# ITRON, INC. (ITRI) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from ITRON, INC.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/780571/000078057122000004/itri-20211231.htm Accession: 0000780571-22-000004 Filing date: 2022-02-28 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/ITRI/ All MD&A years: /company/ITRI/mda/ Next year: /company/ITRI/mda/fy2022/ (FY 2022) Item 7:    Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis compares the change in the consolidated financial statements for fiscal years 2021 and 2020 and should be read in conjunction with Item 8: Financial Statements and Supplementary Data. For comparisons of fiscal years 2020 and 2019, see our Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on February 24, 2021, and incorporated herein by reference. The objective of Management's Discussion and Analysis is to provide our assessment of the financial condition and results of operations, including an evaluation of our liquidity and capital resources along with material events occurring during the year. The discussion and analysis focuses on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. In addition, we address matters that are reasonably likely, based on management's assessment, to have a material impact on future operations. We expect the analysis will enhance a reader's understanding of our financial condition, cash flows, and other changes in financial condition and results of operations. Overview We are a technology and service company, and we are a leader in the Industrial Internet of Things (IIoT). We offer solutions that enable utilities and municipalities to safely, securely and reliably operate their critical infrastructure. Our solutions include the deployment of smart networks, software, services, devices, sensors, and data analytics that allow our customers to manage assets, secure revenue, lower operational costs, improve customer service, improve safety, and enable efficient management of valuable resources. Our comprehensive solutions and data analytics address the unique challenges facing the energy, water, and municipality sectors, including increasing demand on resources, non-technical loss, leak detection, environmental and regulatory compliance, and improved operational reliability. We operate under the Itron brand worldwide and manage and report under three operating segments: Device Solutions, Networked Solutions, and Outcomes. The product and operating definitions of the three segments are as follows: Device Solutions – This segment primarily includes hardware products used for measurement, control, or sensing that do not have communications capability embedded for use with our broader Itron systems, i.e., hardware-based products not part of a complete end-to-end solution. Examples from the Device Solutions portfolio include: standard endpoints that are shipped without Itron communications, such as our standard gas, electricity, and water meters for a variety of global markets and adhering to regulations and standards within those markets, as well as our heat and allocation products; communicating meters that are not a part of an Itron end-to-end solution, such as Smart Spec meters; and the implementation and installation of non-communicating devices, such as gas regulators. Networked Solutions – This segment primarily includes a combination of communicating devices (e.g., smart meters, modules, endpoints, and sensors), network infrastructure, and associated application software designed and sold as a complete solution for acquiring and transporting robust application-specific data. Networked Solutions includes products and software for the implementation, installation, and management of communicating devices and data networks. Examples from the Networked Solutions portfolio include: communicating measurement, control, or sensing endpoints, such as our Itron OpenWay® Centron and Riva meters, Itron traditional ERT® technology, Intelis smart gas meters, 500G gas communication modules, 500W water communication modules, GenX networking infrastructure products and network interface cards (NICs); Smart City control and management software; Distribution Automation bridge devices; and specific network control and management software applications. The 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 these industry and smart city applications to be run and managed on a single, multi-purpose network. Outcomes – This segment primarily includes our value-added, enhanced software and services in which we manage, organize, analyze, and interpret data to improve decision making, maximize operational profitability, drive resource efficiency, and deliver results for consumers, utilities, and smart cities. Outcomes places an emphasis on delivering to Itron customers high-value, turn-key, digital experiences by leveraging the footprint of our Device Solutions and Networked Solutions segments. The revenues from these offerings are primarily recurring in nature and would include any direct management of Device Solutions, Networked Solutions, and other products on behalf of our end customers. Examples from the Outcomes portfolio include: our meter data management and analytics offerings; our managed service solutions including network-as-a-service (NaaS) and Platform-as-a-Service (PaaS); forecasting software and services; our Distributed Energy Management suite of products and 26 Table of Contents 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 43-46 for information about these non-GAAP measures and the detailed reconciliation of items that impacted free cash flow, non-GAAP operating expense, non-GAAP