Itron, Inc.
Table of Contents
| Page | ||||||||||||
| PART I | ||||||||||||
| Item 1: | Business | |||||||||||
| Item 1A: | Risk Factors | |||||||||||
| Item 1B: | Unresolved Staff Comments | |||||||||||
| Item 2: | Properties | |||||||||||
| Item 3: | ||||||||||||
| Item 4: | ||||||||||||
| PART II | ||||||||||||
Quantitative and | ||||||||||||
| PART III | ||||||||||||
| PART IV | ||||||||||||
In this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “Itron,”"we", "us", "our", "Itron", and the “Company”"Company" refer to Itron, Inc.
Certain Forward-Looking Statements
This documentreport contains, forward-lookingand our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements concerningare neither historical factors nor assurances of future performance. These statements are based on our expectations about, among others, revenues, operations, financial performance, revenues, earnings, growth, liquidity, earnings per share, cash flows and restructuring activities including headcount reductions and other items.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 Annual Report on Form 10-K. When we use the words “expect,” “intend,” “anticipate,” “believe,” “plan,” “project,” “estimate,” “future,” “objective,” “may,” “will,” “will continue,”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. TheseAlthough we believe the estimates and assumptions andupon which these forward-looking statements are based are reasonable, any of these estimates or assumptions could prove to be inaccurate and causethe forward-looking statements based on these estimates and assumptions could be incorrect. Our operations involve risks and uncertainties, many of which are outside our actualcontrol, 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 varybe correct. Actual results and trends in the future may differ materially from expected results. Youthose suggested or implied by the forward-looking statements depending on a variety of factors. Therefore, you should not solely rely on any of these forward-looking statements as they are only valid asstatements. Some of the datefactors 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 thiscustomer 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 Annual Report on Form 10-K.10-K and other reports on file with the Securities and Exchange Commission. We do not have anyundertake no obligation to publicly 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 any vaccine, 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 updated risk in Part I, Item 1A:Risk Factors of this document. For a complete description of risks and uncertainties, refer to Item 1A: “Risk Factors” included in this Annual Report on Form 10-K.
PART I
Available Information
Documents we provide to the Securities and Exchange Commission (SEC) 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 the SEC. In addition, these documents are available at the SEC’sSEC's website (http://www.sec.gov) and at the SEC’s Headquarters at 100 F Street, NE, Washington, DC 20549, or by calling 1-800-SEC-0330..
General
Itron is a leader in the Industrial Internet of Things (IIoT), enabling utilities and cities to safely, securely and reliably deliver critical infrastructure solutions to communities in more than 100 countries. Our proven platform enables smart networks, software, services, devices and sensors to help our customers better manage their operations in the energy, water, and smart city spaces. We are among the leading technology and services companies dedicatedoffering end-to-end device solutions, networked solutions, and outcomes-based products and services to the resourceful use of electricity, natural gas,utility and water. Wemunicipal sectors. Our comprehensive offerings measure, monitor, and provide comprehensive solutionsdata analytics and services that measure,enable utilities and municipalities to manage and analyze energy and water use. Our broad product portfolio helps utilitiestheir critical resources responsibly and efficiently manage resources.efficiently.
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We have over 40 years of experience supporting utilities and resource consumption, there continues to be growing demand for electricity, natural gas,municipalities in the management of their data and water. This demand comes at a time when utilities are challenged by cost constraints, regulatory requirements, environmental concerns and water scarcity. Our solution is to provide utilities with the knowledge they need to optimize their resources, improve their efficiency and to better understand and serve their customers - knowledge that gives their customers control over their energy and watercritical infrastructure needs and allows for better management and conservation of valuable resources.
Looking forward, we will continue to innovate and support open standards and maintain a device- and transport-agnostic platform that enables our customers to meet their immediate needs either directly or via our eco-system of over 250 partners. With a networked footprint of over 200 million connected devices, we will continue to develop more applications, new opportunities, and enhanced outcomes for our customers in the future.
The following is a discussion of our major products,solutions, our markets, and our operating segments. Refer to Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8: “FinancialFinancial Statements and Supplementary Data” included in this Annual Report on Form 10-KData for specific segment results.
Our Business
The way the world manages energy and water will be one of the defining actions of this century. At Itron, we are committed to creating a more resourceful world—one where energy, water, and city resources are managed safely, securely, and reliably, to help improve day-to-day life and promote the well-being of people around the world. We offer solutions that enable electricinvent new ways for cities and natural gas utilities to buildwork together so they can cost-effectively leverage the same infrastructure to deliver multiple services and applications on a reliable, intelligent platform capable of serving all their customers.
Itron helps our customers adapt to a rapidly changing world and address a number of macro trends, including:
•Infrastructure – such as aging infrastructure, grid security, renewable energy and storage, and incorporating electric vehicles into the grid
•Environmental– such as extreme weather, resource scarcity and sustainability, safety, monitoring, and management
•Social– such as increased customer expectations, urbanization, population increase, and the management of "big data" and incorporating IIoT technology into their existing operations.
Our solutions include the deployment of smart gridsnetworks, software, services, devices, sensors and data analytics upon a platform that allows our customers to not only address the changing macro environment listed above but also to address pressing industry challenges to better manage assets, secure revenue, lower operational costs, improve customer service, develop new business models and revenue streams, improve safety, and enable efficient management of valuable resources. Our comprehensive solutions and data analytics also help our customers address operational issues including increasing demand response. Ouron resources, non-technical loss, leak detection, environmental and regulatory compliance, integrating renewable and distributed energy sources, and improving operational reliability.
Itron solutions include standard meters and next-generation smart metering products, metering systems,technology, software, and services which ultimately empowerdelivered as part of a standalone, one-time purchase or end-to-end solution over multiple years. The portfolio includes hardware products used for measurement, control, or sensing with and benefit consumers.
inform actions. We also offer a portfolio of services to our customers from standalone services to end-to-end solutions. These include licensing meter data management and analytics software, managed services, software-as-a-service (SaaS), network-as-a-service (NaaS), technical support services, licensing hardware technology, and consulting services.
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Industry Drivers
Utility and smart metering solutions. These categoriesmunicipalities are describedundergoing an evolution in more detail below:
•Efficiently and advanced control systems.effectively operate energy and water systems that are safe, reliable, and resilient
•Reduce the risk and impact of natural disasters
•Think for itself, repair itself, and anticipate problems before they occur
•Deliver enhanced, more personalized services at lower cost
•Accommodate next-generation services through shared infrastructure between utilities and cities/municipalities
•Provide actionable insights for asset management
Our Operating Segments
We operate under the Itron brand worldwide and manage and report under three operating segments: Electricity, Gas,Device Solutions, Networked Solutions, and Water. Our Water operatingOutcomes. The following is a description of each of the three segments:
Device Solutions – This segment primarily includes bothhardware 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 water,markets and adhering to regulations and standards within those markets, as well as our heat and allocation solutions. 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 structuresegment 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® and OpenWay® Riva meters, Itron traditional ERT® technology, Intelis smart gas or water meters, 500G gas communication modules, 500W water communication modules; GenX networking products, network modules and interface cards; and specific network control and management software applications. The 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 each segmentall of these industry and smart city applications to develop its own go-to-market strategy, prioritize its marketingbe run and product development requirements, and focus on its strategic investments. Our sales and marketing functions are managed under each segment. Our product development and manufacturing operations are managed on a worldwide basis to promote a global perspective insingle, multi-purpose network.
Outcomes – This segment primarily includes our operations and processes while serving the needs of our segments.
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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.
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.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 clauses, which will not agree to the total transaction price allocated to the remaining performance obligations disclosed in Item 8: Financial Statements and Supplementary Data, Note 17: Revenues.
| Year Ended | Total Bookings | Total Backlog | 12-Month Backlog | |||||||||||||||||
| In millions | ||||||||||||||||||||
| December 31, 2020 | $ | 2,213 | $ | 3,259 | $ | 1,204 | ||||||||||||||
| December 31, 2019 | 2,551 | 3,207 | 1,499 | |||||||||||||||||
| December 31, 2018 | 2,515 | 3,173 | 1,349 | |||||||||||||||||
| Year Ended | Total Bookings | Total Backlog (1) | 12-Month Backlog (2) | |||||||||
| (in millions) | ||||||||||||
| December 31, 2017 | $ | 1,993 | $ | 1,750 | $ | 931 | ||||||
| December 31, 2016 | 2,066 | 1,652 | 761 | |||||||||
| December 31, 2015 | 1,981 | 1,575 | 836 | |||||||||
| Year Ended | Total Bookings | Electricity | Gas | Water | ||||||||||||
| (in millions) | ||||||||||||||||
| December 31, 2017 | $ | 1,993 | $ | 997 | $ | 502 | $ | 494 | ||||||||
| December 31, 2016 | 2,066 | 1,013 | 567 | 486 | ||||||||||||
| December 31, 2015 | 1,981 | 958 | 577 | 446 | ||||||||||||
Sales and Distribution
We use a combination of direct and indirect sales channels in our operating segments. A direct sales force is utilized for large electric, natural gas, and water utilities, with which we have long-established relationships. This direct sales force is focused on solution selling, solving problems and business challenges, and delivering valuable outcomes to our utility and smart city customers. For smaller utilities and municipalities, we typically use an indirect sales forcechannel that consistsextends the reach of Itron's solutions by empowering trusted partners with the right tools, training, and technology to grow their business, deliver results, and help these customers better manage energy and water. These channels consist of distributors, sales representatives, partners, and meter manufacturer representatives.
No single customer represented more than 10% of total revenues for the years ended December 31, 2017, 2016,2020, 2019, and 2015.2018. Our 10 largest customers accounted for approximately 33% of total revenues in each of the years ended December 31, 2017, 2016,2020 and 2015, accounted for approximately 33%, 31%, in 2019 and 22% of total revenues, respectively.2018.
Manufacturing
Our products require a wide variety of components and materials, which are subject to price and supply fluctuations. We enter into standard purchase orders in the ordinary course of business, which can include purchase orders for specific quantities based on market prices, as well as open-ended agreements that provide for estimated quantities over an extended shipment period, typically up to one year at an established unit cost. Although we have multiple sources of supply for many of our material requirements, certain components and raw materials are supplied by limited or sole-source vendors, and our ability to perform certain contracts depends on the availability of these materials. Refer to Item 1A: “RiskRisk Factors” included in this Annual Report on Form 10-K, for further discussion related to manufacturing and supply risks.
Our manufacturing facilities are located throughout the world, an overview of which is presented in Item 2: “Properties,” included in this Annual Report on Form 10-K.Properties. While we manufacture and assemble the majoritya portion of our products, we outsource the manufacturing of certainmany products to various manufacturing partners.partners and drive to create an efficient and cost effective structure. This approach allows us to reduce ourthe costs as it reducesrelated to our manufacturing overhead and inventory and also allows us to adjust more quickly to changing end-customercustomer demand. These manufacturing partners assemble our sub-assemblies and products using design specifications, quality assurance programs, and standards that we establish and procure components and assemble our products based on demand forecasts. These forecasts represent our estimates of future demand for our products based upon historical trends and analysis from our sales and product management functions, as adjusted for overall market conditions.
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Partners
In connection with delivering productssolutions and systems to our customers, we mayfrequently partner with third partythird-party vendors to provide hardware, software, or services, e.g., meter installation and communication network equipment and infrastructure. Due to the interoperable, open-standards based nature of our platform, we have also cultivated a highly diverse and growing ecosystem of partners and third-party developers who can create complementary solutions for our customers that run on the same network and within the same platform framework.
Our ability to perform on our contractual obligations with our customers is dependent on these partners meeting their obligations to us. Refer to Item 1A: Risk Factors for further discussion related to third-party vendors and strategic partners.
Our productresearch and development is focused on both improving existing technology and developing innovative new technology for electricity, natural gas, water and heat meters,endpoints, sensing and control devices, data collection software, communication technologies, data warehousing, software applications, and software applications.the IIoT. We invested approximately $170$194 million, $168$202 million, and $162$208 million in productresearch and development in 2017, 20162020, 2019 and 2015,2018, which represented 9%, 8% of total revenues for 2017, 8% of total revenues for 2016 and 9% of total revenues in 2015.for 2020, 2019 and 2018. Refer to Item 1A: Risk Factors for further discussion related to costs of developing competitive products and services.
Human Capital
As of December 31, 2017,2020, we had approximately 7,8006,749 people in our workforce, including 6,5006,153 permanent employees. We have not experienced significant employee work stoppages and consider our employee relations to be good.
We are an equal opportunity employer, and we promote cultural diversity and workforce equality. We monitor our progress through various programs and policies. We offer wages and a range of company-paid benefits we believe are competitive with other companies in our industry. Benefits offered vary depending on the countries where we operate.
The table below provides the breakdown of our employees by region and self-identified gender:
| As of December 31, 2020 | ||||||||||||||||||||||||||
| Region | Male | Female | Total Number of Employees | Percentage of Total Employees | ||||||||||||||||||||||
| North America | 1,933 | 874 | 2,807 | 45 | % | |||||||||||||||||||||
| Europe, Middle East and Africa | 1,473 | 777 | 2,250 | 37 | % | |||||||||||||||||||||
| Asia Pacific & Other | 901 | 195 | 1,096 | 18 | % | |||||||||||||||||||||
Total (1) | 4,307 | 1,846 | 6,153 | |||||||||||||||||||||||
(1) These numbers do not include contingent workers (596 as of December 31, 2020)
Competition
We provide a broadenable utilities and cities to safely, securely, and reliably deliver critical infrastructure services to communities in more than 100 countries. Our portfolio of products, solutions,smart networks, software, services, meters, and services to electric,sensors help our customers better manage electricity, gas, water, and water utility customers globally.city infrastructure resources for the people they serve. Consequently, we operate within a large and complex competitive landscape.landscape, and our competitors range from small companies to large, established corporations. Some of our competitors have diversified product portfolios and participate in multiple geographic markets, while others focus on specific regional markets and/or certain types of products, including some low-cost suppliers of devices based in China and India. Our competitors in China have an increasing presence in other markets around the world, however, excluding the Asia Pacific region this competition does not represent a major market share in our global operating regions. Our competitors range from small to large established companies. Our primary competitors for each operating segment are discussed below.include Landis+Gyr (formerly part of Toshiba); Hubbell (formerly Aclara Inc.); Xylem, Inc. (formerly Sensus); Badger Meter, Inc.; and Mueller Water Products.
We believe that our competitive advantage is based on our in-depth knowledge of the utility industries we serve, our capacity to innovate, and our ability to provide complete end-to-end integrated solutions. We also differentiate ourselves with an intelligent IIoT platform that is solution, device, and transport agnostic—a platform that is: backwards compatible and future proofed; able to run a multitude of applications and solutions (including metering,across it; is highly secure, fully integrated into our portfolio, and highly interoperable; captures, relays, and leverages high-resolution data for near real-time decision making; and includes an ever-growing, diverse ecosystem of partners and third-party developers who can create and deploy very specific point solutions across our network communications, data collection systems, meter data management software,for even greater value for our customers.
We are a global leader in the IIoT category; an industry leader in communication modules deployed; a leading industry innovator; a leader in electricity, gas, and other metering software applications),water end-to-end solutions; and a global leader in meters under managed services. We
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continue to serve our established customer relationships, and expand upon our track record of delivering reliable, accurate, and long-lived products and services.
Refer to Item 1A: “Risk Factors” included in this Annual Report on Form 10-KRisk Factors for a discussion of the competitive pressures we face.
Strategic Alliances
We pursue strategic alliances with other companies in areas where collaboration can produce product advancement and acceleration of entry into new markets. The objectives and goals of a strategic alliance can include one or more of the following: technology exchange, productresearch and development, joint sales and marketing, or access to new geographic markets. Refer to Item 1A: “Risk Factors” included in this Annual Report on Form 10-KRisk Factors for a discussion of risks associated with strategic alliances.
Intellectual Property
Our patents and patent applications cover a range of technologies, which relate to standard metering, smart metering solutions and technology, meter data management software, and knowledge application solutions.solutions, and IIoT. We also rely on a combination of copyrights, patents, and trade secrets to protect our products and technologies. Disputes over the ownership, registration, and enforcement of intellectual property rights arise in the ordinary course of our business. While we believe patents and trademarks are important to our operations and, in aggregate, constitute valuable assets, no single patent or trademark, or group of patents or trademarks, is critical to the success of our business. We license some of our technology to other companies, some of which are our competitors.
Environmental Regulations
In the ordinary course of our business we use metals, solvents, and similar materials that are stored on-site. We believe that we are materially in compliance with environmental laws, rules, and regulations applicable to the operation of our business.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Set forth below are the names, ages, and titles of our executive officers as of February 28, 2018.
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| Name | Age | Position | ||||||||||||
| President and Chief Executive Officer | ||||||||||||||
| Joan S. Hooper | Senior Vice President and Chief Financial Officer | |||||||||||||
| Michel C. Cadieux | Senior Vice President, Human Resources | |||||||||||||
| Senior Vice President, General Counsel and Corporate Secretary | ||||||||||||||
| Justin K. Patrick | 48 | Senior Vice President, Device Solutions | ||||||||||||
| John F. Marcolini | 48 | Senior Vice President, Networked Solutions | ||||||||||||
| Donald L. Reeves | 53 | Senior Vice President, Outcomes | ||||||||||||
Joan S. Hooper is Senior Vice President and Chief Financial Officer. Ms. Hooper was appointed to this role in June 2017. Prior to joining Itron, Ms. Hooper was Chief Financial Officer of CHC Helicopter from 2011 to July 2015. Following Ms. Hooper's departure from CHC, CHC filed a voluntary petition of relief under Chapter 11 of the U.S. Bankruptcy Code in May 2016, and CHC emerged from bankruptcy in March 2017. Prior to CHC, she held several executive finance executive positions at Dell, Inc. from 2003 to 2010, including vice presidentVice President and CFOChief Financial Officer for its Global Public and Americas business units, vice president of corporate finance and chief accounting officer.
Michel C. Cadieux is Senior Vice President, Human Resources and has been so since joining Itron in February 2014. From 2008 to 2012, Mr. Cadieux was Senior Vice President of Human Resources and Security at Freescale Semiconductor, Inc. (Freescale). Mr. Cadieux has more than 30 years leading HR organizations in global technology and manufacturing companies including Betz Laboratories, the Hudson Bay Company, ING Bank of Canada, Advanced Micro Devices/ATI, and Freescale.
Justin K. Patrick is Senior Vice President, Device Solutions, where he is responsible for Itron’s strategy to become a leading global provider of measurement, safety, and operational devices for utilities and cities. Mr. Patrick joined Itron in May 2010 as Assistant General Counsel andJanuary 2020. From 2018 to 2020, Mr. Patrick was promoted to Vice President & General Manager, Residential Products at Johnson Controls International (JCI). Before that role, he was Vice President & General Manager, Variable Refrigerant Flow Systems and General CounselDuctless from 2014 to 2017, and Director, Channel Strategy and Marketing from 2010 to 2014 at JCI. Prior to his time at JCI, Mr. Patrick held a sales leadership role at the Auer Steel and Heating Supply Company, and at Carrier Corporation he had roles of increasing responsibility culminating in general management. Prior to his civilian career, Mr. Patrick served as a Surface Warfare Officer in the United States Navy.
John F. Marcolini is Senior Vice President, Networked Solutions, where he is responsible for product development, marketing and overall strategy for Itron’s networking platforms and smart cities strategy and solutions, globally. Mr. Marcolini was appointed to this role in July 2020. Mr. Marcolini joined Itron in January 2012. She assumed2018 as part of Itron's acquisition of SSNI as the responsibilitiesvice president of Corporate Secretaryproduct management, responsible for product strategy and lifecycle management across Itron’s smart energy, smart city and IIoT portfolios.. He has more than 20 years of product management, business development, and customer delivery experience with deep technical knowledge of networking, radio frequency technologies, and IIoT. Mr. Marcolini has also spent many years working with utility customers to deliver and implement complex product deployments.
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Donald L. Reeves is Senior Vice President, Outcomes, where he is responsible for Itron’s software and services offerings, delivery teams, managed services operations and customer support. Mr. Reeves was appointed to this role in September 2019. Mr. Reeves joined Itron in January 2013. Before2018 as part of Itron’s acquisition of SSNI, and from 2016 to 2018, he was SSNI’s Chief Technology Officer. From 2005 to 2016, Mr. Reeves held several managed services and engineering positions at SSNI. Prior to joining Itron, Ms. VotavaSSNI, Mr. Reeves served as Associate General Counsel, CommercialVice President of Engineering at Cooper Industries plc from October 2008 to April 2010, and as General Counsel for Honeywell's Electronic Materials businessBlack Pearl from 2003 to 2008.2004, and was Vice President of Engineering at Commerce One from 2001 to 2003, and prior to that held leadership positions at several startup technology companies.
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Business and Industry Risks
We are dependent on the utility industry, which has lengthy and unpredictable sales cycles and has experienced volatility in capital spending.spending, each of which has and could cause our operating results to fluctuate significantly.
We derive the majority of our revenues from sales of products and services to utilities. Purchases of our products may be deferred as a result of many factors, including economic downturns, slowdowns in new residential and commercial construction, customers’customers' access to capital upon acceptable terms, the timing and availability of government subsidies or other incentives, utility specific financial circumstances, mergers and acquisitions, regulatory decisions, weather conditions and climate change, and fluctuating interest rates. We have experienced, and may in the future experience, variability in operating results on an annual and a quarterly basis as a result of these factors.
