Edgar Filing: ITRON INC /WA/

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017



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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒		Accelerated filer	☐
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☐
			Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of June 30, 2017, there were outstanding 38,700,680 shares of the registrant’s common stock, no par value, which is the only class of common stock of the registrant.

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Itron, Inc.

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	Page
PART I: FINANCIAL INFORMATION

Item 1: Financial Statements (Unaudited)

Consolidated Statements of Operations	1

Consolidated Statements of Comprehensive Income (Loss)	2

Consolidated Balance Sheets	3

Consolidated Statements of Cash Flows	4

Notes to Condensed Consolidated Financial Statements	5

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3: Quantitative and Qualitative Disclosures About Market Risk	45

Item 4: Controls and Procedures	46


PART II: OTHER INFORMATION

Item 1: Legal Proceedings	47

Item 1A: Risk Factors	47

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 5: Other Information	47

Item 6: Exhibits	48


SIGNATURE	49

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PART I: FINANCIAL INFORMATION

Item 1: Financial Statements (Unaudited)

ITRON, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands, except per share data)
Revenues	$	503,082		$	513,024		$	980,674		$	1,010,614
Cost of revenues	325,222			343,319			645,589			677,706
Gross profit	177,860			169,705			335,085			332,908

Operating expenses
Sales and marketing	44,753			39,376			86,221			80,143
Product development	43,111			43,354			83,979			88,700
General and administrative	43,161			45,328			80,407			90,397
Amortization of intangible assets	4,970			7,796			9,519			14,006
Restructuring	5,043			(1,622		)	8,095			615
Total operating expenses	141,038			134,232			268,221			273,861

Operating income	36,822			35,473			66,864			59,047
Other income (expense)
Interest income	470			221			739			492
Interest expense	(2,876		)	(2,735		)	(5,550		)	(5,653		)
Other income (expense), net	(2,849		)	(264		)	(5,425		)	(1,781		)
Total other income (expense)	(5,255		)	(2,778		)	(10,236		)	(6,942		)

Income before income taxes	31,567			32,695			56,628			52,105
Income tax provision	(16,560		)	(12,193		)	(25,607		)	(20,819		)
Net income	15,007			20,502			31,021			31,286
Net income attributable to noncontrolling interests	910			585			1,079			1,280
Net income attributable to Itron, Inc.	$	14,097		$	19,917		$	29,942		$	30,006

Earnings per common share - Basic	$	0.36		$	0.52		$	0.78		$	0.79
Earnings per common share - Diluted	$	0.36		$	0.52		$	0.76		$	0.78

Weighted average common shares outstanding - Basic	38,683			38,236			38,579			38,147
Weighted average common shares outstanding - Diluted	39,332			38,516			39,274			38,446

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 June 30,						Six Months Ended June 30,
	2017			2016			2017		2016
	(in thousands)
Net income	$	15,007		$	20,502		$	31,021	$	31,286

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	20,447			(8,380		)	35,463		1,726
Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges	(231		)	(1,126		)	61		(3,732		)
Pension benefit obligation adjustment	193			(291		)	594		(609		)
Total other comprehensive income (loss), net of tax	20,409			(9,797		)	36,118		(2,615		)

Total comprehensive income, net of tax	35,416			10,705			67,139		28,671

Comprehensive income attributable to noncontrolling interests, net of tax	910			585			1,079		1,280

Comprehensive income attributable to Itron, Inc.	$	34,506		$	10,120		$	66,060	$	27,391

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

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ITRON, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



	June 30, 2017			December 31, 2016
	(in thousands)
ASSETS
Current assets
Cash and cash equivalents	$	127,880		$	133,565
Accounts receivable, net	374,180			351,506
Inventories	203,634			163,049
Other current assets	93,266			84,346
Total current assets	798,960			732,466

Property, plant, and equipment, net	186,506			176,458
Deferred tax assets, net	96,062			94,113
Other long-term assets	52,881			50,129
Intangible assets, net	104,144			72,151
Goodwill	541,071			452,494
Total assets	$	1,779,624		$	1,577,811

LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	208,379		$	172,711
Other current liabilities	60,124			43,625
Wages and benefits payable	99,318			82,346
Taxes payable	15,395			10,451
Current portion of debt	16,875			14,063
Current portion of warranty	25,584			24,874
Unearned revenue	79,112			64,976
Total current liabilities	504,787			413,046

Long-term debt	307,484			290,460
Long-term warranty	14,226			18,428
Pension benefit obligation	93,263			84,498
Deferred tax liabilities, net	3,350			3,073
Other long-term obligations	113,017			117,953
Total liabilities	1,036,127			927,458

Commitments and contingencies (Note 11)

