Itron, Inc.
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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 plans, our ability to achieve estimated cost savings, the rate and timing of customer demand for our products, rescheduling of current customer orders, changes in estimated liabilities for product warranties, adverse impacts of litigation, changes in laws and regulations, our dependence on new product development and intellectual property, future acquisitions, changes in estimates for stock-based and bonus compensation, increasing volatility in foreign exchange rates, international business risks, uncertainties caused by adverse economic conditions, including, without limitation those resulting from extraordinary events or circumstances such as the COVID-19 pandemic and other factors that are more fully described in Part I, Item 1A:Risk Factors included in this Annual Report and other reports on Form 10-K.file with the Securities and Exchange Commission. We do not have anyundertake no obligation to publicly update or revise any forward-looking statement, in 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.whether written or oral.
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,. The information posted on or accessible through our website is not part of or incorporated by calling 1-800-SEC-0330.reference into this Annual Report.
General
Itron is a leader in enabling utilities and cities to safely, securely and reliably deliver critical infrastructure solutions to communities around the world. 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 control, 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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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 needs either directly or via our ecosystem of partners. We support a worldwide network of connected devices, and we will continue to develop more applications, new opportunities, and value-added outcomes for our customers in the future.
The following is a discussion of our major products, oursolutions, markets, and our operating segments. Refer to Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations and Part II, 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 use data captured by our intelligent endpoints, sensors, and systems to cost-effectively leverage their 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 to address a number of macro trends, including:
•Infrastructure – such as aging utility infrastructure, grid security, safety, asset monitoring and management, and incorporating the proliferation of distributed energy resources, such as electric vehicles, renewable energy and storage, into the grid
•Environmental– such as extreme weather, resource scarcity, and demand for sustainability and decarbonization
•Social– such as enhanced customer experience, critical need consumers, privacy, urbanization, population increase, and the management of "big data" and incorporating IIoT technology into their existing operations
Our solutions include smart gridsnetworks, software, services, devices, sensors, and data analytics upon a platform that allows our customers to not only address the changing macro trends listed above but also to address pressing industry challenges to better manage and control assets, intelligently benchmark, 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-serviceSoftware-as-a-Service (SaaS), Network-as-a-Service (NaaS), technical support services, licensinglicensed hardware technology, and consulting services.
Utility and municipalities are undergoing an evolution in affordability, reliability and sustainability impacting how they operate critical infrastructure, manage scarce resources, address impacts of climate disruption, and interact with their customers. Efficiently managing resources within energy, water, and cities is a top priority globally, as increasing populations and resource consumption along with extreme weather events continue to stress an aging infrastructure. The growing demand for energy, water, and municipal services coupled with the proliferation of renewable energy sources, smart metering solutions. These categoriescommunicating devices, sensors, and multiple data-producing technologies as well as the growing need to manage distributed energy resources is forcing providers to rethink how they operate and service their communities. This evolution comes at a time when utilities and municipalities are described in more detail below:
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to understand and industrial (C&I),have control over their resource usage, allowing for better management and transmissionconservation of valuable resources.
To address these challenges, utilities and distribution (T&D) electricity, natural gas, water, and heat meters.
•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.
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. The Industrial Internet of Things (IIoT) solutions supported by this segment include automated meter reading (AMR), advanced metering infrastructure (AMI), distributed energy resource management (DERMs), 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 these utility 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.
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 revenuereflects our understanding of customer's desired deployment over the next 12 months. The actual revenue recognized and timing of revenue earned from backlog may vary based on actual currency rates at the time of shipment, supply constraints, and adjusted customer project timing. 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. Certain of our customers have the right to cancel contracts, but we do not have a history of any significant cancellations. 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 a termination for convenience clause, which will not agree to the total transaction
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| 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 | Total Backlog | 12-Month Backlog | |||||||||||||||||
| In millions | ||||||||||||||||||||
| December 31, 2022 | $ | 2,505 | $ | 4,619 | $ | 2,052 | ||||||||||||||
| December 31, 2021 | 2,755 | 4,017 | 1,539 | |||||||||||||||||
| December 31, 2020 | 2,213 | 3,259 | 1,204 | |||||||||||||||||
Our total backlog, as of December 31, 2021, included $64.7 million of backlog related to the sale of certain Gas product lines from our Device Solutions manufacturing and business operations in Europe and North America to Dresser Utility Solutions (Dresser). At transaction close on bookings by our operating segments is as follows:February 28, 2022, $55.7 million of this backlog was transferred to Dresser. For more information on the transaction refer to Part II, Item 8: Financial Statements and Supplementary Data, Note 18: Sale of Businesses.
| 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 into access our operating segments.customers. A direct sales force is utilized for large electric, natural gas, and water utilities,our larger customers, 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 most 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,agents, partners, and meter manufacturer representatives.
No single customer represented more than 10% of total revenues for the years ended December 31, 2017, 2016,2022, 2021, and 2015.2020. Our 10 largest customers in each of the years ended December 31, 2017, 2016,2022, 2021, and 2015,2020, accounted for approximately 33%32%, 31%25%, and 22%33% of total revenues, respectively.revenues.
Manufacturing
Our products require a wide variety of components and materials, which are subject to price and supply fluctuations. We enter into standard purchase orderstypical contracts 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 and sub-assemblies to various manufacturing partners.partners and strive 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.
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.
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Research and Development
Our productresearch and development is focused on both improving existing technology and developing innovative new technology for critical infrastructure in electricity, natural gas, water, heat, smart city, and heat meters,DERMs verticals. This includes endpoints, sensing and control devices, data collection software, communication technologies, data warehousing, software applications, and software applications.the IIoT. We invested approximately $170$185 million, $168$197 million, and $162$194 million in productresearch and development in 2017, 20162022, 2021 and 2015,2020, which represented 8%10% of total revenues for 2017, 8% of total revenues for 20162022 and 2021 and 9% of total revenues in 2015.for 2020. Refer to Item 1A: Risk Factors for further discussion related to costs of developing competitive products and services.
Human Capital
As of December 31, 2017,2022, we had approximately 7,8005,477 people in our workforce, including 6,5004,822 permanent employees. We have not experienced significant employee work stoppages and consider our employee relations are deemed to be good.
We are an equal opportunity employer, and we promote a culture of inclusion and diversity. 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 and in the markets we serve.
The table below provides the breakdown of our employees by region and self-identified gender:
| As of December 31, 2022 | ||||||||||||||||||||||||||
| Region | Male | Female | Total Number of Employees | Percentage of Total Employees | ||||||||||||||||||||||
| Americas | 1,728 | 721 | 2,449 | 51 | % | |||||||||||||||||||||
| Europe, Middle East and Africa | 942 | 512 | 1,454 | 30 | % | |||||||||||||||||||||
| Asia Pacific & Other | 728 | 191 | 919 | 19 | % | |||||||||||||||||||||
Total (1) | 3,398 | 1,424 | 4,822 | |||||||||||||||||||||||
(1) These numbers do not include contingent workers (655 as of December 31, 2022).
Competition
We provide a broadenable utilities and cities to safely, securely, and reliably deliver critical infrastructure services to communities around the world. Our portfolio of products, solutions,smart networks, software, services, meters, and services to electric, gas,sensors help our customers better manage energy, 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.Asia. Our primary competitors for each operating segment are discussed below.include LM Ericsson Telephone Company, Landis+Gyr, Mueller Water Products, and Xylem, Inc. (formerly Sensus).
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 can be backwards compatible, able to run a multitude of applications and solutions, (including metering, network communications,is highly secure, fully integrated into our portfolio, highly interoperable, captures relays, and leverages high-resolution data collection systems, meter data management software,for near real-time decision making. The platform involves an ever-growing, diverse ecosystem of partners and other metering software applications),third-party developers who can create and deploy specific point solutions creating 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 of energy and water end-to-end solutions; and a global leader in endpoints under managed services. We 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.
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Intellectual Property
Our patents and patent applications cover a range of technologies whichthat 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,trademarks, 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.
In the ordinary course of our business, we use metals, solvents, and similar materials that are stored on-site.impacted by many governmental regulations, including environmental regulations. We believe that we are materially in compliance with environmentalall federal, state, and local governmental laws, rules, and regulations applicable to the operation of our business. There are no known regulations pending that will have a substantial adverse impact on our business, revenue, earnings, or cash flows. However, if new or amended laws or regulations impose significant operational restrictions and compliance requirements upon the Company or its products, the Company's business, capital expenditures, results of operations, financial condition and competitive position could be altered.
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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.
27, 2023.
| 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, Device Solutions | ||||||||||||||
| John F. Marcolini | 50 | Senior Vice President, Networked Solutions | ||||||||||||
| Donald L. Reeves | 55 | Senior Vice President, Outcomes | ||||||||||||
| Christopher E. Ware | 54 | Vice President, General Counsel and Corporate Secretary | ||||||||||||
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.
John F. Marcolini is Senior Vice President, Networked Solutions, where he is responsible for product development, marketing, and overall strategy for Itron's global networking platforms and smart cities strategy and solutions. Mr. Marcolini was appointed to this role in July 2020. Mr. Marcolini joined Itron in January 2018 as part of Itron's acquisition of SSNI as the Vice President of product 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.
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 2018 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 SSNI, Mr. Reeves served as Vice President of Engineering at Black Pearl from 2003 to 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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Christopher E. Ware is Vice President, General Counsel and Corporate Secretary. Ms. Votava was promoted to this role in March 2016. Ms. VotavaMr. Ware has more than 25 years of experience as a senior legal advisor and business executive. He joined Itron in May 2010March 2021 as AssistantAssociate General Counsel and Chief Compliance Officer. In March 2022, he was promoted to Vice President, Legal and Corporate Secretary. In this role, he is responsible for Itron's corporate governance, business legal solutions, and risk management. Prior to joining Itron, Mr. Ware served as Executive Director and General CounselManager at Johnson Controls International (JCI) from 2018 to 2021. Before that position, Mr. Ware occupied numerous senior legal roles within JCI from 2011 to 2018. He also held roles in January 2012. She assumed the responsibilitiesU.S. Attorney's Office, the Department of Corporate Secretary in January 2013. Before joining Itron, Ms. Votava served as Associate General Counsel, Commercial at Cooper Industries plc from October 2008 to April 2010,Justice, and as General Counsel for Honeywell's Electronic Materials business from 2003 to 2008.several private law firms.
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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 disruption, 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 regulatory pressures, and the emergence of new competitive products, all of which impact the way 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 products and services mix could cause us to incur penalties, be liable for damages,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 incur unanticipated expenses with respect tohigher costs, which could unfavorably impact our financial performance.
Delays in the functionality, deployment, operation,availability of or shortages in raw materials and availabilitycomponent parts used in the manufacture of our products, as well as freight, labor, and services.other ancillary cost increases, could unfavorably impact our revenues and results of operations.
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rely on single suppliers for certain of these contracts contain long-term commitmentsmaterials. Our inability to obtain adequate supplies of raw materials and component parts at favorable prices could have a set schedule of delivery or 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,material adverse effect on 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 determine the products and/or services to be delivered under that component would result in a loss due to expected revenues estimated to 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, including reduced revenue, lower profit margins, and delays in deliveries to customers, which could result in damages or penalties to be paid under the terms of certain of our customer contracts. Since we do not control the production of these raw materials and component parts, there may be delays caused by an interruption in the period it is recognized.production or transportation of these materials for reasons that are beyond our control. World commodity markets, inflation, tariffs or embargoes may also affect the availability or prices of raw materials or component parts. Recently, inflation in our raw materials and component costs, freight charges, and labor costs have increased above historical levels, due to, among other things, the continuing impacts of the pandemic and the uncertain economic environment. Certain customer arrangements within our backlog may include previously committed pricing, and we may or may not be able to fully recover increased costs through pricing actions with these customers.
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 mightmay 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 thatIf we receive shipments of products that fail to comply with our technical specifications or that fail to conform to our quality control standards, and if 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, theythose customers 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 consumercustomer 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 have been and will continue to be affected by the ongoing COVID-19 pandemic, and such effects will continue to 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 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 pandemic 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 have and will likely continue to experience difficulties sourcing components, sub-assemblies, outsourced finished goods, and other products and services. In particular, our ability to obtain adequate supply of semiconductor components has impacted our ability to service recovering customer demand.While we believe the current imbalance in supply and demand is temporal, the timeline to recovery is uncertain. Efforts are ongoing with suppliers to increase supply, including the approval of alternate sources. The impact of the COVID-19 pandemic on our customers and demand for our 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 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 have included, among others, restrictions on our employees' access to our physical work locations and the purchase of personal protective equipment. Additionally, we may implement the
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temporary closure or reduction in operations of certain of our facilities, either voluntarily or through imposed lockdowns, 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.
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 resurgence, 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. 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 continues to change, and additional impacts may arise that we are not aware of currently.
We face increasing competition.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. SomeThese competitors may enter markets we servesell products and sell productsservices at lower prices in order to gain or grow market share. Our competitors mayshare, be able to respond more quickly to new or emerging technologies and changes in customer requirements. Theyrequirements, and may also be able to devote greater resources to the development, promotion, and sale of their products and services than we can. Some competitors have made and others mayor 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. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. 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 put pressure onreduce our market position, reduce our overall sales, and require us to invest additional funds in new technology development. In addition, there is a risk thatour products and services may experience price erosion if low-cost providers will expand their presence in our markets, improve their quality, or form alliances or cooperative relationships with our competitors, thereby contributing to future price erosion. Some ofor if our products and services may become commoditized, and we may have to adjust the prices of some of our products to stay competitive. Further,commoditized. For example, some utilities may purchase meters separately from the communication devices. The specifications for such meters may require interchangeability, which could lead to further commoditization of the meter, thus 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 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 current and expected level and terms of indebtedness could adversely affectfuture success will depend, in part, on our ability to raise additionalcontinue 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 requirements, gain international market acceptance, and manage other factors in the markets in which we sell our products and services. Product and service development will require continued investment to maintain our competitive position, and the periods in which we incur significant research and development costs may drive variability in our results of operations. We may not have the necessary capital, or access to fundcapital at acceptable terms, to make these investments. We have made, and expect to continue to make, substantial investments in technology development. However, we may experience unforeseen problems in the development or performance of our operations and take advantage of new business opportunities andtechnologies or products, which can prevent us from meeting our obligations underresearch and development schedules. New products often require certifications or regulatory approvals before the products can be used, and we cannot be certain our debt instruments, and our ability to service our indebtedness is dependent on our ability to generate cash, which is influenced by many factors beyond our control.
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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 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
•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 unfavorably 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 replacements could have a material adverse effect on our business. In addition, as our products and services become more
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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 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, 2022, our total outstanding indebtedness was $460.0 million as described under Liquidity and Capital Resources. Our 2018 credit facility allows us to draw on a $500.0 million revolving line of credit. This 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, 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, could require 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 as amended (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
Our 2018 credit facility places 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 | |||||||
| • execute transactions with affiliates | • execute sale lease-back transactions | |||||||
| • 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 were unable to meet our debt service obligations or to fund our other liquidity needs, we would 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 were 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.
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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.
The convertible note hedge and warrant transactions may affect the value our common stock.
In connection with the issuance of the Convertible Notes, we entered into convertible note hedge transactions with certain financial institutions, which we refer to as "hedge counterparties". We also entered into warrant transactions with the hedge counterparties pursuant to which we sold warrants for the purchase of our common stock. The convertible note hedge transactions are generally to reduce the potential dilution upon any conversion of Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be. The warrant transactions would separately have a dilutive effect to the extent that the market price per share of our common stock exceeds the strike price of any warrants unless, subject to the terms of the warrant transactions, we elect to cash settle the warrants.
The hedge counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Convertible Notes (and are likely to do so during any observation period related to a conversion of Convertible Notes or following any repurchase of Convertible Notes by us in connection with any fundamental change repurchase date or otherwise). This activity could also cause or avoid an increase or a decrease in the market price of our common stock.
The potential effect, if any, of these transactions and activities on the market price of our common stock or the Convertible Notes will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.
Future sales of our stock in the public market, or the issuance of stock upon conversion of the Convertible Notes, could cause our stock price to decline.
We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares for sale will have on the prevailing trading price of our common stock from time to time. Sales of a substantial number of shares of our common stock could cause the price of our common stock to decline. In addition, a substantial number of shares of our common stock will be reserved for issuance upon conversion of the Convertible Notes. We may in the future also issue shares of common stock for financings, acquisitions, or equity incentives. If we issue additional shares of common stock in the future, such issuances would have a dilutive effect on the economic interest of our common stock.
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, or 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 non-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
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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 assurance 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, or 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 fail 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.
We are subject to international business uncertainties, obstacles to the repatriation of earnings, and foreign currency fluctuations.
A 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, 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, and Pound sterling, as well as 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.
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
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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 improve 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 were 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 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 comply with Section 404 of the Sarbanes-Oxley Act prior to 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.
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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 include 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 on our patents or successfully avoid them through design innovation. To combat infringement or unauthorized use of our intellectual property, we may initiate litigation, which can be expensive and time-consuming. In addition, in an infringement proceeding 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.
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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 increased 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 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, telecommunications networks, 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 before they take effect. 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 of severity. 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.
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
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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 could subject 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 relative to the value of sales.related debt and have previously entered into derivative instruments to manage such risk, these instruments could be ineffective at mitigating all or a part of 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 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. However, the discontinuation of LIBOR as a reference rate will require any debt referencing LIBOR to be amended or modified to utilize an alternative reference rate, require an adjustment to the applicable margin and/or require adjustments to other terms or covenants, any of which may unfavorably impact borrowing costs. The 2018 credit facility was amended in the fourth quarter of 2022 to replace LIBOR with Term Secured Overnight Financing Rate (SOFR) plus a credit spread of 10 basis points.
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.
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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.
Beginning January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five or fifteen years, dependent upon the geography in which the expenditures are incurred. Although Congress has considered legislation that would defer, modify, or repeal the capitalization and amortization requirement, as of year-end no such deferral has been passed. The income tax provision has been prepared according to currently enacted tax legislation.
In August 2022, the Inflation Reduction Act was signed into law, which made a number of changes to the Internal Revenue Code, including adding a 1% excise tax on stock buybacks by publicly traded corporations and a 15% minimum tax on adjusted financial statement income of certain large companies. We are subject to the new 1% excise tax beginning January 1, 2023, but the amount will vary depending upon various factors. The 15% minimum tax only applies to corporations with average book income in excess of $1 billion, so is not currently applicable.
The Organization for Economic Cooperation and Development (OECD) guidance under the Base Erosion and Profit Shifting (BEPS) initiatives aiminitiative aims to minimize perceived tax abuses and modernize global tax policy. More countries are beginning to implementThe Anti-Tax Avoidance Directives (ATAD), issued by the Council of the European Union (EU), provide further recommendations for legislative changes based onunder these tax policies. These BEPS recommendations.
most member countries. 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, seizekey components would allocate a portion of depositors' account balances.profits of the largest businesses amongst their markets, curtail new digital services taxes, and introduce a new global minimum tax of 15%. On December 20, 2021, the OECD released model rules to guide countries on implementing and calculating the 15% global minimum tax, and on December 12, 2022, the EU member states agreed to implement the OECD Pillar 2 global minimum tax rate of 15% on companies with revenues of at least 750 million euro, which would go into effect in 2024.Certain countries including the United Kingdom, Switzerland, Canada, Australia, and South Korea are actively considering changes to their tax laws to adopt certain parts of the OECD's proposals. These components do not result in any financial impact until enacted. The seized funds would be usedCompany is monitoring developments and additional details as they are released to recapitalizedetermine 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 weimpacts these new components will 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.business.
A substantial portionsignificant number 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, and adverse tax burdens. 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. Fluctuations in the value of international currencies may impact our operating results due to the translation to the U.S. dollar as well as our ability to compete in international markets. International expansion and market
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 cannotmay not cause harmful interference to licensed users and must be designed to accept interference from licensed radio devices. In the United States, our
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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 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.
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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 theregion and location and product line.
as of December 31, 2022:
| Region | Square Footage | |||||||||
Waseca, MN (L) | 110,000 | |||||||||
| Europe, Middle East, and Africa | Chasseneuil, France (O) | Macon, France | Massy, France (L) Oldenburg, Germany (L) Asti, Italy (O) | 203,513 64,357 90,212 55,834 | ||||||
| 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 environmental proceedings is required.
In conjunction with the Actaris S.p.A. (Actaris) acquisition in April 2007, Itron assumed Actaris’s environmental cleanup liability and the related legal recourse for the Frosinone site in Italy. This site was originally owned and operated by Schlumberger before Schlumberger contributed it to Actaris in the course of the spin off of Actaris from Schlumberger Industries S.p.A on August 1, 2001. Since 2001, Schlumberger has fully reimbursed Actaris, and Itron as successor to Actaris’s interests, for the Frosinone site remediation costs pursuant to an indemnification agreement. In December 2022, Itron was presented with a remediation plan, which addressed the water contamination issues, with an estimated cost of $1.9 million. Schlumberger will fully reimburse Itron. The proposal will be submitted to the Italian Authorities in the first quarter of 2023.
In 2007-2008, Itron acquired an industrial site located at 1310 Emerald Road, Greenwood, South Carolina. Previous site owners used various chlorinated solvents and potential contaminants at the site. In 2013, Itron entered into a voluntary cleanup contract with the South Carolina Department of Health and Environmental Control (DHEC). Itron completed that process in 2019. In October 2021, DHEC sent Itron and three other potentially responsible parties (PRPs) a proposed site remediation plan with an estimated cost of $3.7 million. Itron objected to the proposed plan at a public hearing on November 4, 2021, and again in a letter to DHEC dated January 13, 2022. Given that the contamination arose from activities prior to Itron's ownership of the property and past remediation efforts, Itron has disputed its responsibility for any alleged contamination and suggested alternative proposals. Itron will continue to seek a reasonable resolution with DHEC and the other PRPs.
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, 20172022, peer group of companies used for the year ended December 31, 2021, and the NASDAQ Composite Index.
* $100 invested on 12/31/12December 31, 2017, 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, 20122017 in the common stock of Itron, Inc., the peer group,groups, and the NASDAQ Composite Index, with all dividends reinvested. With respect to companies in the peer group,groups, 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 20162022 peer group includes the following publicly traded companies: Badger Meter,LM Ericsson Telephone Company, Landis+Gyr, Mueller Water Products, and Xylem, Inc., Echelon Corporation, National Instruments Corporation, Roper Technologies, Inc., and Silver Spring Networks, Inc. (SSNI) (formerly Sensus). Our 20172021 peer group includes the following publicly tradedtrade companies: Badger Meter, Inc., Echelon Corporation, Landis+Gyr, National Instruments Corporation,Mueller Water Products, and Roper Technologies,Xylem, Inc. The 2017 peer group was created as a result of our acquisition of SSNI and to add Landis+Gyr as a peer after they became publicly traded in 2017.(formerly Sensus).
Issuer Repurchase of Equity Securities
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share (2) | 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, 2022 through October 31, 2022 | — | $ | — | — | $ | 75,000 | ||||||||||||||||||||
| November 1, 2022 through November 30, 2022 | — | — | — | 75,000 | ||||||||||||||||||||||
| December 1, 2022 through December 31, 2022 | — | — | — | 75,000 | ||||||||||||||||||||||
| Total | — | — | ||||||||||||||||||||||||
(1)Effective November 1, 2021, Itron's Board of ourDirectors authorized a new share repurchase program of up to $100 million of Itron's common stock were repurchased duringover an 18-month period. Repurchases are made in the quarter ended December 31, 2017.open market or in privately negotiated transactions and in accordance with applicable securities laws.
(2) Excludes commissions.
Holders
At January 31, 2018,February 22, 2023, there were 203152 holders of record of our common stock.
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 2022 and 2021 and should be read in conjunction with Item 8: “FinancialFinancial Statements and Supplementary Data” includedData. For comparisons of fiscal years 2021 and 2020, see our Management's Discussion and Analysis of Financial Condition and Results of Operations in thisPart II, Item 7 of our 2021 Annual Report on Form 10-K.10-K, filed with the Securities and Exchange Commission (SEC) on February 28, 2022, 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 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.
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. The Industrial Internet of Things (IIoT) solutions supported by this segment include automated meter reading (AMR), advanced metering infrastructure (AMI), distributed energy resource management (DERMs), 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 these utility 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 raw, anonymized and aggregated data to promote a global perspective in ourimprove decision making, maximize operational profitability, drive resource efficiency, improve grid analytics, and deliver results for consumers, utilities, and smart cities. Outcomes supports high-value use cases such as data management, grid operations, distributed intelligence, operations management, gas distribution and safety, water operations management, revenue assurance, DERMs, energy forecasting, consumer engagement, smart payment, and fleet energy resource management. Utilities leverage these outcomes to capitalize on the power of networks and devices, empower their workforce, maximize their operations and processes while servingenhance the needscustomer experience. 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 segments.end customers.
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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, free cash flow, and constant currency. 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 sometimesmay 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 40-4243-46 for information about these non-GAAP measures and the detailed reconciliation of items that impacted free cash flow, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, non-GAAP diluted EPS, adjusted EBITDA, and non-GAAP diluted EPSfree cash flow in the presented periods.periods presented.
Total Company Highlights
Highlights and significant developments for the twelve monthsyear ended December 31, 2017
•Revenues were $1.8 billion compared with $2.0 billion last year, a decrease of $5.0 million.$186.0 million, or 9%
•Gross margin was 33.5%29.1% compared with 32.8% in the same period28.9% last year. The increase of 70 basis points was due to improvements in our Electricity and Water segments.year
•Operating expenses were $40.4decreased $122.8 million, loweror 19%, compared with the same period last year, primarily due2021
•Net loss attributable to decreased restructuring expense.Itron, Inc. was $9.7 million compared with $81.3 million in 2021
•GAAP loss per share was $0.22 compared with loss per share of $1.83 in 2021
•Non-GAAP diluted EPS improved $0.52 to $3.06was $1.13 compared with the same period last year.$1.75 in 2021
•Adjusted EBITDA decreased $20.1 million, or 17%, to $95.1 million compared with adjusted EBITDA of $115.2 million in 2021
•Total backlog was $1.8$4.6 billion, and twelve-month12-month backlog was $931 million$2.1 billion at December 31, 2017.2022, compared with $4.0 billion and $1.5 billion at December 31, 2021
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As the result of increases in raw material, component, labor and other costs, coupled with a decrease in forecasted revenue within the Device Solutions operating segment and reporting unit, which we completeddetermined during the acquisitionsecond quarter of Comverge by purchasing2022, we performed an interim goodwill impairment test. At the stockconclusion of its parent, Peak Holding Corp. (Comverge). Comverge is an industry leading providerthe test, a goodwill impairment 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 November 2, 2021, Itron entered into a definitive securities and asset purchase agreement to sell certain Gas product lines from our Device Solutions manufacturing and business operations in Europe and North America to Dresser Utility Solutions (Dresser). The sale included one German subsidiary – Itron GmbH along with its business operations, personnel, and the owned manufacturing facility in Karlsruhe; the business operations, personnel, and assets associated with the leased manufacturing facility in Argenteuil, France; and the business and manufacturing assets maintained at one of our contract manufacturers in North America. The base sale price of this divestiture was $75.0 million, with adjustments for (1) pension liabilities assumed by Dresser for related active employees and (2) the final working capital balance. Cash proceeds from the sale were $55.9 million.
The transaction closed on February 28, 2022. The final sales price and loss on sale were determined after the finalization of the working capital adjustment, recognized in the fourth quarter of 2022. As of December 31, 2021, we recognized a pre-tax impairment loss of $34.4 million as well as $3.1 million for professional services in conjunction with the planned sale to Dresser (classified within loss on sale of businesses within the Consolidated Statements of Operations). In determining the amount of the impairment loss for the assets of this transaction during the fourth quarter of 2021, we included $59.7 million of accumulated foreign currency translation losses and $0.9 million in unrealized loss on defined benefit pension plans, both classified within accumulated other comprehensive income (AOCI). Upon closing of the sale transaction in the first quarter of 2022, the then outstanding amounts in AOCI were reclassified to net income through loss on sale of businesses for a total of $55.4 million, with a corresponding reversal of the impairment loss originally booked in the fourth quarter of 2021. The difference between the amounts included for the impairment loss in the fourth quarter of 2021 and the first quarter of 2022 was driven by the change in the euro to U.S. dollar exchange rate, and operating results for the period owned in 2022.
In the first quarter of 2022, we recognized additional loss of $2.2 million related to changes in the working capital balances and additional professional services. In the second quarter of 2022, the loss increased by $0.2 million for professional services related to the divestiture. In the third quarter of 2022, we recognized additional loss of $0.8 million related primarily to a true-up in the working capital balances. In the fourth quarter of 2022, we recognized additional loss of $0.3 million related to changes in the working capital balance and other charges related to the finalization of the transaction. We recognized a total loss of $3.5 million in 2022.
Credit Facility Amendment
On February 21, 2023, we entered into a $1.15 billion senior securedsixth amendment to our credit facility that was initially entered on January 5, 2018 (the 2018 credit facility), which amended and restated. This amendment modifies provisions to allow for the senior secured credit facility we entered into in 2015. The 2018 credit facility consistsaddback for debt covenant calculations of a $650 million U.S. dollar term loan and a multicurrency revolving line of credit with a principal amount of upnon-recurring cash expenses related to $500 million.
On February 22, 2018, our23, 2023, the Board of Directors of Itron approved a restructuring plan (2018(the 2023 Projects). The 20182023 Projects will include activities that continue ourthe Company's 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 to be substantially complete the plan by the end of 2020. We estimateearly 2025. Itron estimates pre-tax restructuring charges of $100$40-45 million. Of the total estimated charge, approximately 95% will result in cash expenditures, and the remainder to non-cash impairment charges. The majority of the expense will be recognized during the
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first quarter of 2023. Once the 2023 Projects are substantially completed, Itron estimates $14-17 million in annualized savings. Certain of Itron's employees are represented by unions or works councils, which requires consultation, and potential restructuring projects may be subject to $110regulatory approval, both of which could impact the timing of planned savings in certain jurisdictions.
Impact of COVID-19, Supply Chain Challenges, and the Conflict in Ukraine
The COVID-19 pandemic has had global economic impacts including disrupting customer demand and global supply chains, resulting in market volatility. The extent of the recent pandemic and its ongoing impact on our operations is volatile, but is being monitored closely by our management. New variants of the virus may cause previously lifted restrictions to be reinstated, which could result in more disruptions. As economies have reopened, global supply chains have struggled to keep pace with rapidly changing demand. The resulting supply constraints have manifested across a variety of areas including mechanical, electrical and logistics portions of the supply chain, which has impacted our ability to ship products in a timely manner. In particular, our ability to obtain adequate supply of semiconductor components has impacted our ability to service recovering customer demand. While we believe the current imbalance in supply and demand is temporal, the timeline to recovery is uncertain. Efforts are ongoing with suppliers to increase supply, including the approval of alternate sources. Recently, inflation in our raw materials and component costs, freight charges, and labor costs have increased above historical levels, due to, among other things, the continuing impacts of the pandemic and uncertain economic environment. We may or may not be able to fully recover these increased costs through pricing actions with our customers. At this time, we have not identified any significant decrease in long-term customer demand for our products and services. However, certain of our customer projects have experienced delay in deliveries, with revenue originally forecasted in prior periods shifting to future periods. For more information on risks associated with the COVID-19 pandemic, please see our risk in Part I, Item 1A: Risk Factors.
While we have limited direct business exposure in Russia, Belarus and Ukraine, the Russian military actions and the resulting sanctions could adversely affect the global economy, as well as further disrupt the supply chain. A major disruption in the global economy and supply chain could have a material adverse effect on our business, prospects, financial condition, results of operations, and cash flows. The extent and duration of the military action, sanctions, and resulting market and/or supply disruptions are impossible to predict, but could be substantial. During the third quarter of 2022, we substantially liquidated our legal entity in Russia, recognizing a loss of $1.9 million with approximately $45 million to $50 millionfor the reclassification of annualized savings when substantially complete.the currency translation adjustment from accumulated other comprehensive income. The loss was classified within sales, general and administrative expense within the Consolidated Statements of Operations.
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Total Company GAAP and Non-GAAP Highlights and Unit Shipments
| Year Ended December 31, | |||||||||||||||||||||||||||||
| In thousands, except margin and per share data | 2022 | % Change | 2021 | ||||||||||||||||||||||||||
| GAAP | |||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||
| Product revenues | $ | 1,500,243 | (11)% | $ | 1,678,195 | ||||||||||||||||||||||||
| Service revenues | 295,321 | (3)% | 303,377 | ||||||||||||||||||||||||||
| Total revenues | 1,795,564 | (9)% | 1,981,572 | ||||||||||||||||||||||||||
| Gross profit | 522,189 | (9)% | 573,169 | ||||||||||||||||||||||||||
| Operating expenses | 529,628 | (19)% | 652,468 | ||||||||||||||||||||||||||
| Operating loss | (7,439) | 91% | (79,299) | ||||||||||||||||||||||||||
| Other income (expense) | (8,304) | 81% | (44,511) | ||||||||||||||||||||||||||
| Income tax benefit | 6,196 | (86)% | 45,512 | ||||||||||||||||||||||||||
| Net loss attributable to Itron, Inc. | (9,732) | 88% | (81,255) | ||||||||||||||||||||||||||
Non-GAAP(1) | |||||||||||||||||||||||||||||
| Non-GAAP operating expenses | $ | 463,766 | (7)% | $ | 497,604 | ||||||||||||||||||||||||
| Non-GAAP operating income | 58,423 | (23)% | 75,565 | ||||||||||||||||||||||||||
| Non-GAAP net income attributable to Itron, Inc. | 50,987 | (35)% | 78,103 | ||||||||||||||||||||||||||
| Adjusted EBITDA | 95,071 | (17)% | 115,211 | ||||||||||||||||||||||||||
| GAAP Margins and EPS | |||||||||||||||||||||||||||||
| Gross margin | |||||||||||||||||||||||||||||
| Product gross margin | 26.5 | % | 26.6 | % | |||||||||||||||||||||||||
| Service gross margin | 42.1 | % | 41.6 | % | |||||||||||||||||||||||||
| Total gross margin | 29.1 | % | 28.9 | % | |||||||||||||||||||||||||
| Operating margin | (0.4) | % | (4.0) | % | |||||||||||||||||||||||||
| Net loss per common share - Basic | $ | (0.22) | $ | (1.83) | |||||||||||||||||||||||||
| Net loss per common share - Diluted | $ | (0.22) | $ | (1.83) | |||||||||||||||||||||||||
Non-GAAP EPS (1) | |||||||||||||||||||||||||||||
| Non-GAAP diluted EPS | $ | 1.13 | $ | 1.75 | |||||||||||||||||||||||||
| 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 | |||||||||
This metric primarily of our OpenWay technology)
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were sold separately from an Itron product directly to our customers or to third party manufacturers for use in endpoints such as electric, water, and gas meters; streetlights and other types of IIoT sensors and actuators; sensors and other capabilities that the meter.end customer would like Itron to connect and manage on their behalf.
