ITRON, INC. The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes included in this report and with the consolidated financial statements and the notes thereto for the fiscal year endedDecember 31, 2020 filed with theSecurities and Exchange Commission (SEC) in our Annual Report on Form 10-K onFebruary 24, 2021 (2020 Annual Report). The objective of Management's Discussion and Analysis is to provide our assessment of the financial condition and results of operations including an evaluation of our liquidity and capital resources along with material events occurring during the year. The discussion and analysis focuses on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. In addition, we address matters that are reasonably likely based on management's assessment to have a material impact on future operations. We expect that the analysis will enhance a reader's understanding of our financial condition, cash flows, and other changes in financial condition and results of operations. Documents we provide to theSEC are available free of charge under the Investors section of our website at www.itron.com as soon as practicable after they are filed with or furnished to theSEC . In addition, these documents are available at theSEC's website (http://www.sec.gov).
Certain Forward-Looking Statements
This report contains, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of theU.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical factors nor assurances of future performance. These statements are based on our expectations about, among others, revenues, operations, financial performance, earnings, liquidity, earnings per share, cash flows and restructuring activities including headcount reductions and other cost savings initiatives. This document reflects our current strategy, plans and expectations and is based on information currently available as of the date of this Quarterly Report on Form 10-Q. When we use words such as "expect", "intend", "anticipate", "believe", "plan", "goal", "seek", "project", "estimate", "future", "strategy", "objective", "may", "likely", "should", "will", "will continue", and similar expressions, including related to future periods, they are intended to identify forward-looking statements. Forward-looking statements rely on a number of assumptions and estimates. Although we believe the estimates and assumptions upon which these forward-looking statements are based are reasonable, any of these estimates or assumptions could prove to be inaccurate and the forward-looking statements based on these estimates and assumptions could be incorrect. Our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. Actual results and trends 31 -------------------------------------------------------------------------------- Table of Contents in the future may differ materially from those suggested or implied by the forward-looking statements depending on a variety of factors. Therefore, you should not rely on any of these forward-looking statements. Some of the factors that we believe could affect our results include our ability to execute on our restructuring plan, our ability to achieve estimated cost savings, the rate and timing of customer demand for our products, rescheduling of current customer orders, changes in estimated liabilities for product warranties, adverse impacts of litigation, changes in laws and regulations, our dependence on new product development and intellectual property, future acquisitions, changes in estimates for stock-based and bonus compensation, increasing volatility in foreign exchange rates, international business risks, uncertainties caused by adverse economic conditions, including, without limitation those resulting from extraordinary events or circumstances such as the COVID-19 pandemic and other factors that are more fully described in Part I, Item 1A: Risk Factors included in our 2020 Annual Report and other reports on file with theSEC . We undertake no obligation to update or revise any forward-looking statement, whether written or oral. The impact caused by the ongoing COVID-19 pandemic includes uncertainty as to the duration, spread, severity, and any resurgence of the COVID-19 pandemic including other factors contributing to infection rates, such as reinfection or mutation of the virus, the effectiveness or widespread availability and application of vaccines, the duration and scope of related government orders and restrictions, impact on overall demand, impact on our customers' businesses and workforce levels, disruptions of our business and operations, including the impact on our employees, limitations on, or closures of, our facilities, or the business and operations of our customers or suppliers. Our estimates and statements regarding the impact of COVID-19 are made in good faith to provide insight to our current and future operating and financial environment and any of these may materially change due to factors outside our control. For more information on risks associated with the COVID-19 pandemic, please see our risk in Part I, Item 1A: Risk Factors in our 2020 Annual Report.
Overview
We are a technology and service company, and we are a leader in the Industrial Internet of Things (IIoT). We offer solutions that enable utilities and municipalities to safely, securely and reliably operate their critical infrastructure. Our solutions include the deployment of smart networks, software, services, devices, sensors, and data analytics that allow our customers to manage assets, secure revenue, lower operational costs, improve customer service, improve safety, and enable efficient management of valuable resources. Our comprehensive solutions and data analytics address the unique challenges facing the energy, water, and municipality sectors, including increasing demand on resources, non-technical loss, leak detection, environmental and regulatory compliance, and improved operational reliability. We operate under the Itron brand worldwide and manage and report under three operating segments: Device Solutions, Networked Solutions, and Outcomes. The product and operating definitions of the three segments are as follows: Device Solutions - This segment primarily includes hardware products used for measurement, control, or sensing that do not have communications capability embedded for use with our broader Itron systems, i.e., hardware-based products not part of a complete end-to-end solution. Examples from the Device Solutions portfolio include: standard endpoints that are shipped without Itron communications, such as our standard gas, electricity, and water meters for a variety of global markets and adhering to regulations and standards within those markets, as well as our heat and allocation products; communicating meters that are not a part of an Itron end-to-end solution such as Smart Spec meters and the implementation and installation of non-communicating devices, such as gas regulators. Networked Solutions - This segment primarily includes a combination of communicating devices (e.g., smart meters, modules, endpoints, and sensors), network infrastructure, and associated application software designed and sold as a complete solution for acquiring and transporting robust application-specific data. Networked Solutions includes products and software for the implementation, installation, and management of communicating devices and data networks. Examples from the Networked Solutions portfolio include: communicating measurement, control, or sensing endpoints such as our Itron® OpenWay® Centron and Riva meters, Itron traditional ERT® technology,Intelis smart gas meters, 500G gas communication modules, 500W water communication modules; GenX networking infrastructure products and network interface cards (NICs); Smart City control and management software; Distribution Automation bridge devices, and specific network control and management software applications. The Industrial Internet of Things (IIoT) solutions supported by this segment include automated meter reading (AMR), advanced metering infrastructure (AMI), smart grid and distribution automation, smart street lighting and an ever-growing set of smart city applications such as traffic management, smart parking, air quality monitoring, electric vehicle charging, customer engagement, digital signage, acoustic (e.g., gunshot) detection, and leak detection and mitigation for both gas and water systems. Our IIoT platform allows all of these industry and smart city applications to be run and managed on a single, multi-purpose network.
Outcomes - This segment primarily includes our value-added, enhanced software and services in which we manage, organize, analyze, and interpret data to improve decision making, maximize operational profitability, drive resource efficiency, and
32
--------------------------------------------------------------------------------
Table of Contents
deliver results for consumers, utilities, and smart cities. Outcomes places an
emphasis on delivering to Itron customers high-value, turn-key, digital
experiences by leveraging the footprint of our Device Solutions and Networked
Solutions segments. The revenues from these offerings are primarily recurring in
nature and would include any direct management of Device Solutions, Networked
Solutions, and other products on behalf of our end customers. Examples from the
Outcomes portfolio include: our meter data management and analytics offerings;
our managed service solutions including Network-as-a-Service (NaaS) and
Platform-as-a-Service (PaaS), forecasting software and services; our Distributed
Intelligence suite of applications and services; and any consulting-based
engagement. Within the Outcomes segment, we also identify new business models,
including performance-based contracting, to drive broader portfolio offerings
across utilities and cities.
We have three measures of segment performance: revenues, gross profit (margin),
and operating income (margin). Intersegment revenues are minimal. Certain
operating expenses are allocated to the operating segments based upon internally
established allocation methodologies. Interest income, interest expense, other
income (expense), the income tax provision (benefit), and certain corporate
operating expenses are neither allocated to the segments nor included in the
measures of segment performance.
Non-GAAP Measures
To supplement our consolidated financial statements, which are prepared in
accordance with accounting principles generally accepted in the United States
(GAAP), we use certain adjusted or non-GAAP financial measures, including
non-GAAP operating expense, non-GAAP operating income, non-GAAP net income,
non-GAAP diluted earnings per share (EPS), adjusted EBITDA, adjusted EBITDA
margin, constant currency, and free cash flow. We provide these non-GAAP
financial measures because we believe they provide greater transparency and
represent supplemental information used by management in its financial and
operational decision making. We exclude certain costs in our non-GAAP financial
measures as we believe the net result is a measure of our core business. We
believe these measures facilitate operating performance comparisons from period
to period by eliminating potential differences caused by the existence and
timing of certain expense items that would not otherwise be apparent on a GAAP
basis. Non-GAAP performance measures should be considered in addition to, and
not as a substitute for, results prepared in accordance with GAAP. We strongly
encourage investors and shareholders to review our financial statements and
publicly-filed reports in their entirety and not to rely on any single financial
measure. Our non-GAAP financial measures may be different from those reported by
other companies.