Equity
Preferred stock, no par value, 10 million shares authorized, no shares issued or outstanding	—			—
Common stock, no par value, 75 million shares authorized, 38,701 and 38,317 shares issued and outstanding	1,282,085			1,270,467
Accumulated other comprehensive loss, net	(193,209		)	(229,327		)
Accumulated deficit	(365,229		)	(409,536		)
Total Itron, Inc. shareholders' equity	723,647			631,604
Noncontrolling interests	19,850			18,749
Total equity	743,497			650,353
Total liabilities and equity	$	1,779,624		$	1,577,811

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)



	Six Months Ended June 30,
	2017			2016
	(in thousands)
Operating activities
Net income	$	31,021		$	31,286
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	29,468			35,481
Stock-based compensation	10,135			7,878
Amortization of prepaid debt fees	533			534
Deferred taxes, net	7,077			9,706
Restructuring, non-cash	80			(131		)
Other adjustments, net	2,395			(366		)
Changes in operating assets and liabilities:
Accounts receivable	(2,032		)	(35,283		)
Inventories	(29,470		)	2,882
Other current assets	(3,905		)	(10,549		)
Other long-term assets	2,186			2,667
Accounts payable, other current liabilities, and taxes payable	36,861			(735		)
Wages and benefits payable	12,299			14,709
Unearned revenue	6,701			5,513
Warranty	(4,825		)	(9,065		)
Other operating, net	(5,080		)	(3,400		)
Net cash provided by operating activities	93,444			51,127

Investing activities
Acquisitions of property, plant, and equipment	(21,898		)	(19,884		)
Business acquisitions, net of cash and cash equivalents acquired	(99,477		)	(951		)
Other investing, net	(456		)	(974		)
Net cash used in investing activities	(121,831		)	(21,809		)

Financing activities
Proceeds from borrowings	35,000			—
Payments on debt	(20,625		)	(26,218		)
Issuance of common stock	2,198			1,956
Other financing, net	952			(4,679		)
Net cash provided provided by (used in) financing activities	17,525			(28,941		)

Effect of foreign exchange rate changes on cash and cash equivalents	5,177			619
Increase (decrease) in cash and cash equivalents	(5,685		)	996
Cash and cash equivalents at beginning of period	133,565			131,018
Cash and cash equivalents at end of period	$	127,880		$	132,014

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net	$	14,480		$	10,545
Interest, net of amounts capitalized	5,021			5,064

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

June 30, 2017

(UNAUDITED)

In this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron,” and the “Company” refer to Itron, Inc.

Note 1: Summary of Significant Accounting Policies

Financial Statement Preparation

The condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q are unaudited and reflect entries necessary for the fair presentation of the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2017 and 2016, the Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, and the Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 of Itron, Inc. and its subsidiaries. All entries required for the fair presentation of the financial statements are of a normal recurring nature, except as disclosed. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results expected for the full year or for any other period.

Certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim results. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in our 2016 Annual Report on Form 10-K filed with the SEC on March 1, 2017. There have been no significant changes in financial statement preparation or significant accounting policies since December 31, 2016 with the exception of the adoption of Accounting Standards Update (ASU) 2016-09 as discussed below.

New Accounting Pronouncements

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

The revenue guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard effective January 1, 2018 using the cumulative catch-up transition method, and therefore, will recognize the cumulative effect of initially applying the revenue standard as an adjustment to the opening balance of retained earnings in the period of initial application. We currently believe the most significant impact relates to our accounting for software and software-related elements, and the increased financial statement disclosures, but are continuing to evaluate the effect that the updated standard will have on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory (ASU 2015-11). The amendments in ASU 2015-11 apply to inventory measured using first-in, first-out (FIFO) or average cost and will require entities to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the normal course of business, minus the cost of completion, disposal and transportation. Replacement cost and net realizable value less a normal profit margin will no longer be considered. We adopted this standard on January 1, 2017 and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as

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operating leases. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the impact of adoption on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718) (ASU 2016-09), which simplifies several areas within Topic 718. These include income tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. The amendments in this ASU becomes effective on a modified retrospective basis for accounting for income tax benefits recognized and forfeitures, retrospectively for accounting related to the presentation of employee taxes paid, prospectively for accounting related to recognition of excess tax benefits, and either prospectively or retrospectively for accounting related to presentation of excess employee tax benefits for annual periods, and interim periods within those annual periods, beginning after December 15, 2016.