Sales cycles for smart metering solutions are generally long and unpredictable due to several factors, including budgeting, purchasing, and regulatory approval processes that can take several years to complete. Our utility customers typically issue requests for quotes and proposals, establish evaluation processes, review different technical options with vendors, analyze performance and cost/benefit justifications, and perform a regulatory review, in addition to applying the normal budget approval process. Today, governments around the world are implementing new laws and regulations to promote increased energy efficiency, slow or reverse growth in the consumption of scarce resources, reduce carbon dioxide emissions, and protect the environment. Many of the legislative and regulatory initiatives encourage utilities to develop a smart grid infrastructure, and some of these initiatives provide for government subsidies, grants, or other incentives to utilities and other participants in their industry to promote transition to smart grid technologies. If government regulations regarding the smart grid and smart metering are delayed, revised to permit lower or different investment levels in metering infrastructure, or terminated altogether, this could have a material adverse effect on our results of operation, cash flow, and financial condition.
We must continually shift and adapt our products and services mix, which requires substantial judgment and investment.
Our customer contractsmarket is characterized by increasing complexity driven by evolving technology, increased industry regulatory pressures, and the emergence of new competitive products, all of which impact the manner in which our products and services are designed, developed, marketed, and delivered. The shift in, and increasing complexity of, our products and services mix involves judgment and entails risks. In order to successfully design and develop more complex offerings, we must anticipate the right products, solutions, and technologies to meet estimated market demands. These estimates may prove wrong. Additionally, our complex offerings may contain provisions thatdefects when they are first introduced; their release may be delayed due to unforeseen difficulties during product and service design and development; or they may have reliability, quality, or compatibility problems. We may not be able to successfully design workarounds. Any shift in, or increased complexity of, our products and services mix may not be easily understood or adopted by our current or future customers, who may be reluctant to buy, or may delay purchases of, our products and services.
Additionally, our evolving product mix could cause us to incur penalties,substantial additional costs if we need to materially improve our manufacturing infrastructure, develop new systems to deliver our services, or fundamentally change the way in which we deliver services. Also, if one of our new offerings were competitive to our prior offerings and represented an adequate or superior alternative, customers could decide to abandon prior offerings that produce higher revenue or better margins than the new offering. Therefore, the adaptation to new technologies or standards or the development and launch of new products or services could result in lower revenue, lower margins, and/or higher costs, which could unfavorably impact our financial performance.
We have been and will continue to be liableaffected by the ongoing COVID-19 pandemic, and such effects could have an adverse effect on our business operations, results of operations, cash flows, and financial condition.
We have experienced disruptions to our business from the ongoing COVID-19 pandemic, and the full impact of the COVID-19 pandemic on all aspects of our business and geographic markets is highly uncertain and cannot be predicted with confidence. This includes how it may impact our customers, employees, vendors, strategic partners, managed services, and manufacturing
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operations. The COVID-19 pandemic has created significant volatility, uncertainty, and economic disruption, which may materially and adversely affect our business operations, cash flows, and financial condition.
The impact of the virus on third parties on which we rely, such as our suppliers, contract manufacturers, distributors, and strategic partners, cannot be fully known or controlled by us. As a result, we may experience difficulties sourcing components, sub-assemblies, outsourced finished goods, and other products and services. The impact of the COVID-19 pandemic on our customers and demand for damages, and/or incur unanticipated expenses with respectour products is also uncertain. Due to resulting financial constraints, illness within their organizations, quarantine and travel restrictions placed upon our customers’ employees, as well as individual actions our customers may take in response to the functionality, deployment, operation,spread of COVID-19, our customers may have difficulty in making timely payments to us or may have an inability or unwillingness to purchase our products and services. Also, certain of our projects require regulatory approvals, and our customers may experience delays in regulatory approvals. Any of these effects may materially and adversely affect us.
We continue to take measures, both voluntary and as a result of government directives and guidance, to mitigate the effects of the COVID-19 pandemic on us and others. These measures include, among others, restrictions on our employees' access to our physical work locations and the purchase of personal protective equipment. Additionally, we may implement the temporary closure or reduction in operations of certain of our facilities, which is disruptive to our operations. We have also implemented measures to allow certain employees to work remotely, which may place a burden on our IT systems and may expose us to increased vulnerability to cyber-attack and other cyber-disruption. Many of these measures may result in incremental costs to us, and such costs may not be recoverable or adequately covered by our insurance. Further, any focus by our management on mitigating COVID-19 effects has required, and will continue to require, a large investment of time and resources, which may delay other value-add initiatives.
As a company with global operations, we are subject to numerous government jurisdictions at all levels that are addressing COVID-19 differently. The guidance and directives provided by these governmental authorities is difficult to predict, may be unclear in their application, and are unknown in duration. This includes uncertainty in governmental authorities’ assessments of our business as "essential". If governmental authorities were to reverse their designation of our business as "essential", it could have a material effect on our results of operations and cash flows.
In addition, the continued spread of COVID-19 has led to disruption and volatility in the worldwide credit and financial markets, which could limit our ability to obtain external financing on acceptable terms or at all. While the COVID-19 pandemic has not materially impacted our liquidity and capital resources to date, the duration and severity of any further economic or market impact of the pandemic remains uncertain and there can be no assurance that it will not have an adverse effect on our liquidity and capital resources, including our ability to access capital markets, in the future.
The full extent to which the COVID-19 pandemic impacts us depends on numerous evolving factors and future developments that we are not able to predict at this time, including: medical advancements to treat or stop the virus including the effectiveness, widespread availability and application of any vaccine, governmental, business, and other actions (which could include limitations on our operations to provide products or services); the duration and severity of the outbreak, including due to reinfections or mutation of the virus, and the related limitations on our ability to conduct business; or the length of time and velocity at which we will return to more normalized operations. In addition, we cannot predict the impact that COVID-19 will have on our customers, vendors, strategic partners, and other business partners, and each of their financial conditions; however, any material effect on these parties could materially and adversely impact us. The impact of COVID-19 may also include possible impairment or other charges and may exacerbate other risks discussed herein, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.
We face competition which may result in a loss of market share or price erosion of our products and services.
We face competitive pressures from a variety of companies in each of the markets we serve. Some of our present and potential future competitors have, or may have, substantially greater financial, marketing, technical, or manufacturing resources and, in some cases, have greater name recognition, customer relationships, and experience. These competitors may sell products and services at lower prices in order to gain or grow market share, be able to respond more quickly to new or emerging technologies and changes in customer requirements, and may have made or make strategic acquisitions or establish cooperative relationships among themselves or with third parties that enhance their ability to address the needs of our prospective customers. Other companies may also drive technological innovation and develop products and services that are equal in quality and performance or superior to our products and services, which could reduce our market position, reduce our overall sales, and require us to invest additional funds in new technology development. In addition, our products and services may experience price erosion if low-cost providers expand their presence in our markets, improve their quality, or form alliances or cooperative relationships with our competitors or if our products and services become commoditized. For example, some utilities may purchase meters
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separately from the communication devices. The specifications for such meters may require interchangeability, which could lead to further commoditization of the riskmeter, driving prices lower and reducing margins. Pricing pressure is also driven by other events outside our control, to include movement away from manually read meters, government programs, and new construction. Should we fail to compete successfully with current or future competitors, or to adequately manage pricing pressure, we could experience material adverse effects on our business, financial condition, results of unanticipated warranty or recall expenses,operations, and cash flows.
If we cannot continue to invest in developing competitive products and services, we will not be able to compete effectively.
Our future success will depend, in part, on our ability to continue to develop, design and manufacture competitive products and services, enhance and sustain our existing products and services, keep pace with technological advances and changing customer contracts may contain provisions that could cause us to incur penalties, be liable for damages, including liquidated damages, or incurrequirements, gain international market acceptance, and manage other expenses iffactors in the markets in which we experience difficulties with respect to the functionality, deployment, operation, and availability ofsell our products and services. Some of these contracts contain long-term commitmentsProduct and service development will require continued investment in order to a set schedule of delivery or performance. Ifmaintain our competitive position, and the periods in which we failedincur significant research and development costs may drive variability in our estimated schedulequarterly results. We may not have the necessary capital, or access to capital at acceptable terms, to make these investments. We have made, and expect to continue to make, substantial investments in technology development. However, we failmay experience unforeseen problems in our management of the project, this may cause delays in completion. In the event of late deliveries, late or improper installations or operations, failure to meet productdevelopment or performance specificationsof our technologies or other product defects,products, which can prevent us from meeting our research and development schedules. New products often require certifications or interruptions or delays in our managed service offerings, our customer contracts may expose us to penalties, liquidated damages, and other liabilities. In the event we were to incur contractual penalties, such as liquidated damages or other related costs that exceed our expectations, our business, financial condition, and operating results could be materially and adversely affected. Further, we could be required to recognize a current-period reduction of revenue related to a specific component of a customer contract at the time we determineregulatory approvals before the products and/or services tocan be delivered underused, and we cannot be certain that component would resultour new products will be approved in a loss due to expected revenues estimated totimely manner, or at all. Finally, we may not achieve market acceptance of our new products and services.
Our operations may be less than expected costs. Depending on the amounts of the associated revenues (if any) and the costs, this charge could be material to our results of operations in the period it is recognized.
Certain of our products, subassemblies, and system components, including most of our circuit boards, are procured from limited or sole sources. We cannot be certain that we will not experience operational difficulties with these sources, including reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines, increases in manufacturing costs, vendors’vendors' access to capital, and increased lead times. Additionally, our manufacturers may experience disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters and pandemics, component or material shortages, cost increases, or other similar problems. Further, in order to minimize their inventory risk, our manufacturers might not order components from third-party suppliers with adequate lead time, thereby impacting our ability to meet our demand forecast. Therefore, ifIf we fail to manage our relationship with our manufacturers effectively, or if they experience operational difficulties, our ability to ship products to our customers and distributors could be impaired, and our competitive position and reputation could be harmed. In the event that we receive shipments of products that fail to comply with our technical specifications or that fail to conform to our quality control standards, and we are not able to obtain replacement products in a timely manner, we risk revenue losses from the inability to sell those products, increased administrative and shipping costs, and lower profitability. Additionally, if defects are not discovered until after consumers purchasetake delivery of our products, they could lose confidence in the technical attributes of our products, and our business could be harmed. Although arrangements with these partners may contain provisions for warranty expense reimbursement, we may remain responsible to the consumer for warranty service in the event of product defects and could experience an unanticipated product defect or warranty liability. While the Company relieswe rely on its partners to adhere to itsour supplier code of conduct, material violations of the supplier code of conduct could occur.
We are impacted by the availability and we may have to adjust the prices of someraw materials and component parts used in the manufacturing process of our productsproducts. Raw materials include purchased castings made of metal or alloys (such as brass, which uses copper as its main component, aluminum, stainless steel and cast iron), plastic resins, glass, microprocessors and other electronic subassemblies, and components. There are multiple sources for these raw materials and components, but we sometimes rely on single suppliers for certain of these materials. Our inability to stay competitive. Further, some utilities may purchase meters separately from the communication devices. The specifications for such meters may require interchangeability, whichobtain adequate supplies of raw materials and component parts at favorable prices could lead to further commoditization of the meter, driving prices lower and reducing margins. Should we fail to compete successfully with current or future competitors, we could experiencehave a material adverse effectseffect on our business, financial condition, or results of operations, including reduced revenue, lower profit margins, and cash flows.
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If we are unable to meetmaintain a high level of customer satisfaction, demand for our debt service obligations or to fundproducts and services could suffer.
We believe that our other liquidity needs, we will need to restructure or refinance all or a portion of our debt which could cause us to default on our debt obligations and impair our liquidity. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Even if refinancing indebtedness is available, any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations.
Product defects could disrupt our operations and result in harm to our reputation and financial position.
Our products are complex and may contain defects or experience failures due to any number of issues in design, materials, deployment, and/or use. If any of our products contain a defect, a compatibility or interoperability issue, or other types of errors, we may have to devote significant time and resources to identify and correct the issue. We provide product warranties for varying lengths of time and establish allowances in anticipation of warranty expenses. In addition, we recognize contingent liabilities for additional product-failure related costs. These warranty and related product-failure allowances may be inadequate due to product defects and unanticipated component failures, as well as higher than anticipated material, labor, and other costs we may incur to replace projected product failures. A product recall or a significant number of product returns could be expensive; damage our reputation and relationships with utilities, meter and communication vendors, and other third-party vendors;vendors, or regulatory entities; result in the loss of business to competitors; or result in litigation. We may incur additional warranty expenses in the future with respect to new or established products, which could materially and adversely affect our operations and financial position.
Business interruptions could adversely affect our business.
Our worldwide operations could be subject to hurricanes, tornadoes, earthquakes, floods, fires, extreme weather conditions, medical epidemics or pandemics, geopolitical instability, or other natural or man-made disasters or business interruptions. The occurrence of any of these business disruptions could seriously harm our business, financial condition, and results of operations.
Our key manufacturing facilities are concentrated, and in the event of a significant interruption in production at any of our manufacturing facilities, considerable expense, time, and effort could be required to establish alternative production lines to meet contractual obligations, which would have a material adverse effect on our business, financial condition, and results of operations.
Asset impairment could result in significant changes that would adversely impact our future operating results.
We have significant inventory, intangible assets, long-lived assets, and goodwill that are susceptible to valuation adjustments as a result of changes in various factors or conditions, which could impact our results of operations and financial condition. Factors that could trigger an impairment of such assets include the following:
•reduction in the net realizable value of inventory, which becomes obsolete or exceeds anticipated demand;
•changes in our organization or management reporting structure, which could result in additional reporting units, requiring greater aggregation or disaggregation in our analysis by reporting unit and potentially alternative methods/assumptions of estimating fair values;
•underperformance relative to projected future operating results;
•changes in the manner or use of the acquired assets or the strategy for our overall business;
•unfavorable industry or economic trends; and
•decline in our stock price for a sustained period or decline in our market capitalization below net book value.
Failure to attract and retain key personnel who are critical to the success of our business could negatively impact our ability to operate or grow our business.
Our success depends in large part on the efforts of our highly qualified technical and management personnel and highly skilled individuals in all disciplines. The loss of one or more of these employees and the inability to attract and retain qualified
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replacements could have a material adverse effect on our business. In addition, as our products and services become more technologically complex, it could become especially difficult to recruit or retain personnel with unique in-demand skills and knowledge, whom we would expect to become recruiting targets for our competitors and for other companies relying on similar talent. There is no assurance that we will be able to recruit or retain qualified personnel, and this failure could diminish our ability to develop and deliver new products and services, which could cause our operations and financial results to be unfavorably impacted.
Changes in accounting principles and guidance could result in unfavorable accounting charges or effects.
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). These principles are subject to interpretation by the Securities and Exchange Commission (SEC) and various bodies formed to create and interpret appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a material effect on our reported results, as well as our processes and related controls, and may retroactively affect previously reported results.
Risks Related to Our Corporate Structure and Organization
Our indebtedness could restrict our operational flexibility and prevent us from raising additional capital or meeting our obligations under our debt instruments.
As of December 31, 2020, our total outstanding indebtedness was $936.1 million as described under Liquidity and Capital Resources. This substantial indebtedness could have important consequences to us, including:
•increasing our vulnerability to general economic and industry conditions;
•requiring a substantial portion of our cash flow used in operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our liquidity and our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
•requiring us to meet specified financial ratios, a failure of which may result in restrictions on us and our subsidiaries to take certain actions or result in the declaration of an event of default, which if not cured or waived, may permit acceleration of required payments against such indebtedness and result in cross defaults under our other indebtedness;
•exposing us to the risk of increased market interest rates, and corresponding increased interest expense, as unhedged borrowings under the 2018 credit facility would be at variable rates of interest;
•limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes; and
•limiting our ability to adjust to changing marketplace conditions and placing us at a competitive disadvantage compared with our competitors who may have less debt.
Our 2018 credit facility, as amended, and Senior Notes place restrictions on our ability, and the ability of many of our subsidiaries, dependent on meeting specified financial ratios, to, among other things:
| • incur more debt; | • pay dividends, make distributions, and repurchase capital stock; | |||||||
| • make certain investments; | • create liens; | |||||||
| • enter into transactions with affiliates; | • enter into sale lease-back transactions; and | |||||||
| • merge or consolidate; | • transfer or sell assets. | |||||||
Our ability to make scheduled payments on and/or to refinance our indebtedness depends on, and is subject to, our financial and operating performance, which is influenced in part by general economic, financial, competitive, legislative, regulatory, counterparty business, and other risks that are beyond our control, including the availability of financing in the U.S. banking system and capital markets. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our debt, to refinance our debt, or to fund our other liquidity needs on commercially reasonable terms or at all.
If we are unable to meet our debt service obligations or to fund our other liquidity needs, we will need to restructure or refinance all or a portion of our debt, which could cause us to default on our debt obligations and impair our liquidity. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at
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such time. Even if refinancing indebtedness is available, any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations.
Moreover, in the event of a default under any of our indebtedness, the holders of the defaulted debt could elect to declare all the funds borrowed to be due and payable, together with accrued and unpaid interest, which in turn could result in cross defaults under our other indebtedness. The lenders under the 2018 credit facility could also elect to terminate their commitments thereunder and cease making further loans, and such lenders could institute foreclosure proceedings against their collateral, and we could be forced into bankruptcy or liquidation. If we breach our covenants under the 2018 credit facility, we would be in default thereunder. Such lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.
Although our debt instruments contain certain restrictions, these restrictions are subject to a number of qualifications and exceptions, including that certain trade payables do not constitute indebtedness. Additional indebtedness incurred in compliance with these restrictions could be substantial. To the extent we incur additional indebtedness or other obligations, the risks described above and others described herein may increase.
Our strategy includes acquisitions, divestitures, and investments, which we may not be able to execute or integrate successfully.
In pursuing our business strategy, we may conduct discussions, evaluate companies, and enter into agreements regarding possible acquisitions, divestitures, and equity investments. We have completed acquisitions and may make investments in the future, both within and outside of the United States. We may also, if appropriate opportunities present themselves, make divestitures. Acquisitions, investments, and divestitures involve numerous risks such as the diversion of senior management's attention; unsuccessful integration of the acquired or disintegration of the divested entity's personnel, operations, technologies, and products; unidentified or identified but un-indemnified pre-closing liabilities that we may be responsible for; incurrence of significant expenses to meet an acquiree's customer contractual commitments; lack of market acceptance of new services and technologies; difficulties in operating businesses in international legal jurisdictions; or transaction-related or other litigation, and other liabilities. Failure to adequately address these issues could result in the diversion of resources and adversely impact our ability to manage our business. In addition, acquisitions and investments in third parties may involve the assumption of obligations, significant write-offs, or other charges associated with the acquisition or investment. Impairment of an investment, goodwill, or an intangible asset may result if these risks were to materialize. For investments in entities that are not wholly owned by Itron, such as joint ventures, a loss of control as defined by GAAP could result in a significant change in accounting treatment and a change in the carrying value of the entity. There can be no assurances that an acquired business will perform as expected, accomplish our strategic objectives, or generate significant revenues, profits, or cash flows. Any divestiture could result in disruption to other parts of our business, potential loss of employees or customers, exposure to unanticipated liabilities, or result in ongoing obligations and liabilities following any such divestiture. For example, in connection with a divestiture, we may enter into transition services agreements or other strategic relationships, including long-term commercial arrangements, sales arrangements, or agree to provide certain indemnities to the purchaser in any such transaction, which may result in additional expense and may adversely affect our financial condition and results of operations.
Our customer contracts are complex and contain provisions that could cause us to incur penalties, be liable for damages, and/or incur unanticipated expenses with respect to the functionality, deployment, operation, and availability of our products and services.
In addition to the risk of unanticipated warranty or recall expenses, our customer contracts may contain provisions that could cause us to incur penalties, be liable for damages including liquidated damages, or incur other expenses if we experience difficulties with respect to the functionality, deployment, operation, and availability of our products and services. Some of these contracts contain long-term commitments to a set schedule of delivery or performance and require us to deliver standby letters of credit or bonds as a guarantee to the customer for our future performance. If we failed in our estimated schedule or we fail in our management of the project, this may cause delays in completion. In the event of late deliveries, late or improper installations or operations, failure to meet product or performance specifications or other product defects, or interruptions or delays in our managed service offerings, our customer contracts may expose us to penalties, liquidated damages, and other liabilities. In the event we were to incur contractual penalties, such as liquidated damages or other related costs that exceed our expectations, our business, financial condition, and operating results could be materially and adversely affected. Additionally, if we were to determine that products and/or services to be delivered under a specific component of a customer contract would result in a loss due to expected revenues estimated to be less than expected costs, we could be required to recognize a reduction of revenue in the period we made such determination, and such reduction could be material to our results of operations.
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We are subject to international business uncertainties, obstacles to the repatriation of earnings, and foreign currency fluctuations.
A substantial portion of our revenues is derived from operations conducted outside the United States. International sales and operations may be subjected to risks such as the imposition of government controls, government expropriation of facilities, lack of a well-established system of laws and enforcement of those laws, access to a legal system free of undue influence or corruption, political instability, terrorist activities, restrictions on the import or export of critical technology, currency exchange rate fluctuations, or adverse tax burdens.
Our business is also subject to foreign currency exchange rates fluctuations, particularly with respect to the euro, Canadian dollar, Indonesian rupiah, Pound sterling, and various other currencies. Change in the value of currencies of the countries in which we do business relative to the value of the U.S. dollar, or euro, could affect our ability to sell products competitively and control our cost structure, which could have an adverse effect on our business, financial condition, and results of operations. Additionally, we are subject to foreign exchange translation risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. The translation risk is primarily concentrated in the exchange rate between the U.S. dollar and the euro. As the U.S. dollar fluctuates against other currencies in which we transact business, revenue and income can be impacted, include revenue decreases due to unfavorable foreign currency impacts. Strengthening of the U.S. dollar relative to the euro and the currencies of the other countries in which we do business, could materially and adversely affect our ability to compete in international markets and our sales growth in future periods.