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 anticipate the opportunity to increase our penetration of Outcomes applications, software, and managed applications will increase as our endpoints under management increases. Management believes using the endpoints under management metric enhances insight to the strategic and operational direction of our Networked Solutions and Outcomes segments to serve clients for years after their one-time installation of an endpoint.
A summary of our meter and communication module shipmentsendpoints under management is as follows:
| Year Ended December 31, | |||||||||||||||||
| Units in thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Endpoints under management | 93,941 | 82,354 | 74,184 | ||||||||||||||
| 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 | 2022 | 2021 | |||||||||||||||||||||||||||
| Total Company | |||||||||||||||||||||||||||||
| Revenues | $ | 1,795,564 | $ | 1,981,572 | $ | (70,849) | $ | (115,159) | $ | (186,008) | |||||||||||||||||||
| Gross profit | 522,189 | 573,169 | (15,348) | (35,632) | (50,980) | ||||||||||||||||||||||||
| 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 $186.0 million in 2017,2022 compared with 2016.2021. We have been unfavorably impacted by global component constraints, which limited our ability to fulfill customer demand, as well as the sale of certain Gas product lines from our Device Solutions manufacturing and business operations in Europe and North America to Dresser during the first quarter of 2022. Product revenues decreased $16.1$178.0 million in 2017 primarily in our North America2022 and Europe, Middle East, and Africa (EMEA) regions. This was partially offset by improved productservice revenues in our Latin America and Asia Pacific regions during 2017. Service revenues increased $21.2decreased $8.1 million in 20172022 as compared with 2016, which was primarily driven2021. Device Solutions decreased by Comverge service revenues of $19.6 million. Changes in currency exchange rates favorably impacted revenues$206.4 million; Networked Solutions increased by $11.6$26.6 million; and Outcomes decreased by $6.3 million in 2017.
No single customer represented more than 10% of total revenues for the years ended December 31, 2017, 2016,2022 and 2015.2021. Our 10 largest customers accounted for 33%, 31%, and 22%32% of total revenues in 2017, 2016,2022 and 2015, respectively.25% of total revenues in 2021.
Gross Margin
Gross margin was 33.5%29.1% for 2017,2022, compared with 32.8%28.9% in 2016. Our gross margin associated with2021. We were favorably impacted by product sales improved to 33.5%and solution mix partially offset by higher component costs and manufacturing inefficiencies in 2017 from 32.3% in 2016 due to improved 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 margin sales in our EMEA region.
Refer to Operating Segment Results section below for further detail on total company revenues and gross margin.
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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 | 2022 | 2021 | |||||||||||||||||||||||||||
| Total Company | |||||||||||||||||||||||||||||
| Sales, general and administrative | $ | 290,453 | $ | 300,520 | $ | (13,013) | $ | 2,946 | $ | (10,067) | |||||||||||||||||||
| Research and development | 185,098 | 197,235 | (946) | (11,191) | (12,137) | ||||||||||||||||||||||||
| Amortization of intangible assets | 25,717 | 35,801 | (730) | (9,354) | (10,084) | ||||||||||||||||||||||||
| Restructuring | (13,625) | 54,623 | 265 | (68,513) | (68,248) | ||||||||||||||||||||||||
| Loss on sale of businesses | 3,505 | 64,289 | (3,467) | (57,317) | (60,784) | ||||||||||||||||||||||||
| Goodwill impairment | 38,480 | — | — | 38,480 | 38,480 | ||||||||||||||||||||||||
| Total operating expenses | $ | 529,628 | $ | 652,468 | $ | (17,891) | $ | (104,949) | $ | (122,840) | |||||||||||||||||||
| 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$122.8 million for the year ended December 31, 20172022 as compared with the same period in 2016.2021. This was primarily relateddue to decreasesa decrease of $68.2 million in restructuring related primarily to the 2021 Projects. The loss on sale of businesses of $64.3 million in 2021 includes the impairment resulting from the sale of certain Gas product lines from our Device Solutions manufacturing and generalbusiness operations in Europe and administrative expense, partially offset byNorth America to Dresser and an increase in sales and marketing expenses.
Other Income (Expense)
The following table shows the components of other income (expense):
| Year Ended December 31, | |||||||||||||||||||||||||||||
| In thousands | 2022 | % Change | 2021 | ||||||||||||||||||||||||||
| Interest income | $ | 2,633 | 69% | $ | 1,557 | ||||||||||||||||||||||||
| Amortization of prepaid debt fees | (3,499) | (81)% | (18,253) | ||||||||||||||||||||||||||
| Other interest expense | (3,225) | (69)% | (10,385) | ||||||||||||||||||||||||||
| Interest expense | (6,724) | (77)% | (28,638) | ||||||||||||||||||||||||||
| Other income (expense), net | (4,213) | (76)% | (17,430) | ||||||||||||||||||||||||||
| Total other income (expense) | $ | (8,304) | (81)% | $ | (44,511) | ||||||||||||||||||||||||
| 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, 20172022 was a net expense of $16.9$8.3 million compared with $11.6$44.5 million in 2016. 2021.
The change in other income (expense), net, for the year ended December 31, 20172022 as compared with 2016the same period in 2021 was dueprimarily driven by 2021 activity: $12.2 million write-off of prepaid debt fees associated with the repayment of senior subordinated notes, $2.6 million in lower debt fee amortization, $11.7 million related to fluctuationsthe extinguishment of debt in the recognized foreign currency exchange gains and losses due to transactions denominated in a currency other than an entity's functional currency.
Income Tax Provision
Our income tax provisionbenefit was $74.3 million, $49.6$6.2 million and $22.1$45.5 million for the years ended December 31, 2017, 2016,2022 and 2015, respectively.2021. Our tax rates of 55%, 59%, and 60%rate for the yearsyear ended December 31, 2017, 2016, and 2015 differ2022 differed from the 35% U.S. federal statutory tax rate of 21% due to 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, adjustments to valuation allowances,stock-based compensation, and uncertain tax positions, among other items.
positions. The 2021 tax provision forbenefit related largely to the year ended December 31, 2017 was significantly impacted by the inclusionrelease of $30.4 million of expense for the provisional determination of the impact to oura valuation allowance on U.S. foreign tax credit deferred tax positionsassets that were utilized in 2021.
32
For additional discussion related to income taxes, seerefer to Item 8: “FinancialFinancial Statements and Supplementary Data, Note 11: Income Taxes.”
Operating Segment Results
For a description of our operating segments, refer to Part I, Item 8: “Financial Statements and Supplementary Data, Note 16: Segment Information”1:Business, Our Operating Segments included in this Annual Report on Form 10-K.10-K and the above Overview section. The following tables and discussion highlight significant changes in trends or components of each operating segment.segment:
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| In thousands | 2022 | % Change | 2021 | ||||||||||||||||||||||||||||||||
| Segment revenues | |||||||||||||||||||||||||||||||||||
| Device Solutions | $ | 438,710 | (32)% | $ | 645,104 | ||||||||||||||||||||||||||||||
| Networked Solutions | 1,119,268 | 2% | 1,092,631 | ||||||||||||||||||||||||||||||||
| Outcomes | 237,586 | (3)% | 243,837 | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 1,795,564 | (9)% | $ | 1,981,572 | ||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| In thousands | Gross Profit | Gross Margin | Gross Profit | Gross Margin | |||||||||||||||||||||||||||||||
| Segment gross profit and margin | |||||||||||||||||||||||||||||||||||
| Device Solutions | $ | 61,778 | 14.1% | $ | 99,355 | 15.4% | |||||||||||||||||||||||||||||
| Networked Solutions | 361,975 | 32.3% | 378,633 | 34.7% | |||||||||||||||||||||||||||||||
| Outcomes | 98,436 | 41.4% | 95,181 | 39.0% | |||||||||||||||||||||||||||||||
| Total gross profit and margin | $ | 522,189 | 29.1% | $ | 573,169 | 28.9% | |||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| In thousands | 2022 | % Change | 2021 | ||||||||||||||||||||||||||||||||
| Segment operating expenses | |||||||||||||||||||||||||||||||||||
| Device Solutions | $ | 35,075 | (17)% | $ | 42,138 | ||||||||||||||||||||||||||||||
| Networked Solutions | 113,707 | (8)% | 124,199 | ||||||||||||||||||||||||||||||||
| Outcomes | 52,189 | 17% | 44,550 | ||||||||||||||||||||||||||||||||
| Corporate unallocated | 328,657 | (26)% | 441,581 | ||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 529,628 | (19)% | $ | 652,468 | ||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| In thousands | Operating Income (Loss) | Operating Margin | Operating Income (Loss) | Operating Margin | |||||||||||||||||||||||||||||||
| Segment operating income (loss) and operating margin | |||||||||||||||||||||||||||||||||||
| Device Solutions | $ | 26,703 | 6.1% | $ | 57,217 | 8.9% | |||||||||||||||||||||||||||||
| Networked Solutions | 248,268 | 22.2% | 254,434 | 23.3% | |||||||||||||||||||||||||||||||
| Outcomes | 46,247 | 19.5% | 50,631 | 20.8% | |||||||||||||||||||||||||||||||
| Corporate unallocated | (328,657) | NM | (441,581) | NM | |||||||||||||||||||||||||||||||
| Total operating loss and operating margin | $ | (7,439) | (0.4)% | $ | (79,299) | (4.0)% | |||||||||||||||||||||||||||||
33
| 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 | 2022 | 2021 | |||||||||||||||||||||||||||
| Device Solutions Segment | |||||||||||||||||||||||||||||
| Revenues | $ | 438,710 | $ | 645,104 | $ | (55,417) | $ | (150,977) | $ | (206,394) | |||||||||||||||||||
| Gross profit | 61,778 | 99,355 | (8,076) | (29,501) | (37,577) | ||||||||||||||||||||||||
| Operating expenses | 35,075 | 42,138 | (1,498) | (5,565) | (7,063) | ||||||||||||||||||||||||
| 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%14.1% in 2017,2022 compared with 30.1%15.4% in 2016.2021. The 110130 basis point improvement over the prior year was primarily the result of higher volumes and favorable product mix.
Operating Expenses
Operating expenses decreased $7.1 million, or 17%, in 2022 compared with 2021. The decrease was primarily due to management's cost savings actions resulting in a $4.0 million decrease in amortization of intangible assets expense.marketing costs and a $3.1 million decrease in research and development 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 | 2022 | 2021 | |||||||||||||||||||||||||||
| Networked Solutions Segment | |||||||||||||||||||||||||||||
| Revenues | $ | 1,119,268 | $ | 1,092,631 | $ | (8,396) | $ | 35,033 | $ | 26,637 | |||||||||||||||||||
| Gross profit | 361,975 | 378,633 | (3,947) | (12,711) | (16,658) | ||||||||||||||||||||||||
| Operating expenses | 113,707 | 124,199 | (377) | (10,115) | (10,492) | ||||||||||||||||||||||||
| 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 increased by $25.7$26.6 million, or 5%2%, in 20162022 compared with 2015. This was due to an increase in product revenues in North America, EMEA, and Asia Pacific. The total change in Gas revenues was unfavorably impacted by $7.0 million due to the effect of changes in foreign currency exchange rates.
Gross Margin
Gross margin was 32.3% in 2022 compared with 34.7% in 2021. The decrease of 240 basis points was primarily due to inflationary pressures driving higher input costs, less favorable product mix, and manufacturing inefficiencies related to component shortages.
Operating Expenses
Operating expenses decreased by $10.5 million, or 8%, in general2022 compared with 2021. The decrease was primarily driven by reduced research and administrative expense.development costs.
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 | 2022 | 2021 | |||||||||||||||||||||||||||
| Outcomes Segment | |||||||||||||||||||||||||||||
| Revenues | $ | 237,586 | $ | 243,837 | $ | (7,036) | $ | 785 | $ | (6,251) | |||||||||||||||||||
| Gross profit | 98,436 | 95,181 | (3,325) | 6,580 | 3,255 | ||||||||||||||||||||||||
| Operating expenses | 52,189 | 44,550 | (226) | 7,865 | 7,639 | ||||||||||||||||||||||||
| 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 - 2017 vs. 2016
Revenues decreased $43.7 million, or 9%, in 2017. This decrease was primarily due to lower product revenues in North America and EMEA. This was partially offset by improved product revenues in Latin America.
Gross Margin - 2017 vs. 2016
Gross margin increased to 35.7%41.4% in 2017,2022 compared with 34.2% in 2016.39.0% for last year. The 150240 basis point increase was driven by lower warranty expense in 2017, including an $8.0 million insurance recovery in North America associated with warranty expenses previously recognized as a result of our 2015 product replacement notification to customers who had purchased certain communication modules. This insurance recovery increased gross margin by 170 basis points in 2017.favorable managed services mix and other cost efficiencies.
Operating Expenses - 2017 vs. 2016
Operating expenses increased by $9.5$7.6 million, or 8%17%, in 2016. The2022 compared with 2021. This increase was primarily duerelated to higher restructuring expenses as a result of the announcement of the 2016 Projects.increased research and development investment.
Corporate unallocated:unallocated
Operating expenses not directly associated with an operating segment are classified as “CorporateCorporate unallocated.” These expenses decreased $15.3$112.9 million or 20%, in 20172022 as compared with 2016. The decrease2021. This was primarily due to lower professional service fees associateda decrease of $68.2 million in restructuring related primarily to the 2021 Projects. The loss on sale of businesses of $64.3 million in 2021 includes the impairment resulting from the sale of certain Gas product lines from our Device Solutions manufacturing and business operations in Europe and North America to Dresser and an increase to the loss related to the 2020 Latin America divestiture. Amortization of intangible assets decreased $10.1 million as compared with audit, accounting, and legal services,2021. The decreases were partially offset by an increase$38.5 million in acquisitiongoodwill impairment within our Device Solutions reporting unit, recognized in 2022. Refer to Item 8: Financial Statements and integration related expenses.Supplementary Data, Note 13: Restructuring and Note 18: Sale of Businesses for more details.
Financial Condition
Cash Flow Information:Information
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Cash provided by operating activities | $ | 24,500 | $ | 154,794 | $ | 109,514 | |||||||||||
| Cash provided by (used in) investing activities | 40,516 | (34,884) | (41,036) | ||||||||||||||
| Cash used in financing activities | (18,737) | (152,887) | (11,576) | ||||||||||||||
| Less: Cash classified within assets held for sale | — | (9,750) | — | ||||||||||||||
| Effect of exchange rates on cash and cash equivalents | (6,851) | (1,627) | 127 | ||||||||||||||
| Increase (decrease) in cash and cash equivalents | $ | 39,428 | $ | (44,354) | $ | 57,029 | |||||||||||
| 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 $487.32022 was $202.0 million compared with $133.6$162.6 million at December 31, 2016.2021. The $353.8$39.4 million increase in cash and cash equivalents and restricted cashin the 2022 period was primarily the result of proceeds from the sale of certain Gas product lines from our net financingDevice Solutions manufacturing and investing activities relatedbusiness operations in Europe and North America to our acquisitions of ComvergeDresser and SSNI, as well as an increase in cash flow provided by operating activities.
35
Operating activities
Investing activities
Cash provided by investing activities during 2022 was $75.4 million higher than in 2016.2021. This increase was due to an improvement in net income adjusted for non-cash items and changes in operating asset and liabilities. Favorable adjustments include a $115.8 million reduction in cash used for accounts payable, other current liabilities, and taxes payable primarily due to the timing of payments and a litigation payment made during the year ended December 31, 2016. Unfavorable adjustments include a $38.6 million increased use of cash for inventory primarily related to net cash proceeds received from the sale of certain Gas product lines from our strategic sourcing projects and relatedDevice Solutions manufacturing and supplier transitions during the year ended December 31, 2017.business operations in Europe and North America to Dresser for $55.9 million, along with $14.9 million less purchases of property, plant, and equipment in 2022.
Net cash used in investingfinancing activities in 2017during 2022 was $100.7$18.7 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.
Cash classified within assets held for sale
Cash classified within assets held for sale was $9.8 million as of December 31, 2016, compared with2021, which was related to the same periodsale of certain Gas product lines from our Device Solutions manufacturing and business operations in 2015.Europe and North America to Dresser, which closed on February 28, 2022.
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 | 2022 | 2021 | |||||||||||||||
| Cash provided by operating activities | $ | 24,500 | $ | 154,794 | |||||||||||||
| Acquisitions of property, plant, and equipment | (19,747) | (34,682) | |||||||||||||||
| Free cash flow | $ | 4,753 | $ | 120,112 | |||||||||||||
| 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 fluctuated primarily as a result of changes indecreased due to lower operating cash providedflow, partially offset by operating activities.lower spending for property, plant, and equipment. See the cash flow discussion of operating and investing 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: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 millioncontinues to be in a net favorable position. We expect existing cash, cash flows from operations, and access to capital markets to continue to be sufficient to fund our operating activities and cash commitments, such as material capital expenditures and debt obligations, for at December 31, 2017.least the next 12 months and into the foreseeable future.
On June 23, 2015,March 12, 2021, we closed the sale of 4,472,222 shares of our common stock in a public offering, resulting in net proceeds to us of $389.4 million, after deducting underwriters' discounts of the offering, and we closed the sale of the Convertible Notes
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in a private placement to qualified institutional buyers, resulting in net proceeds to us of $448.5 million after deducting initial purchasers' discounts of the offering. Concurrently with the issuance of the Convertible Notes, we entered into an amendedthe Convertible Note Hedge Transactions and restated credit agreement providing for committed credit facilities in the amountWarrant Transactions. For further description of $725 million U.S. dollars (the 2015 credit facility). The 2015these transactions, refer to Item 8: Financial Statements and Supplementary Data, Note 6: Debt and Note 7: Derivative Financial Instruments.
Borrowings
Our 2018 credit facility, consists of a $225 million U.S. dollar term loan andas amended, provides a multicurrency revolving line of credit (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. At December 31, 2017, $125.4 million2022, no amount was outstanding under the revolver,2018 credit facility, and $342.7 million was available for additional borrowings or standby letters of credit. At December 31, 2017, $31.9$56.0 million was utilized by outstanding standby letters of credit, resulting in $218.1$444.0 million available for additionalborrowing or standby letters of credit.
On December 22, 2017,March 12, 2021, we issued $300 million aggregate principal amount of 5.00% senior notes due 2026 (December Notes). The December Notes were issued pursuant to an indenture, dated as of December 22, 2017 (Indenture), among Itron, the guarantors from time to time party thereto and U.S. Bank National Association, as trustee. The December Notes formed a part of the financing of SSNI. On January 19, 2018, we issued an additional $100 million aggregate principal amount of 5.00% senior notes due 2026 pursuant to the Indenture (January Notes). The proceeds fromclosed the sale of $460 million in Convertible Notes in a private placement to qualified institutional buyers. The Convertible Notes do not bear regular interest, and the Januaryprincipal amount does not accrete. The Convertible Notes were used to refinance existing indebtedness related to the acquisition of SSNI, pay related fees and expenses and for general corporate purposes.will mature on March 15, 2026, unless earlier repurchased, redeemed, or converted in accordance with their terms.
For further description of our borrowings, refer to Item 8: “FinancialFinancial Statements and Supplementary Data, Note 6: Debt,Debt. Refer to Item 8: Financial Statements and Supplementary Data, Note 19: Subsequent Events” included in this Annual Report on Form 10-K.7: Derivative Financial Instruments for further details of the Convertible Note Hedge Transactions and Warrant Transactions.
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 our 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. We estimate2023, with an estimated $8 million in cash payments remaining as of December 31, 2022 with cash outflows expected through 2024.
On October 29, 2021, our Board of Directors approved a restructuring plan (the 2021 Projects), which in conjunction with the announcement of the sale of certain Gas product lines from our Device Solutions manufacturing and business operations in Europe and North America to Dresser, (refer to Item 8: Financial Statements and Supplementary Data, Note 18: Sale of Businesses),includes activities to drive reductions in certain locations and functional support areas. These projects are expected to be substantially complete by the end of 2024, with an estimated $34 million in cash payments remaining as of December 31, 2022 with cash outflows expected through 2025.
For the year ended December 31, 2022, we paid out a net $25.8 million related to all our restructuring projects. As of December 31, 2022, $42.4 million was accrued for these restructuring projects, of which $14.5 million is expected to be paid within the next 12 months.
On February 23, 2023, the Board of Directors of Itron approved a restructuring plan (the 2023 Projects). The 2023 Projects include activities that continue the Company's efforts to optimize its global supply chain and manufacturing operations, sales and marketing organizations, and other overhead. These projects are to be substantially complete by early 2025. Itron estimates pre-tax restructuring charges of $100 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.$40-45 million. Of the total estimated charge, approximately 95% will result in cash expenditures. We expectexpenditures, and the remainder to record thenon-cash impairment charges. The majority of the charges inexpense will be recognized during the first quarter of 2018. The 20182023. Once the 2023 Projects are expected to resultsubstantially completed, Itron estimates $14-17 million in approximately $45 million to $50 millionannualized savings. Certain of annualized savings when substantially complete.
For further details regarding our restructuring activities, refer to Item 8: “FinancialFinancial Statements and Supplementary Data, Note 13: Restructuring.”
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Stock Repurchase Program
Effective November 1, 2021, Itron's Board of Directors authorized a share repurchase program of up to $100 million of our common stock over an 18-month period (the 2021 Stock Repurchase Program). Repurchases are made in the open market or in privately negotiated transactions, and in accordance with applicable securities laws. Following the announcement of the program and through December 31, 2022, we have repurchased 405,282 shares at an average share price of $61.67 (excluding commissions) for a total of $25 million. As of December 31, 2022, we are authorized to repurchase up to an additional $75 million before May 1, 2023.
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 12 months are $18.2 million and beyond the next 12 months are $47.4 million.
We regularly enter into standard purchase orders in the ordinary course of business that may obligate us to purchase materials and other items but may not yet qualify for recognition in our Consolidated Balance Sheets. Purchase orders and other purchase obligations can include open-ended agreements that provide for estimated quantities over an extended delivery period. At December 31, 2022, purchase orders and other purchase obligations were $728.2 million, which includes capital expenditures of $10.1 million. The purchase orders may include durations longer than one year, but these long-term agreements generally contain termination clauses that could require payment if the commitments were canceled, and as such the total above is considered short-term as of December 31, 2022.
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, 2022.
| In thousands | Next 12 months | Beyond the next 12 months | ||||||||||||
| Warranty obligations | $ | 18,203 | $ | 7,495 | ||||||||||
| Estimated pension benefit payments | 3,805 | 57,839 | ||||||||||||
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, refer to 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.
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 | 2022 | 2021 | |||||||||||||||
| U.S. federal taxes paid | $ | 1,128 | $ | — | |||||||||||||
| State income taxes paid | 3,658 | 817 | |||||||||||||||
| Foreign and local income taxes paid | 7,129 | 6,256 | |||||||||||||||
| Total income taxes paid | $ | 11,915 | $ | 7,073 | |||||||||||||
| 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$27 million in U.S. federal taxes, $8 million inand state taxes and $14$11 million in foreign and local income taxes in 2018. These estimates exclude the impact of the acquisition of SSNI.2023.
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the future would not result in U.S. federal income tax. Accordingly, there is no provision for U.S. deferred taxes on this cash. If this cash were repatriated to fund U.S. operations, additional withholding tax costs may be incurred. Tax is only one of many factors that we consider in the management of global cash. Included in the determination of the tax costs in repatriating foreign cash into the United States are the amount of earnings and profits in a particular jurisdiction, withholding taxes that would be imposed, and available foreign tax credits. Accordingly, the amount of taxes that we would need to accrue and pay to repatriate foreign cash could vary significantly.
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, $12.62022, $9.1 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.updated quarterly. Other variables impacting our estimate of costs to complete
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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.reduced.
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 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
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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%85% 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 ratesrate used depending on the duration of the plans, were 1.00% and 1.75%, respectively.was 3.75%. The weighted average discount rate used to measure the projected benefit obligation for all of the plans at December 31, 20172022 was 2.21%4.14%. A change of 25100 basis points in the discount rate would change our projected benefit obligation by approximately $5$9.0 million. The financial and actuarial assumptions used at December 31, 20172022 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). Prior to December 31, 2020, stock options were also granted as part of the stock-based compensation 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, and expected term. 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. For stock options, the fair value was estimated at the date of grant using the Black-Scholes option-pricing model, which included assumptions for the expected volatility, risk-free interest rate, expected term and dividend yield.
In valuing our stock options and restricted stock units with a market condition and stock options, 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 theThe 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 volatility for stock options was based on the historical and implied volatility of our own common stock. The expected life of stock option grants iswas 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.
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, restructuring, charges orloss on sale of businesses, strategic initiative expenses, software project impairment, Russian currency translation write-off, goodwill impairment, charges.or acquisition and integration related expenses. 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.
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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 businesses, strategic initiative expenses, software project impairment, Russian currency translation write-off, goodwill impairment, and acquisition and integration, and goodwill impairment.integration. We define non-GAAP operating income as operating income (loss) excluding the expenses related to the amortization of intangible assets, restructuring, loss on sale of businesses, strategic initiative expenses, software project impairment, Russian currency translation write-off, goodwill impairment, 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 not related to acquisitions and restructuring projects.our core operating results. By excluding these expenses, we believe that it is easier for management and investors to compare our financial results over multiple periods and analyze trends in our operations. For example, in certain periods, expenses related to amortization of intangible assets may decrease, which would improve GAAP operating margins, yet the improvement in GAAP operating margins due to this lower expense is not necessarily reflective of an improvement in our core business. There are some limitations related to the use of non-GAAP operating expenses and non-GAAP operating income versus operating expenses and operating income calculated in accordance with GAAP. We compensate for these limitations by providing specific information about the GAAP amounts excluded from non-GAAP operating expense and non-GAAP operating income and evaluating non-GAAP operating expense and non-GAAP operating income together with GAAP operating expense and operating income.
Non-GAAP net income and non-GAAP diluted EPS – We define non-GAAP net income as net income (loss) attributable to Itron, Inc. excluding the expenses associated with amortization of intangible assets, restructuring, acquisition and integration, goodwill impairment, amortization of debt placement fees, the impactdebt extinguishment, restructuring, loss on sale of the Tax Cutsbusinesses, strategic initiative expenses, software project impairment, Russian currency translation write-off, goodwill impairment, 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 diluted weighted-average shares outstanding during the weighted average shares,period calculated on a dilutedGAAP basis outstanding during each period.and then reduced to reflect the anti-dilutive impact of the convertible note hedge transaction entered into in connection with the 0% Convertible Notes due 2026 issued in March 2021. We consider these financial measures to be useful metrics for management and investors for the same reasons that we use non-GAAP operating income. The same limitations described above regarding our use of non-GAAP operating income apply to our use of non-GAAP net income and non-GAAP diluted EPS. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP measures and evaluating non-GAAP net income and non-GAAP diluted EPS together with GAAP net income attributable to Itron, Inc. and GAAP diluted EPS.
Adjusted EBITDA – We define adjusted EBITDA as net income (loss) (a) minus interest income, (b) plus interest expense, debt extinguishment, depreciation and amortization, restructuring, loss on sale of businesses, strategic initiative expenses, software project impairment, Russian currency translation write-off, goodwill impairment, 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.in the reconciliation.
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 | 2022 | 2021 | |||||||||||||||||||||
| NON-GAAP OPERATING EXPENSES | |||||||||||||||||||||||
| GAAP operating expenses | $ | 529,628 | $ | 652,468 | |||||||||||||||||||
| Amortization of intangible assets | (25,717) | (35,801) | |||||||||||||||||||||
| Restructuring | 13,625 | (54,623) | |||||||||||||||||||||
| Loss on sale of businesses | (3,505) | (64,289) | |||||||||||||||||||||
| Strategic initiative | (675) | — | |||||||||||||||||||||
| Software project impairment | (8,719) | — | |||||||||||||||||||||
| Russian currency translation write-off | (1,885) | — | |||||||||||||||||||||
| Goodwill impairment | (38,480) | — | |||||||||||||||||||||
| Acquisition and integration | (506) | (151) | |||||||||||||||||||||
| Non-GAAP operating expenses | $ | 463,766 | $ | 497,604 | |||||||||||||||||||
| NON-GAAP OPERATING INCOME | |||||||||||||||||||||||
| GAAP operating loss | $ | (7,439) | $ | (79,299) | |||||||||||||||||||
| Amortization of intangible assets | 25,717 | 35,801 | |||||||||||||||||||||
| Restructuring | (13,625) | 54,623 | |||||||||||||||||||||
| Loss on sale of businesses | 3,505 | 64,289 | |||||||||||||||||||||
| Strategic initiative | 675 | — | |||||||||||||||||||||
| Software project impairment | 8,719 | — | |||||||||||||||||||||
| Russian currency translation write-off | 1,885 | — | |||||||||||||||||||||
| Goodwill impairment | 38,480 | — | |||||||||||||||||||||
| Acquisition and integration | 506 | 151 | |||||||||||||||||||||
| Non-GAAP operating income | $ | 58,423 | $ | 75,565 | |||||||||||||||||||
| NON-GAAP NET INCOME & DILUTED EPS | |||||||||||||||||||||||
| GAAP net loss attributable to Itron, Inc. | $ | (9,732) | $ | (81,255) | |||||||||||||||||||
| Amortization of intangible assets | 25,717 | 35,801 | |||||||||||||||||||||
| Amortization of debt placement fees | 3,323 | 18,078 | |||||||||||||||||||||
| Debt extinguishment | — | 11,681 | |||||||||||||||||||||
| Restructuring | (13,625) | 54,623 | |||||||||||||||||||||
| Loss on sale of businesses | 3,505 | 64,289 | |||||||||||||||||||||
| Strategic initiative | 675 | — | |||||||||||||||||||||
| Software project impairment | 8,719 | — | |||||||||||||||||||||
| Russian currency translation write-off | 1,885 | — | |||||||||||||||||||||
| Goodwill impairment | 38,480 | — | |||||||||||||||||||||
| Acquisition and integration | 506 | 151 | |||||||||||||||||||||
Income tax effect of non-GAAP adjustments (1) | (8,466) | (25,265) | |||||||||||||||||||||
| Non-GAAP net income attributable to Itron, Inc. | $ | 50,987 | $ | 78,103 | |||||||||||||||||||
| Non-GAAP diluted EPS | $ | 1.13 | $ | 1.75 | |||||||||||||||||||
| Non-GAAP weighted average common shares outstanding - Diluted | 45,305 | 44,617 | |||||||||||||||||||||
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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 | ||||||||
| TOTAL COMPANY RECONCILIATIONS | Year Ended December 31, | ||||||||||||||||||||||
| In thousands | 2022 | 2021 | |||||||||||||||||||||
| ADJUSTED EBITDA | |||||||||||||||||||||||
| GAAP net loss attributable to Itron, Inc. | $ | (9,732) | $ | (81,255) | |||||||||||||||||||
| Interest income | (2,633) | (1,557) | |||||||||||||||||||||
| Interest expense | 6,724 | 28,638 | |||||||||||||||||||||
| Income tax benefit | (6,196) | (45,512) | |||||||||||||||||||||
| Debt extinguishment | — | 11,681 | |||||||||||||||||||||
| Depreciation and amortization | 66,763 | 84,153 | |||||||||||||||||||||
| Restructuring | (13,625) | 54,623 | |||||||||||||||||||||
| Loss on sale of businesses | 3,505 | 64,289 | |||||||||||||||||||||
| Strategic initiative | 675 | — | |||||||||||||||||||||
| Software project impairment | 8,719 | — | |||||||||||||||||||||
| Russian currency translation write-off | 1,885 | — | |||||||||||||||||||||
| Goodwill impairment | 38,480 | — | |||||||||||||||||||||
| Acquisition and integration | 506 | 151 | |||||||||||||||||||||
| Adjusted EBITDA | $ | 95,071 | $ | 115,211 | |||||||||||||||||||
| FREE CASH FLOW | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 24,500 | $ | 154,794 | |||||||||||||||||||
| Acquisitions of property, plant, and equipment | (19,747) | (34,682) | |||||||||||||||||||||
| Free Cash Flow | $ | 4,753 | $ | 120,112 | |||||||||||||||||||
(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.
| (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 aremay be 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 inAugust 12, 2021, 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). Underunder 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%.was fully paid. 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%.
| 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 | % | — | % | — | % | |||||||||||||||||
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.future if we were to have variable rate debt outstanding.