In our discussions of the operating results below, we sometimes refer to the
impact of foreign currency exchange rate fluctuations, which are references to
the differences between the foreign currency exchange rates we use to convert
operating results from local currencies into U.S. dollars for reporting
purposes. We also use the term "constant currency", which represents results
adjusted to exclude foreign currency exchange rate impacts. We calculate the
constant currency change as the difference between the current period results
translated using the current period currency exchange rates and the comparable
prior period's results restated using current period currency exchange rates. We
believe the reconciliations of changes in constant currency provide useful
supplementary information to investors in light of fluctuations in foreign
currency exchange rates.
Refer to the Non-GAAP Measures section below on pages 49-51 for information
about these non-GAAP measures and the detailed reconciliation of items that
impacted free cash flow, non-GAAP operating expense, non-GAAP operating income,
non-GAAP net income, adjusted EBITDA, and non-GAAP diluted EPS in the presented
periods.
Total Company Highlights
Highlights and significant developments for the three months ended September 30,
2021 compared with the three months ended September 30, 2020
•Revenues were $486.9 million compared with $540.2 million in 2020, a decrease
of $53.2 million , or 10%
•Gross margin was 27.7%, compared with 26.5% in 2020
•Operating expenses decreased $36.4 million , or 22%, compared with 2020
•Net loss attributable to Itron, Inc. was $1.9 million compared with net loss of
$25.4 million in 2020
•GAAP diluted EPS increased by $0.59 to a diluted loss per share of $0.04 in
2021
•Non-GAAP net income attributable to Itron, Inc. was $9.5 million compared with
$24.6 million in 2020
•Non-GAAP diluted EPS was $0.21 , a decrease of $0.40 compared with 2020
•Adjusted EBITDA was $26.1 million compared with $39.7 million in 2020
•Total backlog was $3.4 billion and twelve-month backlog was $1.4 billion at
September 30, 2021 , compared with $2.8 billion and $1.1 billion at September 30,
2020
33--------------------------------------------------------------------------------
Table of Contents
Highlights and significant developments for the nine months endedSeptember 30, 2021 compared with the nine months endedSeptember 30, 2020 •Revenues were$1.5 billion compared with$1.6 billion in 2020, a decrease of$152.3 million , or 9% •Gross margin was 30.2% compared with 27.5% in 2020 •Operating expenses decreased$72.6 million , or 15%, compared with 2020 •Net loss attributable toItron, Inc. was$22.4 million , compared with net loss of$79.5 million in 2020 •GAAP diluted EPS increased by$1.47 to a diluted loss per share of$0.51 in 2021 •Non-GAAP net income attributable toItron, Inc. was$44.0 million compared with$48.9 million in 2020 •Non-GAAP diluted EPS was$0.99 , a decrease of$0.22 compared with 2020 •Adjusted EBITDA was$112.0 million compared with$122.9 million in 2020 2018 Credit Facility OnAugust 12, 2021 , we fully paid the remaining balance of$31.1 million on the term loan. AtSeptember 30, 2021 , there were no outstanding loan balances under the 2018 Credit Facility. Business Acquisition Subsequent toSeptember 30, 2021 , Itron, through its subsidiaryItron Management Services Ireland, Limited , completed the acquisition of 100% of the shares ofSELC Group Limited (SELC), a private limited company incorporated inIreland since 2014, from Sensus Metering Systems (LUXCO3) S.ár.l onOctober 12, 2021 .SELC was previously a technology supplier to Itron. The acquisition provides value to Itron through the leverage ofSELC's streetlight controls technology coupled with Itron's Smart Cities network and software platform. The acquisition will increase the pace of Smart City growth and innovation within Itron's Networked Solutions business for the benefit of our customers. The purchase was funded through cash on hand. Sale of Business OnNovember 2, 2021 , Itron entered into a definitive securities and asset purchase agreement to sell certain of its Gas device manufacturing and business operations inEurope andNorth America to Dresser Utility Solutions (Dresser). The sale includes one German subsidiary -Itron GmbH along with its business operations, personnel, and the owned manufacturing facility in Karlsruhe; the business operations, personnel, and assets associated with the leased manufacturing facility in Argenteuil,France ; and the business and manufacturing assets maintained at one of our contract manufacturers inNorth America . The sale of these assets and operations is part of Itron's continued strategy to improve profitability and focus on growing its higher value businesses throughout the world. Based on the sales price and the net assets of the businesses sold, Itron concluded onNovember 2, 2021 that it will recognize a pre-tax loss with a range of$30-40 million upon closure of the sale, which is expected in the first half of 2022. The impairment is driven primarily by the required recognition of$58-62 million in foreign currency translation losses accumulated since the acquisition of the German subsidiary in 2007. The base sale price of this divestiture is$75 million , with adjustments for (1) pension liabilities assumed by Dresser for the active employees estimated at$12-13 million and (2) the final working capital balance, which will be determined as of the close date, and, if the balance is outside the targeted amount, the difference will be settled shortly thereafter. Net assets of the businesses, including allocated goodwill, are$35-40 million . Cash proceeds from the sale are currently estimated at$62-63 million . Restructuring Plan Associated with Sale of Business OnOctober 29, 2021 , the Board of Directors of Itron approved a restructuring plan (the 2021 Projects). The 2021 Projects include activities, in conjunction with the announcement of the sale of certain of our Gas device manufacturing operations, which drive reductions in certain locations and functional support areas. These projects are to be substantially complete by the end of 2024. Itron estimates pre-tax restructuring charges of$65-75 million . Of the total estimated charge, approximately$60-65 million will result in cash expenditures, and the remainder to non-cash impairment charges. The majority of the expense will be recognized during the fourth quarter of 2021. Once the 2021 Projects are substantially completed, Itron estimates$15-20 million in annualized savings. Certain of Itron's employees are represented by unions or works councils, which requires consultation, and potential restructuring projects may be subject to regulatory approval, both of which could impact the timing of planned savings in certain jurisdictions. Approval of Share Repurchase Program EffectiveNovember 1, 2021 , the Board of Directors of Itron authorized a new share repurchase program of up to$100 million of Itron's common stock over an 18-month period. Repurchases will be made in the open market and pursuant to the terms of any Rule 10b5-1 plans that Itron may enter into, and in accordance with applicable securities laws. The repurchase program is 34 -------------------------------------------------------------------------------- Table of Contents intended to comply with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time without prior notice. Impact of COVID-19 and Supply Chain Challenges The COVID-19 pandemic has had global economic impacts including disrupting customer demand and global supply chains, resulting in market volatility. The extent of the recent pandemic and its ongoing impact on our operations is volatile, but is being monitored closely by our management. During portions of the first half of 2020 certain of our European factories were closed due to government actions and local conditions, and any further closures that may be imposed on us could impact our results for 2021. New variants of the virus may cause previously lifted restrictions to be reinstated, which could result in more disruptions. Incremental costs we have incurred related to COVID-19, such as personal protective equipment, increased cleaning and sanitizing of our facilities, and other such items, have not been material to date. As economies have reopened, global supply chains have struggled to keep pace with rapidly changing demand. The resulting supply constraints have manifested across a variety of areas including mechanical, electrical and logistics portions of the supply chain, which has impacted our ability to ship products in a timely manner. In particular, our ability to obtain adequate supply of semiconductor components has impacted our ability to service recovering customer demand. While the current imbalance in supply and demand is temporal, the timeline to recovery is uncertain. Efforts are ongoing with suppliers to increase supply, including the approval of alternate sources. At this time, we have not identified any significant decrease in long-term customer demand for our products and services. However, certain of our customer projects have experienced delay in deliveries, with originally forecasted 2021 revenue pushed to future periods. For more information on risks associated with the COVID-19 pandemic, please see our risk in Part I, Item 1A, Risk Factors in our 2020 Annual Report. The COVID-19 pandemic remains a rapidly evolving situation with varying impacts on the locations in which we do business. Changes in the mix of earnings or losses from our different geographical operations, as well as any future enactment of tax legislation and other factors, may result in more volatile quarterly and annual effective tax rates. The detrimental impacts to financial results may be partially offset by financial assistance from theU.S. or the municipalities in which we operate, including employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 pandemic. Other benefits, including options to defer payroll tax payments and additional deductions, resulted in reduced cash costs in 2020, but will increase cash outlays during the fourth quarter of 2021 and into 2022. 35 -------------------------------------------------------------------------------- Table of Contents Total Company GAAP and Non-GAAP Highlights and Unit Shipments: Three Months EndedSeptember 30 , Nine Months Ended September
30,
In thousands, except margin and per share data 2021 2020 % Change 2021 2020 % Change GAAP Revenues Product revenues$ 410,947 $ 470,658 (13)%$ 1,265,470 $ 1,437,780 (12)% Service revenues 76,002 69,526 9% 230,465 210,413 10% Total revenues 486,949 540,184 (10)% 1,495,935 1,648,193 (9)% Gross profit 134,963 143,251 (6)% 451,882 453,334 -% Operating expenses 130,800 167,231 (22)% 423,711 496,331 (15)% Operating income (loss) 4,163 (23,980) NM 28,171 (42,997) NM Other income (expense) (4,037) (13,063) (69)% (42,465) (35,020) 21% Income tax benefit (provision) (1,136) 11,985 NM (5,581) (366)
NM
Net loss attributable to Itron, Inc. (1,869) (25,357) (93)% (22,389) (79,475) (72)% Non-GAAP(1) Non-GAAP operating expenses$ 118,609 $ 113,554 4%$ 369,721 $ 364,788 1% Non-GAAP operating income 16,354 29,697 (45)% 82,161 88,546 (7)% Non-GAAP net income attributable to Itron, Inc. 9,452 24,634 (62)% 44,043 48,929 (10)% Adjusted EBITDA 26,123 39,684 (34)% 111,982 122,858 (9)% GAAP Margins and Earnings Per Share Gross margin Product gross margin 25.5 % 23.9 % 28.2 % 25.4 % Service gross margin 39.7 % 44.4 % 41.4 % 41.7 % Total gross margin 27.7 % 26.5 % 30.2 % 27.5 % Operating margin 0.9 % (4.4) % 1.9 % (2.6) %
Net loss per common share - Basic $ (0.04)
$ (0.51)$ (1.98) Net loss per common share - Diluted $ (0.04)$ (0.63) $ (0.51)$ (1.98) Non-GAAP Earnings Per Share(1) Non-GAAP diluted EPS $ 0.21$ 0.61 $ 0.99$ 1.21
(1)These measures exclude certain expenses that we do not believe are indicative of our core operating results. See pages 49-51 for information about these non-GAAP measures and reconciliations to the most comparable GAAP measures.