Other risks related to our international operations include lack of availability of qualified third-party financing, generally longer receivable collection periods than those commonly practiced in the United States, trade restrictions, changes in tariffs, labor disruptions, difficulties in staffing and managing international operations, difficulties in imposing and enforcing operational and financial controls at international locations, potential insolvency of international distributors, preference for local vendors, burdens of complying with different permitting standards and a wide variety of foreign laws, and obstacles to the repatriation of earnings and cash all present additional risk to our international operations.
International expansion and market acceptance depend on our ability to modify our technology to take into account such factors as the applicable regulatory and business environment, labor costs, and other economic conditions. In addition, the laws of certain countries do not protect our products or technologies in the same manner as the laws of the United States. Further, foreign regulations or restrictions, e.g., opposition from unions or works councils, could delay, limit, or disallow significant operating decisions made by our management, including decisions to exit certain businesses, close certain manufacturing locations, or other restructuring actions. There can be no assurance that these factors will not have a material adverse effect on our future international sales and, consequently, on our business, financial condition, and results of operations.
We may not achieve the anticipated savings and benefits from current or any future restructuring projects and such activities could cause us to incur additional charges in our efforts to improve profitability.
We have implemented multiple restructuring projects to adjust our cost structure, and we may engage in similar restructuring activities in the future. These restructuring activities reduce our available employee talent, assets, and other resources, which could slow research and development, impact ability to respond to customers, increase quality issues, temporarily reduce manufacturing efficiencies, and limit our ability to increase production quickly. In addition, delays in implementing restructuring projects, unexpected costs, unfavorable negotiations with works councils or matters involving third-party service providers, our failure to retain key employees, changes in governmental policies or regulatory matters, adverse market conditions, or failure to meet targeted improvements could change the timing or reduce the overall savings realized from the restructuring project.
The successful implementation and execution of our restructuring projects are critical to achieving our expected cost savings as well as effectively competing in the marketplace and positioning us for future growth. If our restructuring projects are not executed successfully, it could have a material adverse effect on our competitive position, business, financial condition, cash flow, and results of operations.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, prevent fraud, or maintain investor confidence.
Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act. In addition, Section 404 under the Sarbanes-Oxley Act requires that our auditors attest to the operating effectiveness of our controls over financial reporting. Our compliance with the annual internal control report requirement for
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each fiscal year will depend on the effectiveness of our financial reporting, data systems, and controls across our operating subsidiaries. Furthermore, an important part of our growth strategy has been, and will likely continue to be, the acquisition of complementary businesses, and we expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. Likewise, the complexity of our transactions, systems, and controls may become more difficult to manage. In addition, new accounting standards may have a significant impact on our financial statements in future periods, requiring new or enhanced controls. We cannot be certain that we won't experience deficiencies in the design, implementation, and maintenance of adequate controls over our financial processes and reporting in the future, especially for acquisition targets that may not have been required to be in compliance with Section 404 of the Sarbanes-Oxley Act at the date of acquisition.
Failure to implement new controls or enhancements to controls, difficulties encountered in control implementation or operation, or difficulties in the assimilation of acquired businesses into our control system could result in additional errors, material misstatements, or delays in our financial reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have an unfavorable effect on the trading price of our stock and our access to capital.
We may encounter strikes or other labor disruptions that could adversely affect our financial condition and results of operations.
We have significant operations throughout the world. In a number of countries outside the U.S., our employees are covered by collective bargaining agreements. As the result of various corporate or operational actions, which our management has undertaken or may be made in the future, we could encounter labor disruptions. These disruptions may be subject to local media coverage, which could damage our reputation. Additionally, the disruptions could delay our ability to meet customer orders and could adversely affect our results of operations. Any labor disruptions could also have an impact on our other employees. Employee morale and productivity could suffer, and we may lose valued employees whom we wish to retain.
We may not realize the expected benefits from strategic alliances, which could adversely affect our operations.
We have several strategic alliances with large, complex organizations and other companies with which we work to offer complementary products and services. There can be no assurance we will realize the expected benefits from these strategic alliances. If successful, these relationships may be mutually beneficial and result in shared growth. However, alliances carry an element of risk because, in most cases, we must both compete and collaborate with the same company from one market to the next. Should our strategic partnerships fail to perform, we could experience delays in research and development or experience other operational difficulties.
We are exposed to counterparty default risks with our financial institutions and insurance providers.
If one or more of the depository institutions in which we maintain significant cash balances were to fail, our ability to access these funds might be temporarily or permanently limited, and we could face material liquidity problems and financial losses.
The lenders of our 2018 credit facility consist of several participating financial institutions. Our revolving line of credit allows us to provide letters of credit in support of our obligations for customer contracts and provides additional liquidity. If our lenders were unable to honor their line of credit commitments due to the loss of a participating financial institution or other circumstance, we would need to seek alternative financing, which may not be under acceptable terms, and therefore could adversely impact our ability to successfully bid on future sales contracts and adversely impact our liquidity and ability to fund some of our internal initiatives or future acquisitions.
Risks Related to Our Technology and Intellectual Property
If we are unable to adequately protect our intellectual property, we may need to expend significant resources to enforce our rights or suffer competitive injury.
While we believe our patents and other intellectual property have significant value, it is uncertain that this intellectual property or any intellectual property acquired or developed by us in the future will provide meaningful competitive advantages. There can be no assurance our patents or pending applications will not be challenged, invalidated, or circumvented by competitors or that rights granted thereunder will provide meaningful proprietary protection. Moreover, competitors may infringe our patents or successfully avoid them through design innovation. To combat infringement or unauthorized use of our intellectual property, we may need to commence litigation, which can be expensive and time-consuming. In addition, in an infringement proceeding
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a court may decide that a patent or other intellectual property right of ours is not valid or is unenforceable or may refuse to stop the other party from using the technology or other intellectual property right at issue on the grounds that it is non-infringing or the legal requirements for an injunction have not been met. Policing unauthorized use of our intellectual property is difficult and expensive, and we cannot provide assurance that we will be able to prevent misappropriation of our proprietary rights, particularly in countries that do not protect such rights in the same manner as in the United States.
We may face losses associated with alleged unauthorized use of third-party intellectual property.
We may be subject to claims that thereor inquiries regarding alleged unauthorized use of a third-party's intellectual property. An adverse outcome in any intellectual property litigation or negotiation could subject us to significant liabilities to third parties, require us to license technology or other intellectual property rights from others, require us to comply with injunctions to cease marketing or the use of certain products or brands, or require us to redesign, re-engineer, or rebrand certain products or packaging, any of which could affect our business, financial condition, and results of operations. If we are required to seek licenses under patents or other intellectual property rights of others, we may not be able to acquire these licenses at acceptable terms, if at all. In addition, the cost of responding to an intellectual property infringement claim, in terms of legal fees, expenses, and the diversion of management resources, whether or not the claim is valid, could have a material adverse health effects fromeffect on our business, financial condition, and results of operations.
If our products infringe the radio frequencies utilized in connectionintellectual property rights of others, we may be required to indemnify our customers for any damages they suffer. We generally indemnify our customers with respect to infringement by our products of the proprietary rights of third parties. Third parties may assert infringement claims against our customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.
If these claims prevail,we are unable to protect our information technology infrastructure and network against data corruption, cyber-based attacks or network security incidents caused by unauthorized access, we could be exposed to an increase risk of customer liability and reputational damage.
We rely on various information technology systems to capture, process, store, and report data and interact with customers, vendors, and employees. Despite taking security steps to secure all information and transactions, our information technology systems, and those of our third-party providers, may be subject to corruption from cyber-attacks, or other network security incidents. Any unauthorized access to data could result in misappropriation of the data or disruption of operations. In addition, hardware, operating system software, software libraries, and applications that we procure from third parties may contain defects in design or manufacturing that could interfere with the operation of the systems. Misuse of internal applications; theft of intellectual property, trade secrets, or other corporate assets; and inappropriate disclosure of confidential or personal information could stem from such incidents.
In addition, an increasing number of our products and services connect to and are part of the IIoT, the Internet, and public cloud services. As such, the products and services we offer may involve the transmission of large amounts of sensitive and proprietary information over public and private communications networks, as well as the processing and storage of confidential and personal customer data. While we attempt to provide adequate security measures to safeguard our products and services, techniques used to gain unauthorized access to or to sabotage systems are constantly evolving and therefore may not be recognized until launched against a target. Unauthorized access, remnant data exposure, computer viruses, denial of service attacks, accidents, employee error or malfeasance, intentional misconduct by computer "hackers", and other disruptions can occur. This can lead to gaps in infrastructure, hardware and software vulnerabilities, and security controls. The exposed or unprotected data can (i) interfere with the delivery of services to our customers, (ii) impede our customers' ability to do business, or (iii) compromise the security of systems and data, which exposes information to unauthorized third-parties. Like many companies, we are the target of cyber-attacks of varying degrees on a regular basis. Although such cyber-attacks have not had a material adverse effect on our operating results, there can be no assurance of a similar result in future security incidents.
Security incidents that occur could suspend implementationexpose us to an increased risk of lawsuits, loss of existing or purchase substitute products,potential customers, harm to our reputation and increases in our security costs. Depending on the jurisdiction, security incidents could trigger notice requirements to impacted individuals and regulatory investigations leading to penalties and increased reputational harm.
Any such operational disruption and/or misappropriation of information could result in lost sales, unfavorable publicity, product recalls or business delays and could have a material adverse effect on our business.
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We rely on information technology systems that may fail to operate effectively, require upgrades and replacements or experience breaches.
Our industry requires the continued operation of sophisticated information technology systems and network infrastructures, which may be subject to disruptions arising from events that are beyond our control. We are dependent on information technology systems, including, but not limited to, networks, applications, and outsourced services. We continually enhance and implement new systems and processes throughout our global operations.
We offer managed services and software utilizing several data center facilities located worldwide. Any damage to, or failure of, these systems could result in interruptions in the services we provide to our utility customers. As we continue to add capacity to our existing and future data centers, we may move or transfer data. Despite precautions taken during this process, any delayed or unsuccessful data transfers may impair the delivery of our services to our utility customers. We also sell vending and pre-payment systems with security features that, if compromised, may lead to claims against us.
We have a primary enterprise resource planning (ERP) system that maintains sales and transactional information to facilitate processes. This system may require updates and upgrades periodically that could be expensive and time consuming undertakings. Successful upgrades and updates provide many benefits, while unsuccessful upgrades and updates may cost us significant time and resources.
The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems due to computer viruses, hacking, acts of terrorism, and other causes could materially and adversely affect our business, financial condition, and results of operations by harming our ability to accurately forecast sales demand, manage our supply chain and production facilities, achieve accuracy in the conversion of electronic data and records, and report financial and management information on a timely and accurate basis. In addition, due to the systemic internal control features within ERP systems, we may experience difficulties that could affect our internal control over financial reporting.
Financial and Market Risks
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
The 2018 credit facility bears, and other indebtedness we may incur in the future may bear, interest at a lossvariable rate. As a result, at any given time interest rates on the 2018 credit facility and any other variable rate debt could be higher or lower than current levels. If interest rates increase, our debt service obligations on our variable rate indebtedness may increase even though the amount borrowed remains the same, and therefore net income and associated cash flows, including cash available for servicing our indebtedness, may correspondingly decrease. While we continually monitor and assess our interest rate risk and have entered into derivative instruments to manage such risk, these instruments could be ineffective at mitigating all or a part of sales.our risk, including changes to the applicable margin under our 2018 credit facility.
The alteration or discontinuation of LIBOR may adversely affect our borrowing costs.
Certain of our interest rate derivatives and a portion of our indebtedness bear interest at variable interest rates, primarily based on LIBOR, which is subject to regulatory guidance and/or reform that could cause interest rates under our current or future debt agreements to perform differently than in the past or cause other unanticipated consequences. In July 2017, the Chief Executive of the U.K. Financial Conduct Authority (FCA), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. However, on November 30, 2020, the ICE Benchmark Administration Limited announced its plan to extend the date that most U.S. LIBOR values would cease being computed and announced from December 31, 2021 to June 30, 2023. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed, and the timing of such discontinuation, modifications or other reforms to LIBOR is uncertain. At this time, it is not possible to predict the effect any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates will have on the Company. However, as LIBOR is expected to cease to exist in a future period, the Company’s borrowing costs may be adversely affected.
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Disruption and turmoil in global credit and financial markets, which may be exacerbated by the inability of certain countries to continue to service their sovereign debt obligations, and the possible unfavorable implications of such events for the global economy, may unfavorably impact our business, liquidity, operating results, and financial condition.
The current economic conditions, including volatility in the availability of credit and foreign exchange rates and extended economic slowdowns, have contributed to the instability in some global credit and financial markets. Additionally, at-risk financial institutions in certain countries may, without forewarning, seize a portion of depositors' account balances. The seized funds would be used to recapitalize the at-risk financial institution and would no longer be available for the depositors' use. If such seizure were to occur at financial institutions where we have funds on deposit, it could have a significant impact on our overall liquidity. While the ultimate outcome of these events cannot be predicted, it is possible that such events may have an unfavorable impact on the global economy and our business, liquidity, operating results, and financial condition.
We have pension benefit obligations, which could have a material impact on our earnings, liabilities, and shareholders' equity and could have significant adverse impacts in future periods.
We sponsor both funded and unfunded defined benefit pension plans for our international employees, primarily in Germany, France, Indonesia, India, and Italy. Our general funding policy for these qualified pension plans is to contribute amounts sufficient to satisfy regulatory funding standards of the respective countries for each plan.
The determination of pension plan expense, benefit obligation, and future contributions depends heavily on market factors such as the discount rate and the actual return on plan assets. We estimate pension plan expense, benefit obligation, and future contributions to these plans using assumptions with respect to these and other items. Changes to those assumptions could have a significant effect on future contributions as well as on our annual pension costs and/or result in a significant change to shareholders' equity.
Legal and Regulatory Risks
Changes in tax laws, valuation allowances, and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to income tax in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves may be established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered appropriate, as well as valuation allowances when we determine it is more likely than not that a deferred tax asset cannot be realized. In addition, future changes in tax laws in the jurisdictions in which we operate could have a material impact on our effective income tax rate and profitability. We regularly assess all of these matters to determine the adequacy of our tax provision, which is subject to significant judgment.
The Organization for Economic Cooperation and Development guidance under the Base Erosion and Profit Shifting (BEPS) initiatives aim to minimize perceived tax abuses and modernize global tax policy. The Anti-Tax Avoidance Directives (ATAD), issued by the Council of the European Union, provides further recommendations for legislative changes under these tax policies. Additional recommendations will be forthcoming. More countries are beginning to implement legislative changes based on these BEPS recommendations.
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A significant number of our products use radio spectrum, which are subject to regulation by the U.S. Federal Communications Commission (FCC) in the United States.. The FCC may adopt changes to the rules for our licensed and unlicensed frequency bands that are incompatible with our business. In the past, the FCC has adopted changes to the requirements for equipment using radio spectrum, and it is possible that the FCC or the U.S. Congress will adopt additional changes.
Although radio licenses are generally required for radio stations, Part 15 of the FCC’sFCC's rules permits certain low-power radio devices (Part 15 devices) to operate on an unlicensed basis. Part 15 devices are designed for use on frequencies used by others. These other users may include licensed users, which have priority over Part 15 users. Part 15 devices cannot cause harmful interference to licensed users and must be designed to accept interference from licensed radio devices. In the United States, our smart metering solutions are typically Part 15 devices that transmit information to (and receive information from, if applicable) handheld, mobile, or fixed network systems pursuant to these rules.
We depend upon sufficient radio spectrum to be allocated by the FCC for our intended uses. As to the licensed frequencies, there is some risk that there may be insufficient available frequencies in some markets to sustain our planned operations. The unlicensed frequencies are available for a wide variety of uses and may not be entitled to protection from interference by other users who operate in accordance with FCC rules. The unlicensed frequencies are also often the subject of proposals to the FCC requesting a change in the rules under which such frequencies may be used. If the unlicensed frequencies become crowded to unacceptable levels, restrictive, or subject to changed rules governing their use, our business could be materially adversely affected.
We have committed, and will continue to commit, significant resources to the development of products that use particular radio frequencies. Action by the FCC could require modifications to our products. The inability to modify our products to meet such requirements, the possible delays in completing such modifications, and the cost of such modifications all could have a material adverse effect on our future business, financial condition, and results of operations.
Outside of the United States, certain of our products require the use of RF and are subject to regulations in those jurisdictions where we have deployed such equipment. In some jurisdictions, radio station licensees are generally required to operate a radio transmitter, and such licenses may be granted for a fixed term and must be periodically renewed. In other jurisdictions, the rules permit certain low power devices to operate on an unlicensed basis. Our smart metering solutions typically transmit to (and receive information from, if applicable) handheld, mobile, or fixed network reading devices in license-exempt bands pursuant to rules regulating such use. In Europe, we generally use the 169 megahertz (MHz), 433/4 MHz, and 868 MHz bands. In the rest of the world, we primarily use the 433/4 MHz, 920 MHz and 2.4000-2.4835 gigahertz (GHz) bands, as well as other local license-exempt bands. To the extent we introduce new products designed for use in the United States or another country into a new market, such products may require significant modification or redesign in order to meet frequency requirements and other regulatory specifications. In some countries, limitations on frequency availability or the cost of making necessary modifications may preclude
us from selling our products in those countries.jurisdictions. In addition, new consumer products may create interference with the performance of our products, which could lead to claims against us.
Changes in environmental regulations, violations of such regulations, or future environmental liabilities could cause us to incur significant costs and could adversely affect our operations.
Our business and our facilities are subject to numerous laws, regulations, and ordinances governing, among other things, the storage, discharge, handling, emission, generation, manufacture, disposal, remediation of and exposure to toxic or other hazardous substances, and certain waste products. Many of these environmental laws and regulations subject current or previous owners or operators of land to liability for the costs of investigation, removal, or remediation of hazardous materials. In addition, these laws and regulations typically impose liability regardless of whether the owner or operator knew of, or was responsible for, the presence of any hazardous materials and regardless of whether the actions that led to the presence were conducted in compliance with the law. In the ordinary course of our business, we use metals, solvents, and similar materials, which are stored on-site. The waste created by the use of these materials is transported off-site on a regular basis by unaffiliated waste haulers. Many environmental laws and regulations require generators of waste to take remedial actions at, or in relation to, the off-site disposal location even if the disposal was conducted in compliance with the law. The requirements of these laws and regulations are complex, change frequently, and could become more stringent in the future. Failure to comply with current or future environmental regulations could result in the imposition of substantial fines, suspension of production, alteration of our production processes, cessation of operations, or other actions, which could materially and adversely affect our business, financial condition, and results of operations. There can be no assurance that a claim, investigation, or liability willwould not arise
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with respect to these activities or that the cost of complying with governmental regulations in the future, willeither for an individual claim or in aggregate of multiple claims, would not have a material adverse effect on us.
Our international sales and operations are subject to complex laws relating to foreign corrupt practices and anti-bribery laws, among many others, and a violation of, or change in, these laws could adversely affect our operations.
The U.S. Foreign Corrupt Practices Act in the United States requires United StatesU.S. companies to comply with an extensive legal framework to prevent bribery of foreign officials. The laws are complex and require that we closely monitor local practices of our overseas offices. The United StatesU.S. Department of Justice has recently heightenedcontinues to heighten enforcement of these laws. In addition, other countries continue to implement similar laws that may have extra-territorial effect. In the United Kingdom, where we have operations, the U.K. Bribery Act imposes significant oversight obligations on us and could impact our operations outside of the United Kingdom. The costs for complying with these and similar laws may be significant and could require significant management time and focus. Any violation of these or similar laws, intentional or unintentional, could have a material adverse effect on our business, financial condition, or results of operations.
Further, we operate in some parts of the world that have experienced governmental corruption, and, in certain circumstances, local customs and practice might not be consistent with the requirements of anti-corruption laws. We areremain subject to regulatory compliance.the risk that our employees, third party partners, or agents will engage in business practices that are prohibited by our policies and violate such laws and regulations.
Regulations related to “conflict minerals”"conflict minerals" may force us to incur additional expenses, may result in damage to our business reputation, and may adversely impact our ability to conduct our business.
None.
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We own our headquarters facility, which is located in Liberty Lake, Washington.
The following table lists our major manufacturing facilities by the locationregion and product line.
location:
| Region | ||||||||
Waseca, MN (L) | ||||||||
| Europe, Middle East, and Africa | Chasseneuil, France (O) | Macon, France Massy, France (L) Karlsruhe, Germany (O) | Oldenburg, Germany (O) Godollo, Hungary (O) Asti, Italy (O) | |||||
| Asia/Pacific | Bekasi, Indonesia | |||||||
(O) - Manufacturing facility is owned
(L) - Manufacturing facility is leased
Our principal properties are in good condition, and we believe our current facilities are sufficient to support our operations. Our major manufacturing facilities are owned, while smaller factories are typically leased.
In addition to our manufacturing facilities, we have numerous sales offices, productresearch and development facilities, and distribution centers, which are located throughout the world.
SEC regulations require us to disclose certain information about proceedings arising under federal, state or local environmental provisions if we reasonably believe that such proceedings may result in monetary sanctions above a stated threshold. Pursuant to the SEC regulations, Itron uses a threshold of $1 million or more for purposes of determining whether disclosure of any such proceedings is required. Under this threshold, Itron does not have any legal proceedings to report.
Not applicable.
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PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock is traded on the NASDAQ Global Select Market. The following table reflectsMarket under the range of high and low common stock sales prices for the four quarters of 2017 and 2016 as reported by the NASDAQ Global Select Market.
| 2017 | 2016 | ||||||||||||||
| High | Low | High | Low | ||||||||||||
| First Quarter | $ | 66.20 | $ | 58.70 | $ | 43.00 | $ | 30.31 | |||||||
| Second Quarter | $ | 71.10 | $ | 59.15 | $ | 45.51 | $ | 39.78 | |||||||
| Third Quarter | $ | 77.45 | $ | 67.20 | $ | 56.23 | $ | 42.34 | |||||||
| Fourth Quarter | $ | 79.40 | $ | 63.90 | $ | 65.75 | $ | 51.90 | |||||||
symbol ITRI.
