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ITRI Itron

Filed: 3 May 21, 2:09pm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 000-22418
ITRON, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1011792
(State of Incorporation) (I.R.S. Employer Identification No.)
2111 N Molter Road, Liberty Lake, Washington 99019
(509) 924-9900
(Address and telephone number of registrant's principal executive offices) 

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, no par valueITRINASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filer(Do not check if a smaller reporting company)Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of April 30, 2021, there were outstanding 45,132,612 shares of the registrant's common stock, no par value, which is the only class of common stock of the registrant.



Itron, Inc.
Table of Contents
 



PART I: FINANCIAL INFORMATION
Item 1:    Financial Statements (Unaudited)
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
In thousands, except per share data20212020
Revenues
Product revenues$442,804 $528,137 
Service revenues76,770 70,278 
Total revenues519,574 598,415 
Cost of revenues
Product cost of revenues307,691 384,681 
Service cost of revenues44,839 42,168 
Total cost of revenues352,530 426,849 
Gross profit167,044 171,566 
Operating expenses
Sales, general and administrative75,992 80,498 
Research and development51,727 53,781 
Amortization of intangible assets8,973 11,165 
Restructuring(1,980)(248)
Loss on sale of business1,392 
Total operating expenses136,104 145,196 
Operating income30,940 26,370 
Other income (expense)
Interest income542 553 
Interest expense(10,475)(11,277)
Other income (expense), net(2,766)1,066 
Total other income (expense)(12,699)(9,658)
Income before income taxes18,241 16,712 
Income tax provision(4,661)(7,550)
Net income13,580 9,162 
Net income attributable to noncontrolling interests977 478 
Net income attributable to Itron, Inc.$12,603 $8,684 
Net income per common share - Basic$0.30 $0.22 
Net income per common share - Diluted$0.30 $0.21 
Weighted average common shares outstanding - Basic41,526 40,043 
Weighted average common shares outstanding - Diluted41,964 40,474 
The accompanying notes are an integral part of these consolidated financial statements.
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ITRON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

Three Months Ended March 31,
In thousands20212020
Net income$13,580 $9,162 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(15,012)(25,445)
Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges2,528 (767)
Pension benefit obligation adjustment701 1,001 
Total other comprehensive income (loss), net of tax(11,783)(25,211)
Total comprehensive income (loss), net of tax1,797 (16,049)
Comprehensive income attributable to noncontrolling interests, net of tax977 478 
Comprehensive income (loss) attributable to Itron, Inc.$820 $(16,527)
The accompanying notes are an integral part of these consolidated financial statements.
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ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousandsMarch 31, 2021December 31, 2020
ASSETS
Current assets
Cash and cash equivalents$574,592 $206,933 
Accounts receivable, net365,826 369,828 
Inventories169,412 182,377 
Other current assets150,271 171,124 
Total current assets1,260,101 930,262 
Property, plant, and equipment, net199,650 207,816 
Deferred tax assets, net94,620 76,142 
Other long-term assets57,599 51,656 
Operating lease right-of-use assets, net74,815 76,276 
Intangible assets, net122,861 132,955 
Goodwill1,118,322 1,131,916 
Total assets$2,927,968 $2,607,023 
LIABILITIES AND EQUITY
Current liabilities
Accounts payable$181,606 $215,639 
Other current liabilities70,890 72,591 
Wages and benefits payable90,383 86,249 
Taxes payable14,256 15,804 
Current portion of debt400,000 18,359 
Current portion of warranty22,024 28,329 
Unearned revenue130,403 112,928 
Total current liabilities909,562 549,899 
Long-term debt, net496,531 902,577 
Long-term warranty17,310 13,061 
Pension benefit obligation115,257 119,457 
Deferred tax liabilities, net1,806 1,921 
Operating lease liabilities65,822 66,823 
Other long-term obligations100,512 113,012 
Total liabilities1,706,800 1,766,750 
Equity
Preferred stock, no par value, 10,000 shares authorized, 0 shares issued or outstanding
Common stock, no par value, 75,000 shares authorized, 45,122 and 40,444 shares issued and outstanding1,768,517 1,389,419 
Accumulated other comprehensive loss, net(150,309)(138,526)
Accumulated deficit(421,742)(434,345)
Total Itron, Inc. shareholders' equity1,196,466 816,548 
Noncontrolling interests24,702 23,725 
Total equity1,221,168 840,273 
Total liabilities and equity$2,927,968 $2,607,023 
The accompanying notes are an integral part of these consolidated financial statements.
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ITRON, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
Common StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Itron, Inc. Shareholders' EquityNoncontrolling InterestsTotal Equity
In thousandsSharesAmount
Balances at January 1, 202140,444 $1,389,419 $(138,526)$(434,345)$816,548 $23,725 $840,273 
Net income12,603 12,603 977 13,580 
Other comprehensive income (loss), net of tax(11,783)(11,783)(11,783)
Net stock issued and repurchased206 2,009 2,009 2,009 
Stock-based compensation expense6,270 6,270 6,270 
Stock issued related to equity offering4,472 389,419 389,419 389,419 
Proceeds from sale of warrants45,349 45,349 45,349 
Purchases of convertible note hedge contracts, net of tax(63,576)(63,576)(63,576)
Registration fee(373)(373)(373)
Balances at March 31, 202145,122 $1,768,517 $(150,309)$(421,742)$1,196,466 $24,702 $1,221,168 

Common StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Itron, Inc. Shareholders' EquityNoncontrolling InterestsTotal Equity
In thousandsSharesAmount
Balances at January 1, 202039,941 $1,357,600 $(204,672)$(376,390)$776,538 $24,277 $800,815 
Net income8,684 8,684 478 9,162 
Other comprehensive income (loss), net of tax(25,211)(25,211)(25,211)
Net stock issued and repurchased235 2,247 2,247 2,247 
Stock-based compensation expense8,482 8,482 8,482 
Balances at March 31, 202040,176 $1,368,329 $(229,883)$(367,706)$770,740 $24,755 $795,495 
The accompanying notes are an integral part of these consolidated financial statements.
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ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
In thousands20212020
Operating activities
Net income$13,580 $9,162 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization21,810 24,031 
Non-cash operating lease expense4,330 5,496 
Stock-based compensation6,498 8,482 
Amortization of prepaid debt fees2,695 1,007 
Deferred taxes, net2,109 4,062 
Loss on sale of business1,392 
Restructuring, non-cash(45)(955)
Other adjustments, net391 (874)
Changes in operating assets and liabilities, net of sale of business:
Accounts receivable(2,078)1,185 
Inventories9,008 (543)
Other current assets15,692 (4,526)
Other long-term assets(7,627)(6,501)
Accounts payable, other current liabilities, and taxes payable(26,978)135 
Wages and benefits payable5,458 (19,977)
Unearned revenue18,050 17,395 
Warranty(1,382)(4,250)
Other operating, net(12,948)(14,435)
Net cash provided by operating activities49,955 18,894 
Investing activities
Net proceeds related to the sale of business2,842 
Acquisitions of property, plant, and equipment(11,412)(12,602)
Other investing, net2,764 3,345 
Net cash used in investing activities(5,806)(9,257)
Financing activities
Proceeds from borrowings460,000 400,000 
Payments on debt(475,000)
Issuance of common stock2,238 2,911 
Proceeds from common stock offering389,419 
Proceeds from sale of warrants45,349 
Purchases of convertible note hedge contracts(84,139)
Repurchase of common stock(664)
Prepaid debt fees(11,722)(175)
Other financing, net(1,564)(335)
Net cash provided by financing activities324,581 401,737 
Effect of foreign exchange rate changes on cash and cash equivalents(1,071)(6,758)
Increase in cash and cash equivalents367,659 404,616 
Cash and cash equivalents at beginning of period206,933 149,904 
Cash and cash equivalents at end of period$574,592 $554,520 
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Income taxes, net$2,147 $(5,370)
Interest3,193 14,804 
The accompanying notes are an integral part of these consolidated financial statements.
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(UNAUDITED)
In this Quarterly Report on Form 10-Q, the terms "we", "us", "our", "Itron", and the "Company" refer to Itron, Inc. and its subsidiaries.

Note 1:    Summary of Significant Accounting Policies

Financial Statement Preparation
The consolidated financial statements presented in this Quarterly Report on Form 10-Q are unaudited and reflect entries necessary for the fair presentation of the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020, Consolidated Statements of Equity for the three months ended March 31, 2021 and 2020, the Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020, and the Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, of Itron, Inc. and its subsidiaries. All entries required for the fair presentation of the financial statements are of a normal recurring nature, except as disclosed. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results expected for the full year or for any other period.

Certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been partially or completely omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) regarding interim results. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2020 filed with the SEC in our Annual Report on Form 10-K on February 24, 2021 (2020 Annual Report). There have been no significant changes in financial statement preparation or significant accounting policies since December 31, 2020.

Risks and Uncertainties
The COVID-19 pandemic has had global economic impacts including disrupting global supply chains and creating market volatility. The extent of the recent pandemic and its ongoing impact on our operations is volatile, but is being monitored closely by our management. During portions of the first half of 2020 certain of our European factories were closed due to government actions and local conditions, and any further closures that may be imposed on us could impact our results for 2021. Incremental costs we have incurred related to COVID-19, such as personal protective equipment, increased cleaning and sanitizing of our facilities, and other such items, have not been material to date. At this time, we have not identified any significant decrease in long-term customer demand for our products and services. Certain of our customers' projects and deployments have continued to shift later into 2021 and beyond.

Recently Adopted Accounting Standards

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which modifies certain provisions of Accounting Standards Codification (ASC) 740, to reduce the complexity of accounting for income taxes. ASU 2019-12 is effective for us beginning with our interim financial reports for the first quarter of 2021. The adoption of this standard had no impact to our Q1 consolidated financial position, results of operations, or cash flows and is not expected to have a material impact on full year 2021 financial results.

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (ASU 2020-06). This amendment simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. We have chosen to early adopt ASU 2020-06 beginning January 1, 2021, due to the issuance of our convertible debt on March 9, 2021. This amendment will have no retrospective changes but will impact how our newly issued convertible debt is both recognized and disclosed. ASU 2020-06 also amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury stock method is no longer available.

Recent Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts,
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hedging relationships, and other transactions affected by reference rate reform. ASU 2020-04 applies to contracts that reference LIBOR or another reference rate expected to be terminated because of reference rate reform. An entity may elect certain optional expedients for hedging relationships that exist as of December 31, 2022 and maintain those optional expedients through the end of the hedging relationship. ASU 2020-04 can be adopted as of March 12, 2020 or thereafter. In January 2021, the FASB issued ASU 2021-01, which further updates the scope of Topic 848. We do not currently have any contracts that have been changed to a new reference rate, but we will continue to evaluate our contracts and the effects of this standard on our consolidated financial position, results of operations, and cash flows prior to adoption.

Note 2:    Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (EPS):
Three Months Ended March 31,
In thousands, except per share data20212020
Net income available to common shareholders$12,603 $8,684 
Weighted average common shares outstanding - Basic41,526 40,043 
Dilutive effect of stock-based awards438 431 
Dilutive effect of convertible notes
Weighted average common shares outstanding - Diluted41,964 40,474 
Net income per common share - Basic$0.30 $0.22 
Net income per common share - Diluted$0.30 $0.21 

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 0.1 million and 0.3 million stock-based awards were excluded from the calculation of diluted EPS for the three months ended March 31, 2021 and 2020 because they were anti-dilutive. These stock-based awards could be dilutive in future periods.