We adopted this standard effective January 1, 2017 using a modified retrospective transition method. We recognized a $14.6 million one-time reduction in accumulated deficit and increase in deferred tax assets related to cumulative unrecognized excess tax benefits. All future excess tax benefits and tax deficiencies will be recognized prospectively as income tax provision or benefit in the Consolidated Statement of Operations, and as an operating activity on the Consolidated Statement of Cash Flows. We also recognized a $0.2 million one-time increase in accumulated deficit and common stock related to our policy election to prospectively recognize forfeitures as they occur.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (ASU 2017-01), which narrows the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output. ASU 2017-01 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We adopted this standard on January 1, 2017, and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test that requires the determination of the fair value of individual assets and liabilities of a reporting unit. ASU 2017-04 requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We adopted this standard on January 1, 2017, and it did not materially impact our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), which provides additional guidance on the presentation of net benefit costs in the income statement. ASU 2017-07 requires an employer disaggregate the service cost component from the other components of net benefit cost and to disclose other components outside of a subtotal of income from operations. It also allows only the service cost component of net benefit costs to be eligible for capitalization. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. We are currently assessing the impact of adoption on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

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Note 2: Earnings Per Share

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands, except per share data)
Net income available to common shareholders	$	14,097	$	19,917	$	29,942	$	30,006

Weighted average common shares outstanding - Basic	38,683		38,236		38,579		38,147
Dilutive effect of stock-based awards	649		280		695		299
Weighted average common shares outstanding - Diluted	39,332		38,516		39,274		38,446
Earnings per common share - Basic	$	0.36	$	0.52	$	0.78	$	0.79
Earnings per common share - Diluted	$	0.36	$	0.52	$	0.76	$	0.78

Stock-based Awards

For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase common stock at the average market price during the period. Related proceeds include the amount the employee must pay upon exercise and the future compensation cost associated with the stock award. Approximately 0.2 million stock-based awards were excluded from the calculation of diluted EPS for both the three and six months ended June 30, 2017 because they were anti-dilutive. Approximately 0.9 million and 1.0 million stock-based awards were excluded from the calculation of diluted EPS for the three and six months ended June 30, 2016 because they were anti-dilutive. These stock-based awards could be dilutive in future periods.

Note 3: Certain Balance Sheet Components



Accounts receivable, net	June 30, 2017		December 31, 2016
	(in thousands)
Trade receivables (net of allowance of $3,502 and $3,320)	$	345,738	$	299,870
Unbilled receivables	28,442		51,636
Total accounts receivable, net	$	374,180	$	351,506



Allowance for doubtful accounts activity	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands)
Beginning balance	$	3,424		$	4,541		$	3,320		$	5,949
Provision (release) for doubtful accounts, net	441			(80		)	744			(88		)
Accounts written-off	(475		)	(364		)	(805		)	(1,842		)
Effect of change in exchange rates	112			(158		)	243			(80		)
Ending balance	$	3,502		$	3,939		$	3,502		$	3,939



Inventories	June 30, 2017		December 31, 2016
	(in thousands)
Materials	$	124,363	$	103,274
Work in process	14,399		7,925
Finished goods	64,872		51,850
Total inventories	$	203,634	$	163,049

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Property, plant, and equipment, net	June 30, 2017			December 31, 2016
	(in thousands)
Machinery and equipment	$	297,314		$	279,746
Computers and software	105,570			98,125
Buildings, furniture, and improvements	130,165			122,680
Land	18,161			17,179
Construction in progress, including purchased equipment	32,036			29,358
Total cost	583,246			547,088
Accumulated depreciation	(396,740		)	(370,630		)
Property, plant, and equipment, net	$	186,506		$	176,458



Depreciation expense	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands)
Depreciation expense	$	10,120	$	11,011	$	19,949	$	21,475

Note 4: Intangible Assets

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



	June 30, 2017							December 31, 2016
	Gross Assets		Accumulated Amortization			Net		Gross Assets		Accumulated Amortization			Net
	(in thousands)
Core-developed technology	$	415,616	$	(382,015	)	$	33,601	$	372,568	$	(354,878	)	$	17,690
Customer contracts and relationships	250,683		(185,659		)	65,024		224,467		(170,056		)	54,411
Trademarks and trade names	68,626		(64,340		)	4,286		61,785		(61,766		)	19
Other	11,579		(11,056		)	523		11,076		(11,045		)	31
Total intangible assets subject to amortization	$	746,504	$	(643,070	)	$	103,434	$	669,896	$	(597,745	)	$	72,151
In-process research and development	710		—			710		—		—			—
Total intangible assets	$	747,214	$	(643,070	)	$	104,144	$	669,896	$	(597,745	)	$	72,151

A summary of intangible asset activity is as follows:



	Six Months Ended June 30,
	2017		2016
	(in thousands)
Beginning balance, intangible assets, gross	$	669,896	$	702,507
Intangible assets acquired	36,500		—
Effect of change in exchange rates	40,818		(2,512		)
Ending balance, intangible assets, gross	$	747,214	$	699,995

On June 1, 2017, we completed the acquisition of Comverge Inc. by purchasing 100% of the voting stock of Peak Holding Corp., its parent company (Comverge). Intangible assets acquired in 2017 are based on the preliminary purchase price allocation relating to this acquisition. Comverge's intangible assets include in-process research and development, which is not amortized until such time as the associated development projects are completed. These projects are expected to be completed in the next six months. Refer to Note 16 for additional information regarding this acquisition.

