ITRI 10Q 3.31.14
Table of Contents

 
 
 
 
 
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, 2014

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
x
Accelerated filer
¨
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of March 31, 2014 there were outstanding 39,323,103 shares of the registrant’s common stock, no par value, which is the only class of common stock of the registrant.
 


Table of Contents

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


Table of Contents

PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands, except per share data)
Revenues
$
474,795

 
$
447,536

Cost of revenues
320,260

 
307,413

Gross profit
154,535

 
140,123

 
 
 
 
Operating expenses
 
 
 
Sales and marketing
47,609

 
48,216

Product development
44,409

 
44,208

General and administrative
40,407

 
33,595

Amortization of intangible assets
11,070

 
10,744

Restructuring expense
5,524

 
1,013

Goodwill impairment
977

 

Total operating expenses
149,996

 
137,776

 
 
 
 
Operating income
4,539

 
2,347

Other income (expense)
 
 
 
Interest income
97

 
1,061

Interest expense
(2,909
)
 
(2,338
)
Other income (expense), net
(2,498
)
 
(817
)
Total other income (expense)
(5,310
)
 
(2,094
)
 
 
 
 
Income (loss) before income taxes
(771
)
 
253

Income tax benefit
653

 
3,243

Net income (loss)
(118
)
 
3,496

Net income attributable to noncontrolling interests
136

 
926

Net income (loss) attributable to Itron, Inc.
$
(254
)
 
$
2,570

 
 
 
 
Earnings (loss) per common share - Basic
$
(0.01
)
 
$
0.07

Earnings (loss) per common share - Diluted
$
(0.01
)
 
$
0.06

 
 
 
 
Weighted average common shares outstanding - Basic
39,235

 
39,420

Weighted average common shares outstanding - Diluted
39,235

 
39,770

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


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

 
Three Months Ended
March 31,
 
2014
 
2013
 
(in thousands)
Net income (loss)
$
(118
)
 
$
3,496

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
(3,374
)
 
(31,300
)
Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges
(95
)
 
(73
)
Net hedging loss (gain) reclassified into net income
258

 

Pension plan benefit liability adjustment
97

 
(380
)
Total other comprehensive income (loss), net of tax
(3,114
)
 
(31,753
)
Total comprehensive income (loss), net of tax
(3,232
)
 
(28,257
)
Comprehensive income (loss) attributable to noncontrolling interests, net of tax:
 
 
 
Net income attributable to noncontrolling interests
136

 
926

Foreign currency translation adjustments

 
(5
)
Amounts attributable to noncontrolling interests
136

 
921

Comprehensive income (loss) attributable to Itron, Inc.
$
(3,368
)
 
$
(29,178
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
March 31, 2014
 
December 31, 2013
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
146,327

 
$
124,805

Accounts receivable, net
341,547

 
356,709

Inventories
192,573

 
177,467

Deferred tax assets current, net
36,995

 
37,110

Other current assets
104,967

 
103,275

Total current assets
822,409

 
799,366

 
 
 
 
Property, plant, and equipment, net
237,326

 
246,820

Deferred tax assets noncurrent, net
61,873

 
58,880

Other long-term assets
32,102

 
33,027

Intangible assets, net
184,052

 
195,840

Goodwill
546,437

 
548,578

Total assets
$
1,884,199

 
$
1,882,511

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
210,675

 
$
199,769

Other current liabilities
75,969

 
70,768

Wages and benefits payable
89,129

 
89,314

Taxes payable
14,819

 
10,700

Current portion of debt
28,125

 
26,250

Current portion of warranty
21,989

 
21,048

Unearned revenue
53,457

 
37,163

Total current liabilities
494,163

 
455,012

 
 
 
 
Long-term debt
320,000

 
352,500

Long-term warranty
24,035

 
24,098

Pension plan benefit liability
89,498

 
88,687

Deferred tax liabilities noncurrent, net
6,123

 
7,326

Other long-term obligations
79,580

 
81,917

Total liabilities
1,013,399

 
1,009,540

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Equity
 
 
 
Preferred stock

 

Common stock
1,291,690

 
1,290,629

Accumulated other comprehensive loss, net
(24,836
)
 
(21,722
)
Accumulated deficit
(413,925
)
 
(413,671
)
Total Itron, Inc. shareholders' equity
852,929

 
855,236

Noncontrolling interests
17,871

 
17,735

Total equity
870,800

 
872,971

Total liabilities and equity
$
1,884,199

 
$
1,882,511

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

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ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Three Months Ended
March 31,
 
2014
 
2013
 
(in thousands)
Operating activities
 
 
 
Net income (loss)
$
(118
)
 
$
3,496

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
25,592

 
24,757

Stock-based compensation
4,584

 
5,096

Amortization of prepaid debt fees
404

 
414

Deferred taxes, net
(3,915
)
 
(9,227
)
Goodwill impairment
977

 

Restructuring expense, non-cash

 
26

Other adjustments, net
32

 
196

Changes in operating assets and liabilities, net of acquisition:
 
 
 
Accounts receivable
15,392

 
8,362

Inventories
(15,827
)
 
(15,944
)
Other current assets
(1,547
)
 
(6,867
)
Other long-term assets
892

 
3,549

Accounts payable, other current liabilities, and taxes payable
25,303

 
(14,629
)
Wages and benefits payable
272

 
(6,546
)
Unearned revenue
16,441

 
13,474

Warranty
675

 
(2,098
)
Other operating, net
(2,396
)
 
(3,464
)
Net cash provided by operating activities
66,761

 
595

 
 
 
 
Investing activities
 
 
 
Acquisitions of property, plant, and equipment
(8,564
)
 
(14,765
)
Business acquisitions, net of cash and cash equivalents acquired

 
(860
)
Other investing, net
167

 
56

Net cash used in investing activities
(8,397
)
 
(15,569
)
 
 
 
 
Financing activities
 
 
 
Payments on debt
(30,625
)
 
(18,750
)
Issuance of common stock
310

 
1,073

Repurchase of common stock
(2,948
)
 
(200
)
Other financing, net
(2,244
)
 
634

Net cash used in financing activities
(35,507
)
 
(17,243
)
 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(1,335
)
 
(2,633
)
Increase (decrease) in cash and cash equivalents
21,522

 
(34,850
)
Cash and cash equivalents at beginning of period
124,805

 
136,411

Cash and cash equivalents at end of period
$
146,327

 
$
101,561

 
 
 
 
Non-cash transactions:
 
 
 
Property, plant, and equipment purchased but not yet paid
$
540

 
$
6,890

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net
$
(891
)
 
$
2,671

Interest, net of amounts capitalized
2,460

 
1,867

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

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ITRON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
(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

We were incorporated in the state of Washington in 1977. We provide a portfolio of products and services to utilities for the electricity, natural gas, and water markets throughout the world.

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 months ended March 31, 2014 and 2013, the Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, and the Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 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.

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 2013 audited financial statements and notes included in our Annual Report on Form 10-K filed with the SEC on February 26, 2014. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.

Basis of Consolidation
We consolidate all entities in which we have a greater than 50% ownership interest or in which we exercise control over the operations. We use the equity method of accounting for entities in which we have a 50% or less investment and exercise significant influence. Entities in which we have less than a 20% investment and where we do not exercise significant influence are accounted for under the cost method. Intercompany transactions and balances are eliminated upon consolidation.

Noncontrolling Interests
In several of our consolidated international subsidiaries, we have joint venture partners, who are minority shareholders. Although these entities are not wholly-owned by Itron, we consolidate them because we have a greater than 50% ownership interest or because we exercise control over the operations. The noncontrolling interest balance is adjusted each period to reflect the allocation of net income (loss) and other comprehensive income (loss) attributable to the noncontrolling interests, as shown in our Consolidated Statements of Operations and our Consolidated Statements of Comprehensive Income (Loss) as well as contributions from and distributions to the owners. The noncontrolling interest balance in our Consolidated Balance Sheets represents the proportional share of the equity of the joint venture entities, which is attributable to the minority shareholders.

Cash and Cash Equivalents
We consider all highly liquid instruments with remaining maturities of three months or less at the date of acquisition to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded for invoices issued to customers in accordance with our contractual arrangements. Interest and late payment fees are minimal. Unbilled receivables are recorded when revenues are recognized upon product shipment or service delivery and invoicing occurs at a later date. We record an allowance for doubtful accounts representing our estimate of the probable losses in accounts receivable at the date of the balance sheet based on our historical experience of bad debts and our specific review of outstanding receivables. Accounts receivable are written-off against the allowance when we believe an account, or a portion thereof, is no longer collectible.

Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out method. Cost includes raw materials and labor, plus applied direct and indirect costs.


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Derivative Instruments
All derivative instruments, whether designated in hedging relationships or not, are recorded on the Consolidated Balance Sheets at fair value as either assets or liabilities. The components and fair values of our derivative instruments are determined using the fair value measurements of significant other observable inputs (Level 2), as defined by GAAP. The net fair value of our derivative instruments may switch between a net asset and a net liability depending on market circumstances at the end of the period. We include the effect of our counterparty credit risk based on current published credit default swap rates when the net fair value of our derivative instruments are in a net asset position and the effect of our own nonperformance risk when the net fair value of our derivative instruments are in a net liability position.

For any derivative designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. For any derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded as a component of other comprehensive income (loss) (OCI) and are recognized in earnings when the hedged item affects earnings. Ineffective portions of cash flow hedges are recognized in other income (expense) in the Consolidated Statements of Operations. For a hedge of a net investment, the effective portion of any unrealized gain or loss from the foreign currency revaluation of the hedging instrument is reported in OCI as a net unrealized gain or loss on derivative instruments. Upon termination of a net investment hedge, the net derivative gain/loss will remain in accumulated OCI until such time when earnings are impacted by a sale or liquidation of the associated operations. Ineffective portions of fair value changes or the changes in fair value of derivative instruments that do not qualify for hedging activities are recognized in other income (expense) in the Consolidated Statements of Operations. We classify cash flows from our derivative programs as cash flows from operating activities in the Consolidated Statements of Cash Flows.

Derivatives are not used for trading or speculative purposes. Our derivative contract counterparties are credit-worthy multinational commercial banks, with whom we have master netting agreements; however, our derivative positions are not recorded on a net basis in the Consolidated Balance Sheets. There are no credit-risk-related contingent features within our derivative instruments. Refer to Note 7 and Note 13 for further disclosures of our derivative instruments and their impact on OCI.

Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 30 years for buildings and improvements and three to ten years for machinery and equipment, computers and software, and furniture. Leasehold improvements are capitalized and depreciated over the term of the applicable lease, including renewable periods if reasonably assured, or over the useful lives, whichever is shorter. Construction in process represents capital expenditures incurred for assets not yet placed in service. Costs related to internally developed software and software purchased for internal uses are capitalized and are amortized over the estimated useful lives of the assets. Repair and maintenance costs are expensed as incurred. We have no major planned maintenance activities.

We review long-lived assets for impairment whenever events or circumstances indicate the carrying amount of an asset group may not be recoverable. Assets held for sale are classified within other current assets in the Consolidated Balance Sheets, are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Gains and losses from asset disposals and impairment losses are classified within the Consolidated Statement of Operations according to the use of the asset, except those gains and losses recognized in conjunction with our restructuring activities, which are classified within restructuring expense.

Prepaid Debt Fees
Prepaid debt fees represent the capitalized direct costs incurred related to the issuance of debt and are recorded as noncurrent assets. These costs are amortized to interest expense over the terms of the respective borrowings, including contingent maturity or call features, using the effective interest method, or straight-line method when associated with a revolving credit facility. When debt is repaid early, the related portion of unamortized prepaid debt fees is written off and included in interest expense.

Business Combinations
On the date of acquisition, the assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree are recorded at their fair values. The acquiree's results of operations are also included as of the date of acquisition in our consolidated results. Intangible assets that arise from contractual/legal rights, or are capable of being separated, as well as in-process research and development (IPR&D), are measured and recorded at fair value, and amortized over the estimated useful life. IPR&D is not amortized until such time as the associated development projects are completed or terminated. If a development project is completed, the IPR&D is reclassified as a core technology intangible asset and amortized over its estimated useful life. If the development project is terminated, the recorded value of the associated IPR&D is immediately expensed. If practicable, assets acquired and liabilities assumed arising from contingencies are measured and recorded at fair value. If not practicable, such assets and liabilities are measured and recorded when it is probable that a gain or loss has occurred and the amount can be reasonably estimated. The residual balance of the purchase price, after fair value allocations to all identified assets and liabilities, represents goodwill.

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Acquisition-related costs are expensed as incurred. Restructuring costs associated with an acquisition are generally expensed in periods subsequent to the acquisition date, and changes in deferred tax asset valuation allowances and acquired income tax uncertainties, including penalties and interest, after the measurement period are recognized as a component of the provision for income taxes. Our acquisitions may include contingent consideration, which require us to recognize the fair value of the estimated liability at the time of the acquisition. Subsequent changes in the estimate of the amount to be paid under the contingent consideration arrangement are recognized in the Consolidated Statements of Operations. Cash payments for contingent or deferred consideration are classified within cash flows from investing activities within the Consolidated Statements of Cash Flows.

Goodwill and Intangible Assets
Goodwill and intangible assets may result from our acquisitions. We use estimates, including estimates of useful lives of intangible assets, the amount and timing of related future cash flows, and fair values of the related operations, in determining the value assigned to goodwill and intangible assets. Our finite-lived intangible assets are amortized over their estimated useful lives based on estimated discounted cash flows. IPR&D is considered an indefinite-lived intangible asset and is not subject to amortization until the associated projects are completed or terminated. Finite-lived intangible assets are tested for impairment at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable. Indefinite-lived intangible assets are tested for impairment annually, when events or changes in circumstances indicate the asset may be impaired, or at the time when their useful lives are determined to be no longer indefinite.

Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics, including the forecast discounted cash flows associated with each reporting unit. Each reporting unit corresponds with its respective operating segment, effective in the fourth quarter of 2013.

We test goodwill for impairment each year as of October 1, or more frequently should a significant impairment indicator occur. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the two-step impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss amount. This second step determines the current fair values of all assets and liabilities of the reporting unit and then compares the implied fair value of the reporting unit's goodwill to the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We forecast discounted future cash flows at the reporting unit level using risk-adjusted discount rates and estimated future revenues and operating costs, which take into consideration factors such as existing backlog, expected future orders, supplier contracts, and expectations of competitive and economic environments. We also identify similar publicly traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. These combined fair values are then reconciled to the aggregate market value of our common stock on the date of valuation, while considering a reasonable control premium.

Contingencies
A loss contingency is recorded if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of the ultimate loss. Loss contingencies that we determine to be reasonably possible, but not probable, are disclosed but not recorded. Changes in these factors and related estimates could materially affect our financial position and results of operations. Legal costs to defend against contingent liabilities are expensed as incurred.

Bonus and Profit Sharing
We have various employee bonus and profit sharing plans, which provide award amounts for the achievement of annual financial and nonfinancial targets. If management determines it is probable that the targets will be achieved, and the amounts can be reasonably estimated, a compensation accrual is recorded based on the proportional achievement of the financial and nonfinancial targets. Although we monitor and accrue expenses quarterly based on our progress toward the achievement of the annual targets, the actual results at the end of the year may result in awards that are significantly greater or less than the estimates made in earlier quarters.

Warranty
We offer standard warranties on our hardware products and large application software products. We accrue the estimated cost of new product warranties based on historical and projected product performance trends and costs during the warranty period. Testing of new products in the development stage helps identify and correct potential warranty issues prior to manufacturing. Quality

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control efforts during manufacturing reduce our exposure to warranty claims. When our quality control efforts fail to detect a fault in one of our products, we may experience an increase in warranty claims. We track warranty claims to identify potential warranty trends. If an unusual trend is noted, an additional warranty accrual would be recorded if a failure event is probable and the cost can be reasonably estimated. When new products are introduced, our process relies on historical averages of similar products until sufficient data are available. As actual experience on new products becomes available, it is used to modify the historical averages to ensure the expected warranty costs are within a range of likely outcomes. Management regularly evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. The warranty allowances may fluctuate due to changes in estimates for material, labor, and other costs we may incur to repair or replace projected product failures, and we may incur additional warranty and related expenses in the future with respect to new or established products, which could adversely affect our financial position and results of operations. The long-term warranty balance includes estimated warranty claims beyond one year. Warranty expense is classified within cost of revenues.