Convertible Notes and Warrants
For our Convertible Notes issued in March 2021, the dilutive effect is calculated using the if-converted method in accordance with ASU 2020-06. 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 conversion obligation, assuming all the Convertible Notes are converted. The average closing price of our common stock for the quarter ended March 31, 2021 is used as the basis for determining the dilutive effect on EPS. The average price of our common stock for the quarter ended March 31, 2021 was less than the conversion price of $126.00, and 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 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 issuance of common shares 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 shares. 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 quarter ended March 31, 2021, the average share price was below 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). 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
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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 thousandsMarch 31, 2021December 31, 2020
Trade receivables (net of allowance of $1,136 and $1,312)$319,052 $318,269 
Unbilled receivables46,774 51,559 
Total accounts receivable, net$365,826 $369,828 

Allowance for credit losses account activityThree Months Ended March 31,
In thousands20212020
Beginning balance$1,312 $3,064 
Provision for (release of) doubtful accounts, net(67)510 
Accounts written-off(79)(415)
Effect of change in exchange rates(30)(113)
Ending balance$1,136 $3,046 

Inventories
In thousandsMarch 31, 2021December 31, 2020
Raw materials$109,314 $114,058 
Work in process9,287 8,094 
Finished goods50,811 60,225 
Total inventories$169,412 $182,377 

Property, plant, and equipment, net
In thousandsMarch 31, 2021December 31, 2020
Machinery and equipment$333,973 $334,050 
Computers and software116,121 115,776 
Buildings, furniture, and improvements153,246 155,676 
Land13,900 14,303 
Construction in progress, including purchased equipment30,207 31,425 
Total cost647,447 651,230 
Accumulated depreciation(447,797)(443,414)
Property, plant, and equipment, net$199,650 $207,816 

Depreciation expenseThree Months Ended March 31,
In thousands20212020
Depreciation expense$12,837 $12,866 

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Note 4:    Intangible Assets and Liabilities

The gross carrying amount and accumulated amortization (accretion) of our intangible assets and liabilities, other than goodwill, were as follows:
March 31, 2021December 31, 2020
In thousandsGrossAccumulated
(Amortization) Accretion
NetGrossAccumulated
(Amortization) Accretion
Net
Intangible Assets
Core-developed technology$514,416 $(491,146)$23,270 $525,051 $(498,113)$26,938 
Customer contracts and relationships378,430 (281,965)96,465 383,245 (280,497)102,748 
Trademarks and trade names78,763 (76,055)2,708 79,716 (76,912)2,804 
Other12,024 (11,606)418 12,025 (11,560)465 
Total intangible assets$983,633 $(860,772)$122,861 $1,000,037 $(867,082)$132,955 
Intangible Liabilities
Customer contracts and relationships$(23,900)$21,969 $(1,931)$(23,900)$21,479 $(2,421)

A summary of intangible assets and liabilities activity is as follows:
Three Months Ended March 31,
In thousands20212020
Intangible assets, gross beginning balance$1,000,037 $979,814 
Effect of change in exchange rates(16,404)(16,075)
Intangible assets, gross ending balance$983,633 $963,739 
Intangible liabilities, gross beginning balance$(23,900)$(23,900)
Effect of change in exchange rates
Intangible liabilities, gross ending balance$(23,900)$(23,900)

Assumed intangible liabilities reflect the present value of the projected cash outflows for an existing contract where remaining costs are expected to exceed projected revenues.

Estimated future annual amortization (accretion) is as follows:
Year Ending December 31,AmortizationAccretionEstimated Annual Amortization, net
In thousands
2021 (amount remaining at March 31, 2021)$28,447 $(1,472)$26,975 
202227,516 (459)27,057 
202319,898 19,898 
202415,700 15,700 
202514,706 14,706 
Thereafter16,594 16,594 
Total intangible assets subject to amortization (accretion)$122,861 $(1,931)$120,930 


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Note 5:    Goodwill

The following table reflects changes in the carrying amount of goodwill for the three months ended March 31, 2021:
In thousandsDevice SolutionsNetworked SolutionsOutcomesTotal Company
Goodwill balance at January 1, 2021$53,214 $933,814 $144,888 $1,131,916 
Effect of change in exchange rates(551)(11,288)(1,755)(13,594)
Goodwill balance at March 31, 2021$52,663 $922,526 $143,133 $1,118,322 

Note 6:    Debt

The components of our borrowings were as follows:
In thousandsMarch 31, 2021December 31, 2020
Credit facility
USD denominated term loan$61,094 $536,094 
Multicurrency revolving line of credit
Senior notes400,000 400,000 
Convertible notes460,000 
Total debt921,094 936,094 
Less: current portion of debt400,000 18,359 
Less: unamortized prepaid debt fees - term loan1,798 3,469 
Less: unamortized prepaid debt fees - senior notes11,118 11,689 
Less: unamortized prepaid debt fees - convertible notes11,647 
Long-term debt, net$496,531 $902,577 

Credit Facility
On October 18, 2019, we amended our credit facility that was initially entered on January 5, 2018 (together with the amendment, the 2018 credit facility). The 2018 credit facility provides for committed credit facilities in the amount of $1.2 billion U.S. dollars. The 2018 credit facility consists of a $650 million U.S. dollar term loan (the term loan) and a multicurrency revolving line of credit (the revolver) with a principal amount of up to $500 million. The revolver also contains a $300 million standby letter of credit sub-facility and a $50 million swingline sub-facility. The October 18, 2019 amendment extended the maturity date to October 18, 2024 and re-amortized the term loan based on the new balance as of the amendment date. The amendment also modified the required interest payments and made it based on total net leverage instead of total leverage. Through the third quarter of 2020, amounts not borrowed under the revolver were subject to a commitment fee, which was paid in arrears on the last day of each fiscal quarter, ranging from 0.15% to 0.25% and drawn amounts were subject to a margin ranging from 1.00% to 1.75%.

On October 19, 2020, we completed a second amendment to our 2018 credit facility. This amendment adjusts the maximum total net leverage ratio thresholds for the period beginning with the fourth quarter of 2020 through the fourth quarter of 2021 to allow for increased operational flexibility. The maximum leverage ratio is increased to 4.75:1 for the fourth quarter of 2020 and the first quarter of 2021 and 4.50:1 for the second quarter through the fourth quarter of 2021. An additional level of pricing was added to the existing pricing grid and is effective throughout the remaining term of the 2018 credit facility. Beginning with the fourth quarter of 2020, the commitment fee ranges from 0.15% to 0.30% and drawn amounts are subject to a margin ranging from 1.00% to 2.00%. Debt fees of approximately $1.4 million were incurred for the amendment, as well as other legal and advisory fees. Both the term loan and the revolver can be repaid without penalty. Amounts repaid on the term loan may not be reborrowed, and amounts borrowed under the revolver may be repaid and reborrowed until the revolver's maturity, at which time all outstanding loans together with all accrued and unpaid interest must be repaid.

On March 8, 2021, we entered into a third amendment to our 2018 credit facility, which modified provisions to permit cash settlement upon the conversion of the Convertible Notes, the Convertible Senior Note Hedge Transactions and Warrant Transactions and also to adjust certain settlement provisions for convertible indebtedness. See Note 7: Derivative Financial Instruments for further details of the Convertible Note Hedge Transactions and Warrant Transactions.

The 2018 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 2018 credit facility are
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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. 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 first-tier foreign subsidiaries. In addition, the obligations of any foreign subsidiary who is a foreign borrower, as defined by the 2018 credit facility, are guaranteed by the foreign subsidiary and by its direct and indirect foreign parents. The 2018 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 2018 credit facility at March 31, 2021.

Under the 2018 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 as defined in the credit agreement. The applicable rates per annum may be based on either: (1) the LIBOR rate or EURIBOR rate (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 0.50%, or (iii) one-month LIBOR plus 1.00%. At March 31, 2021, the interest rate for both the term loan and revolver was 1.86%, which includes the LIBOR rate plus a margin of 1.75%.

In March 2020, we drew $400 million in U.S. dollars under the revolving line of credit within the 2018 credit facility to increase our cash position and preserve future financial flexibility, which was fully repaid as of December 31, 2020. At March 31, 2021, there was 0 amount outstanding under the revolver, and $64.3 million was utilized by outstanding standby letters of credit, resulting in $435.7 million available for additional borrowings or standby letters of credit. At March 31, 2021, $235.7 million was available for additional standby letters of credit under the letter of credit sub-facility, and 0 amounts were outstanding under the swingline sub-facility.

Senior Notes
In December 2017 and January 2018, we issued $300 million and $100 million of aggregate principal amount of 5.00% senior notes maturing January 15, 2026 (Senior Notes). The proceeds were used to refinance existing indebtedness related to the acquisition of Silver Spring Networks, Inc., pay related fees and expenses, and for general corporate purposes. Interest on the Senior Notes was payable semi-annually in arrears on January 15 and July 15. The Senior Notes were fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of our subsidiaries that guarantee the senior credit facilities.

On March 9, 2021, we submitted a Notice of Redemption to the trustee to redeem all outstanding Senior Notes at a redemption price of 102.50%, in accordance with the indenture governing the Senior Notes, totaling $410 million. As of April 8, 2021 the Senior Notes have been fully discharged, and 0 principal or unpaid interest remains outstanding. The 2.5%, or $10 million, early redemption premium and write off of $11.1 million prepaid debt fees will be recognized in the second quarter of 2021.

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 approximately $448.5 million after deducting initial purchasers’ discounts of the offering (the Convertible Notes). 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 is equivalent to an initial conversion price of approximately $126.00 per share. The conversion rate of the Convertible 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 the indenture governing the Convertible Notes) or upon a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder that elects to convert its Convertible Notes in connection with such make-whole fundamental change or notice of redemption, as the case 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 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 conversion rate on each such trading day; (3) upon the occurrence of specified corporate events; or (4) upon redemption by us. On or after
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December 15, 2025, until the 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 any time. Upon conversion, we will pay cash up to the aggregate principal amount of Convertible Notes to be converted and pay and/or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted.

On or after March 20, 2024 and prior to December 15, 2025, we may redeem for cash all or part of the Convertible Notes, at our option, if the last reported sales price of common stock has been at 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 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 Convertible Notes. The Convertible Notes will be effectively subordinated to any of our existing and future secured debt to the extent of the assets 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.

Debt Maturities
The amount of required minimum principal payments on our debt in aggregate over the next five years is as follows:
Year Ending December 31,Minimum Payments
In thousands
2021 (amount remaining at March 31, 2021)$400,000 
2022
2023
202461,094 
2025
Thereafter460,000 
Total minimum payments on debt$921,094 

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 13: Shareholders' Equity and Note 14: 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 (and are classified as "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.
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The fair values of our derivative instruments were as follows:
Fair Value
Derivatives AssetsBalance Sheet LocationMarch 31, 2021December 31, 2020
Derivatives designated as hedging instruments under ASC 815-20In thousands
Foreign exchange optionsOther current assets$1,851 $
Cross currency swap contractOther current assets1,768 
Derivatives not designated as hedging instruments under ASC 815-20
Foreign exchange forward contractsOther current assets39 52 
Total asset derivatives$3,658 $52 
Derivatives Liabilities
Derivatives designated as hedging instruments under ASC 815-20
Interest rate swap contractsOther current liabilities$$1,025 
Interest rate swap contractsOther long-term obligations957 
Cross currency swap contractOther current liabilities526 
Derivatives not designated as hedging instruments under ASC 815-20
Foreign exchange forward contractsOther current liabilities84 128 
Total liability derivatives$84 $2,636 
The changes in accumulated other comprehensive income (loss) (AOCI), net of tax, for our derivative and nonderivative hedging instruments designated as hedging instruments, net of tax, were as follows:
In thousands20212020
Net unrealized loss on hedging instruments at January 1,$(16,001)$(15,103)
Unrealized gain (loss) on derivative instruments3,409 282 
Realized (gains) losses reclassified into net income (loss)(881)(1,049)
Net unrealized loss on hedging instruments at March 31,$(13,473)$(15,870)

Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations. Included in the net unrealized gain (loss) on hedging instruments at March 31, 2021 and 2020 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 earnings are impacted by a sale or liquidation of the associated foreign operation.

A summary of the 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 AssetsGross Amounts of Recognized Assets Presented in the Consolidated Balance SheetsGross Amounts Not Offset in the Consolidated Balance Sheets
In thousandsDerivative Financial InstrumentsCash Collateral ReceivedNet Amount
March 31, 2021$3,658 $(82)$$3,576 
December 31, 202052 (52)

Offsetting of Derivative LiabilitiesGross Amounts of Recognized Liabilities Presented in the Consolidated Balance SheetsGross Amounts Not Offset in the Consolidated Balance Sheets
In thousandsDerivative Financial InstrumentsCash Collateral PledgedNet Amount
March 31, 2021$84 $(82)$$
December 31, 20202,636 (52)2,584 

Our derivative assets and liabilities subject to netting arrangements consist of foreign exchange forward and interest rate contracts with 6 counterparties at March 31, 2021 and 6 counterparties at December 31, 2020. No derivative asset or liability
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balance with any of our counterparties was individually significant at March 31, 2021 or December 31, 2020. 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, and we have not received pledges of cash collateral from our counterparties under the associated derivative contracts.

Cash Flow Hedges
As a result of our floating rate debt under our Credit Facility, we are exposed to variability in our cash flows from changes in the applicable interest rate index. We enter into interest rate caps and swaps to reduce the variability of cash flows from increases in the LIBOR based borrowing rates on our floating rate credit facility. These instruments do not protect us from changes to the applicable margin under our credit facility. At March 31, 2021, our LIBOR-based debt balance was $61.1 million.

In October 2015, we entered into 1 interest rate swap, which was effective from August 31, 2016 and expired on June 23, 2020, to convert $214 million of our LIBOR-based debt from a floating LIBOR interest rate to a fixed interest rate of 1.42% (excluding the applicable margin on the debt). The notional balance amortized to maturity at the same rate as required minimum payments on the term loan. This cash flow hedge was expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk through the term of the hedge. Consequently, effective changes in the fair value of the interest rate swap were recognized as a component of other comprehensive income (loss) (OCI) and recognized in earnings when the hedged item affected earnings. The amounts paid or received on the hedge were recognized as adjustment to interest expense.