Definition of an Endpoint Under Management
An "endpoint under management" is a unique endpoint, or data from that endpoint,
which Itron manages via our networked platform or a third party's platform that
is connected to one or multiple types of endpoints. Itron's management of an
endpoint occurs when on behalf of our client, we manage one or more of the
physical endpoints, operating system, data, application, data analytics, and/or
outcome deriving from this unique endpoint. Itron has the ability to monitor
and/or manage endpoints or the data from the endpoints via NaaS,
Software-as-a-Service (SaaS), and/or a licensed offering at a remote location
designated by our client. Our offerings typically, but not exclusively, provide
an Itron product or Itron certified partner product to our clients that has the
capability of one-way communication or two-way communication of data that may
include remote product configuration and upgradability. Examples of these
offerings include our Temetra, OpenWay®, OpenWay® Riva and Gen X.
This metric primarily includes Itron or third-party endpoints deployed within
the electricity, water, and gas utility industries, as well as within cities and
municipalities around the globe. Endpoints under management also include smart
communication modules and network interface cards (NICs) within Itron's
platforms. At times, these NICs are communicating modules that were sold
separately from an Itron product directly to our customers or to third party
manufacturers for use in endpoints such as
36
--------------------------------------------------------------------------------
Table of Contents
electric, water, and gas meters; streetlights and other types of IIoT sensors
and actuators; sensors and other capabilities that the end customer would like
Itron to connect and manage on their behalf.
The "endpoint under management" metric only accounts for the specific, unique
endpoint itself, though that endpoint may have multiple applications, services,
outcomes, and higher margin recurring offerings associated with it. This metric
does not reflect the multi-application value that can be derived from the
individual endpoint itself. Additionally, this metric excludes those endpoints
that are non-communicating, non-Itron system hardware component sales or
licensed applications that Itron does not manage the unit or the data from that
unit directly.
While the one-time sale of the platform and endpoints are primarily delivered
via our Networked Solutions segment, our enhanced solutions, on-going
monitoring, maintenance, software, analytics, and distributed intelligent
applications are predominantly recognized in our Outcomes segment. We would
anticipate the opportunity to increase our penetration of Outcomes applications,
software, and managed applications will increase as our endpoints under
management increases. Management believes using the endpoints under management
metric enhances insight to the strategic and operational direction of our
Networked Solutions and Outcomes segments to serve clients for years after their
one-time installation of an endpoint.
A summary of our endpoints under management is as follows:
September 30,
Units in thousands 2021 2020
Endpoints under management 78,487 74,652
Results of Operations
Revenues and Gross Margin
The actual results of and effects of changes in foreign currency exchange rates on revenues and gross profit were as follows:
Effect of
Changes in
Foreign
Three Months Ended September 30, Currency
Exchange Constant
In thousands 2021 2020 Rates Currency Change Total Change
Total Company
Revenues $ 486,949 $ 540,184 $ 4,157 $ (57,392) $ (53,235)
Gross profit 134,963 143,251 557 (8,845) (8,288)
Effect of
Changes in
Foreign
Nine Months Ended September 30, Currency
Exchange Constant
In thousands 2021 2020 Rates Currency Change Total Change
Total Company
Revenues $ 1,495,935 $ 1,648,193 $ 37,455 $ (189,713) $ (152,258)
Gross profit 451,882 453,334 4,684 (6,136) (1,452)
Revenues - Three months ended September 30, 2021 vs. Three months ended
September 30, 2020
Total revenues decreased $53.2 million , or 10%, compared with the same period in
2020. We have been unfavorably impacted by COVID-19 related global component
constraints, which limited our ability to fulfill customer demand. Product
revenues decreased by $59.7 million , while service revenues increased $6.5
million . Device Solutions decreased by $23.9 million ; Networked Solution
decreased by $32.2 million ; and Outcomes increased by $2.8 million when compared
with the same period last year. Changes in exchange rates favorably impacted
total revenues by $4.2 million , of which $2.5 million favorably impacted Device
Solutions.
Revenues - Nine months ended September 30, 2021 vs. Nine Months Ended September
30, 2020
Total revenues decreased $152.3 million , or 9%, compared with the same period in
2020. We have been unfavorably impacted by the timing of customer projects and
COVID-19, particularly global component constraints, which limited our ability
to fulfill customer demand. Product revenues decreased by $172.3 million , while
service revenues increased by $20.1 million . Device Solutions decreased by $19.6
million ; Networked Solutions decreased by $144.1 million ; and Outcomes increased
by
37
--------------------------------------------------------------------------------
Table of Contents
$11.4 million when compared with the same period last year. Changes in exchange
rates favorably impacted total revenues by $37.5 million , of which $25.7 million
favorably impacted Device Solutions.
Gross Margin - Three months ended September 30, 2021 vs. Three months ended
September 30, 2020
Gross margin was 27.7%, compared with 26.5% in 2020. We were favorably impacted
by product and solution mix and manufacturing efficiencies in 2021 compared with
2020, which was more unfavorably impacted by COVID-19. Product sales gross
margin increased to 25.5%, compared with 23.9% in 2020. Gross margin on service
revenues decreased to 39.7%, compared with 44.4% in 2020.
Gross Margin - Nine months ended September 30, 2021 vs. Nine Months Ended
September 30, 2020
Gross margin was 30.2%, compared with 27.5% in 2020. We were favorably impacted
by product and solution mix and operating efficiencies in 2021 compared with
2020, which was more unfavorably impacted by COVID-19. Product sales gross
margin increased to 28.2%, compared with 25.4% in 2020, and gross margin on
service revenues decreased to 41.4%, compared with 41.7% in 2020.
Refer to Operating Segment Results section below for further detail on total company revenues and gross margin.
