in the Consolidated Balance Sheets.

Note 10: Income Taxes

We determine the interim tax benefit (provision) by applying an estimate of the annual effective tax rate to the year-to-date pretax book income (loss) and adjusting for discrete items during the reporting period, if any. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded.

Our tax rate for the three months ended March 31, 2019 of 102% differed from the federal statutory rate of 21% due primarily to unbenefitted losses experienced in jurisdictions with valuation allowances on deferred tax assets as well as the forecasted mix of earnings in domestic and international jurisdictions.

Our tax rate for the three months ended March 31, 2018 of 7% differed from the federal statutory rate of 21% due primarily to unbenefitted losses experienced in jurisdictions with valuation allowances on deferred tax assets as well as the forecasted mix of earnings in domestic and international jurisdictions, a benefit related to excess stock-based compensation, and uncertain tax positions.

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 March 31,
In thousands
2019
 
2018
Net interest and penalties expense
$
301

 
$
424


Accrued interest and penalties recognized were as follows:
In thousands
March 31, 2019
 
December 31, 2018
Accrued interest
$
2,516

 
$
2,127

Accrued penalties
1,653

 
1,758



19


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:
In thousands
March 31, 2019
 
December 31, 2018
Unrecognized tax benefits related to uncertain tax positions
$
113,543

 
$
112,558

The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate
112,228

 
111,224


At March 31, 2019, we are under examination by certain tax authorities for the 2010 to 2017 tax years. The material jurisdictions where we are subject to examination for the 2010 to 2017 tax years include, among others, the United States, France, Germany, Italy, Brazil and the United Kingdom. No material changes have occurred to previously disclosed assessments. We believe we have appropriately accrued for the expected outcome of all tax matters and do not currently anticipate that the ultimate resolution of these examinations will have a material adverse effect on our financial condition, future results of operations, or liquidity.

Based upon the timing and outcome of examinations, litigation, the impact of legislative, regulatory, and judicial developments, and the impact of these items on the statute of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those 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:
In thousands
March 31, 2019
 
December 31, 2018
Credit facilities
 
 
 
Multicurrency revolving line of credit
$
500,000

 
$
500,000

Long-term borrowings

 

Standby LOCs issued and outstanding
(40,748
)
 
(40,983
)
Net available for additional borrowings under the multi-currency revolving line of credit
$
459,252

 
$
459,017

 
 
 
 
Net available for additional standby LOCs under sub-facility
$
259,252

 
$
259,017

 
 
 
 
Unsecured multicurrency revolving lines of credit with various financial institutions
 
 
 
Multicurrency revolving lines of credit
$
107,117

 
$
108,039

Standby LOCs issued and outstanding
(19,300
)
 
(19,386
)
Short-term borrowings
(513
)
 
(2,232
)
Net available for additional borrowings and LOCs
$
87,304

 
$
86,421

 
 
 
 
Unsecured surety bonds in force
$
111,197

 
$
94,365


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

20


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 would 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 March 31,
In thousands
2019
 
2018
Beginning balance
$
60,443

 
$
34,862

Assumed liabilities from acquisition

 
5,742

New product warranties
1,718

 
818

Other adjustments and expirations
1,861

 
4,044

Claims activity
(6,083
)
 
(4,108
)
Effect of change in exchange rates
(407
)
 
621

Ending balance
57,532

 
41,979

Less: current portion of warranty
39,737

 
26,533

Long-term warranty
$
17,795

 
$
15,446


Total warranty expense is classified within cost of revenues and consists of new product warranties issued, costs related to insurance and supplier recoveries, other changes and adjustments to warranties, and customer claims. Warranty expense was as follows:
 
Three Months Ended March 31,
In thousands
2019
 
2018
Total warranty expense
$
1,779

 
$
4,862


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 March 31,
In thousands
2019
 
2018
Plan costs
$
6,878

 
$
8,680


The IBNR accrual, which is included in wages and benefits payable, was as follows:
In thousands
March 31, 2019
 
December 31, 2018
IBNR accrual
$
3,234