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 30% of total revenues for the year ended December 31, 2022, compared with 38% for the year ended December 31, 2021 and 37% for the year ended December 31, 2020. 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.third party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recognized towithin 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, 2017,2022, a total of 5436 contracts were offsetting our exposures from the euro, pound sterling,
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Indonesian rupiah, Canadian dollar, Indonesian Rupiah, Chinese Yuan, Saudi RiyalAustralian dollar, and various other currencies, with notional amounts ranging from $158,000$117,000 to $39.5$57.9 million. Based on a sensitivity analysis as of December 31, 2017,2022, we estimate that, if foreign currency exchange rates average ten10 percentage points higher in 20182023 for these financial instruments, our financial results in 20182023 would not be materially impacted.
In future periods, we may use additional derivative contracts to protect against foreign currency exchange rate risks.
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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, 20172022 and 2016,2021, 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, 2017,2022, 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, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2017,2022, 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, 2017,2022, 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, 2018,27, 2023, 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.
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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.
Deferred Tax Assets — Valuation Allowance — Refer to Note 11 to the financial statements
Critical Audit Matter Description
As described in Note 11 to the consolidated financial statements, the Company has recorded deferred tax assets totaling $686.4 million, and deferred tax liabilities totaling $47.8 million, at December 31, 2022. The Company has recorded a valuation allowance of $427.4 million at December 31, 2022 against its deferred tax assets, primarily associated with foreign loss carryforwards. The net deferred tax asset is $211.2 million. Deferred tax assets are reduced by a tax valuation allowance when, management believes, it is more likely than not that some portion of the deferred tax assets will not be realized. In evaluating the Company's ability to realize its deferred tax assets, management considers all available favorable and unfavorable evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and the ability to carry losses to prior years. The most sensitive and critical factors are the projection, source, and character of future taxable income.
We identified the Company's determination of the realizability of U.S. deferred tax assets as a critical audit matter because there is significant judgment required by management, specifically considering the realization of losses before income taxes in recent years, to conclude that it is more likely than not that these deferred tax assets will be realized in future periods. In addition, the auditing of these elements involved complex and subjective auditor judgment, including the need to involve personnel with specialized skill and knowledge.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures to evaluate management's determination that sufficient taxable income will be generated to realize deferred tax assets included the following, among others:
•We evaluated the design and operating effectiveness of internal controls over income taxes, specifically those controls over the evaluation of the realizability of deferred tax assets.
•We evaluated the reasonableness of management's estimates in regard to the ability to generate future taxable income and utilize the deferred tax assets by evaluating the forecast of future taxable income, including testing of management's forecasts against the Company's historical performance as adjusted for nonrecurring items, and evaluating total backlog supporting future revenues.
•We evaluated whether the estimates of future taxable income were consistent with evidence obtained in other areas of the audit.
•We utilized personnel with specialized knowledge and skill in income taxes and accounting for income taxes under ASC 740 to assist in the evaluation of management's assessment of positive and negative evidence and their conclusion that it is more likely than not that the Company will realize the benefit of its deferred tax assets.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
February 27, 2023
We have served as the Company's auditor since 2016.
50
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 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||
| Revenues | Revenues | |||||||||||||||||||||||||||
| Product revenues | $ | 1,813,925 | $ | 1,830,070 | $ | 1,699,534 | Product revenues | $ | 1,500,243 | $ | 1,678,195 | $ | 1,889,173 | |||||||||||||||
| Service revenues | 204,272 | 183,116 | 183,999 | Service revenues | 295,321 | 303,377 | 284,177 | |||||||||||||||||||||
| Total revenues | 2,018,197 | 2,013,186 | 1,883,533 | Total revenues | 1,795,564 | 1,981,572 | 2,173,350 | |||||||||||||||||||||
| Cost of revenues | Cost of revenues | |||||||||||||||||||||||||||
| Product cost of revenues | 1,205,548 | 1,239,152 | 1,216,709 | Product cost of revenues | 1,102,475 | 1,231,230 | 1,408,615 | |||||||||||||||||||||
| Service cost of revenues | 137,495 | 113,714 | 110,139 | Service cost of revenues | 170,900 | 177,173 | 162,568 | |||||||||||||||||||||
| Total cost of revenues | 1,343,043 | 1,352,866 | 1,326,848 | Total cost of revenues | 1,273,375 | 1,408,403 | 1,571,183 | |||||||||||||||||||||
| Gross profit | 675,154 | 660,320 | 556,685 | Gross profit | 522,189 | 573,169 | 602,167 | |||||||||||||||||||||
| 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 | 290,453 | 300,520 | 276,920 | ||||||||||||||||||||||||
| Research and development | Research and development | 185,098 | 197,235 | 194,101 | ||||||||||||||||||||||||
| Amortization of intangible assets | 20,785 | 25,112 | 31,673 | Amortization of intangible assets | 25,717 | 35,801 | 44,711 | |||||||||||||||||||||
| Restructuring | 6,418 | 49,090 | (7,263 | ) | Restructuring | (13,625) | 54,623 | 37,013 | ||||||||||||||||||||
| Loss on sale of businesses | Loss on sale of businesses | 3,505 | 64,289 | 59,817 | ||||||||||||||||||||||||
| Goodwill impairment | Goodwill impairment | 38,480 | — | — | ||||||||||||||||||||||||
| Total operating expenses | 523,728 | 564,109 | 503,839 | Total operating expenses | 529,628 | 652,468 | 612,562 | |||||||||||||||||||||
| Operating income | 151,426 | 96,211 | 52,846 | |||||||||||||||||||||||||
| Operating loss | Operating loss | (7,439) | (79,299) | (10,395) | ||||||||||||||||||||||||
| Other income (expense) | Other income (expense) | |||||||||||||||||||||||||||
| Interest income | 2,126 | 865 | 761 | Interest income | 2,633 | 1,557 | 2,998 | |||||||||||||||||||||
| Interest expense | (11,581 | ) | (10,948 | ) | (12,289 | ) | Interest expense | (6,724) | (28,638) | (44,001) | ||||||||||||||||||
| Other income (expense), net | (7,396 | ) | (1,501 | ) | (4,216 | ) | Other income (expense), net | (4,213) | (17,430) | (5,241) | ||||||||||||||||||
| Total other income (expense) | (16,851 | ) | (11,584 | ) | (15,744 | ) | Total other income (expense) | (8,304) | (44,511) | (46,244) | ||||||||||||||||||
| 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 | |||||||||||||||||||||||||
| Loss before income taxes | Loss before income taxes | (15,743) | (123,810) | (56,639) | ||||||||||||||||||||||||
| Income tax benefit (provision) | Income tax benefit (provision) | 6,196 | 45,512 | (238) | ||||||||||||||||||||||||
| Net loss | Net loss | (9,547) | (78,298) | (56,877) | ||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | 2,951 | 3,283 | 2,325 | Net income attributable to noncontrolling interests | 185 | 2,957 | 1,078 | |||||||||||||||||||||
| Net income attributable to Itron, Inc. | $ | 57,298 | $ | 31,770 | $ | 12,678 | ||||||||||||||||||||||
| Net loss attributable to Itron, Inc. | Net loss attributable to Itron, Inc. | $ | (9,732) | $ | (81,255) | $ | (57,955) | |||||||||||||||||||||
| Earnings per common share - Basic | $ | 1.48 | $ | 0.83 | $ | 0.33 | ||||||||||||||||||||||
| Earnings per common share - Diluted | $ | 1.45 | $ | 0.82 | $ | 0.33 | ||||||||||||||||||||||
| Net loss per common share - Basic | Net loss per common share - Basic | $ | (0.22) | $ | (1.83) | $ | (1.44) | |||||||||||||||||||||
| Net loss per common share - Diluted | Net loss per common share - Diluted | $ | (0.22) | $ | (1.83) | $ | (1.44) | |||||||||||||||||||||
| Weighted average common shares outstanding - Basic | 38,655 | 38,207 | 38,224 | Weighted average common shares outstanding - Basic | 45,101 | 44,301 | 40,253 | |||||||||||||||||||||
| Weighted average common shares outstanding - Diluted | 39,387 | 38,643 | 38,506 | Weighted average common shares outstanding - Diluted | 45,101 | 44,301 | 40,253 | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
51
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 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||
| Net loss | Net loss | $ | (9,547) | $ | (78,298) | $ | (56,877) | |||||||||||||||||||||
| 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 | (28,748) | (26,923) | 21,082 | |||||||||||||||||||
| Net unrealized gain (loss) on derivative instruments designated as cash flow hedges | 923 | (275 | ) | 1,086 | ||||||||||||||||||||||||
| Foreign currency translation adjustment reclassified to net loss on sale or disposal of businesses | Foreign currency translation adjustment reclassified to net loss on sale or disposal of businesses | 57,321 | — | 52,074 | ||||||||||||||||||||||||
| Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges | Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges | — | 1,411 | (898) | ||||||||||||||||||||||||
| Pension benefit obligation adjustment | 3,588 | (3,468 | ) | 6,296 | Pension benefit obligation adjustment | 24,851 | 15,940 | (6,112) | ||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | 58,849 | (28,720 | ) | (65,547 | ) | Total other comprehensive income (loss), net of tax | 53,424 | (9,572) | 66,146 | |||||||||||||||||||
| Total comprehensive income (loss), net of tax | 119,098 | 6,333 | (50,544 | ) | Total comprehensive income (loss), net of tax | 43,877 | (87,870) | 9,269 | ||||||||||||||||||||
| 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 | 185 | 2,957 | 1,078 | ||||||||||||||||||||||||
| Comprehensive income (loss) attributable to Itron, Inc. | $ | 116,147 | $ | 3,050 | $ | (52,869 | ) | Comprehensive income (loss) attributable to Itron, Inc. | $ | 43,692 | $ | (90,827) | $ | 8,191 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
52
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, 2017 | December 31, 2016 | ||||||
| (in thousands) | |||||||
| ASSETS | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 176,274 | $ | 133,565 | |||
| Accounts receivable, net | 398,029 | 351,506 | |||||
| Inventories | 193,835 | 163,049 | |||||
| Other current assets | 81,604 | 84,346 | |||||
| Total current assets | 849,742 | 732,466 | |||||
| Property, plant, and equipment, net | 200,768 | 176,458 | |||||
| Deferred tax assets, net | 49,971 | 94,113 | |||||
| Restricted cash | 311,010 | — | |||||
| Other long-term assets | 43,666 | 50,129 | |||||
| Intangible assets, net | 95,228 | 72,151 | |||||
| Goodwill | 555,762 | 452,494 | |||||
| Total assets | $ | 2,106,147 | $ | 1,577,811 | |||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities | |||||||
| Accounts payable | $ | 262,166 | $ | 172,711 | |||
| Other current liabilities | 56,736 | 43,625 | |||||
| Wages and benefits payable | 90,505 | 82,346 | |||||
| Taxes payable | 16,100 | 10,451 | |||||
| Current portion of debt | 19,688 | 14,063 | |||||
| Current portion of warranty | 21,150 | 24,874 | |||||
| Unearned revenue | 41,438 | 64,976 | |||||
| Total current liabilities | 507,783 | 413,046 | |||||
| Long-term debt | 593,572 | 290,460 | |||||
| Long-term warranty | 13,712 | 18,428 | |||||
| Pension benefit obligation | 95,717 | 84,498 | |||||
| Deferred tax liabilities, net | 1,525 | 3,073 | |||||
| Other long-term obligations | 88,206 | 117,953 | |||||
| Total liabilities | 1,300,515 | 927,458 | |||||
| Commitments and contingencies (Note 12) | |||||||
| 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 | |||||
| Accumulated other comprehensive loss, net | (170,478 | ) | (229,327 | ) | |||
| Accumulated deficit | (337,873 | ) | (409,536 | ) | |||
| Total Itron, Inc. shareholders' equity | 786,416 | 631,604 | |||||
| Noncontrolling interests | 19,216 | 18,749 | |||||
| Total equity | 805,632 | 650,353 | |||||
| Total liabilities and equity | $ | 2,106,147 | $ | 1,577,811 | |||
| In thousands | December 31, 2022 | December 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 202,007 | $ | 162,579 | |||||||
| Accounts receivable, net | 280,435 | 298,459 | |||||||||
| Inventories | 228,701 | 165,799 | |||||||||
| Other current assets | 118,441 | 123,092 | |||||||||
| Total current assets | 829,584 | 749,929 | |||||||||
| Property, plant, and equipment, net | 140,123 | 163,184 | |||||||||
| Deferred tax assets, net | 211,982 | 181,472 | |||||||||
| Other long-term assets | 39,901 | 42,178 | |||||||||
| Operating lease right-of-use assets, net | 52,826 | 65,523 | |||||||||
| Intangible assets, net | 64,941 | 92,529 | |||||||||
| Goodwill | 1,038,721 | 1,098,975 | |||||||||
| Total assets | $ | 2,378,078 | $ | 2,393,790 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 237,178 | $ | 193,129 | |||||||
| Other current liabilities | 42,869 | 81,253 | |||||||||
| Wages and benefits payable | 89,431 | 113,532 | |||||||||
| Taxes payable | 15,324 | 12,208 | |||||||||
| Current portion of warranty | 18,203 | 18,406 | |||||||||
| Unearned revenue | 95,567 | 82,816 | |||||||||
| Total current liabilities | 498,572 | 501,344 | |||||||||
| Long-term debt, net | 452,526 | 450,228 | |||||||||
| Long-term warranty | 7,495 | 13,616 | |||||||||
| Pension benefit obligation | 57,839 | 87,863 | |||||||||
| Deferred tax liabilities, net | 833 | 2,000 | |||||||||
| Operating lease liabilities | 44,370 | 57,314 | |||||||||
| Other long-term obligations | 124,887 | 138,666 | |||||||||
| Total liabilities | 1,186,522 | 1,251,031 | |||||||||
| Equity | |||||||||||
| Preferred stock, no par value, 10,000 shares authorized, no shares issued or outstanding | — | — | |||||||||
| Common stock, no par value, 75,000 shares authorized, 45,186 and 45,152 shares issued and outstanding | 1,788,479 | 1,779,775 | |||||||||
| Accumulated other comprehensive loss, net | (94,674) | (148,098) | |||||||||
| Accumulated deficit | (525,332) | (515,600) | |||||||||
| Total Itron, Inc. shareholders' equity | 1,168,473 | 1,116,077 | |||||||||
| Noncontrolling interests | 23,083 | 26,682 | |||||||||
| Total equity | 1,191,556 | 1,142,759 | |||||||||
| Total liabilities and equity | $ | 2,378,078 | $ | 2,393,790 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
53
ITRON, INC.
CONSOLIDATED STATEMENTS OF EQUITY
| Common Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Itron, Inc. Shareholders' Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||
| Balances at January 1, 2015 | 38,591 | $ | 1,270,045 | $ | (135,060 | ) | $ | (453,984 | ) | $ | 681,001 | $ | 17,541 | $ | 698,542 | |||||||||||
| Net income | 12,678 | 12,678 | 2,325 | 15,003 | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (65,547 | ) | (65,547 | ) | — | (65,547 | ) | |||||||||||||||||||
| Distributions to noncontrolling interests | (1,921 | ) | (1,921 | ) | ||||||||||||||||||||||
| Stock issues and repurchases: | ||||||||||||||||||||||||||
| Options exercised | 24 | 853 | 853 | 853 | ||||||||||||||||||||||
| Restricted stock awards released | 296 | — | — | — | ||||||||||||||||||||||
| Issuance of stock-based compensation awards | 20 | 706 | 706 | 706 | ||||||||||||||||||||||
| Employee stock purchase plan | 54 | 1,819 | 1,819 | 1,819 | ||||||||||||||||||||||
| Stock-based compensation expense | 13,384 | 13,384 | 13,384 | |||||||||||||||||||||||
| Employee stock plans income tax deficiencies | (1,853 | ) | (1,853 | ) | (1,853 | ) | ||||||||||||||||||||
| Repurchase of common stock | (1,079 | ) | (38,283 | ) | (38,283 | ) | (38,283 | ) | ||||||||||||||||||
| Balances at December 31, 2015 | 37,906 | $ | 1,246,671 | $ | (200,607 | ) | $ | (441,306 | ) | $ | 604,758 | $ | 17,945 | $ | 622,703 | |||||||||||
| Net income | 31,770 | 31,770 | 3,283 | 35,053 | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (28,720 | ) | (28,720 | ) | — | (28,720 | ) | |||||||||||||||||||
| Distributions to noncontrolling interests | (2,479 | ) | (2,479 | ) | ||||||||||||||||||||||
| Stock issues and repurchases: | ||||||||||||||||||||||||||
| Options exercised | 58 | 2,144 | 2,144 | 2,144 | ||||||||||||||||||||||
| Restricted stock awards released | 312 | — | — | — | ||||||||||||||||||||||
| Issuance of stock-based compensation awards | 21 | 955 | 955 | 955 | ||||||||||||||||||||||
| Employee stock purchase plan | 20 | 747 | 747 | 747 | ||||||||||||||||||||||
| Stock-based compensation expense | 17,080 | 17,080 | 17,080 | |||||||||||||||||||||||
| Employee stock plans income tax deficiencies | 2,870 | 2,870 | 2,870 | |||||||||||||||||||||||
| Balances at December 31, 2016 | 38,317 | $ | 1,270,467 | $ | (229,327 | ) | $ | (409,536 | ) | $ | 631,604 | $ | 18,749 | $ | 650,353 | |||||||||||
| Net income | 57,298 | 57,298 | 2,951 | 60,249 | ||||||||||||||||||||||
Cumulative effect of accounting change | 215 | 14,365 | 14,580 | 14,580 | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 58,849 | 58,849 | — | 58,849 | ||||||||||||||||||||||
| Distributions to noncontrolling interests | (2,171 | ) | (2,171 | ) | ||||||||||||||||||||||
| Stock issues and repurchases: | ||||||||||||||||||||||||||
| Options exercised | 41 | 1,631 | 1,631 | 1,631 | ||||||||||||||||||||||
| Restricted stock awards released | 372 | — | — | — | ||||||||||||||||||||||
| Issuance of stock-based compensation awards | 10 | 974 | 974 | 974 | ||||||||||||||||||||||
| Employee stock purchase plan | 31 | 1,978 | 1,978 | 1,978 | ||||||||||||||||||||||
| Stock-based compensation expense | 20,433 | 20,433 | 20,433 | |||||||||||||||||||||||
| Repurchase of noncontrolling interest | (906 | ) | (906 | ) | (313 | ) | (1,219 | ) | ||||||||||||||||||
| Registration fee | (25 | ) | (25 | ) | (25 | ) | ||||||||||||||||||||
| Balances at December 31, 2017 | 38,771 | $ | 1,294,767 | $ | (170,478 | ) | $ | (337,873 | ) | $ | 786,416 | $ | 19,216 | $ | 805,632 | |||||||||||
| Common Stock | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Itron, Inc. Shareholders' Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||
| In thousands | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| Balances at January 1, 2020 | 39,941 | $ | 1,357,600 | $ | (204,672) | $ | (376,390) | $ | 776,538 | $ | 24,277 | $ | 800,815 | ||||||||||||||||||||||||||||
| Net income (loss) | (57,955) | (57,955) | 1,078 | (56,877) | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 66,146 | 66,146 | — | 66,146 | |||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (1,630) | (1,630) | |||||||||||||||||||||||||||||||||||||||
| Stock options exercised | 103 | 5,551 | 5,551 | 5,551 | |||||||||||||||||||||||||||||||||||||
| Restricted stock awards released net of repurchased shares for taxes | 334 | (2,120) | (2,120) | (2,120) | |||||||||||||||||||||||||||||||||||||
| Issuance of stock-based compensation awards | 12 | 824 | 824 | 824 | |||||||||||||||||||||||||||||||||||||
| Employee stock purchase plan | 54 | 3,335 | 3,335 | 3,335 | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 24,229 | 24,229 | 24,229 | ||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | 40,444 | 1,389,419 | (138,526) | (434,345) | 816,548 | 23,725 | 840,273 | ||||||||||||||||||||||||||||||||||
| Net income (loss) | (81,255) | (81,255) | 2,957 | (78,298) | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (9,572) | (9,572) | — | (9,572) | |||||||||||||||||||||||||||||||||||||
| Stock options exercised | 30 | 1,924 | 1,924 | 1,924 | |||||||||||||||||||||||||||||||||||||
| Restricted stock awards released net of repurchased shares for taxes | 285 | (804) | (804) | (804) | |||||||||||||||||||||||||||||||||||||
| Issuance of stock-based compensation awards | 9 | 856 | 856 | 856 | |||||||||||||||||||||||||||||||||||||
| Employee stock purchase plan | 37 | 3,156 | 3,156 | 3,156 | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 22,762 | 22,762 | 22,762 | ||||||||||||||||||||||||||||||||||||||
| Stock issued related to equity offering | 4,472 | 389,419 | 389,419 | 389,419 | |||||||||||||||||||||||||||||||||||||
| Proceeds from sale of warrants | 45,349 | 45,349 | 45,349 | ||||||||||||||||||||||||||||||||||||||
| Purchases of convertible note hedge contracts, net of tax | (63,576) | (63,576) | (63,576) | ||||||||||||||||||||||||||||||||||||||
| Registration fee | (359) | (359) | (359) | ||||||||||||||||||||||||||||||||||||||
| Stock repurchase program | (125) | (8,028) | (8,028) | (8,028) | |||||||||||||||||||||||||||||||||||||
| Other | (343) | (343) | (343) | ||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | 45,152 | 1,779,775 | (148,098) | (515,600) | 1,116,077 | 26,682 | 1,142,759 | ||||||||||||||||||||||||||||||||||
| Net income (loss) | (9,732) | (9,732) | 185 | (9,547) | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 53,424 | 53,424 | — | 53,424 | |||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | (3,784) | (3,784) | ||||||||||||||||||||||||||||||||||||||
| Stock options exercised | 1 | 30 | 30 | 30 | |||||||||||||||||||||||||||||||||||||
| Restricted stock awards released net of repurchased shares for taxes | 227 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of stock-based compensation awards | 16 | 952 | 952 | 952 | |||||||||||||||||||||||||||||||||||||
| Employee stock purchase plan | 70 | 3,422 | 3,422 | 3,422 | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 20,929 | 20,929 | 20,929 | ||||||||||||||||||||||||||||||||||||||
| Stock repurchase program | (280) | (16,629) | (16,629) | (16,629) | |||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | 45,186 | $ | 1,788,479 | $ | (94,674) | $ | (525,332) | $ | 1,168,473 | $ | 23,083 | $ | 1,191,556 | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
54
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Operating activities | |||||||||||
| Net income | $ | 60,249 | $ | 35,053 | $ | 15,003 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 63,215 | 68,318 | 75,993 | ||||||||
| Stock-based compensation | 21,407 | 18,035 | 14,089 | ||||||||
| Amortization of prepaid debt fees | 1,067 | 1,076 | 2,128 | ||||||||
| Deferred taxes, net | 50,667 | 13,790 | 1,488 | ||||||||
| Restructuring, non-cash | (2,297 | ) | 7,188 | 976 | |||||||
| Other adjustments, net | 3,673 | 4,309 | 2,003 | ||||||||
| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
| Accounts receivable | (17,573 | ) | (27,162 | ) | (9,009 | ) | |||||
| Inventories | (16,242 | ) | 22,343 | (52,737 | ) | ||||||
| Other current assets | 8,112 | 20,705 | 12,512 | ||||||||
| Other long-term assets | 11,230 | (339 | ) | (3,721 | ) | ||||||
| Accounts payables, other current liabilities, and taxes payable | 78,463 | (37,312 | ) | (7,060 | ) | ||||||
| Wages and benefits payable | 1,926 | 7,808 | (10,866 | ) | |||||||
| Unearned revenue | (41,309 | ) | (25,810 | ) | 11,943 | ||||||
| Warranty | (10,554 | ) | (10,246 | ) | 20,161 | ||||||
| Other operating, net | (20,680 | ) | 18,086 | 447 | |||||||
| Net cash provided by operating activities | 191,354 | 115,842 | 73,350 | ||||||||
| Investing activities | |||||||||||
| Acquisitions of property, plant, and equipment | (49,495 | ) | (43,543 | ) | (43,918 | ) | |||||
| Business acquisitions, net of cash equivalents acquired | (99,386 | ) | (951 | ) | (5,754 | ) | |||||
| Other investing, net | 702 | (3,034 | ) | 721 | |||||||
| Net cash used in investing activities | (148,179 | ) | (47,528 | ) | (48,951 | ) | |||||
| Financing activities | |||||||||||
| Proceeds from borrowings | 335,000 | 15,877 | 113,467 | ||||||||
| Payments on debt | (29,063 | ) | (79,119 | ) | (62,998 | ) | |||||
| Issuance of common stock | 3,609 | 2,891 | 2,663 | ||||||||
| Repurchase of common stock | — | — | (38,283 | ) | |||||||
| Other financing, net | (7,587 | ) | (2,672 | ) | (7,109 | ) | |||||
| Net cash provided by (used in) financing activities | 301,959 | (63,023 | ) | 7,740 | |||||||
| Effect of foreign exchange rate changes 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 beginning of period | 133,565 | 131,018 | 112,371 | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 487,335 | $ | 133,565 | $ | 131,018 | |||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Income taxes, net | $ | 28,969 | $ | 24,287 | $ | 29,189 | |||||
| Interest | 10,106 | 9,921 | 10,198 | ||||||||
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Operating activities | |||||||||||||||||
| Net loss | $ | (9,547) | $ | (78,298) | $ | (56,877) | |||||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization of intangible assets | 66,763 | 84,153 | 97,290 | ||||||||||||||
| Non-cash operating lease expense | 16,257 | 17,107 | 18,178 | ||||||||||||||
| Stock-based compensation | 21,881 | 23,618 | 25,053 | ||||||||||||||
| Amortization of prepaid debt fees | 3,499 | 18,253 | 4,130 | ||||||||||||||
| Deferred taxes, net | (32,635) | (85,574) | (12,939) | ||||||||||||||
| Loss on sale of businesses | 3,505 | 64,289 | 59,817 | ||||||||||||||
| Loss on extinguishment of debt, net | — | 10,000 | — | ||||||||||||||
| Goodwill impairment | 38,480 | — | — | ||||||||||||||
| Restructuring, non-cash | (624) | 8,744 | 5,888 | ||||||||||||||
| Other adjustments, net | 11,678 | 2,930 | 10,392 | ||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions and sale of businesses: | |||||||||||||||||
| Accounts receivable | 5,064 | 60,242 | 108,256 | ||||||||||||||
| Inventories | (68,124) | (3,721) | 35,403 | ||||||||||||||
| Other current assets | (16,695) | 41,461 | (11,832) | ||||||||||||||
| Other long-term assets | (5,436) | 4,515 | (11,391) | ||||||||||||||
| Accounts payable, other current liabilities, and taxes payable | 45,085 | (23,330) | (122,890) | ||||||||||||||
| Wages and benefits payable | (21,749) | 30,915 | (34,664) | ||||||||||||||
| Unearned revenue | 18,466 | (29,366) | 8,212 | ||||||||||||||
| Warranty | (5,497) | (8,169) | (13,538) | ||||||||||||||
| Restructuring | (40,981) | 15,967 | 11,767 | ||||||||||||||
| Other operating, net | (4,890) | 1,058 | (10,741) | ||||||||||||||
| Net cash provided by operating activities | 24,500 | 154,794 | 109,514 | ||||||||||||||
| Investing activities | |||||||||||||||||
| Net proceeds related to the sale of businesses | 55,933 | 3,142 | 1,133 | ||||||||||||||
| Acquisitions of property, plant, and equipment | (19,747) | (34,682) | (46,208) | ||||||||||||||
| Business acquisitions, net of cash and cash equivalents acquired | 23 | (8,670) | — | ||||||||||||||
| Other investing, net | 4,307 | 5,326 | 4,039 | ||||||||||||||
| Net cash provided by (used in) investing activities | 40,516 | (34,884) | (41,036) | ||||||||||||||
| Financing activities | |||||||||||||||||
| Proceeds from borrowings | — | 460,000 | 400,000 | ||||||||||||||
| Payments on debt | — | (946,094) | (414,063) | ||||||||||||||
| Issuance of common stock | 3,452 | 5,080 | 8,886 | ||||||||||||||
| Proceeds from common stock offering | — | 389,419 | — | ||||||||||||||
| Proceeds from sale of warrants | — | 45,349 | — | ||||||||||||||
| Purchases of convertible note hedge contracts | — | (84,139) | — | ||||||||||||||
| Repurchase of common stock | (16,972) | (8,028) | — | ||||||||||||||
| Prepaid debt fees | (697) | (12,031) | (1,571) | ||||||||||||||
| Other financing, net | (4,520) | (2,443) | (4,828) | ||||||||||||||
| Net cash used in financing activities | (18,737) | (152,887) | (11,576) | ||||||||||||||
| Less: Cash classified within assets held for sale | — | (9,750) | — | ||||||||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | (6,851) | (1,627) | 127 | ||||||||||||||
| Increase (decrease) in cash and cash equivalents | 39,428 | (44,354) | 57,029 | ||||||||||||||
| Cash and cash equivalents at beginning of period | 162,579 | 206,933 | 149,904 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 202,007 | $ | 162,579 | $ | 206,933 | |||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||||||||
| Cash paid during the period for: | |||||||||||||||||
| Income taxes, net | $ | 11,915 | $ | 7,073 | $ | 2,688 | |||||||||||
| Interest | 1,622 | 8,983 | 47,241 | ||||||||||||||
| Non-cash operating, investing and financing activities: | |||||||||||||||||
| Deferred tax on purchase of convertible note hedge contracts | — | 20,563 | — | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20172022
In this Annual Report, the terms “we,” “us,” “our,” “Itron,”"we", "us", "our", "Itron", and the “Company”"Company" refer to Itron, Inc.
Note 1: Summary of Significant Accounting Policies
We were incorporated in the state of Washington in 1977 and are a technology company, offering end-to-end solutions to enhance productivity and efficiency, primarily focused on utilities and municipalities around the globe. Our solutions generally include robust industrial grade networks, smart meters, meter data management software, and knowledge application solutions, which bring additional value to the customer. Our professional services help our customers project-manage, install, implement, operate, and maintain their systems. We operate under the Itron brand worldwide and manage and report under three operating segments: Electricity, Gas,Device Solutions, Networked Solutions, and Water.Outcomes.
Financial Statement Preparation
The consolidated financial statements presented in this Annual Report include the Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Equity, and Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016,2022, 2021, and 20152020 and the Consolidated Balance Sheets as of December 31, 20172022 and 20162021 of Itron, Inc. and its subsidiaries, prepared in accordance with U.S. generally accepted accounting principles (GAAP).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples of significant estimates include revenue recognition, warranty, restructuring, income taxes, business combinations, goodwill and intangible assets, defined benefit pension plans, contingencies, and stock-based compensation. Due to various factors affecting future costs and operations, actual results could differ materially from these estimates.
Risks and Uncertainties
The COVID-19 pandemic has had global economic impacts including disrupting customer demand and global supply chains, resulting in market volatility. The extent of the recent pandemic and its ongoing impact on our operations is volatile, but is being monitored closely by our management. New variants of the virus may cause previously lifted restrictions to be reinstated, which could result in more disruptions. As economies have reopened, global supply chains have struggled to keep pace with rapidly changing demand. The resulting supply constraints have manifested across a variety of areas including mechanical, electrical and logistics portions of the supply chain, which has impacted our ability to ship products in a timely manner. In particular, our ability to obtain adequate supply of semiconductor components has impacted our ability to service recovering customer demand. While we believe the current imbalance in supply and demand is temporal, the timeline to recovery is uncertain. Efforts are ongoing with suppliers to increase supply, including the approval of alternate sources. Recently, inflation in our raw materials and component costs, freight charges, and labor costs have increased above historical levels, due to, among other things, the continuing impacts of the pandemic and uncertain economic environment. We may or may not be able to fully recover these increased costs through pricing actions with our customers. At this time, we have not identified any significant decrease in long-term customer demand for our products and services. However, certain of our customer projects have experienced delay in deliveries, with revenue originally forecasted in prior periods shifting to future periods.
While we have limited direct business exposure in Russia, Belarus and Ukraine, the Russian military actions and the resulting sanctions could adversely affect the global economy, as well as further disrupt the supply chain. A major disruption in the global economy and supply chain could have a material adverse effect on our business, prospects, financial condition, results of operations, and cash flows. The extent and duration of the military action, sanctions, and resulting market and/or supply disruptions are impossible to predict, but could be substantial. During the third quarter of 2022, we substantially liquidated our legal entity in Russia, recognizing a loss of $1.9 million for the reclassification of the currency translation adjustment from accumulated other comprehensive income. The loss was classified within sales, general and administrative expense within the Consolidated Statements of Operations.
Basis of Consolidation
We consolidate all entities in which we have a greater than 50% ownership interest or in which we exercise control over the operations. We use the equity method of accounting for entities in which we have a 20% to 50% or less investment and exercise significant influence. Entities in which we have less than a 20% investment and where we do not exercise significant influence are accounted for under the costfair value method. Intercompany transactions and balances are eliminated upon consolidation.
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Noncontrolling Interests
In several of our consolidated international subsidiaries, we have joint venture partners, who are minority shareholders. Although these entities are not wholly-ownedwholly owned by Itron, we consolidate them because we have a greater than 50% ownership interest or because we exercise control over the operations. The noncontrolling interest balance is adjusted each period to reflect the allocation of net income (loss) and other comprehensive income (loss) attributable to the noncontrolling interests, as shown in our Consolidated Statements of Operations and our Consolidated Statements of Comprehensive Income (Loss), as well as contributions from and distributions to the owners. 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.
Cash and Cash Equivalents
We consider all highly liquid instruments with remaining maturities of three months or less at the date of acquisition to be cash equivalents.