Operating Expenses
The actual results of and effects of changes in foreign currency exchange rates on operating expenses were as follows:
Effect of
Changes in
Foreign
Three Months Ended September 30, Currency Constant
Exchange Currency
In thousands 2021 2020 Rates Change Total Change
Total Company
Sales, general and
administrative $ 71,838 $ 64,982 $ 262 $ 6,594 $ 6,856
Research and development 46,889 46,224 90 575 665
Amortization of intangible
assets 8,944 11,183 46 (2,285) (2,239)
Restructuring 958 44,462 (3) (43,501) (43,504)
Loss on sale of business 2,171 380 (159) 1,950 1,791
Total operating expenses $ 130,800 $ 167,231 $ 236 $ (36,667) $ (36,431)
Effect of
Changes in
Foreign
Nine Months Ended September 30, Currency Constant
Exchange Currency
In thousands 2021 2020 Rates Change Total Change
Sales, general and
administrative $ 221,974 $ 215,018 $ 5,960 $ 996 $ 6,956
Research and development 147,379 148,999 1,864 (3,484) (1,620)
Amortization of intangible
assets 26,914 33,488 384 (6,958) (6,574)
Restructuring (830) 41,531 (250) (42,111) (42,361)
Loss on sale of business 28,274 57,295 3,502 (32,523) (29,021)
Total operating expenses $ 423,711 $ 496,331 $ 11,460 $ (84,080) $ (72,620) Operating expenses decreased
Operating expenses decreased$72.6 million for the nine months endedSeptember 30, 2021 as compared with the same period in 2020. This was primarily the result of$42.4 million in lower restructuring costs due to the new plan announced in 2020 and$29.0 million decrease in the loss on sale of business. 38 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense)
The following table shows the components of other income (expense):
Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2021 2020 % Change 2021 2020 % Change
Interest income $ 352 $ 354 (1)% $ 1,326 $ 2,165 (39)%
Amortization of prepaid
debt fees (1,949) (1,016) 92% (17,383) (3,029) NM
Other interest expense (679) (9,794) (93)% (9,724) (30,742) (68)%
Interest expense (2,628) (10,810) (76)% (27,107) (33,771) (20)%
Other income (expense),
net (1,761) (2,607) (32)% (16,684) (3,414) NM
Total other income
(expense) $ (4,037) $ (13,063) (69)% $ (42,465) $ (35,020) 21%
Total other income (expense) for the three and nine months ended
The lower total expense for the three months endedSeptember 30, 2021 , as compared with the same period in 2020, was primarily driven by repayment of all interest bearing debt, except$31.1 million of the term loan, prior to the start of the third quarter of 2021. The higher total expense for the nine months endedSeptember 30, 2021 , as compared with the same period in 2020, was primarily driven by a$14.3 million increase related to a write-off of prepaid debt fees in 2021 associated with the repayment of senior subordinated notes and the term loan as well as increased amortization, and a$11.7 million charge related to the 2021 extinguishment of debt that is included in other income (expense). The increase was partially offset by lower interest costs of$9.6 million for the senior subordinated notes,$7.4 million for the term loan, and$3.8 million for the revolving credit.
Income Tax Provision
For the three and nine months endedSeptember 30, 2021 , our income tax expense was$1.1 million and$5.6 million , respectively, compared with income tax expense (benefit) of$(12.0) million and$0.4 million for the same period in 2020. Our tax rate for the three and nine months endedSeptember 30, 2021 of 902% and (39)%, differed from the federal statutory rate of 21% due to losses in jurisdictions for which no benefit is recognized because of valuation allowances on deferred tax assets, the forecasted mix of earnings in domestic and international jurisdictions, a benefit related to stock-based compensation, uncertain tax positions, and reserves recognized on deferred purchase price receivables. Our tax rate for the three and nine months endedSeptember 30, 2020 of 32% and 0% differed from the federal statutory rate of 21% primarily due to a significant loss recognized in the second quarter for the divestiture of the majority of our Latin American business activities. This loss was recognized for tax as a discrete item and resulted in no tax benefit. A discrete tax benefit was recognized in the third quarter for$10.1 million related to the release of a valuation allowance onU.S. foreign tax credit deferred tax assets. This release was triggered by the carryforward of tax attributes due to the filing of amended tax returns in the third quarter. Other rate drivers include losses in jurisdictions for which no benefit is recognized because of valuation allowances on deferred tax assets as well as the forecasted mix of earnings in domestic and international jurisdictions, a benefit related to stock-based compensation, and uncertain tax positions.
For additional discussion related to income taxes, see Item 1: Financial Statements (Unaudited), Note 10: Income Taxes included in this Quarterly Report on Form 10-Q.
39
--------------------------------------------------------------------------------
Table of Contents
Operating Segment Results
For a description of our operating segments, refer to Item 1: Financial
Statements (Unaudited), Note 15: Segment Information included in this Quarterly
Report on Form 10-Q. The following tables and discussion highlight significant
changes in trends or components of each operating segment:
Nine Months Ended
Three Months Ended September 30, September 30,
In thousands 2021 2020 % Change 2021 2020 % Change
Segment revenues
Device Solutions $ 152,234 $ 176,128 (14)% $ 487,982 $ 507,572 (4)%
Networked Solutions 274,498 306,659 (10)% 827,870 971,984 (15)%
Outcomes 60,217 57,397 5% 180,083 168,637 7%
Total revenues $ 486,949 $ 540,184 (10)% $ 1,495,935 $ 1,648,193 (9)%
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Gross Gross Gross Gross Gross Gross Gross Gross
In thousands Profit Margin Profit Margin Profit Margin Profit Margin
Segment gross profit and
margin
Device Solutions $ 22,480 14.8% $ 20,528 11.7% $ 85,228 17.5% $ 64,843 12.8%
Networked Solutions 89,915 32.8% 102,295 33.4% 298,627 36.1% 332,368 34.2%
Outcomes 22,568 37.5% 20,428 35.6% 68,027 37.8% 56,123 33.3%
Total gross profit and
margin $ 134,963 27.7% $ 143,251 26.5% $ 451,882 30.2% $ 453,334 27.5%
Nine Months Ended
Three Months Ended September 30, September 30,
In thousands 2021 2020 % Change 2021 2020 % Change
Segment operating
expenses
Device Solutions $ 10,385 $ 9,511 9% $ 31,444 $ 36,748 (14)%
Networked Solutions 28,765 30,891 (7)% 93,556 94,902 (1)%
Outcomes 10,794 8,384 29% 33,380 26,655 25%
Corporate unallocated 80,856 118,445 (32)% 265,331 338,026 (22)%
Total operating expenses$ 130,800 $ 167,231 (22)%$ 423,711 $ 496,331 (15)% Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Operating Operating Operating Operating Operating Operating Operating Operating In thousands Income (Loss) Margin Income (Loss) Margin Income (Loss) Margin Income (Loss) Margin Segment operating income (loss) and operating margin Device Solutions$ 12,095 7.9%$ 11,017 6.3%$ 53,784 11.0%$ 28,095 5.5% Networked Solutions 61,150 22.3% 71,404 23.3% 205,071 24.8% 237,466 24.4% Outcomes 11,774 19.6% 12,044 21.0% 34,647 19.2% 29,468 17.5% Corporate unallocated (80,856) NM (118,445) NM (265,331) NM (338,026) NM Total operating income (loss) and operating margin$ 4,163 0.9%$ (23,980) (4.4)%$ 28,171 1.9%$ (42,997) (2.6)% 40
--------------------------------------------------------------------------------
Table of Contents
Device Solutions
The effects of changes in foreign currency exchange rates and the constant
currency changes in certain Device Solutions segment financial results were as
follows:
Effect of
Changes in
Foreign
Three Months Ended September 30, Currency Constant
Exchange Currency
In thousands 2021 2020 Rates Change Total Change
Device Solutions Segment
Revenues $ 152,234 $ 176,128 $ 2,514 $ (26,408) $ (23,894)
Gross profit 22,480 20,528 231 1,721 1,952
Operating expenses 10,385 9,511 31 843 874
Effect of
Changes in
Foreign
Nine Months Ended September 30, Currency Constant
Exchange Currency
In thousands 2021 2020 Rates Change Total Change
Device Solutions Segment
Revenues $ 487,982 $ 507,572 $ 25,740 $ (45,330) $ (19,590)
Gross profit 85,228 64,843 2,073 18,312 20,385
Operating expenses 31,444 36,748 710 (6,014) (5,304)
Revenues - Three months ended September 30, 2021 vs. Three months ended
September 30, 2020
Revenues decreased $23.9 million , or 14%. Changes in foreign currency exchange
rates favorably impacted revenues by $2.5 million . Revenue was unfavorably
impacted by decreased shipments in Europe , Middle East , and Africa (EMEA) in
2021 compared with 2020 primarily due to global component shortages, which
limited our ability to ship all our customer demand.
Revenues - Nine months ended September 30, 2021 vs. Nine months ended September
30, 2020
Revenues decreased $19.6 million , or 4%, compared with 2020. Changes in foreign
currency exchange rates favorably impacted revenues by $25.7 million . The first
nine months of 2021 were impacted by COVID-19 reduced demand and global
component shortages.