operating income, non-GAAP net income, adjusted EBITDA, and non-GAAP diluted EPS in the presented periods. Total Company Highlights Highlights and significant developments for the year ended December 31, 2021 compared with the year ended December 31, 2020 •Revenues were $2.0 billion compared with $2.2 billion last year, a decrease of $191.8 million, or 9% •Gross margin was 28.9% compared with 27.7% last year •Operating expenses increased $39.9 million, or 7%, compared with 2020, and includes the impact of 2021 restructuring projects and variable compensation •Net loss attributable to Itron, Inc. was $81.3 million compared with net loss attributable to Itron, Inc. of $58.0 million in 2020 •GAAP loss per share was $1.83 compared with loss per share of $1.44 in 2020 •Non-GAAP net income attributable to Itron, Inc. was $78.1 million compared with $75.3 million in 2020 •Non-GAAP diluted EPS was $1.75 compared with $1.85 in 2020 •Adjusted EBITDA decreased $63.2 million, or 35%, to $115.2 million compared with adjusted EBITDA of $178.4 million in 2020 •Total backlog was $4.0 billion, and twelve-month backlog was $1.5 billion at December 31, 2021, compared with $3.3 billion and $1.2 billion at December 31, 2020. 27 Table of Contents 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 $389.4 million, after deducting underwriters' discounts, and we closed the sale of the Convertible Notes (the Convertible Notes) in a private placement to qualified institutional buyers, resulting in net proceeds to us of $448.5 million after deducting initial purchasers' discounts of the offering. Concurrently with the issuance of the Convertible Notes, we entered into the Convertible Note Hedge Transactions (the Convertible Note Hedge Transactions), and Warrant Transactions (Warrant Transactions). For further description of these transactions, refer to Item 8: Financial Statements and Supplementary Data, Note 6: Debt and Note 7: Derivative Financial Instruments. Credit Facility Amendment and Repayment On March 8, 2021, we entered into a third amendment to our credit facility that was initially entered on January 5, 2018 (together with the amendment, the 2018 credit facility). The third amendment modified provisions to permit cash settlement upon the conversion of the Convertible Notes, the Convertible Note Hedge Transactions, and Warrant Transactions and also to adjust certain settlement provisions for convertible indebtedness. On August 12, 2021, we repaid the remaining balance of $31.1 million on the U.S. dollar term loan (the term loan). At December 31, 2021, there were no outstanding loan balances under the 2018 Credit Facility. See Item 8: Financial Statements and Supplementary Data, Note 7: Derivative Financial Instruments, for further details of the Convertible Note Hedge Transactions and Warrant Transactions. Senior Notes Redemption 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). 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 $410.0 million. As of April 8, 2021 the Senior Notes were fully discharged, and no principal or unpaid interest remains outstanding. The 2.5%, or $10.0 million, early redemption premium and write off of $11.1 million prepaid debt fees were recognized upon redemption in the second quarter of 2021. See Item 8: Financial Statements and Supplementary Data, Note 6: Debt, for further details of the redemption. Reserve on Receivables from Sale of Business On June 25, 2020, we closed on the sale of five subsidiaries comprising our manufacturing and sales operations in Latin America to buyers led by Instalación Profesional y Tecnologías del Centro S.A. de C.V., a Mexican company doing business as Accell in Brazil (Accell), through the execution of various definitive stock purchase agreements. The total sales price of $35.0 million included deferred payments of $21.1 million for working capital, which was to be paid in full by December 31, 2020, as evidenced by a promissory note, and the remainder in cash ($4.5 million) and other deferred consideration. In January 2021, we agreed to extend the payment terms on the remaining outstanding working capital balance of $18.4 million. Accell had agreed to make monthly payments, including interest, through September 2022, under which we received full payments for January through March and partial payments in April and May (totaling $3.8 million including $0.7 million in interest). Based on Accell's failure to make timely payments, continued requests to defer payments significantly beyond the original maturity of the working capital note, and the negative impact of the COVID-19 pandemic on the Latin American markets, we determined to fully reserve the working capital and other deferred receivables, recognizing a loss on sale of business of $26.8 million for the year ended December 31, 2021. See Item 8: Financial Statements and Supplementary Data, Note 18: Sale of Businesses, for more details. Business Acquisition On October 12, 2021, Itron, through its subsidiary Itron Management Services Ireland, Limited, completed the acquisition of 100% of the shares of SELC Group Limited (SELC), a private limited company incorporated in Ireland since 2014, from Sensus Metering Systems (LUXCO3) S.