Restructuring and Asset Impairments
We record a liability for costs associated with an exit or disposal activity at its fair value in the period in which the liability is incurred. Employee termination benefits considered postemployment benefits are accrued when the obligation is probable and estimable, such as benefits stipulated by human resource policies and practices or statutory requirements. One-time termination benefits are expensed at the date the employee is notified. If the employee must provide future service greater than 60 days, such benefits are expensed ratably over the future service period. For contract termination costs, we record a liability upon the termination of a contract in accordance with the contract terms or the cessation of the use of the rights conveyed by the contract, whichever occurs later.

Asset impairments are determined at the asset group level. An impairment may be recorded for assets that are to be abandoned, are to be sold for less than net book value, or are held for sale in which the estimated proceeds less costs to sell are less than the net book value. We may also recognize impairment on an asset group, which is held and used, when the carrying value is not recoverable and exceeds the asset group's fair value. If an asset group is considered a business, a portion of the Company's goodwill balance is allocated to it based on relative fair value.

Defined Benefit Pension Plans
We sponsor both funded and unfunded defined benefit pension plans for certain international employees. We recognize a liability for the projected benefit obligation in excess of plan assets or an asset for plan assets in excess of the projected benefit obligation. We also recognize the funded status of our defined benefit pension plans on our Consolidated Balance Sheets and recognize as a component of OCI, net of tax, the actuarial gains or losses and prior service costs or credits, if any, that arise during the period but that are not recognized as components of net periodic benefit cost.

Share Repurchase Plan
From time to time, we may repurchase shares of Itron common stock under programs authorized by our Board of Directors. Share repurchases are made in the open market or in privately negotiated transactions and in accordance with applicable securities laws. Under applicable Washington State law, shares repurchased are retired and not reported separately as treasury stock on the financial statements; the value of the repurchased shares is deducted from common stock.

Revenue Recognition
Revenues consist primarily of hardware sales, software license fees, software implementation, project management services, installation, consulting, and post-sale maintenance support. Revenues are recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.
The majority of our revenue arrangements involve multiple deliverables, which combine two or more of the following: hardware, meter reading system software, installation, and/or project management services. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the delivered item(s) has value to the customer on a standalone basis and delivery/performance of the undelivered item(s) is probable. The total arrangement consideration is allocated among the separate units of accounting based on their relative fair values and the applicable revenue recognition criteria considered for each unit of accounting. The amount allocable to a delivered item is limited to the amount that we are entitled to collect and that is not contingent upon the delivery/performance of additional items. Revenues for each deliverable are then recognized based on the type of deliverable, such as 1) when the products are shipped, 2) services are delivered, 3) percentage-of-completion when implementation services are essential to other deliverables in the arrangement, 4) upon receipt of customer acceptance, or 5) transfer of title and risk of loss. The majority of our revenue is recognized when products are shipped to or received by a customer or when services are provided.

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Hardware revenues are recognized at the time of shipment, receipt by the customer, or, if applicable, upon completion of customer acceptance provisions.
Generally, network software revenue is recognized when shipped if all other revenue recognition criteria are met and services are not essential to the functionality of the software. If implementation services are essential to the functionality of the network software, software and implementation revenues are recognized using the percentage-of-completion methodology of contract accounting when project costs are reliably estimated.
If the data collection system does not use standard internet protocols and network design services are deemed complex and extensive, revenue from network software and services is recognized using the units-of-delivery method of contract accounting, as network design services and network software are essential to the functionality of the related hardware (network). This methodology results in the deferral of costs and revenues as professional services and software implementation commence prior to deployment of hardware.

In the unusual instances when we are unable to reliably estimate the cost to complete a contract at its inception, we use the completed contract method of contract accounting. Revenues and costs are recognized upon substantial completion when remaining costs are insignificant and potential risks are minimal.

Under contract accounting, if we estimate that the completion of a contract component (unit of accounting) will result in a loss, the loss is recognized in the period in which it is estimated. We reevaluate the estimated loss through the completion of the contract component and adjust the estimated loss for changes in facts and circumstances.

We also enter into multiple deliverable software arrangements that do not include hardware. For this type of arrangement, revenue recognition is dependent upon the availability of vendor specific objective evidence (VSOE) of fair value for each of the deliverables. The lack of VSOE, or the existence of extended payment terms or other inherent risks, may affect the timing of revenue recognition for multiple deliverable software arrangements.
Certain of our revenue arrangements include an extended or noncustomary warranty provision that covers all or a portion of a customer's replacement or repair costs beyond the standard or customary warranty period. Whether or not the extended warranty is separately priced in the arrangement, a portion of the arrangement's total consideration is allocated to this extended warranty deliverable. This revenue is deferred and recognized over the extended warranty coverage period. Extended or noncustomary warranties do not represent a significant portion of our revenue.
We allocate consideration to each deliverable in an arrangement based on its relative selling price. We determine selling price using VSOE, if it exists, otherwise we use third-party evidence (TPE). We define VSOE as a median price of recent standalone transactions that are priced within a narrow range. TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately. If neither VSOE nor TPE of selling price exists for a unit of accounting, we use estimated selling price (ESP) to determine the price at which we would transact if the product or service were regularly sold by us on a standalone basis. Our determination of ESP involves a weighting of several factors based on the specific facts and circumstances of the arrangement. The factors considered include the cost to produce the deliverable, the anticipated margin on that deliverable, our ongoing pricing strategy and policies, and the characteristics of the varying markets in which the deliverable is sold.
We analyze the selling prices used in our allocation of arrangement consideration on an annual basis. Selling prices are analyzed on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.
Unearned revenue is recorded when a customer pays for products or services, but the criteria for revenue recognition have not been met as of the balance sheet date. Unearned revenues of $85.9 million and $69.8 million at March 31, 2014 and December 31, 2013 related primarily to professional services and software associated with our smart metering contracts, extended or noncustomary warranty, and prepaid post-contract support. Deferred costs are recorded for products or services for which ownership (typically defined as title and risk of loss) has transferred to the customer, but the criteria for revenue recognition have not been met as of the balance sheet date. Deferred costs were $24.3 million and $23.5 million at March 31, 2014 and December 31, 2013 and are recorded within other assets in the Consolidated Balance Sheets.

Hardware and software post-sale maintenance support fees are recognized ratably over the life of the related service contract. Shipping and handling costs and incidental expenses billed to customers are recorded as revenue, with the associated cost charged to cost of revenues. We record sales, use, and value added taxes billed to our customers on a net basis.


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Product and Software Development Costs
Product and software development costs primarily include employee compensation and third party contracting fees. We do not capitalize product development costs, and we do not generally capitalize software development expenses as the costs incurred are immaterial for the relatively short period of time between technological feasibility and the completion of software development.

Stock-Based Compensation
We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options, stock sold pursuant to our Employee Stock Purchase Plan (ESPP), and the issuance of restricted stock units and unrestricted stock awards, based on estimated fair values. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model, which includes assumptions for the dividend yield, expected volatility, risk-free interest rate, and expected term. For ESPP awards, the fair value is the difference between the market close price of our common stock on the date of purchase and the discounted purchase price. For performance-based restricted stock units and unrestricted stock awards with no market conditions, the fair value is the market close price of our common stock on the date of grant. For restricted stock units with market conditions, the fair value is estimated at the date of award using a Monte Carlo simulation model, which includes assumptions for dividend yield and expected volatility for our common stock and the common stock for companies within the Russell 3000 index, as well as the risk-free interest rate and expected term of the awards. We expense stock-based compensation at the date of grant for unrestricted stock awards. For awards with only a service condition, we expense stock-based compensation, adjusted for estimated forfeitures, using the straight-line method over the requisite service period for the entire award. For awards with performance and service conditions, if vesting is probable, we expense the stock-based compensation, adjusted for estimated forfeitures, on a straight-line basis over the requisite service period for each separately vesting portion of the award. For awards with a market condition, we expense the fair value over the requisite service period. Excess tax benefits are credited to common stock when the deduction reduces cash taxes payable. When we have tax deductions in excess of the compensation cost, they are classified as financing cash inflows in the Consolidated Statements of Cash Flows.

Effective October 1, 2013, we changed the terms of the ESPP to reduce the discount to 5% from the fair market value of the stock at the end of each fiscal quarter. As a result of this change, the ESPP is no longer considered compensatory, and no compensation expense is recognized for sales of our common stock to employees.