Gross Margin - Three months ended September 30, 2021 vs. Three months ended
September 30, 2020
For the three months ended September 30, 2021 , gross margin was 14.8%, compared
with 11.7% for the same period in 2020. The 310 basis point improvement over the
prior year was primarily due to favorable product mix and reduced manufacturing
inefficiencies related to COVID-19.
Gross Margin - Nine months ended September 30, 2021 vs. Nine months ended
September 30, 2020
For the nine months ended September 30, 2021 , gross margin was 17.5%, compared
with 12.8% for the same period in 2020. The 470 basis point increase over the
prior year was primarily due to favorable product mix and reduced manufacturing
inefficiencies as 2020 was impacted by COVID-19.
Operating Expenses - Three months ended September 30, 2021 vs. Three months
ended September 30, 2020
Operating expenses in 2021 compared with the same period in 2020 increased $0.9
million , or 9%, due to higher sales and marketing and research and development
expenses.
Operating Expenses - Nine months ended September 30, 2021 vs. Nine months ended
September 30, 2020
Operating expenses decreased $5.3 million , or 14%, for the first nine months of
2021 compared with the same period in 2020. The decrease was primarily a result
of lower research and development costs.
41
--------------------------------------------------------------------------------
Table of Contents
Networked Solutions
The effects of changes in foreign currency exchange rates and the constant
currency changes in certain Networked Solutions segment financial results were
as follows:
Effect of
Changes in
Foreign
Three Months Ended
Exchange Constant
In thousands 2021 2020 Rates Currency Change Total Change
Networked Solutions Segment
Revenues $ 274,498 $ 306,659 $ 973 $ (33,134) $ (32,161)
Gross profit 89,915 102,295 (77) (12,303) (12,380)
Operating expenses 28,765 30,891 25 (2,151) (2,126)
Effect of
Changes in
Foreign
Nine Months Ended September 30, Currency
Exchange Constant
In thousands 2021 2020 Rates Currency Change Total Change
Networked Solutions Segment
Revenues $ 827,870 $ 971,984 $ 7,784 $ (151,898) $ (144,114)
Gross profit 298,627 332,368 977 (34,718) (33,741)
Operating expenses 93,556 94,902 229 (1,575) (1,346)
Revenues - Three months ended September 30, 2021 vs. Three months ended
September 30, 2020
Revenues decreased $32.2 million , or 10%, compared with 2020. The change was
primarily due to global component shortages, which limited our ability to ship
all our customer demand, partially offset by customer project timing. Lower
product revenue of $40.2 million was partially offset by higher maintenance
service revenue of $8.0 million .
Revenues - Nine months ended September 30, 2021 vs. Nine months ended September
30, 2020
Revenues decreased $144.1 million , or 15%, for the first nine months of 2021
compared with the same period in 2020. The change was primarily due to COVID-19
demand impacts and global component shortages, which limited our ability to ship
all our customer demand. Lower product revenue of $162.1 million was partially
offset by higher maintenance service revenue of $18.0 million .
Gross Margin - Three months ended September 30, 2021 vs. Three months ended
September 30, 2020
Gross margin decreased to 32.8% for the period ending September 30, 2021 ,
compared with 33.4% in 2020. The 60 basis point decrease was primarily driven by
inefficiencies related to component shortages, partially offset by favorable
product mix.
Gross Margin - Nine months ended September 30, 2021 vs. Nine months ended
September 30, 2020
Gross margin increased to 36.1% for the 2021 period, compared with 34.2% in
2020. The 190 basis point increase was primarily driven by favorable product mix
and reduced manufacturing inefficiencies related to COVID-19, partially offset
by inefficiencies related to component shortages.
Operating Expenses - Three months ended September 30, 2021 vs. Three months
ended September 30, 2020
Operating expenses decreased $2.1 million , or 7%, for the quarter in 2021,
compared with the same period in 2020. The decrease was primarily related to
reduced research and development expenses.
Operating Expenses - Nine months ended September 30, 2021 vs. Nine months ended
September 30, 2020
Operating expenses decreased $1.3 million , or 1%, for the first nine months of
2021, compared with the same period in 2020. The decrease was primarily driven
by a decreased investment in research and development.
42
--------------------------------------------------------------------------------
Table of Contents
Outcomes
The effects of changes in foreign currency exchange rates and the constant
currency changes in certain Outcomes segment financial results were as follows:
Effect of
Changes in
Foreign
Three Months Ended September 30, Currency
Exchange Constant
In thousands 2021 2020 Rates Currency Change Total Change
Outcomes Segment
Revenues $ 60,217 $ 57,397 $ 670 $ 2,150 $ 2,820
Gross profit 22,568 20,428 404 1,736 2,140
Operating expenses 10,794 8,384 6 2,404 2,410
Effect of
Changes in
Foreign
Nine Months Ended September 30, Currency
Exchange Constant
In thousands 2021 2020 Rates Currency Change Total Change
Outcomes Segment
Revenues $ 180,083 $ 168,637 $ 3,931 $ 7,515 $ 11,446
Gross profit 68,027 56,123 1,634 10,270 11,904
Operating expenses 33,380 26,655 72 6,653 6,725
Revenues - Three months ended September 30, 2021 vs. Three months ended
September 30, 2020
Revenues increased $2.8 million , or 5%, compared with 2020. This increase was
driven by an increase in product sales and software licensing.
Revenues - Nine months ended September 30, 2021 vs. Nine months ended September
30, 2020
Revenues increased $11.4 million , or 7%, for the first nine months of 2021
compared with the same period in 2020. This increase was driven by an increase
in software license sales and higher managed and professional services.
Gross Margin - Three months ended September 30, 2021 vs. Three months ended
September 30, 2020
Gross margin increased to 37.5% for the third quarter of 2021, compared with
35.6% for the same period last year. The 190 basis point increase was driven by
favorable product and services mix and other cost efficiencies.
Gross Margin - Nine months ended September 30, 2021 vs. Nine months ended
September 30, 2020
Gross margin increased to 37.8% for the period ending in 2021, compared with
33.3% for last year. The 450 basis point increase was driven by cost
efficiencies.
Operating Expenses - Three months ended September 30, 2021 vs. Three months
ended September 30, 2020
Operating expenses for the 2021 period increased $2.4 million , compared with the
same period last year. The increase was primarily related to increased research
and development investment of $2.0 million and higher product marketing expenses
of $0.4 million .
Operating Expenses - Nine months ended September 30, 2021 vs. Nine months ended
September 30, 2020
Operating expenses for the first nine months of 2021 increased $6.7 million , or
25%, compared with the same period last year. This increase was primarily
related to increased research and development investment of $5.2 million and
higher product marketing expenses of $1.5 million .
Corporate Unallocated
Corporate Unallocated Expenses - Three months endedSeptember 30, 2021 vs. Three months endedSeptember 30, 2020 Operating expenses not directly associated with an operating segment are classified as Corporate unallocated. These expenses decreased$37.6 million , or 32%, for the three months endedSeptember 30, 2021 compared with the same period in 2020. This was primarily the result of$43.5 million in reduced restructuring charges related to the plan announced in 2020. 43 -------------------------------------------------------------------------------- Table of Contents Corporate Unallocated Expenses - Nine months endedSeptember 30, 2021 vs. Nine months endedSeptember 30, 2020 For the first nine months of 2021, Corporate unallocated expenses decreased$72.7 million , or 22%, as compared with the same period in 2020. This was primarily the result of decreases of$42.4 million in restructuring related to the plan announced in 2020 and$29.0 million related to the sale of business.
Bookings and Backlog of Orders
Bookings for a reported period represent customer contracts and purchase orders
received during the period for hardware, software, and services that have met
certain conditions, such as regulatory and/or contractual approval. Total
backlog represents committed but undelivered products and services for contracts
and purchase orders at period-end. Twelve-month backlog represents the portion
of total backlog that we estimate will be recognized as revenue over the next 12
months. Backlog is not a complete measure of our future revenues as we also
receive significant book-and-ship orders, as well as frame contracts. Bookings
and backlog may fluctuate significantly due to the timing of large project
awards. In addition, annual or multi-year contracts are subject to rescheduling
and cancellation by customers due to the long-term nature of the contracts.
Beginning total backlog, plus bookings, minus revenues, will not equal ending
total backlog due to miscellaneous contract adjustments, foreign currency
fluctuations, and other factors. Total bookings and backlog include certain
contracts with termination for convenience clause, which will not agree to the
total transaction price allocated to the remaining performance obligations
disclosed in Item 1: Financial Statements (Unaudited), Note 16: Revenues
included in this Quarterly Report on Form 10-Q.