In March 2020, we entered into 1 interest rate swap, which was effective from June 30, 2020 to June 30, 2023, and converted $240 million of our LIBOR-based debt from a floating LIBOR interest rate to a fixed interest rate of 0.617% (excluding the applicable margin). The notional balance amortized to maturity at the same rate of originally required amortizations on our term loan. Changes in the fair value of the interest rate swap were recognized as a component of OCI and recognized in earnings when the hedged item affected earnings. The amounts paid or received on the hedge was recognized as an adjustment to interest expense along with the earnings effect of the hedged item. On March 17, 2021 following the paydown of the term loan within the 2018 credit facility, we terminated the interest rate swap, and paid a fee of $1.7 million to settle it, since the likelihood of LIBOR-based interest payments was no longer probable of occurring.

In April 2018, we entered into 1 cross-currency swap, which converts $56.0 million of floating LIBOR-based U.S. dollar denominated debt into 1.38% fixed rate euro denominated debt. This cross-currency swap matures on April 30, 2021 and mitigates the risk associated with fluctuations in currency rates impacting cash flows related to U.S. dollar denominated debt in a euro functional currency entity. Changes in the fair value of the cross-currency swap are recognized as a component of OCI and are recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedge are recognized as an adjustment to interest expense along with the earnings effect of the hedged item. The amount of net gains expected to be reclassified into earnings in the next 12 months is $1.8 million.

As a result of our forecasted inventory purchases in a non-functional currency, we are exposed to foreign exchange risk. We hedge portions of these purchases. During February 2021, we entered into foreign exchange option contracts for a total notional amount of $77 million at a cost of $1.1 million. The contracts will mature ratably through the year with final maturity in October 2021. Changes in the fair value of the option contracts are recognized as a component of OCI and will be recognized in product cost of revenues when the hedged item affects earnings.

The before-tax effects of our accounting for derivative instruments designated as hedges on AOCI 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
LocationAmount
In thousands2021202020212020
Three Months Ended March 31,
Interest rate swap contracts$73 $(1,579)Interest expense$(229)$104 
Interest rate swap contractsOther income/(expense), net(1,681)
Interest rate cap contracts393 Interest expense197 
Foreign exchange options947 (89)Product cost of revenues— 
Cross currency swap contract2,413 1,255 Interest expense70 305 
Cross currency swap contractOther income/(expense), net2,254 517 
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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. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recognized within other income (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 March 31, 2021, a total of 40 contracts were offsetting our exposures from the euro, Pound sterling, Canadian dollar, Chinese Yuan, Australian dollar and various other currencies, with notional amounts ranging from $93,300 to $26.4 million.

The effect of our derivative instruments not designated as hedges on the Consolidated Statements of Operations was as follows:
Derivatives Not Designated as Hedging Instrument under ASC 815-20LocationGain (Loss) Recognized on Derivatives in Other Income (Expense)
In thousands20212020
Three Months Ended March 31,
Foreign exchange forward contractsOther income (expense), net$31 $1,493 

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 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 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, and therefore the warrants are not revalued after issuance.

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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, Indonesia, India, and 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, 2020.

Amounts recognized on the Consolidated Balance Sheets consist of:
In thousandsMarch 31, 2021December 31, 2020
Liabilities
Current portion of pension benefit obligation in wages and benefits payable$2,989 $3,069 
Long-term portion of pension benefit obligation115,257 119,457 
Pension benefit obligation, net$118,246 $122,526 

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.

Net periodic pension benefit cost for our plans include the following components:
Three Months Ended March 31,
In thousands20212020
Service cost$1,149 $976 
Interest cost352 473 
Expected return on plan assets(89)(146)
Amortization of prior service costs17 16 
Amortization of actuarial net loss695 455 
Net periodic benefit cost$2,124 $1,774 

The components of net periodic benefit cost, other than the service cost component, are included in total other income (expense) on the Consolidated Statements of Operations.

Note 9:    Stock-Based Compensation

We grant stock-based compensation awards including stock options, restricted stock units, phantom stock, and unrestricted stock units, under the Second Amended and Restated 2010 Stock Incentive Plan (Stock Incentive Plan). In the Stock Incentive Plan, we have 12,623,538 shares of common stock reserved and authorized for issuance subject to stock splits, dividends, and other similar events, and at March 31, 2021, 5,334,496 shares were available for 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 available for grant is reduced by (i) 1 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 Employee Stock Purchase Plan (ESPP), for which 169,194 shares of common stock were available for future issuance at March 31, 2021.

ESPP activity and stock-based grants other than stock options and restricted stock units were not significant for the three months ended March 31, 2021 and 2020.

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Stock-Based Compensation Expense
Total stock-based compensation expense and the related tax benefit were as follows:
Three Months Ended March 31,
In thousands20212020
Stock options$340 $467 
Restricted stock units5,931 7,809 
Unrestricted stock awards227 206 
Phantom stock units1,117 433 
Total stock-based compensation$7,615 $8,915 
Related tax benefit$1,363 $1,767 

Stock Options
A summary of our stock option activity is as follows:
SharesWeighted
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, 2020458 $56.38 7.0$12,641 
Granted73 87.27 $26.72 
Exercised(40)54.03 934 
Forfeited0
Expired0
Outstanding, March 31, 2020491 $61.13 7.5$3,106 
Outstanding, January 1, 2021433 $61.95 6.9$14,697 
Granted00
Exercised(24)67.04 926 
Forfeited(4)80.90 
Outstanding, March 31, 2021405 $61.48 6.7$11,012 
Exercisable, March 31, 2021295 $55.03 5.9$9,930 

At March 31, 2021, total unrecognized stock-based compensation expense related to nonvested stock options was $2.1 million, which is expected to be recognized over a weighted average period of approximately 1.7 years.

The weighted average assumptions used to estimate the fair value of stock options granted and the resulting weighted average fair value are as follows:
Three Months Ended March 31,
20212020
Expected volatility%31.0 %
Risk-free interest rate%1.4 %
Expected term (years)N/A5.3

There were no employee stock options granted for the three months ended March 31, 2021.
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Restricted Stock Units
The following table summarizes restricted stock unit activity:
In thousands, except fair valueNumber of
Restricted Stock Units
Weighted
Average Grant
Date Fair Value
Aggregate
Intrinsic Value
Outstanding, January 1, 2020684 
Granted182 $87.17 
Released (1)
(192)$12,454 
Forfeited(7)
Outstanding, March 31, 2020667 
Outstanding, January 1, 2021544 $71.79 
Granted186 100.28 
Released (1)
(177)74.10 $18,007 
Forfeited(10)74.41 
Outstanding, March 31, 2021543 81.03 
Vested but not released, March 31, 202110 $845 
(1)     Shares released is presented as gross shares and does not reflect shares withheld by us for employee payroll tax obligations.

At March 31, 2021, total unrecognized compensation expense on restricted stock units was $43.4 million, which is expected to be recognized over a weighted average period of approximately 2.0 years.

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:
Three Months Ended March 31,
20212020
Expected volatility50.5 %37.6 %
Risk-free interest rate0.2 %1.5 %
Expected term (years)2.91.8
Weighted average fair value$113.75 $94.28 

Note 10: Income Taxes

We determine the interim tax benefit (provision) by applying an estimate of the annual effective tax rate to the year-to-date pretax book income (loss) and adjusting for discrete items during the reporting period, if any. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded.

Our tax rate for the three months ended March 31, 2021 of 26% differed from the federal statutory rate of 21% primarily due to losses in jurisdictions for which no benefit is recognized because of valuation allowances on deferred tax assets, the forecasted mix of earnings in domestic and international jurisdictions, a benefit related to stock-based compensation, and uncertain tax positions.

Our tax rate for the three months ended March 31, 2020 of 45% differed from the federal statutory rate of 21% primarily due to losses in jurisdictions for which no benefit is recognized because of valuation allowances on deferred tax assets as well as the forecasted mix of earnings in domestic and international jurisdictions, a benefit related to stock-based compensation, and uncertain tax positions.
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We classify interest expense and penalties related to unrecognized tax liabilities and interest income on tax overpayments as components of income tax expense. The net interest and penalties expense amounts recognized were as follows:
Three Months Ended March 31,
In thousands20212020
Net interest and penalties expense$(231)$308 

Accrued interest and penalties recognized were as follows:
In thousandsMarch 31, 2021December 31, 2020
Accrued interest$3,336 $3,432 
Accrued penalties1,384 1,645 

Unrecognized tax benefits related to uncertain tax positions and the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate were as follows:
In thousandsMarch 31, 2021December 31, 2020
Unrecognized tax benefits related to uncertain tax positions$133,964 $135,910 
The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate132,836 134,473 

At March 31, 2021, we are under examination by certain tax authorities. We believe we have appropriately accrued for the expected outcome of all tax matters and do not currently anticipate that the ultimate resolution of these examinations will have a material adverse effect on our financial condition, future results of operations, or 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 various jurisdictions. The material jurisdictions where we are subject to examination include, among others, the United States, France, Germany, Italy, Indonesia, and the United Kingdom.

On March 27, 2020, the U.S. Federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide economic relief from COVID-19. The CARES Act contains significant business tax provisions, which the Company has evaluated and determined will not have a material impact on the Company's financial statements or related disclosures.

The CARES Act also provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and options to defer payroll tax payments. The Company has elected to defer remittances of payroll and other taxes into the future as provided for under the Act, and may assess in subsequent quarters the impact and availability of payroll tax credits from the U.S. and similar programs provided for by foreign governments, as applicable.

Note 11:    Commitments and Contingencies

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 were as follows:
In thousandsMarch 31, 2021December 31, 2020
Credit facility
Multicurrency revolving line of credit$500,000 $500,000 
Long-term borrowings
Standby LOCs issued and outstanding(64,307)(64,948)
Net available for additional borrowings under the multicurrency revolving line of credit$435,693 $435,052 
Net available for additional standby LOCs under sub-facility$235,693 $235,052 
Unsecured multicurrency revolving lines of credit with various financial institutions
Multicurrency revolving lines of credit$95,687 $99,201 
Standby LOCs issued and outstanding(24,478)(24,966)
Short-term borrowings
Net available for additional borrowings and LOCs$71,209 $74,235 
Unsecured surety bonds in force$146,532 $162,912 

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 May 3, 2021, we do not believe that any outstanding LOC or bond 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'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-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 would 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:
Three Months Ended March 31,
In thousands20212020
Beginning balance$41,390 $53,241 
New product warranties786 1,070 
Other adjustments and expirations, net2,289 694 
Claims activity(4,369)(5,940)
Effect of change in exchange rates(762)(346)
Ending balance39,334 48,719 
Less: current portion of warranty22,024 36,409 
Long-term warranty$17,310 $12,310 

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Total warranty expense is classified within cost of revenues and consists of new product warranties issued, costs related to insurance and supplier recoveries, other changes and adjustments to warranties, and customer claims. Warranty expense was as follows:
Three Months Ended March 31,
In thousands20212020
Total warranty expense$3,075 $1,763 

Note 12:    Restructuring

2020 Projects
On September 17, 2020, our Board 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 are scheduled to be substantially complete by the end of 2022. The largest component of expected remaining costs to be recognized is related to a non-cash cumulative translation adjustment charge. Many of the affected employees are represented by unions or works councils, which require consultation, and potential restructuring projects may be subject to regulatory approval, both of which could impact the timing of charges, total expected charges, cost recognized, and planned savings in certain jurisdictions.

The total expected restructuring costs, the restructuring costs recognized, and the remaining expected restructuring costs related to the 2020 Projects were as follows:
In thousandsTotal Expected Costs at March 31, 2021Costs Recognized in Prior PeriodsCosts Recognized During the Three Months Ended
 March 31, 2021
Expected Remaining Costs to be Recognized at
March 31, 2021
Employee severance costs$32,907 $36,225 $(3,318)$
Asset impairments & net loss (gain) on sale or disposal6,861 6,944 (83)
Other restructuring costs17,076 63 771 16,242 
Total$56,844 $43,232 $(2,630)$16,242 

2018 Projects
In February 2018, our Board of Directors approved a restructuring plan (the 2018 Projects) to continue our efforts to optimize our global supply chain and manufacturing operations, research and development, and sales and marketing organizations. Actions under the 2018 Projects were substantially completed as of the end of 2020.

During the first quarter of 2021, we incurred additional legal costs related to a facility closure, partially offset by reduced severance costs.