Income Taxes
We compute our interim income tax provision through the use of an estimated annual effective tax rate (ETR) applied to year-to-date operating results and specific events that are discretely recognized as they occur. In calculating the estimated annual ETR, we analyze various factors, including 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. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments, are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated annual ETR.

Deferred tax assets and liabilities are recognized based upon anticipated future tax consequences, in each of the jurisdictions in which we operate, attributable to: (1) the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases; and (2) operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The calculation of our tax liabilities involves applying complex tax regulations in different jurisdictions to our tax positions. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets if it is more likely than not that such assets will not be realized. We do not record tax liabilities on undistributed earnings of international subsidiaries that are permanently reinvested.

We utilize a two step approach to account for uncertain tax positions. A tax position is first evaluated for recognition based on its technical merits. Tax positions that have a greater than 50% likelihood of being realized upon ultimate settlement are then measured to determine amounts to be recognized in the financial statements. This measurement incorporates information about potential settlements with taxing authorities. A previously recognized tax position is derecognized in the first period in which the position no longer meets the recognition threshold or upon expiration of the statute of limitations. We classify interest expense and penalties related to uncertain tax positions and interest income on tax overpayments as part of income tax expense.

Foreign Exchange
Our consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries with non-U.S. dollar functional currencies are translated to U.S. dollars at the exchange rates in effect on the balance sheet date, or the last business day of the period, if applicable. Revenues and expenses for each subsidiary are translated to U.S. dollars using a weighted average rate for the relevant reporting period. Translation adjustments resulting from this process are included, net of tax, in OCI.

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Gains and losses that arise from exchange rate fluctuations for monetary asset and liability balances that are not denominated in an entity’s functional currency are included within other income (expense), net in the Consolidated Statements of Operations. Currency gains and losses of intercompany balances deemed to be long-term in nature or designated as a hedge of the net investment in international subsidiaries are included, net of tax, in OCI.

Fair Value Measurements
For assets and liabilities measured at fair value, the GAAP fair value hierarchy prioritizes the inputs used in different valuation methodologies, assigning the highest priority to unadjusted quoted prices for identical assets and liabilities in actively traded markets (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 inputs consist of quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in non-active markets; and model-derived valuations in which significant inputs are corroborated by observable market data either directly or indirectly through correlation or other means. Inputs may include yield curves, volatility, credit risks, and default rates.

Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Due to various factors affecting future costs and operations, actual results could differ materially from these estimates.

New Accounting Pronouncement
The Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013.11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists on July 18, 2013. The ASU requires that an unrecognized tax benefit should be presented as a reduction of a deferred tax asset when settlement in this manner is available under the law. We adopted this amendment as of January 1, 2014. The result of adoption was to reclassify an immaterial amount of long-term liabilities to long-term deferred tax assets with no impact to the tax provision during the first quarter of 2014.


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Note 2:    Earnings Per Share and Capital Structure

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

 
Three Months Ended
March 31,
 
2014
 
2013
 
(in thousands, except per share data)
Net income (loss) available to common shareholders
$
(254
)
 
$
2,570

 
 
 
 
Weighted average common shares outstanding - Basic
39,235

 
39,420

Dilutive effect of stock-based awards

 
350

Weighted average common shares outstanding - Diluted
39,235

 
39,770

Earnings (loss) per common share - Basic
$
(0.01
)
 
$
0.07

Earnings (loss) per common share - Diluted
$
(0.01
)
 
$
0.06


Stock-based Awards
For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase common stock at the average market price during the period. Related proceeds include the amount the employee must pay upon exercise, future compensation cost associated with the stock award, and the amount of excess tax benefits, if any. As a result of our net loss for for the three months ended March 31, 2014, there was no dilutive effect to the weighted average common shares outstanding for this period. Approximately 1.6 million stock-based awards were excluded from the calculation of diluted EPS for the three months ended March 31, 2014, and approximately 1.2 million stock-based awards were excluded from the calculation of diluted EPS for the three months ended March 31, 2013, because they were anti-dilutive. These stock-based awards could be dilutive in future periods.

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 March 31, 2014 and December 31, 2013.

Stock Repurchase Plan
On March 8, 2013, the Board authorized a 12-month repurchase program of up to $50 million in shares of our common stock. The March 8, 2013 authorization expired on March 7, 2014. From March 8, 2013 through March 7, 2014, we repurchased 720,595 shares of our common stock, totaling $29.9 million. From January 1, 2014 through March 7, 2014, we repurchased 75,203 shares of our common stock, totaling $2.9 million.

On February 7, 2014, the Board authorized a 12-month repurchase program of up to $50 million in shares of our common stock, to begin on March 8, 2014, upon the expiration of the previous stock repurchase program. From March 8, 2014 through March 31, 2014, we have not repurchased any shares of our common stock, and $50.0 million remains under the current program for future purchases.
Note 3:    Certain Balance Sheet Components
 
Accounts receivable, net
March 31, 2014
 
December 31, 2013
 
(in thousands)
Trade receivables (net of allowance of $8,758 and $8,368)
$
310,927

 
$
328,240

Unbilled receivables
30,620

 
28,469

Total accounts receivable, net
$
341,547

 
$
356,709


At March 31, 2014 and December 31, 2013, $3.1 million and $3.2 million, respectively, were recorded within trade receivables as billed but not yet paid by customers, in accordance with contract retainage provisions. At March 31, 2014 and December 31, 2013, contract retainage amounts that were unbilled and classified as unbilled receivables were $5.0 million and $4.3 million,

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respectively. These contract retainage amounts within trade receivables and unbilled receivables are expected to be collected within the following 12 months.

At March 31, 2014, long-term unbilled receivables totaled $4.5 million. These long-term unbilled receivables are classified within other long-term assets, as collection is not anticipated within the following 12 months. We had no long-term billed contract retainage receivables at March 31, 2014, as we expect to collect all contract retainage receivables within the following 12 months. At December 31, 2013, long-term unbilled receivables totaled $4.7 million. These long-term unbilled receivables are classified within other long-term assets. We had no long-term billed contract retainage receivables at December 31, 2013.

Allowance for doubtful account activity
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Beginning balance
$
8,368

 
$
7,372

Provision (release) of doubtful accounts, net
606

 
(904
)
Accounts written-off
(232
)
 
(105
)
Effect of change in exchange rates
16

 
(219
)
Ending balance
$
8,758

 
$
6,144

 
Inventories
March 31, 2014
 
December 31, 2013
 
(in thousands)
Materials
$
110,861

 
$
102,596

Work in process
10,958

 
13,770

Finished goods
70,754

 
61,101

Total inventories
$
192,573

 
$
177,467


Our inventory levels may vary from period to period as a result of our factory scheduling and the timing of contract fulfillments, which may include the buildup of materials in preparation for customer orders or finished goods for shipment.

Consigned inventory is held at third-party locations; however, we retain title to the inventory until it is purchased by the third-party. Consigned inventory, consisting of raw materials and finished goods, was $4.2 million and $6.4 million at March 31, 2014 and December 31, 2013, respectively.

Property, plant, and equipment, net
March 31, 2014
 
December 31, 2013
 
(in thousands)
Machinery and equipment
$
311,578

 
$
309,525

Computers and software
101,002

 
99,654

Buildings, furniture, and improvements
146,214

 
145,926

Land
24,039

 
24,005

Construction in progress, including purchased equipment
13,393

 
14,257

Total cost
596,226

 
593,367

Accumulated depreciation
(358,900
)
 
(346,547
)
Property, plant, and equipment, net
$
237,326

 
$
246,820


Depreciation expense
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Depreciation expense
$
14,522

 
$
14,013



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Note 4:    Intangible Assets

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

 
March 31, 2014
 
December 31, 2013
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
Gross Assets
 
Accumulated
Amortization
 
Net
 
(in thousands)
Core-developed technology
$
427,981

 
$
(361,601
)
 
$
66,380

 
$
428,890

 
$
(356,017
)
 
$
72,873

Customer contracts and relationships
290,198

 
(177,737
)
 
112,461

 
291,185

 
(173,952
)
 
117,233

Trademarks and trade names
72,942

 
(67,795
)
 
5,147

 
73,117

 
(67,449
)
 
5,668

Other
11,087

 
(11,023
)
 
64

 
11,089

 
(11,023
)
 
66

Total intangible assets
$
802,208

 
$
(618,156
)
 
$
184,052

 
$
804,281

 
$
(608,441
)
 
$
195,840


A summary of intangible asset activity is as follows:

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Beginning balance, intangible assets, gross
$
804,281

 
$
802,540

Effect of change in exchange rates
(2,073
)
 
(20,624
)
Ending balance, intangible assets, gross
$
802,208

 
$
781,916


Intangible assets of our international subsidiaries are recorded in their respective functional currency; therefore, the carrying amounts of intangible assets increase or decrease, with a corresponding change in accumulated OCI, due to changes in foreign currency exchange rates.