Ending Ending
Quarterly Total 12-Month
Quarter Ended Bookings Backlog Backlog
In millions
September 30, 2021 $ 395 $ 3,433 $ 1,442
June 30, 2021 596 3,530 1,378
March 31, 2021 688 3,421 1,293
December 31, 2020 973 3,259 1,204
September 30, 2020 432 2,795 1,107
Financial Condition
Cash Flow Information
Nine Months Ended September 30,
In thousands 2021 2020
Net cash provided by operating activities $ 141,147 $ 70,571
Net cash used in investing activities (21,819) (33,472)
Net cash (used in) provided by financing activities (136,808) 402,590
Effect of foreign exchange rate changes on cash and cash equivalents
(762) (3,426)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents were$188.7 million atSeptember 30, 2021 , compared with$206.9 million atDecember 31, 2020 . The$18.2 million decrease in cash and cash equivalents in the 2021 period was primarily the result of repayment of the term loan and the senior subordinated notes, purchases of equity classified derivative contract, and the acquisitions of property, plant, and equipment, partially offset by proceeds from the convertible senior note and equity offering inMarch 2021 , along with cash flows from operating activities. Operating activities Cash provided by operating activities during the nine months in 2021 was$141.1 million compared with$70.6 million during the same period in 2020. The increase was primarily due to lower variable compensation payouts, net cash inflows for working capital, and lower interest payments. Investing activities Cash used in investing activities during the nine months in 2021 was$11.7 million lower than in 2020. This decrease in use of cash was primarily related to$8.5 million less purchases of property, plant, and equipment. 44 -------------------------------------------------------------------------------- Table of Contents Financing activities Net cash provided by financing activities during the nine months in 2021 was$136.8 million , compared with net cash provided of$402.6 million for the same period in 2020. InMarch 2021 , we received$389.4 million from issuance of common stock related to the equity offering, after deducting underwriters' discounts of the offering, purchased$84.1 million of the convertible note hedge contracts, and proceeds of$45.3 million from the sale of warrants. Also in March, we entered into the convertible senior notes with gross proceeds of$460 million , which was used to pay off the outstanding term loan balance. In April, we repaid the senior subordinated notes totaling$410 million (including$10 million early repayment premium) with proceeds from the equity offering and cash on hand. For the nine months endedSeptember 30, 2021 , we had net repayments of$486.1 million of debt. Cash payments for prepaid debt fees were$12.0 million . Effect of exchange rates on cash and cash equivalents The effect of exchange rates on the cash balances of currencies held in foreign denominations atSeptember 30, 2021 was a decrease of$0.8 million , compared with a decrease of$3.4 million for the same period in 2020. Our foreign currency exposure relates to non-U.S. dollar denominated balances in our international subsidiary operations. Free cash flow (Non-GAAP) To supplement our Consolidated Statements of Cash Flows presented on a GAAP basis, we use the non-GAAP measure of free cash flow to analyze cash flows generated from our operations. The presentation of non-GAAP free cash flow is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity. We calculate free cash flows, using amounts from our Consolidated Statements of Cash Flows, as follows: Nine Months Ended September 30, In thousands 2021 2020 Net cash provided by operating activities $ 141,147$ 70,571 Acquisitions of property, plant, and equipment (27,781) (36,297) Free cash flow $ 113,366$ 34,274
Free cash flow fluctuated primarily as a result of changes in cash provided by operating activities. See the cash flow discussion of operating activities above.
Off-balance sheet arrangements
We have no off-balance sheet financing agreements or guarantees as defined by Item 303 of Regulation S-K atSeptember 30, 2021 andDecember 31, 2020 that we believe could reasonably likely have a current or future effect on our financial condition, results of operations, or cash flows.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows from operations, borrowings, and the sale of our common stock. Cash flows may fluctuate and are sensitive to many factors including changes in working capital and the timing and magnitude of capital expenditures and payments of debt. Working capital, which represents current assets less current liabilities, continues to be in a net favorable position. Stock Offering OnMarch 12, 2021 , we closed the sale of 4,472,222 shares of our common stock in a public offering, resulting in net proceeds to us of$389.4 million , after deducting underwriters' discounts of the offering, as well as the sale of the Convertible Notes in a private placement to qualified institutional buyers, resulting in net proceeds to us of$448.5 million after deducting initial purchasers' discounts of the offering. Concurrently with the issuance of the Convertible Notes, we entered into the Convertible Note Hedge Transactions and Warrant Transactions. For further description of these transactions, refer to Item 1: Financial Statements (Unaudited), Note 6: Debt and Item 1: Financial Statements (Unaudited), Note 7: Derivative Financial Instruments included in this Quarterly Report on Form 10-Q.
Borrowings
OnOctober 18, 2019 we amended our credit facility that was initially entered onJanuary 5, 2018 (together with the amendment, the "2018 credit facility"). The 2018 credit facility provides for committed credit facilities in the amount of$1.2 billion U.S. dollars. The 2018 credit facility consists of a$650 million U.S. dollar term loan (the term loan) and a multicurrency revolving line of credit (the revolver) with a principal amount of up to$500 million . The revolver also contains a 45 -------------------------------------------------------------------------------- Table of Contents$300 million standby letter of credit sub-facility and a$50 million swingline sub-facility. TheOctober 18, 2019 , amendment extended the maturity date toOctober 18, 2024 and re-amortized the term loan based on the new balance as of the amendment date. OnOctober 19, 2020 , we completed a second amendment to our 2018 credit facility. This amendment adjusts the maximum total net leverage ratio thresholds for the period beginning with the fourth quarter of 2020 through the fourth quarter of 2021 to allow for increased operational flexibility. The maximum leverage ratio is increased to 4.75:1 for the fourth quarter of 2020 and the first quarter of 2021 and 4.50:1 for the second quarter through the fourth quarter of 2021. An additional level of pricing was added to the existing pricing grid and is effective throughout the remaining term of the 2018 credit facility. Beginning with the fourth quarter of 2020, the commitment fee ranges from 0.15% to 0.30% and drawn amounts are subject to a margin ranging from 1.00% to 2.00%. Debt fees of approximately$1.4 million were incurred for the amendment, as well as other legal and advisory fees. Both the term loan and the revolver can be repaid without penalty. Amounts repaid on the term loan may not be reborrowed, and amounts borrowed under the revolver may be repaid and reborrowed until the revolver's maturity, at which time all outstanding loans together with all accrued and unpaid interest must be repaid. OnMarch 8, 2021 , we entered into a third amendment to our 2018 credit facility, which modified provisions to permit cash settlement upon the conversion of the Convertible Notes, the Convertible Senior Note Hedge Transactions and Warrant Transactions and also to adjust certain settlement provisions for convertible indebtedness. See Item 1: Financial Statements (Unaudited), Note 7: Derivative Financial Instruments for further details of the Convertible Note Hedge Transactions and Warrant Transactions. OnMarch 9, 2021 , we submitted a Notice of Redemption to the trustee to redeem all outstanding Senior Notes at a redemption price of 102.50%, in accordance with the indenture governing the Senior Notes, totaling$410 million . As ofApril 8, 2021 , the Senior Notes were fully discharged and no principal or unpaid interest remains outstanding.
For further description of our borrowings, refer to Item 1: Financial Statements (Unaudited), Note 6: Debt included in this Quarterly Report on Form 10-Q.
For a description of our letters of credit and performance bonds, and the amounts available for additional borrowings or letters of credit under our lines of credit, including the revolver that is part of our credit facility, refer to Item 1: Financial Statements (Unaudited), Note 11: Commitments and Contingencies included in this Quarterly Report on Form 10-Q.Silver Spring Networks, Inc. Acquisition As part of the acquisition of SSNI, we achieved approximately$65 million of annualized savings by the end of the third quarter in 2021. For the nine months endedSeptember 30, 2021 , we paid out$1.1 million and we are expecting the remaining cash payment on the integration plan to be paid out in the next 12 months.
Restructuring
OnSeptember 17, 2020 , our Board of Directors approved a restructuring plan (the 2020 Projects). The 2020 Projects include activities that continue our efforts to optimize its global supply chain and manufacturing operations, sales and marketing organizations, and other overhead. These projects are scheduled to be substantially complete by the end of 2022. At the time of the approval, we estimated pre-tax restructuring charges of$55 million to$65 million . Of the total estimated charge, approximately$35 million to$45 million will result in cash expenditures, and the remainder related to non-cash charges. In the third quarter of 2021, expected remaining costs to be recognized were reduced by$13.0 million due to the removal of a previously planned non-cash cumulative translation adjustment charge, resulting from our recent reassessment of the legal entity and its related operations. The adjusted pre-tax restructuring charge expected would be$42 million to$52 million . For the nine months endedSeptember 30, 2021 , we paid$21.2 million related to all our restructuring projects. As ofSeptember 30, 2021 ,$47.3 million was accrued for these restructuring projects, of which$28.7 million is expected to be paid within the next 12 months.
