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, 2021 filed with theSecurities and Exchange Commission (SEC) in our Annual Report on Form 10-K onFebruary 28, 2022 (2021 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 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). 29 -------------------------------------------------------------------------------- Table of Contents 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 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 plans, 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 2021 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.
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. 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- 30 -------------------------------------------------------------------------------- Table of Contents 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 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 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 Energy Management suite of products 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 inthe 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 intoU.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 46-48 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. 31 -------------------------------------------------------------------------------- Table of Contents Total Company Highlights
Highlights and significant developments for the three months ended
•Revenues were
•Gross margin was 29.2%, compared with 30.6% in 2021
•Operating expenses increased
•Net loss attributable to
•GAAP loss per share increased by
•Non-GAAP net income attributable to
•Non-GAAP diluted EPS was
•Adjusted EBITDA was
•Total backlog was
Highlights and significant developments for the six months ended
•Revenues were
•Gross margin was 28.8% compared with 31.4% in 2021
•Operating expenses decreased
•Net loss attributable to
•GAAP loss per share increased by
•Non-GAAP net income attributable to
•Non-GAAP diluted EPS was
•Adjusted EBITDA was
Goodwill Impairment As the result of increases in raw material, component, labor and other costs, coupled with a decrease in forecasted revenue within the Device Solutions operating segment and reporting unit, which we determined during the second quarter of 2022, we performed an interim goodwill impairment test. At the conclusion of the test, a goodwill impairment of$38.5 million was recognized in our Corporate unallocated segment as ofJune 30, 2022 . No interim impairment test was determined to be necessary for the Networked Solutions or Outcomes reporting units. Refer to Note 1: Summary of Significant Accounting Policies in Part II, Item 8: Financial Statements and Supplementary Data of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 for a description of our reporting units and our method used to determine the fair values of our reporting units and to determine the amount of any goodwill impairment. 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 included 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 inArgenteuil, France ; and the business and manufacturing assets maintained at one of our contract manufacturers inNorth America . 32
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The transaction closed onFebruary 28, 2022 . The final sales price and loss on sale will be determined and recognized after the finalization of the working capital adjustment, expected in the third quarter of 2022. As ofDecember 31, 2021 , we recognized a pre-tax impairment loss of$34.4 million as well as$3.1 million for professional services in conjunction with the planned sale to Dresser (classified within loss on sale of business within the Consolidated Statements of Operations). In determining the amount of the impairment loss for the assets of this transaction during the fourth quarter of 2021, we included$59.7 million of accumulated foreign currency translation losses and$0.9 million in unrealized loss on defined benefit pension plans, both classified within accumulated other comprehensive income (AOCI). Upon closing of the sale transaction in the first quarter of 2022, the then outstanding amounts in AOCI were reclassified to net income through loss on sale of business for a total of$55.4 million , with a corresponding reversal of the impairment loss originally booked in the fourth quarter of 2021. The difference between the amounts included for the impairment loss in the fourth quarter of 2021 and the first quarter of 2022 was driven by the change in the euro toU.S. dollar exchange rate, and operating results for the period owned in 2022. In the first quarter of 2022, we recognized a loss of$2.2 million related to changes in the working capital balances and additional professional services. In the second quarter of 2022, we recognized a loss of$0.2 million related to additional professional services. The base sale price of this divestiture was$75.0 million , with adjustments for (1) pension liabilities assumed by Dresser for related active employees and (2) the final working capital balance. Cash proceeds from the sale were$55.9 million . Impact of COVID-19, Supply Chain Challenges, and the Conflict inUkraine 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 the initial months of the pandemic 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 2022. 