Restricted Cash and Cash Equivalents
Cash and cash equivalents that are contractually restricted from operating use are classified as restricted cash and cash equivalents. On December 22, 2017, we issued $300 million aggregate principal amount of 5.00% senior unsecured notes due in 2026 (Notes). The proceeds of the Notes plus payments for prepaid interest and a premium for a special mandatory redemption option were deposited into escrow, where the funds remained until all the escrow release conditions were satisfied, specifically the closing of the acquisition of Silver Spring Networks, Inc. (SSNI) on January 5, 2018. Had the acquisition agreement been terminated, the funds in escrow would have been returned to the investors of the Notes plus accrued and unpaid interest up to the date of release, with any remaining balance from prepaid interest returned to the Company. We have recognized the balance in escrow asno restricted cash in our consolidated financial statements. See Note 6 - Debt and Note 19 - Subsequent Events for further details.all periods presented.
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Cash and cash equivalents | $ | 176,274 | $ | 133,565 | $ | 131,018 | |||||
| Current restricted cash included in other current assets | 51 | — | — | ||||||||
| Long-term restricted cash | 311,010 | — | — | ||||||||
| Total cash, cash equivalents, and restricted cash: | $ | 487,335 | $ | 133,565 | $ | 131,018 | |||||
Accounts Receivable, net
Accounts receivable are recognized for invoices issued to customers in accordance with our contractual arrangements. Interest and late payment fees are minimal. Unbilled receivables are recognized when revenues are recognized upon product shipment or service delivery and invoicing occurs at a later date. We recognize an allowance for doubtful accountscredit losses representing our estimate of the probableexpected losses in accounts receivable at the date of the balance sheet based on our historical experience of bad debts, and our specific review of outstanding receivables.receivables, and our review of current and expected economic conditions. Accounts receivable are written-off against the allowance when we believe an account, or a portion thereof, is no longer collectible.
Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in, first-out method. Cost includes raw materials and labor, plus applied direct and indirect overhead costs. Net realizable value is the estimated selling price in the normal course of business, minus the cost of completion, disposal and transportation.
Derivative Instruments
All derivative instruments, whether designated in hedging relationships or not, are recognized on the Consolidated Balance Sheets at fair value as either assets or liabilities. The components and fair values of our derivative instruments are determined using the fair value measurements of significant other observable inputs (Level 2), as defined by GAAP. The fair value of our derivative instruments may switch between an asset and a liability depending on market circumstances at the end of the period. We include the effect of our counterparty credit risk based on current published credit default swap rates when the net fair value of our derivative instruments areis in a net asset position and the effect of our own nonperformance risk when the net fair value of our derivative instruments areis in a net liability position.
For any derivative designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. For any derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recognized as a component of other comprehensive income (loss) (OCI) and are recognized in earnings when the hedged item affects earnings. Ineffective portions of cash flow hedges are recognized in other income (expense) in the Consolidated Statements of Operations. For a hedge of a net investment, the effective portion of any unrealized gain or loss from the foreign currency revaluation of the hedging instrument is reported in OCI as a net unrealized gain or loss on derivative instruments. Upon termination of a net investment hedge, the net derivative gain/loss will remain in accumulated other comprehensive income (loss) (AOCI) until such time when earnings are impacted by a sale or liquidation of the associated operations. Ineffective portions of fair value changes or the changes in fair value of derivative instruments that do not qualify for hedging activities are recognized in other income (expense) in the Consolidated Statements of Operations. We classify cash flows from our derivative programs as cash flows from operating activities in the Consolidated Statements of Cash Flows.
Derivatives are not used for trading or speculative purposes. Our derivatives are with credit worthycredit-worthy multinational commercial banks, with whomwhich we have master netting agreements; however, our derivative positions are not recognized on a net basis in the Consolidated Balance Sheets. There are no credit-risk-relatedcredit-risk related contingent features within our derivative instruments. Refer to Note 77: Derivative Financial Instruments and Note 1414: Shareholders' Equity for further disclosures of our derivative instruments and their impact on OCI.
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Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 30 years for buildings and improvements and three years to ten10 years for machinery and equipment, computers and software, and furniture. Leasehold improvements are capitalized and depreciated over the term of the applicable lease, including renewable periods if reasonably assured,certain, or over the useful lives, whichever is shorter. Construction in process represents capital expenditures incurred for assets not yet placed in service. Costs related to internally
developed software and software purchased for internal uses are capitalized and are amortized over the estimated useful lives of the assets. Repair and maintenance costs are recognized as incurred. We have no major planned maintenance activities.
We review long-lived assets for impairment whenever events or circumstances indicate the carrying amount of an asset group may not be recoverable. Assets held for sale are classified within other current assets in the Consolidated Balance Sheets, are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Gains and losses from asset disposals and impairment losses are classified within the Consolidated StatementStatements of Operations according to the use of the asset, except those gains and losses recognized in conjunction with our restructuring activities, which are classified within restructuring expense.expense, or impairment losses recognized in conjunction with an announced or completed sale of a business, which are classified within loss on sale of businesses.
Prepaid Debt Fees
Prepaid debt fees for term debt represent the capitalized direct costs incurred related to the issuance of debt and are recognized as a direct deduction from the carrying amount of the corresponding debt liability. We have elected to present prepaid debt fees for revolving debt within other long-term assets in the Consolidated Balance Sheets. These costs are amortized to interest expense over the terms of the respective borrowings, including any contingent maturity or call features, using the effective interest method or the straight-line method when associated with a revolving credit facility. When debt is repaid early, the related portion of unamortized prepaid debt fees is written off and included in interest expense.
Business Combinations
On the date of acquisition, the assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree are recognized at their fair values. The acquiree's results of operations are also included as of the date of acquisition in our consolidated results. Intangible assets that arise from contractual/legal rights, or are capable of being separated, as well as in-process research and development (IPR&D), are measured and recognized at fair value, and amortized over the estimated useful life. IPR&D is not amortized until such time as the associated development projects are completed or terminated. If a development project is completed, the IPR&D is reclassified as a core technology intangible asset and amortized over its estimated useful life. If the development project is terminated, the recognized value of the associated IPR&D is immediately recognized. If practicable, assets acquired and liabilities assumed arising from contingencies are measured and recognized at fair value. If not practicable, such assets and liabilities are measured and recognized when it is probable that a gain or loss has occurred and the amount can be reasonably estimated. The residual balance of the purchase price, after fair value allocations to all identified assets and liabilities, represents goodwill. Acquisition-related costs are recognized as incurred. Integration costs associated with an acquisition are generally recognized in periods subsequent to the acquisition date, and changes in deferred tax asset valuation allowances and acquired income tax uncertainties, including penalties and interest, after the measurement period are recognized as a component of the provision for income taxes. Our acquisitions may include contingent consideration, which requirerequires us to recognize the fair value of the estimated liability at the time of the acquisition. Subsequent changes in the estimate of the amount to be paid under the contingent consideration arrangement are recognized in the Consolidated Statements of Operations.
We estimate the preliminary fair value of acquired assets and liabilities as of the date of acquisition based on information available at that time utilizing either a cost or income approach. The determination of the fair value is judgmental in nature and involves the use of significant estimates and assumptions. Contingent consideration is recordedrecognized at fair value as of the date of the acquisition with adjustments occurring after the purchase price allocation period, which could be up to one year, recordedrecognized in earnings. Changes to valuation allowances on acquired deferred tax assets that occur after the acquisition date are recognized in the provision for, or benefit from, income taxes. The valuation of these tangible and identifiable intangible assets and liabilities is subject to further management review and may change materially between the preliminary allocation and end of the purchase price allocation period. Any changes in these estimates may have a material effect on our consolidated operating results or financial position.
Leases
We determine if an arrangement is a lease at inception. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment), and (2) the customer has the right to control the use of the identified asset.
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Operating leases are included in operating lease right-of-use (ROU) assets, other current liabilities, and operating lease liabilities on our Consolidated Balance Sheets. Finance leases are included in property, plant, and equipment, other long-term assets, other current liabilities, and other long-term obligations on our Consolidated Balance Sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use the rate implicit in the lease agreement when readily determinable. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is the estimated rate of interest we expect to pay on a collateralized basis over a similar term, based on the information available at the lease commencement date. The Operating lease ROU asset also includes any lease payments made and is reduced by lease incentives received and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements that include lease and nonlease components. When nonlease components are fixed, we have elected the practical expedient to account for lease and nonlease components as a single lease component, except for leases embedded in service contracts.
All leases with a lease term that is greater than one month are subject to recognition and measurement on the balance sheet, except where we have leases in service contracts with contract manufacturers. For leases with contract manufacturers, we have elected to utilize the short-term lease exemption.
Lease expense for variable lease payments, where the timing or amount of the payment is not fixed, are recognized when the obligation is incurred. Variable lease payments generally arise in our net lease arrangements where executory and other lease-related costs are billed to Itron when incurred by the lessor.
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 in a transaction that does not qualify as a business combination. 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, generally three years to ten10 years for core-developed technology and customer contracts and relationships. Finite-lived 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 forecasted 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 quantitative impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of thea reporting unit's goodwillunit exceeds theits fair value, ofwe first evaluate the long-lived assets within the reporting unit anfor impairment and then recognize 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 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.
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
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and our ability to make a reasonable estimate of the amount of the ultimate loss. Loss contingencies that we determine to be 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.
Bonus and Profit Sharing
We have various employee bonus and profit sharing plans, which provide award amounts for the achievement of financial and nonfinancial targets. If management determines it is probable that the discretionary targets will be achieved and the amounts can be reasonably estimated, a compensation accrual is recognized based on the proportional achievement of the financial and nonfinancial targets. Although we monitorIn addition, management or the Board of Directors may decide to grant monetary bonus awards, at their discretion, and accrue expenses quarterly based on our progress toward the achievement of the targets, the actual results may result insuch awards that are significantly greater or less than the estimates made in earlier quarters.when it becomes probable they will be paid.
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, 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 is 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. The long-term warranty balance includes estimated warranty claims beyond one year. Warranty expense is classified within cost of revenues.
Restructuring
We recognize a liability for costs associated with an exit or disposal activity under a restructuring project in the period in which the liability is incurred. Employee termination benefits considered postemployment 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 termination of a contract in accordance with the contract terms or the cessation of the use of the rights conveyed by the contract, whichever occurs later.
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 less costs to sell are less than the net book value. 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.
Defined Benefit Pension Plans
We sponsor both funded and unfunded defined benefit pension plans for certain international employees. We recognize a liability for the projected benefit obligation in excess of plan assets orassets. We recognize an asset forwhen plan assets in excess ofexceed 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 OCI, net of tax, the actuarial gains or losses and prior service costs or credits, if any, thatwhich arise during the period but that are not recognized as components of net periodic benefit cost. If actuarial gains and losses exceed ten10 percent of the greater of plan assets or plan liabilities, we amortize them over the employees' average future service period.
Share Repurchase PlanPlans
From time to time, we may repurchase shares of Itron common stock under programs authorized by our Board of Directors. Share repurchases are made in the open market or in privately negotiated transactions and in accordance with applicable securities laws. Under applicable Washington State law, shares repurchased are retired and not displayed separately as treasury stock on the financial statements; the value of the repurchased shares is deducted from common stock.
Product Revenues and Service Revenues
Product revenues include sales from standard and smart meters, systems or software, and any associated implementation and installation revenue. Service revenues include sales from post-sale maintenance support, consulting, outsourcing, and managed services.
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Revenue Recognition
Many of our revenue arrangements involve multiple deliverables, which combine two or more of the following:performance obligations as our hardware meter reading system software, installation, and/or project management services.and services are often sold together. Separate contracts entered into with the same customer that meet certain criteria such as those that are entered into(or related parties of the customer) at or near the same time are evaluated as one single arrangement for purposes of applying multiple element arrangement revenue recognition. Revenue arrangements with multiple deliverables are divided into separate units of accounting at the inception of the arrangement and as each item in the arrangement is delivered. If the delivered item(s) has value to the customer on a standalone basis and delivery/performance of the undelivered item(s) is probable the total arrangement consideration is allocated among the separate units of accounting based on their relative fair values and the applicable revenue recognition criteria are then considered for each unit of accounting. The amount allocable to a delivered item is limited to the amount that we are entitled to collect and that is not contingent upon the delivery/performance of additional items. Revenues for each deliverable are then recognized based on the type of deliverable, such as 1) when the products are shipped, 2) 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. The majority of our revenue is recognized when products are shipped to or received by a customer or when services are provided.
•The contracts are negotiated as a package with a single commercial objective;
•The amount of consideration to be paid in one contract depends on the price or performance of the other contract; or
•The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation.
Once the contract has been defined, we evaluate whether the promises in the contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment, and the decision to separate arrangement for purposesthe combined or single contract into multiple performance obligations could change the amount of applyingrevenue and profit recognized in a given period. Some of our contracts contain a significant service of integrating, customizing or modifying goods or services in the contract, accounting.
in which case the goods or services would be combined into a single performance obligation. It is common that we may promise to provide multiple distinct goods or services, in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services. For 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 that the completionstandalone selling price using either the adjusted market assessment approach or the expected cost plus a margin approach. Approaches used to estimate the standalone selling price for a given good or service will maximize the use of observable inputs and considers several factors, including our pricing practices, costs to provide a contract component (unitgood or service, the type of accounting) will result in a loss, the loss is recognized in the period in which the loss becomes evident. good or service, and availability of other transactional data, among others.
We reevaluatedetermine the estimated loss through the completionstandalone selling prices of the contract component and adjust the estimated loss for changesgoods or services used in facts and circumstances.our allocation of arrangement consideration on an annual basis or more frequently if there is a significant change in our business or if we experience significant variances in our transaction prices.
In the normal course of business, we do not accept product returns unless the item is defective as manufactured. We establish provisions for estimated returns and warranties. In addition, we do not typically provide customers with the right to a refund.
Hardware revenue is recognized at a point in time. Transfer of control is typically at the time of shipment, receipt by the customer, or, if applicable, upon receipt of customer acceptance provisions. We will recognize revenue prior to receipt of customer acceptance for delivered elementshardware in cases where the customer acceptance provision is determined to be a formality. Transfer of control would not occur until receipt of customer acceptance in hardware arrangements where such provisions are subjective or where we do not have history of meeting the acceptance criteria.
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Perpetual software licenses are considered to be a right to use intellectual property and are recognized at a point in time. Transfer of control is considered to be at the point at which it is available to the customer to download and use or upon receipt of customer acceptance. In certain contracts, software licenses may be sold with implementation services that include a significant service of integrating, customizing or modifying the software. In these instances, the software license is combined into single performance obligation with the implementation services and recognized over time as the implementation services are performed.
Hardware and software licenses (when not combined with professional services) are typically billed when all othershipped and revenue recognized at a point-in-time. As a result, the timing of revenue recognition criteriaand invoicing does not have a significant impact on contract assets and liabilities.
Professional services, which include implementation, project management, installation, and consulting services are met. Arrangementsrecognized 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. We expect this method to best depict our performance in transferring control of services promised to the customer or represents a reasonable proxy for measuring progress. The estimate of expected costs to provide services requires judgment. Cost estimates take into consideration our historical experience and the specific scope requested by the customer and are updated quarterly. We may also offer professional services on a stand-ready basis over a specified period of time, in which VSOE for all undelivered elementscase revenue would be recognized ratably over the term. Invoicing of these services is not established, we recognize revenue under the combined services approach where revenue for softwarecommensurate with performance and software related elements is deferred until all software products have been delivered, all software related services have commenced, and undeliveredoccurs on a monthly basis. As such, these services do not includehave a significant production, customization or modification. This will also result in the deferral of costs for softwareimpact on contract assets and software implementation services until the undelivered element commence. Revenue would be recognized over the longest period that services would be provided, which is typically the PCS period.contract liabilities.
Cloud services and software as a service (SaaS)SaaS arrangements where customers have access to certain of our software within a cloud-based IT environment that we manage, host, and support are offered to customers on a subscription basis. Revenue for the cloud services and SaaS offerings are generally recognized over time, ratably over the contact term commencing with the date the services isare made available to customers and all other revenue recognition criteria have been satisfied. For arrangements wherethe customer.
Services, including professional services, cloud services, and SaaS is providedarrangements, are commonly billed on a per metermonthly basis revenuein arrears and typically result in an unbilled receivable, which is recognized based on actual meters read during the period. not considered a contract asset as our right to consideration is unconditional.
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, such warranties are considered to be a separate good or service, and a portion of the arrangement's total considerationtransaction price is allocated to this extended warranty deliverable.performance obligation. This revenue is deferred and recognized ratably over the extended warranty coverage period. Extended or noncustomary warranties do not represent a significant portion of our revenue.
Hardware and software post-sale maintenance support fees such as post contract support or extended warranty are recognized over time, ratably over the life of the related service contract. Support fees are typically billed on an annual basis, resulting in a contract liability. Shipping and handling costs and incidental expenses billed to customers are recognized as revenue, with the associated cost charged to cost of revenues. We recognize sales, use, and value added taxes billed to our customers on a net basis.
Payment terms with customers can vary by customer; however, amounts billed are typically payable within 30 to 90 days, depending on the destination country. We do not typically offer financing as part of our contracts with customers.
We incur certain incremental costs to obtain contracts with customers, primarily in the form of sales commissions. Where the amortization period is one year or less, we have elected to apply the practical expedient and recognize the related commissions expense as incurred. Otherwise, such incremental costs are capitalized and amortized over the contract period. Capitalized incremental costs are not material.
Product and Software Development Costs
Product and software development costs primarily include employee compensation and third partythird-party contracting fees. We do not capitalize product development costs, and we do not generally capitalize development expenses for computer software to be sold, leased, or otherwise marketed as the costs incurred are immaterial for the relatively short period of time between technological feasibility and the completion of software development.
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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). Prior to December 31, 2020, stock options were also granted as part of the stock-based compensation 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 ifwhere 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 have elected to account for forfeitures of any awards in stock-based compensation expense prospectively as they occur.
The fair value of a restricted stock unit is the market close price of our common stock on the date of grant. Restricted stock units vest over a maximum period of three years. After vesting, the restricted stock units are converted into shares of our common stock on a one-for-one basis and issued to employees. Certain restricted stock units are issued under the Long-Term Performance Restricted Stock Unit Award Agreement and include performance and market conditions. The final number of shares issued will be based on the achievement of financial targets and our total shareholder return relative to the Russell 3000 Index during the performance periods. Due to the presence of a market condition, we utilize a Monte Carlo valuation model to determine the fair value of the awards at the grant date. Expected volatility is based on the historical volatility of our common stock for the related expected term. We believe this approach is reflective of current and historical market conditions and is an appropriate indicator of expected volatility. The risk-free interest rate is the rate available as of the awardgrant date on zero-coupon U.S. government issues with a term equal to the expected term of the award. The expected term is the remaining term of an award based on the period of time between the grant date of the award and the date the award is expected to vest. The expected term assumption is based upon the plan's performance period as of the date of the award. We have not paid dividends in the past and do not plan to pay dividends in the foreseeable future.
Phantom stock units are a form of share-based award that are indexed to our stock price and are settled in cash upon vesting and accounted for as liability-based awards. Fair value is remeasured at the end of each reporting period based on the market close price of our common stock. Phantom stock units vest over a maximum period of three years. Since phantom stock units are settled in cash, compensation expense recognized over the vesting period will vary based on changes in the fair value.value of the awards.
The fair value of unrestricted stock awards is the market close price of our common stock on the date of grant, and the awards are deemed fully vested. We expense stock-based compensation at the date of grant for unrestricted stock awards.
The fair value of stock options was estimated at the date of grant using the Black-Scholes option-pricing model. Options to purchase our common stock were granted with an exercise price equal to the market close price of the stock on the date the Board of Directors approved the grant. Options generally became exercisable in three equal annual installments beginning one year from the date of grant and expiring 10 years from the date of grant. Expected volatility was based on a combination of the historical volatility of our common stock and the implied volatility of our traded options for the related expected term. We believe this combined approach was reflective of current and historical market conditions and was an appropriate indicator of expected volatility. The risk-free interest rate was the rate available as of the award date on zero-coupon U.S. government issues with a term equal to the expected term of the award. The expected term was the weighted average expected term of an award based on the period of time between the date the award was granted and the estimated date the award will be fully exercised. Factors considered in estimating the expected term included historical experience of similar awards, contractual terms, vesting schedules, and expectations of future employee behavior.
Excess tax benefits and deficiencies resulting from employee share-based payment are recognized as income tax provision or benefit in the Consolidated StatementStatements of Operations, and as an operating activity on the Consolidated StatementStatements of Cash Flows.
We also maintain an Employee Stock Purchase Plan (ESPP) for our employees. Under the terms of the ESPP, employees can deduct up to 10% of their regular casheligible compensation to purchase our common stock at a 5% discount from the fair market value of the stock at the end of each fiscal quarter, subject to other limitations under the plan. The sale of the stock to the employees occurs at the beginning of the subsequent quarter. The ESPP is not considered compensatory, and no compensation expense is recognized for sales of our common stock to employees.
Income Taxes
We account for income taxes using the asset and liability method of accounting. Deferred tax assets and liabilities are recognized based upon anticipated future tax consequences, in each of the jurisdictions that we operate, attributable to: (1) the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases; and (2) net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured annually using
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enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The calculation of our tax liabilities involves applying complex tax regulations in different tax jurisdictions to our tax positions. The effect on deferred tax assets and liabilities of a change in tax legislation and/or rates is recognized in the period that includes the enactment date. A valuation allowance is recognized to reduce the carrying amounts of deferred tax assets if it is not more likely than not that such assets will be realized. We do not recognize tax liabilities on undistributed earnings of international subsidiaries that are permanently reinvested.
Foreign Exchange
Our consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries with non-U.S. dollar functional currencies are translated to U.S. dollars at the exchange rates in effect on the balance sheet date, or the last business day of the period, if applicable. Revenues and expenses for each subsidiary are translated to U.S. dollars using a weightedan average rate for the relevant reporting period. Translation adjustments resulting from this process are included, net of tax, in OCI. Gains and losses that arise from exchange rate fluctuations for monetary asset and liability balances that are not denominated in an entity’sentity's functional currency are included within other income (expense), net in the Consolidated Statements of Operations. Currency gains and losses of intercompany balances deemed to be long-term in nature or designated as a hedge of the net investment in international subsidiaries are included, net of tax, in OCI. Foreign currency losses, net of hedging, of $5.1$2.9 million, $0.3$3.2 million, and $3.0$2.8 million were included in other expenses, net, for the years ended December 31, 2017, 20162022, 2021, and 2015, respectively.2020.
Fair Value Measurements
For assets and liabilities measured at fair value, the GAAP fair value hierarchy prioritizes the inputs used in different valuation methodologies, assigning the highest priority to unadjusted quoted prices for identical assets and liabilities in actively traded markets (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 inputs consist of quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in non-active markets; and model-derived valuations in which significant inputs are corroborated by observable market data either directly or indirectly through correlation or other means. Inputs may include yield curves, volatility, credit risks, and default rates.
In the Consolidated Statements of Cash Flows, the following reclassifications have been made to prior year amounts to conform to current year presentation of restructuring liabilities.
| Year Ended December 31, 2021 | ||||||||||||||||||||
| In thousands | As Previously Reported | Adjustments | As Reclassified | |||||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions and sale of businesses: | ||||||||||||||||||||
| Accounts payable, other current liabilities, and taxes payable | $ | (23,391) | $ | 61 | $ | (23,330) | ||||||||||||||
| Restructuring | — | 15,967 | 15,967 | |||||||||||||||||
| Other operating, net | 17,086 | (16,028) | 1,058 | |||||||||||||||||
| Year Ended December 31, 2020 | ||||||||||||||||||||
| In thousands | As Previously Reported | Adjustments | As Reclassified | |||||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions and sale of businesses: | ||||||||||||||||||||
| Accounts payable, other current liabilities, and taxes payable | $ | (111,724) | $ | (11,166) | $ | (122,890) | ||||||||||||||
| Restructuring | — | 11,767 | 11,767 | |||||||||||||||||
| Other operating, net | (10,140) | (601) | (10,741) | |||||||||||||||||
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Recently Adopted Accounting PronouncementsStandards
In May 2014,2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-04 amending Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). The amendment affects entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. We adopted this amendment as of the effective date of January 1, 2022. The adoption of this amendment did not have a material impact on our financial statements.
In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors-Certain Leases with Variable Lease Payments. The amendments in this update modify the lease classification requirements for lessors to align them with practice under Topic 840, particularly in the area of day-one loss accounting. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if certain criteria are met. The effective date for this amendment was January 1, 2022. The adoption of this amendment did not have a material impact on our financial statements.
In November 2021, the FASB issued ASU 2021-10 amending Government Assistance: (Topic 832). The FASB issued this update to increase the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity's accounting for the assistance, and (3) the effect of the assistance on an entity's financial statements. The effective date for this amendment was January 1, 2022. The adoption of this amendment did not have a material impact on our financial statements.
Recent Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08 amending Business Combination: (Topic 805), which was necessary due to 2014-09,Revenue from Contracts with Customers: Topic 606 (ASU 2014-09),Customers (Topic 606). The FASB issued this update to supersede nearly all existingimprove the accounting for acquired revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred tocontracts with customers in a business combination by addressing diversity in practice and inconsistency related to (1) recognition of an amount that reflectsacquired contract liability and (2) payment terms and their effect on subsequent revenue recognized by the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred theacquirer. The effective date for implementation of ASU 2014-09 by one year andthis amendment is now effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted but not earlier than the original effective date. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08), which clarifies the implementation guidance of principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing (ASU 2016-10), which clarifies the identification of performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients (ASU 2016-12), to improve guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The effective date and transition requirements in ASU 2016-08, ASU 2016-10, and ASU 2016-12 are the same as the effective date and transition requirements of ASU 2015-14.
Note 2: Earnings Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share (EPS):
| Year Ended December 31, | |||||||||||||||||
| In thousands, except per share data | 2022 | 2021 | 2020 | ||||||||||||||
| Net loss available to common shareholders | $ | (9,732) | $ | (81,255) | $ | (57,955) | |||||||||||
| Weighted average common shares outstanding - Basic | 45,101 | 44,301 | 40,253 | ||||||||||||||
| Dilutive effect of stock-based awards | — | — | — | ||||||||||||||
| Dilutive effect of convertible notes | — | — | — | ||||||||||||||
| Weighted average common shares outstanding - Diluted | 45,101 | 44,301 | 40,253 | ||||||||||||||
| Net loss per common share - Basic | $ | (0.22) | $ | (1.83) | $ | (1.44) | |||||||||||
| Net loss per common share - Diluted | $ | (0.22) | $ | (1.83) | $ | (1.44) | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands, except per share data) | |||||||||||
| Net income available to common shareholders | $ | 57,298 | $ | 31,770 | $ | 12,678 | |||||
| Weighted average common shares outstanding - Basic | 38,655 | 38,207 | 38,224 | ||||||||
| Dilutive effect of stock-based awards | 732 | 436 | 282 | ||||||||
| Weighted average common shares outstanding - Diluted | 39,387 | 38,643 | 38,506 | ||||||||
| Earnings per common share - Basic | $ | 1.48 | $ | 0.83 | $ | 0.33 | |||||
| Earnings per common share - Diluted | $ | 1.45 | $ | 0.82 | $ | 0.33 | |||||
Stock-based Awards
For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase our common stock at the average market price during the period. Related proceeds include the amount the employee must pay upon exercise and the future compensation cost associated with the stock award. Approximately 0.2 million, 0.7 million, 0.5 million, and 1.20.7 million stock-based awards were excluded from the calculation of diluted EPS for the years ended December 31, 2017, 2016,2022, 2021, and 2015, respectively,2020, because they were anti-dilutive. These stock-based awards could be dilutive in future periods.
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Convertible Notes and Warrants
For our Convertible Notes issued in March 2021, the dilutive effect is calculated using the if-converted method. We are required, pursuant to the indenture governing our Convertible Notes, to settle the principal amount of the Convertible Notes in cash and may elect to settle the remaining conversion obligation (stock price in excess of conversion price) in cash, shares, or a combination thereof. Under the if-converted method, we include the number of shares required to satisfy the remaining conversion obligation, assuming all the Convertible Notes were converted. The average quarterly closing prices of our common stock for the year ended December 31, 2022 were used as the basis for determining the dilutive effect on EPS. The quarterly average closing prices for our common stock did not exceed the conversion price of $126.00, and therefore all associated shares were anti-dilutive.
In conjunction with the issuance of the Convertible Notes, we sold warrants to purchase 3.7 million shares of Itron common stock. The warrants have a strike price of $180.00 per share. For calculating the dilutive effect of the warrants, we use the treasury stock method. With this method, we assume exercise of the warrants at the beginning of the period, or at time of issuance if later, and the issuance of common stock upon exercise. Proceeds from the exercise of the warrants are assumed to be used to repurchase shares of our stock at the average market price during the period. The incremental shares, representing the number of shares assumed to be exercised with the warrants less the number of shares repurchased, are included in diluted weighted average common shares outstanding. For periods where the warrants strike price of $180.00 per share is greater than the average share price of Itron stock for the period, the warrants would be anti-dilutive. For the year ended December 31, 2022, the quarterly average closing prices of our common stock did not exceed the warrant strike price and therefore 3.7 million shares were considered anti-dilutive.
Convertible Note Hedge Transactions
In connection with the issuance of the Convertible Notes, we entered into privately negotiated call option contracts on our common stock (the Convertible Note Hedge Transactions) with certain commercial banks (the Counterparties). The Convertible Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those in the Convertible Notes, approximately 3.7 million shares of our common stock, the same number of shares initially underlying the Convertible Notes, at a strike price of approximately $126.00, subject to customary adjustments. The Convertible Note Hedge Transactions will expire upon the maturity of the Convertible Notes, subject to earlier exercise or termination. Exercise of the Convertible Note Hedge Transactions would reduce the number of shares of our common stock outstanding and therefore would be anti-dilutive.