The total expected restructuring costs, the restructuring costs recognized, and the remaining expected restructuring costs related to the 2018 Projects were as follows:
In thousandsTotal Expected Costs at March 31, 2021Costs Recognized in Prior PeriodsCosts Recognized During the Three Months Ended
 March 31, 2021
Expected Remaining Costs to be Recognized at
March 31, 2021
Employee severance costs$61,476 $63,173 $(1,697)$
Asset impairments & net loss (gain) on sale or disposal2,824 2,786 38 
Other restructuring costs19,826 15,217 2,309 2,300 
Total$84,126 $81,176 $650 $2,300 


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The following table summarizes the activity within the restructuring related balance sheet accounts for the 2020 Projects and 2018 Projects during the three months ended March 31, 2021:
In thousandsAccrued Employee SeveranceAsset Impairments & Net Loss (Gain) on Sale or DisposalOther Accrued CostsTotal
Beginning balance, January 1, 2021$70,005 $$2,621 $72,626 
Costs charged to expense(5,015)(45)3,080 (1,980)
Cash (payments) receipts(6,269)1,868 (1,498)(5,899)
Net assets disposed and impaired(1,823)(1,823)
Effect of change in exchange rates(2,250)(33)(2,283)
Ending balance, March 31, 2021$56,471 $$4,170 $60,641 

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.

Other restructuring costs include expenses for employee relocation, professional fees associated with employee severance, costs to exit the facilities once the operations in those facilities have ceased, and other costs associated with the liquidation of any effected 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 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 portion of restructuring liabilities were $30.2 million and $31.7 million as of March 31, 2021 and December 31, 2020. The current portion of restructuring liabilities is classified within other current liabilities on the Consolidated Balance Sheets. The long-term portion of restructuring liabilities balances were $30.4 million and $40.9 million as of March 31, 2021 and December 31, 2020. The long-term portion of restructuring liabilities is classified within other long-term obligations on the Consolidated Balance Sheets and includes severance accruals and facility exit costs.

Note 13:    Shareholders' Equity

Preferred Stock
We have authorized the issuance of 10 million shares of preferred stock with 0 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 will be entitled to be paid a preferential amount per share to be determined by the Board of Directors prior to any payment to holders of common stock. There was 0 preferred stock issued or outstanding at March 31, 2021 or December 31, 2020.

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, and therefore the Convertible Note Hedge 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
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impact of this tax election makes the call options deductible as original issue discount for tax purposes over the term of the 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 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 thousandsForeign Currency Translation AdjustmentsNet Unrealized Gain (Loss) on Derivative InstrumentsNet Unrealized Gain (Loss) on Nonderivative InstrumentsPension Benefit Obligation AdjustmentsAccumulated Other Comprehensive Income (Loss)
Balances at January 1, 2020$(157,999)$(723)$(14,380)$(31,570)$(204,672)
OCI before reclassifications(25,445)282 534 (24,629)
Amounts reclassified from AOCI(1,049)467 (582)
Total other comprehensive income (loss)(25,445)(767)1,001 (25,211)
Balances at March 31, 2020$(183,444)$(1,490)$(14,380)$(30,569)$(229,883)
Balances at January 1, 2021$(84,843)$(1,621)$(14,380)$(37,682)$(138,526)
OCI before reclassifications(15,012)3,409 (11,603)
Amounts reclassified from AOCI(881)701 (180)
Total other comprehensive income (loss)(15,012)2,528 701 (11,783)
Balances at March 31, 2021$(99,855)$907 $(14,380)$(36,981)$(150,309)
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The before-tax, income tax (provision) benefit, and net-of-tax amounts related to each component of OCI were as follows:
Three Months Ended March 31,
In thousands20212020
Before-tax amount
Foreign currency translation adjustment$(14,925)$(26,593)
Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges3,427 (10)
Net hedging (gain) loss reclassified to net income(414)(1,123)
Net unrealized gain (loss) on defined benefit plans538 
Net defined benefit plan (gain) loss reclassified to net income712 471 
Total other comprehensive income (loss), before tax$(11,200)$(26,717)
Tax (provision) benefit
Foreign currency translation adjustment$(87)$1,148 
Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges(18)292 
Net hedging (gain) loss reclassified to net income(467)74 
Net unrealized gain (loss) on defined benefit plans(4)
Net defined benefit plan (gain) loss reclassified to net income(11)(4)
Total other comprehensive income (loss) tax (provision) benefit$(583)$1,506 
Net-of-tax amount
Foreign currency translation adjustment$(15,012)$(25,445)
Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges3,409 282 
Net hedging (gain) loss reclassified to net income(881)(1,049)
Net unrealized gain (loss) on defined benefit plans534 
Net defined benefit plan (gain) loss reclassified to net income701 467 
Total other comprehensive income (loss), net of tax$(11,783)$(25,211)

Note 14:    Fair Value of Financial Instruments

The fair values at March 31, 2021 and December 31, 2020 do not reflect subsequent changes in the economy, interest rates, tax rates, and other variables that may affect the determination of fair value.

March 31, 2021December 31, 2020
In thousandsCarrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Credit facility
USD denominated term loan$59,296 $59,749 $532,625 $520,347 
Multicurrency revolving line of credit
Senior notes388,882 410,000 388,311 410,000 
Convertible notes448,353 465,042 

The following methods and assumptions were used in estimating fair values:

Cash and cash equivalents: Due to the liquid nature of these instruments, the carrying amount approximates fair value (Level 1).

Credit Facility - term loan and multicurrency revolving line of credit: The term loan and the revolver are not traded publicly. The fair values, which are determined based upon a hypothetical market participant, are calculated using a discounted cash flow
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model with Level 2 inputs, including estimates of incremental borrowing rates for debt with similar terms, maturities, and credit profiles. Refer to Note 6: Debt for a further discussion of our debt.

Senior Notes and Convertible Notes: The Senior Notes and Convertible Notes are not registered securities nor listed on any securities exchange but may be actively traded by qualified institutional buyers. The fair value is estimated using Level 1 inputs, as it is based on quoted prices for these instruments in active markets.

Derivatives: See Note 7: 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 15:    Segment Information

We operate under the Itron brand worldwide and manage and report under three operating segments: Device Solutions, Networked Solutions, and Outcomes.

We have 3 GAAP measures of segment performance: revenues, gross profit (gross margin), and operating income (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 neither allocated to the segments, nor are they included in the measure of segment performance. 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, such as gas regulators.

Networked Solutions – This segment primarily includes a combination of communicating devices (e.g., smart meters, modules, endpoints, and sensors), network infrastructure, and associated application software designed and sold as a complete solution for acquiring and transporting robust application-specific data. Networked Solutions includes products and software for the implementation, installation, and management of communicating devices and data networks. Examples from the Networked Solutions portfolio include: communicating measurement, control, or sensing endpoints such as our Itron® and OpenWay® Riva meters, Itron traditional ERT® technology, Intelis smart gas or water meters, 500G gas communication modules, 500W water communication modules; GenX networking products, network modules and interface cards; and specific network control and management software applications. The Industrial Internet of Things (IIoT) solutions supported by this segment include automated meter reading (AMR), advanced metering infrastructure (AMI), smart grid and distribution automation, smart street lighting and an ever-growing set of smart city applications such as traffic management, smart parking, air quality monitoring, electric vehicle charging, customer engagement, digital signage, acoustic (e.g., gunshot) detection, and leak detection and mitigation for both gas and water systems. Our IIoT platform allows all of these industry and smart city applications to be run and managed on a single, multi-purpose network.

Outcomes – This segment primarily includes our value-added, enhanced software and services in which we manage, organize, analyze, and interpret data to improve decision making, maximize operational profitability, drive resource efficiency, and deliver results for consumers, utilities, and smart cities. Outcomes places an emphasis on delivering to Itron customers high-value, turn-key, digital experiences by leveraging the footprint of our Device Solutions and Networked Solutions segments. The revenues from these offerings are primarily recurring in nature and would include any direct management of Device Solutions, Networked Solutions, and other products on behalf of our end customers. Examples from the Outcomes portfolio include: our meter data management and analytics offerings; our managed service solutions including Network-as-a-Service (NaaS) and Platform-as-a-Service (PaaS), forecasting software and services; our Distributed Intelligence suite of applications and services; and any consulting-based engagement. Within the Outcomes segment, we also identify new business models, including performance-based contracting, to drive broader portfolio offerings across utilities and cities.
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Revenues, gross profit, and operating income associated with our operating segments were as follows:
Three Months Ended March 31,
In thousands20212020
Product revenues
Device Solutions$170,331 $200,168 
Networked Solutions258,703 315,437 
Outcomes13,770 12,532 
Total Company$442,804 $528,137 
Service revenues
Device Solutions$2,450 $2,111 
Networked Solutions29,611 25,408 
Outcomes44,709 42,759 
Total Company$76,770 $70,278 
Total revenues
Device Solutions$172,781 $202,279 
Networked Solutions288,314 340,845 
Outcomes58,479 55,291 
Total Company$519,574 $598,415 
Gross profit
Device Solutions$32,296 $32,367 
Networked Solutions112,759 121,750 
Outcomes21,989 17,449 
Total Company$167,044 $171,566 
Operating income (loss)
Device Solutions$21,701 $18,198 
Networked Solutions79,291 88,680 
Outcomes10,336 8,198 
Corporate unallocated(80,388)(88,706)
Total Company30,940 26,370 
Total other income (expense)(12,699)(9,658)
Income (loss) before income taxes$18,241 $16,712 

For the three months ended March 31, 2021, no customer represented more than 10% of total company revenue. During the three months ended March 31, 2020, one customer represented 11% of total company revenues.

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Revenues by region were as follows:
Three Months Ended March 31,
In thousands20212020
United States and Canada$325,536 $385,325 
Europe, Middle East, and Africa160,369 166,984 
Asia Pacific and Latin America(1)
33,669 46,106 
Total Company$519,574 $598,415 
(1) On June 25, 2020, we sold our Latin American operations. We continue to sell into the region through an exclusive distributor.

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:
Three Months Ended March 31,
In thousands20212020
Device Solutions$6,188 $6,435 
Networked Solutions4,275 3,737 
Outcomes1,234 1,393 
Corporate unallocated10,113 12,466 
Total Company$21,810 $24,031 

Note 16: Revenues

A summary of significant net changes in the contract assets and the contract liabilities balances during the period is as follows:
In thousandsContract Liabilities, Less Contract Assets
Beginning balance, January 1, 2021$98,388 
Revenues recognized from beginning contract liability(58,754)
Cumulative catch-up adjustments8,668 
Increases due to amounts collected or due91,347 
Revenues recognized from current period increases(7,434)
Other(447)
Ending balance, March 31, 2021$131,768 

On January 1, 2021, total contract assets were $49.8 million and total contract liabilities were $148.2 million. On March 31, 2021, total contract assets were $35.3 million and total contract liabilities were $167.1 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.

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 estimate will be recognized as revenue over the next 12 months. Total transaction price allocated to remaining performance obligations is not a complete measure of our future revenues as we also receive orders where the customer may have legal termination rights but are not likely to terminate.

Total transaction price allocated to remaining performance obligations related to contracts is approximately $1.1 billion for the next twelve months and approximately $1.5 billion for periods longer than 12 months. The total remaining performance obligations consist of product 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 extended warranty contracts,
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for which revenue is recognized over the warranty period, and hardware, which is recognized as units are delivered. The estimate of when 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 15: Segment Information and the Consolidated Statements of Operations for disclosure regarding the disaggregation of revenue into categories, which depict how revenue and cash flows are affected by economic factors. Specifically, our operating segments and geographical regions as disclosed, and categories for products, which include hardware and software and services, are presented.

Note 17: Sale of Business

Latin America Divestiture
On June 25, 2020, we closed on the sale of 5 subsidiaries comprising our manufacturing and sales operations in Latin America to buyers led by Instalación Profesional y Tecnologías del Centro S.A. de C.V., a Mexican company doing business as Accell in Brazil (Accell), through the execution of various definitive stock purchase agreements. The sale of these Latin America-based operations is part of our continued strategy to improve profitability and focus on growing our Networked Solutions and Outcomes businesses in Latin America and throughout the world. We retained the intellectual property rights to our products sold in Latin America. As part of the transaction, we entered into an intellectual property license agreement whereby Accell pays a royalty on certain products manufactured by Accell using licensed Company intellectual property. In addition, Accell serves as the exclusive distributor for our Device Solutions, Networked Solutions, and Outcomes product and service offerings in Latin America.

The total sales price of $35 million included payment of $21.1 million for working capital, which was to be paid in full by December 31, 2020, as evidenced by a promissory note. In January 2021, we agreed to extend the payment terms on the outstanding working capital balance of $18.4 million. Accell agreed to make monthly payments including interest through September 2022. During the quarter ended March 31, 2021, we received $3.5 million of payments on the working capital note, including $0.7 million in interest.

We recognized additional loss on sale of business for the quarter ended March 31, 2021 of $1.4 million driven primarily by $1.2 million in adjustment to the working capital note, resulting from a change to the currency denominations of the note.

Item 2:    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes included in this report and with the consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission (SEC) in our Annual Report on Form 10-K on February 24, 2021 (2020 Annual Report).

The objective of Management’s Discussion and Analysis is to provide our assessment of the financial condition and results of operations including an evaluation of our liquidity and capital resources along with material events occurring during the year. The discussion and analysis focuses on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. In addition, we address matters that are reasonably likely based on management’s assessment to have a material impact on future operations. We expect that the analysis will enhance a reader’s understanding of our financial condition, cash flows, and other changes in financial condition and results of operations.