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 we believe 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. Recently, inflation in our raw materials and component costs, freight charges, and labor costs have increased above historical levels, due to, among other things, the continuing impacts of the pandemic and uncertain economic environment. We may or may not be able to fully recover these increased costs through pricing actions with our customers. 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 revenue originally forecasted in prior periods shifting 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 2021 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 payments in 2020, but increased cash outlays during 2021 and into 2022. While we have limited direct business exposure inRussia ,Belarus andUkraine , the Russian military actions and the resulting sanctions could adversely affect the global economy, as well as further disrupt the supply chain. A major disruption in the global economy and supply chain could have a material adverse effect on our business, prospects, financial condition, results of operations, and cash flows. The extent and duration of the military action, sanctions, and resulting market and/or supply disruptions are impossible to predict, but could be substantial. 33 -------------------------------------------------------------------------------- Table of Contents Total Company GAAP and Non-GAAP Highlights and Unit Shipments: Three Months Ended June 30, Six Months Ended June 30, In thousands, except margin and per share data 2022 2021 % Change 2022 2021 % Change GAAP Revenues Product revenues$ 359,898 $ 411,719 (13)%$ 759,708 $ 854,523 (11)% Service revenues 71,984 77,693 (7)% 147,505 154,463 (5)% Total revenues 431,882 489,412 (12)% 907,213 1,008,986 (10)% Gross profit 126,105 149,875 (16)% 261,329 316,919 (18)% Operating expenses 159,632 156,807 2% 288,037 292,911 (2)% Operating income (loss) (33,527) (6,932) NM (26,708) 24,008 NM Other income (expense) (2,697) (25,729) (90)% (4,761) (38,428) (88)% Income tax benefit (provision) (641) 216 NM (4,500) (4,445)
1%
Net loss attributable to Itron, Inc. (36,967) (33,123) 12% (36,061) (20,520) 76% Non-GAAP(1) Non-GAAP operating expenses$ 117,068 $ 123,016 (5)%$ 243,003 $ 251,112 (3)% Non-GAAP operating income 9,037 26,859 (66)% 18,326 65,807 (72)% Non-GAAP net income attributable to Itron, Inc. 3,133 12,644 (75)% 8,304 34,591 (76)% Adjusted EBITDA 17,478 36,136 (52)% 36,372 85,859 (58)% GAAP Margins and Earnings Per Share Gross margin Product gross margin 26.3 % 28.3 % 26.3 % 29.5 % Service gross margin 43.7 % 42.8 % 41.8 % 42.2 % Total gross margin 29.2 % 30.6 % 28.8 % 31.4 % Operating margin (7.8) % (1.4) % (2.9) % 2.4 %
Net loss per common share - Basic
$ (0.80) $ (0.47)
Net loss per common share - Diluted
$ (0.80) $ (0.47) Non-GAAP Earnings Per Share(1) Non-GAAP diluted EPS$ 0.07 $ 0.28 $ 0.18 $ 0.79
(1)These measures exclude certain expenses that we do not believe are indicative of our core operating results. See pages 46-48 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 viaNaaS , 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 34 -------------------------------------------------------------------------------- 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:
As of June 30,
Units in thousands 2022 2021
Endpoints under management 85,390 78,208
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 Constant
Three Months Ended June 30, Currency Exchange Currency
In thousands 2022 2021 Rates Change Total Change
Total Company
Revenues $ 431,882 $ 489,412 $ (18,935) $ (38,595) $ (57,530)
Gross profit 126,105 149,875 (4,470) (19,300) (23,770)
Effect of Changes
in Foreign Constant
Six Months Ended June 30, Currency Exchange Currency
In thousands 2022 2021 Rates Change Total Change
Total Company
Revenues $ 907,213 $ 1,008,986 $ (30,702) $ (71,071) $ (101,773)
Gross profit 261,329 316,919 (6,945) (48,645) (55,590)
Revenues - Three months ended June 30, 2022 vs. Three months ended June 30, 2021
Total revenues decreased $57.5 million , or 12%, compared with the same period in
2021. We have been unfavorably impacted by global component constraints, which
limited our ability to fulfill customer demand. Product revenues decreased by
$51.8 million and service revenues decreased $5.7 million . Device Solutions
decreased by $58.2 million ; Networked Solutions increased by $4.4 million ; and
Outcomes decreased by $3.8 million when compared with the same period last year.
Revenue decreased for Device Solutions due to the sale of certain Gas device
manufacturing and business operations in Europe and North America to Dresser.
Changes in exchange rates unfavorably impacted total revenues by $18.9 million ,
of which $14.9 million unfavorably impacted Device Solutions.
Revenues - Six months ended June 30, 2022 vs. Six Months Ended June 30, 2021
Total revenues decreased $101.8 million , or 10%, compared with the same period
in 2021. We have been unfavorably impacted by global component constraints,
which limited our ability to fulfill customer demand. Product revenues decreased
by $94.8 million and service revenues decreased by $7.0 million . Device
Solutions decreased by $91.4 million ; Networked
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Solutions decreased by $5.1 million ; and Outcomes decreased by $5.3 million when
compared with the same period last year. Revenue decreased for Device Solutions
due to the sale of certain Gas device manufacturing and business operations in
Europe and North America to Dresser. Changes in exchange rates unfavorably
impacted total revenues by $30.7 million , of which $24.4 million unfavorably
impacted Device Solutions.