Performance Graph
The following graph compares the five-year cumulative total return to shareholders on our common stock with the five-year cumulative total return of our peer group of companies used for the year ended December 31, 20172020 and the NASDAQ Composite Index.
* $100 invested on 12/31/12December 31, 2015, in stock or index, including reinvestment of dividends.
Fiscal years ending December 31.
The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any of our filings, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
The above presentation assumes $100 invested on December 31, 20122015 in the common stock of Itron, Inc., the peer group, and the NASDAQ Composite Index, with all dividends reinvested. With respect to companies in the peer group, the returns of each such corporation have been weighted to reflect relative stock market capitalization at the beginning of each annual period plotted. The historical stock prices shown above for our common stock are historical and not necessarily indicative of future price performance.
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Each year, we reassess our peer group to identify global companies that are either direct competitors or have similar industry and business operating characteristics. Our 20162020 peer group includes the following publicly traded companies: Badger Meter, Inc., Echelon Corporation, National Instruments Corporation,Landis+Gyr, Mueller Water Products, Inc., and Xylem, Inc. (Sensus). Our 2020 peer group was updated due to the direction of one of our peer's business. Our 2020 peer group was updated to exclude Roper Technologies, Inc., and Silver Spring Networks, Inc. (SSNI). Our 2017 peer group includes due to the following publicly traded companies: Badger Meter, Inc., Echelon Corporation, Landis+Gyr, National Instruments Corporation, and Roper Technologies, Inc. The 2017 peer group was created as a resultdirection of our acquisition of SSNI and to add Landis+Gyr as a peer after they became publicly traded in 2017.its business
Issuer Repurchase of Equity Securities
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| In thousands | ||||||||||||||||||||||||||
| October 1, 2020 through October 31, 2020 | — | $ | — | — | $ | — | ||||||||||||||||||||
| November 1, 2020 through November 30, 2020 | 4,409 | 73.72 | — | — | ||||||||||||||||||||||
| December 1, 2020 through December 31, 2020 | 3,222 | 84.20 | — | — | ||||||||||||||||||||||
| Total | 7,631 | — | ||||||||||||||||||||||||
(1)Shares purchased represent shares transferred to us by certain employees who vested in restricted stock units and used shares to pay all, or a portion of, our common stock were repurchased during the quarter ended December 31, 2017.related taxes.
Holders
At January 31, 2018,2021, there were 203 179holders of record of our common stock. This does not include persons whose stock is in nominee or accounts through brokers.
Dividends
Since the inception of the Company, we have not declared or paid cash dividends. We intend to retain future earnings for the development of our business and do not anticipate paying cash dividends in the foreseeable future.
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| Year Ended December 31, | |||||||||||||||||||
2017(6) | 2016(4) | 2015 | 2014(3) | 2013(2) | |||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||
| Consolidated Statements of Operations Data | |||||||||||||||||||
| Revenues | $ | 2,018,197 | $ | 2,013,186 | $ | 1,883,533 | $ | 1,947,616 | $ | 1,938,025 | |||||||||
| Cost of revenues | 1,343,043 | 1,352,866 | 1,326,848 | 1,333,566 | 1,323,257 | ||||||||||||||
| Gross profit | 675,154 | 660,320 | 556,685 | 614,050 | 614,768 | ||||||||||||||
| Operating income (loss) | 151,426 | 96,211 | 52,846 | 480 | (139,863 | ) | |||||||||||||
| Net income (loss) attributable to Itron, Inc. | 57,298 | 31,770 | 12,678 | (23,670 | ) | (153,153 | ) | ||||||||||||
| Earnings (loss) per common share - Basic | $ | 1.48 | $ | 0.83 | $ | 0.33 | $ | (0.60 | ) | $ | (3.90 | ) | |||||||
| Earnings (loss) per common share - Diluted | $ | 1.45 | $ | 0.82 | $ | 0.33 | $ | (0.60 | ) | $ | (3.90 | ) | |||||||
| Weighted average common shares outstanding - Basic | 38,655 | 38,207 | 38,224 | 39,184 | 39,281 | ||||||||||||||
| Weighted average common shares outstanding - Diluted | 39,387 | 38,643 | 38,506 | 39,184 | 39,281 | ||||||||||||||
| Consolidated Balance Sheets Data | |||||||||||||||||||
Working capital(1) | $ | 341,959 | $ | 319,420 | $ | 281,166 | $ | 262,393 | $ | 338,476 | |||||||||
Total assets (5) | 2,106,147 | 1,577,811 | 1,680,316 | 1,751,085 | 1,906,025 | ||||||||||||||
Total debt, net (5) | 613,260 | 304,523 | 370,165 | 323,307 | 377,596 | ||||||||||||||
| Total Itron, Inc. shareholders' equity | 786,416 | 631,604 | 604,758 | 681,001 | 839,011 | ||||||||||||||
| Other Financial Data | |||||||||||||||||||
| Cash provided by operating activities | $ | 191,354 | $ | 115,842 | $ | 73,350 | $ | 132,973 | $ | 105,421 | |||||||||
| Cash used in investing activities | (148,179 | ) | (47,528 | ) | (48,951 | ) | (41,496 | ) | (56,771 | ) | |||||||||
| Cash provided by (used in) financing activities | 301,959 | (63,023 | ) | 7,740 | (91,877 | ) | (57,438 | ) | |||||||||||
| Capital expenditures | (49,495 | ) | (43,543 | ) | (43,918 | ) | (44,495 | ) | (60,020 | ) | |||||||||
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis compares the change in the consolidated financial statements for fiscal years 2020 and 2019 and should be read in conjunction with Item 8: “FinancialFinancial Statements and Supplementary Data” includedData. For comparisons of fiscal years 2019 and 2018, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in thisPart II, Item 7 of our 2019 Annual Report on Form 10-K.10-K, filed with the Securities and Exchange Commission (SEC) on February 27, 2020, and incorporated herein by reference.
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.
Overview
We are a technology and service company, offering end-to-endand we are a leader in the Industrial Internet of Things (IIoT). We offer solutions to enhance productivity and efficiency, primarily focused onthat enable utilities and municipalities around the globe.to safely, securely and reliably operate their critical infrastructure. Our solutions generally include robust industrial gradethe deployment of smart networks, smart meters, metersoftware, services, devices, sensors, and data management software, and knowledge application solutions, which bring additional value to the customer. Our professional services helpanalytics that allow our customers project-manage, install, implement, operate,to manage assets, secure revenue, lower operational costs, improve customer service, improve safety, and maintain their systems. 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: Electricity, Gas,Device Solutions, Networked Solutions, and Water. Our WaterOutcomes. 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 water,markets and adhering to regulations and standards within those markets, as well as our heat and allocation solutions. 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 structuresegment 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® and OpenWay® Riva meters, Itron traditional ERT® technology, Intelis smart gas or water meters, 500G gas communication modules, 500W water communication modules; GenX networking products, network modules and interface cards; and specific network control and management software applications. The 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 each segmentall of these industry and smart city applications to develop its own go-to-market strategy, prioritize its marketingbe run and product development requirements, and focus on its strategic investments. Our sales and marketing functions are managed under each segment. Our product development and manufacturing operations are managed on a worldwide basissingle, 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 promote a global perspective in our operationsimprove decision making, maximize operational profitability, drive resource efficiency, and processes while servingdeliver 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 needsfootprint 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, forecasting software and services; our Distributed Intelligence suite of applications and services; and any
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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.
To supplement our consolidated financial informationstatements, which are prepared in accordance with accounting principles generally accepted in the United States (GAAP), as well aswe use certain adjusted or non-GAAP financial measures, such as constant currency, free cash flow,including non-GAAP operating expenses,expense, non-GAAP operating income, non-GAAP net income, adjusted EBITDA, and non-GAAP diluted earnings per share (EPS)., adjusted EBITDA, adjusted EBITDA margin, constant currency, and free cash flow. We believe thatprovide these non-GAAP financial measures when reviewedbecause we believe they provide greater transparency and represent supplemental information used by management in conjunction with GAAPits financial and operational decision making. We exclude certain costs in our non-GAAP financial measures can provide more informationas we believe the net result is a measure of our core business. We believe these measures facilitate operating performance comparisons from period to assist investorsperiod 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 evaluating current period performanceaddition to, and not as a substitute for, results prepared in assessing future performance. For these reasons, our internal management reporting also includes non-GAAP measures.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. Non-GAAPOur non-GAAP financial measures as presented herein may not be comparable to similarly titled measures useddifferent 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,”"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’speriod'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 40-4242-44 for information about these non-GAAP measures and the detailed reconciliation of items that impacted free cash flow, non-GAAP operating expenses,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 twelve monthsyear ended December 31, 2017
•Revenues were $2.2 billion compared with $2.5 billion last year, a decrease of $5.0 million.$329.1 million, or 13%
•Gross margin was 33.5%27.7% compared with 32.8% in the same period30.1% last year. The increase of 70 basis points was due to improvements in our Electricity and Water segments.year
•Operating expenses were $40.4decreased $7.1 million, loweror 1%, compared with 2019, and included a $59.8 million loss on sale of business and $43.2 million of restructuring expense related to the same period last year, primarily due2020 Projects
•Net loss attributable to decreased restructuring expense.Itron, Inc. was $58.0 million compared with net income attributable to Itron, Inc. of $49.0 million in 2019
•GAAP loss per share was $1.44 compared with diluted EPS of $1.23 in 2019
•Non-GAAP diluted EPS improved $0.52 to $3.06was $1.85 compared with the same period last year.$3.32 in 2019
•Adjusted EBITDA decreased $91.6 million, or 34%, to $178.4 million compared with adjusted EBITDA of $270.0 million in 2019
•Total backlog was $1.8$3.3 billion, and twelve-month backlog was $931 million$1.2 billion at December 31, 2017.2020, compared with $3.2 billion and $1.5 billion at December 31, 2019.
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Outlook for 2021 due to COVID-19
The COVID-19 pandemic has had global economic impacts including disrupting global supply chains and creating 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. While certain of our European factories were closed during portions of the first half of 2020 due to government actions and local conditions, all were open by May and throughout the remainder of the year. Any further closures that may be imposed on us could impact our results for 2021. 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. At this time, we have not identified any significant decrease in long-term customer demand for our products and services. Certain of our customers’ projects and deployments have shifted into 2021 and beyond. For more information on risks associated with the COVID-19 pandemic, please see our risk in Part I, Item 1A, Risk Factors.
The COVID-19 pandemic remains a rapidly evolving situation. 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 the U.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 outbreak. Other benefits, including options to defer payroll tax payments and additional deductions, have resulted in reduced future cash outlays in the near term.
2020 Restructuring Plan
On June 1, 2017, we completed the acquisitionSeptember 17, 2020, our Board of Comverge by purchasing the stock of its parent, Peak Holding Corp. (Comverge). Comverge is an industry leading provider of integrated cloud-based demand response, energy efficiency and customer engagement solutions that allow electric utilities to improve grid reliability, lower energy costs, meet regulatory demands, and enhance customer experience. This acquisition provides opportunities to combine our technologies and continues our focus on transitioning from a hardware manufacturer into a total solutions provider, delivering even more value to our customers.
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 sale of these Latin America-based operations is part of our continued strategy to improve profitability and focus on growing our Networked Solutions and Outcomes businesses in Latin America and throughout the world. We retained the intellectual property rights to our products sold in Latin America. As part of the transaction, we entered into an intellectual property license agreement whereby Accell pays a royalty on certain products manufactured by Accell using licensed Company intellectual property. In addition, Accell serves as the exclusive distributor for our Device Solutions, Networked Solutions, and Outcomes product and service offerings in Latin America. We recognized a loss on sale of business of $59.8 million during the year ended December 31, 2020, primarily due to foreign currency translation losses and allocated goodwill. Refer to Item 8: Financial Statements and Supplementary Data, Note 18: Sale of Business for more information.
Credit Facility Revolving Line of Credit
In March 2020, we drew $400 million in U.S. dollars under the multicurrency revolving line of credit (the revolver) within the credit facility that was initially entered on January 5, 2018 and amended on October 18, 2019 (2018 credit facility) to increase our cash position and preserve future financial flexibility. During the fourth quarter, we repaid the $400 million under the revolver. At December 31, 2020, there were no amounts outstanding under the revolver and $64.9 million was utilized by outstanding standby letters of credit, resulting in $435.1 million available for additional borrowings or standby letters of credit under the revolver. At December 31, 2020, $235.1 million was available for additional standby letters of credit under the letter of credit sub-facility and no amounts were outstanding under the swingline sub-facility.
Credit Facility Amendment
On October 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 4.5:1 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
27
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 U.S. term loan (the term loan) and the revolver may 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.
Stock Repurchase Authorization
On March 14, 2019, Itron's Board of Directors authorized the Company to repurchase up to $50 million of annualized savings when substantially complete.our common stock over a 12-month period (the 2019 Stock Repurchase Program). Following the announcement of the program and through December 31, 2019, we repurchased 529,396 shares at an average share price of $47.22 (including commissions) for a total of $25 million. The program expired on March 13, 2020, and no additional shares were repurchased during 2020.
Total Company GAAP and Non-GAAP Highlights and Unit ShipmentsEndpoints Under Management
| Year Ended December 31, | |||||||||||||||||||||||||||||
| In thousands, except margin and per share data | 2020 | % Change | 2019 | ||||||||||||||||||||||||||
| GAAP | |||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||
| Product revenues | $ | 1,889,173 | (15)% | $ | 2,220,395 | ||||||||||||||||||||||||
| Service revenues | 284,177 | 1% | 282,075 | ||||||||||||||||||||||||||
| Total revenues | 2,173,350 | (13)% | 2,502,470 | ||||||||||||||||||||||||||
| Gross profit | 602,167 | (20)% | 752,319 | ||||||||||||||||||||||||||
| Operating expenses | 612,562 | (1)% | 619,636 | ||||||||||||||||||||||||||
| Operating income (loss) | (10,395) | NM | 132,683 | ||||||||||||||||||||||||||
| Other income (expense) | (46,244) | (22)% | (59,651) | ||||||||||||||||||||||||||
| Income tax benefit (provision) | (238) | NM | (20,617) | ||||||||||||||||||||||||||
| Net income (loss) attributable to Itron, Inc. | (57,955) | NM | 49,006 | ||||||||||||||||||||||||||
Non-GAAP(1) | |||||||||||||||||||||||||||||
| Non-GAAP operating expenses | $ | 470,028 | (10)% | $ | 519,954 | ||||||||||||||||||||||||
| Non-GAAP operating income | 132,139 | (43)% | 232,365 | ||||||||||||||||||||||||||
| Non-GAAP net income attributable to Itron, Inc. | 75,253 | (43)% | 132,795 | ||||||||||||||||||||||||||
| Adjusted EBITDA | 178,399 | (34)% | 270,023 | ||||||||||||||||||||||||||
| GAAP Margins and EPS | |||||||||||||||||||||||||||||
| Gross margin | |||||||||||||||||||||||||||||
| Product gross margin | 25.4 | % | 28.5 | % | |||||||||||||||||||||||||
| Service gross margin | 42.8 | % | 42.4 | % | |||||||||||||||||||||||||
| Total gross margin | 27.7 | % | 30.1 | % | |||||||||||||||||||||||||
| Operating margin | (0.5) | % | 5.3 | % | |||||||||||||||||||||||||
| Net income (loss) per common share - Basic | $ | (1.44) | $ | 1.24 | |||||||||||||||||||||||||
| Net income (loss) per common share - Diluted | $ | (1.44) | $ | 1.23 | |||||||||||||||||||||||||
Non-GAAP EPS (1) | |||||||||||||||||||||||||||||
| Non-GAAP diluted EPS | $ | 1.85 | $ | 3.32 | |||||||||||||||||||||||||
(1)These measures exclude certain expenses that we do not believe are indicative of our core operating results. See pages 42-44 for information about these non-GAAP measures and reconciliations to the most comparable GAAP measures.
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| Year Ended December 31, | |||||||||||||||
| 2017 | % Change | 2016 | % Change | 2015 | |||||||||||
| (in thousands, except margin and per share data) | |||||||||||||||
| GAAP | |||||||||||||||
| Revenues | |||||||||||||||
| Product revenues | $ | 1,813,925 | (1)% | $ | 1,830,070 | 8% | $ | 1,699,534 | |||||||
| Service revenues | 204,272 | 12% | 183,116 | —% | 183,999 | ||||||||||
| Total revenues | 2,018,197 | —% | 2,013,186 | 7% | 1,883,533 | ||||||||||
| Gross profit | 675,154 | 2% | 660,320 | 19% | 556,685 | ||||||||||
| Operating expenses | 523,728 | (7)% | 564,109 | 12% | 503,839 | ||||||||||
| Operating income | 151,426 | 57% | 96,211 | 82% | 52,846 | ||||||||||
| Other income (expense) | (16,851 | ) | 45% | (11,584 | ) | (26)% | (15,744 | ) | |||||||
| Income tax provision | (74,326 | ) | 50% | (49,574 | ) | 124% | (22,099 | ) | |||||||
| Net income attributable to Itron, Inc. | 57,298 | 80% | 31,770 | 151% | 12,678 | ||||||||||
Non-GAAP(1) | |||||||||||||||
| Non-GAAP operating expenses | $ | 479,386 | (2)% | $ | 490,104 | 1% | $ | 484,967 | |||||||
| Non-GAAP operating income | 195,768 | 15% | 170,216 | 137% | 71,718 | ||||||||||
| Non-GAAP net income attributable to Itron, Inc. | 120,486 | 23% | 98,284 | 251% | 27,981 | ||||||||||
| Adjusted EBITDA | 227,851 | 9% | 208,638 | 91% | 109,497 | ||||||||||
| GAAP Margins and Earnings Per Share | |||||||||||||||
| Gross margin | |||||||||||||||
| Product gross margin | 33.5 | % | 32.3 | % | 28.4 | % | |||||||||
| Service gross margin | 32.7 | % | 37.9 | % | 40.1 | % | |||||||||
| Total gross margin | 33.5 | % | 32.8 | % | 29.6 | % | |||||||||
| Operating margin | 7.5 | % | 4.8 | % | 2.8 | % | |||||||||
| Basic EPS | $ | 1.48 | $ | 0.83 | $ | 0.33 | |||||||||
| Diluted EPS | $ | 1.45 | $ | 0.82 | $ | 0.33 | |||||||||
Non-GAAP Earnings Per Share(1) | |||||||||||||||
| Non-GAAP diluted EPS | $ | 3.06 | $ | 2.54 | $ | 0.73 | |||||||||
More than 15 years ago we accelerated our ability to offer utilities higher value solutions with the purchase of Schlumberger's electricity metering business. With this acquisition, Itron solidified itself as one of the leaders in AMR modules, meters, and other critical infrastructure to the electric, gas, and water utility industries. In 2008, we continued our technology advancement with our first generation of AMI focused on growing our offerings of networked products and services around the globe. We expanded our network footprint and expanded our capabilities as a unified operating platform with the acquisition of Silver Spring Networks (SSNI) in 2018, strengthening our position as a global technology leader in smart utility and smart city critical infrastructure and outcomes.
Following the acquisition of SSNI, we realigned out product portfolio into reporting segments of Device Solutions, Networked Solutions, and Communication Module SummaryOutcomes to emphasize our transformation from increasingly commoditized, undifferentiated endpoints to higher value data-centric networked solutions and outcomes. Our customers - utilities, municipalities, and cities - who deploy our Networked Solutions tend to utilize these assets for 10 to 15 years after their initial deployment. Building upon our established installed base of networked endpoints, our strategy focuses on converting our customers to long-term clients with ongoing professional services, managed services, software, security, and tools that improve data insight, risk mitigation, service resiliency, sustainability, and efficiency in their daily operations. In some instances, the "endpoints under management" are not on an Itron provided network but rather a network of another third party that has asked Itron to manage, monitor, or run the network or application for them.
Our management team places an emphasis on investments, both organic and inorganic, focused on growth in our Outcomes segment. Our strategy is to build higher value solutions, applications, and customer focused outcomes upon a set of global networked endpoint assets under Itron’s active management on behalf of our clients. To inform progression of our strategy, management relies on the metric of "endpoints under management" as a leading indicator of the potential for long-term value creation and growth for our Outcomes business.
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.
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 endpoint, 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 reading communication technology
This metric primarily of our OpenWay technology)
While the one-time sale of metersthe platform and communication modules. 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.