Estimated future annual amortization expense is as follows:

Years ending December 31,
Estimated Annual
Amortization
 
(in thousands)
2014 (amount remaining at March 31, 2014)
$
33,305

2015
35,630

2016
28,025

2017
20,836

2018
14,655

Beyond 2018
51,601

Total intangible assets subject to amortization
$
184,052


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Note 5:    Goodwill

The following table reflects goodwill allocated to each reporting segment as of March 31, 2014:

 
Electricity
 
Gas
 
Water
 
Total Company
 
(in thousands)
Balance at January 1, 2014
 
 
 
 
 
 
 
Goodwill before impairment
$
493,610

 
$
394,878

 
$
429,783

 
$
1,318,271

Accumulated impairment losses
(433,378
)
 

 
(336,315
)
 
(769,693
)
Goodwill, net
60,232

 
394,878

 
93,468

 
548,578

 
 
 
 
 
 
 
 
Goodwill impairment
(977
)
 

 

 
(977
)
Effect of change in exchange rates
(105
)
 
(852
)
 
(207
)
 
(1,164
)
 
 
 
 
 
 
 
 
Balance at March 31, 2014
 
 
 
 
 
 
 
Goodwill before impairment
492,619

 
394,026

 
428,835

 
1,315,480

Accumulated impairment losses
(433,469
)
 

 
(335,574
)
 
(769,043
)
Goodwill, net
$
59,150

 
$
394,026

 
$
93,261

 
$
546,437


During our 2013 annual goodwill impairment test, we determined that the carrying value of the Electricity reporting unit exceeded its fair value, primarily due to delays in global smart grid projects and lower volumes and pricing pressures in certain regions in Europe and Asia/Pacific. The revised forecast for the Electricity business drove a decrease in the fair value of the reporting unit. As a result, we performed the second step of the goodwill impairment test for the Electricity reporting unit, which indicated a goodwill impairment of $173.2 million was necessary. This charge was recorded during the fourth quarter of 2013. Upon finalizing our 2013 goodwill analysis late in the year-end reporting process, we determined $977,000 of additional goodwill impairment expense should have been recognized. In accordance with relevant accounting guidance, we evaluated the materiality of the error from a qualitative and quantitative perspective. Based on such evaluation, we concluded that recognizing the incremental goodwill impairment during the three months ended March 31, 2014 would not be material, quantitatively or qualitatively, to our results of operations for the three months ended March 31, 2014 or our expected full year results of operations for 2014 and would not have had a material impact on our results for the year ended December 31, 2013. Because this adjustment was not material individually or in aggregate, we did not retrospectively adjust the comparative amount on the Consolidated Balance Sheet as of December 31, 2013.

Refer to Note 1 for a description of our reporting units and the methods used to determine the fair values of our reporting units and to determine the amount of any goodwill impairment.

Goodwill and accumulated impairment losses associated with our international subsidiaries are recorded in their respective functional currency; therefore, the carrying amounts of these balances increase or decrease, with a corresponding change in accumulated OCI, due to changes in foreign currency exchange rates.
Note 6:    Debt

The components of our borrowings were as follows:

 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Credit facility:
 
 
 
USD denominated term loan
$
253,125

 
$
258,750

Multicurrency revolving line of credit
95,000

 
120,000

Total debt
348,125

 
378,750

Less: current portion of debt
28,125

 
26,250

Long-term debt
$
320,000

 
$
352,500


Credit Facility
Our credit facility is dated August 5, 2011. The credit facility consists of a $300 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 $660 million. Both the term loan and the revolver mature on August 8, 2016. Amounts borrowed under the revolver are classified as long-term and, during the credit facility

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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 0.20% to 0.40% 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 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 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 credit facility, are guaranteed by the foreign subsidiary and by its direct and indirect foreign parents. The credit facility includes debt covenants, which contain certain financial ratio 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 credit facility at March 31, 2014.

Scheduled principal repayments for the term loan are due quarterly in the amounts of $5.6 million through June 2014 and $7.5 million from September 2014 through June 2016, with the remainder due at maturity on August 8, 2016. The term loan may be repaid early in whole or in part, subject to certain minimum thresholds, without penalty.

Under the 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, 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 March 31, 2014, the interest rate for both the term loan and the revolver was 1.66% (the LIBOR rate plus a margin of 1.50%).

Total credit facility repayments were as follows:

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Term loan
$
5,625

 
$
3,750

Multicurrency revolving line of credit
25,000

 
15,000

Total credit facility repayments
$
30,625

 
$
18,750

 
At March 31, 2014, $95.0 million was outstanding under the credit facility revolver, and $47.3 million was utilized by outstanding standby letters of credit, resulting in $517.7 million available for additional borrowings.

Unamortized prepaid debt fees were as follows:

 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Unamortized prepaid debt fees
$
3,431

 
$
3,810

Note 7:    Derivative Financial Instruments

As part of our risk management strategy, we use derivative instruments to hedge certain foreign currency and interest rate exposures. Refer to Note 1, Note 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.


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The fair values of our derivative instruments at March 31, 2014 and December 31, 2013 were as follows:
 
 
 
 
 
Fair Value
 
 
Balance Sheet Location
 
March 31,
2014
 
December 31,
2013
 
 
 
 
(in thousands)
Asset Derivatives
 
 
 
 
Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current assets
 
$
126

 
$
41

 
 
 
 
 
 
 
Liability Derivatives
 
 
 
 
 
 
Derivatives designated as hedging instruments under ASC 815-20
 
 
 
 
Interest rate swap contracts
 
Other current liabilities
 
$
1,623

 
$
1,557

Interest rate swap contracts
 
Other long-term obligations
 
145

 
474

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
Foreign exchange forward contracts
 
Other current liabilities
 
330

 
145

Total liability derivatives
 
 
 
$
2,098

 
$
2,176


OCI during the reporting periods for our derivative and nonderivative hedging instruments, net of tax, was as follows:

 
2014
 
2013
 
(in thousands)
Net unrealized loss on hedging instruments at January 1,
$
(15,636
)
 
$
(16,069
)
Unrealized gain (loss) on derivative instruments
(95
)
 
(73
)
Realized losses reclassified into net income (loss)
258

 

Net unrealized loss on hedging instruments at March 31,
$
(15,473
)
 
$
(16,142
)

Included in the net unrealized loss on hedging instruments at March 31, 2014 and 2013 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 accumulated OCI until such time when earnings are impacted by a sale or liquidation of the associated foreign operation.

A summary of the potential effect of netting arrangements on our financial position related to the offsetting of our recognized derivative assets and liabilities under master netting arrangements or similar agreements is as follows:
Offsetting of Derivative Assets
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not
Offset in the Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Assets Presented in
the Consolidated
Balance Sheets
 
Derivative Financial Instruments
 
Cash Collateral Received
 
Net Amount
 
(in thousands)
March 31, 2014
$
126

 
$
(123
)
 
$

 
$
3

 
 
 
 
 
 
 
 
December 31, 2013
$
41

 
$
(40
)
 
$

 
$
1



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Offsetting of Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not
Offset in the Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Liabilities Presented in
the Consolidated
Balance Sheets
 
Derivative Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
 
(in thousands)
March 31, 2014
$
2,098

 
$
(123
)
 
$

 
$
1,975

 
 
 
 
 
 
 
 
December 31, 2013
$
2,176

 
$
(40
)
 
$

 
$
2,136


Our derivative assets and liabilities consist of foreign exchange forward and interest rate swap contracts with nine counterparties at March 31, 2014 and seven counterparties at December 31, 2013. No derivative asset or liability balance with any of our counterparties was individually significant at March 31, 2014 or December 31, 2013. Our derivative contracts with each of these counterparties exist under agreements that provide for the net settlement of all contracts through a single payment in a single currency in the event of default. We have no pledges of cash collateral against our obligations nor have we received pledges of cash collateral from our counterparties under the associated derivative contracts.
 