Documents we provide to the 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's website (http://www.sec.gov).

Certain Forward-Looking Statements

This report contains, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical factors nor assurances of future performance. These statements are based on our expectations about,
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among others, revenues, operations, financial performance, earnings, liquidity, earnings per share, cash flows and restructuring activities including headcount reductions and other cost savings initiatives. This document reflects our current strategy, plans and expectations and is based on information currently available as of the date of this Quarterly Report on Form 10-Q. When we use words such as "expect", "intend", "anticipate", "believe", "plan", "goal", "seek", "project", "estimate", "future", "strategy", "objective", "may", "likely", "should", "will", "will continue", and similar expressions, including related to future periods, they are intended to identify forward-looking statements. Forward-looking statements rely on a number of assumptions and estimates. Although we believe the estimates and assumptions upon which these forward-looking statements are based are reasonable, any of these estimates or assumptions could prove to be inaccurate and the forward-looking statements based on these estimates and assumptions could be incorrect. Our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements depending on a variety of factors. Therefore, you should not rely on any of these forward-looking statements. Some of the factors that we believe could affect our results include our ability to execute on our restructuring plan, our ability to achieve estimated cost savings, the rate and timing of customer demand for our products, rescheduling of current customer orders, changes in estimated liabilities for product warranties, adverse impacts of litigation, changes in laws and regulations, our dependence on new product development and intellectual property, future acquisitions, changes in estimates for stock-based and bonus compensation, increasing volatility in foreign exchange rates, international business risks, uncertainties caused by adverse economic conditions, including, without limitation those resulting from extraordinary events or circumstances such as the COVID-19 pandemic and other factors that are more fully described in Part I, Item 1A: Risk Factors included in our 2020 Annual Report and other reports on file with the SEC. We undertake no obligation to update or revise any forward-looking statement, whether written or oral.

The impact caused by the ongoing COVID-19 pandemic includes uncertainty as to the duration, spread, severity, and any resurgence of the COVID-19 pandemic including other factors contributing to infection rates, such as reinfection or mutation of the virus, the effectiveness or widespread availability and application of vaccines, the duration and scope of related government orders and restrictions, impact on overall demand, impact on our customers’ businesses and workforce levels, disruptions of our business and operations, including the impact on our employees, limitations on, or closures of, our facilities, or the business and operations of our customers or suppliers. Our estimates and statements regarding the impact of COVID-19 are made in good faith to provide insight to our current and future operating and financial environment and any of these may materially change due to factors outside our control. For more information on risks associated with the COVID-19 pandemic, please see our risk in Part I, Item 1A: Risk Factors in our 2020 Annual Report.

Overview

We are a technology and service company, and we are a leader in the Industrial Internet of Things (IIoT). We offer solutions that enable utilities and municipalities to safely, securely and reliably operate their critical infrastructure. Our solutions include the deployment of smart networks, software, services, devices, sensors, and data analytics that allow our customers to manage assets, secure revenue, lower operational costs, improve customer service, improve safety, and enable efficient management of valuable resources. Our comprehensive solutions and data analytics address the unique challenges facing the energy, water, and municipality sectors, including increasing demand on resources, non-technical loss, leak detection, environmental and regulatory compliance, and improved operational reliability.

We operate under the Itron brand worldwide and manage and report under three operating segments: Device Solutions, Networked Solutions, and Outcomes. The product and operating definitions of the three segments are as follows:

Device Solutions – This segment primarily includes hardware products used for measurement, control, or sensing that do not have communications capability embedded for use with our broader Itron systems, i.e., hardware-based products not part of a complete "end-to-end" solution. Examples from the Device Solutions portfolio include: standard endpoints that are shipped without Itron communications, such as our standard gas, electricity, and water meters for a variety of global markets and adhering to regulations and standards within those markets, as well as our heat and allocation products; communicating meters that are not a part of an Itron end-to-end solution such as Smart Spec meters; and the implementation and installation of non-communicating devices, such as gas regulators.

Networked Solutions – This segment primarily includes a combination of communicating devices (e.g., smart meters, modules, endpoints, and sensors), network infrastructure, and associated application software designed and sold as a complete solution for acquiring and transporting robust application-specific data. Networked Solutions includes products and software for the implementation, installation, and management of communicating devices and data networks. Examples from the Networked Solutions portfolio include: communicating measurement, control, or sensing endpoints such as our Itron® and OpenWay® Riva meters, Itron traditional ERT® technology, Intelis smart gas or water meters, 500G gas communication modules, 500W water communication modules; GenX networking products, network modules and interface cards; and specific network control
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and management software applications. The Industrial Internet of Things (IIoT) solutions supported by this segment include automated meter reading (AMR), advanced metering infrastructure (AMI), smart grid and distribution automation, smart street lighting and an ever-growing set of smart city applications such as traffic management, smart parking, air quality monitoring, electric vehicle charging, customer engagement, digital signage, acoustic (e.g., gunshot) detection, and leak detection and mitigation for both gas and water systems. Our IIoT platform allows all of these industry and smart city applications to be run and managed on a single, multi-purpose network.

Outcomes – This segment primarily includes our value-added, enhanced software and services in which we manage, organize, analyze, and interpret data to improve decision making, maximize operational profitability, drive resource efficiency, and deliver results for consumers, utilities, and smart cities. Outcomes places an emphasis on delivering to Itron customers high-value, turn-key, digital experiences by leveraging the footprint of our Device Solutions and Networked Solutions segments. The revenues from these offerings are primarily recurring in nature and would include any direct management of Device Solutions, Networked Solutions, and other products on behalf of our end customers. Examples from the Outcomes portfolio include: our meter data management and analytics offerings; our managed service solutions including Network-as-a-Service (NaaS) and Platform-as-a-Service (PaaS), forecasting software and services; our Distributed Intelligence suite of applications and services; and any consulting-based engagement. Within the Outcomes segment, we also identify new business models, including performance-based contracting, to drive broader portfolio offerings across utilities and cities.

We have three measures of segment performance: revenues, gross profit (margin), and operating income (margin). Intersegment revenues are minimal. Certain operating expenses are allocated to the operating segments based upon internally established allocation methodologies. Interest income, interest expense, other income (expense), the income tax provision (benefit), and certain corporate operating expenses are neither allocated to the segments nor included in the measures of segment performance.

Non-GAAP Measures
To supplement our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States (GAAP), we use certain adjusted or non-GAAP financial measures, including non-GAAP operating expense, non-GAAP operating income, non-GAAP net income, non-GAAP diluted earnings per share (EPS), adjusted EBITDA, adjusted EBITDA margin, constant currency, and free cash flow. We provide these non-GAAP financial measures because we believe they provide greater transparency and represent supplemental information used by management in its financial and operational decision making. We exclude certain costs in our non-GAAP financial measures as we believe the net result is a measure of our core business. We believe these measures facilitate operating performance comparisons from period to period by eliminating potential differences caused by the existence and timing of certain expense items that would not otherwise be apparent on a GAAP basis. Non-GAAP performance measures should be considered in addition to, and not as a substitute for, results prepared in accordance with GAAP. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Our non-GAAP financial measures may be different from those reported by other companies.

In our discussions of the operating results below, we sometimes refer to the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert operating results from local currencies into U.S. dollars for reporting purposes. We also use the term "constant currency", which represents results adjusted to exclude foreign currency exchange rate impacts. We calculate the constant currency change as the difference between the current period results translated using the current period currency exchange rates and the comparable prior period's results restated using current period currency exchange rates. We believe the reconciliations of changes in constant currency provide useful supplementary information to investors in light of fluctuations in foreign currency exchange rates.

Refer to the Non-GAAP Measures section below on pages 42-44 for information about these non-GAAP measures and the detailed reconciliation of items that impacted free cash flow, non-GAAP operating expense, non-GAAP operating income, non-GAAP net income, adjusted EBITDA, and non-GAAP diluted EPS in the presented periods.

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Total Company Highlights

Highlights and significant developments for the three months ended March 31, 2021 compared with the three months ended March 31, 2020
Revenues were $519.6 million compared with $598.4 million in 2020, a decrease of $78.8 million, or 13%
Gross margin was 32.2% compared with 28.7% in 2020
Operating expenses decreased $9.1 million, or 6%, compared with 2020
Net income attributable to Itron, Inc. was $12.6 million, compared with $8.7 million in 2020
GAAP diluted EPS increased by $0.09 to $0.30 as compared with 2020
Non-GAAP net income attributable to Itron, Inc. was $21.9 million compared with $23.0 million in 2020
Non-GAAP diluted EPS was $0.52, a decrease of $0.05 compared with 2020
Adjusted EBITDA was $49.7 million compared with $52.0 million in 2020
Total backlog was $3.4 billion, and twelve-month backlog was $1.3 billion at March 31, 2021, compared with $3.0 billion and $1.3 billion at March 31, 2020

Financing Activity
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, as well as the sale of the Convertible Notes in a private placement to qualified institutional buyers, resulting in net proceeds to us of approximately $448.5 million after deducting initial purchasers’ discounts of the offering. Concurrently with the issuance of the Convertible Notes, we entered into the Convertible Note Hedge Transactions and Warrant Transactions. For further description of these transactions, refer to Item 1: Financial Statements (Unaudited), Note 6: Debt and Item 1: Financial Statements (Unaudited), Note 7: Derivative Financial Instruments included in this Quarterly Report on Form 10-Q.

Credit Facility Amendment
On March 8, 2021, we entered into a third amendment to our 2018 credit facility, which modified provisions to permit cash settlement upon the conversion of the Convertible Notes, the Convertible Senior Note Hedge Transactions and Warrant Transactions and also to adjust certain settlement provisions for convertible indebtedness. See Item 1: Financial Statements (Unaudited), Note 7: Derivative Financial Instruments, included in this Quarterly Report on Form 10-Q, for further details of the Convertible Note Hedge Transactions and Warrant Transactions.

Outlook for 2021 due to COVID-19
The COVID-19 pandemic has had global economic impacts including disrupting global supply chains and creating market volatility. The extent of the recent pandemic and its ongoing impact on our operations is volatile, but is being monitored closely by our management. During portions of the first half of 2020 certain of our European factories were closed due to government actions and local conditions, and any further closures that may be imposed on us could impact our results for 2021. Incremental costs we have incurred related to COVID-19, such as personal protective equipment, increased cleaning and sanitizing of our facilities, and other such items, have not been material to date. At this time, we have not identified any significant decrease in long-term customer demand for our products and services. Certain of our customers' projects and deployments have continued to shift later into 2021 and beyond. For more information on risks associated with the COVID-19 pandemic, please see our risk in Part I, Item 1A, Risk Factors in our 2020 Annual Report.

The COVID-19 pandemic remains a rapidly evolving situation with varying impacts on the locations in which we do business. Changes in the mix of earnings or losses from our different geographical operations, as well as any future enactment of tax legislation and other factors, may result in more volatile quarterly and annual effective tax rates. The detrimental impacts to financial results may be partially offset by financial assistance from the U.S. or the municipalities in which we operate, including employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 pandemic. Other benefits, including options to defer payroll tax payments and additional deductions, have resulted in reduced cash costs in 2020, but will increase cash outlays during the fourth quarter of 2021 and into 2022.

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Total Company GAAP and Non-GAAP Highlights and Unit Shipments:
Three Months Ended March 31,
In thousands, except margin and per share data20212020% Change
GAAP
Revenues
Product revenues$442,804 $528,137 (16)%
Service revenues76,770 70,278 9%
Total revenues519,574 598,415 (13)%
Gross profit$167,044 $171,566 (3)%
Operating expenses136,104 145,196 (6)%
Operating income30,940 26,370 17%
Other income (expense)(12,699)(9,658)31%
Income tax provision(4,661)(7,550)(38)%
Net income attributable to Itron, Inc.12,603 8,684 45%
Non-GAAP(1)
Non-GAAP operating expenses$128,096 $133,047 (4)%
Non-GAAP operating income38,948 38,519 1%
Non-GAAP net income attributable to Itron, Inc.21,947 22,969 (4)%
Adjusted EBITDA49,723 51,973 (4)%
GAAP Margins and Earnings Per Share
Gross margin
Product gross margin30.5 %27.2 %
Service gross margin41.6 %40.0 %
Total gross margin32.2 %28.7 %
Operating margin6.0 %4.4 %
Net income per common share - Basic$0.30 $0.22 
Net income per common share - Diluted$0.30 $0.21 
Non-GAAP Earnings Per Share(1)
Non-GAAP diluted EPS$0.52 $0.57 
(1)These measures exclude certain expenses that we do not believe are indicative of our core operating results. See pages 42-44 for information about these non-GAAP measures and reconciliations to the most comparable GAAP measures.