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A summary of our meter and communication module shipmentsendpoints under management is as follows:
| Year Ended December 31, | |||||||||||||||||
| Units in thousands | 2020 | 2019 | 2018 | ||||||||||||||
| Endpoints Under Management | 74,184 | 64,719 | 47,755 | ||||||||||||||
| Year Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| (units in thousands) | ||||||||
| Meters | ||||||||
| Standard | 15,740 | 15,540 | 17,560 | |||||
| Smart | 10,390 | 9,340 | 7,290 | |||||
| Total meters | 26,130 | 24,880 | 24,850 | |||||
| Stand-alone communication modules | ||||||||
| Smart | 6,250 | 5,980 | 5,840 | |||||
Results of Operations
Revenues and Gross Margin
The actual results of and effects of changes in foreign currency exchange rates inon revenues and gross profit were as follows:
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change | Total Change | |||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||
| In thousands | 2020 | 2019 | |||||||||||||||||||||||||||
| Total Company | |||||||||||||||||||||||||||||
| Revenues | $ | 2,173,350 | $ | 2,502,470 | $ | (3,384) | $ | (325,736) | $ | (329,120) | |||||||||||||||||||
| Gross profit | 602,167 | 752,319 | (219) | (149,933) | (150,152) | ||||||||||||||||||||||||
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change(1) | Total Change | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Total Company | ||||||||||||||||||||
| Revenues | $ | 2,018,197 | $ | 2,013,186 | $ | 11,639 | $ | (6,628 | ) | $ | 5,011 | |||||||||
| Gross Profit | 675,154 | 660,320 | 923 | 13,911 | 14,834 | |||||||||||||||
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change(1) | Total Change | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Total Company | ||||||||||||||||||||
| Revenues | $ | 2,013,186 | $ | 1,883,533 | $ | (34,781 | ) | $ | 164,434 | $ | 129,653 | |||||||||
| Gross Profit | 660,320 | 556,685 | (9,381 | ) | 113,016 | 103,635 | ||||||||||||||
Revenues
Revenues increased $5.0decreased $329.1 million in 2017,2020 compared with 2016.2019. We have been unfavorably impacted by COVID-19, which played a significant role in customer demand and lower year-over-year results. Product revenues decreased $16.1$331.2 million in 2017 primarily in our North America2020 and Europe, Middle East, and Africa (EMEA) regions. This was partially offset by improved product revenues in our Latin America and Asia Pacific regions during 2017. Serviceservice revenues increased $21.2$2.1 million in 20172020 as compared with 2016, which was primarily driven2019. Device Solutions decreased by Comverge service revenues of $19.6 million. Changes in currency exchange rates favorably impacted revenues$164.9 million; Networked Solutions decreased by $11.6$167.9 million; and Outcomes increased by $3.6 million in 2017.
No single customer represented more than 10% of total revenues for the years ended December 31, 2017, 2016,2020 and 2015.2019. Our 10 largest customers accounted for 33%, 31%, and 22% of total revenues in 2017, 2016,2020 and 2015, respectively.31% of total revenues in 2019.
Gross Margin
Gross margin was 33.5%27.7% for 2017,2020, compared with 32.8%30.1% in 2016. Our gross margin associated with product sales improved to 33.5% in 2017 from 32.3% in 2016 due to improved2019. We were unfavorably impacted by COVID-19 induced operating inefficiencies, product mix particularly in our Electricity segment, and an $8.0 million insurance recovery in 2017 associated with warranty expenses previously recognized as a result of our 2015 communication module product replacement notification to customers in our Water segment. This recovery contributed 40 basis points to the gross margin improvement. Gross margin associated with our service revenues declined to 32.7% from 37.9% in 2016 due to lower marginincreased inventory reserves. Product sales in our EMEA region.
Refer to Operating Segment Results section below for further detail on total company revenues and gross margin.
Operating Expenses
The following table shows the componentsactual results of and effects of changes in foreign currency exchange rates on operating expense:expenses were as follows:
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change | Total Change | |||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||
| In thousands | 2020 | 2019 | |||||||||||||||||||||||||||
| Total Company | |||||||||||||||||||||||||||||
| Sales, general and administrative | $ | 276,920 | $ | 346,872 | $ | 1,466 | $ | (71,418) | $ | (69,952) | |||||||||||||||||||
| Research and development | 194,101 | 202,200 | 569 | (8,668) | (8,099) | ||||||||||||||||||||||||
| Amortization of intangible assets | 44,711 | 64,286 | 46 | (19,621) | (19,575) | ||||||||||||||||||||||||
| Restructuring | 37,013 | 6,278 | (154) | 30,889 | 30,735 | ||||||||||||||||||||||||
| Loss on sale of business | 59,817 | — | — | 59,817 | 59,817 | ||||||||||||||||||||||||
| Total Operating expenses | $ | 612,562 | $ | 619,636 | $ | 1,927 | $ | (9,001) | $ | (7,074) | |||||||||||||||||||
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change(1) | Total Change | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Total Company | ||||||||||||||||||||
| Sales and marketing | $ | 170,008 | $ | 158,883 | $ | 1,548 | $ | 9,577 | $ | 11,125 | ||||||||||
| Product development | 169,977 | 168,209 | (1,531 | ) | 3,299 | 1,768 | ||||||||||||||
| General and administrative | 156,540 | 162,815 | 2,831 | (9,106 | ) | (6,275 | ) | |||||||||||||
| Amortization of intangible assets | 20,785 | 25,112 | 261 | (4,588 | ) | (4,327 | ) | |||||||||||||
| Restructuring | 6,418 | 49,090 | 1,925 | (44,597 | ) | (42,672 | ) | |||||||||||||
| Total Operating expenses | $ | 523,728 | $ | 564,109 | $ | 5,034 | $ | (45,415 | ) | $ | (40,381 | ) | ||||||||
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change(1) | Total Change | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Total Company | ||||||||||||||||||||
| Sales and marketing | $ | 158,883 | $ | 161,380 | $ | (2,883 | ) | $ | 386 | $ | (2,497 | ) | ||||||||
| Product development | 168,209 | 162,334 | (1,273 | ) | 7,148 | 5,875 | ||||||||||||||
| General and administrative | 162,815 | 155,715 | (2,047 | ) | 9,147 | 7,100 | ||||||||||||||
| Amortization of intangible assets | 25,112 | 31,673 | (705 | ) | (5,856 | ) | (6,561 | ) | ||||||||||||
| Restructuring | 49,090 | (7,263 | ) | (412 | ) | 56,765 | 56,353 | |||||||||||||
| Total Operating expenses | $ | 564,109 | $ | 503,839 | $ | (7,320 | ) | $ | 67,590 | $ | 60,270 | |||||||||
Operating expenses decreased $40.4$7.1 million for the year ended December 31, 20172020 as compared with the same period in 2016.2019. This was primarily relateddue to decreasesa decrease of $70.0 million in restructuring andsales, general and administrative expense, partially offset by an increase inexpenses due to lower variable compensation and reduced travel expenses, which includes lower acquisition and integration costs of $25.6 million classified
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within sales, and marketing expenses.
Other Income (Expense)
The following table shows the components of other income (expense):
| Year Ended December 31, | |||||||||||||||||||||||||||||
| In thousands | 2020 | % Change | 2019 | ||||||||||||||||||||||||||
| Interest income | $ | 2,998 | 62% | $ | 1,849 | ||||||||||||||||||||||||
| Interest expense | (39,871) | (15)% | (46,822) | ||||||||||||||||||||||||||
| Amortization of prepaid debt fees | (4,130) | (27)% | (5,631) | ||||||||||||||||||||||||||
| Other income (expense), net | (5,241) | (42)% | (9,047) | ||||||||||||||||||||||||||
| Total other income (expense) | $ | (46,244) | (22)% | $ | (59,651) | ||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||
| 2017 | % Change | 2016 | % Change | 2015 | |||||||||||
| (in thousands) | (in thousands) | (in thousands) | |||||||||||||
| Interest income | $ | 2,126 | 146% | $ | 865 | 14% | $ | 761 | |||||||
| Interest expense | (10,514 | ) | 7% | (9,872 | ) | (3)% | (10,161 | ) | |||||||
| Amortization of prepaid debt fees | (1,067 | ) | (1)% | (1,076 | ) | (49)% | (2,128 | ) | |||||||
| Other income (expense), net | (7,396 | ) | 393% | (1,501 | ) | (64)% | (4,216 | ) | |||||||
| Total other income (expense) | $ | (16,851 | ) | 45% | $ | (11,584 | ) | (26)% | $ | (15,744 | ) | ||||
Total other income (expense) for the year ended December 31, 20172020 was a net expense of $16.9$46.2 million compared with $11.6$59.7 million in 2016. 2019.
The change in other income (expense), net, for the year ended December 31, 20172020 as compared with 2016the same period in 2019 was primarily the result of $8.9 million decrease in interest expense for the credit facility, $2.7 million decrease due to fluctuations in the recognizedlower foreign currency exchange gains and losses due toresulting from transactions denominated in a currency other than anthe reporting entity's functional currency.
Income Tax Provision
Our income tax provision was $74.3 million, $49.6$0.2 million and $22.1$20.6 million for the years ended December 31, 2017, 2016,2020 and 2015,2019, respectively. Our tax rates of 55%, 59%, and 60%rate for the yearsyear ended December 31, 2017, 2016, and 2015 differ2020 differed from the 35% U.S. federal statutory tax rate of 21% due primarily to a significant loss recognized in the second quarter for the divestiture of the majority of our Latin American business activities. Refer to Item 8: Financial Statements and Supplementary Data, Note 18: Sale of Business for additional information on the transaction. 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 on U.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, the level of profit or losses in domestic and foreigninternational jurisdictions, new or revised tax legislation and accounting pronouncements, tax credits (including research and development and foreign tax), state income taxes, adjustmentsa benefit related to valuation allowances,excess stock-based compensation, and uncertain tax positions, among other items.positions.
For additional discussion related to income taxes, see Item 8: “FinancialFinancial Statements and Supplementary Data, Note 11: Income Taxes.”
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Operating Segment Results
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| In thousands | 2020 | % Change | 2019 | ||||||||||||||||||||||||||||||||
| Segment revenues | |||||||||||||||||||||||||||||||||||
| Device Solutions | $ | 693,995 | (19)% | $ | 858,881 | ||||||||||||||||||||||||||||||
| Networked Solutions | 1,249,402 | (12)% | 1,417,254 | ||||||||||||||||||||||||||||||||
| Outcomes | 229,953 | 2% | 226,335 | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 2,173,350 | (13)% | $ | 2,502,470 | ||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| In thousands | Gross Profit | Gross Margin | Gross Profit | Gross Margin | |||||||||||||||||||||||||||||||
| Segment gross profit and margin | |||||||||||||||||||||||||||||||||||
| Device Solutions | $ | 86,859 | 12.5% | $ | 152,562 | 17.8% | |||||||||||||||||||||||||||||
| Networked Solutions | 432,906 | 34.6% | 518,749 | 36.6% | |||||||||||||||||||||||||||||||
| Outcomes | 82,402 | 35.8% | 81,008 | 35.8% | |||||||||||||||||||||||||||||||
| Total gross profit and margin | $ | 602,167 | 27.7% | $ | 752,319 | 30.1% | |||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| In thousands | 2020 | % Change | 2019 | ||||||||||||||||||||||||||||||||
| Segment operating expenses | |||||||||||||||||||||||||||||||||||
| Device Solutions | $ | 46,090 | (16)% | $ | 54,809 | ||||||||||||||||||||||||||||||
| Networked Solutions | 124,807 | 3% | 121,424 | ||||||||||||||||||||||||||||||||
| Outcomes | 34,783 | (7)% | 37,205 | ||||||||||||||||||||||||||||||||
| Corporate unallocated | 406,882 | —% | 406,198 | ||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 612,562 | (1)% | $ | 619,636 | ||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| In thousands | Operating Income (Loss) | Operating Margin | Operating Income (Loss) | Operating Margin | |||||||||||||||||||||||||||||||
| Segment operating income (loss) and operating margin | |||||||||||||||||||||||||||||||||||
| Device Solutions | $ | 40,769 | 5.9% | $ | 97,753 | 11.4% | |||||||||||||||||||||||||||||
| Networked Solutions | 308,099 | 24.7% | 397,325 | 28.0% | |||||||||||||||||||||||||||||||
| Outcomes | 47,619 | 20.7% | 43,803 | 19.4% | |||||||||||||||||||||||||||||||
| Corporate unallocated | (406,882) | NM | (406,198) | NM | |||||||||||||||||||||||||||||||
| Total operating income (loss) and operating margin | $ | (10,395) | (0.5)% | $ | 132,683 | 5.3% | |||||||||||||||||||||||||||||
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| Year Ended December 31, | |||||||||||||||||
| 2017 | % Change | 2016 | % Change | 2015 | |||||||||||||
| Segment Revenues | (in thousands) | (in thousands) | (in thousands) | ||||||||||||||
| Electricity | $ | 1,022,939 | 9% | $ | 938,374 | 14% | $ | 820,306 | |||||||||
| Gas | 533,624 | (6)% | 569,476 | 5% | 543,805 | ||||||||||||
| Water | 461,634 | (9)% | 505,336 | (3)% | 519,422 | ||||||||||||
| Total revenues | $ | 2,018,197 | —% | $ | 2,013,186 | 7% | $ | 1,883,533 | |||||||||
| Year Ended December 31, | |||||||||||||||||
| 2017 | 2016 | 2015 | |||||||||||||||
Gross Profit | Gross Margin | Gross Profit | Gross Margin | Gross Profit | Gross Margin | ||||||||||||
| Segment Gross Profit and Margin | (in thousands) | (in thousands) | (in thousands) | ||||||||||||||
| Electricity | $ | 318,953 | 31.2% | $ | 282,677 | 30.1% | $ | 225,446 | 27.5% | ||||||||
| Gas | 191,303 | 35.8% | 205,063 | 36.0% | 185,559 | 34.1% | |||||||||||
| Water | 164,898 | 35.7% | 172,580 | 34.2% | 145,680 | 28.0% | |||||||||||
| Total gross profit and margin | $ | 675,154 | 33.5% | $ | 660,320 | 32.8% | $ | 556,685 | 29.6% | ||||||||
| Year Ended December 31, | |||||||||||||||||
| 2017 | % Change | 2016 | % Change | 2015 | |||||||||||||
| Segment Operating Expenses | (in thousands) | (in thousands) | (in thousands) | ||||||||||||||
| Electricity | $ | 225,387 | 5% | $ | 214,390 | 10% | $ | 194,342 | |||||||||
| Gas | 117,097 | (15)% | 138,250 | 17% | 118,088 | ||||||||||||
| Water | 120,404 | (11)% | 135,314 | 8% | 125,816 | ||||||||||||
| Corporate unallocated | 60,840 | (20)% | 76,155 | 16% | 65,593 | ||||||||||||
| Total operating expenses | $ | 523,728 | (7)% | $ | 564,109 | 12% | $ | 503,839 | |||||||||
| Year Ended December 31, | |||||||||||||||||
| 2017 | 2016 | 2015 | |||||||||||||||
Operating Income (Loss) | Operating Margin | Operating Income (Loss) | Operating Margin | Operating Income (Loss) | Operating Margin | ||||||||||||
| Segment Operating Income (Loss) and Operating Margin | (in thousands) | (in thousands) | (in thousands) | ||||||||||||||
| Electricity | $ | 93,566 | 9.1% | $ | 68,287 | 7.3% | $ | 31,104 | 3.8% | ||||||||
| Gas | 74,206 | 13.9% | 66,813 | 11.7% | 67,471 | 12.4% | |||||||||||
| Water | 44,494 | 9.6% | 37,266 | 7.4% | 19,864 | 3.8% | |||||||||||
| Corporate unallocated | (60,840 | ) | (76,155 | ) | (65,593 | ) | |||||||||||
| Total operating income | $ | 151,426 | 7.5% | $ | 96,211 | 4.8% | $ | 52,846 | 2.8% | ||||||||
Device Solutions:
The effects of changes in foreign currency exchange rates and the constant currency changes in certain ElectricityDevice Solutions segment financial results were as follows:
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change | Total Change | |||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||
| In thousands | 2020 | 2019 | |||||||||||||||||||||||||||
| Device Solutions Segment | |||||||||||||||||||||||||||||
| Revenues | $ | 693,995 | $ | 858,881 | $ | (3,880) | $ | (161,006) | $ | (164,886) | |||||||||||||||||||
| Gross profit | 86,859 | 152,562 | (2,040) | (63,663) | (65,703) | ||||||||||||||||||||||||
| Operating expenses | 46,090 | 54,809 | 169 | (8,888) | (8,719) | ||||||||||||||||||||||||
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change(1) | Total Change | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Electricity Segment | ||||||||||||||||||||
| Revenues | $ | 1,022,939 | $ | 938,374 | $ | 4,152 | $ | 80,413 | $ | 84,565 | ||||||||||
| Gross Profit | 318,953 | 282,677 | 70 | 36,206 | 36,276 | |||||||||||||||
| Operating Expenses | 225,387 | 214,390 | 1,144 | 9,853 | 10,997 | |||||||||||||||
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change(1) | Total Change | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Electricity Segment | ||||||||||||||||||||
| Revenues | $ | 938,374 | $ | 820,306 | $ | (17,643 | ) | $ | 135,711 | $ | 118,068 | |||||||||
| Gross Profit | 282,677 | 225,446 | (5,606 | ) | 62,837 | 57,231 | ||||||||||||||
| Operating Expenses | 214,390 | 194,342 | (3,368 | ) | 23,416 | 20,048 | ||||||||||||||
Revenues
Revenues - 2017 vs. 2016
Gross Margin - 2017 vs. 2016
Gross margin was 31.2%12.5% in 2017,2020 compared with 30.1%17.8% in 2016.2019. The 110530 basis point improvement over the prior year was primarily the result of higher volumes and favorable product mix.
Operating Expenses - 2016 vs. 2015
Operating expenses increased by $20.0decreased $8.7 million, or 10%16%. The increasedecrease was primarily a result of a $6.6 million decrease in research and development costs, and a $2.1 million decrease due to higher restructuring expenses. In addition, generallower sales commissions and administrative expenses for the year ended December 31, 2015 included a recovery of $8.2 million related to the settlement of litigation arising from the SmartSynch acquisition. These increases were partially offset by a decrease in amortization of intangible assets expense.travel costs.
The effects of changes in foreign currency exchange rates and the constant currency changes in certain GasNetworked Solutions segment financial results were as follows:
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change | Total Change | |||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||
| In thousands | 2020 | 2019 | |||||||||||||||||||||||||||
| Networked Solutions Segment | |||||||||||||||||||||||||||||
| Revenues | $ | 1,249,402 | $ | 1,417,254 | $ | 455 | $ | (168,307) | $ | (167,852) | |||||||||||||||||||
| Gross profit | 432,906 | 518,749 | 1,709 | (87,552) | (85,843) | ||||||||||||||||||||||||
| Operating expenses | 124,807 | 121,424 | 69 | 3,314 | 3,383 | ||||||||||||||||||||||||
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change(1) | Total Change | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Gas Segment | ||||||||||||||||||||
| Revenues | $ | 533,624 | $ | 569,476 | $ | 3,426 | $ | (39,278 | ) | $ | (35,852 | ) | ||||||||
| Gross Profit | 191,303 | 205,063 | 329 | (14,089 | ) | (13,760 | ) | |||||||||||||
| Operating Expenses | 117,097 | 138,250 | 1,113 | (22,266 | ) | (21,153 | ) | |||||||||||||
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change(1) | Total Change | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Gas Segment | ||||||||||||||||||||
| Revenues | $ | 569,476 | $ | 543,805 | $ | (6,990 | ) | $ | 32,661 | $ | 25,671 | |||||||||
| Gross Profit | 205,063 | 185,559 | (982 | ) | 20,486 | 19,504 | ||||||||||||||
| Operating Expenses | 138,250 | 118,088 | (1,336 | ) | 21,498 | 20,162 | ||||||||||||||
Revenues - 2017 vs. 2016
Revenues decreased by $35.9$167.9 million, or 6%12%, in 20172020 compared with 2016. This2019. The change was due to a decrease in product revenues in EMEA and North Americaprimarily due to the completiontiming of significant projects incustomer deployments and the prior year,impact of COVID-19 project delays, with lower product revenue of $173.7 million partially offset by an increase in module revenues in North America and product revenues in Latin America.higher maintenance service revenue of $5.8 million.
Gross Margin - 2017 vs. 2016
Gross margin was 35.8%34.6% in 2017,2020 compared with 36.0%36.6% in 2016.2019. The decrease of 20200 basis points was primarily related to higher warranty expensesCOVID-19 induced operational inefficiencies and lower volumes, mostly offset by improvedunfavorable product mix.
Operating Expenses - 2017 vs. 2016
Operating expenses increased by $20.2$3.4 million, or 17%2.8%, in 2016.2020. The increase was primarily due to higher restructuring expenses as a resultincreased investment in product development of the announcement of the 2016 Projects,$7.9 million, partially offset by a decrease of $4.5 million in generalproduct marketing and administrative expense.travel expenses.
Outcomes:
The effects of changes in foreign currency exchange rates and the constant currency changes in certain WaterOutcomes segment financial results were as follows:
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change | Total Change | |||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||
| In thousands | 2020 | 2019 | |||||||||||||||||||||||||||
| Outcomes Segment | |||||||||||||||||||||||||||||
| Revenues | $ | 229,953 | $ | 226,335 | $ | 40 | $ | 3,578 | $ | 3,618 | |||||||||||||||||||
| Gross profit | 82,402 | 81,008 | 109 | 1,285 | 1,394 | ||||||||||||||||||||||||
| Operating expenses | 34,783 | 37,205 | 18 | (2,440) | (2,422) | ||||||||||||||||||||||||
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change(1) | Total Change | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Water Segment | ||||||||||||||||||||
| Revenues | $ | 461,634 | $ | 505,336 | $ | 4,061 | $ | (47,763 | ) | $ | (43,702 | ) | ||||||||
| Gross Profit | 164,898 | 172,580 | 524 | (8,206 | ) | (7,682 | ) | |||||||||||||
| Operating Expenses | 120,404 | 135,314 | 2,223 | (17,133 | ) | (14,910 | ) | |||||||||||||
| Effect of Changes in Foreign Currency Exchange Rates | Constant Currency Change(1) | Total Change | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Water Segment | ||||||||||||||||||||
| Revenues | $ | 505,336 | $ | 519,422 | $ | (10,148 | ) | $ | (3,938 | ) | $ | (14,086 | ) | |||||||
| Gross Profit | 172,580 | 145,680 | (2,793 | ) | 29,693 | 26,900 | ||||||||||||||
| Operating Expenses | 135,314 | 125,816 | (1,003 | ) | 10,501 | 9,498 | ||||||||||||||
Revenues
Revenues - 2017 vs. 2016
Gross Margin
Gross margin was consistent at 35.8% in 2020 and 2019. Margin remained unchanged due to an unfavorable customer adjustment in 2019 in addition to higher restructuringmargin software license sales in 2020, which were offset by higher costs in 2020.