For further details regarding our restructuring activities, refer to Item 1: Financial Statements (Unaudited), Note 12: Restructuring included in this Quarterly Report on Form 10-Q.
46
--------------------------------------------------------------------------------
Table of Contents
On October 29, 2021 , the Board of Directors of Itron approved a restructuring
plan (the 2021 Projects). The 2021 Projects include activities, in conjunction
with the announcement of the sale of certain of our Gas device manufacturing
operations, which drive reductions in certain locations and functional support
areas. These projects are to be substantially complete by the end of 2024. Itron
estimates pre-tax restructuring charges of $65-75 million . Of the total
estimated charge, approximately $60-65 million will result in cash expenditures,
and the remainder to non-cash impairment charges. The majority of the expense
will be recognized during the fourth quarter of 2021. Once the 2021 Projects are
substantially completed, Itron estimates $15-20 million in annualized savings.
Certain of Itron's employees are represented by unions or works councils, which
requires consultation, and potential restructuring projects may be subject to
regulatory approval, both of which could impact the timing of planned savings in
certain jurisdictions.
Reserve of Receivables from Sale of Business
On June 25, 2020 , we closed on the sale of five subsidiaries comprising our
manufacturing and sales operations in Latin America to buyers led by Instalación
Profesional y Tecnologías del Centro S.A. de C.V. , a Mexican company doing
business as Accell in Brazil (Accell), through the execution of various
definitive stock purchase agreements. The total sales price of $35.0 million
included deferred payments of $21.1 million for working capital, which was to be
paid in full by December 31, 2020 , as evidenced by a promissory note, and the
remainder in cash ($4.5 million ) and other deferred consideration. In January
2021 , we agreed to extend the payment terms on the remaining outstanding working
capital balance of $18.4 million . Accell had agreed to make monthly payments,
including interest, through September 2022 , under which we received full
payments for January through March and partial payments in April and May
(totaling $3.8 million including $0.7 million in interest). In July 2021 , we
received a revised payment plan for the remaining working capital note
receivable, as well as the other deferred transaction receivables. Based on
Accell's failure to make timely payments, continued requests to defer payments
significantly beyond the original maturity of the working capital note, and the
unfavorable impact of the COVID-19 pandemic on the Latin American markets, we
determined to fully reserve the working capital and other deferred consideration
in the second quarter of 2021.
Approval of Share Repurchase Program
Effective November 1, 2021 , the Board of Directors of Itron authorized a new
share repurchase program of up to $100 million of Itron's common stock over an
18-month period. Repurchases will be made in the open market and pursuant to the
terms of any Rule 10b5-1 plans that Itron may enter into, and in accordance with
applicable securities laws. The repurchase program is intended to comply with
Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended.
Depending on market conditions and other factors, these repurchases may be
commenced or suspended from time to time without prior notice.
Other Liquidity Considerations
We have tax credits and net operating loss carryforwards in various
jurisdictions that are available to reduce cash taxes. However, utilization of
tax credits and net operating losses are limited in certain jurisdictions. Based
on current projections, we expect to pay, net of refunds, approximately $1
million in state taxes, and $8 million in local and foreign taxes during 2021.
We do not expect to pay any U.S. federal taxes. For a discussion of our tax
provision and unrecognized tax benefits, see Item 1: Financial Statements
(Unaudited), Note 10: Income Taxes included in this Quarterly Report on Form
10-Q.
As of September 30, 2021 , we are under examination by certain tax authorities.
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.
As of September 30, 2021 , there was $46.8 million of cash and short-term
investments held by certain foreign subsidiaries in which we are permanently
reinvested for tax purposes. As a result of recent changes in U.S. tax
legislation, any repatriation in the future would not result in U.S. federal
income tax. Accordingly, there is no provision for U.S. deferred taxes on this
cash. If this cash were repatriated to fund U.S. operations, additional
withholding tax costs may be incurred. Tax is only one of the many factors that
we consider in the management of global cash. Accordingly, the amount of taxes
that we would need to accrue and pay to repatriate foreign cash could vary
significantly.
On October 8, 2021 the G20 /OECD Inclusive Framework on BEPS published a
statement on the components of global tax reform agreed to by most member
countries. The key components would allocate a portion of profits of the largest
businesses amongst their markets, curtail new digital services taxes, and
introduce a new global minimum tax of 15%. These components do not result in any
financial impact until enacted, which is not currently expected until 2023. The
Company is monitoring developments and additional details as they are released
to determine the impacts these new components will have on our business.
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, Inc. , we consolidate them because we have a greater than
50% ownership interest and/or because we exercise control over the operations.
The noncontrolling interest balance in our
47
--------------------------------------------------------------------------------
Table of Contents
Consolidated Balance Sheets represents the proportional share of the equity of
the joint venture entities, which is attributable to the minority shareholders.
At September 30, 2021 , $18.5 million of our consolidated cash balance was held
in our joint venture entities. As a result, the minority shareholders of these
entities have rights to their proportional share of this cash balance, and there
may be limitations on our ability to repatriate cash to the United States from
these entities.
General Liquidity Overview
Notwithstanding the expected short to mid-term impacts of the COVID-19 pandemic,
we expect to grow through a combination of internal new research and
development, licensing technology from and to others, distribution agreements,
partnering arrangements, and acquisitions of technology or other companies. We
expect these activities to be funded with existing cash, cash flow from
operations, borrowings, or the sale of our common stock or other securities. We
believe existing sources of liquidity will be sufficient to fund our existing
operations and obligations for the next 12 months and into the foreseeable
future, but offer no assurances. Our liquidity could be affected by the
stability of the electricity, gas, and water utility industries, competitive
pressures, our dependence on certain key vendors and components, changes in
estimated liabilities for product warranties and/or litigation, duration of the
COVID-19 pandemic, future business combinations, capital market fluctuations,
international risks, and other factors described under Risk Factors within Item
1A of Part I of our 2020 Annual Report, as well as Quantitative and Qualitative
Disclosures About Market Risk within Item 3 of Part I included in this Quarterly
Report on Form 10-Q.
Contingencies
Refer to Item 1: Financial Statements (Unaudited), Note 11: Commitments and Contingencies included in this Quarterly Report on Form 10-Q.
Critical Accounting Estimates and Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Our critical accounting policies that require the use of estimates and assumptions were discussed in detail in the 2020 Annual Report and have not changed materially.
Refer to Item 1: Financial Statements (Unaudited), Note 1: Summary of Significant Accounting Policies included in this Quarterly Report on Form 10-Q for further disclosures regarding new accounting pronouncements.
48
--------------------------------------------------------------------------------
Table of Contents
Non-GAAP Measures
The accompanying schedule contains non-GAAP financial measures. To supplement
our consolidated financial statements, which are prepared in accordance with
GAAP, we use certain non-GAAP financial measures, including non-GAAP operating
expense, non-GAAP operating income, non-GAAP net income, non-GAAP diluted EPS,
adjusted EBITDA, free cash flow, and constant currency. The presentation of this
financial information is not intended to be considered in isolation or as a
substitute for, or superior to, the financial information prepared and presented
in accordance with GAAP, and other companies may define such measures
differently. For more information on these non-GAAP financial measures, please
see the table captioned Reconciliations of Non-GAAP Financial Measures to the
Most Directly Comparable GAAP Financial Measures.
We use these non-GAAP financial measures for financial and operational decision
making and/or as a means for determining executive compensation. Management
believes that these non-GAAP financial measures provide meaningful supplemental
information regarding our performance and ability to service debt by excluding
certain expenses that may not be indicative of our recurring core operating
results. These non-GAAP financial measures facilitate management's internal
comparisons to our historical performance, as well as comparisons to our
competitors' operating results. Our executive compensation plans exclude
non-cash charges related to amortization of intangibles and certain discrete
cash and non-cash charges, such as acquisition and integration related expenses,
loss on sale of business, or restructuring charges. We believe that both
management and investors benefit from referring to these non-GAAP financial
measures in assessing our performance and when planning, forecasting and
analyzing future periods. We believe these non-GAAP financial measures are
useful to investors because they provide greater transparency with respect to
key metrics used by management in its financial and operational decision making
and because they are used by our institutional investors and the analyst
community to analyze the health of our business.