Note 3: Certain Balance Sheet Components
A summary of accounts receivable from contracts with customers is as follows:
| Accounts receivable, net | |||||||||||
| In thousands | December 31, 2022 | December 31, 2021 | |||||||||
| Trade receivables (net of allowance of $4,863 and $5,730) | $ | 249,771 | $ | 261,124 | |||||||
| Unbilled receivables | 30,664 | 37,335 | |||||||||
| Total accounts receivable, net | $ | 280,435 | $ | 298,459 | |||||||
| Allowance for credit losses account activity | Year Ended December 31, | ||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Beginning balance | $ | 5,730 | $ | 1,312 | $ | 3,064 | |||||||||||
| Provision for (release of) doubtful accounts, net | (258) | 4,636 | (299) | ||||||||||||||
| Accounts written-off | (492) | (107) | (1,463) | ||||||||||||||
| Effect of change in exchange rates | (117) | (111) | 10 | ||||||||||||||
| Ending balance | $ | 4,863 | $ | 5,730 | $ | 1,312 | |||||||||||
| Inventories | |||||||||||
| In thousands | December 31, 2022 | December 31, 2021 | |||||||||
| Raw materials | $ | 182,118 | $ | 122,434 | |||||||
| Work in process | 8,386 | 7,856 | |||||||||
| Finished goods | 38,197 | 35,509 | |||||||||
| Total inventories | $ | 228,701 | $ | 165,799 | |||||||
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| Accounts receivable, net | December 31, 2017 | December 31, 2016 | |||||
| (in thousands) | |||||||
Trade receivables (net of allowance of $3,957 and $3,320) | $ | 369,047 | $ | 299,870 | |||
| Unbilled receivables | 28,982 | 51,636 | |||||
| Total accounts receivable, net | $ | 398,029 | $ | 351,506 | |||
| Property, plant, and equipment, net | |||||||||||
| In thousands | December 31, 2022 | December 31, 2021 | |||||||||
| Machinery and equipment | $ | 306,699 | $ | 314,502 | |||||||
| Computers and software | 119,670 | 111,540 | |||||||||
| Buildings, furniture, and improvements | 130,301 | 131,764 | |||||||||
| Land | 8,566 | 8,952 | |||||||||
| Construction in progress, including purchased equipment | 19,403 | 39,527 | |||||||||
| Total cost | 584,639 | 606,285 | |||||||||
| Accumulated depreciation | (444,516) | (443,101) | |||||||||
| Property, plant, and equipment, net | $ | 140,123 | $ | 163,184 | |||||||
| Depreciation expense | Year Ended December 31, | ||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Depreciation expense | $ | 41,046 | $ | 48,352 | $ | 52,579 | |||||||||||
| Allowance for doubtful account activity | Year Ended December 31, | ||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Beginning balance | $ | 3,320 | $ | 5,949 | $ | 6,195 | |||||
| Provision for doubtful accounts, net | 1,656 | 60 | 1,025 | ||||||||
| Accounts written-off | (1,351 | ) | (2,422 | ) | (549 | ) | |||||
| Effects of change in exchange rates | 332 | (267 | ) | (722 | ) | ||||||
| Ending balance | $ | 3,957 | $ | 3,320 | $ | 5,949 | |||||
On November, 2, 2021, Itron entered into an agreement to sell certain Gas product lines from our Device Solutions manufacturing and business operations in Europe and North America to Dresser Utility Solutions (Dresser). The asset disposal group, which included $0.8 million of accounts receivable, $15.4 million of inventories, and $12.0 million of property, plant, and equipment, was classified as held for sale during the fourth quarter of 2021. The disposal group was removed from the balance sheet when the transaction closed on February 28, 2022. Refer to Note 18: Sale of Businesses for additional information on the transaction.
| Inventories | December 31, 2017 | December 31, 2016 | |||||
| (in thousands) | |||||||
| Materials | $ | 126,656 | $ | 103,274 | |||
| Work in process | 9,863 | 7,925 | |||||
| Finished goods | 57,316 | 51,850 | |||||
| Total inventories | $ | 193,835 | $ | 163,049 | |||
| Property, plant, and equipment, net | December 31, 2017 | December 31, 2016 | |||||
| (in thousands) | |||||||
| Machinery and equipment | $ | 310,753 | $ | 279,746 | |||
| Computers and software | 104,384 | 98,125 | |||||
| Buildings, furniture, and improvements | 135,566 | 122,680 | |||||
| Land | 18,433 | 17,179 | |||||
| Construction in progress, including purchased equipment | 39,946 | 29,358 | |||||
| Total cost | 609,082 | 547,088 | |||||
| Accumulated depreciation | (408,314 | ) | (370,630 | ) | |||
| Property, plant, and equipment, net | $ | 200,768 | $ | 176,458 | |||
| Depreciation expense | Year Ended December 31, | ||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Depreciation expense | $ | 42,430 | $ | 43,206 | $ | 44,320 | |||||
Note 4: Intangible Assets and Liabilities
The gross carrying amount and accumulated amortization (accretion) of our intangible assets and liabilities, other than goodwill, arewere as follows:
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| In thousands | Gross | Accumulated (Amortization) Accretion | Net | Gross | Accumulated (Amortization) Accretion | Net | |||||||||||||||||||||||||||||
| Intangible Assets | |||||||||||||||||||||||||||||||||||
| Core-developed technology | $ | 498,601 | $ | (492,782) | $ | 5,819 | $ | 505,429 | $ | (491,047) | $ | 14,382 | |||||||||||||||||||||||
| Customer contracts and relationships | 322,360 | (265,503) | 56,857 | 336,421 | (261,043) | 75,378 | |||||||||||||||||||||||||||||
| Trademarks and trade names | 72,156 | (70,101) | 2,055 | 74,551 | (72,133) | 2,418 | |||||||||||||||||||||||||||||
| Other | 12,017 | (11,807) | 210 | 12,021 | (11,670) | 351 | |||||||||||||||||||||||||||||
| Total intangible assets | $ | 905,134 | $ | (840,193) | $ | 64,941 | $ | 928,422 | $ | (835,893) | $ | 92,529 | |||||||||||||||||||||||
| Intangible Liabilities | |||||||||||||||||||||||||||||||||||
| Customer contracts and relationships | $ | (23,900) | $ | 23,900 | $ | — | $ | (23,900) | $ | 23,441 | $ | (459) | |||||||||||||||||||||||
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| December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||
| Gross Assets | Accumulated Amortization | Net | Gross Assets | Accumulated Amortization | Net | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Core-developed technology | $ | 429,548 | $ | (399,969 | ) | $ | 29,579 | $ | 372,568 | $ | (354,878 | ) | $ | 17,690 | |||||||||
| Customer contracts and relationships | 258,586 | (197,582 | ) | 61,004 | 224,467 | (170,056 | ) | 54,411 | |||||||||||||||
| Trademarks and trade names | 70,056 | (66,004 | ) | 4,052 | 61,785 | (61,766 | ) | 19 | |||||||||||||||
| Other | 11,661 | (11,068 | ) | 593 | 11,076 | (11,045 | ) | 31 | |||||||||||||||
| Total intangible assets | $ | 769,851 | $ | (674,623 | ) | $ | 95,228 | $ | 669,896 | $ | (597,745 | ) | $ | 72,151 | |||||||||
A summary of the intangible asset accountassets and liabilities activity is as follows:
| Year Ended December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Intangible assets, gross beginning balance | $ | 928,422 | $ | 1,000,037 | |||||||
| Intangible assets acquired | — | 2,059 | |||||||||
| Intangible assets reclassified to held for sale | — | (39,089) | |||||||||
| Effect of change in exchange rates | (23,288) | (34,585) | |||||||||
| Intangible assets, gross ending balance | $ | 905,134 | $ | 928,422 | |||||||
| Intangible liabilities, gross beginning balance | $ | (23,900) | $ | (23,900) | |||||||
| Effect of change in exchange rates | — | — | |||||||||
| Intangible liabilities, gross ending balance | $ | (23,900) | $ | (23,900) | |||||||
| Year Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Beginning balance, intangible assets, gross | $ | 669,896 | $ | 702,507 | |||
| Intangible assets acquired | 36,500 | — | |||||
| Effect of change in exchange rates | 63,455 | (32,611 | ) | ||||
| Ending balance, intangible assets, gross | $ | 769,851 | $ | 669,896 | |||
In conjunction with the business divestiture to Dresser (refer to Note 3: Certain Balance Sheet Components), the asset amortization expense isdisposal group, which included $3.4 million of net intangible assets, was classified as follows:held for sale during the fourth quarter of 2021. The disposal group was removed from the balance sheet when the transaction closed on February 28, 2022. Refer to Note 18: Sale of Businesses for additional information on the transaction.
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Amortization expense | $ | 20,785 | $ | 25,112 | $ | 31,673 | |||||
Estimated future annual amortization expense is as follows:
| Year Ending December 31, | Estimated Annual Amortization | ||||
| In thousands | |||||
| 2023 | $ | 18,960 | |||
| 2024 | 15,027 | ||||
| 2025 | 14,297 | ||||
| 2026 | 10,300 | ||||
| 2027 | 5,630 | ||||
| Thereafter | 727 | ||||
| Total intangible assets subject to amortization | $ | 64,941 | |||
| Amortization Expense | Year Ended December 31, | ||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Amortization expense | $ | 25,717 | $ | 35,801 | $ | 44,711 | |||||||||||
We have recognized amortization expense within operating expenses in the Consolidated Statements of Operations. These expenses relate to intangible assets acquired and liabilities assumed as part of business combinations.
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| Year Ending December 31, | Estimated Annual Amortization | |||
| (in thousands) | ||||
| 2018 | $ | 19,380 | ||
| 2019 | 16,553 | |||
| 2020 | 14,208 | |||
| 2021 | 12,162 | |||
| 2022 | 9,961 | |||
| Beyond 2022 | 22,964 | |||
| Total intangible assets subject to amortization | $ | 95,228 | ||
Note 5: Goodwill
The following table reflects changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2021:
| In thousands | Device Solutions | Networked Solutions | Outcomes | Total Company | |||||||||||||||||||
| Goodwill balance at January 1, 2021 | $ | 53,214 | $ | 933,814 | $ | 144,888 | $ | 1,131,916 | |||||||||||||||
| Goodwill reclassified to held for sale | (12,800) | — | — | (12,800) | |||||||||||||||||||
| Goodwill acquired | — | 5,440 | — | 5,440 | |||||||||||||||||||
| Effect of change in exchange rates | (1,037) | (21,249) | (3,295) | (25,581) | |||||||||||||||||||
| Goodwill balance at December 31, 2021 | 39,377 | 918,005 | 141,593 | 1,098,975 | |||||||||||||||||||
| Adjustment to goodwill acquired | — | (23) | — | (23) | |||||||||||||||||||
| Goodwill impairment | (38,480) | — | — | (38,480) | |||||||||||||||||||
| Effect of change in exchange rates | (897) | (18,095) | (2,759) | (21,751) | |||||||||||||||||||
| Goodwill balance at December 31, 2022 | $ | — | $ | 899,887 | $ | 138,834 | $ | 1,038,721 | |||||||||||||||
The accumulated goodwill impairment losses at December 31, 2022 were $714.9 million and at December 31, 2021 were $676.5 million. The goodwill impairment losses were originally recognized in 2011, 2013, and 2022.
In conjunction with the acquisition of SELC (refer to Note 4: Intangible Assets and Liabilities), the purchase resulted in the recognition of $5.4 million in goodwill allocated to each reporting segment at our Networked Solutions segment. During the year ended December 31, 20172022, an immaterial adjustment was recorded to the goodwill acquired.
In conjunction with the business divestiture to Dresser (refer to Note 3: Certain Balance Sheet Components), the asset disposal group, which included $12.8 million of goodwill, was classified as held for sale during the fourth quarter of 2021. The disposal group was removed from the balance sheet when the transaction closed on February 28, 2022. Refer to Note 18: Sale of Businesses for additional information on the transaction.
As the result of increases in raw material, component, labor and 2016:
| Electricity | Gas | Water | Total Company | ||||||||||||
| (in thousands) | |||||||||||||||
| Goodwill balance at January 1, 2016 | |||||||||||||||
| Goodwill before impairment | $ | 414,910 | $ | 331,436 | $ | 350,314 | $ | 1,096,660 | |||||||
| Accumulated impairment losses | (362,177 | ) | — | (266,361 | ) | (628,538 | ) | ||||||||
| Goodwill, net | 52,733 | 331,436 | 83,953 | 468,122 | |||||||||||
| Effect of change in exchange rates | (1,360 | ) | (11,523 | ) | (2,745 | ) | (15,628 | ) | |||||||
| Goodwill balance at December 31, 2016 | |||||||||||||||
| Goodwill before impairment | 400,299 | 319,913 | 334,505 | 1,054,717 | |||||||||||
| Accumulated impairment losses | (348,926 | ) | — | (253,297 | ) | (602,223 | ) | ||||||||
| Goodwill, net | 51,373 | 319,913 | 81,208 | 452,494 | |||||||||||
| Goodwill acquired | 59,675 | — | — | 59,675 | |||||||||||
| Effect of change in exchange rates | 3,193 | 32,790 | 7,610 | 43,593 | |||||||||||
| Goodwill balance at December 31, 2017 | |||||||||||||||
| Goodwill before impairment | 500,625 | 352,703 | 378,901 | 1,232,229 | |||||||||||
| Accumulated impairment losses | (386,384 | ) | — | (290,083 | ) | (676,467 | ) | ||||||||
| Goodwill, net | $ | 114,241 | $ | 352,703 | $ | 88,818 | $ | 555,762 | |||||||
We test goodwill for impairment each year as of October 1. Changes in market demand, fluctuations in the markets in which we operate, the volatility and decline in the worldwide equity markets, and a decline in our market capitalization could unfavorably impact the remaining carrying value of our goodwill, which could have a significant effect on our current and future results of operations and financial position. Based on the results of the annual impairment testing for our reporting units performed as of October 1, 2017, we performed a qualitative assessment and determined it is not more likely than not that2022, no adjustments to the faircarrying value of our reporting units is less than their carrying amounts.goodwill were required. Refer to Note 1: Summary of Significant Accounting Policies for further details regarding the annual goodwill impairment process.
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Note 6: Debt
The components of our borrowings arewere as follows:
| December 31, 2017 | December 31, 2016 | ||||||
| (in thousands) | |||||||
| Credit Facilities | |||||||
| USD denominated term loan | $ | 194,063 | $ | 208,125 | |||
| Multicurrency revolving line of credit | 125,414 | 97,167 | |||||
| Senior notes | 300,000 | — | |||||
| Total debt | 619,477 | 305,292 | |||||
| Less: current portion of debt | 19,688 | 14,063 | |||||
| Less: unamortized prepaid debt fees - term loan | 629 | 769 | |||||
Less: unamortized prepaid debt fees - senior notes | 5,588 | — | |||||
| Long-term debt | $ | 593,572 | $ | 290,460 | |||
| In thousands | December 31, 2022 | December 31, 2021 | |||||||||
| Credit facility | |||||||||||
| Multicurrency revolving line of credit | $ | — | $ | — | |||||||
| Convertible notes | 460,000 | 460,000 | |||||||||
| Total debt | 460,000 | 460,000 | |||||||||
| Less: unamortized prepaid debt fees - convertible notes | 7,474 | 9,772 | |||||||||
| Long-term debt, net | $ | 452,526 | $ | 450,228 | |||||||
Credit FacilitiesFacility
The 2018 credit facility was amended on October 18, 2019, and this amendment extended the revolver maturematurity date to October 18, 2024. The amendment also modified the required interest payments and with covenants based on June 23,total net leverage instead of total leverage. On October 19, 2020, we entered into a second amendment to obtain temporary covenant relief while also adding an additional level of pricing was added to the existing pricing grid, which is effective throughout the remaining term of the debt. On March 8, 2021, we entered into a third amendment to the 2018 credit facility, which modified provisions to permit cash settlement upon the conversion of the Convertible Notes, the Convertible Note Hedge Transactions and amounts borrowed underWarrant Transactions and also to adjust certain settlement provisions for convertible indebtedness. Refer to Note 7: Derivative Financial Instruments for further details of the revolver are classified as long-termConvertible Note Hedge Transactions and Warrant Transactions.
On February 25, 2022, we entered into a fourth amendment to the 2018 credit facility, which modifies provisions to allow for the addback of non-cash expenses related to restructuring charges incurred during the credit facility term, may be repaidquarter ended December 31, 2021 and reborrowed untilalso adjusted the revolver's maturity, at which time the revolver will terminate, and all outstanding loans, together with all accrued and unpaid interest, must be repaid. Amounts not borrowed under the revolver are subject to a commitment fee, which is paid in arrears on the last day of each fiscal quarter, ranging from 0.18% to 0.30% per annum depending on ourmaximum total net leverage ratio asthresholds for the period which began with the first quarter of 2022 through the most recently ended fiscal quarter. Amounts repaid onfourth quarter of 2022 to allow for increased operational flexibility. The maximum leverage ratio was increased to 4.75:1 for the term loan may not be reborrowed. first through third quarters of 2022 and 4.50:1 for the fourth quarter of 2022.
The 20152018 credit facility permits us and certain of our foreign subsidiaries to borrow in U.S. dollars, euros, British pounds, or, with lender approval, other currencies readily convertible
into U.S. dollars. All obligations under the 20152018 credit facility are guaranteed by Itron, Inc. and material U.S. domestic subsidiaries and are secured by a pledge of substantially all of the assets of Itron, Inc. and material U.S. domestic subsidiaries, includingsubsidiaries. This includes a pledge of 100% of the capital stock of material U.S. domestic subsidiaries and up to 66% of the voting stock (100% of the non-voting stock) of their first-tier foreign subsidiaries. In addition, the obligations of any foreign subsidiary who is a foreign borrower, as defined by the 20152018 credit facility, are guaranteed by the foreign subsidiary and by its direct and indirect foreign parents. The 20152018 credit facility includes debt covenants, which contain certain financial thresholds and place certain restrictions on the incurrence of debt, investments, and the issuance of dividends. We were in compliance with the debt covenants under the 20152018 credit facility at December 31, 2017.2022.
| Year Ending December 31, | Minimum Payments | |||
| (in thousands) | ||||
| 2018 | $ | 19,688 | ||
| 2019 | 22,500 | |||
| 2020 | 277,289 | |||
| 2021 | — | |||
| 2022 | — | |||
| Total minimum payments on debt | $ | 319,477 | ||
Under the 20152018 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 net leverage ratio (asas defined in the credit agreement).agreement. The applicable rates per annum may be based on either: (1) the LIBOR rate or EURIBOR rate (floor(subject to a 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%0.50%, or (iii) one monthone-month LIBOR plus 1%1.00%. The cessation of LIBOR will occur in June 2023. On November 23, 2022, we entered into a fifth amendment to the 2018 credit facility, which replaces the LIBOR rate with Term Secured Overnight Financing Rate (SOFR) as the base interest rate.
At December 31, 2017 and 2016,
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Term loan | $ | 14,063 | $ | 11,250 | $ | 13,125 | |||||
| Multicurrency revolving line of credit | 15,000 | 67,869 | 49,873 | ||||||||
| Total credit facility repayments | $ | 29,063 | $ | 79,119 | $ | 62,998 | |||||
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On January 5, 2018,February 21, 2023, we entered into a credit agreement (thesixth amendment to the 2018 credit facility)facility. This amendment modifies provisions to allow for the addback for debt covenant calculations of non-recurring cash expenses related to restructuring charges to be incurred during the quarter ended March 31, 2023.
Convertible Notes
On March 12, 2021, we closed the sale of the Convertible Notes in a private placement to qualified institutional buyers, resulting in net proceeds to us of $448.5 million after deducting initial purchasers' discounts of the offering. The Convertible Notes do not bear regular interest, and the principal amount does not accrete. The Convertible Notes will mature on March 15, 2026, unless earlier repurchased, redeemed, or converted in accordance with their terms. No sinking fund is provided for the Convertible Notes.
The initial conversion rate of the Convertible Notes is 7.9365 shares of our common stock per $1,000 principal amount of notes, which amended and restatedis equivalent to an initial conversion price of approximately $126.00 per share. The conversion rate of the 2015 credit facilityConvertible Notes is subject to adjustment upon the occurrence of certain specified events. In addition, upon the occurrence of a make-whole fundamental change (as defined in its entirety. The 2018 credit facility providesthe indenture governing the Convertible Notes) or upon a notice of redemption, we will, in certain circumstances, increase the conversion rate for a $650 million term loan and a $500 million revolving credit facility, including a $300 million letterholder that elects to convert its Convertible Notes in connection with such make-whole fundamental change or notice of credit sub-facility and $50 million swingline loan sub-facility. Bothredemption, as the term loancase may be.
Prior to the close of business on the business day immediately preceding December 15, 2025, the Convertible Notes are convertible at the option of the holders only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business-day period after any five consecutive trading-day period (the measurement period) in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the revolver matureconversion rate on January 5, 2023, and amounts borrowed undereach such trading day; (3) upon the revolver may be repaid and reborrowedoccurrence of specified corporate events; or (4) upon redemption by us. On or after December 15, 2025, until the revolver's maturity,close of business on the second scheduled trading day immediately preceding March 15, 2026, holders of the Convertible Notes may convert all or a portion of their notes at which timeany time. Upon conversion, we will pay cash up to the revolver will terminate, and all outstanding loans, together with all accrued and unpaid interest, must be repaid. For additional details see Note 19: Subsequent Events.
On or after March 20, 2024 and prior to December 15, 2025, we may redeem for cash all or part of the net proceedsConvertible Notes, at our option, if the last reported sales price of certain equity offeringscommon stock has been at 105.00%least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related notice of the redemption. The redemption price of each Convertible Notes to be redeemed will be the principal amount thereof,of such note, plus accrued and unpaid special interest, if any. Upon the occurrence of a fundamental change (as defined in the indenture governing the Convertible Notes), subject to a limited exception described in the indenture governing the Convertible Notes, holders may require us to repurchase all or a portion of their notes for cash at a price equal to plus accrued and unpaid special interest to, but not including, the fundamental change repurchase date (as defined in the indenture governing the Convertible Notes).
The Convertible Notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsubordinated debt and senior in right of payment to any future debt that is expressly subordinated in right of payment to the dateConvertible Notes. The Convertible Notes will be effectively subordinated to any of redemption; provided that (i) at least 65%our existing and future secured debt to the extent of the aggregate principalassets securing such indebtedness. The Convertible Notes will be structurally subordinated to all existing debt and any future debt and any other liabilities of our subsidiaries.
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Debt Maturities
The amount of Notes remains outstanding after such redemption and (ii)required minimum principal payments on our long-term debt in aggregate over the redemption occurs within 60 days of the closing of any such equity offering.next five years is as follows:
| Year Ending December 31, | Minimum Payments | |||||||
| In thousands | ||||||||
| 2023 | $ | — | ||||||
| 2024 | — | |||||||
| 2025 | — | |||||||
| 2026 | 460,000 | |||||||
| 2027 | — | |||||||
| Thereafter | — | |||||||
| Total minimum payments on debt | $ | 460,000 | ||||||
Note 7: Derivative Financial Instruments
As part of our risk management strategy, we use derivative instruments to hedge certain foreign currency and interest rate exposures. Refer to Note 1,1: Summary of Significant Accounting Policies, Note 14,14: Shareholders' Equity, and Note 1515: Fair Value of Financial Instruments for additional disclosures on our derivative instruments.
The fair values of our derivative instruments are determined using the income approach and significant other observable inputs (also known(and are classified as “Level 2”)"Level 2" in the fair value hierarchy). We have used observable market inputs based on the type of derivative and the nature of the underlying instrument. The key inputs include interest rate yield curves (swap rates and futures) and foreign exchange spot and forward rates, all of which are available in an active market. We have utilized the mid-market pricing convention for these inputs. We include, as a discount to the derivative asset, the effect of our counterparty credit risk based on current published credit default swap rates when the net fair value of our derivative instruments is in a net asset position. We consider our own nonperformance risk when the net fair value of our derivative instruments is in a net liability position by discounting our derivative liabilities to reflect the potential credit risk to our counterparty through applying a current market indicative credit spread to all cash flows.
The fair values of our derivative instruments arewere as follows:
| Fair Value | ||||||||||||||||||||
| Derivatives Assets | Balance Sheet Location | December 31, 2022 | December 31, 2021 | |||||||||||||||||
| Derivatives not designated as hedging instruments under ASC 815-20 | In thousands | |||||||||||||||||||
| Foreign exchange forward contracts | Other current assets | $ | 45 | $ | 37 | |||||||||||||||
| Total asset derivatives | $ | 45 | $ | 37 | ||||||||||||||||
| Derivatives Liabilities | ||||||||||||||||||||
| Derivatives not designated as hedging instruments under ASC 815-20 | In thousands | |||||||||||||||||||
| Foreign exchange forward contracts | Other current liabilities | $ | 44 | $ | 135 | |||||||||||||||
| Total liability derivatives | $ | 44 | $ | 135 | ||||||||||||||||
| Fair Value | ||||||||||
| Balance Sheet Location | December 31, 2017 | December 31, 2016 | ||||||||
| (in thousands) | ||||||||||
| Asset Derivatives | ||||||||||
| Derivatives designated as hedging instruments under ASC 815-20 | ||||||||||
| Interest rate swap contracts | Other current assets | $ | 658 | $ | — | |||||
| Interest rate cap contracts | Other current assets | 17 | 3 | |||||||
| Interest rate swap contracts | Other long-term assets | 1,712 | 1,830 | |||||||
| Interest rate cap contracts | Other long-term assets | 179 | 376 | |||||||
| Derivatives not designated as hedging instruments under ASC 815-20 | ||||||||||
| Foreign exchange forward contracts | Other current assets | 41 | 169 | |||||||
| Interest rate cap contracts | Other current assets | 25 | 4 | |||||||
| Interest rate cap contracts | Other long-term assets | 268 | 563 | |||||||
| Total asset derivatives | $ | 2,900 | $ | 2,945 | ||||||
| Liability Derivatives | ||||||||||
| Derivatives designated as hedging instruments under ASC 815-20 | ||||||||||
| Interest rate swap contracts | Other current liabilities | $ | — | $ | 934 | |||||
| Derivatives not designated as hedging instruments under ASC 815-20 | ||||||||||
| Foreign exchange forward contracts | Other current liabilities | 289 | 449 | |||||||
| Total liability derivatives | $ | 289 | $ | 1,383 | ||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Net unrealized loss on hedging instruments at January 1, | $ | (14,590) | $ | (16,001) | $ | (15,103) | |||||||||||
| Unrealized gain (loss) on derivative instruments | — | 1,121 | (7,002) | ||||||||||||||
| Realized (gains) losses reclassified into net income (loss) | — | 290 | 6,104 | ||||||||||||||
| Net unrealized loss on hedging instruments at December 31, | $ | (14,590) | $ | (14,590) | $ | (16,001) | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Net unrealized gain (loss) on hedging instruments at January 1, | $ | (14,337 | ) | $ | (14,062 | ) | $ | (15,148 | ) | ||
| Unrealized gain (loss) on derivative instruments | 360 | (1,087 | ) | 76 | |||||||
| Realized (gains) losses reclassified into net income (loss) | 563 | 812 | 1,010 | ||||||||
| Net unrealized gain (loss) on hedging instruments at December 31, | $ | (13,414 | ) | $ | (14,337 | ) | $ | (14,062 | ) | ||
Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations. Included in the net unrealized lossgain (loss) on hedging instruments at December 31, 20172022 and 20162021 is a loss of $14.4 million, net of tax, related to our nonderivative net investment hedge, which terminated in 2011. This loss on our net investment hedge will remain in AOCI until such time when earnings are impacted by a sale or liquidation of the associated foreign operation.
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A summary of the potential effect of netting arrangements on our financial position related to the offsetting of our recognized derivative assets and liabilities under master netting arrangements or similar agreements is as follows:
| Offsetting of Derivative Assets | Gross Amounts of Recognized Assets Presented in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||||||||
| In thousands | Derivative Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||||
| December 31, 2022 | $ | 45 | $ | (43) | $ | — | $ | 2 | |||||||||||||||
| December 31, 2021 | 37 | (37) | — | — | |||||||||||||||||||
| Offsetting of Derivative Liabilities | Gross Amounts of Recognized Liabilities Presented in the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||||||||
| In thousands | Derivative Financial Instruments | Cash Collateral Pledged | Net Amount | ||||||||||||||||||||
| December 31, 2022 | $ | 44 | $ | (43) | $ | — | $ | 1 | |||||||||||||||
| December 31, 2021 | 135 | (37) | — | 98 | |||||||||||||||||||
| Offsetting of Derivative Assets | |||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||
| Gross Amounts of Recognized Assets Presented in the Consolidated Balance Sheets | Derivative Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||
| (in thousands) | |||||||||||||||
| December 31, 2017 | $ | 2,900 | $ | (90 | ) | $ | — | $ | 2,810 | ||||||
| December 31, 2016 | $ | 2,945 | $ | (1,322 | ) | $ | — | $ | 1,623 | ||||||
| Offsetting of Derivative Liabilities | |||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||
| Gross Amounts of Recognized Liabilities Presented in the Consolidated Balance Sheets | Derivative Financial Instruments | Cash Collateral Pledged | Net Amount | ||||||||||||
| (in thousands) | |||||||||||||||
| December 31, 2017 | $ | 289 | $ | (90 | ) | $ | — | $ | 199 | ||||||
| December 31, 2016 | $ | 1,383 | $ | (1,322 | ) | $ | — | $ | 61 | ||||||
Our derivative assets and liabilities subject to netting arrangements consist ofinclude foreign exchange forward and interest rate contracts with three counterparties at December 31, 20172022 and three counterparties at December 31, 2016.2021. No derivative asset or liability balance with any of our counterparties was individually significant at December 31, 20172022 or 2016.2021. Our derivative contracts with each of these counterparties exist under agreements that provide for the net settlement of all contracts through a single payment in a single currency in the event of default. We have no pledges of cash collateral against our obligations, norand we have wenot received pledges of cash collateral from our counterparties under the associated derivative contracts.
Cash Flow Hedges
As a result of our floating rate debt,forecasted inventory purchases in a non-functional currency, we are exposed to variability in our cash flows from changes in the applicable interest rate index.foreign exchange risk. We enter into swaps to achieve a fixed rate of interest on the hedged portion of debt in order to decrease this variability in our cash flows. The objectivehedge portions of these swaps is to reduce the variability of cash flows from increases in the LIBOR-based borrowing rates on our floating rate credit facility. The swaps do not protect us from changes to the applicable margin under our credit facility.
The before-tax effects of our accounting for derivative instruments designated as hedges on AOCI for the Consolidated Balance Sheets and the Consolidated Statements of Operationsyear ended December 31, were as follows:
| Derivatives in ASC 815-20 Cash Flow Hedging Relationships | Amount of Gain (Loss) Recognized in OCI on Derivative | Gain (Loss) Reclassified from AOCI into Income | ||||||||||||||||||||||||||||||||||||||||||
| Location | Amount | |||||||||||||||||||||||||||||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | In thousands | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| Interest rate swap contract | $ | — | $ | 73 | $ | (2,900) | Interest expense | $ | — | $ | (229) | $ | (745) | |||||||||||||||||||||||||||||||
| Interest rate swap contract | — | — | — | Other income (expense), net | — | (1,680) | — | |||||||||||||||||||||||||||||||||||||
| Interest rate cap contracts | — | — | 782 | Interest expense | — | — | 392 | |||||||||||||||||||||||||||||||||||||
| Foreign exchange options | — | 403 | (1,228) | Product cost of revenues | — | 403 | (1,228) | |||||||||||||||||||||||||||||||||||||
| Cross currency swap contract | — | 669 | (4,164) | Interest expense | — | 94 | 619 | |||||||||||||||||||||||||||||||||||||
| Cross currency swap contract | — | — | — | Other income (expense), net | — | 656 | (5,228) | |||||||||||||||||||||||||||||||||||||
| Derivatives in ASC 815-20 Cash Flow Hedging Relationships | Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) | Loss Reclassified from AOCI into Income (Effective Portion) | Loss Recognized in Income on Derivative (Ineffective Portion) | |||||||||||||||||||||||||||||||||||||
| Location | Amount | Location | Amount | |||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||||||
| Interest rate swap contracts | $ | 768 | $ | (1,163 | ) | $ | 367 | Interest expense | $ | (706 | ) | $ | (1,296 | ) | $ | (1,639 | ) | Interest expense | $ | — | $ | — | $ | — | ||||||||||||||||
| Interest rate cap contracts | $ | (183 | ) | $ | (605 | ) | $ | (244 | ) | Interest expense | $ | (210 | ) | $ | (27 | ) | $ | — | Interest expense | $ | — | $ | (1 | ) | $ | — | ||||||||||||||
Derivatives Not Designated as Hedging Relationships
We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third-party.third party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recognized towithin 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, 2017,2022, a total of 5436 contracts were offsetting our exposures from the euro, pound sterling, Indonesian rupiah, Canadian dollar, Indonesian Rupiah, Chinese Yuan, Saudi RiyalAustralian dollar, and various other currencies, with notional amounts ranging from $158,000$117,000 to $39.5 million.$57.9 million.
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The effect of our derivative instruments not designated as hedges on the Consolidated Statements of Operations for the year ended December 31, was as follows:
| Derivatives Not Designated as Hedging Instrument under ASC 815-20 | Location | Gain (Loss) Recognized on Derivatives in Other Income (Expense) | ||||||||||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Foreign exchange forward contracts | Other income (expense), net | $ | (865) | $ | 1,536 | $ | (4,538) | |||||||||||||||||||
| Derivatives Not Designated as Hedging Instrument under ASC 815-20 | Location | Gain (Loss) Recognized in Income on Derivative | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||
| (in thousands) | ||||||||||||||
| Foreign exchange forward contracts | Other income (expense), net | $ | (6,281 | ) | $ | 537 | $ | (3,145 | ) | |||||
| Interest rate cap contracts | Interest expense | $ | (274 | ) | $ | 129 | $ | — | ||||||
We will continue to monitor and assess our interest rate and foreign exchange risk and may institute additional derivative instruments to manage such risk in the future.
Convertible Note Hedge Transactions
We paid an aggregate amount of $84.1 million for the Convertible Note Hedge Transactions. The Convertible Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those in the Convertible Notes, approximately 3.7 million shares of our common stock, the same number of shares initially underlying the Convertible Notes, at a strike price of approximately $126.00, subject to customary adjustments. The Convertible Note Hedge Transactions will expire upon the maturity of the Convertible Notes, subject to earlier exercise or termination. The Convertible Note Hedge Transactions are expected generally to reduce the potential dilutive effect of the conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of the converted notes, as the case may be, in the event that the market price per share of our common stock, as measured under the terms of the Convertible Note Hedge Transactions, is greater than the strike price of those Convertible Note Hedge Transactions. The Convertible Note Hedge Transactions meet the criteria in Accounting Standards Codification (ASC) 815-40 to be classified within Stockholders' Equity, and therefore the transactions are not revalued after their issuance.
We made a tax election to integrate the Convertible Notes and the call options. We are retaining the identification statements in our books and records, together with a schedule providing the accruals on the synthetic debt instruments. The accounting impact of this tax election makes the call options deductible as original issue discount for tax purposes over the term of the Convertible Note, and results in a $20.6 million deferred tax asset recognized through equity.
Warrant Transactions
In addition, concurrently with entering into the Convertible Note Hedge Transactions, we separately entered into privately-negotiated Warrant Transactions (the Warrant Transactions), whereby we sold to the Counterparties warrants to acquire, collectively, subject to anti-dilution adjustments, 3.7 million shares of our common stock at an initial strike price of $180.00 per share, which represents a premium of 100% over the public offering price in the common stock issuance. We received aggregate proceeds of $45.3 million from the Warrant Transactions with the Counterparties, with such proceeds partially offsetting the costs of entering into the Convertible Note Hedge Transactions. The warrants expire in June 2026. If the market value per share of our common stock, as measured under the Warrants Transactions, exceeds the strike price of the warrants, the warrants will have a dilutive effect on our earnings per share, unless we elect, subject to certain conditions, to settle the warrants in cash. The warrants meet the criteria in ASC 815-40 to be classified within Stockholders' Equity, therefore the warrants are not revalued after issuance.
Note 8: Defined Benefit Pension Plans
We sponsor both funded and unfunded defined benefit pension plans offering death and disability, retirement, and special termination benefits for certain of our international employees, primarily in Germany, France, Italy, Indonesia, Brazil,India, and Spain.Italy. The defined benefit obligation is calculated annually by using the projected unit credit method. The measurement date for the pension plans was December 31, 2017.2022.