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Estimated future annual amortization expense is as follows:



Year Ending December 31,	Estimated Annual Amortization
	(in thousands)
2017 (amount remaining at June 30, 2017)	$	11,103
2018	18,761
2019	16,050
2020	13,698
2021	11,799
Beyond 2021	32,023
Total intangible assets subject to amortization	$	103,434

Note 5: Goodwill

The following table reflects goodwill allocated to each reporting unit:



	Electricity			Gas		Water			Total Company
	(in thousands)
Balances at January 1, 2017
Goodwill before impairment	$	400,299		$	319,913	$	334,505		$	1,054,717
Accumulated impairment losses	(348,926		)	—		(253,297		)	(602,223		)
Goodwill, net	51,373			319,913		81,208			452,494

Goodwill acquired	60,286			—		—			60,286
Effect of change in exchange rates	2,065			21,158		5,068			28,291

Balances at June 30, 2017
Goodwill before impairment	486,834			341,071		363,185			1,191,090
Accumulated impairment losses	(373,110		)	—		(276,909		)	(650,019		)
Goodwill, net	$	113,724		$	341,071	$	86,276		$	541,071

Note 6: Debt

The components of our borrowings were as follows:



	June 30, 2017		December 31, 2016
	(in thousands)
Credit facility:
USD denominated term loan	$	202,500	$	208,125
Multicurrency revolving line of credit	122,497		97,167
Total debt	324,997		305,292
Less: current portion of debt	16,875		14,063
Less: unamortized prepaid debt fees - term loan	638		769
Long-term debt less unamortized prepaid debt fees - term loan	$	307,484	$	290,460

Credit Facility

On June 23, 2015, we entered into an amended and restated credit agreement providing for committed credit facilities in the amount of $725 million U.S. dollars (the 2015 credit facility). The 2015 credit facility consists of a $225 million U.S. dollar term loan (the term loan) and a multicurrency revolving line of credit (the revolver) with a principal amount of up to $500 million. The revolver also contains a $250 million standby letter of credit sub-facility and a $50 million swingline sub-facility (available for immediate cash needs at a higher interest rate). Both the term loan and the revolver mature on June 23, 2020, and amounts borrowed under the revolver are classified as long-term and, during the credit facility term, may be repaid and reborrowed until the revolver's maturity, at which time the revolver will terminate, and all outstanding loans, together with all accrued and unpaid interest, must be repaid. Amounts not borrowed under the revolver are subject to a commitment fee, which is paid in arrears on the last day of each fiscal quarter, ranging from 0.18% to 0.30% per annum depending on our total leverage ratio as of the most recently ended fiscal quarter. Amounts repaid on the term loan may not be reborrowed. The 2015 credit facility permits us and certain of our

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foreign subsidiaries to borrow in U.S. dollars, euros, British pounds, or, with lender approval, other currencies readily convertible into U.S. dollars. All obligations under the 2015 credit facility are guaranteed by Itron, Inc. and material U.S. domestic subsidiaries and are secured by a pledge of substantially all of the assets of Itron, Inc. and material U.S. domestic subsidiaries, including a pledge of 100% of the capital stock of material U.S. domestic subsidiaries and up to 66% of the voting stock (100% of the non-voting stock) of their first-tier foreign subsidiaries. In addition, the obligations of any foreign subsidiary who is a foreign borrower, as defined by the 2015 credit facility, are guaranteed by the foreign subsidiary and by its direct and indirect foreign parents.

Under the 2015 credit facility, we elect applicable market interest rates for both the term loan and any outstanding revolving loans. We also pay an applicable margin, which is based on our total leverage ratio (as defined in the credit agreement). The applicable rates per annum may be based on either: (1) the LIBOR rate or EURIBOR rate (floor of 0%), plus an applicable margin, or (2) the Alternate Base Rate, plus an applicable margin. The Alternate Base Rate election is equal to the greatest of three rates: (i) the prime rate, (ii) the Federal Reserve effective rate plus 1/2 of 1%, or (iii) one month LIBOR plus 1%. At June 30, 2017 and December 31, 2016, the interest rate for both the term loan and the USD revolver was 2.48% and 2.02%, respectively, which includes the LIBOR rate plus a margin of 1.25%. At June 30, 2017 and December 31, 2016, the interest rate for the EUR revolver was 1.25% (the EURIBOR floor rate plus a margin of 1.25%).

At June 30, 2017, $122.5 million was outstanding under the 2015 credit facility revolver, and $28.7 million was utilized by outstanding standby letters of credit, resulting in $348.8 million available for additional borrowings or standby letters of credit. At June 30, 2017, $221.3 million was available for additional standby letters of credit under the letter of credit sub-facility and no amounts were outstanding under the swingline sub-facility.