Operating Expenses
Operating expenses as a resultdecreased $2.4 million, or 6.5%, in 2020. The decrease was due to lower research and development of the announcement$1.8 million and lower marketing expense of the 2016 Projects.$0.6 million.
Corporate unallocated:
Operating expenses not directly associated with an operating segment are classified as “CorporateCorporate unallocated.” These expenses decreased $15.3increased $0.7 million or 20%, in 20172020 as compared with 2016. The decrease2019. This was primarily the result of a $59.8 million loss on sale of business due to the Latin America divestiture and an increase of $30.7 million in restructuring expense primarily due to lower professional service fees associated with audit, accounting, and legal services, partially offset by an increase in acquisition and integration related expenses.
Financial Condition
Cash Flow Information:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2020 | 2019 | 2018 | ||||||||||||||
| Cash provided by operating activities | $ | 109,514 | $ | 172,840 | $ | 109,755 | |||||||||||
| Cash used in investing activities | (41,036) | (48,180) | (862,658) | ||||||||||||||
| Cash provided by (used in) financing activities | (11,576) | (97,519) | 395,821 | ||||||||||||||
| Effect of exchange rates on cash, cash equivalents, and restricted cash | 127 | 435 | (7,925) | ||||||||||||||
| Increase (decrease) in cash, cash equivalents, and restricted cash | $ | 57,029 | $ | 27,576 | $ | (365,007) | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Operating activities | $ | 191,354 | $ | 115,842 | $ | 73,350 | |||||
| Investing activities | (148,179 | ) | (47,528 | ) | (48,951 | ) | |||||
| Financing activities | 301,959 | (63,023 | ) | 7,740 | |||||||
| Effect of exchange rates on cash, cash equivalents, and restricted cash | 8,636 | (2,744 | ) | (13,492 | ) | ||||||
| Increase in cash, cash equivalents, and restricted cash | $ | 353,770 | $ | 2,547 | $ | 18,647 | |||||
Cash, cash equivalents, and restricted cash at December 31, 2017 were $487.32020 was $206.9 million compared with $133.6$149.9 million at December 31, 2016.2019. The $353.8$57.0 million increase in cash, cash equivalents, and restricted cash in the 2020 period was primarily the result of our net financing and investingcash flows from operating activities, related to ourpartially offset by acquisitions of Comvergeproperty, plant, and SSNI, as well as an increase in cash flow provided by operating activities.equipment, and net repayment of debt.
Operating activities
34
Investing activities
Cash used in investing activities during the year ended December 31, 2016. Unfavorable adjustments include a $38.62020 was $7.1 million increasedlower than in 2019. This decrease in use of cash was primarily lower spending of $14.5 million for inventory primarily related to our strategic sourcing projectsproperty, plant, and related manufacturingequipment, as well as lower proceeds from sale of property, plant, and supplier transitions during the year ended December 31, 2017.equipment.
Net cash used in investingfinancing activities in 2017during 2020 was $100.7$11.6 million, higher than in 2016. This increased use of cash was primarily related to our acquisition of Comverge during the year ended December 31, 2017.
Effect of exchange rates on cash and cash equivalents
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:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2020 | 2019 | |||||||||||||||
| Cash provided by operating activities | $ | 109,514 | $ | 172,840 | |||||||||||||
| Acquisitions of property, plant, and equipment | (46,208) | (60,749) | |||||||||||||||
| Free cash flow | $ | 63,306 | $ | 112,091 | |||||||||||||
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
| Net cash provided by operating activities | $ | 191,354 | $ | 115,842 | $ | 73,350 | ||||||
| Acquisitions of property, plant, and equipment | (49,495 | ) | (43,543 | ) | (43,918 | ) | ||||||
| Free cash flow | $ | 141,859 | $ | 72,299 | $ | 29,432 | ||||||
Free cash flow fluctuateddecreased primarily as a result of changes in cash providedlower earnings, partially offset by operating activities.lower spending for property, plant, and equipment. See the cash flow discussion of operating activities above.
| Total | Less than 1 year | 1-3 years | 3-5 years | Beyond 5 years | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
Credit Facilities(1) | ||||||||||||||||||||
| USD denominated term loan | $ | 207,959 | $ | 25,412 | $ | 182,547 | $ | — | $ | — | ||||||||||
| Multicurrency revolving line of credit | 132,388 | 2,664 | 129,724 | — | — | |||||||||||||||
| Senior notes | 420,958 | 8,458 | 30,000 | 30,000 | 352,500 | |||||||||||||||
Operating lease obligations(2) | 48,602 | 15,353 | 16,830 | 6,620 | 9,799 | |||||||||||||||
Purchase and service commitments(3) | 156,549 | 155,642 | 815 | 92 | — | |||||||||||||||
Other long-term liabilities reflected on the balance sheet under generally accepted accounting principles(4) | 84,597 | — | 41,858 | 12,755 | 29,984 | |||||||||||||||
| Total | $ | 1,051,053 | $ | 207,529 | $ | 401,774 | $ | 49,467 | $ | 392,283 | ||||||||||
Liquidity and Capital Resources:
Our principal sources of liquidity are cash flows from operations, borrowings, and salesthe 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, was $342.0 million at December 31, 2017.continues to be in a net favorable position.
Borrowings
On June 23, 2015,October 18, 2019, we amended our credit facility that was initially entered into an amended and restatedon January 5, 2018 (together with the amendment, the 2018 credit agreement providingfacility). The 2018 credit facility provides for committed credit facilities in the amount of $725 million$1.2 billion U.S. dollars (the 2015 credit facility).dollars. The 20152018 credit facility consists of a $225$650 million U.S. dollarthe term loan and a multicurrency revolving line of credit (the revolver)the revolver with a principal amount of up to $500 million. The revolver also contains a $300 million standby letter of credit sub-facility and a $50 million swingline sub-facility. The October 18, 2019, amendment extended the maturity date to October 18, 2024 and re-amortized the term loan based on the new balance as of the amendment date.
We drew $400 million in U.S. dollars under the revolving line of credit within the 2018 credit facility in March 2020. In light of the uncertain environment, we deemed it prudent to increase our cash position and preserve financial flexibility. We repaid the revolving line of credit during the fourth quarter of 2020. The Total Net Leverage Ratio, as defined in the amended 2018 credit facility agreement, was unchanged by this drawing.
On October 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
35
from 1.00% to 2.00%. Going forward, we do not expect any significant increase in interest expense as the result of this amendment.
At December 31, 2017, $125.4 million2020, no amount was outstanding under the 2018 credit facility revolver, and $342.7 million was available for additional borrowings or standby letters of credit. At December 31, 2017, $31.9$65 million was utilized by outstanding standby letters of credit, resulting in $218.1$435.1 million available for additional borrowings or standby letters of credit.
Prior to maturity, we may redeem some or all of the Senior Notes, together with accrued and unpaid interest, if any, plus a "make-whole" premium. On or after January 15, 2021, we may redeem some or all of the Senior Notes at any time at declining redemption prices equal to 102.50% beginning on January 15, 2021, 101.25% beginning on January 15, 2022 and 100.00% beginning on January 15, 2023 and thereafter to the applicable redemption date. In the next 12 months, principal and interest of $10 million is due on the Senior Note. Principal and interest of $490 million is due beyond the next 12 months.
For further description of our borrowings, refer to Item 8: “FinancialFinancial Statements and Supplementary Data, Note 6: Debt, and Note 19: Subsequent Events” included in this Annual Report on Form 10-K.Debt.
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 8: “FinancialFinancial Statements and Supplementary Data, Note 12: Commitments and Contingencies” included in this Annual Report on Form 10-K.Contingencies.
Restructuring
On February 22, 2018,September 17, 2020, our Board of Directors approved the 2018 Projects.a restructuring plan (the 2020 Projects). The 20182020 Projects will include activities that continue our efforts to optimize ourits global supply chain and manufacturing operations, product development, and sales and marketing organizations. We expectorganizations, and other overhead. These projects are scheduled to be substantially complete the plan by the end of 2020.2022. We estimate pre-tax restructuring charges of $100$55 million to $110 million with approximately 20% related to closing or consolidating facilities and non-manufacturing operations and approximately 80% associated with severance and other one-time termination benefits.$65 million. Of the total estimated charge, approximately 95%$35 million to $45 million will result in cash expenditures. We expectexpenditures, and the remainder relates to recordnon-cash charges.
For the majorityyear ended December 31, 2020, we paid out a net $17.1 million related to all our restructuring projects. As of the charges in the first quarterDecember 31, 2020, $72.6 million was accrued for these restructuring projects, of 2018. The 2018 Projects arewhich $31.7 million is expected to result in approximately $45 million to $50 million of annualized savings when substantially complete.be paid within the next 12 months.
For further details regarding our restructuring activities, refer to Item 8: “FinancialFinancial Statements and Supplementary Data, Note 13: Restructuring.”
Other contractual obligations and commitments
Operating lease obligations are disclosed in Item 8: Financial Statements and Supplementary Data, Note 19: Leases and do not include common area maintenance charges, real estate taxes, and insurance charges for which we are obligated. Amounts due under operating lease liabilities for the next twelve months are $18.3 million and beyond the next twelve months are $75.6 million.
36
We enter into standard purchase orders in the ordinary course of business that typically obligate us to purchase materials and other items. Purchase orders and other purchase obligations can include open-ended agreements that provide for estimated quantities over an extended shipment period, typically up to one year at an established unit cost. Our long-term executory purchase agreements, which contain termination clauses, have been classified as less than one year, as the commitments are the estimated amounts, we would be required to pay at December 31, 2021 if the commitments were canceled. Purchase order and other purchase obligations are $236.7 million for the next twelve months and $2.5 million for periods longer than twelve months, which includes capital expenditures of $0.8 million for the next twelve months and no obligations related to capital expenditures for periods beyond twelve months.
Other long-term liabilities consist of warranty obligations, estimated pension benefit payments, and other obligations. Estimated pension benefit payments include amounts to be paid from our assets for unfunded plans and reflect expected future service. The following table summarizes our known obligations to make future payments pursuant to certain contracts as of December 31, 2020.
| In thousands | Next 12 months | Beyond the next 12 months | ||||||||||||
| Warranty obligations | $ | 28,329 | $ | 13,061 | ||||||||||
| Estimated pension benefit payments | 3,995 | 119,457 | ||||||||||||
The period of cash settlement for long-term unrecognized tax benefits, which include accrued interest and penalties, cannot be reasonably estimated with the respective taxing authorities. For further information on defined benefit pension plans, income taxes, warranty obligations, and unearned revenue for extended warranties, see Item 8: Financial Statements and Supplementary Data, Note 8: Defined Benefit Pension Plans, Note 11: Income Taxes, Note 12: Commitments and Contingencies, and Note 17: Revenues, respectively.
Income Tax
Our tax provision as a percentage of income before tax typically differs from the U.S. federal statutory rate of 35%21%. Changes in our actual tax rate are subject to several factors, including fluctuations in operating results, new or revised tax legislation and accounting pronouncements, changes in the level of business in domestic and foreign jurisdictions, tax credits (including research and development and foreign tax),tax credits, state income taxes, adjustments to valuation allowances, settlement of tax audits, and uncertain tax positions, among other items. Changes in tax laws, valuation allowances, and unanticipated tax liabilities could significantly impact our tax rate.
Our cash income tax payments were as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2020 | 2019 | |||||||||||||||
| U.S. federal taxes paid (refunded) | $ | (6,816) | $ | 184 | |||||||||||||
| State income taxes paid | 914 | 1,664 | |||||||||||||||
| Foreign and local income taxes paid | 8,590 | 10,193 | |||||||||||||||
| Total income taxes paid | $ | 2,688 | $ | 12,041 | |||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| U.S. federal taxes paid | $ | 17,500 | $ | 9,000 | $ | 15,700 | |||||
| State income taxes paid | 4,636 | 4,526 | 1,543 | ||||||||
| Foreign and local income taxes paid | 6,833 | 10,761 | 11,946 | ||||||||
| Total income taxes paid | $ | 28,969 | $ | 24,287 | $ | 29,189 | |||||
Based on current projections, we expect to pay, net of refunds, approximately $13$5 million in U.S. federal taxes, $8 million inand state taxes and $14$9 million in foreign and local income taxes in 2018. These estimates exclude the impact of the acquisition of SSNI.2021.
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Other Liquidity Considerations
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 Consolidated Balance Sheets represents the proportional share of the equity of the joint venture entities, which is attributable to the minority shareholders. At December 31, 2017, $12.62020, $21.8 million of our consolidated cash balance iswas 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
Contingencies
Refer to Item 8: “FinancialFinancial Statements and Supplementary Data, Note 12:Commitments and Contingencies” included in this Annual Report on Form 10-K.Contingencies.
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, revenue,revenues, and expenses. These estimates and assumptions are affected by management’smanagement's application of accounting policies. CriticalOur critical accounting policies for us include revenue recognition, warranty, restructuring, income taxes, business combinations, goodwill and intangible assets, defined benefit pension plans, contingencies, and stock-based compensation. Refer to Item 8: “FinancialFinancial Statements and Supplementary Data, Note 1: Summary of Significant Accounting Policies” included in this Annual Report on Form 10-KPolicies for further disclosures regarding accounting policies and new accounting pronouncements.
Revenue Recognition
Many of our revenue arrangements involve multiple deliverables, whichperformance obligations, consisting of hardware, software, and professional services such as implementation, project management, installation, and consulting services. These arrangements require us to determine the fair valuestandalone selling price of the promised goods or services underlying each deliverableperformance obligation and then allocate the total arrangement consideration among the separate deliverablesperformance obligations based on thetheir relative fair value percentages.standalone selling price. Revenues for each deliverableperformance obligation are then recognized based onupon transfer of control to the type of deliverable, suchcustomer at a point in time as 1) when the products are shipped 2)or received by a customer, or over time as services are delivered, 3) percentage-of-completion for implementation services, 4) upon receipt of customer acceptance, or 5) transfer of title and risk of loss.delivered. The majority of our revenue is recognized at a point in time when products are shipped to or received by a customer. Certain contracts that contain multiple performance obligations may contain customer-specific terms and conditions that govern service level commitments, transfer of control, and variable consideration that may involve complex accounting considerations.
Professional services revenues are recognized over time. We measure progress towards satisfying these performance obligations using input methods, most commonly based on the costs incurred in relation to the total expected costs to provide the service. The estimate of expected costs to provide services requires judgment. Cost estimates take into consideration past history and the specific scope requested by the customer or when servicesand are provided.
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number of endpoints deployed. We estimate variable consideration using the expected value method, taking into consideration contract terms, historical customer arrangementsbehavior, and historical sales. Some of our contracts with customers contain clauses for liquidated damages related to delays inthe timing of delivery or milestone accomplishments, which could become material in an event of failure to meet the contractual deadlines. At the inception of the arrangement and on an ongoing basis, we evaluate if the probability of having to pay liquidated damages represent contingent revenue and the magnitude of such damages. In the case of liquidated damages, we also take into consideration progress towards meeting contractual milestones, including whether milestones have not been achieved, specified rates, if so, we reduceapplicable, stated in the amountcontract, and history of consideration allocatedpaying liquidated damages to the delivered products and services and recognize it as a reduction in revenue in the period of default. If the arrangement is subject to contract accounting, liquidated damages resulting from failurecustomer or expected failure to meet milestones are estimated and are accounted for as a reduction in revenue in the period in which the liquidated damages are deemed probable of occurrence and are reasonably estimable.similar customers.
Certain of our revenue arrangements include an extended or noncustomarycustomer-specific warranty provision that covers all or a portion of a customer's replacement or repair costs beyond the standard or customary warranty period. Whether or not the extended warranty is separately priced in the arrangement, a portion of the arrangement's total consideration is allocated to this extended warranty deliverable. This revenue is deferred and recognized over the extended warranty coverage period. Extended or noncustomarycustomer-specific warranties do not represent a significant portion of our revenue.
We allocate consideration to each deliverableperformance obligation in an arrangement based on its relative standalone selling price. WeFor goods or services where we have observable standalone sales, the observable standalone sales are used to determine the standalone selling price. For the majority of our goods and services, we do not have observable standalone sales. As a result, we estimate the standalone selling price using vendor specific objective evidence (VSOE), if it exists, otherwise we use third-party evidence (TPE). We define VSOE aseither the adjusted market assessment approach or the expected cost plus a medianmargin approach. Approaches used to estimate the standalone selling price of recent standalone transactions that are priced within a narrow range. TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately. If neither VSOE nor TPEgiven good or service maximize the use of selling price exists forobservable inputs and consider several factors, including our pricing practices, costs to provide a unitgood or service, the type of accounting, we use estimated selling price (ESP). The objectivegood or service, and availability of ESP is toother transactional data, among others.
We determine the price,estimated standalone selling prices of goods or fair value, at which we would transact if the product or service were regularly sold by us on a standalone basis. Our determination of ESP involves a weighting of several factors based on the specific facts and circumstances of the arrangement. The factors considered include historical contractual sales, market conditions and entity specific factors, the cost to produce the deliverable, the anticipated margin on that deliverable, our ongoing pricing strategy and policies, and the characteristics of the varying markets in which the deliverable is sold.
Our contracts may be modified to add, remove, or change existing performance obligations or change contract price. The accounting for modifications to our contracts involves assessing whether the products or services added to an existing contract are distinct and whether the pricing is at the standalone selling prices.price. Products or services added that are not distinct are accounted for as if it were part of the existing contract. The effect of the modification on the transaction price and on the measure of progress is recognized as an adjustment to revenue as of the date of the modification (i.e., on a cumulative catch-up basis). Those products or services that are distinct are accounted for prospectively, either as a separate contract if the additional services are priced at the standalone selling price, or as a termination of the existing contract and creation of a new contract if not priced at the standalone selling price.
Warranty
We offer standard warranties on our hardware products and large application software products. We accrue the estimated cost of new product warranties based on historical and projected product performance trends and costs during the warranty period. Testing of new products in the development stage helps identify and correct potential warranty issues prior to manufacturing. Quality control efforts during manufacturing reduce our exposure to warranty claims. When testing or quality control efforts fail to detect a fault in one of our products, we may experience an increase in warranty claims. We track warranty claims to identify potential warranty trends. If an unusual trend is noted,identified, an additional warranty accrual would be recognized if a failure event is probable and the cost can be reasonably estimated. When new products are introduced, our process relies on historical averages of similar products until sufficient data are available. As actual experience on new products becomes available, it is used to modify the historical averages to ensure the expected warranty costs are within a range of likely outcomes. Management regularly evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. The warranty allowances may fluctuate due to changes in estimates for material, labor, and other costs we may incur to repair or replace projected product failures, and we may incur additional warranty and related expenses in the future with respect to new or established products, which could adversely affect our financial position and results of operations.
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Restructuring
We recognize a liability for costs associated with an exit or disposal activity under a restructuring project at its fair value in the period in which the liability is incurred. Employee termination benefits considered post-employment benefits are accrued when the obligation is probable and estimable, such as benefits stipulated by human resource policies and practices or statutory requirements. One-time termination benefits are recognized at the date the employee is notified. If the employee must provide future service greater than 60 days, such benefits are recognized ratably over the future service period. For contract termination costs, we recognize a liability upon the later of when we terminate a contract in accordance with the contract terms or when we cease using the rights conveyed by the contract.
Asset impairments associated with a restructuring project are determined at the asset group level. An impairment may be recognized for assets that are to be abandoned, are to be sold for less than net book value, or are held for sale in which the estimated proceeds are less than the net book value less costs to sell. We may also recognize impairment on an asset group, which is held and used, when the carrying value is not recoverable and exceeds the asset group's fair value. If an asset group is considered a business, a portion of our goodwill balance is allocated to it based on relative fair value. If the sale of an asset group under a restructuring project results in proceeds that exceed the net book value of the asset group, the resulting gain is recognized within restructuring expense in the Consolidated Statements of Operations.
In determining restructuring charges, we analyze our future operating requirements, including the required headcount by business functions and facility space requirements. Our restructuring costs and any resulting accruals involve significant estimates using the best information available at the time the estimates are made. Our estimates involve a number of risks and uncertainties, some of which are beyond our control, including real estate market conditions and local labor and employment laws, rules, and regulations. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and asset impairment charges could be materially different, either higher or lower, than those we have recognized.
Income Taxes
We estimate income tax expense in each of the taxing jurisdictions in which we operate. Changes in our actual tax rate are subject to several factors, including fluctuations in operating results, new or revised tax legislation and accounting pronouncements, changes in the level of business in domestic and foreign jurisdictions, tax credits (including research and development and foreign tax),tax credits, state income taxes, adjustments to valuation allowances, settlement of tax audits, and uncertain tax positions, among other items. Changes in tax laws, valuation allowances, and unanticipated tax liabilities could significantly impact our tax rate.
We recognize valuation allowances to reduce deferred tax assets to the extent we believe it is more likely than not that a portion of such assets will not be realized. In making such determinations, we consider all available favorable and unfavorable evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and our ability to carry back losses to prior years. We are required to make assumptions and judgments about potential outcomes that lie outside our control. Our most sensitive and critical factors are the projection, source, and character of future taxable income. Although realization is not assured, management believes it is more likely than not that deferred tax assets, net of valuation allowance, will be realized. The amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced or current tax planning strategies are not implemented.
We are subject to audits in multiple taxing jurisdictions in which we operate. These audits may involve complex issues, which may require an extended period of time to resolve. We believe we have recognized adequate income tax provisions and reserves for uncertain tax positions.