Gross Margin - Three months ended June 30, 2022 vs. Three months ended June 30,
2021
Gross margin was 29.2%, compared with 30.6% in 2021. We were unfavorably
impacted by input cost increases and manufacturing inefficiencies related to
component shortages in 2022 compared with 2021. Product sales gross margin
decreased to 26.3%, compared with 28.3% in 2021. Gross margin on service
revenues increased to 43.7%, compared with 42.8% in 2021.
Gross Margin - Six months ended June 30, 2022 vs. Six Months Ended June 30, 2021
Gross margin was 28.8%, compared with 31.4% in 2021. We were unfavorably
impacted by higher input costs and manufacturing inefficiencies in 2022 compared
with 2021. Product sales gross margin decreased to 26.3%, compared with 29.5% in
2021, and gross margin on service revenues decreased to 41.8%, compared with
42.2% in 2021.
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 June 30, Currency
Exchange Constant
In thousands 2022 2021 Rates Currency Change Total Change
Total Company
Sales, general and
administrative $ 72,877 $ 74,144 $ (3,577) $ 2,310 $ (1,267)
Research and development 45,055 48,763 (369) (3,339) (3,708)
Amortization of intangible
assets 6,485 8,997 (192) (2,320) (2,512)
Restructuring (3,459) 192 58 (3,709) (3,651)
Loss on sale of business 194 24,711 (1,147) (23,370) (24,517)
Goodwill impairment 38,480 - - 38,480 38,480
Total operating expenses $ 159,632 $ 156,807 $ (5,227) $ 8,052 $ 2,825
Effect of
Changes in
Foreign
Six Months Ended June 30, Currency
Exchange Constant
In thousands 2022 2021 Rates Currency Change Total Change
Sales, general and
administrative $ 149,278 $ 150,136 $ (5,734) $ 4,876 $ (858)
Research and development 94,651 100,490 (789) (5,050) (5,839)
Amortization of intangible
assets 13,038 17,970 (293) (4,639) (4,932)
Restructuring (9,825) (1,788) 234 (8,271) (8,037)
Loss on sale of business 2,415 26,103 (1,192) (22,496) (23,688)
Goodwill impairment 38,480 - - 38,480 38,480
Total operating expenses $ 288,037 $ 292,911 $ (7,774) $ 2,900 $ (4,874)
Operating expenses increased $2.8 million for the second quarter of 2022 as
compared with the same period in 2021. This was primarily the result of $38.5
million in goodwill impairment, partially offset by a reduction of $3.7 million
in research and development expenses, $2.5 million in amortization of intangible
assets, $3.7 million in restructuring, and $24.5 million for the loss on sale of
business primarily related to the Latin America divestiture.
Operating expenses decreased $4.9 million for the six months ended June 30, 2022
as compared with the same period in 2021. This was primarily the result of a
reduction of $5.8 million in research and development expenses, $4.9 million in
amortization
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of intangible assets, $8.0 million in restructuring, and $23.7 million for the
loss on sale of business primarily related to the Latin America divestiture,
offset by $38.5 million in goodwill impairment in 2022.
Other Income (Expense)
The following table shows the components of other income (expense):
Three Months Ended June 30, Six Months Ended June 30,
In thousands 2022 2021 % Change 2022 2021 % Change
Interest income $ 349 $ 432 (19)% $ 566 $ 974 (42)%
Amortization of prepaid
debt fees (880) (12,739) (93)% (1,720) (15,434) (89)%
Other interest expense (780) (1,265) (38)% (1,532) (9,045) (83)%
Interest expense (1,660) (14,004) (88)% (3,252) (24,479) (87)%
Other income (expense),
net (1,386) (12,157) (89)% (2,075) (14,923) (86)%
Total other income
(expense) $ (2,697) $ (25,729) (90)% $ (4,761) $ (38,428) (88)%
Total other income (expense) for the three and six months ended June 30, 2022
was a net expense of $2.7 million and $4.8 million , compared with net expense of
$25.7 million and $38.4 million in the same period in 2021.
The lower total expense for the three months ended June 30, 2022 , as compared
with the same period in 2021, was primarily driven by $11.1 million write-off of
prepaid debt fees associated with the repayment of senior subordinated notes and
$10.0 million related to the extinguishment of debt in other income (expense),
net during 2021.