Note 7: Derivative Financial Instruments

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

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

The fair values of our derivative instruments were as follows:



		Fair Value
Asset Derivatives	Balance Sheet Location	June 30, 2017		December 31, 2016
Derivatives designated as hedging instruments under ASC 815-20		(in thousands)
Interest rate cap contracts	Other current assets	$	5	$	3
Interest rate swap contracts	Other long-term assets	1,219		1,830
Interest rate cap contracts	Other long-term assets	173		376
Derivatives not designated as hedging instruments under ASC 815-20
Foreign exchange forward contracts	Other current assets	62		169
Interest rate cap contracts	Other current assets	7		4
Interest rate cap contracts	Other long-term assets	259		563
Total asset derivatives		$	1,725	$	2,945

Liability Derivatives
Derivatives designated as hedging instruments under ASC 815-20
Interest rate swap contracts	Other current liabilities	$	114	$	934
Derivatives not designated as hedging instruments under ASC 815-20
Foreign exchange forward contracts	Other current liabilities	382		449
Total liability derivatives		$	496	$	1,383

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



	2017			2016
	(in thousands)
Net unrealized loss on hedging instruments at January 1,	$	(14,337	)	$	(14,062	)
Unrealized loss on hedging instruments	(330		)	(4,080		)
Realized losses reclassified into net income	391			348
Net unrealized loss on hedging instruments at June 30,	$	(14,276	)	$	(17,794	)

Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations for the periods ended June 30, 2017 and 2016. Included in the net unrealized loss on hedging instruments at June 30, 2017 and 2016 is a loss of $14.4 million, net of tax, related to our nonderivative net investment hedge, which terminated in 2011. This loss on our net investment hedge will remain in AOCI until such time when earnings are impacted by a sale or liquidation of the associated foreign operation.

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



Offsetting of Derivative Assets	Gross Amounts of Recognized Assets Presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets
			Derivative Financial Instruments			Cash Collateral Received		Net Amount
	(in thousands)
June 30, 2017	$	1,725	$	(302	)	$	—	$	1,423

December 31, 2016	$	2,945	$	(1,322	)	$	—	$	1,623



Offsetting of Derivative Liabilities	Gross Amounts of Recognized Liabilities Presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets
			Derivative Financial Instruments			Cash Collateral Pledged		Net Amount
	(in thousands)
June 30, 2017	$	496	$	(302	)	$	—	$	194

December 31, 2016	$	1,383	$	(1,322	)	$	—	$	61

Our derivative assets and liabilities subject to netting arrangements consist of foreign exchange forward and interest rate contracts with three counterparties at June 30, 2017 and December 31, 2016. No derivative asset or liability balance with any of our counterparties was individually significant at June 30, 2017 or December 31, 2016. Our derivative contracts with each of these counterparties exist under agreements that provide for the net settlement of all contracts through a single payment in a single currency in the event of default. We have no pledges of cash collateral against our obligations nor have we received pledges of cash collateral from our counterparties under the associated derivative contracts.

Cash Flow Hedges

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

In May 2012, we entered into six interest rate swaps, which were effective July 31, 2013 and expired on August 8, 2016, to convert $200 million of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of 1.00% (excluding the applicable margin on the debt). The cash flow hedges were expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swaps were

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recognized as a component of other comprehensive income (loss) (OCI) and recognized in earnings when the hedged item affected earnings. The amounts paid on the hedges were recognized as adjustments to interest expense.

In October 2015, we entered into an interest rate swap, which is effective from August 31, 2016 to June 23, 2020, and converts $214 million of our LIBOR based debt from a floating LIBOR interest rate to a fixed interest rate of 1.42% (excluding the applicable margin on the debt). The notional balance will amortize to maturity at the same rate as required minimum payments on our term loan. The cash flow hedge is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swap is recognized as a component of OCI and will be recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedge will be recognized as an adjustment to interest expense. The amount of net losses expected to be reclassified into earnings in the next 12 months is $0.1 million. At June 30, 2017, our LIBOR-based debt balance was $262.5 million.

In November 2015, we entered into three interest rate cap contracts with a total notional amount of $100 million at a cost of $1.7 million. The interest rate cap contracts expire on June 23, 2020 and were entered into in order to limit our interest rate exposure on $100 million of our variable LIBOR based debt up to 2.00%. In the event LIBOR is higher than 2.00%, we will pay interest at the capped rate of 2.00% with respect to the $100 million notional amount of such agreements. The interest rate cap contracts do not include the effect of the applicable margin. As of December 31, 2016, due to the accelerated revolver payments from surplus cash, we elected to de-designate two of the interest rate cap contracts as cash flow hedges and discontinued the use of cash flow hedge accounting. The amounts recognized in AOCI from de-designated interest rate cap contracts will continue to be reported in AOCI unless it is not probable that the forecasted transactions will occur. As a result of the discontinuance of cash flow hedge accounting, all subsequent changes in fair value of the de-designated derivative instruments are recognized within interest expense instead of OCI. The amount of net losses expected to be reclassified into earnings for all interest rate cap contracts in the next 12 months is $0.3 million.