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The following tables set forth the components of the changes in benefit obligations and fair value of plan assets:
| Year Ended December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Change in benefit obligation: | |||||||||||
| Benefit obligation at January 1, | $ | 112,073 | $ | 132,732 | |||||||
| Service cost | 2,908 | 4,479 | |||||||||
| Interest cost | 1,676 | 1,383 | |||||||||
| Actuarial gain | (23,682) | (13,986) | |||||||||
| Benefits paid | (2,753) | (3,381) | |||||||||
| Foreign currency exchange rate changes | (7,162) | (8,505) | |||||||||
| Curtailment | (225) | (579) | |||||||||
| Settlement | (1,499) | (171) | |||||||||
| Release for divestiture | (11,081) | — | |||||||||
| Other | (516) | 101 | |||||||||
| Benefit obligation at December 31, | $ | 69,739 | $ | 112,073 | |||||||
| Change in plan assets: | |||||||||||
| Fair value of plan assets at January 1, | $ | 9,609 | $ | 10,206 | |||||||
| Actual return on plan assets | (4) | 308 | |||||||||
| Company contributions | 217 | 102 | |||||||||
| Benefits paid | (278) | (329) | |||||||||
| Foreign currency exchange rate changes | (655) | (678) | |||||||||
| Settlement | (227) | — | |||||||||
| Fair value of plan assets at December 31, | 8,662 | 9,609 | |||||||||
| Net pension benefit obligation at fair value | $ | 61,077 | $ | 102,464 | |||||||
| Year Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Change in benefit obligation: | |||||||
| Benefit obligation at January 1, | $ | 97,261 | $ | 98,767 | |||
| Service cost | 3,968 | 3,472 | |||||
| Interest cost | 2,264 | 2,573 | |||||
| Actuarial (gain) loss | (2,351 | ) | 7,733 | ||||
| Benefits paid | (3,136 | ) | (9,481 | ) | |||
| Foreign currency exchange rate changes | 13,014 | (4,386 | ) | ||||
| Curtailment | (858 | ) | 14 | ||||
| Settlement | (175 | ) | (1,431 | ) | |||
| Other | 833 | — | |||||
| Benefit obligation at December 31, | $ | 110,820 | $ | 97,261 | |||
| Change in plan assets: | |||||||
| Fair value of plan assets at January 1, | $ | 10,215 | $ | 9,662 | |||
| Actual return on plan assets | 786 | 604 | |||||
| Company contributions | 399 | 348 | |||||
| Benefits paid | (383 | ) | (370 | ) | |||
| Foreign currency exchange rate changes | 984 | (29 | ) | ||||
| Other | 833 | — | |||||
| Fair value of plan assets at December 31, | 12,834 | 10,215 | |||||
| Net pension benefit obligation at fair value | $ | 97,986 | $ | 87,046 | |||
Amounts recognized on the Consolidated Balance Sheets consist of:
| December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Assets | |||||||||||
| Plan assets in other long-term assets | $ | 162 | $ | — | |||||||
| Liabilities | |||||||||||
| Current portion of pension benefit obligation in wages and benefits payable | $ | 3,400 | $ | 3,088 | |||||||
| Pension benefit obligation held for sale within other current liabilities | — | 11,513 | |||||||||
| Long-term portion of pension benefit obligation | 57,839 | 87,863 | |||||||||
| Pension benefit obligation, net | $ | 61,077 | $ | 102,464 | |||||||
In conjunction with the business divestiture to Dresser (refer to Note 3: Certain Balance Sheet Components), the related disposal group was classified as held for sale during the fourth quarter of 2021. The disposal group was removed from the balance sheet when the transaction closed on February 28, 2022. Refer to Note 18: Sale of Businesses for additional information on the transaction.
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| At December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Assets | |||||||
| Plan assets in other long-term assets | $ | 991 | $ | 654 | |||
| Liabilities | |||||||
| Current portion of pension benefit obligation in wages and benefits payable | 3,260 | 3,202 | |||||
| Long-term portion of pension benefit obligation | 95,717 | 84,498 | |||||
| Pension benefit obligation, net | $ | 97,986 | $ | 87,046 | |||
| At December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Net actuarial loss | $ | 25,379 | $ | 26,767 | |||
| Net prior service cost | 641 | 619 | |||||
| Amount included in AOCI | $ | 26,020 | $ | 27,386 | |||
Amounts recognized in OCI (pre-tax) are as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Net actuarial (gain) loss | $ | (24,316) | $ | (14,565) | $ | 8,734 | |||||||||||
| Settlement | (166) | 2 | (286) | ||||||||||||||
| Curtailment | 20 | 557 | — | ||||||||||||||
| Plan asset loss | 316 | 38 | 64 | ||||||||||||||
| Amortization of net actuarial loss | (1,490) | (2,183) | (2,255) | ||||||||||||||
| Amortization of prior service cost | (70) | (71) | (68) | ||||||||||||||
| Other | 481 | 101 | — | ||||||||||||||
| Other comprehensive (income) loss | $ | (25,225) | $ | (16,121) | $ | 6,189 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Net actuarial (gain) loss | $ | (3,209 | ) | $ | 6,316 | $ | (6,894 | ) | |||
| Settlement (gain) loss | 2 | (1,343 | ) | (336 | ) | ||||||
| Curtailment (gain) loss | 586 | — | — | ||||||||
| Plan asset (gain) loss | (192 | ) | (64 | ) | 343 | ||||||
| Amortization of net actuarial loss | (2,308 | ) | (1,351 | ) | (1,979 | ) | |||||
| Amortization of prior service cost | (62 | ) | (58 | ) | (59 | ) | |||||
| Other | — | 4 | (46 | ) | |||||||
| Other comprehensive (income) loss | $ | (5,183 | ) | $ | 3,504 | $ | (8,971 | ) | |||
If actuarial gains and losses exceed ten10 percent of the greater of plan assets or plan liabilities, we amortize them over the employees' average future service period. The estimated net actuarial lossgain and prior service cost that will be amortized from AOCI into net periodic benefit cost during 20182023 is $1.6 million.$0.4 million.
Net periodic pension benefit costscost for our plans include the following components:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Service cost | $ | 2,908 | $ | 4,479 | $ | 4,027 | |||||||||||
| Interest cost | 1,676 | 1,383 | 1,817 | ||||||||||||||
| Expected return on plan assets | (312) | (346) | (453) | ||||||||||||||
| Amortization of prior service costs | 70 | 71 | 68 | ||||||||||||||
| Amortization of actuarial net loss | 1,490 | 2,183 | 2,255 | ||||||||||||||
| Settlement | 166 | (2) | 286 | ||||||||||||||
| Curtailment | (20) | (557) | — | ||||||||||||||
| Net periodic benefit cost | $ | 5,978 | $ | 7,211 | $ | 8,000 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Service cost | $ | 3,968 | $ | 3,472 | $ | 4,572 | |||||
| Interest cost | 2,264 | 2,573 | 2,380 | ||||||||
| Expected return on plan assets | (594 | ) | (540 | ) | (502 | ) | |||||
| Amortization of prior service costs | 62 | 58 | 59 | ||||||||
| Amortization of actuarial net loss | 2,308 | 1,351 | 1,979 | ||||||||
| Settlement | (2 | ) | 1,343 | 375 | |||||||
| Curtailment | (586 | ) | — | 46 | |||||||
| Other | — | (3 | ) | (1 | ) | ||||||
| Net periodic pension benefit costs | $ | 7,420 | $ | 8,254 | $ | 8,908 | |||||
The significant actuarial weighted average assumptions used in determining the benefit obligations and net periodic benefit cost for our benefit plans are as follows:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Actuarial assumptions used to determine benefit obligations at end of period: | |||||||||||||||||
| Discount rate | 4.14 | % | 1.66 | % | 1.10 | % | |||||||||||
| Expected annual rate of compensation increase | 4.26 | % | 3.88 | % | 3.68 | % | |||||||||||
| Actuarial assumptions used to determine net periodic benefit cost for the period: | |||||||||||||||||
| Discount rate | 1.93 | % | 1.10 | % | 1.76 | % | |||||||||||
| Expected rate of return on plan assets | 3.45 | % | 3.45 | % | 4.89 | % | |||||||||||
| Expected annual rate of compensation increase | 3.88 | % | 3.68 | % | 3.76 | % | |||||||||||
| At and For The Year Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| Actuarial assumptions used to determine benefit obligations at end of period: | ||||||||
| Discount rate | 2.21 | % | 2.18 | % | 2.59 | % | ||
| Expected annual rate of compensation increase | 3.64 | % | 3.65 | % | 3.60 | % | ||
| Actuarial assumptions used to determine net periodic benefit cost for the period: | ||||||||
| Discount rate | 2.18 | % | 2.59 | % | 2.36 | % | ||
| Expected rate of return on plan assets | 5.58 | % | 5.29 | % | 5.45 | % | ||
| Expected annual rate of compensation increase | 3.65 | % | 3.60 | % | 3.37 | % | ||
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%85% 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 ratesrate used depending on the durationwas 3.75%.
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Our expected rate of return on plan assets is derived from a study of actual historic returns achieved and anticipated future long-term performance of plan assets, specific to plan investment asset category. While the study primarily gives consideration to recent insurers’insurers' performance and historical returns, the assumption represents a long-term prospective return.
The total accumulated benefit obligation for our defined benefit pension plans was $101.4$63.2 million and $87.2$103.4 million at December 31, 20172022 and 2016, respectively.2021.
The total obligations and fair value of plan assets for plans with projected benefit obligations and accumulated benefit obligations exceeding the fair value of plan assets are as follows:
| In thousands | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Projected benefit obligation | $ | 68,799 | $ | 112,073 | |||||||
| Accumulated benefit obligation | 62,503 | 103,437 | |||||||||
| Fair value of plan assets | 7,560 | 9,609 | |||||||||
| At December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Projected benefit obligation | $ | 106,486 | $ | 94,110 | |||
| Accumulated benefit obligation | 97,546 | 84,448 | |||||
| Fair value of plan assets | 7,509 | 6,410 | |||||
Our asset investment strategy focuses on maintaining a portfolio using primarily insurance funds, which are accounted for as investments and measured at fair value, in order to achieve our long-term investment objectives on a risk adjusted basis. Our general funding policy for these qualified pension plans is to contribute amounts sufficient to satisfy regulatory funding standards of the respective countries for each plan.
The fair values of our plan investments by asset category are as follows:
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
| In thousands | December 31, 2022 | ||||||||||||||||
| Cash | $ | 857 | $ | 857 | $ | — | |||||||||||
| Insurance funds | 7,805 | — | 7,805 | ||||||||||||||
| Total fair value of plan assets | $ | 8,662 | $ | 857 | $ | 7,805 | |||||||||||
| In thousands | December 31, 2021 | ||||||||||||||||
| Cash | $ | 1,075 | $ | 1,075 | $ | — | |||||||||||
| Insurance funds | 8,534 | — | 8,534 | ||||||||||||||
| Total fair value of plan assets | $ | 9,609 | $ | 1,075 | $ | 8,534 | |||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Unobservable Inputs (Level 3) | |||||||||
| (in thousands) | |||||||||||
| December 31, 2017 | |||||||||||
| Cash | $ | 789 | $ | 789 | $ | — | |||||
| Insurance funds | 8,384 | — | 8,384 | ||||||||
| Other securities | 3,661 | — | 3,661 | ||||||||
| Total fair value of plan assets | $ | 12,834 | $ | 789 | $ | 12,045 | |||||
| December 31, 2016 | |||||||||||
| Cash | $ | 783 | $ | 783 | $ | — | |||||
| Insurance funds | 7,011 | — | 7,011 | ||||||||
| Other securities | 2,421 | — | 2,421 | ||||||||
| Total fair value of plan assets | $ | 10,215 | $ | 783 | $ | 9,432 | |||||
The following tables present a reconciliation of Level 3 assets held during the years ended December 31, 20172022 and 2016.2021:
| In thousands | Balance at January 1, 2022 | Net Realized and Unrealized Gains | Net Purchases, Issuances, Settlements, and Other | Effect of Foreign Currency | Balance at December 31, 2022 | ||||||||||||||||||||||||||||||
| Insurance funds | $ | 8,534 | $ | (14) | $ | (165) | $ | (550) | $ | 7,805 | |||||||||||||||||||||||||
| In thousands | Balance at January 1, 2021 | Net Realized and Unrealized Gains | Net Purchases, Issuances, Settlements, and Other | Effect of Foreign Currency | Balance at December 31, 2021 | ||||||||||||||||||||||||||||||
| Insurance funds | $ | 9,156 | $ | 289 | $ | (242) | $ | (669) | $ | 8,534 | |||||||||||||||||||||||||
| Balance at January 1, 2017 | Net Realized and Unrealized Gains | Net Purchases, Issuances, Settlements, and Other | Net Transfers Into Level 3 | Effect of Foreign Currency | Balance at December 31, 2017 | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Insurance funds | $ | 7,011 | $ | 257 | $ | 102 | $ | — | $ | 1,014 | $ | 8,384 | |||||||||||
| Other securities | 2,421 | 523 | (93 | ) | 833 | (23 | ) | 3,661 | |||||||||||||||
| Total | $ | 9,432 | $ | 780 | $ | 9 | $ | 833 | $ | 991 | $ | 12,045 | |||||||||||
| Balance at January 1, 2016 | Net Realized and Unrealized Gains | Net Purchases, Issuances, Settlements, and Other | Net Transfers Into Level 3 | Effect of Foreign Currency | Balance at December 31, 2016 | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Insurance funds | $ | 7,089 | $ | 235 | $ | 54 | $ | — | $ | (367 | ) | $ | 7,011 | ||||||||||
| Other securities | 1,778 | 405 | (84 | ) | — | 322 | 2,421 | ||||||||||||||||
| Total | $ | 8,867 | $ | 640 | $ | (30 | ) | $ | — | $ | (45 | ) | $ | 9,432 | |||||||||
As the plan assets and contributions are not significant to our total company assets, no further disclosures are considered material.
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Annual benefit payments for the next 10 years, including amounts to be paid from our assets for unfunded plans and reflecting expected future service, as appropriate, are expected to be paid as follows:
| Year Ending December 31, | Estimated Annual Benefit Payments | |||||||
| In thousands | ||||||||
| 2023 | $ | 3,805 | ||||||
| 2024 | 3,989 | |||||||
| 2025 | 4,170 | |||||||
| 2026 | 4,167 | |||||||
| 2027 | 4,731 | |||||||
| 2028-2032 | 25,359 | |||||||
| Year Ending December 31, | Estimated Annual Benefit Payments | ||||
| (in thousands) | |||||
| 2018 | $ | 3,801 | |||
| 2019 | 3,124 | ||||
| 2020 | 3,744 | ||||
| 2021 | 4,329 | ||||
| 2022 | 4,511 | ||||
| 2023-2027 | 28,121 | ||||
Note 9: Stock-Based Compensation
We maintaingrant stock-based compensation awards, including restricted stock units, phantom stock, and unrestricted stock units, under the Second Amended and Restated 2010 Stock Incentive Plan (Stock Incentive Plan), which allows us. Prior to grantDecember 31, 2020, stock options were also granted as part of the stock-based compensation awards, including stock options, restricted stock units, phantom stock, and unrestricted stock units. Underawards. In the Stock Incentive Plan, we have 10,473,95612,623,538 shares of common stock reserved and authorized for issuance subject to stock splits, dividends, and other similar events. At events, and at December 31, 2017, 4,656,3272022, 4,602,456 shares were available for grant under the Stock Incentive Plan.grant. We issue new shares of common stock upon the exercise of stock options or when vesting conditions on restricted stock units are fully satisfied. These shares are subject to a fungible share provision such that the authorized share reserveavailable for grant is reduced by (i) one share for every one share subject to a stock option or share appreciation right granted under the Plan and (ii) 1.7 shares for every one share of common stock that was subject to an award other than an option or share appreciation right.
We also periodically award phantom stock units, which are settled in cash upon vesting and accounted for as liability-based awards, with no impact to the shares available for grant.
In addition, we maintain the ESPP, for which approximately 340,00071,253 shares of common stock were available for future issuance at December 31, 2017.2022.
Stock-Based Compensation Expense
Total stock-based compensation expense and the related tax benefit were as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Stock options | $ | 891 | $ | 1,371 | $ | 1,944 | |||||||||||
| Restricted stock units | 20,038 | 21,391 | 22,285 | ||||||||||||||
| Unrestricted stock awards | 952 | 856 | 824 | ||||||||||||||
| Phantom stock units | 1,315 | 3,242 | 3,720 | ||||||||||||||
| Total stock-based compensation | $ | 23,196 | $ | 26,860 | $ | 28,773 | |||||||||||
| Related tax benefit | $ | 5,371 | $ | 4,991 | $ | 5,086 | |||||||||||
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| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Stock options | $ | 2,695 | $ | 2,357 | $ | 2,648 | |||||
| Restricted stock units | 17,738 | 14,723 | 10,735 | ||||||||
| Unrestricted stock awards | 974 | 955 | 706 | ||||||||
| Phantom stock units | 1,747 | 1,077 | — | ||||||||
| Total stock-based compensation | $ | 23,154 | $ | 19,112 | $ | 14,089 | |||||
| Related tax benefit | $ | 5,034 | $ | 4,927 | $ | 4,228 | |||||
Stock Options
A summary of our stock option activity is as follows:
| Shares | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | Weighted Average Grant Date Fair Value | |||||||||||||||||||||||||
| In thousands | Years | In thousands | |||||||||||||||||||||||||||
| Outstanding, January 1, 2020 | 458 | $ | 56.38 | 7.0 | $ | 12,641 | |||||||||||||||||||||||
| Granted | 83 | 84.39 | $ | 26.37 | |||||||||||||||||||||||||
| Exercised | (103) | 53.99 | 2,061 | ||||||||||||||||||||||||||
| Forfeited | (5) | 83.94 | |||||||||||||||||||||||||||
| Outstanding, December 31, 2020 | 433 | $ | 61.95 | 6.9 | $ | 14,697 | |||||||||||||||||||||||
| Granted | — | — | $ | — | |||||||||||||||||||||||||
| Exercised | (34) | 67.21 | 1,215 | ||||||||||||||||||||||||||
| Forfeited | (6) | 83.33 | |||||||||||||||||||||||||||
| Outstanding, December 31, 2021 | 393 | $ | 61.18 | 5.9 | $ | 4,737 | |||||||||||||||||||||||
| Granted | — | — | $ | — | |||||||||||||||||||||||||
| Exercised | (1) | 45.90 | 4 | ||||||||||||||||||||||||||
| Canceled | (9) | 80.00 | |||||||||||||||||||||||||||
| Forfeited | (2) | 87.27 | |||||||||||||||||||||||||||
| Outstanding, December 31, 2022 | 381 | $ | 60.63 | 4.8 | $ | 1,892 | |||||||||||||||||||||||
| Exercisable, December 31, 2022 | 360 | $ | 59.25 | 4.7 | $ | 1,892 | |||||||||||||||||||||||
| Shares | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | Weighted Average Grant Date Fair Value | ||||||||||||
| (in thousands) | (years) | (in thousands) | ||||||||||||||
| Outstanding, January 1, 2015 | 1,123 | $ | 51.90 | 4.4 | $ | 1,676 | ||||||||||
| Granted | 291 | 35.25 | $ | 12.09 | ||||||||||||
| Exercised | (24 | ) | 36.05 | 26 | ||||||||||||
| Forfeited | (17 | ) | 37.47 | |||||||||||||
| Expired | (193 | ) | 52.17 | |||||||||||||
| Outstanding, December 31, 2015 | 1,180 | $ | 48.31 | 5.7 | $ | 405 | ||||||||||
| Granted | 191 | $ | 40.40 | $ | 13.27 | |||||||||||
| Exercised | (58 | ) | 37.00 | $ | 742 | |||||||||||
| Forfeited | (36 | ) | 35.29 | |||||||||||||
| Expired | (318 | ) | 55.13 | |||||||||||||
| Outstanding, December 31, 2016 | 959 | $ | 45.64 | 6.6 | $ | 19,125 | ||||||||||
| Granted | 135 | $ | 65.94 | $ | 21.99 | |||||||||||
| Exercised | (41 | ) | 39.92 | $ | 1,071 | |||||||||||
| Forfeited | (35 | ) | 47.38 | |||||||||||||
| Expired | (62 | ) | 70.12 | |||||||||||||
| Outstanding, December 31, 2017 | 956 | $ | 47.10 | 6.3 | $ | 21,965 | ||||||||||
| Exercisable, December 31, 2017 | 640 | $ | 46.08 | 5.3 | $ | 15,934 | ||||||||||
| Expected to vest, December 31, 2017 | 316 | $ | 49.17 | 8.4 | $ | 6,031 | ||||||||||
At December 31, 2017,2022, total unrecognized stock-based compensation expense related to nonvested stock options was $2.9$0.1 million, which is expected to be recognized over a weighted average period of approximately 1.5 years.0.6 year.
The weighted-averageweighted average assumptions used to estimate the fair value of stock options granted and the resulting weighted average fair value are as follows:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Expected volatility | — | % | — | % | 32.3 | % | |||||||||||
| Risk-free interest rate | — | % | — | % | 1.3 | % | |||||||||||
| Expected term (years) | N/A | N/A | 5.3 | ||||||||||||||
Employee stock options are no longer a part of our stock compensation plan as of December 31, 2020.
79
| Year Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| Expected volatility | 32.5 | % | 33.5 | % | 34.3 | % | ||
| Risk-free interest rate | 2.0 | % | 1.3 | % | 1.7 | % | ||
| Expected term (years) | 5.5 | 5.5 | 5.5 | |||||
Restricted Stock Units
The following table summarizes restricted stock unit activity:
| Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||||||||||
| In thousands | In thousands | ||||||||||||||||
| Outstanding, January 1, 2020 | 684 | $ | 64.38 | ||||||||||||||
| Granted | 262 | 83.42 | |||||||||||||||
Released (1) | (363) | $ | 23,702 | ||||||||||||||
| Forfeited | (39) | ||||||||||||||||
| Outstanding, December 31, 2020 | 544 | $ | 71.79 | ||||||||||||||
| Granted | 230 | 97.66 | |||||||||||||||
Released (1) | (293) | $ | 20,639 | ||||||||||||||
| Forfeited | (51) | ||||||||||||||||
| Outstanding, December 31, 2021 | 430 | $ | 85.77 | ||||||||||||||
| Granted | 391 | 53.33 | |||||||||||||||
Released (1) | (227) | 80.08 | $ | 18,169 | |||||||||||||
| Forfeited | (66) | 71.08 | |||||||||||||||
| Outstanding, December 31, 2022 | 528 | $ | 66.39 | ||||||||||||||
| Vested but not released, December 31, 2022 | 12 | $ | 50.65 | $ | 606 | ||||||||||||
| Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | ||||||||
| (in thousands) | (in thousands) | |||||||||
| Outstanding, January 1, 2015 | 682 | |||||||||
| Granted | 434 | $ | 35.09 | |||||||
| Released | (296 | ) | $ | 12,204 | ||||||
| Forfeited | (64 | ) | ||||||||
| Outstanding, December 31, 2015 | 756 | |||||||||
| Granted | 306 | $ | 41.58 | |||||||
| Released | (312 | ) | $ | 11,944 | ||||||
| Forfeited | (49 | ) | ||||||||
| Outstanding, December 31, 2016 | 701 | $ | 38.04 | |||||||
| Granted | 273 | $ | 50.95 | |||||||
| Released | (372 | ) | 36.93 | $ | 14,219 | |||||
| Forfeited | (46 | ) | 48.56 | |||||||
| Outstanding, December 31, 2017 | 556 | $ | 47.68 | |||||||
| Vested but not released, December 31, 2017 | 142 | $ | 9,650 | |||||||
| Expected to vest, December 31, 2017 | 350 | $ | 23,877 | |||||||
(1)Shares released is presented as gross shares and does not reflect shares withheld by us for employee payroll tax obligations.
At December 31, 2017,2022, total unrecognized compensation expense on restricted stock units was $21.7 million, which is expected to be recognized over a weighted average period of approximately 1.6 years.
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Expected volatility | 28.0 | % | 30.0 | % | 30.1 | % | |||||
| Risk-free interest rate | 1.0 | % | 0.7 | % | 0.7 | % | |||||
| Expected term (years) | 1.7 | 1.8 | 2.1 | ||||||||
| Weighted average grant date fair value | $ | 77.75 | $ | 44.92 | $ | 33.48 | |||||
| Number of Phantom Stock Units | Weighted Average Grant Date Fair Value | |||||
| (in thousands) | ||||||
| Outstanding, January 1, 2016 | — | |||||
| Granted | 63 | $ | 40.11 | |||
| Forfeited | (1 | ) | ||||
| Outstanding, December 31, 2016 | 62 | |||||
| Expected to vest, December 31, 2016 | 57 | |||||
| Outstanding, January 1, 2017 | 62 | $ | 40.11 | |||
| Granted | 32 | 65.55 | ||||
| Released | (20 | ) | 47.02 | |||
| Forfeited | (11 | ) | 40.11 | |||
| Outstanding, December 31, 2017 | 63 | $ | 47.28 | |||
| Expected to vest, December 31, 2017 | 63 | |||||
The weighted average assumptions used to estimate the fair value of performance-based restricted stock units granted with a service and market condition and the resulting weighted average fair value are as follows:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Expected volatility | 55.7 | % | 54.2 | % | 44.9 | % | |||||||||||
| Risk-free interest rate | 1.7 | % | 0.4 | % | 1.0 | % | |||||||||||
| Expected term (years) | 2.9 | 1.9 | 1.8 | ||||||||||||||
| Weighted average fair value | $ | 57.88 | $ | 77.65 | $ | 93.97 | |||||||||||
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Phantom Stock Units
The following table summarizes phantom stock unit activity:
| Number of Phantom Stock Units | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||||||||||
| In thousands | In thousands | ||||||||||||||||
| Outstanding, January 1, 2020 | 89 | $ | 62.85 | ||||||||||||||
| Granted | 38 | 87.27 | |||||||||||||||
| Released | (40) | $ | 2,971 | ||||||||||||||
| Forfeited | (5) | ||||||||||||||||
| Outstanding, December 31, 2020 | 82 | $ | 73.13 | ||||||||||||||
| Granted | 35 | 96.49 | |||||||||||||||
| Released | (41) | $ | 4,100 | ||||||||||||||
| Forfeited | (7) | ||||||||||||||||
| Outstanding, December 31, 2021 | 69 | $ | 85.47 | ||||||||||||||
| Granted | 59 | 53.07 | |||||||||||||||
| Released | (34) | 79.08 | $ | 1,780 | |||||||||||||
| Forfeited | (9) | 76.02 | |||||||||||||||
| Outstanding, December 31, 2022 | 85 | $ | 66.46 | ||||||||||||||
At December 31, 2022, total unrecognized compensation expense on phantom stock units was $2.6 million, which is expected to be recognized over a weighted average period of approximately 1.9 years. As of December 31, 20172022 and 2016,2021, we have recognized a phantom stock liability of $1.7 million and $1.0$1.9 million respectively, within wages and benefits payable in the Consolidated Balance Sheets.
Note 10: Defined Contribution Bonus, and Profit Sharing Plans
In the United States, United Kingdom, and certain other countries, we make contributions to defined contribution plans. For our U.S. employee savings plan, which represents a majority of our contribution expense, we provide a 75% match on the first 6% of the employee salary deferral, subject to statutory limitations. For our international defined contribution plans, we provide various levels of contributions, based on salary, subject to stipulated or statutory limitations. The expense for our defined contribution plans was as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Defined contribution plans expense | $ | 14,241 | $ | 18,287 | $ | 18,424 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Defined contribution plans expense | $ | 11,709 | $ | 7,941 | $ | 6,579 | |||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Bonus and profit sharing plans and award expense | $ | 40,005 | $ | 43,377 | $ | 14,192 | |||||
Note 11: Income Taxes
In August 2022, the Inflation Reduction Act was enactedsigned into law, in the United States. This new tax legislation represents onewhich made a number of the most significant overhaulschanges to the U.S. federalInternal Revenue Code, including adding a 1% excise tax code since 1986. The Tax Act loweredon stock buybacks by publicly traded corporations and a 15% minimum tax on adjusted financial statement income of certain large companies.We are subject to the U.S. corporate incomenew 1% excise tax rate from 35% to 21% effectivebeginning January 1, 2018. It also includes numerous provisions that accelerate2023, but the amount will vary depending upon various factors.The 15% minimum tax recovery for fixed assets and impacts business-related exclusions, deductions, and credits.only applies to corporations with average book income in excess of $1 billion, so is not currently applicable.
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The following table summarizes the provision (benefit) for U.S. federal, state, and foreign taxes on income from continuing operations:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | (2,692) | $ | 20,197 | $ | (963) | |||||||||||
| State and local | 3,698 | 7,271 | 1,731 | ||||||||||||||
| Foreign | 25,433 | 12,594 | 12,409 | ||||||||||||||
| Total current | 26,439 | 40,062 | 13,177 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (24,167) | (36,196) | (2,852) | ||||||||||||||
| State and local | (4,723) | (12,186) | (3,340) | ||||||||||||||
| Foreign | (23,832) | (12,657) | (60,444) | ||||||||||||||
| Total deferred | (52,722) | (61,039) | (66,636) | ||||||||||||||
| Change in valuation allowance | 20,087 | (24,535) | 53,697 | ||||||||||||||
| Total provision (benefit) for income taxes | $ | (6,196) | $ | (45,512) | $ | 238 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Current: | |||||||||||
| Federal | $ | 7,679 | $ | 20,490 | $ | 5,033 | |||||
| State and local | 3,841 | 2,708 | 1,633 | ||||||||
| Foreign | 12,139 | 12,586 | 13,945 | ||||||||
| Total current | 23,659 | 35,784 | 20,611 | ||||||||
| Deferred: | |||||||||||
| Federal | 40,340 | 10,805 | 3,951 | ||||||||
| State and local | (1,144 | ) | 1,160 | (972 | ) | ||||||
| Foreign | 3,480 | (24,815 | ) | (41,893 | ) | ||||||
| Total deferred | 42,676 | (12,850 | ) | (38,914 | ) | ||||||
| Change in valuation allowance | 7,991 | 26,640 | 40,402 | ||||||||
| Total provision for income taxes | $ | 74,326 | $ | 49,574 | $ | 22,099 | |||||
The change in the valuation allowance does not include the impacts of currency translation adjustments, acquisitions, or significant intercompany transactions.
Our tax provision (benefit) as a percentage of income before tax was 55.2%39%, 58.6%37%, and 59.6%less than 1% for 2017, 2016,2022, 2021, and 2015, respectively. Our actual tax rate differed from the 35% U.S. federal statutory tax rate due to various items.2020. A reconciliation of income taxes at the U.S. federal statutory rate of 35%21% to the consolidated actual tax rate is as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Income (loss) before income taxes | |||||||||||||||||
| Domestic | $ | (19,104) | $ | (91,579) | $ | 24,010 | |||||||||||
| Foreign | 3,361 | (32,231) | (80,649) | ||||||||||||||
| Total income (loss) before income taxes | $ | (15,743) | $ | (123,810) | $ | (56,639) | |||||||||||
| Expected federal income tax provision (benefit) | $ | (3,306) | $ | (26,000) | $ | (11,894) | |||||||||||
| Divestitures | 1,578 | — | 10,936 | ||||||||||||||
| Change in valuation allowance | 20,087 | (24,535) | 53,697 | ||||||||||||||
| Onshoring of international operations | — | (10,933) | — | ||||||||||||||
| Stock-based compensation | 1,611 | (2,465) | (163) | ||||||||||||||
| Foreign earnings | (22,244) | 25,738 | (58,649) | ||||||||||||||
| Tax credits | (10,967) | (8,988) | (9,101) | ||||||||||||||
| Uncertain tax positions, including interest and penalties | (2,053) | 6,693 | 11,144 | ||||||||||||||
| Change in tax rates | 385 | (1,919) | 557 | ||||||||||||||
| State income tax provision (benefit), net of federal effect | (2,873) | (5,722) | (1,997) | ||||||||||||||
| U.S. tax provision on foreign earnings | 146 | 58 | 142 | ||||||||||||||
| Nondeductible goodwill impairment | 6,375 | — | — | ||||||||||||||
| Local foreign taxes | 551 | 667 | 1,298 | ||||||||||||||
| Other, net | 4,514 | 1,894 | 4,268 | ||||||||||||||
| Total provision (benefit) from income taxes | $ | (6,196) | $ | (45,512) | $ | 238 | |||||||||||
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| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Income (loss) before income taxes | |||||||||||
| Domestic | $ | 220,342 | $ | 196,750 | $ | 115,526 | |||||
| Foreign | (85,767 | ) | (112,123 | ) | (78,424 | ) | |||||
| Total income before income taxes | $ | 134,575 | $ | 84,627 | $ | 37,102 | |||||
| Expected federal income tax provision | $ | 47,101 | $ | 29,619 | $ | 12,986 | |||||
| Change in valuation allowance | 7,991 | 26,640 | 40,402 | ||||||||
| Stock-based compensation | (1,225 | ) | 2,762 | 939 | |||||||
| Foreign earnings | (22,045 | ) | (12,584 | ) | (33,364 | ) | |||||
| Tax credits | (777 | ) | (7,471 | ) | (5,257 | ) | |||||
| Uncertain tax positions, including interest and penalties | (7,637 | ) | 3,817 | 4,274 | |||||||
| Change in tax rates | 41,125 | 67 | 312 | ||||||||
| State income tax provision (benefit), net of federal effect | 4,986 | 2,806 | (14 | ) | |||||||
| U.S. tax provision on foreign earnings | 33 | 997 | 203 | ||||||||
| Domestic production activities deduction | (2,534 | ) | (2,424 | ) | (1,100 | ) | |||||
| Local foreign taxes | 2,324 | 2,914 | 1,450 | ||||||||
| Transaction costs | 2,643 | — | — | ||||||||
| Other, net | 2,341 | 2,431 | 1,268 | ||||||||
| Total provision for income taxes | $ | 74,326 | $ | 49,574 | $ | 22,099 | |||||
Deferred tax assets and liabilities consist of the following:
| December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Deferred tax assets | |||||||||||
Loss carryforwards(1) | $ | 405,674 | $ | 412,023 | |||||||
Tax credits(2) | 44,790 | 39,767 | |||||||||
| Accrued expenses | 18,774 | 39,511 | |||||||||
| Pension plan benefits expense | 7,037 | 17,140 | |||||||||
| Warranty reserves | 8,535 | 9,302 | |||||||||
| Depreciation and amortization | 72,505 | 94,917 | |||||||||
| Equity compensation | 7,061 | 6,126 | |||||||||
| Inventory valuation | 5,356 | 2,593 | |||||||||
| Deferred revenue | 13,346 | 11,534 | |||||||||
| Interest | 11,721 | 17,971 | |||||||||
| Leases | 9,543 | 9,460 | |||||||||
| Capitalized research costs | 74,058 | 29,246 | |||||||||
| Other deferred tax assets, net | 7,986 | 9,062 | |||||||||
| Total deferred tax assets | 686,386 | 698,652 | |||||||||
| Valuation allowance | (427,423) | (443,593) | |||||||||
| Total deferred tax assets, net of valuation allowance | 258,963 | 255,059 | |||||||||
| Deferred tax liabilities | |||||||||||
| Depreciation and amortization | (34,909) | (56,897) | |||||||||
| Leases | (8,274) | (8,489) | |||||||||
| Other deferred tax liabilities, net | (4,631) | (10,201) | |||||||||
| Total deferred tax liabilities | (47,814) | (75,587) | |||||||||
| Net deferred tax assets | $ | 211,149 | $ | 179,472 | |||||||
| At December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Deferred tax assets | |||||||
Loss carryforwards(1) | $ | 218,420 | $ | 194,381 | |||
Tax credits(2) | 58,616 | 53,323 | |||||
| Accrued expenses | 23,752 | 36,336 | |||||
| Pension plan benefits expense | 18,262 | 16,822 | |||||
| Warranty reserves | 11,170 | 21,306 | |||||
| Depreciation and amortization | 5,736 | 15,698 | |||||
| Equity compensation | 5,352 | 6,924 | |||||
| Inventory valuation | 2,554 | 3,086 | |||||
| Deferred revenue | 2,431 | 4,896 | |||||
| Other deferred tax assets, net | 16,606 | 13,621 | |||||
| Total deferred tax assets | 362,899 | 366,393 | |||||
| Valuation allowance | (285,784 | ) | (249,560 | ) | |||
| Total deferred tax assets, net of valuation allowance | 77,115 | 116,833 | |||||
| Deferred tax liabilities | |||||||
| Depreciation and amortization | (23,135 | ) | (19,995 | ) | |||
| Tax effect of accumulated translation | (303 | ) | (100 | ) | |||
| Other deferred tax liabilities, net | (5,231 | ) | (5,698 | ) | |||
| Total deferred tax liabilities | (28,669 | ) | (25,793 | ) | |||
| Net deferred tax assets | $ | 48,446 | $ | 91,040 | |||
(2)For tax return purposes at December 31, 2022, we had: U.S. general business credits of $47.1 million, which begin to expire in 2037; and state tax credits of $41.9 million, which begin to expire in 2023.