Definition of an Endpoint Under Management
An "endpoint under management" is a unique endpoint, or data from that endpoint, which Itron manages via our networked platform or a third party's platform that is connected to one or multiple types of endpoints. Itron’s management of an endpoint occurs when on behalf of our client, we manage one or more of the physical endpoints, operating system, data, application, data analytics, and/or outcome deriving from this unique endpoint. Itron has the ability to monitor and/or manage endpoints or the data from the endpoints via NaaS, Software-as-a-Service, and/or a licensed offering at a remote location designated by our client. Our offerings typically, but not exclusively, provide an Itron product or Itron certified partner product to our clients that has the capability of one-way communication or two-way communication of data that may include remote product configuration and upgradability. Examples of these offerings include our Temetra, OpenWay®, OpenWay® Riva and Gen X.

This metric primarily includes Itron or third-party endpoints deployed within the electricity, water, and gas utility industries, as well as within cities and municipalities around the globe. Endpoints under management also include smart communication modules and network interface cards (NICs) within Itron’s platforms. At times, these NICs are communicating modules that were sold separately from an Itron product directly to our customers or to third party manufacturers for use in endpoints such as
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electric, water, and gas meters; streetlights and other types of IIoT sensors and actuators; sensors and other capabilities that the end customer would like Itron to connect and manage on their behalf.

The "endpoint under management" metric only accounts for the specific, unique endpoint itself, though that endpoint may have multiple applications, services, outcomes, and higher margin recurring offerings associated with it. This metric does not reflect the multi-application value that can be derived from the individual endpoint itself. Additionally, this metric excludes those endpoints that are non-communicating, non-Itron system hardware component sales or licensed applications that Itron does not manage the unit or the data from that unit directly.

While the one-time sale of the platform and endpoints are primarily delivered via our Networked Solutions segment, our enhanced solutions, on-going monitoring, maintenance, software, analytics, and distributed intelligent applications are predominantly recognized in our Outcomes segment. We would anticipate the opportunity to increase our penetration of Outcomes applications, software, and managed applications will increase as our Endpoints Under Management increases. Management believes using the Endpoints Under Management metric enhances insight to the strategic and operational direction of our Networked Solutions and Outcomes segments to serve clients for years after their one-time installation of an endpoint.

A summary of our endpoints under management is as follows:
As of March 31,
Units in thousands20212020
Endpoints Under Management71,388 63,741 

Results of Operations

Revenues and Gross Margin

The actual results of and effects of changes in foreign currency exchange rates on revenues and gross profit were as follows:
Effect of Changes in Foreign Currency Exchange RatesConstant Currency ChangeTotal Change
Three Months Ended March 31,
In thousands20212020
Total Company
Revenues$519,574 $598,415 $17,692 $(96,533)$(78,841)
Gross profit167,044 171,566 3,012 (7,534)(4,522)

Revenues - Three months ended March 31, 2021 vs. Three Months Ended March 31, 2020
Total revenues decreased $78.8 million, or 13%, for the first three months of 2021, compared with the same period in 2020. We have been unfavorably impacted by timing of customer projects and shipments that continue to be impacted by COVD-19, which drove the lower year-over-year results. Product revenues decreased by $85.3 million, and service revenues increased by $6.5 million. Device Solutions decreased by $29.5 million; Networked Solutions decreased by $52.5 million; and Outcomes increased by $3.2 million when compared with the same period last year. Changes in exchange rates favorably impacted total revenues by $17.7 million, of which $13.4 million favorably impacted Device Solutions.

Gross Margin - Three months ended March 31, 2021 vs. Three Months Ended March 31, 2020
Gross margin for the current year was 32.2%, compared with 28.7% in 2020. We were impacted by favorable product and solution mix and operating efficiencies in 2021 compared with the first quarter of 2020, which was more negatively impacted by COVID-19. Product sales gross margin increased to 30.5% in the 2021 period, compared with 27.2% in 2020, and gross margin on service revenues increased to 41.6%, compared with 40.0% in 2020.

Refer to Operating Segment Results section below for further detail on total company revenues and gross margin.

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Operating Expenses

The actual results of and effects of changes in foreign currency exchange rates on operating expenses were as follows:
Effect of Changes in Foreign Currency Exchange RatesConstant Currency ChangeTotal Change
Three Months Ended March 31,
In thousands20212020
Total Company
Sales, general and administrative$75,992 $80,498 $2,827 $(7,333)$(4,506)
Research and development51,727 53,781 949 (3,003)(2,054)
Amortization of intangible assets8,973 11,165 150 (2,342)(2,192)
Restructuring(1,980)(248)(27)(1,705)(1,732)
Loss on sale of business1,392 — — 1,392 1,392 
Total Operating expenses$136,104 $145,196 $3,899 $(12,991)$(9,092)

Operating expenses decreased $9.1 million for the three months ended March 31, 2021 as compared with the same period in 2020. This was primarily the result of decreases of $4.3 million in travel expense, $1.4 million in facility costs, $2.2 million in amortization of intangible assets, $1.7 million in restructuring, and $1.6 million in acquisition and integration expenses classified within sales, general and administrative. The overall decrease was partially offset by a $3.0 million increase in information technology expenses.

Other Income (Expense)

The following table shows the components of other income (expense):
Three Months Ended March 31,% Change
In thousands20212020
Interest income$542 $553 (2)%
Interest expense(7,780)(10,270)(24)%
Amortization of prepaid debt fees(2,695)(1,007)168%
Other income (expense), net(2,766)1,066 (359)%
Total other income (expense)$(12,699)$(9,658)31%

Total other income (expense) for the three months ended March 31, 2021 was a net expense of $12.7 million, compared with net expense of $9.7 million in the same period in 2020.

The higher total expense for the three months ended March 31, 2021, as compared with the same period in 2020, was primarily driven by $1.7 million in higher debt fee amortization, $1.7 million related to the extinguishment of debt in other income (expense), and $1.0 million due to higher foreign currency exchange losses resulting from transactions denominated in currency other than the reporting entity's functional currency. The increase was partially offset by a decrease of $2.4 million in interest expense for the term loan.

Income Tax Provision

For the three months ended March 31, 2021, our income tax expense was $4.7 million compared with income tax expense of $7.6 million for the same period in 2020. Our tax rate for the three months ended March 31, 2021 of 26%, differed from the federal statutory rate of 21% primarily due to losses in jurisdictions for which no benefit is recognized because of valuation allowances on deferred tax assets, the forecasted mix of earnings in domestic and international jurisdictions, a benefit related to stock-based compensation, and uncertain tax positions. Our tax rate for the three months ended March 31, 2020 of 45% differed from the federal statutory rate of 21% primarily due to losses in jurisdictions for which no benefit is recognized because of valuation allowances on deferred tax assets as well as the forecasted mix of earnings in domestic and international jurisdictions, a benefit related to stock-based compensation, and uncertain tax positions.

For additional discussion related to income taxes, see Item 1: Financial Statements (Unaudited), Note 10: Income Taxes included in this Quarterly Report on Form 10-Q.

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Operating Segment Results

For a description of our operating segments, refer to Item 1: Financial Statements (Unaudited), Note 15: Segment Information included in this Quarterly Report on Form 10-Q. The following tables and discussion highlight significant changes in trends or components of each operating segment:
Three Months Ended
March 31,
In thousands20212020% Change
Segment revenues
Device Solutions$172,781 $202,279 (15)%
Networked Solutions288,314 340,845 (15)%
Outcomes58,479 55,291 6%
Total revenues$519,574 $598,415 (13)%
Three Months Ended March 31,
20212020
In thousandsGross
Profit
Gross
Margin
Gross
Profit
Gross
Margin
Segment gross profit and margin
Device Solutions$32,296 18.7%$32,367 16.0%
Networked Solutions112,759 39.1%121,750 35.7%
Outcomes21,989 37.6%17,449 31.6%
Total gross profit and margin$167,044 32.2%$171,566 28.7%
Three Months Ended
March 31,
In thousands20212020% Change
Segment operating expenses
Device Solutions$10,595 $14,169 (25)%
Networked Solutions33,468 33,070 1%
Outcomes11,653 9,251 26%
Corporate unallocated80,388 88,706 (9)%
Total operating expenses$136,104 $145,196 (6)%
Three Months Ended March 31,
20212020
In thousandsOperating
Income (Loss)
Operating
Margin
Operating
Income (Loss)
Operating
Margin
Segment operating income (loss) and operating margin
Device Solutions$21,701 12.6%$18,198 9.0%
Networked Solutions79,291 27.5%88,680 26.0%
Outcomes10,336 17.7%8,198 14.8%
Corporate unallocated(80,388)NM(88,706)NM
Total operating income (loss) and operating margin$30,940 6.0%$26,370 4.4%

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Device Solutions

The effects of changes in foreign currency exchange rates and the constant currency changes in certain Device Solutions segment financial results were as follows:
Effect of Changes in Foreign Currency Exchange RatesConstant Currency ChangeTotal Change
Three Months Ended March 31,
In thousands20212020
Device Solutions Segment
Revenues$172,781 $202,279 $13,425 $(42,923)$(29,498)
Gross profit32,296 32,367 1,616 (1,687)(71)
Operating expenses10,595 14,169 358 (3,932)(3,574)

Revenues - Three months ended March 31, 2021 vs. Three months ended March 31, 2020
Revenues decreased $29.5 million, or 15%, for the first three months of 2021 compared with the same period in 2020. Changes in foreign currency exchange rates favorably impacted revenues by $13.4 million. Revenue decreased due to lower shipments to Europe, Middle East and Africa, COVID related delays and a decrease of $9.0 million in the Latin America region primarily due to the sale of the business in June 2020.

Gross Margin - Three months ended March 31, 2021 vs. Three months ended March 31, 2020
For the three months ended March 31, 2021, gross margin was 18.7%, compared with 16.0% for the same period in 2020. The 270 basis point increase over the prior year was primarily due to favorable product mix and reduced operating inefficiencies related to COVID-19 compared with the first quarter of 2020.

Operating Expenses - Three months ended March 31, 2021 vs. Three months ended March 31, 2020
Operating expenses decreased $3.6 million, or 25%, for the first three months of 2021 compared with the same period in 2020. The decrease was primarily a result of lower research and development costs.

Networked Solutions

The effects of changes in foreign currency exchange rates and the constant currency changes in certain Networked Solutions segment financial results were as follows:
Effect of Changes in Foreign Currency Exchange RatesConstant Currency ChangeTotal Change
Three Months Ended March 31,
In thousands20212020
Networked Solutions Segment
Revenues$288,314 $340,845 $2,963 $(55,494)$(52,531)
Gross profit112,759 121,750 946 (9,937)(8,991)
Operating expenses33,468 33,070 84 314 398 

Revenues - Three months ended March 31, 2021 vs. Three months ended March 31, 2020
Revenues decreased $52.5 million, or 15%, for the first three months of 2021 compared with the same period in 2020. The change was primarily due to the timing of project completion and the impact of COVID-19 on new deployments, Lower product revenue of $56.7 million was partially offset by higher maintenance service revenue of $4.2 million.

Gross Margin - Three months ended March 31, 2021 vs. Three months ended March 31, 2020
Gross margin was 39.1% for the 2021 period, compared with 35.7% in 2020. The 340 basis point increase was primarily related to favorable product mix and reduced operating inefficiencies related to COVID-19 compared with the first quarter of 2020.

Operating Expenses - Three months ended March 31, 2021 vs. Three months ended March 31, 2020
Operating expenses increased $0.4 million, or 1%, for the first three months of 2021, compared with the same period in 2020. The increase was primarily driven by increased investment in research and development.

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Outcomes

The effects of changes in foreign currency exchange rates and the constant currency changes in certain Outcomes segment financial results were as follows:
Effect of Changes in Foreign Currency Exchange RatesConstant Currency ChangeTotal Change
Three Months Ended March 31,
In thousands20212020
Outcomes Segment
Revenues$58,479 $55,291 $1,303 $1,885 $3,188 
Gross profit21,989 17,449 451 4,089 4,540 
Operating expenses11,653 9,251 28 2,374 2,402 

Revenues - Three months ended March 31, 2021 vs. Three months ended March 31, 2020
Revenues increased $3.2 million, or 6%, for the first three months of 2021 compared with the same period in 2020. This increase was driven by an increase in software license sales, professional services, and maintenance.

Gross Margin - Three months ended March 31, 2021 vs. Three months ended March 31, 2020
Gross margin increased to 37.6% for the period ending in 2021, compared with 31.6% for last year. The 600 basis point increase was driven by favorable mix, driven by higher one-time software license sales.

Operating Expenses - Three months ended March 31, 2021 vs. Three months ended March 31, 2020
Operating expenses for the first three months of 2021 increased $2.4 million, or 26%, compared with the same period last year. This increase was primarily related to increased research and development investment of $1.7 million and higher product marketing expenses of $0.7 million.