Cash Flow Hedges
As a result of our floating rate debt, we are exposed to variability in our cash flows from changes in the applicable interest rate index. We enter into swaps to achieve a fixed rate of interest on the hedged portion of debt in order to 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 forward starting pay-fixed, receive one-month LIBOR interest rate swaps. The interest rate swaps convert $200 million of our LIBOR-based debt from a floating LIBOR interest rate to a fixed interest rate of 1.00% (excluding the applicable margin on the debt) and are effective from July 31, 2013 to August 8, 2016. These cash flow hedges are expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swaps are recorded as a component of OCI and are recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedges are recognized as adjustments to interest expense. The amount of net losses expected to be reclassified into earnings in the next 12 months is $1.6 million. At March 31, 2014, our LIBOR-based debt balance was $348.1 million.

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

The before-tax effect of our cash flow derivative instruments on the Consolidated Balance Sheets and the Consolidated Statements of Operations for the three months ended March 31 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
 
 
2014
 
2013
 
 
 
2014
 
2013
 
 
 
2014
 
2013
 
 
(in thousands)
 
 
 
(in thousands)
 
 
 
(in thousands)
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$
(155
)
 
$
(92
)
 
Interest expense
 
$
(418
)
 
$

 
Interest expense
 
$

 
$


Derivatives Not Designated as Hedging Relationships
We are exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third-party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recorded to other income and expense. We enter into monthly foreign exchange forward contracts (a total of 126 contracts were entered into during the three months ended March 31, 2014), which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with certain of these non-functional currency assets and liabilities. The notional amounts of the contracts ranged from $283,000 to $12.4 million, offsetting our exposures to the euro, South African rand, Saudi riyal, Canadian dollar, Australian dollar, Chinese yuan renminbi, and various other currencies.


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The effect of our foreign exchange forward derivative instruments on the Consolidated Statements of Operations for the three months ended March 31 was as follows:
 
Derivatives Not Designated as
Hedging Instrument under ASC 815-20
 
Gain (Loss) Recognized on Derivatives in Other Income (Expense)
 
 
Three Months Ended
March 31,
 
 
2014
 
2013
 
 
(in thousands)
Foreign exchange forward contracts
 
$
(848
)
 
$
214

Note 8:    Defined Benefit Pension Plans

We sponsor both funded and unfunded defined benefit pension plans for our international employees, primarily in Germany, France, Italy, Indonesia, Brazil, and Spain, offering death and disability, retirement, and special termination benefits. The defined benefit obligation is calculated annually by using the projected unit credit method. The measurement date for the pension plans was December 31, 2013.
Our defined benefit pension plans are denominated in the functional currencies of the respective countries in which the plans are sponsored; therefore, the balances increase or decrease, with a corresponding change in OCI, due to changes in foreign currency exchange rates. Amounts recognized on the Consolidated Balance Sheets consist of:
 
 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Assets
 
 
 
Plan assets in other long-term assets
$
1,482

 
$
1,426

 
 
 
 
Liabilities
 
 
 
Current portion of pension plan liability in wages and benefits payable
3,199

 
3,721

Long-term portion of pension plan liability
89,498

 
88,687

 
 
 
 
Net pension plan benefit liability
$
91,215

 
$
90,982


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. We contributed $26,000 and $42,000 to the defined benefit pension plans for the three months ended March 31, 2014 and 2013, respectively. The timing of contributions can vary by plan and from year to year. For 2014, assuming that actual plan asset returns are consistent with our expected rate of return, and that interest rates remain constant, we expect to contribute approximately $458,000 to our defined benefit pension plans. We contributed $436,000 to the defined benefit pension plans for the year ended December 31, 2013.
Net periodic pension benefit costs for our plans include the following components:

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Service cost
$
948

 
$
981

Interest cost
893

 
800

Expected return on plan assets
(157
)
 
(79
)
Settlements and other
(2
)
 
(814
)
Amortization of actuarial net loss
123

 
251

Amortization of unrecognized prior service costs
18

 
17

Net periodic benefit cost
$
1,823

 
$
1,156


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Note 9:    Stock-Based Compensation

We record stock-based compensation expense for awards of stock options, stock sold pursuant to our ESPP (until October 1, 2013), and the issuance of restricted stock units and unrestricted stock awards. We expense stock-based compensation primarily using the straight-line method over the requisite service period. For the three months ended March 31, stock-based compensation expense and the related tax benefit were as follows:
 
 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Stock options
$
554

 
$
473

Restricted stock units
3,800

 
4,235

Unrestricted stock awards
230

 
197

ESPP

 
191

Total stock-based compensation
$
4,584

 
$
5,096

 
 
 
 
Related tax benefit
$
1,287

 
$
1,364


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

Subject to stock splits, dividends, and other similar events, 3,500,000 shares of common stock are reserved and authorized for issuance under our 2010 Stock Incentive Plan (Stock Incentive Plan). Awards consist of stock options, restricted stock units, and unrestricted stock awards. At March 31, 2014, 72,843 shares were available for grant under the Stock Incentive Plan. The Stock Incentive Plan shares are subject to a fungible share provision such that, with respect to grants made after December 31, 2009, the authorized share reserve is reduced by (i) one share for every one share subject to a stock option or share appreciation right granted under the Plan and (ii) 1.7 shares for every one share of common stock that was subject to an award other than an option or share appreciation right.

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

The fair values of stock options granted were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
 
 
Three Months Ended March 31,
 
2014
 
2013
Dividend yield
0.0
%
 
0.0
%
Expected volatility
39.8
%
 
38.1
%
Risk-free interest rate
1.7
%
 
1.0
%
Expected term (years)
5.5

 
5.5


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


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A summary of our stock option activity for the three months ended March 31 is as follows:
 
 
Shares
 
Weighted
Average Exercise
Price per Share
 
Weighted Average
Remaining
Contractual Life
 
Aggregate
Intrinsic Value(1)
 
Weighted
Average Grant
Date Fair Value
 
(in thousands)
 
 
 
(years)
 
(in thousands)
 
 
Outstanding, January 1, 2013
1,137

 
$
54.06

 
4.8
 
$
3,815

 
 
Granted
129

 
42.76

 
 
 
 
 
$
15.44

Exercised
(11
)
 
28.92

 
 
 
$
171

 
 
Expired
(3
)
 
48.51

 
 
 
 
 
 
Outstanding, March 31, 2013
1,252

 
$
53.14

 
5.1
 
$
4,805

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2014
1,180

 
$
54.79

 
4.6
 
$
1,300

 
 
Granted
147

 
35.19

 
 
 
 
 
$
13.64

Exercised
(5
)
 
35.71

 
 
 
$
25

 
 
Expired

 

 
 
 
 
 
 
Outstanding, March 31, 2014
1,322

 
$
52.68

 
5.0
 
$
613

 
 
 
 
 
 
 
 
 
 
 
 
Exercisable, March 31, 2014
975

 
$
57.41

 
3.5
 
$
562

 
 
 
 
 
 
 
 
 
 
 
 
Expected to vest, March 31, 2014
329

 
$
39.45

 
9.2
 
$
47

 
 

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

As of March 31, 2014, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $4.5 million, which is expected to be recognized over a weighted average period of approximately 2.2 years.