The lower total expense for the six months ended June 30, 2022 , as compared with
the same period in 2021, was primarily driven by 2021 activity: $11.1 million
write-off of prepaid debt fees associated with the repayment of senior
subordinated notes, $2.7 million in lower debt fee amortization, $11.7 million
related to the extinguishment of debt in other income (expense), net, as well as
lower interest costs of $5.4 million for bonds and $2.2 million for the term
loan.
Income Tax Provision
For the three and six months ended June 30, 2022 , our income tax expense was
$0.6 million and $4.5 million , respectively, compared with income tax expense
(benefit) of $(0.2) million and $4.4 million for the same period in 2021. Our
tax rate for the three and six months ended June 30, 2022 of (2)% and (14)%,
differed from the federal statutory rate of 21% due to the impact of valuation
allowances on deferred tax assets, the forecasted mix of earnings in domestic
and international jurisdictions, GILTI (Global Intangible Low-Taxed Income) and
Subpart F tax, net of Section 250 deduction (largely driven by research and
development capitalization), discrete tax expense related to the Dresser
divestiture, a discrete tax benefit due to goodwill impairment, an expense
related to stock-based compensation, tax credits, and uncertain tax positions.
Our tax rate for the three and six months ended June 30, 2021 of 1% and (31)%
differed from the federal statutory rate of 21% primarily due to reserves on
deferred sales price receivables recognized in the second quarter related to the
2020 divestiture of the majority of our Latin American business activities. This
item was recognized for tax as a discrete and resulted in no tax benefit. Other
rate drivers include 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, and uncertain tax positions.
Beginning January 1, 2022 , the Tax Cuts and Jobs Act of 2017 eliminates the
option to deduct research and development expenditures currently and requires
taxpayers to capitalize and amortize them over five or fifteen years. Although
Congress is considering legislation that would defer the capitalization and
amortization requirement, there is no assurance that the provision will be
repealed or otherwise modified. As a result of research and development
conducted outside of the U.S. , we expect additional GILTI (Global Intangible
Low-Taxed Income) tax, net of Section 250 deduction for 2022. The income tax
provision has been prepared according to this currently enacted tax legislation,
but a change in tax law with regards to capitalization of research and
development expenditures would have a material beneficial impact on our annual
effective tax rate.
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.
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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:
Six Months Ended
Three Months Ended June 30, June 30,
In thousands 2022 2021 % Change 2022 2021 % Change
Segment revenues
Device Solutions $ 104,810 $ 162,967 (36)% $ 244,375 $ 335,748 (27)%
Networked Solutions 269,462 265,058 2% 548,282 553,372 (1)%
Outcomes 57,610 61,387 (6)% 114,556 119,866 (4)%
Total revenues $ 431,882 $ 489,412 (12)% $ 907,213 $ 1,008,986 (10)%
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
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 $ 13,878 13.2% $ 30,452 18.7% $ 35,684 14.6% $ 62,748 18.7%
Networked Solutions 89,909 33.4% 95,953 36.2% 181,260 33.1% 208,712 37.7%
Outcomes 22,318 38.7% 23,470 38.2% 44,385 38.7% 45,459 37.9%
Total gross profit and
margin $ 126,105 29.2% $ 149,875 30.6% $ 261,329 28.8% $ 316,919 31.4%
Six Months Ended
Three Months Ended June 30, June 30,
In thousands 2022 2021 % Change 2022 2021 % Change
Segment operating
expenses
Device Solutions $ 8,419 $ 10,464 (20)% $ 18,647 $ 21,059 (11)%
Networked Solutions 27,627 31,323 (12)% 57,971 64,791 (11)%
Outcomes 13,209 10,933 21% 26,935 22,586 19%
Corporate unallocated 110,377 104,087 6% 184,484 184,475 NM
Total operating expenses $ 159,632 $ 156,807 2% $ 288,037 $ 292,911 (2)%
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
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 $ 5,459 5.2% $ 19,988 12.3% $ 17,037 7.0% $ 41,689 12.4%
Networked Solutions 62,282 23.1% 64,630 24.4% 123,289 22.5% 143,921 26.0%
Outcomes 9,109 15.8% 12,537 20.4% 17,450 15.2% 22,873 19.1%
Corporate unallocated (110,377) NM (104,087) NM (184,484) NM (184,475) NM
Total operating income
(loss) and operating
margin $ (33,527) (7.8)% $ (6,932) (1.4)% $ (26,708) (2.9)% $ 24,008 2.4%
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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 Constant
Three Months Ended June 30, Currency Exchange Currency
In thousands 2022 2021 Rates Change Total ChangeDevice Solutions Segment
Revenues $ 104,810 $ 162,967 $ (14,935) $ (43,222) $ (58,157)
Gross profit 13,878 30,452 (1,452) (15,122) (16,574)
Operating expenses 8,419 10,464 (417) (1,628) (2,045)
Effect of Changes
in Foreign Constant
Six Months Ended June 30, Currency Exchange Currency
In thousands 2022 2021 Rates Change Total ChangeDevice Solutions Segment
Revenues $ 244,375 $ 335,748 $ (24,404) $ (66,969) $ (91,373)
Gross profit 35,684 62,748 (3,654) (23,410) (27,064)
Operating expenses 18,647 21,059 (689) (1,723) (2,412)
Revenues - Three months ended June 30, 2022 vs. Three months ended June 30, 2021
Revenues decreased $58.2 million , or 36%. Changes in foreign currency exchange
rates unfavorably impacted revenues by $14.9 million . Revenue decreased over the
prior year due to the discontinuation of some legacy products and the sale of
certain Gas product lines to Dresser during 2022.