Changes in the valuation allowance for deferred tax assets are summarized as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Balance at beginning of period | $ | 443,593 | $ | 503,859 | $ | 427,030 | |||||||||||
| Other adjustments | (36,257) | (35,731) | 23,132 | ||||||||||||||
| Additions charged to costs and expenses | 20,087 | (24,535) | 53,697 | ||||||||||||||
| Balance at end of period, noncurrent | $ | 427,423 | $ | 443,593 | $ | 503,859 | |||||||||||
| Description | Balance at Beginning of Period | Other Adjustments | Additions Charged to Costs and Expenses | Balance at End of Period, Noncurrent | ||||||||||||
| (in thousands) | ||||||||||||||||
| Year ended December 31, 2017: | ||||||||||||||||
| Deferred tax assets valuation allowance | $ | 249,560 | $ | 28,233 | $ | 7,991 | $ | 285,784 | ||||||||
| Year ended December 31, 2016: | ||||||||||||||||
| Deferred tax assets valuation allowance | $ | 235,339 | $ | (12,419 | ) | $ | 26,640 | $ | 249,560 | |||||||
| Year ended December 31, 2015: | ||||||||||||||||
| Deferred tax assets valuation allowance | $ | 257,728 | $ | (62,791 | ) | $ | 40,402 | $ | 235,339 | |||||||
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 management’smanagement's 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
83
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.reduced.
We do not provide U.S. deferred taxes on temporary differences related to our foreign investments that are considered permanent in duration. These temporary differences consist primarily ofinclude undistributed foreign earnings of $5.2$43.0 million and $4.9$25.7 million at December 31, 20172022 and 2016, respectively.2021. Foreign taxes have been provided on these undistributed foreign earnings. We haveAs a result of recent changes in U.S. tax legislation, any repatriation of these earnings would not computed the unrecognized deferredresult in additional U.S. federal income tax liability on these temporary differences. There are many assumptions that must be considered to calculate the liability, thereby making it impractical to compute at this time.tax.
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 are 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, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered appropriate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits iswere as follows:
| In thousands | Total | ||||
| Unrecognized tax benefits at January 1, 2020 | $ | 121,715 | |||
| Gross increase to positions in prior years | 633 | ||||
| Gross decrease to positions in prior years | (2,140) | ||||
| Gross increases to current period tax positions | 14,821 | ||||
| Audit settlements | (795) | ||||
| Decrease related to lapsing of statute of limitations | (2,381) | ||||
| Effect of change in exchange rates | 4,057 | ||||
| Unrecognized tax benefits at December 31, 2020 | $ | 135,910 | |||
| Gross increase to positions in prior years | 570 | ||||
| Gross decrease to positions in prior years | (19,709) | ||||
| Gross increases to current period tax positions | 31,456 | ||||
| Audit settlements | — | ||||
| Decrease related to lapsing of statute of limitations | (4,535) | ||||
| Effect of change in exchange rates | (4,163) | ||||
| Unrecognized tax benefits at December 31, 2021 | $ | 139,529 | |||
| Gross increase to positions in prior years | 14,450 | ||||
| Gross decrease to positions in prior years | (2,786) | ||||
| Gross increases to current period tax positions | 4,702 | ||||
| Audit settlements | — | ||||
| Decrease related to lapsing of statute of limitations | (23,164) | ||||
| Effect of change in exchange rates | (2,587) | ||||
| Unrecognized tax benefits at December 31, 2022 | $ | 130,144 | |||
| Total | |||
| (in thousands) | |||
| Unrecognized tax benefits at January 1, 2015 | $ | 28,146 | |
| Gross increase to positions in prior years | 6,461 | ||
| Gross decrease to positions in prior years | (2,512 | ) | |
| Gross increases to current period tax positions | 25,741 | ||
| Audit settlements | — | ||
| Decrease related to lapsing of statute of limitations | (908 | ) | |
| Effect of change in exchange rates | (2,048 | ) | |
| Unrecognized tax benefits at December 31, 2015 | $ | 54,880 | |
| Gross increase to positions in prior years | 1,164 | ||
| Gross decrease to positions in prior years | (612 | ) | |
| Gross increases to current period tax positions | 5,071 | ||
| Audit settlements | (1,116 | ) | |
| Decrease related to lapsing of statute of limitations | (860 | ) | |
| Effect of change in exchange rates | (901 | ) | |
| Unrecognized tax benefits at December 31, 2016 | $ | 57,626 | |
| Gross increase to positions in prior years | 3,367 | ||
| Gross decrease to positions in prior years | (5,559 | ) | |
| Gross increases to current period tax positions | 6,453 | ||
| Audit settlements | (5,169 | ) | |
| Decrease related to lapsing of statute of limitations | (3,445 | ) | |
| Effect of change in exchange rates | 3,429 | ||
| Unrecognized tax benefits at December 31, 2017 | $ | 56,702 | |
| At December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate | $ | 130,137 | $ | 139,503 | $ | 134,473 | |||||||||||
| At December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate | $ | 55,312 | $ | 56,411 | $ | 53,602 | |||||
If certain unrecognized tax benefits are recognized they would create additional deferred tax assets. These assets would require a full valuation allowance in certain locations based upon present circumstances.
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We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. The net interest and penalties expense recognized iswere as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Net interest and penalties expense (benefit) | $ | 4,665 | $ | (1,097) | $ | 400 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Net interest and penalties expense (benefit) | $ | (543 | ) | $ | 193 | $ | 880 | ||||
| At December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Accrued interest | $ | 7,575 | $ | 2,964 | |||||||
| Accrued penalties | 567 | 747 | |||||||||
| At December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Accrued interest | $ | 2,706 | $ | 2,473 | |||
| Accrued penalties | 2,426 | 2,329 | |||||
At December 31, 2017,2022, we are under examination by certain tax authorities. Subsequent to year end we expect to receive an assessment from German tax authorities for the 2010years 2014-2017. We have agreed to 2015 tax years. The material jurisdictions where we are subjectsettle certain issues with Germany, and plan to examination for the 2010 to 2015 tax years include, among others, the U.S., France, Germany, Italy, Brazil and the United Kingdom. During December 2017 we settled our tax audit with the Internal Revenue Service related to research and development tax credits for the 2011-2013 years.appeal or litigate others. We believe we have appropriately accrued for the expected outcome of all tax matters and do not currently anticipate that the ultimate resolution of these examinations will have a material adverse effect on our financial condition, future results of operations, or cash flows.
Based upon the timing and outcome of examinations, litigation, the impact of legislative, regulatory, and judicial developments, and the impact of these items on the statute of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those recognized within the next twelve months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.
We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are subject to income tax examination by tax authorities in our major tax jurisdictions as follows:
| Tax Jurisdiction | Years Subject to Audit | |||||||
| U.S. federal | Subsequent to 2002 | |||||||
| France | Subsequent to 2018 | |||||||
| Germany | Subsequent to 2013 | |||||||
| Subsequent to | ||||||||
| Subsequent to | ||||||||
| Subsequent to | ||||||||
Note 12: Commitments and Contingencies
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Rental expense | $ | 14,824 | $ | 14,232 | $ | 15,524 | |||||
| Year Ending December 31, | Minimum Payments | |||
| (in thousands) | ||||
| 2018 | $ | 15,353 | ||
| 2019 | 10,274 | |||
| 2020 | 6,556 | |||
| 2021 | 3,732 | |||
| 2022 | 2,888 | |||
| Beyond 2022 | 9,799 | |||
| Future minimum lease payments | $ | 48,602 | ||
Guarantees and Indemnifications
We are often required to obtain standby letters of credit (LOCs) or bonds in support of our obligations for customer contracts. These standby LOCs or bonds typically provide a guarantee to the customer for our future performance, which usually covers the installation phase of a contract and may, on occasion, cover the operations and maintenance phase of outsourcing contracts.
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Our available lines of credit, outstanding standby LOCs, and bonds arewere as follows:
| At December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Credit facility | |||||||||||
| Multicurrency revolving line of credit | $ | 500,000 | $ | 500,000 | |||||||
| Standby LOCs issued and outstanding | (55,990) | (64,374) | |||||||||
| Net available for additional borrowings under the multicurrency revolving line of credit | $ | 444,010 | $ | 435,626 | |||||||
| Net available for additional standby LOCs under sub-facility | $ | 244,010 | $ | 235,626 | |||||||
| Unsecured multicurrency revolving lines of credit with various financial institutions | |||||||||||
| Multicurrency revolving lines of credit | $ | 81,781 | $ | 94,845 | |||||||
| Standby LOCs issued and outstanding | (22,530) | (19,957) | |||||||||
| Short-term borrowings | — | — | |||||||||
| Net available for additional borrowings and LOCs | $ | 59,251 | $ | 74,888 | |||||||
| Unsecured surety bonds in force | $ | 285,754 | $ | 281,270 | |||||||
| At December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
Credit facilities(1) | |||||||
| Multicurrency revolving line of credit | $ | 500,000 | $ | 500,000 | |||
| Long-term borrowings | (125,414 | ) | (97,167 | ) | |||
| Standby LOCs issued and outstanding | (31,881 | ) | (46,103 | ) | |||
| Net available for additional borrowings under the multi-currency revolving line of credit | $ | 342,705 | $ | 356,730 | |||
| Net available for additional standby LOCs under sub-facility | 218,119 | 203,897 | |||||
| Unsecured multicurrency revolving lines of credit with various financial institutions | |||||||
| Multicurrency revolving line of credit | $ | 110,477 | $ | 91,809 | |||
| Standby LOCs issued and outstanding | (21,030 | ) | (21,734 | ) | |||
Short-term borrowings(2) | (916 | ) | (69 | ) | |||
| Net available for additional borrowings and LOCs | $ | 88,531 | $ | 70,006 | |||
| Unsecured surety bonds in force | $ | 51,344 | $ | 48,221 | |||
In the event any such standby LOC or bond is called, we would be obligated to reimburse the issuer of the standby LOC or bond; however, as of February 27, 2023, we do not believe that any outstanding LOCstandby LOCs or bondbonds will be called.
We generally provide an indemnification related to the infringement of any patent, copyright, trademark, or other intellectual property right on software or equipment within our sales contracts, which indemnifies the customer from, and pays the resulting costs, damages, and attorney’sattorney's fees awarded against a customer with respect to, such a claim provided that (a) the customer promptly notifies us in writing of the claim and (b) we have the sole control of the defense and all related settlement negotiations. We may also provide an indemnification to our customers for third partythird-party claims resulting from damages caused by the negligence or willful misconduct of our employees/agents in connection with the performance of certain contracts. The terms of our indemnifications generally do not limit the maximum potential payments. It is not possible to predict the maximum potential amount of future payments under these or similar agreements.
Legal Matters
We are subject to various legal proceedings and claims of which the outcomes are subject to significant uncertainty. Our policy is to assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required, if any, for these contingencies is made after an analysis of each known issue. A liability iswould be recognized and charged to operating expense when we determine that a loss is probable and the amount can be reasonably estimated. Additionally, we disclose contingencies for which a material loss is reasonably possible, but not probable.
Warranty
A summary of the warranty accrual account activity is as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Beginning balance | $ | 32,022 | $ | 41,390 | $ | 53,241 | |||||||||||
| New product warranties | 5,061 | 4,848 | 3,616 | ||||||||||||||
| Other adjustments and expirations, net | (882) | 551 | 7,736 | ||||||||||||||
| Claims activity | (9,719) | (13,593) | (25,582) | ||||||||||||||
| Warranties reclassified to held for sale | — | (90) | — | ||||||||||||||
| Effect of change in exchange rates | (784) | (1,084) | 2,379 | ||||||||||||||
| Ending balance | 25,698 | 32,022 | 41,390 | ||||||||||||||
| Less: current portion of warranty | 18,203 | 18,406 | 28,329 | ||||||||||||||
| Long-term warranty | $ | 7,495 | $ | 13,616 | $ | 13,061 | |||||||||||
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| Year Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Beginning balance | $ | 43,302 | $ | 54,512 | |||
| New product warranties | 7,849 | 7,987 | |||||
| Other adjustments and expirations | (393 | ) | 5,933 | ||||
| Claims activity | (18,094 | ) | (24,364 | ) | |||
| Effect of change in exchange rates | 2,198 | (766 | ) | ||||
| Ending balance | 34,862 | 43,302 | |||||
| Less: current portion of warranty | 21,150 | 24,874 | |||||
| Long-term warranty | $ | 13,712 | $ | 18,428 | |||
Total warranty expense is classified within cost of revenues and consists of new product warranties issued, costs related to extended warranty contracts, insurance and supplier recoveries, and other changes and adjustments to warranties. warranties, and customer claims.
In conjunction with the business divestiture to Dresser (refer to Note 3: Certain Balance Sheet Components), the related disposal group was classified as held for sale during the fourth quarter of 2021. The disposal group was removed from the balance sheet when the transaction closed on February 28, 2022. Refer to Note 18: Sale of Businesses for additional information on the transaction.
Warranty expense was as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Total warranty expense | $ | 4,179 | $ | 5,399 | $ | 11,539 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Total warranty expense | $ | (2,054 | ) | $ | 13,920 | $ | 45,984 | ||||
Warranty expense decreased during the year ended December 31, 20172022 compared with the same period in 20162021. The lower costs in 2022 are primarily duethe result of a $2.6 million change in estimated liability relating to an insurance recoveryresolution for gas interface modules, offset in part by recognition of $8.0$1.4 million associatedfor incremental specific reserves in North America Networked Solutions.
Warranty expense decreased during the year ended December 31, 2021 compared with our 2015 product replacement provision.the same period in 2020. The lower costs in 2021 are primarily the result of incremental specific reserves recognized in 2020 including $3.0 million for water products in Europe, Middle East, and Africa Device Solutions and $2.0 million for electric and water products in North America Networked Solutions.
| Year Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| Beginning balance | $ | 31,549 | $ | 33,654 | |||
| Unearned revenue for new extended warranties | 1,186 | 1,437 | |||||
| Unearned revenue recognized | (4,247 | ) | (3,594 | ) | |||
| Effect of change in exchange rates | 154 | 52 | |||||
| Ending balance | 28,642 | 31,549 | |||||
| Less: current portion of unearned revenue for extended warranty | 4,220 | 4,226 | |||||
| Long-term unearned revenue for extended warranty within other long-term obligations | $ | 24,422 | $ | 27,323 | |||
Health Benefits
We are self insuredself-insured for a substantial portion of the cost of our U.S. employee group health insurance. We purchase insurance from a third party,third-party, which provides individual and aggregate stop lossstop-loss protection for these costs. Each reporting period, we expense the
costs of our health insurance plan including paid claims, the change in the estimate of incurred but not reported (IBNR) claims, taxes, and administrative fees (collectively, the plan costs).
Plan costs were as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Plan costs | $ | 37,942 | $ | 39,187 | $ | 36,672 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Plan costs | $ | 30,521 | $ | 27,276 | $ | 25,355 | |||||
IBNR accrual, which is included in wages and benefits payable, was as follows:
| At December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| IBNR accrual | $ | 4,277 | $ | 3,478 | |||||||
| At December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| IBNR accrual | $ | 2,664 | $ | 2,441 | |||
Our IBNR accrual and expenses may fluctuate due to the number of plan participants, claims activity, and deductible limits. For our employees located outside of the United States, health benefits are provided primarily through governmental social plans, which are funded through employee and employer tax withholdings.
Note 13: Restructuring
On September 1, 2016, we announcedOctober 29, 2021, our Board of Directors approved a restructuring plan (the 2021 Projects), which in conjunction with the announcement of the sale of certain Gas product lines from our Device Solutions manufacturing and business operations in Europe and North America to Dresser (refer to Note 18:Sale of Businesses), includes activities to drive reductions in certain locations and functional support areas. These projects (2016 Projects)are expected to restructure various company activities in order to improve operational efficiencies, reduce expenses and improve competiveness. We expect to close or consolidate several facilities and reduce our global workforce as a result of the restructuring.
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The total expected restructuring costs, the restructuring costs recognized, in prior periods, costs recognized during the year ended December 31, 2017, and the remaining expected restructuring costs as of December 31, 2017 related to the 20162021 Projects arewere as follows:
| In thousands | Total Expected Costs at December 31, 2022 | Costs Recognized in Prior Periods | Costs Recognized During the Year Ended December 31, 2022 | Expected Remaining Costs to be Recognized at December 31, 2022 | |||||||||||||||||||
| Employee severance costs | $ | 38,359 | $ | 49,013 | $ | (10,654) | $ | — | |||||||||||||||
| Asset impairments & net loss on sale or disposal | 8,599 | 9,246 | (647) | — | |||||||||||||||||||
| Other restructuring costs | 5,509 | 2,452 | 632 | 2,425 | |||||||||||||||||||
| Total | $ | 52,467 | $ | 60,711 | $ | (10,669) | $ | 2,425 | |||||||||||||||
| Total Expected Costs at December 31, 2017 | Costs Recognized in Prior Periods | Costs Recognized During the Year Ended December 31, 2017 | Remaining Costs to be Recognized at December 31, 2017 | ||||||||||||
| (in thousands) | |||||||||||||||
| Employee severance costs | $ | 39,855 | $ | 39,686 | $ | 169 | $ | — | |||||||
| Asset impairments & net gain on sale or disposal | 4,922 | 7,219 | (2,297 | ) | — | ||||||||||
| Other restructuring costs | 15,435 | 889 | 8,546 | 6,000 | |||||||||||
| Total | $ | 60,212 | $ | 47,794 | $ | 6,418 | $ | 6,000 | |||||||
| Segments: | |||||||||||||||
| Electricity | $ | 10,525 | $ | 8,827 | $ | 198 | $ | 1,500 | |||||||
| Gas | 31,181 | 23,968 | 5,213 | 2,000 | |||||||||||
| Water | 15,761 | 13,061 | 700 | 2,000 | |||||||||||
| Corporate unallocated | 2,745 | 1,938 | 307 | 500 | |||||||||||
| Total | $ | 60,212 | $ | 47,794 | $ | 6,418 | $ | 6,000 | |||||||
In November 2014,September 2020, our managementBoard of Directors approved a restructuring plan (the 2020 Projects), which includes activities that continue our efforts to optimize our global supply chain and manufacturing operations, sales and marketing organizations, and other overhead. These projects (2014 Projects) to restructure our Electricity business and related general and administrative activities, along with certain Gas and Water activities, to improve operational efficiencies and
The 2014total expected restructuring costs, the restructuring costs recognized, and the remaining expected restructuring costs related to the 2020 Projects resulted in $48.5 million of restructuring expense, which was recognized from the fourth quarter of 2014 through the third quarter of 2016.were as follows:
| In thousands | Total Expected Costs at December 31, 2022 | Costs Recognized in Prior Periods | Costs Recognized During the Year Ended December 31, 2022 | Expected Remaining Costs to be Recognized at December 31, 2022 | |||||||||||||||||||
| Employee severance costs | $ | 20,382 | $ | 24,532 | $ | (4,150) | $ | — | |||||||||||||||
| Asset impairments & net loss on sale or disposal | 6,465 | 6,442 | 23 | — | |||||||||||||||||||
| Other restructuring costs | 7,841 | 6,170 | 1,171 | 500 | |||||||||||||||||||
| Total | $ | 34,688 | $ | 37,144 | $ | (2,956) | $ | 500 | |||||||||||||||
The following table summarizes the activity within the restructuring related balance sheet accounts for the 20162021 Projects and 2014the 2020 Projects during the year ended December 31, 2017:2022:
| In thousands | Accrued Employee Severance | Asset Impairments & Net Loss (Gain) on Sale or Disposal | Other Accrued Costs | Total | |||||||||||||||||||
| Beginning balance, January 1, 2022 | $ | 79,876 | $ | — | $ | 5,130 | $ | 85,006 | |||||||||||||||
| Costs charged to expense | (14,804) | (624) | 1,803 | (13,625) | |||||||||||||||||||
| Cash payments | (21,683) | (242) | (3,840) | (25,765) | |||||||||||||||||||
| Cash receipts | — | 3,937 | — | 3,937 | |||||||||||||||||||
| Net assets disposed and impaired | — | (3,071) | — | (3,071) | |||||||||||||||||||
| Effect of change in exchange rates | (3,831) | — | (207) | (4,038) | |||||||||||||||||||
| Ending balance, December 31, 2022 | $ | 39,558 | $ | — | $ | 2,886 | $ | 42,444 | |||||||||||||||
| Accrued Employee Severance | Asset Impairments & Net Gain on Sale or Disposal | Other Accrued Costs | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| Beginning balance, January 1, 2017 | $ | 45,368 | $ | — | $ | 2,602 | $ | 47,970 | |||||||
| Costs incurred and charged to expense | 169 | (2,297 | ) | 8,546 | 6,418 | ||||||||||
| Cash receipts (payments) | (12,423 | ) | 3,704 | (8,683 | ) | (17,402 | ) | ||||||||
| Net assets disposed and impaired | — | (1,407 | ) | — | (1,407 | ) | |||||||||
| Effect of change in exchange rates | 4,540 | — | 6 | 4,546 | |||||||||||
| Ending balance, December 31, 2017 | $ | 37,654 | $ | — | $ | 2,471 | $ | 40,125 | |||||||
Asset impairments are determined at the asset group level. Revenues and net operating income from the activities we have exited or will exit under the restructuring projects are not material to our operating segments or consolidated results.
Certain of Itron's employees are represented by unions or works councils, which requires consultation, and potential restructuring projects may be subject to regulatory approval, both of which could impact the timing of planned savings in certain jurisdictions.
Other restructuring costs include expenses for employee relocation, professional fees associated with employee severance, and costs to exit the facilities once the operations in those facilities have ceased.ceased, and other costs associated with the liquidation of any affected legal entities. Costs associated with restructuring activities are generally presented in the Consolidated Statements of Operations as restructuring, except for certain costs associated with inventory write-downs, which are classified within cost of
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revenues, and accelerated depreciation expense, which is recognized according to the use of the asset. Restructuring expense is part of the Corporate unallocated segment and does not impact the results of our operating segments.
The current portions of restructuring liabilities were $32.5$14.5 million and $26.2$29.7 million as of December 31, 20172022 and 2016, respectively. The current restructuring liabilities2021 and are classified within other current liabilities on the Consolidated Balance Sheets. The long-term portions of restructuring liabilities balances were $7.6$27.9 million and $21.8$55.3 million as of December 31, 20172022 and 2016, respectively.2021. The long-term portions of restructuring liabilities are classified within other long-term obligations on the Consolidated Balance Sheets,Sheet and include severance accruals and facility exit costs and severance accruals.costs.
Note 14: Shareholders’Shareholders' Equity
Preferred Stock
We have authorized the issuance of 10 million shares of preferred stock with no par value. In the event of a liquidation, dissolution, or winding up of the affairs of the corporation, whether voluntary or involuntary, the holders of any outstanding preferred stock willwould be entitled to be paid a preferential amount per share to be determined by ourthe Board of Directors prior to any payment to holders of common stock. There was no preferred stock issued or outstanding at December 31, 2017, 2016, and 2015.2022 or 2021.
Stock Repurchase PlanProgram
Issuance of Common Stock
On March 12, 2021, we closed the sale of 4,472,222 shares of our common stock in a public offering, resulting in net proceeds to us of approximately $389.4 million, after deducting underwriters' discounts of the offering.
Convertible Note Hedge Transactions
We paid an aggregate amount of $84.1 million for the Convertible Note Hedge Transactions. The Convertible Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those in the Convertible Notes, approximately 3.7 million shares of our common stock, the same number of shares initially underlying the Convertible Notes, at a strike price of approximately $126.00, subject to customary adjustments. The Convertible Note Hedge Transactions will expire upon the maturity of the Convertible Notes, subject to earlier exercise or termination. The Convertible Note Hedge Transactions are expected generally to reduce the potential dilutive effect of the conversion of our Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of the converted notes, as the case may be, in the event the price per share of our common stock, as measured under the terms of the Convertible Note Hedge Transactions, is greater than the strike price of the Convertible Note Hedge Transactions. The Convertible Note Hedge Transactions meet the criteria in ASC 815-40 to be classified within Stockholders' Equity, therefore the Convertible Note Hedge Transactions are not revalued after their issuance.
We made priora tax election to plan terminationintegrate the Convertible Notes and the call options. We are retaining the identification statements in our books and records, together with a schedule providing the accruals on February 23, 2018.the synthetic debt instruments. The accounting impact of this tax election makes the call options deductible as original issue discount for tax purposes over the term of the Convertible Note, and results in a $20.6 million deferred tax asset recognized through equity.
Warrant Transactions
In addition, concurrently with entering into the Convertible Note Hedge Transactions, we separately entered into privately-negotiated Warrant Transactions, whereby we sold to the Counterparties warrants to acquire, collectively, subject to anti-dilution adjustments, 3.7 million shares of our common stock at an initial strike price of $180.00 per share, which represents a premium of 100% over the public offering price in the common stock issuance. We received aggregate proceeds of $45.3 million from the Warrant Transactions with the Counterparties, with such proceeds partially offsetting the costs of entering into the Convertible Note Hedge Transactions. The warrants expire in June 2026. If the market value per share of our common stock, as measured under the Warrant Transactions, exceeds the strike price of the warrants, the warrants will have a
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dilutive effect on our earnings per share, unless we elect, subject to certain conditions, to settle the warrants in cash. The warrants meet the criteria in ASC 815-40 to be classified within Stockholders' Equity, and therefore the warrants are not revalued after issuance.
Accumulated Other Comprehensive Income (Loss)
The changes in the components of AOCI, net of tax, were as follows:
| In thousands | Foreign Currency Translation Adjustments | Net Unrealized Gain (Loss) on Derivative Instruments | Net Unrealized Gain (Loss) on Nonderivative Instruments | Pension Benefit Obligation Adjustments | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||
| Balances at January 1, 2020 | $ | (157,999) | $ | (723) | $ | (14,380) | $ | (31,570) | $ | (204,672) | |||||||||||||||||||
| OCI before reclassifications | 21,082 | (7,002) | — | (8,689) | 5,391 | ||||||||||||||||||||||||
| Amounts reclassified from AOCI | 52,074 | 6,104 | — | 2,577 | 60,755 | ||||||||||||||||||||||||
| Total other comprehensive income (loss) | 73,156 | (898) | — | (6,112) | 66,146 | ||||||||||||||||||||||||
| Balances at December 31, 2020 | (84,843) | (1,621) | (14,380) | (37,682) | (138,526) | ||||||||||||||||||||||||
| OCI before reclassifications | (26,923) | 1,121 | — | 14,264 | (11,538) | ||||||||||||||||||||||||
| Amounts reclassified from AOCI | — | 290 | — | 1,676 | 1,966 | ||||||||||||||||||||||||
| Total other comprehensive income (loss) | (26,923) | 1,411 | — | 15,940 | (9,572) | ||||||||||||||||||||||||
| Balances at December 31, 2021 | (111,766) | (210) | (14,380) | (21,742) | (148,098) | ||||||||||||||||||||||||
| OCI before reclassifications | (28,748) | — | — | 23,170 | (5,578) | ||||||||||||||||||||||||
| Amounts reclassified from AOCI | 57,321 | — | — | 1,681 | 59,002 | ||||||||||||||||||||||||
| Total other comprehensive income (loss) | 28,573 | — | — | 24,851 | 53,424 | ||||||||||||||||||||||||
| Balances at December 31, 2022 | $ | (83,193) | $ | (210) | $ | (14,380) | $ | 3,109 | $ | (94,674) | |||||||||||||||||||
In determining the amount of the impairment loss for the assets of the transaction with Dresser during the fourth quarter of 2021, we included $59.7 million of accumulated foreign currency translation losses and $0.9 million in unrealized defined benefit plan losses.Upon closing of the sale transaction in the first quarter of 2022, the then outstanding amounts in AOCI were reclassified to net income (loss) through loss on sale of businesses for a total of $55.4 million, with a corresponding reversal of the impairment loss originally booked in the fourth quarter of 2021. Refer to Note 18: Sale of Businesses for additional information on the transaction.
During the third quarter of 2022, we substantially liquidated our legal entity in Russia, recognizing a loss of $1.9 million for the reclassification of the currency translation adjustment from accumulated other comprehensive income (loss) related to the disposal of the business.