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

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

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

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determine our expected TSR performance ranking. The weighted-average assumptions used to estimate the fair value of performance-based restricted stock units awarded and the resulting weighted average fair-value are as follows:

 
Three Months Ended March 31,
 
2014
 
2013
Dividend yield
0.0
%
 
0.0
%
Expected volatility
30.9
%
 
31.9
%
Risk-free interest rate
0.2
%
 
0.3
%
Expected term (years)
1.4

 
2.5

 
 
 
 
Weighted-average fair value
$
28.88

 
$
44.93


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

The following table summarizes restricted stock unit activity for the three months ended March 31:

 
Number of
Restricted Stock Units
 
Weighted
Average Grant
Date Fair Value
 
Aggregate
Intrinsic Value(1)
 
(in thousands)
 
 
 
(in thousands)
Outstanding, January 1, 2013
774

 
 
 
 
Granted (2)
237

 
$
42.13

 
 
Released
(224
)
 
 
 
$
12,084

Forfeited
(7
)
 
 
 
 
Outstanding, March 31, 2013
780

 
 
 
 
 
 
 
 
 
 
Outstanding, January 1, 2014
658

 
 
 
 
Granted (2)
308

 
$
35.38

 
 
Released
(236
)
 
 
 
$
11,666

Forfeited
(3
)
 
 
 
 
Outstanding, March 31, 2014
727

 
 
 
 
 
 
 
 
 
 
Vested but not released, March 31, 2014
8

 
 
 
$
300

 
 
 
 
 
 
Expected to vest, March 31, 2014
605

 
 
 
$
21,503


(1) 
The aggregate intrinsic value is the market value of the stock, before applicable income taxes, based on the closing price on the stock release dates or at the end of the period for restricted stock units expected to vest.
(2) 
Restricted stock units granted in 2013 and 2014 do not include awards under the Performance Award Agreement for the respective years, as these awards are not granted until attainment of annual performance goals has been determined at the conclusion of the performance period, which had not occurred as of March 31, 2013 and 2014, respectively.

At March 31, 2014, unrecognized compensation expense on restricted stock units was $23.5 million, which is expected to be recognized over a weighted average period of approximately 2.1 years.

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


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Table of Contents

The following table summarizes unrestricted stock award activity for the three months ended March 31:
 
 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands, except per share data)
Shares of unrestricted stock granted
6

 
4

 
 
 
 
Weighted average grant date fair value per share
$
40.63

 
$
45.43


Employee Stock Purchase Plan
Under the terms of the ESPP, employees can deduct up to 10% of their regular cash compensation to purchase our common stock at a discount from the fair market value of the stock at the end of each fiscal quarter, subject to other limitations under the plan. The sale of the stock to the employees occurs at the beginning of the subsequent quarter. Effective October 1, 2013, we changed the terms of the ESPP to reduce the discount from 15% to 5% from the fair market value of the stock at the end of each fiscal quarter. As a result of this change, the ESPP is no longer considered compensatory, and no compensation expense is recognized for future sales of our common stock to employees. Prior to October 1, 2013, the plan was considered compensatory.

The following table summarizes ESPP activity for the three months ended March 31:

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands, except per share data)
Shares of stock sold to employees(1)
14

 
20

 
 
 
 
Weighted average fair value per ESPP award(2)
$

 
$
6.96


(1) 
Stock sold to employees during each fiscal quarter under the ESPP is associated with the offering period ending on the last day of the previous fiscal quarter.
(2) 
Effective October 1, 2013, the ESPP is no longer compensatory, and therefore the weighted average fair value per award is not applicable for the three months ended March 31, 2014.

There were approximately 492,000 shares of common stock available for future issuance under the ESPP at March 31, 2014.
Note 10:    Income Taxes

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

Our tax benefit for the first three months of 2014 was higher than the federal statutory benefit of 35% due to discrete tax benefits recognized.

Our tax benefit for the first three months of 2013 reflects the favorable discrete tax benefit for the retroactive extension of the 2012 research and experimentation credit in the amount of $4.0 million. The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013 and extended several business tax provisions including the research and experimentation credit. Our annual estimated effective tax rate for 2013 was favorably impacted by a higher percentage of projected earnings in foreign jurisdictions with tax rates below 35%, the benefit of certain interest expense deductions, and an election under U.S. Internal Revenue Code Section 338 with respect to a foreign acquisition in 2007. 


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Table of Contents

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,
 
2014
 
2013
 
(in thousands)
Net interest and penalties expense (benefit)
$
(543
)
 
$
171


Accrued interest and penalties recorded were as follows:

 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Accrued interest
$
1,846

 
$
2,078

Accrued penalties
2,808

 
3,075


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:
 
 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Unrecognized tax benefits related to uncertain tax positions
$
29,068

 
$
28,615

The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate
27,833

 
27,694


We believe it is reasonably possible that our unrecognized tax benefits may decrease by approximately $2.0 million within the next twelve months due to the expiration of the statute of limitations. At March 31, 2014, we are not able to reasonably estimate the timing of future cash flows related to our uncertain tax positions.


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Table of Contents

Note 11:    Commitments and Contingencies

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

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

 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Credit facilities(1)
 
 
 
Multicurrency revolving line of credit
$
660,000

 
$
660,000

Long-term borrowings
(95,000
)
 
(120,000
)
Standby LOCs issued and outstanding
(47,336
)
 
(49,491
)
Net available for additional borrowings and LOCs
$
517,664

 
$
490,509

 
 
 
 
Unsecured multicurrency revolving lines of credit with various financial institutions
 
 
 
Multicurrency revolving lines of credit
$
127,181

 
$
115,269

Standby LOCs issued and outstanding
(32,882
)
 
(31,714
)
Short-term borrowings(2)
(2,058
)
 
(4,252
)
Net available for additional borrowings and LOCs
$
92,241

 
$
79,303

 
 
 
 
Unsecured surety bonds in force
$
145,292

 
$
186,446


(1)
Refer to Note 6 for details regarding our secured credit facilities.
(2) 
Short-term borrowings are included in "Other current liabilities" on the Consolidated Balance Sheets.

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

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

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

In 2010 and 2011, Transdata Incorporated (Transdata) filed lawsuits against four of our customers, CenterPoint Energy (CenterPoint), TriCounty Electric Cooperative, Inc. (Tri-County), San Diego Gas & Electric Company (San Diego), and Texas-New Mexico Power Company (TNMP), as well as several other utilities, alleging infringement of three patents owned by Transdata related to the use of an antenna in a meter. Pursuant to our contractual obligations with our customers, we agreed, subject to certain exceptions, to indemnify and defend them in these lawsuits. The complaints seek unspecified damages as well as injunctive relief. CenterPoint, Tri-County, San Diego, and TNMP have denied all of the substantive allegations and filed counterclaims seeking a declaratory judgment that the patents are invalid and not infringed. In December 2011, the Judicial Panel on Multi-District Litigation consolidated all of these cases in the Western District of Oklahoma for pretrial proceedings. On April 17, 2011, the Oklahoma court stayed the litigation pending the resolution of re-examination proceedings in the United States Patent and Trademark Office (U.S. PTO). The U.S. PTO has issued re-examination certificates confirming the patentability of the original claims and allowing

25

Table of Contents

certain new claims added by TransData. The parties conducted a claim construction hearing on February 5, 2013 on one claim term -- "electric meter circuitry." After initially adopting defendants' proposed construction of the term, the Court granted TransData's motion for reconsideration by order of June 25, 2013, and has adopted TransData's proposed construction. On October 1, 2013, the Court issued an order construing other claim terms. Fact discovery is currently scheduled to close on June 29, 2014, with experts' reports to follow. No trials are scheduled. We do not believe this matter will have a material adverse effect on our business or financial condition, although an unfavorable outcome could have a material adverse effect on our results of operations for the period in which such a loss is recognized.

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

In a series of cases, approximately 300 former employees of Itron Sistemas e Technologia Ltda. (Itron Brazil), the majority of whose employment contracts were terminated in 2011, have sued Itron Brazil seeking payment of overtime and salary differential and alleging that the assumption of the employment relationship by Itron Brazil constituted illegal outsourcing under Brazilian law. In 2008, Itron Brazil entered into an agreement to provide installation and maintenance services to one of its customers and, to perform such services, hired over 800 employees of the previous provider of such services. In 2011, Itron Brazil determined to terminate the contract with its customer, which led to the termination of approximately 870 employees. Under applicable statutes of limitation, most additional employee claims must have been brought prior to October 31, 2013. Itron Brazil intends to vigorously defend these cases, but the ultimate outcome of the cases cannot be determined at this time.

On October 31, 2013, we received a claim from one of our customers relating to alleged defects in meters sold to this customer since the year 2000. The customer asserts that it should be compensated for product and other related costs. We have engaged the customer in discussions to determine the factual basis for the claim. Since the discussions and related analysis are at an early stage, we are not yet able to estimate a potential range of loss. Currently, we do not believe that the outcome of this matter will have a material adverse effect on our business or financial condition, although an unfavorable outcome could have a material adverse effect on our results of operations for the period in which such a loss is recognized.