Revenues - Six months ended June 30, 2022 vs. Six months ended June 30, 2021
Revenues decreased $91.4 million , or 27%. Changes in foreign currency exchange
rates unfavorably impacted revenues by $24.4 million . Revenue decreased over the
prior year due to the discontinuation of some legacy products and the sale of
certain Gas product lines to Dresser during the first quarter of 2022, as well
as the impact of component shortages, which limited our ability to fulfill
customer demand.
Gross Margin - Three months ended June 30, 2022 vs. Three months ended June 30,
2021
For the three months ended June 30, 2022 , gross margin was 13.2%, compared with
18.7% for the same period in 2021. The 550 basis point decrease over the prior
year was primarily due to higher input costs and manufacturing inefficiencies
related to component shortages.
Gross Margin - Six months ended June 30, 2022 vs. Six months ended June 30, 2021
For the six months ended June 30, 2022 , gross margin was 14.6%, compared with
18.7% for the same period in 2021. The 410 basis point reduction over the prior
year was primarily due to higher input costs and manufacturing inefficiencies
related to component shortages.
Operating Expenses - Three months ended June 30, 2022 vs. Three months ended
June 30, 2021
Operating expenses in 2022 compared with the same period in 2021 decreased $2.0
million , or 20%, due to a $1.0 million decrease in sales and marketing expenses
and a $1.0 million decrease in research and development expenses.
Operating Expenses - Six months ended June 30, 2022 vs. Six months ended
June 30, 2021
Operating expenses decreased $2.4 million , or 11%, for the first six months of
2022, compared with the same period in 2021. The decrease was primarily a result
of a $1.7 million decrease in sales and marketing expenses and a $0.7 million
decrease in research and development expenses.
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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 June 30, Currency Constant
Exchange Currency
In thousands 2022 2021 Rates Change Total Change
Networked Solutions Segment
Revenues $ 269,462 $ 265,058 $ (2,090) $ 6,494 $ 4,404
Gross profit 89,909 95,953 (2,059) (3,985) (6,044)
Operating expenses 27,627 31,323 (96) (3,600) (3,696)
Effect of
Changes in
Foreign
Six Months Ended June 30, Currency Constant
Exchange Currency
In thousands 2022 2021 Rates Change Total Change
Networked Solutions Segment
Revenues $ 548,282 $ 553,372 $ (3,448) $ (1,642) $ (5,090)
Gross profit 181,260 208,712 (1,887) (25,565) (27,452)
Operating expenses 57,971 64,791 (153) (6,667) (6,820)
Revenues - Three months ended June 30, 2022 vs. Three months ended June 30, 2021
Revenues increased $4.4 million , or 2%, compared with 2021. The change was
primarily due to the ramp of new deployments, partially offset by component
shortages, which limited our ability to fulfill customer demand. Product revenue
was higher by $6.4 million partially offset by lower maintenance service revenue
of $2.0 million .
Revenues - Six months ended June 30, 2022 vs. Six months ended June 30, 2021
Revenues decreased $5.1 million , or 1%, for the first six months of 2022
compared with the same period in 2021. The change was primarily due to component
shortages that limited our ability to fulfill customer demand, partially offset
by the ramp of new deployments. Product revenue was lower by $3.0 million and
maintenance service revenue lower by $2.1 million .
Gross Margin - Three months ended June 30, 2022 vs. Three months ended June 30,
2021
Gross margin decreased to 33.4% for the period ending June 30, 2022 , compared
with 36.2% in 2021. The 280 basis point decrease was primarily driven by higher
input costs and manufacturing inefficiencies related to component shortages.