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| Foreign Currency Translation Adjustments | Net Unrealized Gain (Loss) on Derivative Instruments | Net Unrealized Gain (Loss) on Nonderivative Instruments | Pension Benefit Obligation Adjustments | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Balances at January 1, 2015 | $ | (85,080 | ) | $ | (768 | ) | $ | (14,380 | ) | $ | (34,832 | ) | $ | (135,060 | ) | ||||
| OCI before reclassifications | (73,891 | ) | 76 | — | 4,570 | (69,245 | ) | ||||||||||||
| Amounts reclassified from AOCI | 962 | 1,010 | — | 1,726 | 3,698 | ||||||||||||||
| Total other comprehensive income (loss) | (72,929 | ) | 1,086 | — | 6,296 | (65,547 | ) | ||||||||||||
| Balances at December 31, 2015 | $ | (158,009 | ) | $ | 318 | $ | (14,380 | ) | $ | (28,536 | ) | $ | (200,607 | ) | |||||
| OCI before reclassifications | (23,570 | ) | (1,087 | ) | — | (6,191 | ) | (30,848 | ) | ||||||||||
| Amounts reclassified from AOCI | (1,407 | ) | 812 | — | 2,723 | 2,128 | |||||||||||||
| Total other comprehensive income (loss) | (24,977 | ) | (275 | ) | — | (3,468 | ) | (28,720 | ) | ||||||||||
| Balances at December 31, 2016 | $ | (182,986 | ) | $ | 43 | $ | (14,380 | ) | $ | (32,004 | ) | $ | (229,327 | ) | |||||
| OCI before reclassifications | 53,854 | 360 | — | 2,354 | 56,568 | ||||||||||||||
| Amounts reclassified from AOCI | 484 | 563 | — | 1,234 | 2,281 | ||||||||||||||
| Total other comprehensive income (loss) | 54,338 | 923 | — | 3,588 | 58,849 | ||||||||||||||
| Balances at December 31, 2017 | $ | (128,648 | ) | $ | 966 | $ | (14,380 | ) | $ | (28,416 | ) | $ | (170,478 | ) | |||||
The before-tax, income tax (provision) benefit, and net-of-tax amounts related to each component of OCI during the reporting periods were as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Before-tax amount | |||||||||||||||||
| Foreign currency translation adjustment | $ | (28,921) | $ | (26,757) | $ | 20,947 | |||||||||||
| Foreign currency translation adjustment reclassified to net loss on sale or disposal of businesses | 57,321 | — | 52,074 | ||||||||||||||
| Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges | — | 1,139 | (7,519) | ||||||||||||||
| Net hedging (gain) loss reclassified to net loss | — | 756 | 6,190 | ||||||||||||||
| Net unrealized gain (loss) on defined benefit plans | 23,519 | 14,426 | (8,798) | ||||||||||||||
| Net defined benefit plan (gain) loss reclassified to net loss | 1,706 | 1,695 | 2,609 | ||||||||||||||
| Total other comprehensive income (loss), before tax | 53,625 | (8,741) | 65,503 | ||||||||||||||
| Tax (provision) benefit | |||||||||||||||||
| Foreign currency translation adjustment | 173 | (166) | 135 | ||||||||||||||
| Foreign currency translation adjustment reclassified to net loss on sale or disposal of businesses | — | — | — | ||||||||||||||
| Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges | — | (18) | 517 | ||||||||||||||
| Net hedging (gain) loss reclassified to net loss | — | (466) | (86) | ||||||||||||||
| Net unrealized gain (loss) on defined benefit plans | (349) | (162) | 109 | ||||||||||||||
| Net defined benefit plan (gain) loss reclassified to net loss | (25) | (19) | (32) | ||||||||||||||
| Total other comprehensive income (loss) tax (provision) benefit | (201) | (831) | 643 | ||||||||||||||
| Net-of-tax amount | |||||||||||||||||
| Foreign currency translation adjustment | (28,748) | (26,923) | 21,082 | ||||||||||||||
| Foreign currency translation adjustment reclassified to net loss on sale or disposal of businesses | 57,321 | — | 52,074 | ||||||||||||||
| Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges | — | 1,121 | (7,002) | ||||||||||||||
| Net hedging (gain) loss reclassified to net loss | — | 290 | 6,104 | ||||||||||||||
| Net unrealized gain (loss) on defined benefit plans | 23,170 | 14,264 | (8,689) | ||||||||||||||
| Net defined benefit plan (gain) loss reclassified to net loss | 1,681 | 1,676 | 2,577 | ||||||||||||||
| Total other comprehensive income (loss), net of tax | $ | 53,424 | $ | (9,572) | $ | 66,146 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Before-tax amount | |||||||||||
| Foreign currency translation adjustment | $ | 54,218 | $ | (23,280 | ) | $ | (74,219 | ) | |||
| Foreign currency translation adjustment reclassified into net income on disposal | 484 | (1,407 | ) | 962 | |||||||
| Net unrealized gain (loss) on derivative instruments designated as cash flow hedges | 585 | (1,768 | ) | 123 | |||||||
| Net hedging (gain) loss reclassified to net income | 916 | 1,322 | 1,639 | ||||||||
| Net unrealized gain (loss) on defined benefit plans | 3,401 | (6,256 | ) | 6,512 | |||||||
| Net defined benefit plan loss reclassified to net income | 1,782 | 2,752 | 2,459 | ||||||||
| Total other comprehensive income (loss), before tax | 61,386 | (28,637 | ) | (62,524 | ) | ||||||
| Tax (provision) benefit | |||||||||||
| Foreign currency translation adjustment | (364 | ) | (290 | ) | 328 | ||||||
| Foreign currency translation adjustment reclassified into net income on disposal | — | — | — | ||||||||
| Net unrealized gain (loss) on derivative instruments designated as cash flow hedges | (225 | ) | 681 | (47 | ) | ||||||
| Net hedging (gain) loss reclassified into net income | (353 | ) | (510 | ) | (629 | ) | |||||
| Net unrealized gain (loss) on defined benefit plans | (1,047 | ) | 65 | (1,942 | ) | ||||||
| Net defined benefit plan loss reclassified to net income | (548 | ) | (29 | ) | (733 | ) | |||||
| Total other comprehensive income (loss) tax (provision) benefit | (2,537 | ) | (83 | ) | (3,023 | ) | |||||
| Net-of-tax amount | |||||||||||
| Foreign currency translation adjustment | 53,854 | (23,570 | ) | (73,891 | ) | ||||||
| Foreign currency translation adjustment reclassified into net income on disposal | 484 | (1,407 | ) | 962 | |||||||
| Net unrealized gain (loss) on derivative instruments designated as cash flow hedges | 360 | (1,087 | ) | 76 | |||||||
| Net hedging (gain) loss reclassified into net income | 563 | 812 | 1,010 | ||||||||
| Net unrealized gain (loss) on defined benefit plans | 2,354 | (6,191 | ) | 4,570 | |||||||
| Net defined benefit plan loss reclassified to net income | 1,234 | 2,723 | 1,726 | ||||||||
| Total other comprehensive income (loss), net of tax | $ | 58,849 | $ | (28,720 | ) | $ | (65,547 | ) | |||
Note 15: Fair ValuesValue of Financial Instruments
The fair values at December 31, 20172022 and 20162021 do not reflect subsequent changes in the economy, interest rates, tax rates, and other variables that may affect the determination of fair value.
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| In thousands | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Credit facility | |||||||||||||||||||||||
| Multicurrency revolving line of credit | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Convertible notes | 452,526 | 377,200 | 450,228 | 422,749 | |||||||||||||||||||
| December 31, 2017 | December 31, 2016 | ||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
| (in thousands) | |||||||||||||||
| Assets | |||||||||||||||
| Cash and cash equivalents | $ | 176,274 | $ | 176,274 | $ | 133,565 | $ | 133,565 | |||||||
| Restricted cash | 311,061 | 311,061 | — | — | |||||||||||
| Foreign exchange forwards | 41 | 41 | 169 | 169 | |||||||||||
| Interest rate swaps | 2,370 | 2,370 | 1,830 | 1,830 | |||||||||||
| Interest rate caps | 489 | 489 | 946 | 946 | |||||||||||
| Liabilities | |||||||||||||||
| Credit facility | |||||||||||||||
| USD denominated term loan | $ | 194,063 | $ | 192,295 | $ | 208,125 | $ | 205,676 | |||||||
| Multicurrency revolving line of credit | 125,414 | 124,100 | 97,167 | 95,906 | |||||||||||
| Senior notes | 300,000 | 301,125 | — | — | |||||||||||
| Interest rate swaps | — | — | 934 | 934 | |||||||||||
| Foreign exchange forwards | 289 | 289 | 449 | 449 | |||||||||||
The following methods and assumptions were used in estimating fair values:
Cash and cash equivalents, and restricted cash:equivalents: Due to the liquid nature of these instruments, the carrying valueamount approximates fair value (Level 1).
Credit Facility - term loan and multicurrency revolving line of credit: The term loan and revolver areis not traded publicly. The fair values, which are determined based upon a hypothetical market participant, are calculated using a discounted cash flow model with Level 2
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inputs, including estimates of incremental borrowing rates for debt with similar terms, maturities, and credit profiles. Refer to Note 66: Debt for a further discussion of our debt.
Convertible Notes: The Convertible Notes are not listed on any securities exchange but may be actively traded. The fair value is estimated using Level 1 inputs, as it is based on quoted prices for these instruments in active markets.
Derivatives: See Refer to Note 77: Derivative Financial Instruments for a description of our methods and assumptions in determining the fair value of our derivatives, which were determined using Level 2 inputs. Each derivative asset and liability has a carrying value equal to fair value.
Note 16: Segment Information
We operate under the Itron brand worldwide and manage and report under three operating segments, Electricity, Gas,segments: Device Solutions, Networked Solutions, and Water. Our Water operating segment includes our global water, and heat and allocation solutions. This structure allows each segment to develop its own go-to-market strategy, prioritize its marketing and product development requirements, and focus on its strategic investments. Our sales, marketing, and delivery functions are managed under each segment. Our product development and manufacturing operations are managed on a worldwide basis to promote a global perspective in our operations and processes and yet still maintain alignment with the segments.Outcomes.
We have three GAAP measures of segment performance: revenues, gross profit (margin)(gross margin), and operating income (margin)(operating margin). Intersegment revenues are minimal. Certain operating expenses are allocated to the operating segments based upon internally established allocation methodologies. Corporate operating expenses, interest income, interest expense, other income (expense), and the income tax provision (benefit) are notneither allocated to the segments, nor are they included in the measure of segment profit or loss.performance. Goodwill impairment charges are recognized in Corporate unallocated. Refer to Note 5:Goodwillfor discussion of goodwill impairment recognized during the second quarter of 2022. In addition, we allocate only certain production assets and intangible assets to our operating segments. We do not manage the performance of the segments on a balance sheet basis.
Segment Products
Device Solutions – This segment primarily includes hardware products used for measurement, control, or sensing that do not have communications capability embedded for use with our broader Itron systems, i.e., hardware-based products not part of a complete end-to-end solution. Examples from the Device Solutions portfolio include: standard endpoints that are shipped without Itron communications, such as our standard gas, electricity, and water meters for a variety of global markets and adhering to regulations and standards within those markets, as well as our heat and allocation products; communicating meters that are not a part of an Itron end-to-end solution, such as Smart Spec meters; and the implementation and installation of non-communicating devices.
Networked Solutions – This segment primarily includes a combination of communicating devices (e.g., smart meters, modules, endpoints, and sensors), network infrastructure, and associated application software designed and sold as a complete solution for acquiring and transporting robust application-specific data. Networked Solutions includes products and software for the implementation, installation, and management of communicating devices and data networks. The Industrial Internet of Things (IIoT) solutions supported by this segment include automated meter reading (AMR), advanced metering infrastructure (AMI), distributed energy resource management (DERMs), smart grid and distribution automation, smart street lighting, and an ever-growing set of smart city applications such as traffic management, smart parking, air quality monitoring, electric vehicle charging, customer engagement, digital signage, acoustic (e.g., gunshot) detection, and leak detection and mitigation for both gas and water systems. Our IIoT platform allows all these utility and smart city applications to be run and managed on a single, multi-purpose network.
Outcomes – This segment primarily includes our value-added, enhanced software and services in which we manage, organize, analyze, and interpret raw, anonymized and aggregated data to improve decision making, maximize operational profitability, drive resource efficiency, improve grid analytics, and deliver results for consumers, utilities, and smart cities. Outcomes supports high-value use cases such as data management, grid operations, distributed intelligence, operations management, gas distribution and safety, water operations management, revenue assurance, DERMs, energy forecasting, consumer engagement, smart payment, and fleet energy resource management. Utilities leverage these outcomes to capitalize on the power of networks and devices, empower their workforce, maximize their operations and enhance the customer experience. 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.
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Revenues, gross profit, and operating income associated with our operating segments were as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Product revenues | |||||||||||||||||
| Device Solutions | $ | 433,354 | $ | 635,103 | $ | 684,517 | |||||||||||
| Networked Solutions | 1,002,156 | 974,531 | 1,148,698 | ||||||||||||||
| Outcomes | 64,733 | 68,561 | 55,958 | ||||||||||||||
| Total Company | $ | 1,500,243 | $ | 1,678,195 | $ | 1,889,173 | |||||||||||
| Service revenues | |||||||||||||||||
| Device Solutions | $ | 5,356 | $ | 10,001 | $ | 9,478 | |||||||||||
| Networked Solutions | 117,112 | 118,100 | 100,704 | ||||||||||||||
| Outcomes | 172,853 | 175,276 | 173,995 | ||||||||||||||
| Total Company | $ | 295,321 | $ | 303,377 | $ | 284,177 | |||||||||||
| Total revenues | |||||||||||||||||
| Device Solutions | $ | 438,710 | $ | 645,104 | $ | 693,995 | |||||||||||
| Networked Solutions | 1,119,268 | 1,092,631 | 1,249,402 | ||||||||||||||
| Outcomes | 237,586 | 243,837 | 229,953 | ||||||||||||||
| Total Company | $ | 1,795,564 | $ | 1,981,572 | $ | 2,173,350 | |||||||||||
| Gross profit | |||||||||||||||||
| Device Solutions | $ | 61,778 | $ | 99,355 | $ | 86,859 | |||||||||||
| Networked Solutions | 361,975 | 378,633 | 432,906 | ||||||||||||||
| Outcomes | 98,436 | 95,181 | 82,402 | ||||||||||||||
| Total Company | $ | 522,189 | $ | 573,169 | $ | 602,167 | |||||||||||
| Operating income (loss) | |||||||||||||||||
| Device Solutions | $ | 26,703 | $ | 57,217 | $ | 40,769 | |||||||||||
| Networked Solutions | 248,268 | 254,434 | 308,099 | ||||||||||||||
| Outcomes | 46,247 | 50,631 | 47,619 | ||||||||||||||
| Corporate unallocated | (328,657) | (441,581) | (406,882) | ||||||||||||||
| Total Company | (7,439) | (79,299) | (10,395) | ||||||||||||||
| Total other income (expense) | (8,304) | (44,511) | (46,244) | ||||||||||||||
| Loss before income taxes | $ | (15,743) | $ | (123,810) | $ | (56,639) | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Revenues | |||||||||||
| Electricity | $ | 1,022,939 | $ | 938,374 | $ | 820,306 | |||||
| Gas | 533,624 | 569,476 | 543,805 | ||||||||
| Water | 461,634 | 505,336 | 519,422 | ||||||||
| Total Company | $ | 2,018,197 | $ | 2,013,186 | $ | 1,883,533 | |||||
| Gross profit | |||||||||||
| Electricity | $ | 318,953 | $ | 282,677 | $ | 225,446 | |||||
| Gas | 191,303 | 205,063 | 185,559 | ||||||||
| Water | 164,898 | 172,580 | 145,680 | ||||||||
| Total Company | $ | 675,154 | $ | 660,320 | $ | 556,685 | |||||
| Operating income | |||||||||||
| Electricity | $ | 93,566 | $ | 68,287 | $ | 31,104 | |||||
| Gas | 74,206 | 66,813 | 67,471 | ||||||||
| Water | 44,494 | 37,266 | 19,864 | ||||||||
| Corporate unallocated | (60,840 | ) | (76,155 | ) | (65,593 | ) | |||||
| Total Company | 151,426 | 96,211 | 52,846 | ||||||||
| Total other income (expense) | (16,851 | ) | (11,584 | ) | (15,744 | ) | |||||
| Income before income taxes | $ | 134,575 | $ | 84,627 | $ | 37,102 | |||||
For the year ended December 31, 2017, one customer represented 19% and two additional customers each represented 11% of the Electricity operating segment revenues. There wasall periods presented, no single customer that representedrepresents more than 10% of total Company or the Gas or Water operating segment revenues.company revenue.
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Revenues by region were as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| United States and Canada | $ | 1,302,241 | $ | 1,273,868 | $ | 1,434,577 | |||||||||||
| Europe, Middle East, and Africa | 391,556 | 568,008 | 594,264 | ||||||||||||||
Asia Pacific and Latin America (1) | 101,767 | 139,696 | 144,509 | ||||||||||||||
| Total Company | $ | 1,795,564 | $ | 1,981,572 | $ | 2,173,350 | |||||||||||
(1)On June 25, 2020, we sold our Latin American operations. We continue to sell into the region through a distributor.
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| United States and Canada | $ | 1,137,508 | $ | 1,126,787 | $ | 997,293 | |||||
| Europe, Middle East, and Africa (EMEA) | 672,942 | 698,106 | 701,301 | ||||||||
| Other | 207,747 | 188,293 | 184,939 | ||||||||
| Total Company | $ | 2,018,197 | $ | 2,013,186 | $ | 1,883,533 | |||||
Property, plant, and equipment, net, by geographic area were as follows:
| At December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| United States | $ | 85,704 | $ | 94,899 | |||||||
| Outside United States | 54,419 | 68,285 | |||||||||
| Total Company | $ | 140,123 | $ | 163,184 | |||||||
| At December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands) | |||||||
| United States | $ | 67,764 | $ | 70,435 | |||
| Outside United States | 133,004 | 106,023 | |||||
| Total Company | $ | 200,768 | $ | 176,458 | |||
Depreciation expense is allocated to the operating segments based upon each segment's use of the assets. All amortization expense is recognized within Corporate unallocated. Depreciation and amortization of intangible assets expense associated with our operating segments was as follows:
| Year Ended December 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | 2020 | ||||||||||||||
| Device Solutions | $ | 14,452 | $ | 22,884 | $ | 25,058 | |||||||||||
| Networked Solutions | 17,539 | 16,607 | 16,965 | ||||||||||||||
| Outcomes | 5,501 | 4,454 | 5,348 | ||||||||||||||
| Corporate unallocated | 29,271 | 40,208 | 49,919 | ||||||||||||||
| Total Company | $ | 66,763 | $ | 84,153 | $ | 97,290 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Electricity | $ | 24,703 | $ | 28,468 | $ | 35,896 | |||||
| Gas | 18,800 | 20,714 | 20,288 | ||||||||
| Water | 16,092 | 18,675 | 19,459 | ||||||||
| Corporate unallocated | 3,620 | 461 | 350 | ||||||||
| Total Company | $ | 63,215 | $ | 68,318 | $ | 75,993 | |||||
Note 17: Business CombinationsRevenues
A summary of significant net changes in the contract assets and the contract liabilities balances during the period is as follows:
| In thousands | Contract liabilities, less contract assets | ||||
| Beginning balance, January 1, 2022 | $ | 83,180 | |||
| Revenues recognized from beginning contract liability | (47,997) | ||||
| Cumulative catch-up adjustments | 5,417 | ||||
| Increases due to amounts collected or due | 312,173 | ||||
| Revenues recognized from current period increases | (275,348) | ||||
| Other | (1,467) | ||||
| Ending balance, December 31, 2022 | $ | 75,958 | |||
On JuneJanuary 1, 2017,2022, total contract assets were $33.7 million and total contract liabilities were $116.9 million. On December 31, 2022, total contract assets were $57.0 million and total contract liabilities were $133.0 million. The contract assets primarily relate to contracts that include a retention clause and allocations related to contracts with multiple performance obligations. The contract liabilities primarily relate to deferred revenue, such as extended warranty and maintenance cost. The cumulative catch-up adjustments relate to contract modifications, measure-of-progress changes, and changes in the estimate of the transaction price.
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Transaction price allocated to the remaining performance obligations
Total transaction price allocated to remaining performance obligations represents committed but undelivered products and services for contracts and purchase orders at period end. Twelve-month remaining performance obligations represent the portion of total transaction price allocated to remaining performance obligations that we completedestimate will be recognized as revenue over the acquisitionnext 12 months. Total transaction price allocated to remaining performance obligations is not a complete measure of Comverge by purchasingour future revenues as we also receive orders where the stockcustomer may have legal termination rights but are not likely to terminate.
Total transaction price allocated to remaining performance obligations related to contracts is approximately $1.9 billion for the next 12 months and approximately $1.6 billion for periods longer than 12 months. The total remaining performance obligations consist of its parent, Peak Holding Corp. (Comverge). This was financed through borrowings onproduct and service components. The service component relates primarily to maintenance agreements for which customers pay a full year's maintenance in advance, and service revenues are generally recognized over the service period. Total transaction price allocated to remaining performance obligations also includes our multicurrency revolving lineextended warranty contracts, for which revenue is recognized over the warranty period, and hardware, which is recognized as units are delivered. The estimate of creditwhen remaining performance obligations will be recognized requires significant judgment.
Cost to obtain a contract and cost to fulfill a contract with a customer
Cost to obtain a contract and costs to fulfill a contract were capitalized and amortized using a systematic rational approach to align with the transfer of control of underlying contracts with customers. While amounts were capitalized, they are not material.
Disaggregation of revenue
Refer to Note 16: Segment Information and the Consolidated Statements of Operations for disclosure regarding the disaggregation of revenue into categories, which depict how revenue and cash on hand. Comverge is a leading provider of integrated demand responseflows are affected by economic factors. Specifically, our operating segments and customer engagement solutions that enable electric utilities to ensure grid reliability, lower energy costsgeographical regions as disclosed, and categories for consumers, meet regulatory demands,products, which include hardware and enhance the customer experience. Comverge's technologies are complementary to our Electricity segment's growing software and services, are presented.
Note 18: Sale of Businesses
Latin America Divestiture
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 and will help optimize grid performance and reliability.in Latin America.
The purchasetotal sales price of Comverge$35.0 million included deferred payments of $21.1 million for working capital, which was $100.0to be paid in full by December 31, 2020, as evidenced by a promissory note, and the remainder in cash ($4.5 million) and other deferred consideration. We recognized a total loss of $59.8 million during the year ended 2020, as the result of the total of the net assets sold (including the cumulative translation adjustment in AOCI) exceeding the sales price.
In January 2021, we agreed to extend the payment terms on the remaining outstanding working capital balance of $18.4 million. Accell had agreed to make monthly payments including interest through September 2022, under which we received full payments for January through March and partial payments in April and May (totaling $3.8 million including $0.7 million in cash, netinterest). Based on Accell's failure to make timely payments, continued requests to defer payments significantly beyond the original maturity of $18.2the working capital note and the unfavorable impact of the COVID-19 pandemic on the Latin American markets, we determined to fully reserve the working capital and other deferred receivables, recognizing a loss on sale of business of $26.8 million for the year ended December 31, 2021.
Sale to Dresser
On November 2, 2021, Itron entered into a definitive securities and asset purchase agreement to sell certain Gas product lines from our Device Solutions manufacturing and business operations in Europe and North America to Dresser. The sale included one German subsidiary – Itron GmbH along with its business operations, personnel, and the owned manufacturing facility in Karlsruhe; the business operations, personnel, and assets associated with the leased manufacturing facility in Argenteuil, France; and the business and manufacturing assets maintained at one of cash and cash equivalents acquired. We allocated the purchaseour contract manufacturers in North America. The base
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sale price to the assets acquired andof this divestiture was $75.0 million, with adjustments for (1) pension liabilities assumed basedby Dresser for related active employees and (2) the final working capital balance. Cash proceeds from the sale were $55.9 million.
The transaction closed on fair value assessments.February 28, 2022. The fair values of these assetsfinal sales price and liabilities are considered final. The following reflects our final allocation of purchase price as of June 1, 2017:
| Fair Value | Weighted Average Useful Life | ||||
| (in thousands) | (in years) | ||||
| Current assets | $ | 15,118 | |||
| Property, plant, and equipment | 2,275 | ||||
| Other long-term assets | 1,879 | ||||
| Identified intangible assets | |||||
| Core-developed technology | 19,250 | 8 | |||
| Customer contracts and relationships | 12,230 | 10 | |||
| Trademarks and trade names | 4,310 | 15 | |||
| Total identified intangible assets subject to amortization | 35,790 | ||||
| In-process research and development (IPR&D) | 710 | ||||
| Total identified intangible assets | 36,500 | ||||
| Goodwill | 59,675 | ||||
| Current liabilities | (10,787 | ) | |||
| Long-term liabilities | (4,645 | ) | |||
| Total net assets acquired | $ | 100,015 | |||
| June 1, 2017 - December 31, 2017 | |||
| Revenues | $ | 32,436 | |
| Net income (loss) | (2,448 | ) | |
| Year Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| Revenues | $ | 2,040,309 | $ | 2,072,695 | |||
| Net income | 64,230 | 24,415 | |||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year | |||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||
| 2017 | |||||||||||||||||||
| Statement of operations data (unaudited): | |||||||||||||||||||
| Revenues | $ | 477,592 | $ | 503,082 | $ | 486,747 | $ | 550,776 | $ | 2,018,197 | |||||||||
| Gross profit | 157,225 | 177,860 | 165,318 | 174,751 | 675,154 | ||||||||||||||
| Net income attributable to Itron, Inc. | 15,845 | 14,097 | 25,576 | 1,780 | 57,298 | ||||||||||||||
Earnings per common share - Basic(1) | $ | 0.41 | $ | 0.36 | $ | 0.66 | $ | 0.05 | $ | 1.48 | |||||||||
Earnings per common share - Diluted(1) | $ | 0.40 | $ | 0.36 | $ | 0.65 | $ | 0.05 | $ | 1.45 | |||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year | |||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||
| 2016 | |||||||||||||||||||
| Statement of operations data (unaudited): | |||||||||||||||||||
| Revenues | $ | 497,590 | $ | 513,024 | $ | 506,859 | $ | 495,713 | $ | 2,013,186 | |||||||||
| Gross profit | 163,203 | 169,705 | 170,749 | 156,663 | 660,320 | ||||||||||||||
| Net income (loss) attributable to Itron, Inc. | 10,089 | 19,917 | (9,885 | ) | 11,649 | 31,770 | |||||||||||||
Earnings (loss) per common share - Basic(1) | $ | 0.27 | $ | 0.52 | $ | (0.26 | ) | $ | 0.30 | $ | 0.83 | ||||||||
Earnings (loss) per common share - Diluted(1) | $ | 0.26 | $ | 0.52 | $ | (0.26 | ) | $ | 0.30 | $ | 0.82 | ||||||||
Note 19: Leases
We lease certain factories, service and distribution locations, offices, and equipment under operating leases. Our operating leases have initial lease terms ranging from one to 12 years, some of which include options to extend or renew the leases for up to 10 years. Certain lease agreements contain provisions for future rent increases. Our leases do not contain material residual value guarantees, and finance leases are not material.
The components of operating lease expense are as follows:
| In thousands | Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Operating lease cost | $ | 19,092 | $ | 20,577 | |||||||||||||
| Variable lease cost | 4,107 | 2,662 | |||||||||||||||
| Total operating lease cost | $ | 23,199 | $ | 23,239 | |||||||||||||
Supplemental cash flow information related to operating leases is as follows:
| In thousands | Year Ended December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 19,214 | $ | 20,958 | |||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | 5,597 | 8,342 | |||||||||
Supplemental balance sheet information related to operating leases is as follows:
| In thousands | December 31, 2022 | December 31, 2021 | |||||||||
| Operating lease right-of-use assets, net | $ | 52,826 | $ | 65,523 | |||||||
| Other current liabilities | 15,967 | 16,602 | |||||||||
| Operating lease liabilities | 44,370 | 57,314 | |||||||||
| Total operating lease liability | $ | 60,337 | $ | 73,916 | |||||||
| Weighted average remaining lease term - Operating leases | 3.8 years | 4.7 years | |||||||||
| Weighted average discount rate - Operating leases | 4.4 | % | 4.4 | % | |||||||
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Amounts due under operating lease liabilities as of December 31, 2022 are as follows:
| In thousands | December 31, 2022 | ||||
| 2023 | $ | 18,199 | |||
| 2024 | 16,080 | ||||
| 2025 | 14,558 | ||||
| 2026 | 12,201 | ||||
| 2027 | 3,543 | ||||
| Thereafter | 1,033 | ||||
| Total lease payments | 65,614 | ||||
| Less: imputed interest | (5,277) | ||||
| Total operating lease liability | $ | 60,337 | |||
Note 19: 20:Subsequent Events
On February 22, 2018, our23, 2023, the Board of Directors of Itron approved a restructuring plan (2018(the 2023 Projects). The 20182023 Projects will include activities that continue ourthe Company's 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 to be substantially complete the plan by the end of 2020. We estimateearly 2025. Itron estimates pre-tax restructuring charges of $100 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.$40-45 million. Of the total estimated charge, approximately 95% will result in cash expenditures. We expectexpenditures, and the remainder to record thenon-cash impairment charges. The majority of the charges inexpense will be recognized during the first quarter of 2018.
2023. Certain of Itron's employees are represented by unions or works councils, which requires consultation, and potential restructuring projects may be subject to regulatory approval.
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Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no disagreements with our independent accountants on accounting and financial disclosure matters within the three year period ended December 31, 2017,2022, or in any period subsequent to such date, through the date of this report.
Evaluation of disclosure controls and procedures
An evaluation was performed under the supervision and with the participation of our Company’sCompany's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’sCompany's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934 as amended. Based on that evaluation, the Company’sCompany's management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of December 31, 2017,2022, the Company’sCompany's disclosure controls and procedures were effective to ensure the information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the 2013 Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 20172022 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report that is included in this Annual Report on Form 10-K.Report.
Changes in internal control over financial reporting
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Shareholders of Itron, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Itron, Inc. and subsidiaries (the “Company”"Company") as of December 31, 2017,2022, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017,2022, of the Company and our report dated February 28, 2018,27, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’sCompany's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’sCompany's internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
February 28, 201827, 2023
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Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
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PART III
The section entitled “Proposal"Proposal 1 – Election of Directors”Directors" appearing in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 201811, 2023 (the 20182023 Proxy Statement) sets forth certain information with regard to our directors as required by Item 401 of Regulation S-K and is incorporated herein by reference.
Certain information with respect to persons who are or may be deemed to be executive officers of Itron, Inc. as required by Item 401 of Regulation S-K is set forth under the caption “Executive Officers”"Information about our Executive Officers" in Part I of this Annual Report on Form 10-K.Report.
The section entitled “Section"Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports" appearing in the 20182023 Proxy Statement sets forth certain information as required by Item 405 of Regulation S-K and is incorporated herein by reference.
The section entitled “Corporate Governance”"Corporate Governance" appearing in the 20182023 Proxy Statement sets forth certain information with respect to the Registrant’sRegistrant's code of conduct and ethics as required by Item 406 of Regulation S-K and is incorporated herein by reference. Our code of conduct and ethics can be accessed on our website, at www.itron.com under the Investors section.
There were no material changes to the procedures by which security holders may recommend nominees to Itron's board of directors during 2018,2023, as set forth by Item 407(c)(3) of Regulation S-K.
The section entitled “Corporate Governance”"Corporate Governance" appearing in the 20182023 Proxy Statement sets forth certain information regarding the Audit/Finance Committee, including the members of the Committee and the Audit/Finance Committee financial experts, as set forth by Item 407(d)(4) and (d)(5) of Regulation S-K and is incorporated herein by reference.
The sections entitled “Compensation"Compensation of Directors”Directors" and “Executive Compensation”"Executive Compensation" appearing in the 20182023 Proxy Statement set forth certain information with respect to the compensation of directors and management of Itron as required by Item 402 of Regulation S-K and are incorporated herein by reference.
The section entitled “Corporate Governance”"Corporate Governance" appearing in the 20182023 Proxy Statement sets forth certain information regarding members of the Compensation Committee required by Item 407(e)(4) of Regulation S-K and is incorporated herein by reference.
The section entitled “Compensation"Compensation Committee Report”Report" appearing in the 20182023 Proxy Statement sets forth certain information required by Item 407(e)(5) of Regulation S-K and is incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The section entitled “Equity"Equity Compensation Plan Information”Information" appearing in the 20182023 Proxy Statement sets forth certain information required by Item 201(d) of Regulation S-K and is incorporated herein by reference.
The section entitled “Security"Security Ownership of Certain Beneficial Owners and Management”Management" appearing in the 20182023 Proxy Statement sets forth certain information with respect to the ownership of our common stock as required by Item 403 of Regulation S-K and is incorporated herein by reference.
The section entitled “Corporate Governance”"Corporate Governance" appearing in the 20182023 Proxy Statement sets forth certain information required by Item 404 of Regulation S-K and is incorporated herein by reference.
The section entitled “Corporate Governance”"Corporate Governance" appearing in the 20182023 Proxy Statement sets forth certain information with respect to director independence as required by Item 407(a) of Regulation S-K and is incorporated herein by reference.
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The section entitled “Independent"Independent Registered Public Accounting Firm’sFirm's Audit Fees and Services”Services" appearing in the 20182023 Proxy Statement sets forth certain information with respect to the principal accounting fees and services and the Audit/Finance Committee’sCommittee's policy on pre-approval of audit and permissible non-audit services performed by our independent auditors as required by Item 9(e) of Schedule 14A and is incorporated herein by reference.
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PART IV
(a) (1) Financial Statements:
The financial statements required by this item are submitted in Part II, Item 88: Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
(a) (2) Financial Statement Schedule:
All schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the notes thereto.
(a) (3) Exhibits:
| Exhibit Number | Description of Exhibits | |||||||
| 2.1 | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 4.4 | ||||||||
| 4.6 | ||||||||
| 4.7 | ||||||||
| 4.8 | ||||||||
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| Exhibit Number | Description of Exhibits | |||||||
| 4.9 | ||||||||
| 4.10 | ||||||||
| 4.11 | ||||||||
| 4.12 | ||||||||
| 4.13 | ||||||||
| 4.14 | ||||||||
| 10.1* | ||||||||
| 10.2* | ||||||||
| 10.3* | ||||||||
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| Exhibits | ||||||||
| 10.11* | ||||||||
| 10.24* | ||||||||
| 10.25* | ||||||||
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| Exhibit Number | Description of Exhibits | |||||||
| 10.26* | ||||||||
| 10.27* | ||||||||
| 10.28* | ||||||||
| 10.29* | ||||||||
| 10.30* | ||||||||
| 21.1 | ||||||||
| 23.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
| * | ||||||||
| Management contract or compensatory plan or arrangement. | ||||||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Liberty Lake, State of Washington, on the 28th27th day of February, 2018.
2023.
| ITRON, INC. | ||||||||
| By: | ||||||||
| /s/ JOAN S. HOOPER | ||||||||
| Joan S. Hooper | ||||||||
| Senior Vice President and Chief Financial Officer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities indicated on the 28th27th day of February, 2018.
2023.
| Signatures | Title | |||||||
| Thomas L. Deitrich | ||||||||
| President and Chief Executive Officer (Principal Executive Officer), Director | ||||||||
| /s/ JOAN S. HOOPER | ||||||||
| Joan S. Hooper | Senior Vice President and Chief Financial Officer | |||||||
| /s/ | ||||||||
| Director | ||||||||
| /s/ FRANK M. JAEHNERT | ||||||||
| Frank M. Jaehnert | Director | |||||||
| /s/ JEROME J. LANDE | ||||||||
| Jerome J. Lande | Director | |||||||
| /s/ TIMOTHY M. LEYDEN | ||||||||
| Timothy M. Leyden | Director | |||||||
| /s/ | ||||||||
| Director | ||||||||
| /s/ GARY E. PRUITT | ||||||||
| Gary E. Pruitt | Director | |||||||
| /s/ DIANA D. TREMBLAY | ||||||||
| Diana D. Tremblay | ||||||||
| /s/ LYNDA L. ZIEGLER | ||||||||
| Lynda L. Ziegler | ||||||||
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