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

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Beginning balance
$
45,146

 
$
53,605

New product warranties
1,231

 
861

Other changes/adjustments to warranties
2,093

 
2,027

Claims activity
(2,631
)
 
(5,099
)
Effect of change in exchange rates
185

 
(640
)
Ending balance
46,024

 
50,754

Less: current portion of warranty
21,989

 
25,150

Long-term warranty
$
24,035

 
$
25,604


Total warranty expense is classified within cost of revenues and consists of new product warranties issued, costs related to extended warranty contracts, and other changes and adjustments to warranties. Warranty expense for the three months ended March 31 was as follows:
 
 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Total warranty expense
$
3,324

 
$
2,888

 

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Table of Contents

Unearned Revenue Related to Extended Warranty
A summary of changes to unearned revenue for extended warranty contracts is as follows:
 
 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Beginning balance
$
33,528

 
$
31,960

Unearned revenue for new extended warranties
848

 
961

Unearned revenue recognized
(669
)
 
(470
)
Effect of change in exchange rates
(117
)
 
(88
)
Ending balance
33,590

 
32,363

Less: current portion of unearned revenue for extended warranty
2,424

 
2,285

Long-term unearned revenue for extended warranty within other long-term obligations
$
31,166

 
$
30,078


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,
 
2014
 
2013
 
(in thousands)
Plan costs
$
6,263

 
$
4,838


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

 
March 31, 2014
 
December 31, 2013
 
(in thousands)
IBNR accrual
$
2,075

 
$
2,206


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

2013 Projects
On September 10, 2013, our management approved new projects to restructure our operations to improve profitability and increase efficiencies. These restructuring projects will reduce headcount and close or consolidate several manufacturing and office facilities. Overall, we expect to reduce our work force by approximately 9%.

We began implementing these projects in the third quarter of 2013, and we expect to substantially complete these projects by December 31, 2014. Certain aspects of the projects are subject to a variety of labor and employment laws, rules, and regulations, which could result in a delay in implementing the projects at some locations.

During the three months ended March 31, 2014, the total expected costs increased $5.8 million from our December 31, 2013 expected costs. This increase was primarily a result of additional workforce reductions from the planned consolidation of certain corporate functions, partially offset by lower than expected severance costs in the Electricity and Gas segments.


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The total expected restructuring costs, the restructuring costs recognized during the three months ended March 31, 2014, and the remaining expected restructuring costs as of March 31, 2014 were as follows:

 
Total Expected Costs at
March 31, 2014
 
Costs Recognized in Prior Periods
 
Costs Recognized During the Three Months Ended March 31, 2014
 
Remaining Costs to be Recognized at March 31, 2014
 
(in thousands)
Employee severance costs
$
33,381

 
$
29,186

 
$
4,195

 
$

Asset impairments
1,232

 
1,232

 

 

Other restructuring costs
2,510

 
681

 
1,329

 
500

Total
$
37,123

 
$
31,099

 
$
5,524

 
$
500

 
 
 
 
 
 
 
 
Segments:
 
 
 
 
 
 
 
Electricity
$
23,526

 
$
24,056

 
$
(530
)
 
$

Gas
4,066

 
4,369

 
(303
)
 

Water
2,514

 
1,957

 
557

 

Corporate unallocated
7,017

 
717

 
5,800

 
500

Total
$
37,123

 
$
31,099

 
$
5,524

 
$
500


The following table summarizes the activity within the restructuring related balance sheet accounts during the three months ended March 31, 2014:

 
Accrued Employee Severance
 
Asset Impairments & Net Loss on Sale or Disposal
 
Other Accrued Costs
 
Total
 
(in thousands)
Beginning balance, January 1, 2014
$
32,709

 
$

 
$
3,632

 
$
36,341

Costs incurred and charged to expense
4,195

 

 
1,329

 
5,524

Cash payments
(3,675
)
 

 
(88
)
 
(3,763
)
Non-cash items

 

 

 

Effect of change in exchange rates
(124
)
 

 
9

 
(115
)
Ending balance, March 31, 2014
$
33,105

 
$

 
$
4,882

 
$
37,987


Other restructuring costs include expenses to exit facilities, such as costs to relocate inventory and equipment and contract cancellation costs, once the operations in those facilities have ceased. Costs associated with restructuring activities are generally presented as restructuring expense in the Consolidated Statements of Operations, 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 portions of the restructuring related liability balances were $32.0 million and $30.3 million as of March 31, 2014 and December 31, 2013, respectively. The current portion of the liability is classified within "Other current liabilities" on the Consolidated Balance Sheets. The long-term portions of the restructuring related liability balances were $6.0 million as of March 31, 2014 and December 31, 2013. The long-term portion of the restructuring liability is classified within "Other long-term obligations" on the Consolidated Balance Sheets.

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 plan are not material to our operating segments or consolidated results.

2011 Projects
During the fourth quarter of 2011, we announced the approval of projects to restructure our manufacturing operations to increase efficiency and lower our cost of manufacturing. We began implementing these projects in the fourth quarter of 2011.

As of June 30, 2013, we had substantially completed these restructuring projects, resulting in approximately $74.1 million of restructuring expense, which was recognized from the fourth quarter of 2011 through the second quarter of 2013.

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Note 13:    Other Comprehensive Income (Loss)

OCI is reflected as a net increase (decrease) to Itron, Inc. shareholders’ equity and is not reflected in our results of operations. The before-tax amount, income tax (provision) benefit, and net-of-tax amount related to each component of other comprehensive income (loss) during the reporting periods were as follows:

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Before-tax amount
 
 
 
Foreign currency translation adjustment
$
(3,523
)
 
$
(27,447
)
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
(155
)
 
(92
)
Net hedging loss (gain) reclassified into net income
418

 

Pension plan benefits liability adjustment
139

 
(546
)
Total other comprehensive income (loss), before tax
(3,121
)
 
(28,085
)
 
 
 
 
Tax (provision) benefit
 
 
 
Foreign currency translation adjustment
149

 
(3,848
)
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
60

 
19

Net hedging loss (gain) reclassified into net income
(160
)
 

Pension plan benefits liability adjustment
(42
)
 
166

Total other comprehensive income (loss) tax (provision) benefit
7

 
(3,663
)
 
 
 
 
Net-of-tax amount
 
 
 
Foreign currency translation adjustment
(3,374
)
 
(31,295
)
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges
(95
)
 
(73
)
Net hedging loss (gain) reclassified into net income
258

 

Pension plan benefits liability adjustment
97

 
(380
)
Total other comprehensive income (loss), net of tax
$
(3,114
)
 
$
(31,748
)

The changes in the components of accumulated other comprehensive income (loss) (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 Plan Benefit Liability Adjustments
 
Total
 
(in thousands)
Balances at January 1, 2013
$
(3,313
)
 
$
(1,689
)
 
$
(14,380
)
 
$
(15,002
)
 
$
(34,384
)
OCI before reclassifications
(31,295
)
 
(73
)
 

 
(566
)
 
(31,934
)
Amounts reclassified from AOCI

 

 

 
186

 
186

Total other comprehensive income (loss)
(31,295
)

(73
)


 
(380
)
 
(31,748
)
Balances at March 31, 2013
$
(34,608
)
 
$
(1,762
)
 
$
(14,380
)
 
$
(15,382
)
 
$
(66,132
)
 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2014
$
3,799

 
$
(1,256
)
 
$
(14,380
)
 
$
(9,885
)
 
$
(21,722
)
OCI before reclassifications
(3,374
)
 
(95
)
 

 
(2
)
 
(3,471
)
Amounts reclassified from AOCI

 
258

 

 
99

 
357

Total other comprehensive income (loss)
(3,374
)

163

 

 
97

 
(3,114
)
Balances at March 31, 2014
$
425

 
$
(1,093
)
 
$
(14,380
)
 
$
(9,788
)
 
$
(24,836
)


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Table of Contents

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

 
 
Amount Reclassified from AOCI(1)
 
 
 
 
Three Months Ended
March 31,
 
Affected Line Item in the Income Statement
 
 
2014
 
2013
 
 
 
 
(in thousands)
 
 
Amortization of defined benefit pension items
 
 
 
 
 
 
Prior-service costs
 
$
(18
)
 
$
(17
)
 
(2) 
Actuarial losses
 
(123
)
 
(251
)
 
(2) 
Total, before tax
 
(141
)
 
(268
)
 
Income before income taxes
Tax benefit (provision)
 
42

 
82