Gross Margin - Six months ended June 30, 2022 vs. Six months ended June 30, 2021
Gross margin was 33.1% for the 2022 period, compared with 37.7% in 2021. The 460
basis point decrease was primarily related to higher input costs, manufacturing
inefficiencies related to component shortages, and unfavorable product mix.
Operating Expenses - Three months ended June 30, 2022 vs. Three months ended
June 30, 2021
Operating expenses decreased $3.7 million , or 12%, in 2022 compared with the
same period in 2021. The decrease was primarily related to reduced research and
development expenses.
Operating Expenses - Six months ended June 30, 2022 vs. Six months ended
June 30, 2021
Operating expenses decreased $6.8 million , or 11%, for the first six months of
2022, compared with the same period in 2021. The decrease was primarily related
to reduced research and development expenses.
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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 June 30, Currency Constant
Exchange Currency
In thousands 2022 2021 Rates Change Total Change
Outcomes Segment
Revenues $ 57,610 $ 61,387 $ (1,909) $ (1,868) $ (3,777)
Gross profit 22,318 23,470 (959) (193) (1,152)
Operating expenses 13,209 10,933 (56) 2,332 2,276
Effect of
Changes in
Foreign
Six Months Ended June 30, Currency Constant
Exchange Currency
In thousands 2022 2021 Rates Change Total Change
Outcomes Segment
Revenues $ 114,556 $ 119,866 $ (2,850) $ (2,460) $ (5,310)
Gross profit 44,385 45,459 (1,404) 330 (1,074)
Operating expenses 26,935 22,586 (86) 4,435 4,349
Revenues - Three months ended June 30, 2022 vs. Three months ended June 30, 2021
Revenues decreased $3.8 million , or 6%, for the first three months of 2022,
compared with 2021. This decrease was driven by a decrease in product sales,
software licensing, and consulting services.
Revenues - Six months ended
Gross Margin - Three months endedJune 30, 2022 vs. Three months endedJune 30, 2021 Gross margin increased to 38.7% for the second quarter of 2022, compared with 38.2% for the same period last year. The 50 basis point increase was driven by more favorable managed services mix and other cost efficiencies. Gross Margin - Six months endedJune 30, 2022 vs. Six months endedJune 30, 2021 Gross margin increased to 38.7% for the period ending in 2022, compared with 37.9% for last year. The 80 basis point increase was driven by favorable managed services mix and other cost efficiencies. Operating Expenses - Three months endedJune 30, 2022 vs. Three months endedJune 30, 2021 Operating expenses for the 2022 period increased$2.3 million , compared with the same period last year. The increase was primarily related to increased research and development investment of$2.2 million . Operating Expenses - Six months endedJune 30, 2022 vs. Six months endedJune 30, 2021 Operating expenses for the first six months of 2022 increased$4.3 million , or 19%, compared with the same period last year. This was primarily related to increased research and development expenses of$3.9 million .
Corporate Unallocated
Corporate Unallocated Expenses - Three months endedJune 30, 2022 vs. Three months endedJune 30, 2021 Operating expenses not directly associated with an operating segment are classified as Corporate unallocated. These expenses increased$6.3 million , or 6%, for the three months endedJune 30, 2022 compared with the same period in 2021. This was primarily the result of$38.5 million in goodwill impairment, slightly offset by a reduction of$24.5 million in loss on sale of business primarily related to theLatin America divestiture in 2021,$3.7 million in restructuring, and$2.5 million in amortization of intangible assets. 41 -------------------------------------------------------------------------------- Table of Contents Corporate Unallocated Expenses - Six months endedJune 30, 2022 vs. Six months endedJune 30, 2021 For the first six months of 2022, Corporate unallocated expenses were substantially flat compared with the 2021 period. This was primarily the result of$38.5 million in goodwill impairment, offset by a reduction of$23.7 million in loss on sale of business primarily related to theLatin America divestiture in 2021,$8.0 million in restructuring, and$4.9 million in amortization of intangible assets.
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
June 30, 2022 $ 612 $ 4,063 $ 1,746
March 31, 2022 417 3,897 1,557
December 31, 2021 1,076 4,017 1,539
September 30, 2021 395 3,433 1,442
June 30, 2021 596 3,530 1,378
During the first quarter of 2022, we reduced our total backlog by $55.7 million
in order to reflect the sale of certain Gas product lines to Dresser, effective
February 28, 2022 .
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