In evaluating uncertain tax positions, we consider the relative risks and merits of positions taken in tax returns filed and to be filed, considering statutory, judicial, and regulatory guidance applicable to those positions. We make assumptions and judgments about potential outcomes that lie outside management’smanagement's control. To the extent the tax authorities disagree with our conclusions and depending on the final resolution of those disagreements, our actual tax rate may be materially affected in the period of final settlement with the tax authorities.
Goodwill and Intangible Assets
Goodwill and intangible assets may result from our business acquisitions. Intangible assets may also result from the purchase of assets and intellectual property where we do not acquire a business. We use estimates, including estimates of useful lives of intangible assets, the amount and timing of related future cash flows, and fair values of the related operations, in determining the value assigned to goodwill and intangible assets. Our finite-lived intangible assets are amortized over their estimated useful lives based on estimated discounted cash flows. In-process research and development (IPR&D) is considered an indefinite-lived intangible asset and is not subject to amortization until the associated projects are completed or terminated. Finite-lived
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intangible assets are tested for impairment at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable. Indefinite-lived intangible assets are tested for impairment annually, when events or changes in circumstances indicate the asset may be impaired, or at the time when their useful lives are determined to be no longer indefinite.
Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics, including the forecast discounted cash flows associated with each reporting unit. Each reporting unit corresponds with its respective operating segment.
We test goodwill for impairment each year as of October 1, or more frequently should a significant impairment indicator occur. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, anwe first evaluate the long-lived assets within the reporting unit for impairment and then recognize a goodwill impairment loss is recognized in an amount equal to theany excess.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We forecast discounted future cash flows at the reporting unit level using risk-adjusted discount rates and estimated future revenues and operating costs, which take into consideration factors such as existing backlog, expected future orders, supplier contracts, and expectations of competitive, business and economic environments. We also identify similar publicly traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. These combined fair values are then reconciled to the aggregate market value of our common stock on the date of valuation, while considering a reasonable control premium.
Defined Benefit Pension Plans
We sponsor both funded and unfunded defined benefit pension plans for our international employees, primarily in Germany, France, Italy, Indonesia, Brazil,India, and Spain.Italy. We recognize a liability for the projected benefit obligation in excess of plan assets or an asset for plan assets in excess of the projected benefit obligation. We also recognize the funded status of our defined benefit pension plans on our Consolidated Balance Sheets and recognize as a component of other comprehensive income (loss) (OCI),
net of tax, the actuarial gains or losses and prior service costs or credits, if any, thatwhich arise during the period but are not recognized as components of net periodic benefit cost.
Several economic assumptions and actuarial data are used in calculating the expense and obligations related to these plans. The assumptions are updated annually at December 31 and include the discount rate, the expected remaining service life, the expected rate of return on plan assets, and the rate of future compensation increase.increases. The discount rate is a significant assumption used to value our pension benefit obligation. We determine a discount rate for our plans based on the estimated duration of each plan’splan's liabilities. For our euro denominated defined benefit pension plans, which represent 93%92% of our projected benefit obligation, we use two discount rates with consideration of the duration of each of the plans, using a hypothetical yield curve developed from euro-denominated AA-rated corporate bond issues. These bond issuesbonds are partially weighted for market value, with minimum amounts outstanding of €500 million for bonds with less than 10 yearsassigned different weights to maturityadjust their relative influence on the yield curve, and €50 million for bonds with 10 or more years to maturity, and excluding the highest and lowest yielding 10% of bonds are excluded within each maturity group. The discount rates used, depending on the duration of the plans, were 1.00%between 0.20% and 1.75%, respectively.0.75%. The weighted average discount rate used to measure the projected benefit obligation for all of the plans at December 31, 20172020 was 2.21%1.10%. A change of 25 basis points in the discount rate would change our projected benefit obligation by approximately $5$6.5 million. The financial and actuarial assumptions used at December 31, 20172020 may differ materially from actual results due to changing market and economic conditions and other factors. These differences could result in a significant change in the amount of pension expense recognized in future periods.
Contingencies
A loss contingency is recognized if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of the ultimate loss. Loss contingencies that we determine to be
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reasonably possible, but not probable, are disclosed but not recognized. Changes in these factors and related estimates could materially affect our financial position and results of operations. Legal costs to defend against contingent liabilities are recognized as incurred.
Stock-Based Compensation
We grant various stock-based compensation awards to our officers, employees, and Board of Directors with service, performance, and market vesting conditions, including stock options, restricted stock units, phantom stock units, and unrestricted stock units (awards). We measure and recognize compensation expense for all awards based on estimated fair values. For awards with only a service condition, we expense stock-based compensation using the straight-line method over the requisite service period for the entire award. For awards with service and performance conditions, if vesting is probable, we expense the stock-based compensation on a straight-line basis over the requisite service period for each separately vesting portion of the award. For awards with a market condition, we expense the fair value over the requisite service period.
We measure and recognize compensation expense for all stock-based compensation based on estimated fair values. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model, which includes assumptions for the dividend yield, expected volatility, risk-free interest rate, expected term and expected term.dividend yield. For unrestricted stock awards with no market conditions, the fair value is the market close price of our common stock on the date of grant. For restricted stock units with market conditions, the fair value is estimated at the date of award using a Monte Carlo simulation model, which includes assumptions for dividend yield and expected volatility for our common stock and the common stock for companies within the Russell 3000 index, as well as the risk-free interest rate and expected term of the awards. For phantom stock units, fair value is the market close price of our common stock at the end of each reporting period.
In valuing our stock options and restricted stock units with a market condition, significant judgment is required in determining the expected volatility of our common stock and the expected life that individuals will hold their stock options prior to exercising. Expected volatility for stock options is based on the historical and implied volatility of our own common stock, while the volatility for our restricted stock units with a market condition is based on the historical volatility of our own stock and the stock for companies comprising the market index within the market condition. The expected life of stock option grants is derived from the historical actual term of option grants and an estimate of future exercises during the remaining contractual period of the option. While volatility and estimated life are assumptions that do not bear the risk of change subsequent to the grant date, these assumptions may be difficult to measure as they represent future expectations based on historical experience. Further, our expected volatility and expected life may change in the future, which could substantially change the grant-date fair value of future awards and ultimately the expense we recognize. Actual results and future estimates may differ substantially from our current estimates. We have not paid dividends in the past and do not plan to pay dividends in the foreseeable future.
Non-GAAP 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 purchase accounting adjustments,acquisition and integration related expenses, loss on sale of business, or restructuring charges or goodwill impairment 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, and goodwill impairment.integration. We define non-GAAP operating income as operating income
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excluding the expenses related to the amortization of intangible assets, restructuring, loss on sale of business, corporate transition cost, and acquisition and integration, and goodwill impairment.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 attributable to Itron, Inc. excluding the expenses associated with amortization of intangible assets, restructuring, acquisition and integration, goodwill impairment, amortization of debt placement fees, the impactrestructuring, loss on sale of the Tax Cutsbusiness, corporate transition cost, acquisition and Jobs Act (Tax Act),integration, and the tax effect of excluding these expenses. We define non-GAAP diluted EPS as non-GAAP net income divided by the weighted average shares, on a diluted basis, outstanding during each period. 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.
Adjusted EBITDA – We define adjusted EBITDA as net income (a) minus interest income, (b) plus interest expense, depreciation and amortization of intangible assets, restructuring, loss on sale of business, corporate transition cost, acquisition and integration related expense, goodwill impairment 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.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 local currenciesthe entity's functional currency into U.S. dollars for financial reporting purposes. We also use the term “constant currency,”"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’speriod's results restated using current period foreign currency exchange rates.
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Reconciliations of Non-GAAP Financial Measures to Non-GAAPthe 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 and operating income by segment with the most directly comparable GAAP financial measures.
| TOTAL COMPANY RECONCILIATIONS | Year Ended December 31, | ||||||||||||||||||||||
| In thousands, except per share data | 2020 | 2019 | |||||||||||||||||||||
| NON-GAAP OPERATING EXPENSES | |||||||||||||||||||||||
| GAAP operating expenses | $ | 612,562 | $ | 619,636 | |||||||||||||||||||
| Amortization of intangible assets | (44,711) | (64,286) | |||||||||||||||||||||
| Restructuring | (37,013) | (6,278) | |||||||||||||||||||||
| Loss on sale of business | (59,817) | — | |||||||||||||||||||||
| Corporate transition cost | 33 | (2,520) | |||||||||||||||||||||
| Acquisition and integration related expense | (1,026) | (26,598) | |||||||||||||||||||||
| Non-GAAP operating expenses | $ | 470,028 | $ | 519,954 | |||||||||||||||||||
| NON-GAAP OPERATING INCOME | |||||||||||||||||||||||
| GAAP operating income (loss) | $ | (10,395) | $ | 132,683 | |||||||||||||||||||
| Amortization of intangible assets | 44,711 | 64,286 | |||||||||||||||||||||
| Restructuring | 37,013 | 6,278 | |||||||||||||||||||||
| Loss on sale of business | 59,817 | — | |||||||||||||||||||||
| Corporate transition cost | (33) | 2,520 | |||||||||||||||||||||
| Acquisition and integration related expense | 1,026 | 26,598 | |||||||||||||||||||||
| Non-GAAP operating income | $ | 132,139 | $ | 232,365 | |||||||||||||||||||
| NON-GAAP NET INCOME & DILUTED EPS | |||||||||||||||||||||||
| GAAP net income (loss) attributable to Itron, Inc. | $ | (57,955) | $ | 49,006 | |||||||||||||||||||
| Amortization of intangible assets | 44,711 | 64,286 | |||||||||||||||||||||
| Amortization of debt placement fees | 3,954 | 5,455 | |||||||||||||||||||||
| Restructuring | 37,013 | 6,278 | |||||||||||||||||||||
| Loss on sale of business | 59,817 | — | |||||||||||||||||||||
| Corporate transition cost | (33) | 2,520 | |||||||||||||||||||||
| Acquisition and integration related expense | 1,026 | 26,598 | |||||||||||||||||||||
Income tax effect of non-GAAP adjustments (1) | (13,280) | (21,348) | |||||||||||||||||||||
| Non-GAAP net income attributable to Itron, Inc. | $ | 75,253 | $ | 132,795 | |||||||||||||||||||
| Non-GAAP diluted EPS | $ | 1.85 | $ | 3.32 | |||||||||||||||||||
| Weighted average common shares outstanding - Diluted | 40,571 | 39,980 | |||||||||||||||||||||
| ADJUSTED EBITDA | |||||||||||||||||||||||
| GAAP net income (loss) attributable to Itron, Inc. | $ | (57,955) | $ | 49,006 | |||||||||||||||||||
| Interest income | (2,998) | (1,849) | |||||||||||||||||||||
| Interest expense | 44,001 | 52,453 | |||||||||||||||||||||
| Income tax (benefit) provision | 238 | 20,617 | |||||||||||||||||||||
| Depreciation and amortization | 97,290 | 114,400 | |||||||||||||||||||||
| Restructuring | 37,013 | 6,278 | |||||||||||||||||||||
| Loss on sale of business | 59,817 | — | |||||||||||||||||||||
| Corporate transition cost | (33) | 2,520 | |||||||||||||||||||||
| Acquisition and integration related expense | 1,026 | 26,598 | |||||||||||||||||||||
| Adjusted EBITDA | $ | 178,399 | $ | 270,023 | |||||||||||||||||||
| FREE CASH FLOW | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 109,514 | $ | 172,840 | |||||||||||||||||||
| Acquisitions of property, plant, and equipment | (46,208) | (60,749) | |||||||||||||||||||||
| Free Cash Flow | $ | 63,306 | $ | 112,091 | |||||||||||||||||||
(1)The income tax effect of non-GAAP adjustments is calculated using the statutory tax rates for the relevant jurisdictions if no valuation allowance exists. If a valuation allowance exists, there is no tax impact to the non-GAAP adjustment.
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| (Unaudited; in thousands, except per share data) | ||||||||||||||
| TOTAL COMPANY RECONCILIATIONS | Year Ended December 31, | |||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||
| NON-GAAP OPERATING EXPENSES | ||||||||||||||
| GAAP operating expenses | $ | 523,728 | $ | 564,109 | $ | 503,839 | ||||||||
| Amortization of intangible assets | (20,785 | ) | (25,112 | ) | (31,673 | ) | ||||||||
| Restructuring | (6,418 | ) | (49,090 | ) | 7,263 | |||||||||
| Acquisition and integration related recovery (expense) | (17,139 | ) | 197 | 5,538 | ||||||||||
| Non-GAAP operating expenses | $ | 479,386 | $ | 490,104 | $ | 484,967 | ||||||||
| NON-GAAP OPERATING INCOME | ||||||||||||||
| GAAP operating income | $ | 151,426 | $ | 96,211 | $ | 52,846 | ||||||||
| Amortization of intangible assets | 20,785 | 25,112 | 31,673 | |||||||||||
| Restructuring | 6,418 | 49,090 | (7,263 | ) | ||||||||||
| Acquisition and integration related (recovery) expense | 17,139 | (197 | ) | (5,538 | ) | |||||||||
| Non-GAAP operating income | $ | 195,768 | $ | 170,216 | $ | 71,718 | ||||||||
| NON-GAAP NET INCOME & DILUTED EPS | ||||||||||||||
| GAAP net income attributable to Itron, Inc. | $ | 57,298 | $ | 31,770 | $ | 12,678 | ||||||||
| Amortization of intangible assets | 20,785 | 25,112 | 31,673 | |||||||||||
| Amortization of debt placement fees | 966 | 987 | 2,021 | |||||||||||
| Restructuring | 6,418 | 49,090 | (7,263 | ) | ||||||||||
| Acquisition and integration related (recovery) expense | 17,139 | (197 | ) | (5,538 | ) | |||||||||
| Tax Cuts and Jobs Act Adjustment | 30,424 | — | — | |||||||||||
Income tax effect of non-GAAP adjustments(1) | (12,544 | ) | (8,478 | ) | (5,590 | ) | ||||||||
Non-GAAP net income attributable to Itron, Inc. | $ | 120,486 | $ | 98,284 | $ | 27,981 | ||||||||
| Non-GAAP diluted EPS | $ | 3.06 | $ | 2.54 | $ | 0.73 | ||||||||
| Weighted average common shares outstanding - Diluted | 39,387 | 38,643 | 38,506 | |||||||||||
| ADJUSTED EBITDA | ||||||||||||||
| GAAP net income attributable to Itron, Inc. | $ | 57,298 | $ | 31,770 | $ | 12,678 | ||||||||
| Interest income | (2,126 | ) | (865 | ) | (761 | ) | ||||||||
| Interest expense | 11,581 | 10,948 | 12,289 | |||||||||||
| Income tax provision | 74,326 | 49,574 | 22,099 | |||||||||||
| Depreciation and amortization | 63,215 | 68,318 | 75,993 | |||||||||||
| Restructuring | 6,418 | 49,090 | (7,263 | ) | ||||||||||
| Acquisition and integration related (recovery) expense | 17,139 | (197 | ) | (5,538 | ) | |||||||||
| Adjusted EBITDA | $ | 227,851 | $ | 208,638 | $ | 109,497 | ||||||||
| FREE CASH FLOW | ||||||||||||||
| Net cash provided by operating activities | $ | 191,354 | $ | 115,842 | $ | 73,350 | ||||||||
| Acquisitions of property, plant, and equipment | (49,495 | ) | (43,543 | ) | (43,918 | ) | ||||||||
| Free Cash Flow | $ | 141,859 | $ | 72,299 | $ | 29,432 | ||||||||
| (Unaudited; in thousands) | ||||||||||||||
| SEGMENT RECONCILIATIONS | Year Ended December 31, | |||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||
| NON-GAAP OPERATING INCOME - ELECTRICITY | ||||||||||||||
| Electricity - GAAP operating income | $ | 93,566 | $ | 68,287 | $ | 31,104 | ||||||||
| Amortization of intangible assets | 11,618 | 13,273 | 17,663 | |||||||||||
| Restructuring | 198 | 7,694 | (7,253 | ) | ||||||||||
| Acquisition and integration related (recovery) expense | 10,258 | (197 | ) | (5,655 | ) | |||||||||
| Electricity - Non-GAAP operating income | $ | 115,640 | $ | 89,057 | $ | 35,859 | ||||||||
| NON-GAAP OPERATING INCOME - GAS | ||||||||||||||
| Gas - GAAP operating income | $ | 74,206 | $ | 66,813 | $ | 67,471 | ||||||||
| Amortization of intangible assets | 5,349 | 6,456 | 7,787 | |||||||||||
| Restructuring | 5,213 | 25,744 | (287 | ) | ||||||||||
| Gas - Non-GAAP operating income | $ | 84,768 | $ | 99,013 | $ | 74,971 | ||||||||
| NON-GAAP OPERATING INCOME - WATER | ||||||||||||||
| Water - GAAP operating income | $ | 44,494 | $ | 37,266 | $ | 19,864 | ||||||||
| Amortization of intangible assets | 3,818 | 5,383 | 6,223 | |||||||||||
| Restructuring | 700 | 13,116 | 778 | |||||||||||
| Acquisition and integration related expense | — | — | 104 | |||||||||||
| Water - Non-GAAP operating income | $ | 49,012 | $ | 55,765 | $ | 26,969 | ||||||||
| NON-GAAP OPERATING INCOME - CORPORATE UNALLOCATED | ||||||||||||||
| Corporate unallocated - GAAP operating loss | $ | (60,840 | ) | $ | (76,155 | ) | $ | (65,593 | ) | |||||
| Restructuring | 307 | 2,536 | (501 | ) | ||||||||||
| Acquisition and integration related expense | 6,881 | — | 13 | |||||||||||
| Corporate unallocated - Non-GAAP operating loss | $ | (53,652 | ) | $ | (73,619 | ) | $ | (66,081 | ) | |||||
In the normal course of business, we are exposed to interest rate and foreign currency exchange rate risks that could impact our financial position and results of operations. As part of our risk management strategy, we may use derivative financial instruments to hedge certain foreign currency and interest rate exposures. Our objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, therefore reducing the impact of volatility on earnings or protecting the fair values of assets and liabilities. We use derivative contracts only to manage existing underlying exposures. Accordingly, we do not use derivative contracts for trading or speculative purposes.
Interest Rate Risk
We are exposed to interest rate risk through our variable rate debt instruments. On June 23, 2015, we entered into an amended and restated credit agreement providing for committed credit facilities in the amount of $725 million U.S. dollars (the 2015 credit facility). The 2015 credit facility consists of a $225 million U.S. dollar term loan and a multicurrency revolving line of credit (the revolver) with a principal amount of up to $500 million. The revolver also contains a $250 million letter of credit sub-facility and a $50 million swingline sub-facility (available for immediate cash needs at a higher interest rate). Under the 2015 credit facility, we elect applicable market interest rates for both the term loan and any outstanding revolving loans. We also pay an applicable margin, which is based on our total leverage ratio (as defined in the credit agreement). The applicable rates per annum may be based on either: (1) the LIBOR rate or EURIBOR rate (floor of 0%), plus an applicable margin, or (2) the Alternate Base Rate, plus an applicable margin. The Alternate Base Rate election is equal to the greatest of three rates: (i) the prime rate, (ii) the Federal Reserve effective rate plus 1/2 of 1%, or (iii) one month LIBOR plus 1%. At December 31, 2017 the interest rates for both the term loan and the USD revolver was 2.82%, which includes the LIBOR rate plus a margin of 1.25%. At December 31, 2017, the interest rates for the EUR revolver was 1.25%, which includes the EURIBOR floor rate plus a margin of 1.25%.
In October 2015,March 2020, we entered into an interest rate swap, which is effective from August 31, 2016June 30, 2020 to June 23, 2020,30, 2023, and converts $214$240 million of our LIBOR-based debt from a floating LIBOR interest rate to a fixed interest rate of 1.42%0.617% (excluding the applicable margin on the debt)margin). The notional balance will amortizeamortizes to maturity at the same rate asof the originally required minimum paymentsamortization on our term loan. At December 31, 2017,2020, our LIBOR-based debt balance was $254.1$536.1 million.
In November 2015,April 2018, we entered into three interest rate cap contracts with a total notional amount of $100 million at a cost of $1.7 million. The interest rate cap contracts expire on June 23, 2020 and were entered into in order to limit our interest rate exposure on $100cross-currency swap, which converts $56.0 million of our variable LIBOR basedfloating rate LIBOR-based U.S. dollar denominated debt upinto 1.38% fixed rate euro denominated debt. This cross-currency swap matures on April 30, 2021 and mitigates the risk associated with fluctuations in interest and currency rates impacting cash flows related to 2.00%. In the event LIBOR is higher than 2.00%, we will pay interesta U.S. dollar denominated debt in a euro functional currency entity.