Non-GAAP operating expenses and non-GAAP operating income - We define non-GAAP
operating expenses as operating expenses excluding certain expenses related to
the amortization of intangible assets, restructuring, loss on sale of business,
corporate transition cost, and acquisition and integration. We define non-GAAP
operating income as operating income (loss) excluding the expenses related to
the amortization of intangible assets, restructuring, loss on sale of business,
corporate transition cost, and acquisition and integration. Acquisition and
integration related expenses include costs, which are incurred to affect and
integrate business combinations, such as professional fees, certain employee
retention and salaries related to integration, severances, contract
terminations, travel costs related to knowledge transfer, system conversion
costs, and asset impairment charges. We consider these non-GAAP financial
measures to be useful metrics for management and investors because they exclude
the effect of expenses that are related to acquisitions and restructuring
projects. By excluding these expenses, we believe that it is easier for
management and investors to compare our financial results over multiple periods
and analyze trends in our operations. For example, in certain periods, expenses
related to amortization of intangible assets may decrease, which would improve
GAAP operating margins, yet the improvement in GAAP operating margins due to
this lower expense is not necessarily reflective of an improvement in our core
business. There are some limitations related to the use of non-GAAP operating
expenses and non-GAAP operating income versus operating expenses and operating
income calculated in accordance with GAAP. We compensate for these limitations
by providing specific information about the GAAP amounts excluded from non-GAAP
operating expense and non-GAAP operating income and evaluating non-GAAP
operating expense and non-GAAP operating income together with GAAP operating
expense and operating income.
Non-GAAP net income and non-GAAP diluted EPS - We define non-GAAP net income as
net income (loss) attributable to Itron, Inc. excluding the expenses associated
with amortization of intangible assets, amortization of debt placement fees,
debt extinguishment, restructuring, loss on sale of business, corporate
transition cost, acquisition and integration, and the tax effect of excluding
these expenses. We define non-GAAP diluted EPS as non-GAAP net income divided by
diluted weighted-average shares outstanding during the period calculated on a
GAAP basis and then reduced to reflect the anti-dilutive impact of the
convertible note hedge transaction entered into in connection with the 0%
Convertible Notes due 2026 issued in March 2021 . We consider these financial
measures to be useful metrics for management and investors for the same reasons
that we use non-GAAP operating income. The same limitations described above
regarding our use of non-GAAP operating income apply to our use of non-GAAP net
income and non-GAAP diluted EPS. We compensate for these limitations by
providing specific information regarding the GAAP amounts excluded from these
non-GAAP measures and evaluating non-GAAP net income and non-GAAP diluted EPS
together with GAAP net income attributable to Itron, Inc. and GAAP diluted EPS.
For interim periods the budgeted annual effective tax rate (AETR) is used,
adjusted for any discrete items, as defined in Accounting Standards Codification
(ASC) 740 - Income Taxes. The budgeted AETR is determined at the beginning of
the fiscal year. The AETR is revised throughout the year based on changes to our
full-year forecast. If the revised AETR increases or decreases by 200 basis
points or more from the budgeted AETR due to changes in the full-year forecast
during the year, the revised AETR is used in place of the budgeted AETR
beginning with the quarter the 200 basis point threshold is exceeded and going
forward for all subsequent interim quarters in the year. We continue to assess
the AETR based on latest forecast
49--------------------------------------------------------------------------------
Table of Contents throughout the year and use the most recent AETR anytime it increases or decreases by 200 basis points or more from the prior interim period.
Adjusted EBITDA - We define adjusted EBITDA as net income (loss) (a) minus interest income, (b) plus interest expense, depreciation and amortization, debt extinguishment, restructuring, loss on sale of business, corporate transition cost, acquisition and integration, and (c) excluding income tax provision or benefit. Management uses adjusted EBITDA as a performance measure for executive compensation. A limitation to using adjusted EBITDA is that it does not represent the total increase or decrease in the cash balance for the period and the measure includes some non-cash items and excludes other non-cash items. Additionally, the items that we exclude in our calculation of adjusted EBITDA may differ from the items that our peer companies exclude when they report their results. We compensate for these limitations by providing a reconciliation of this measure to GAAP net income (loss). Free cash flow - We define free cash flow as net cash provided by operating activities less cash used for acquisitions of property, plant and equipment. We believe free cash flow provides investors with a relevant measure of liquidity and a useful basis for assessing our ability to fund our operations and repay our debt. The same limitations described above regarding our use of adjusted EBITDA apply to our use of free cash flow. We compensate for these limitations by providing specific information regarding the GAAP amounts and reconciling to free cash flow. Constant currency - We refer to the impact of foreign currency exchange rate fluctuations in our discussions of financial results, which references the differences between the foreign currency exchange rates used to translate operating results from the entity's functional currency intoU.S. dollars for financial reporting purposes. We also use the term "constant currency", which represents financial results adjusted to exclude changes in foreign currency exchange rates as compared with the rates in the comparable prior year period. We calculate the constant currency change as the difference between the current period results and the comparable prior period's results restated using current period foreign currency exchange rates. 50 -------------------------------------------------------------------------------- Table of Contents Reconciliations of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures
The tables below reconcile the non-GAAP financial measures of operating expenses, operating income, net income, diluted EPS, adjusted EBITDA, and free cash flow with the most directly comparable GAAP financial measures.
TOTAL COMPANY RECONCILIATIONS Three Months Ended September 30, Nine Months Ended
In thousands, except per share data 2021 2020 2021 2020
NON-GAAP OPERATING EXPENSES
GAAP operating expenses $ 130,800 $ 167,231 $ 423,711 $ 496,331
Amortization of intangible assets (8,944) (11,183) (26,914) (33,488)
Restructuring (958) (44,462) 830 (41,531)
Loss on sale of business (2,171) (380) (28,274) (57,295)
Corporate transition cost - - - 33
Acquisition and integration (118) 2,348 368 738
Non-GAAP operating expenses $ 118,609 $ 113,554 $ 369,721 $ 364,788
NON-GAAP OPERATING INCOME
GAAP operating income (loss) $ 4,163 $ (23,980) $ 28,171 $ (42,997)
Amortization of intangible assets 8,944 11,183 26,914 33,488
Restructuring 958 44,462 (830) 41,531
Loss on sale of business 2,171 380 28,274 57,295
Corporate transition cost - - - (33)
Acquisition and integration 118 (2,348) (368) (738)
Non-GAAP operating income $ 16,354 $ 29,697 $ 82,161 $ 88,546
NON-GAAP NET INCOME & DILUTED EPS
GAAP net loss attributable to Itron, Inc. $ (1,869) $ (25,357) $ (22,389) $ (79,475)
Amortization of intangible assets 8,944 11,183 26,914 33,488
Amortization of debt placement fees 1,905 972 17,252 2,898
Debt extinguishment - - 11,681 -
Restructuring 958 44,462 (830) 41,531
Loss on sale of business 2,171 380 28,274 57,295
Corporate transition cost - - - (33)
Acquisition and integration 118 (2,348) (368) (738)
Income tax effect of non-GAAP
adjustments (2,775) (4,658) (16,491) (6,037)
Non-GAAP net income attributable to Itron, Inc. $ 9,452 $ 24,634 $ 44,043 $ 48,929
Non-GAAP diluted EPS $ 0.21 $ 0.61 $ 0.99 $ 1.21
Non-GAAP weighted average common shares outstanding -
Diluted 45,506 40,559 44,330 40,507
ADJUSTED EBITDA
GAAP net loss attributable to Itron, Inc. $ (1,869) $ (25,357) $ (22,389) $ (79,475)
Interest income (352) (354) (1,326) (2,165)
Interest expense 2,628 10,810 27,107 33,771
Income tax provision (benefit) 1,136 (11,985) 5,581 366
Debt extinguishment - - 11,681 -
Depreciation and amortization 21,333 24,076 64,252 72,306
Restructuring 958 44,462 (830) 41,531
Loss on sale of business 2,171 380 28,274 57,295
Corporate transition cost - - - (33)
Acquisition and integration 118 (2,348) (368) (738)
Adjusted EBITDA $ 26,123 $ 39,684 $ 111,982 $ 122,858
FREE CASH FLOW
Net cash provided by operating
activities $ 18,467 $ 44,785 $ 141,147 $ 70,571
Acquisitions of property, plant, and
equipment (7,305) (7,248) (27,781) (36,297)
Free Cash Flow $ 11,162 $ 37,537 $ 113,366 $ 34,274
51--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
