Segment Disclosure

12 Months Ended

Dec. 31, 2013

Segment Reporting [Abstract]

Segment Disclosure

15.     Segment Disclosure

ASC Topic 280, Segment Reporting, establishes standards for reporting information about operating segments, products and services, geographic areas of operations and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing business performance. The Company’s chief operating decision-making group is the Executive Staff, which is comprised of the Chief Executive Officer and his direct reports (CODM).

Prior to the fourth quarter of 2013, the Company previously operated as one operating segment. Effective in the fourth quarter of 2013, the Company changed the way it managed the business to focus the business on two operating segments based on homogeneity of products and technology- Industrial Internet of Things (IIoT) and Grid Modernization (Grid). As a result of the change, product families and services were organized and evaluated within the above mentioned operating segments.

The Company’s IIoT segment represents Horizontal Embedded Control Platforms, such as LONWORKS and IzoT, which include components, control nodes. and development software, and which are sold typically to Original Equipment Manufacturers (OEMs) to build into their industrial application solutions It allows a single device to be brought to market as a LONWORKS®, BACnet®, or other protocol-supporting device; and it can be used with any underlying wired or wireless communications link, such as Ethernet, RS-485, Wi-Fi, 15.4, or Echelon’s free topology (FT) standard. The IzoT platform provides a smooth migration path for legacy devices to the IIoT. The product portfolio includes Smart Transceivers, SmartServer Controllers, LNS and OpenLNS Operating Systems, Outdoor Lighting Controllers, SmartServer Segment Controllers and PL/RF Bridges.

The Company’s Grid segment primarily offers vertical solutions and platform components that connect homes to the grid and allow utilities to accurately collect billing data and vital health statistics with a high degree of field-proven reliability. In addition to usage data required for billing the consumer, this segment's products collect a large number of power quality metrics at the smart meter and from other devices such as distribution transformers. This data can be used in applications such as transformer monitoring, theft detection, and fault detection to guide preventive maintenance and to reduce energy loss. The product portfolio includes Smart Meters, Distributed Control Nodes (DCNs) or Data Concentrators, NES System Software, Element Manager and Control Point Modules.

The Company operates in three main geographic areas: the Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific / Japan (“APJ”). Each geographic area provides products and services to the Company’s customers located in the respective region. The Company’s long-lived assets include property and equipment, goodwill, purchased technology, and deposits on its leased facilities. Long-lived assets are attributed to geographic areas based on the country where the assets are located. As of December 31, 2013 and December 31, 2012, long-lived assets of approximately $24.6 million and $27.7 million, respectively, were domiciled in the United States. Long-lived assets for all other locations are not material to the consolidated financial statements. Although management reviews asset information on a corporate level and allocates depreciation expense by segment, the CODM does not review asset information on a segment basis.

The CODM allocates resources and assesses performance of operating segments based on a non-GAAP measure of segment contribution margin comprising revenue, direct costs and operating expenses, such as standard cost of goods sold, research and development, and sales and marketing expenses; indirect costs, such as manufacturing overhead and other cost of revenues allocated based on factors including headcount, usage, and revenue, as well as the benefit from allocation of loss to non-controlling interest (this impact is solely noted in the Grid segment). The CODM does not allocate to the Company's business segments certain operating expenses managed separately at the corporate level. Corporate unallocated expenses include general and administrative costs, stock-based compensation expenses, restructuring charges and other one-time, non-routine charges. Operating segments do not generate inter-segment revenue. We do not allocate gains and losses from interest and other income, or taxes to operating segments. The accounting policies for each segment are the same as those disclosed by the Company for its consolidated financial statements. 

The change from one operating segment to two operating segments was a fundamental reorganization of the entity in 2013 making it impracticable for the Company to restate the segment information for the earlier periods of 2012 and 2011, except as relates to the segment revenue information which is presented. Prior to the reorganization, the Company’s organizational structure was set up to report and track information for a single reporting unit, the Company as a whole. The reorganization into the two operating segments resulted in, among other things, a complex movement affecting a majority of the Company's employees, a significant modification to the Company's departmental organization structure, and a completely new way of presenting and reviewing operating performance for the new organizations. Prior to the fourth quarter of 2013, the Company was not structured nor was it managed in a “product line” manner. Therefore, management believes that restatement of prior year information for these segments, except as it relates to segment revenues, is impracticable.

In accordance with the disclosure requirements of ASC280-10-50-35, the Company has disclosed the segment information for 2013 (the year in which the change has occurred) under the old basis and new basis of segmentation. Since the Company only had one operating segment previously, please refer to the consolidated statement of operations for information under the old basis of segmentation as relates to all information except revenues.

The following table summarizes financial information for each segment used by the CODM for the year endedDecember 31, 2013 (in thousands):

	Grid			IIoT		Shared/ Corporate			Stock Compensation expenses			Adjustments to reconcile to GAAP reported amounts			Total
Revenues	$	40,303		$	45,857	$	—		$	—		$	—		$	86,160
Segment gross profit 1	13,891			29,506		—			(240		)				43,157
Segment contribution	(5,446		)	12,272		(13,676		)	(2,538		)	—			(9,388		)
Corporate unallocated expenses
Restructuring charges	—			—								(2,522		)	(2,522		)
Litigation charges	—			—								(3,452		)	(3,452		)
Interest and other income (expense), net												(702		)	(702		)
Interest expense on lease financing obligations												(1,235		)	(1,235		)
Income tax expense												$	311		$	311
Net loss attributable to Echelon Corporation Stockholders															$	(17,610	)

¹ Represents unallocated share based compensation expenses considered in GAAP results as part of cost of revenues, but excluded from segment gross profit calculation as presented to the CODM. This amount has been presented to reconcile the segment gross profit to total gross profit presented in the Consolidated Statement of Operations.

For the year endedDecember 31, 2013, depreciation expense for the Grid and IIoT segments was $1.7 million and $735,000, respectively and unallocated depreciation was $1.5 million.

The following table summarizes revenues for each segment described above for the years ended December 31, 2013, 2012 and 2011 (in thousands):

	Year ended 31 December
	2013		2012		2011
Grid	$	40,303	$	85,241	$	99,428
IIoT	45,857		48,776		57,059
Total	$	86,160	$	134,017	$	156,487

In North America, the Company sells its products primarily through a direct sales organization and select third-party electronics representatives. Outside North America, the Company sells its products through direct sales organizations in EMEA and APJ, value-added resellers, and local distributors. Revenues are attributed to geographic areas based on the country where the products are shipped to or the services are delivered. Summary revenue information by geography for the years endedDecember 31, 2013, 2012 and 2011 is as follows (in thousands):

	Year ended 31 December
	2013		2012		2011
Americas
United States	$	16,694	$	32,981	$	58,182
Other Americas	1,677		2,485		2,524
Total Americas	18,371		35,466		60,706
EMEA
Finland	10,092		38,958		23,633
Germany	14,167		13,097		18,455
Denmark	1,896		10,939		17,959
Other EMEA	28,140		21,195		20,201
Total EMEA	54,295		84,189		80,248
APJ	13,494		14,362		15,533
Total	$	86,160	$	134,017	$	156,487

For information regarding the Company’s major customers, please refer to Note 7, Significant Customers.