The table below provides information about our financial instruments that are sensitive to changes in interest rates and the scheduled minimum repayment of principal and the weighted average interest rates at December 31, 2017.2020. Weighted average variable rates in the table are based on implied forward rates in the Reuters U.S. dollar yield curve as of December 31, 20172020 and our estimated leverage ratio, which determines our additional interest rate margin at December 31, 2017.2020.
| In thousands | 2021 | 2022 | 2023 | 2024 | 2025 | Total | Fair Value | |||||||||||||||||||||||||||||||||||||
| Variable Rate Debt | ||||||||||||||||||||||||||||||||||||||||||||
| Principal: U.S. dollar term loan | $ | 18,359 | $ | 44,063 | $ | 44,063 | $ | 429,609 | $ | — | $ | 536,094 | $ | 520,347 | ||||||||||||||||||||||||||||||
| Weighted average interest rate | 1.62 | % | 1.67 | % | 1.84 | % | 2.09 | % | — | % | ||||||||||||||||||||||||||||||||||
| Principal: Multicurrency revolving line of credit | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Weighted average interest rate | 1.62 | % | 1.67 | % | 1.84 | % | 2.09 | % | — | % | ||||||||||||||||||||||||||||||||||
| Interest rate swap | $ | (1,982) | ||||||||||||||||||||||||||||||||||||||||||
| Weighted average interest rate (pay) Fixed | 0.62 | % | 0.62 | % | 0.62 | % | ||||||||||||||||||||||||||||||||||||||
| Weighted average interest rate (receive) Floating LIBOR | 0.12 | % | 0.17 | % | 0.30 | % | ||||||||||||||||||||||||||||||||||||||
| Cross currency swap | $ | (526) | ||||||||||||||||||||||||||||||||||||||||||
| Weighted average interest rate (pay) Fixed - EURIBOR | 1.38 | % | ||||||||||||||||||||||||||||||||||||||||||
| Weighted average interest rate (receive) Floating - LIBOR | 0.13 | % | ||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | Total | Fair Value | |||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||
| Variable Rate Debt | |||||||||||||||||||||||||||
| Principal: U.S. dollar term loan | $ | 19,688 | $ | 22,500 | $ | 151,875 | $ | — | $ | — | $ | 194,063 | $ | 192,295 | |||||||||||||
| Average interest rate | 3.02 | % | 3.38 | % | 3.44 | % | — | % | — | % | |||||||||||||||||
| Principal: Multicurrency revolving line of credit | $ | — | $ | — | $ | 125,414 | $ | — | $ | — | $ | 125,414 | $ | 124,100 | |||||||||||||
| Average interest rate | 2.10 | % | 2.27 | % | 2.35 | % | — | % | — | % | |||||||||||||||||
| Interest rate swap on LIBOR based debt | |||||||||||||||||||||||||||
| Average interest rate (pay) | 1.42 | % | 1.42 | % | 1.42 | % | — | % | — | % | |||||||||||||||||
| Average interest rate (receive) | 1.77 | % | 2.13 | % | 2.19 | % | — | % | — | % | |||||||||||||||||
| Net/spread | 0.35 | % | 0.71 | % | 0.77 | % | — | % | — | % | |||||||||||||||||
Based on a sensitivity analysis as of December 31, 2017,2020, we estimate that, if market interest rates average one percentage point higher in 20182021 than in the table above, our financial results in 20182021 would not be materially impacted.
We continually monitor and assess our interest rate risk and may institute additional interest rate swaps or other derivative instruments to manage such risk in the future.
Foreign Currency Exchange Rate Risk
We conduct business in a number of countries. As a result, approximately half of our revenues and operating expenses areRevenues denominated in foreignfunctional currencies whichother than the U.S. dollar were 37% of total revenues for the year ended December 31, 2020, compared with 37% and 41% for the years ended December 31,
45
2019 and 2018. These transactions expose our account balances to movements in foreign currency exchange rates that could have a material effect on our financial results. Our primary foreign currency exposure relates to non-U.S. dollar denominated transactions in our international subsidiary operations, the most significant of which is the euro. Revenues denominated in functional currencies other than the U.S. dollar were 47% of total revenues for the year ended December 31, 2017, compared with 47% and 51% for the years ended December 31, 2016 and 2015.
We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third-party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recognized to otherwithin Other income and expense.(expense) in our Consolidated Statements of Operations. We enter into monthly foreign exchange forward contracts, which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with currency exposures. As of December 31, 2017,2020, a total of 5439 contracts were offsetting our exposures from the euro, Pound sterling, Canadian dollar, Indonesian Rupiah, Chinese Yuan, Saudi RiyalBrazilian real, Mexican peso and various other currencies, with notional amounts ranging from $158,000$121,000 to $39.5$26.4 million. Based on a sensitivity analysis as of December 31, 2017,2020, we estimate that, if foreign currency exchange rates average ten percentage points higher in 20182021 for these financial instruments, our financial results in 20182021 would not be materially impacted.
In future periods, we may use additional derivative contracts to protect against foreign currency exchange rate risks.
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Shareholders of Itron, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Itron, Inc. and subsidiaries (the "Company") as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows, for each of the twothree years in the period ended December 31, 2017,2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2017,2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2018,24, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition ASC 606 — Revenue arrangements involving multiple performance obligations consisting of hardware, software, and professional services such as implementation, project management, installation, and consulting services — Refer to Notes 1 and 17 to the financial statements
Critical Audit Matter Description
Many of the Company’s revenue arrangements involve multiple performance obligations consisting of hardware, software, and professional services such as implementation, project management, installation, and consulting services. These contracts may contain customer-specific business terms and conditions, including service level commitments, variable consideration, and terms that govern when the customer has taken control. Additionally, these contracts may be modified from time to time as the Company delivers under the contract. These customer-specific business terms and conditions and modifications may involve complex accounting considerations, including determining whether the Company has enforceable rights and obligations, whether contract modifications represent new contracts or modification of existing contracts, whether certain performance obligations are distinct, and other considerations that may impact the timing of revenue recognition.
47
The evaluation of these factors is executed in accordance with the ASC 606 revenue recognition framework and requires significant management judgment that could affect the amount and timing of revenue recognition over the contractual period. The computations to recognize revenue under the ASC 606 revenue recognition framework can be complex and require a significant volume of data input. Additionally, there can be complexity in the computations and entries made to record the related contract assets and liabilities at the balance sheet date. Given the challenge in auditing the judgments and computations made in determining revenue recognition for these multiple performance obligation arrangements with customer-specific business terms and conditions and modifications, we identified revenue recognition as a critical audit matter.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to (1) determining whether the Company has enforceable rights and obligations, whether contract modifications represent new contracts or modifications, whether certain performance obligations are distinct and other considerations that may impact the timing of revenue recognition and (2) the completeness and accuracy of the revenue recognition computations and entries used to recognize revenue included the following, among others:
•We tested the effectiveness of controls over contract reviews, including management’s use of checklists and other review procedures to determine whether customer-specific business terms are evident in the contract and whether accounting conclusions regarding enforceable rights and obligations, contract modifications, distinct products and services, and other considerations that may impact the timing of revenue recognition are appropriately applied.
•We tested the effectiveness of controls over revenue recognition computations and entries to determine whether the computations and entries appropriately reflect the accounting conclusions for these contracts. Such controls included (1) the review of the completeness and accuracy of data input into the computations and entries and (2) the review of the mathematical accuracy of the computations and entries.
•For a sample of contracts with customers that included existing contracts, new contracts and contract modifications, we:
–Tested management’s identification of customer-specific terms, whether the Company had enforceable rights and obligations, whether contract modifications represented new contracts or modifications to existing contracts, whether customer-specific terms introduced new or implied performance obligations, or other factors influencing the timing, nature and amount of revenue recognized, and assessed management’s conclusions regarding accounting treatment. Our procedures included reading the selected contracts and inquiring of the Company’s operational personnel to understand the nature of the contract and its business purpose, as well as evaluating management’s conclusions.
–Evaluated whether the identified accounting conclusions were appropriately reflected in the revenue recognition computations and entries.
–Tested the accuracy and completeness of the data used in the computations and entries to record revenue.
–Tested mathematical accuracy of revenue recognition computations and entries.
Goodwill — Device Solutions Reporting Unit — Refer to Notes 1 and 5 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of its reporting units to their carrying amounts. Due to a decline in the Company's updated long-term forecast for the Device Solutions ("Devices") reporting unit, the Company identified an impairment indicator and, as a result, evaluated goodwill for impairment during the third quarter of 2020. The Company develops its estimate of fair value of the reporting unit using forecast discounted cash flows at the reporting unit level, which requires the Company to make significant estimates and assumptions related to forecasts of future revenues and operating costs. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance relating to the Devices reporting unit is $53.2 million as of December 31, 2020. The estimated fair value of Devices exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized.
We identified goodwill for Devices as a critical audit matter because of the significant estimates and assumptions the Company makes to estimate the fair value of Devices and the sensitivity of Devices' operations to changes in the Company’s financial performance. This required a high degree of auditor judgment and an increased extent of effort, including the involvement of our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future revenues and operating costs.
48
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of revenue and operating costs ("forecasts") for the Devices reporting unit included the following, among others:
•We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of Devices, such as controls related to the Company’s forecasts.
•We inquired of members of the Company’s management responsible for the Devices reporting unit to understand and corroborate management’s plan to achieve planned forecast revenue growth
•We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in analyst and industry reports as well as press releases of the Company and companies in its peer group.
•With the assistance of our fair value specialists, we evaluated the valuation methodology and long-term forecast growth rates, including testing the underlying source information and the mathematical accuracy of the calculations, and developed a range of independent estimates and compared those to selections made by management.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
February 24, 2021
We have served as the Company's auditor since 2016.
49
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||||||||||
| In thousands, except per share data | In thousands, except per share data | 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| Revenues | Revenues | |||||||||||||||||||||||||||
| Product revenues | $ | 1,813,925 | $ | 1,830,070 | $ | 1,699,534 | Product revenues | $ | 1,889,173 | $ | 2,220,395 | $ | 2,095,458 | |||||||||||||||
| Service revenues | 204,272 | 183,116 | 183,999 | Service revenues | 284,177 | 282,075 | 280,659 | |||||||||||||||||||||
| Total revenues | 2,018,197 | 2,013,186 | 1,883,533 | Total revenues | 2,173,350 | 2,502,470 | 2,376,117 | |||||||||||||||||||||
| Cost of revenues | Cost of revenues | |||||||||||||||||||||||||||
| Product cost of revenues | 1,205,548 | 1,239,152 | 1,216,709 | Product cost of revenues | 1,408,615 | 1,587,710 | 1,476,498 | |||||||||||||||||||||
| Service cost of revenues | 137,495 | 113,714 | 110,139 | Service cost of revenues | 162,568 | 162,441 | 169,300 | |||||||||||||||||||||
| Total cost of revenues | 1,343,043 | 1,352,866 | 1,326,848 | Total cost of revenues | 1,571,183 | 1,750,151 | 1,645,798 | |||||||||||||||||||||
| Gross profit | 675,154 | 660,320 | 556,685 | Gross profit | 602,167 | 752,319 | 730,319 | |||||||||||||||||||||
| Operating expenses | Operating expenses | |||||||||||||||||||||||||||
| Sales and marketing | 170,008 | 158,883 | 161,380 | |||||||||||||||||||||||||
| Product development | 169,977 | 168,209 | 162,334 | |||||||||||||||||||||||||
| General and administrative | 156,540 | 162,815 | 155,715 | |||||||||||||||||||||||||
| Sales, general and administrative | Sales, general and administrative | 276,920 | 346,872 | 423,210 | ||||||||||||||||||||||||
| Research and development | Research and development | 194,101 | 202,200 | 207,905 | ||||||||||||||||||||||||
| Amortization of intangible assets | 20,785 | 25,112 | 31,673 | Amortization of intangible assets | 44,711 | 64,286 | 71,713 | |||||||||||||||||||||
| Restructuring | 6,418 | 49,090 | (7,263 | ) | Restructuring | 37,013 | 6,278 | 77,183 | ||||||||||||||||||||
| Loss on sale of business | Loss on sale of business | 59,817 | 0 | 0 | ||||||||||||||||||||||||
| Total operating expenses | 523,728 | 564,109 | 503,839 | Total operating expenses | 612,562 | 619,636 | 780,011 | |||||||||||||||||||||
| Operating income | 151,426 | 96,211 | 52,846 | |||||||||||||||||||||||||
| Operating income (loss) | Operating income (loss) | (10,395) | 132,683 | (49,692) | ||||||||||||||||||||||||
| Other income (expense) | Other income (expense) | |||||||||||||||||||||||||||
| Interest income | 2,126 | 865 | 761 | Interest income | 2,998 | 1,849 | 2,153 | |||||||||||||||||||||
| Interest expense | (11,581 | ) | (10,948 | ) | (12,289 | ) | Interest expense | (44,001) | (52,453) | (58,203) | ||||||||||||||||||
| Other income (expense), net | (7,396 | ) | (1,501 | ) | (4,216 | ) | Other income (expense), net | (5,241) | (9,047) | (3,409) | ||||||||||||||||||
| Total other income (expense) | (16,851 | ) | (11,584 | ) | (15,744 | ) | Total other income (expense) | (46,244) | (59,651) | (59,459) | ||||||||||||||||||
| Income before income taxes | 134,575 | 84,627 | 37,102 | |||||||||||||||||||||||||
| Income tax provision | (74,326 | ) | (49,574 | ) | (22,099 | ) | ||||||||||||||||||||||
| Net income | 60,249 | 35,053 | 15,003 | |||||||||||||||||||||||||
| Income (loss) before income taxes | Income (loss) before income taxes | (56,639) | 73,032 | (109,151) | ||||||||||||||||||||||||
| Income tax benefit (provision) | Income tax benefit (provision) | (238) | (20,617) | 12,570 | ||||||||||||||||||||||||
| Net income (loss) | Net income (loss) | (56,877) | 52,415 | (96,581) | ||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | 2,951 | 3,283 | 2,325 | Net income attributable to noncontrolling interests | 1,078 | 3,409 | 2,669 | |||||||||||||||||||||
| Net income attributable to Itron, Inc. | $ | 57,298 | $ | 31,770 | $ | 12,678 | ||||||||||||||||||||||
| Net income (loss) attributable to Itron, Inc. | Net income (loss) attributable to Itron, Inc. | $ | (57,955) | $ | 49,006 | $ | (99,250) | |||||||||||||||||||||
| Earnings per common share - Basic | $ | 1.48 | $ | 0.83 | $ | 0.33 | ||||||||||||||||||||||
| Earnings per common share - Diluted | $ | 1.45 | $ | 0.82 | $ | 0.33 | ||||||||||||||||||||||
| Net income (loss) per common share - Basic | Net income (loss) per common share - Basic | $ | (1.44) | $ | 1.24 | $ | (2.53) | |||||||||||||||||||||
| Net income (loss) per common share - Diluted | Net income (loss) per common share - Diluted | $ | (1.44) | $ | 1.23 | $ | (2.53) | |||||||||||||||||||||
| Weighted average common shares outstanding - Basic | 38,655 | 38,207 | 38,224 | Weighted average common shares outstanding - Basic | 40,253 | 39,556 | 39,244 | |||||||||||||||||||||
| Weighted average common shares outstanding - Diluted | 39,387 | 38,643 | 38,506 | Weighted average common shares outstanding - Diluted | 40,253 | 39,980 | 39,244 | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
50
ITRON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Year Ended December 31, | ||||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
| Net income | $ | 60,249 | $ | 35,053 | $ | 15,003 | ||||||||||||||||||||||
| In thousands | In thousands | 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| Net income (loss) | Net income (loss) | $ | (56,877) | $ | 52,415 | $ | (96,581) | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||||||
| Foreign currency translation adjustments | 54,338 | (24,977 | ) | (72,929 | ) | Foreign currency translation adjustments | 21,082 | (2,953) | (28,841) | |||||||||||||||||||
| Net unrealized gain (loss) on derivative instruments designated as cash flow hedges | 923 | (275 | ) | 1,086 | ||||||||||||||||||||||||
| Foreign currency translation adjustment reclassified to net income on sale of business | Foreign currency translation adjustment reclassified to net income on sale of business | 52,074 | 2,443 | 0 | ||||||||||||||||||||||||
| Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges | Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges | (898) | (1,924) | 235 | ||||||||||||||||||||||||
| Pension benefit obligation adjustment | 3,588 | (3,468 | ) | 6,296 | Pension benefit obligation adjustment | (6,112) | (5,933) | 2,779 | ||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | 58,849 | (28,720 | ) | (65,547 | ) | Total other comprehensive income (loss), net of tax | 66,146 | (8,367) | (25,827) | |||||||||||||||||||
| Total comprehensive income (loss), net of tax | 119,098 | 6,333 | (50,544 | ) | Total comprehensive income (loss), net of tax | 9,269 | 44,048 | (122,408) | ||||||||||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interest, net of tax: | 2,951 | 3,283 | 2,325 | |||||||||||||||||||||||||
| Comprehensive income attributable to noncontrolling interests, net of tax | Comprehensive income attributable to noncontrolling interests, net of tax | 1,078 | 3,409 | 2,669 | ||||||||||||||||||||||||
| Comprehensive income (loss) attributable to Itron, Inc. | $ | 116,147 | $ | 3,050 | $ | (52,869 | ) | Comprehensive income (loss) attributable to Itron, Inc. | $ | 8,191 | $ | 40,639 | $ | (125,077) | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
51
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, 2017 | December 31, 2016 | |||||||||||||||||
| (in thousands) | ||||||||||||||||||
| In thousands | In thousands | December 31, 2020 | December 31, 2019 | |||||||||||||||
| ASSETS | ASSETS | |||||||||||||||||
| Current assets | Current assets | |||||||||||||||||
| Cash and cash equivalents | $ | 176,274 | $ | 133,565 | Cash and cash equivalents | $ | 206,933 | $ | 149,904 | |||||||||
| Accounts receivable, net | 398,029 | 351,506 | Accounts receivable, net | 369,828 | 472,925 | |||||||||||||
| Inventories | 193,835 | 163,049 | Inventories | 182,377 | 227,896 | |||||||||||||
| Other current assets | 81,604 | 84,346 | Other current assets | 171,124 | 146,526 | |||||||||||||
| Total current assets | 849,742 | 732,466 | Total current assets | 930,262 | 997,251 | |||||||||||||
| Property, plant, and equipment, net | 200,768 | 176,458 | Property, plant, and equipment, net | 207,816 | 233,228 | |||||||||||||
| Deferred tax assets, net | 49,971 | 94,113 | Deferred tax assets, net | 76,142 | 63,899 | |||||||||||||
| Restricted cash | 311,010 | — | ||||||||||||||||
| Other long-term assets | 43,666 | 50,129 | Other long-term assets | 51,656 | 44,686 | |||||||||||||
| Operating lease right-of-use assets, net | Operating lease right-of-use assets, net | 76,276 | 79,773 | |||||||||||||||
| Intangible assets, net | 95,228 | 72,151 | Intangible assets, net | 132,955 | 185,097 | |||||||||||||
| Goodwill | 555,762 | 452,494 | Goodwill | 1,131,916 | 1,103,907 | |||||||||||||
| Total assets | $ | 2,106,147 | $ | 1,577,811 | Total assets | $ | 2,607,023 | $ | 2,707,841 | |||||||||
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | |||||||||||||||||
| Current liabilities | Current liabilities | |||||||||||||||||
| Accounts payable | $ | 262,166 | $ | 172,711 | Accounts payable | $ | 215,639 | $ | 328,128 | |||||||||
| Other current liabilities | 56,736 | 43,625 | Other current liabilities | 72,591 | 63,785 | |||||||||||||
| Wages and benefits payable | 90,505 | 82,346 | Wages and benefits payable | 86,249 | 119,220 | |||||||||||||
| Taxes payable | 16,100 | 10,451 | Taxes payable | 15,804 | 22,193 | |||||||||||||
| Current portion of debt | 19,688 | 14,063 | Current portion of debt | 18,359 | 0 | |||||||||||||
| Current portion of warranty | 21,150 | 24,874 | Current portion of warranty | 28,329 | 38,509 | |||||||||||||
| Unearned revenue | 41,438 | 64,976 | Unearned revenue | 112,928 | 99,556 | |||||||||||||
| Total current liabilities | 507,783 | 413,046 | Total current liabilities | 549,899 | 671,391 | |||||||||||||
| Long-term debt | 593,572 | 290,460 | ||||||||||||||||
| Long-term debt, net | Long-term debt, net | 902,577 | 932,482 | |||||||||||||||
| Long-term warranty | 13,712 | 18,428 | Long-term warranty | 13,061 | 14,732 | |||||||||||||
| Pension benefit obligation | 95,717 | 84,498 | Pension benefit obligation | 119,457 | 98,712 | |||||||||||||
| Deferred tax liabilities, net | 1,525 | 3,073 | Deferred tax liabilities, net | 1,921 | 1,809 | |||||||||||||
| Operating lease liabilities | Operating lease liabilities | 66,823 | 68,919 | |||||||||||||||
| Other long-term obligations | 88,206 | 117,953 | Other long-term obligations | 113,012 | 118,981 | |||||||||||||
| Total liabilities | 1,300,515 | 927,458 | Total liabilities | 1,766,750 | 1,907,026 | |||||||||||||
| Commitments and contingencies (Note 12) | ||||||||||||||||||
| Equity | Equity | |||||||||||||||||
| Preferred stock, no par value, 10 million shares authorized, no shares issued or outstanding | — | — | ||||||||||||||||
| Common stock, no par value, 75 million shares authorized, 38,771 and 38,317 shares issued and outstanding | 1,294,767 | 1,270,467 | ||||||||||||||||
| Preferred stock, no par value, 10,000 shares authorized, 0 shares issued or outstanding | Preferred stock, no par value, 10,000 shares authorized, 0 shares issued or outstanding | 0 | 0 | |||||||||||||||
| Common stock, no par value, 75,000 shares authorized, 40,444 and 39,941 shares issued and outstanding | Common stock, no par value, 75,000 shares authorized, 40,444 and 39,941 shares issued and outstanding | 1,389,419 | 1,357,600 | |||||||||||||||
| Accumulated other comprehensive loss, net | (170,478 | ) | (229,327 | ) | Accumulated other comprehensive loss, net | (138,526) | (204,672) | |||||||||||
| Accumulated deficit | (337,873 | ) | (409,536 | ) | Accumulated deficit | (434,345) | (376,390) | |||||||||||
| Total Itron, Inc. shareholders' equity | 786,416 | 631,604 | Total Itron, Inc. shareholders' equity | 816,548 | 776,538 | |||||||||||||
| Noncontrolling interests | 19,216 | 18,749 | Noncontrolling interests | 23,725 | 24,277 | |||||||||||||
| Total equity | 805,632 | 650,353 | Total equity | 840,273 | 800,815 | |||||||||||||
| Total liabilities and equity | $ | 2,106,147 | $ | 1,577,811 | Total liabilities and equity | $ | 2,607,023 | $ | 2,707,841 | |||||||||