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



Derivatives in ASC 815-20 Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)							Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Derivatives in ASC 815-20 Cash Flow Hedging Relationships							Location	Amount						Location	Amount
	2017			2016				2017			2016				2017		2016
	(in thousands)							(in thousands)							(in thousands)
Three Months Ended June 30,
Interest rate swap contracts	$	(517	)	$	(1,771	)	Interest expense	$	(210	)	$	(280	)	Interest expense	$	—	$	—
Interest rate cap contracts	(117		)	(357		)	Interest expense	(50		)	—			Interest expense	—		—

Six Months Ended June 30,
Interest rate swap contracts	$	(336	)	$	(5,551	)	Interest expense	$	(545	)	$	(566	)	Interest expense	$	—	$	—
Interest rate cap contracts	(201		)	(1,090		)	Interest expense	(93		)	—			Interest expense	—		—

Derivatives Not Designated as Hedging Relationships

We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recognized to other income and expense. We enter into monthly foreign exchange forward contracts, which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with currency exposures. As of June 30, 2017, a total of 53 contracts were offsetting our exposures from the euro, Saudi Riyal, Indian Rupee, Chinese Yuan, Indonesian Rupiah, and various other currencies, with notional amounts ranging from $118,000 to $45.5 million.

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The effect of our derivative instruments not designated as hedges on the Consolidated Statements of Operations was as follows:



Derivatives Not Designated as Hedging Instrument under ASC 815-20	Location	Gain (Loss) Recognized on Derivatives in Other Income (Expense)
		2017			2016
Three Months Ended June 30,		(in thousands)
Foreign exchange forward contracts	Other income (expense), net	$	(2,063	)	$	856
Interest rate cap contracts	Interest expense	(175		)	—

Six Months Ended June 30,
Foreign exchange forward contracts	Other income (expense), net	$	(3,805	)	$	1
Interest rate cap contracts	Interest expense	(301		)	—

Note 8: Defined Benefit Pension Plans

We sponsor both funded and unfunded defined benefit pension plans offering death and disability, retirement, and special termination benefits for our international employees, primarily in Germany, France, Italy, Indonesia, Brazil, and Spain. The defined benefit obligation is calculated annually by using the projected unit credit method. The measurement date for the pension plans was December 31, 2016.

Amounts recognized on the Consolidated Balance Sheets consist of:



	June 30, 2017		December 31, 2016
	(in thousands)
Assets
Plan assets in other long-term assets	$	702	$	654

Liabilities
Current portion of pension benefit obligation in wages and benefits payable	3,340		3,202
Long-term portion of pension benefit obligation	93,263		84,498

Pension benefit obligation, net	$	95,901	$	87,046

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

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands)
Service cost	$	924		$	941		$	1,852		$	1,927
Interest cost	535			650			1,060			1,283
Expected return on plan assets	(147		)	(133		)	(293		)	(259		)
Settlements and other	—			(4		)	—			(7		)
Amortization of actuarial net loss	403			334			794			661
Amortization of unrecognized prior service costs	15			16			30			31
Net periodic benefit cost	$	1,730		$	1,804		$	3,443		$	3,636

Note 9: Stock-Based Compensation

We maintain the Second Amended and Restated 2010 Stock Incentive Plan (Stock Incentive Plan), which allows us to grant equity-based compensation awards, including stock options, restricted stock units, phantom stock, and unrestricted stock units. Under

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the Stock Incentive Plan, we have 10,473,956 shares of common stock reserved and authorized for issuance subject to stock splits, dividends, and other similar events. At June 30, 2017, 4,647,815 shares were available for grant under the Stock Incentive Plan. We issue new shares of common stock upon the exercise of stock options or when vesting conditions on restricted stock units are fully satisfied. These shares are subject to a fungible share provision such that the authorized share reserve is reduced by (i) one share for every one share subject to a stock option or share appreciation right granted under the Plan and (ii) 1.7 shares for every one share of common stock that was subject to an award other than an option or share appreciation right.

We also periodically award phantom stock units, which are settled in cash upon vesting and accounted for as liability-based awards with no impact to the shares available for grant.

In addition, we maintain the Employee Stock Purchase Plan (ESPP), for which approximately 355,000 shares of common stock were available for future issuance at June 30, 2017.

Unrestricted stock and ESPP activity for the three and six months ended June 30, 2017 and 2016 was not significant.