Corporate Unallocated

Corporate Unallocated Expenses - Three months ended March 31, 2021 vs. Three months ended March 31, 2020
Operating expenses not directly associated with an operating segment are classified as Corporate unallocated. For the first three months of 2021, Corporate unallocated expenses decreased $8.3 million, or 9%, as compared with the same period in 2020. This was primarily the result of decreases of $3.5 million in travel expense, $2.2 million in amortization of intangible assets, $1.7 million in restructuring, and $1.6 million in acquisition and integration expenses classified within sales, general and administrative. The overall decrease was partially offset by a $3.0 million increase in information technology expenses.

Bookings and Backlog of Orders

Bookings for a reported period represent customer contracts and purchase orders received during the period for hardware, software, and services that have met certain conditions, such as regulatory and/or contractual approval. Total backlog represents committed but undelivered products and services for contracts and purchase orders at period-end. Twelve-month backlog represents the portion of total backlog that we estimate will be recognized as revenue over the next 12 months. Backlog is not a complete measure of our future revenues as we also receive significant book-and-ship orders, as well as frame contracts. Bookings and backlog may fluctuate significantly due to the timing of large project awards. In addition, annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. Beginning total backlog, plus bookings, minus revenues, will not equal ending total backlog due to miscellaneous contract adjustments, foreign currency fluctuations, and other factors. Total bookings and backlog include certain contracts with termination for convenience clause, which will not agree to the total transaction price allocated to the remaining performance obligations disclosed in Item 1: Financial Statements (Unaudited), Note 16: Revenues included in this Quarterly Report on Form 10-Q.
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Quarter EndedQuarterly
Bookings
Ending
Total
Backlog
Ending
12-Month
Backlog
In millions
March 31, 2021$688 $3,421 $1,293 
December 31, 2020973 3,259 1,204 
September 30, 2020432 2,795 1,107 
June 30, 2020390 2,895 1,291 
March 31, 2020418 3,020 1,319 

Financial Condition

Cash Flow Information
Three Months Ended March 31,
In thousands20212020
Cash provided by operating activities$49,955 $18,894 
Cash used in investing activities(5,806)(9,257)
Cash provided by financing activities324,581 401,737 
Effect of exchange rates on cash and cash equivalents(1,071)(6,758)
Increase in cash and cash equivalents$367,659 $404,616 

Cash and cash equivalents was $574.6 million at March 31, 2021, compared with $206.9 million at December 31, 2020. The $367.7 million increase in cash and cash equivalents in the 2021 period was primarily the result of proceeds from convertible senior note and equity offering in March 2021, along with cash flows from operating activities, partially offset by purchases of equity classified derivative contracts, repayment of term loan, and acquisitions of property, plant, and equipment.

Operating activities
Cash provided by operating activities during the three months in 2021 was $50.0 million compared with $18.9 million during the same period in 2020. The increase was primarily due to lower variable compensation payouts.

Investing activities
Cash used in investing activities during the three months in 2021 was $3.5 million lower than in 2020. This decrease in use of cash was primarily related to the net cash inflow related to the working capital note from the sale of our Latin America operation, and a decrease of $1.2 million in investment of property, plant, and equipment.

Financing activities
Net cash provided by financing activities during the three months in 2021 was $324.6 million, compared with net cash provided of $401.7 million for the same period in 2020. In March 2021, we entered into a convertible senior note with proceeds used to pay off a portion of the term loan, which resulted in net repayment of $15.0 million of debt. We also received $389.4 million from issuance of common stock related to our equity offering, after deducting underwriters’ discounts of the offering, and purchased $38.8 million of equity classified derivative contacts. Cash payments for prepaid debt fees was $11.7 million.

Effect of exchange rates on cash and cash equivalents
The effect of exchange rates on the cash balances of currencies held in foreign denominations at March 31, 2021 was a decrease of $1.1 million, compared with a decrease of $6.8 million for the same period in 2020. Our foreign currency exposure relates to non-U.S. dollar denominated balances in our international subsidiary operations.

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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:
Three Months Ended March 31,
In thousands20212020
Cash provided by operating activities$49,955 $18,894 
Acquisitions of property, plant, and equipment(11,412)(12,602)
Free cash flow$38,543 $6,292 

Free cash flow fluctuated primarily as a result of changes in cash provided by operating activities. See the cash flow discussion of operating activities above.

Off-balance sheet arrangements

We have no off-balance sheet financing agreements or guarantees as defined by Item 303 of Regulation S-K at March 31, 2021 and December 31, 2020 that we believe could reasonably likely have a current or future effect on our financial condition, results of operations, or cash flows.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flows from operations, borrowings, and the sale of our common stock. Cash flows may fluctuate and are sensitive to many factors including changes in working capital and the timing and magnitude of capital expenditures and payments of debt. Working capital, which represents current assets less current liabilities, continues to be in a net favorable position.

Financing Activity
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, as well as the sale of the Convertible Notes in a private placement to qualified institutional buyers, resulting in net proceeds to us of approximately $448.5 million after deducting initial purchasers’ discounts of the offering. Concurrently with the issuance of the Convertible Notes, we entered into the Convertible Note Hedge Transactions and Warrant Transactions. For further description of these transactions, refer to Item 1: Financial Statements (Unaudited), Note 6: Debt and Item 1: Financial Statements (Unaudited), Note 7: Derivative Financial Instruments included in this Quarterly Report on Form 10-Q.

Borrowings
On October 18, 2019 we amended our credit facility that was initially entered on January 5, 2018 (together with the amendment, the "2018 credit facility"). The 2018 credit facility provides for committed credit facilities in the amount of $1.2 billion U.S. dollars. The 2018 credit facility consists of a $650 million U.S. dollar term loan (the term loan) and a multicurrency revolving line of credit (the revolver) with a principal amount of up to $500 million. The revolver also contains a $300 million standby letter of credit sub-facility and a $50 million swingline sub-facility. The October 18, 2019, amendment extended the maturity date to October 18, 2024 and re-amortized the term loan based on the new balance as of the amendment date.

On October 19, 2020, we completed a second amendment to our 2018 credit facility. This amendment adjusts the maximum total net leverage ratio thresholds for the period beginning with the fourth quarter of 2020 through the fourth quarter of 2021 to allow for increased operational flexibility. The maximum leverage ratio is increased to 4.75:1 for the fourth quarter of 2020 and the first quarter of 2021 and 4.50:1 for the second quarter through the fourth quarter of 2021. An additional level of pricing was added to the existing pricing grid and is effective throughout the remaining term of the 2018 credit facility. Beginning with the fourth quarter of 2020, the commitment fee ranges from 0.15% to 0.30% and drawn amounts are subject to a margin ranging from 1.00% to 2.00%. Debt fees of approximately $1.4 million were incurred for the amendment, as well as other legal and advisory fees. Both the term loan and the revolver can be repaid without penalty. Amounts repaid on the term loan may not be reborrowed, and amounts borrowed under the revolver may be repaid and reborrowed until the revolver's maturity, at which time all outstanding loans together with all accrued and unpaid interest must be repaid.

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On March 8, 2021, we entered into a third amendment to our 2018 credit facility, which modified provisions to permit cash settlement upon the conversion of the Convertible Notes, the Convertible Senior Note Hedge Transactions and Warrant Transactions and also to adjust certain settlement provisions for convertible indebtedness. See Item 1: Financial Statements (Unaudited), Note 7: Derivative Financial Instruments for further details of the Convertible Note Hedge Transactions and Warrant Transactions.

On March 9, 2021, we submitted a Notice of Redemption to the trustee to redeem all outstanding Senior Notes at a redemption price of 102.50%, in accordance with the indenture governing the Senior Notes, totaling $410 million. As of April 8, 2021 the Senior Notes have been fully discharged, and no principal or unpaid interest remains outstanding. The 2.5%, or $10 million, early redemption premium and write off of $11.1 million prepaid debt fees will be recognized in the second quarter of 2021.

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 approximately $448.5 million after deducting initial purchasers’ discounts of the offering. The proceeds were used to enter into the Convertible Hedge Transactions (which was partially offset by the proceeds from the Warrant Transactions) and, together with cash on hand, to redeem the outstanding Senior Notes as described above.

For further description of our borrowings, refer to Item 1: Financial Statements (Unaudited), Note 6: Debt included in this Quarterly Report on Form 10-Q.

For a description of our letters of credit and performance bonds, and the amounts available for additional borrowings or letters of credit under our lines of credit, including the revolver that is part of our credit facility, refer to Item 1: Financial Statements (Unaudited), Note 11: Commitments and Contingencies included in this Quarterly Report on Form 10-Q.

Silver Spring Networks, Inc. Acquisition
As part of the acquisition of SSNI, we achieved approximately $50 million of annualized savings by the end of 2020. For the three months ended March 31, 2021, we paid out $0.8 million and we have approximately $4 million to $8 million of estimated cash payments remaining on the integration plan, the majority of which is expected to be paid out in the next 12 months.

Restructuring
On September 17, 2020, our Board of Directors approved a restructuring plan (the 2020 Projects). The 2020 Projects include activities that continue our efforts to optimize its global supply chain and manufacturing operations, sales and marketing organizations, and other overhead. These projects are scheduled to be substantially complete by the end of 2022. We estimate pre-tax restructuring charges of $55 million to $65 million. Of the total estimated charge, approximately $35 million to $45 million will result in cash expenditures, and the remainder relates to non-cash charges.

For the three months ended March 31, 2021, we paid out a net $5.9 million related to all our restructuring projects. As of March 31, 2021, $60.6 million was accrued for these restructuring projects, of which $30.2 million is expected to be paid within the next 12 months.

For further details regarding our restructuring activities, refer to Item 1: Financial Statements (Unaudited), Note 12: Restructuring included in this Quarterly Report on Form 10-Q.

Other Liquidity Considerations
We have tax credits and net operating loss carryforwards in various jurisdictions that are available to reduce cash taxes. However, utilization of tax credits and net operating losses are limited in certain jurisdictions. Based on current projections, we expect to pay, net of refunds, approximately $1 million in U.S. federal taxes, $2 million in state taxes, and approximately $7 million in local and foreign taxes during 2021. For a discussion of our tax provision and unrecognized tax benefits, see Item 1: Financial Statements (Unaudited), Note 10: Income Taxes included in this Quarterly Report on Form 10-Q.

As of March 31, 2021, we are under examination by certain tax authorities. We believe we have appropriately accrued for the expected outcome of all tax matters and do not currently anticipate that the ultimate resolution of these examinations will have a material adverse effect on our financial condition, future results of operations, or liquidity.

As of March 31, 2021, there was $56.7 million of cash and short-term investments held by certain foreign subsidiaries in which we are permanently reinvested for tax purposes. As a result of recent changes in U.S. tax legislation, any repatriation in the future would not result in U.S. federal income tax. Accordingly, there is no provision for U.S. deferred taxes on this cash. If this cash were repatriated to fund U.S. operations, additional withholding tax costs may be incurred. Tax is only one of the many factors that we consider in the management of global cash. Accordingly, the amount of taxes that we would need to accrue and pay to repatriate foreign cash could vary significantly.
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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 March 31, 2021, $19.0 million of our consolidated cash balance was held in our joint venture entities. As a result, the minority shareholders of these entities have rights to their proportional share of this cash balance, and there may be limitations on our ability to repatriate cash to the United States from these entities.

General Liquidity Overview
Notwithstanding the expected short to mid-term impacts of the COVID-19 pandemic, we expect to grow through a combination of internal new research and development, licensing technology from and to others, distribution agreements, partnering arrangements, and acquisitions of technology or other companies. We expect these activities to be funded with existing cash, cash flow from operations, borrowings, or the sale of our common stock or other securities. We believe existing sources of liquidity will be sufficient to fund our existing operations and obligations for the next 12 months and into the foreseeable future, but offer no assurances. Our liquidity could be affected by the stability of the electricity, gas, and water utility industries, competitive pressures, our dependence on certain key vendors and components, changes in estimated liabilities for product warranties and/or litigation, duration of the COVID-19 pandemic, future business combinations, capital market fluctuations, international risks, and other factors described under Risk Factors within Item 1A of Part I of our 2020 Annual Report, as well as Quantitative and Qualitative Disclosures About Market Risk within Item 3 of Part I included in this Quarterly Report on Form 10-Q.

Contingencies

Refer to Item 1: Financial Statements (Unaudited), Note 11: Commitments and Contingencies included in this Quarterly Report on Form 10-Q.

Critical Accounting Estimates and Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Our critical accounting policies that require the use of estimates and assumptions were discussed in detail in the 2020 Annual Report and have not changed materially.

Refer to Item 1: Financial Statements (Unaudited), Note 1: Summary of Significant Accounting Policies included in this Quarterly Report on Form 10-Q for further disclosures regarding new accounting pronouncements.
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Non-GAAP Measures

The accompanying schedule contains non-GAAP financial measures. To supplement our consolidated financial statements, which are prepared in accordance with GAAP, we use certain non-GAAP financial measures, including non-GAAP operating expense, non-GAAP operating income, non-GAAP net income, non-GAAP diluted EPS, adjusted EBITDA, free cash flow, and constant currency. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and other companies may define such measures differently. For more information on these non-GAAP financial measures, please see the table captioned Reconciliations of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures.