Stock-Based Compensation Expense

Total stock-based compensation expense and the related tax benefit were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands)
Stock options	$	598	$	585	$	1,257	$	1,139
Restricted stock units	4,071		3,143		8,368		6,239
Unrestricted stock awards	255		250		510		500
Phantom stock units	492		211		884		287
Total stock-based compensation	$	5,416	$	4,189	$	11,019	$	8,165

Related tax benefit	$	1,100	$	1,296	$	2,328	$	2,504

Stock Options

A summary of our stock option activity is as follows:



	Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value		Weighted Average Grant Date Fair Value
	(in thousands)				(years)	(in thousands)
Outstanding, January 1, 2016	1,180		$	48.31	5.7	$	405
Granted	185		40.04					$	13.15
Exercised	(34	)	35.29			195
Forfeited	(36	)	35.29
Expired	(147	)	62.50
Outstanding, June 30, 2016	1,148		$	45.95	6.0	$	3,700

Outstanding, January 1, 2017	959		$	45.64	6.6	$	19,125
Granted	132		65.80					$	21.99
Exercised	(34	)	37.58			933
Forfeited	(35	)	47.38
Expired	(47	)	67.43
Outstanding, June 30, 2017	975		$	47.54	6.7	$	21,680

Exercisable June 30, 2017	632		$	47.38	5.5	$	14,846

Expected to vest, June 30, 2017	343		$	47.85	8.8	$	6,834

At June 30, 2017, total unrecognized stock-based compensation expense related to nonvested stock options was $4.2 million, which is expected to be recognized over a weighted average period of approximately 1.8 years.

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The weighted-average assumptions used to estimate the fair value of stock options granted and the resulting weighted average fair value are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Expected volatility	30.8		%	—		%	32.6		%	33.5		%
Risk-free interest rate	1.8		%	—		%	2.0		%	1.3		%
Expected term (years)	5.5			—			5.5			5.5

Weighted average fair value	$	21.71		$	—		$	21.99		$	13.15

Restricted Stock Units

The following table summarizes restricted stock unit activity:



	Number of Restricted Stock Units		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
	(in thousands)				(in thousands)
Outstanding, January 1, 2016	756
Granted	172		$	40.02
Released	(270	)			$	10,429
Forfeited	(42	)
Outstanding, June 30, 2016	616

Outstanding, January 1, 2017	701		$	38.04
Granted	140		65.48
Released	(328	)	38.26		$	12,533
Forfeited	(19	)	43.60
Outstanding, June 30, 2017	494		45.58

Vested but not released, June 30, 2017	7				$	447

Expected to vest, June 30, 2017	403				$	27,332

At June 30, 2017, total unrecognized compensation expense on restricted stock units was $30.2 million, which is expected to be recognized over a weighted average period of approximately 1.9 years.

The weighted-average assumptions used to estimate the fair value of performance-based restricted stock units granted and the resulting weighted average fair value are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Expected volatility	28.0		%	—		%	28.0		%	30.0		%
Risk-free interest rate	1.4		%	—		%	1.1		%	0.7		%
Expected term (years)	2.5			—			1.7			1.8

Weighted average fair value	$	75.58		$	—		$	77.65		$	44.77

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Phantom Stock Units

The following table summarizes phantom stock unit activity:



	Number of Phantom Stock Units		Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding, January 1, 2016	—
Granted	63		$	40.11
Forfeited	(1	)
Outstanding, June 30, 2016	62

Expected to vest, June 30, 2016	55

Outstanding, January 1, 2017	62		$	40.11
Granted	32		65.55
Released	(20	)	40.11
Forfeited	(6	)	40.05
Outstanding, June 30, 2017	68		52.18

Expected to vest, June 30, 2017	68

At June 30, 2017, total unrecognized compensation expense on phantom stock units was $3.9 million, which is expected to be recognized over a weighted average period of approximately 2.0 years. As of June 30, 2017 and December 31, 2016, we have recognized a phantom stock liability of $0.7 million and $1.0 million, respectively, within wages and benefits payable in the Consolidated Balance Sheets.

Note 10: Income Taxes

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

Excess tax benefits and tax deficiencies resulting from employee share-based payments have been recognized as income tax provision or benefit in the 2017 Consolidated Statement of Operations pursuant to the adoption of ASU 2016-09 (see Note 1).

Our tax expense for the three and six months ended June 30, 2017 differed from the federal statutory rate of 35% due to the forecasted mix of earnings in domestic and international jurisdictions, a benefit related to excess tax benefits under ASU 2016-09, and losses experienced in jurisdictions with valuation allowances on deferred tax assets.

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

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands)
Net interest and penalties expense	$	207	$	233	$	413	$	332

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Accrued interest and penalties recognized were as follows:



	June 30, 2017		December 31, 2016
	(in thousands)
Accrued interest	$	3,435	$	2,473
Accrued penalties	2,509		2,329

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



	June 30, 2017		December 31, 2016
	(in thousands)
Unrecognized tax benefits related to uncertain tax positions	$	64,396	$	57,626
The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate	63,067		56,411

At June 30, 2017, we are under examination by certain tax authorities for the 2000 to 2015 tax years. The material jurisdictions where we are subject to examination include, among others, the United States, France, Germany, Italy, Brazil and the United Kingdom. No material changes have occurred to previously disclosed assessments. We believe we have appropriately accrued for the expected outcome of all tax matters and do not currently anticipate that the ultimate resolution of these examinations will have a material adverse effect on our financial condition, future results of operations, or liquidity.

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

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Note 11: Commitments and Contingencies

Guarantees and Indemnifications

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

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



	June 30, 2017			December 31, 2016
	(in thousands)
Credit facilities
Multicurrency revolving line of credit	$	500,000		$	500,000
Long-term borrowings	(122,497		)	(97,167		)
Standby LOCs issued and outstanding	(28,723		)	(46,103		)

Net available for additional borrowings under the multi-currency revolving line of credit	$	348,780		$	356,730
Net available for additional standby LOCs under sub-facility	221,277			203,897

Unsecured multicurrency revolving lines of credit with various financial institutions
Multicurrency revolving lines of credit	$	106,113		$	91,809
Standby LOCs issued and outstanding	(22,838		)	(21,734		)
Short-term borrowings	(1,094		)	(69		)
Net available for additional borrowings and LOCs	$	82,181		$	70,006

Unsecured surety bonds in force	$	48,879		$	48,221

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

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

Legal Matters

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

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Warranty

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands)
Beginning balance	$	41,536		$	50,742		$	43,302		$	54,512
New product warranties	1,568			1,501			3,929			3,905
Other adjustments and expirations	219			1,001			1,901			2,035
Claims activity	(4,248		)	(7,613		)	(10,599		)	(15,003		)
Effect of change in exchange rates	735			(174		)	1,277			8
Ending balance	39,810			45,457			39,810			45,457
Less: current portion of warranty	25,584			26,825			25,584			26,825
Long-term warranty	$	14,226		$	18,632		$	14,226		$	18,632

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



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
	(in thousands)
Total warranty expense	$	(6,213	)	$	2,502	$	(2,170	)	$	5,940

Warranty expense decreased during the three and six months ended June 30, 2017 compared with the same periods in 2016 primarily due to an insurance recovery in our Water segment of $8.0 million. This recovery is associated with warranty costs previously recognized as a result of our 2015 product replacement notification to customers who had purchased certain communication modules.

Unearned Revenue Related to Extended Warranty

A summary of changes to unearned revenue for extended warranty contracts is as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands)
Beginning balance	$	30,898		$	33,498		$	31,549		$	33,654
Unearned revenue for new extended warranties	382			433			704			1,014
Unearned revenue recognized	(1,062		)	(878		)	(2,067		)	(1,735		)
Effect of change in exchange rates	53			15			85			135
Ending balance	30,271			33,068			30,271			33,068
Less: current portion of unearned revenue for extended warranty	4,325			3,951			4,325			3,951
Long-term unearned revenue for extended warranty within other long-term obligations	$	25,946		$	29,117		$	25,946		$	29,117

Health Benefits

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

Table of Contents

Plan costs were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands)
Plan costs	$	6,742	$	6,859	$	15,496	$	13,633

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



	June 30, 2017		December 31, 2016
	(in thousands)
IBNR accrual	$	2,650	$	2,441

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

Note 12: Restructuring

2016 Projects

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

The 2016 Projects began during the three months ended September 30, 2016, and we expect to substantially complete the 2016 Projects by the end of 2018. Many of the affected employees are represented by unions or works councils, which require consultation, and potential restructuring projects may be subject to regulatory approval, both of which could impact the timing of charges, total expected charges, cost recognized, and planned savings in certain jurisdictions.

The total expected restructuring costs, the restructuring costs recognized during the six months ended June 30, 2017, and the remaining expected restructuring costs as of June 30, 2017 related to the 2016 Projects are as follows:



	Total Expected Costs at June 30, 2017		Costs Recognized in Prior Periods		Costs Recognized During the Six Months Ended June 30, 2017		Expected Remaining Costs to be Recognized at June 30, 2017
	(in thousands)
Employee severance costs	$	45,193	$	39,686	$	5,507	$	—
Asset impairments & net loss on sale or disposal	7,299		7,219		80		—
Other restructuring costs	15,397		889		2,508		12,000
Total	$	67,889	$	47,794	$	8,095	$	12,000

Segments:
Electricity	$	11,157	$	8,827