We use these non-GAAP financial measures for financial and operational decision making and/or as a means for determining executive compensation. Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance and ability to service debt by excluding certain expenses that may not be indicative of our recurring core operating results. These non-GAAP financial measures facilitate management's internal comparisons to our historical performance, as well as comparisons to our competitors' operating results. Our executive compensation plans exclude non-cash charges related to amortization of intangibles and certain discrete cash and non-cash charges, such as acquisition and integration related expenses, loss on sale of business, or restructuring charges. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. We believe these non-GAAP financial measures are useful to investors because they provide greater transparency with respect to key metrics used by management in its financial and operational decision making and because they are used by our institutional investors and the analyst community to analyze the health of our business.

Non-GAAP operating expenses and non-GAAP operating income – We define non-GAAP operating expenses as operating expenses excluding certain expenses related to the amortization of intangible assets, restructuring, loss on sale of business, corporate transition cost, and acquisition and integration. We define non-GAAP operating income as operating income excluding the expenses related to the amortization of intangible assets, restructuring, loss on sale of business, corporate transition cost, and acquisition and integration. Acquisition and integration related expenses include costs, which are incurred to affect and integrate business combinations, such as professional fees, certain employee retention and salaries related to integration, severances, contract terminations, travel costs related to knowledge transfer, system conversion costs, and asset impairment charges. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of expenses that are related to acquisitions and restructuring projects. By excluding these expenses, we believe that it is easier for management and investors to compare our financial results over multiple periods and analyze trends in our operations. For example, in certain periods, expenses related to amortization of intangible assets may decrease, which would improve GAAP operating margins, yet the improvement in GAAP operating margins due to this lower expense is not necessarily reflective of an improvement in our core business. There are some limitations related to the use of non-GAAP operating expenses and non-GAAP operating income versus operating expenses and operating income calculated in accordance with GAAP. We compensate for these limitations by providing specific information about the GAAP amounts excluded from non-GAAP operating expense and non-GAAP operating income and evaluating non-GAAP operating expense and non-GAAP operating income together with GAAP operating expense and operating income.

Non-GAAP net income and non-GAAP diluted EPS – We define non-GAAP net income as net income attributable to Itron, Inc. excluding the expenses associated with amortization of intangible assets, amortization of debt placement fees, debt extinguishment, restructuring, loss on sale of business, corporate transition cost, acquisition and integration, and the tax effect of excluding these expenses. We define non-GAAP diluted EPS as non-GAAP net income divided by diluted weighted-average shares outstanding during the period calculated on a GAAP basis and then reduced to reflect the anti-dilutive impact of the convertible note hedge transaction entered into in connection with the 0% Convertible Notes due 2026 issued in March 2021. We consider these financial measures to be useful metrics for management and investors for the same reasons that we use non-GAAP operating income. The same limitations described above regarding our use of non-GAAP operating income apply to our use of non-GAAP net income and non-GAAP diluted EPS. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP measures and evaluating non-GAAP net income and non-GAAP diluted EPS together with GAAP net income attributable to Itron, Inc. and GAAP diluted EPS.

For interim periods the budgeted annual effective tax rate (AETR) is used, adjusted for any discrete items, as defined in Accounting Standards Codification (ASC) 740 - Income Taxes. The budgeted AETR is determined at the beginning of the fiscal year. The AETR is revised throughout the year based on changes to our full-year forecast. If the revised AETR increases or decreases by 200 basis points or more from the budgeted AETR due to changes in the full-year forecast during the year, the revised AETR is used in place of the budgeted AETR beginning with the quarter the 200 basis point threshold is exceeded and going forward for all subsequent interim quarters in the year. We continue to assess the AETR based on latest forecast
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throughout the year and use the most recent AETR anytime it increases or decreases by 200 basis points or more from the prior interim period.

Adjusted EBITDA – We define adjusted EBITDA as net income (a) minus interest income, (b) plus interest expense, depreciation and amortization of intangible assets, debt extinguishment, restructuring, loss on sale of business, corporate transition cost, acquisition and integration related expense, and (c) excluding income tax provision or benefit. Management uses adjusted EBITDA as a performance measure for executive compensation. A limitation to using adjusted EBITDA is that it does not represent the total increase or decrease in the cash balance for the period and the measure includes some non-cash items and excludes other non-cash items. Additionally, the items that we exclude in our calculation of adjusted EBITDA may differ from the items that our peer companies exclude when they report their results. We compensate for these limitations by providing a reconciliation of this measure to GAAP net income (loss).

Free cash flow – We define free cash flow as net cash provided by operating activities less cash used for acquisitions of property, plant and equipment. We believe free cash flow provides investors with a relevant measure of liquidity and a useful basis for assessing our ability to fund our operations and repay our debt. The same limitations described above regarding our use of adjusted EBITDA apply to our use of free cash flow. We compensate for these limitations by providing specific information regarding the GAAP amounts and reconciling to free cash flow.

Constant currency – We refer to the impact of foreign currency exchange rate fluctuations in our discussions of financial results, which references the differences between the foreign currency exchange rates used to translate operating results from the entity's functional currency into U.S. dollars for financial reporting purposes. We also use the term "constant currency", which represents financial results adjusted to exclude changes in foreign currency exchange rates as compared with the rates in the comparable prior year period. We calculate the constant currency change as the difference between the current period results and the comparable prior period's results restated using current period foreign currency exchange rates.
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Reconciliations of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures

The tables below reconcile the non-GAAP financial measures of operating expenses, operating income, net income, diluted EPS, adjusted EBITDA, and free cash flow with the most directly comparable GAAP financial measures.

TOTAL COMPANY RECONCILIATIONSThree Months Ended March 31,
In thousands, except per share data20212020
NON-GAAP OPERATING EXPENSES
GAAP operating expenses$136,104 $145,196 
Amortization of intangible assets(8,973)(11,165)
Restructuring1,980 248 
Loss on sale of business(1,392)— 
Corporate transition cost— 40 
Acquisition and integration related expense377 (1,272)
Non-GAAP operating expenses$128,096 $133,047 
NON-GAAP OPERATING INCOME
GAAP operating income$30,940 $26,370 
Amortization of intangible assets8,973 11,165 
Restructuring(1,980)(248)
Loss on sale of business1,392 — 
Corporate transition cost— (40)
Acquisition and integration related expense(377)1,272 
Non-GAAP operating income$38,948 $38,519 
NON-GAAP NET INCOME & DILUTED EPS
GAAP net income attributable to Itron, Inc.$12,603 $8,684 
Amortization of intangible assets8,973 11,165 
Amortization of debt placement fees2,652 963 
Debt extinguishment1,681 — 
Restructuring(1,980)(248)
Loss on sale of business1,392 — 
Corporate transition cost— (40)
Acquisition and integration related expense(377)1,272 
Income tax effect of non-GAAP adjustments(2,997)1,173 
Non-GAAP net income attributable to Itron, Inc.$21,947 $22,969 
Non-GAAP diluted EPS$0.52 $0.57 
Non-GAAP weighted average common shares outstanding - Diluted41,964 40,474 
ADJUSTED EBITDA
GAAP net income attributable to Itron, Inc.$12,603 $8,684 
Interest income(542)(553)
Interest expense10,475 11,277 
Income tax provision4,661 7,550 
Debt extinguishment1,681 — 
Depreciation and amortization21,810 24,031 
Restructuring(1,980)(248)
Loss on sale of business1,392 — 
Corporate transition cost— (40)
Acquisition and integration related expense(377)1,272 
Adjusted EBITDA$49,723 $51,973 
FREE CASH FLOW
Net cash provided by operating activities$49,955 $18,894 
Acquisitions of property, plant, and equipment(11,412)(12,602)
Free Cash Flow$38,543 $6,292 

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Item 3:    Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, we are exposed to interest rate and foreign currency exchange rate risks that could impact our financial position and results of operations. As part of our risk management strategy, we may use derivative financial instruments to hedge certain foreign currency and interest rate exposures. Our objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, therefore reducing the impact of volatility on earnings or protecting the fair values of assets and liabilities. We use derivative contracts only to manage existing underlying exposures. Accordingly, we do not use derivative contracts for trading or speculative purposes.

Interest Rate Risk
We are exposed to interest rate risk through our variable rate debt instruments. In March 2020, we entered into an interest rate swap, which is effective from June 30, 2020 to June 30, 2023, and converts $240 million of our LIBOR-based debt from a floating LIBOR interest rate to a fixed interest rate of 0.617% (excluding the applicable margin). The notional balance amortizes to maturity at the same rate of the originally required amortization on our term loan. On March 17, 2021, we paid a fee of $1.68 million to terminate the interest rate swap since the likelihood of LIBOR based interest payments were no longer probable of occurring. At March 31, 2021, our LIBOR-based debt balance was $61.1 million.

In April 2018, we entered into a cross-currency swap, which converts $56.0 million of floating rate LIBOR-based U.S. dollar denominated debt into 1.38% fixed rate euro denominated debt. This cross-currency swap matures on April 30, 2021 and mitigates the risk associated with fluctuations in interest and currency rates impacting cash flows related to a U.S. dollar denominated debt in a euro functional currency entity.

The table below provides information about our financial instruments that are sensitive to changes in interest rates and the scheduled minimum repayment of principal and the weighted average interest rates at March 31, 2021. Weighted average variable rates in the table are based on implied forward rates in the Reuters U.S. dollar yield curve as of March 31, 2021 and our estimated leverage ratio, which determines our additional interest rate margin at March 31, 2021.

Dollars in thousands2021202220232024TotalFair Value
Variable Rate Debt
Principal: U.S. dollar term loan$— $— $— $61,094 $61,094 $59,749 
Weighted average interest rate1.88 %1.95 %2.33 %2.80 %
Principal: Multicurrency revolving line of credit$— $— $— $— $— $— 
Weighted average interest rate1.88 %1.95 %2.33 %2.80 %
Cross currency swap
Weighted average interest rate (pay) Fixed - EURIBOR1.38 %
Weighted average interest rate (receive) Floating - LIBOR0.11 %

Based on a sensitivity analysis as of March 31, 2021, we estimate that, if market interest rates average one percentage point higher in 2021 than in the table above, our financial results in 2021 would not be materially impacted.

We continually monitor and assess our interest rate risk and may institute additional interest rate swaps or other derivative instruments to manage such risk in the future.

Foreign Currency Exchange Rate Risk
We conduct business in a number of countries. Revenues denominated in functional currencies other than the U.S. dollar were 40% of total revenues for the three months ended March 31, 2021 compared with 39% for the same respective periods in 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.

We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third-party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recognized
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within other income (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 March 31, 2021, a total of 40 contracts were offsetting our exposures from the euro, Pound sterling, Canadian dollar, Chinese Yuan, Australian dollar and various other currencies, with notional amounts ranging from $93,300 to $26.4 million. Based on a sensitivity analysis as of March 31, 2021, we estimate that, if foreign currency exchange rates average ten percentage points higher in 2021 for these financial instruments, our financial results in 2021 would not be materially impacted.

In future periods, we may use additional derivative contracts to protect against foreign currency exchange rate risks.

Item 4:    Controls and Procedures

Evaluation of disclosure controls and procedures
An evaluation was performed under the supervision and with the participation of our Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company'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's management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of March 31, 2021, the Company'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.

Changes in internal controls over financial reporting
There have been no changes in our internal control over financial reporting during the three months ended March 31, 2021 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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PART II: OTHER INFORMATION

Item 1:    Legal Proceedings
Refer to Item 1: Financial Statements (Unaudited), Note 11: Commitments and Contingencies included in this Quarterly Report on Form 10-Q.

Item 1A:    Risk Factors
For a complete list of Risk Factors, refer to Part I, Item 1A: Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed with the Securities and Exchange Commission on February 24, 2021.


Item 2:    Unregistered Sales of Equity Securities and Use of Proceeds

(a)Not applicable.

(b)Not applicable.

(c)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 ProgramsMaximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
In thousands
January 1, 2021 through January 31, 2021— $— — $— 
February 1, 2021 through February 28, 20214,308 102.18 — — 
March 1, 2021 through March 31, 2021150 110.92 — — 
Total4,458 — 

(1)Shares repurchased represent shares transferred to us by certain employees who vested in restricted stock units and used shares to pay all, or a portion of, the related taxes.
(2)Includes commissions.

Item 5:    Other Information

(a)No information was required to be disclosed in a report on Form 8-K during the first quarter of 2021 that was not reported.

(b)Not applicable.
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Item 6:    Exhibits

Exhibit
Number
Description of Exhibits
4.1
4.2
10.1
10.2
10.3
31.1
31.2
32.1
101The following financial information from Itron, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ITRON, INC.
May 3, 2021By:/s/ JOAN S. HOOPER
DateJoan S. Hooper
Senior Vice President and Chief Financial Officer

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