ár.l. SELC was previously a technology supplier to Itron. The acquisition provides value to Itron through the leverage of SELC's streetlight controls technology coupled with Itron's Smart Cities network and software platform. The acquisition will increase the pace of Smart City growth and innovation within Itron's Networked Solutions business for the benefit of our customers. The purchase was funded through cash on hand and included $2.1 million in intangible assets and $5.4 million in goodwill. See Item 8: Financial Statements and Supplementary Data, Note 4: Intangible Assets and Liabilities and Note 5: Goodwill, for further details. Restructuring Plan On October 29, 2021, our Board of Directors approved a restructuring plan (the 2021 Projects), which in conjunction with the announcement of the sale of certain of our Gas device manufacturing operations (refer to Item 8: Financial Statements and Supplementary Data, Note 18: Sale of Businesses), includes activities to drive reductions in certain locations and functional support areas. These projects are to be substantially complete by the end of 2024. Itron recognized pre-tax restructuring charges of $60.7 million. Of the total charge, approximately $55 million will result in cash expenditures, and the remainder to non-cash impairment charges. Once the 2021 Projects are substantially completed, Itron estimates $15 million to $20 million in 28 Table of Contents annualized savings. Certain of Itron's employees are represented by unions or works councils, which requires consultation, and potential restructuring projects may be subject to regulatory approval, both of which could impact the timing of planned savings in certain jurisdictions. Approval of Share Repurchase Program Effective November 1, 2021, Itron's Board of Directors authorized a share repurchase program of up to $100 million of our common stock over an 18-month period (the 2021 Stock Repurchase Program). Repurchases are made in the open market or in privately negotiated transactions, and in accordance with applicable securities laws. Following the announcement of the program and through December 31, 2021, we repurchased 125,314 shares at an average share price of $64.05 (excluding commissions) for a total of $8.0 million. Subsequent to December 31, 2021, we repurchased 279,968 shares of our common stock under the 2021 Stock Repurchase Program. The average price paid per share was $60.60 (excluding commissions) for total of $17.0 million. Sale of Business On November 2, 2021, Itron entered into a definitive securities and asset purchase agreement to sell certain of its Gas device manufacturing and business operations in Europe and North America to Dresser Utility Solutions (Dresser). The sale includes one German subsidiary – Itron GmbH along with its business operations, personnel, and the owned manufacturing facility in Karlsruhe; the business operations, personnel, and assets associated with the leased manufacturing facility in Argenteuil, France; and the business and manufacturing assets maintained at one of our contract manufacturers in North America. The sale of these assets and operations is part of Itron's continued strategy to improve profitability and focus on growing its higher value businesses throughout the world. As of the fourth quarter of 2021, we reclassified the assets and liabilities of this asset group as held for sale. Based on the sales price and the carrying value of the assets including the foreign currency translation losses accumulated since the acquisition of the German subsidiary in 2007, we recognized a pre-tax loss of $34.4 million (classified within Loss on sale of business within the Consolidated Statements of Operations) as of December 31, 2021. The base sale price of this divestiture was $75 million, with adjustments for (1) pension liabilities assumed by Dresser for the active employees and (2) the final working capital balance, which will be determined as of the close date, and, if the balance is outside the targeted amount, the difference will be settled shortly thereafter. Cash proceeds from the sale were estimated at a net $53.9 million ($63.7 million less $9.8 million in cash held for sale) at December 31, 2021. The transaction closed on February 28, 2022, and the final sales price and loss on sale will be determined and recognized during the second quarter of 2022, based on the 90-day working capital validation process. Impact of COVID-19 and Supply Chain Challenges The COVID-19 pandemic has had global economic impacts including disrupting customer demand and global supply chains, resulting in market volatility. The extent of the recent pandemic and its ongoing impact on our operations is volatile, but is being monitored closely by our management. During portions of the first half of 2020 certain of our European factories were closed due to government actions and local conditions, and any further closures that may be imposed on us could impact our future results. New variants of the virus may cause previously lifted restrictions to be reinstated, which could result in more disruptions. Incremental costs we have incurred related to COVID-19, such as personal protective equipment, increased cleaning and sanitizing of our facilities, and other such items, have not been material to date. As economies have reopened, global supply chains have struggled to keep pace with rapidly changing demand. The resulting supply constraints have manifested across a variety of areas including mechanical, electrical and logistics portions of the supply chain, which has impacted our ability to ship products in a timely manner. In particular, our ability to obtain adequate supply of semiconductor components has impacted our ability to service recovering customer demand. While we believe the current imbalance in supply and demand is temporal, the timeline to recovery is uncertain. Efforts are ongoing with suppliers to increase supply, including the approval of alternate sources. Recently, inflation in our raw materials and component costs, freight charges, and labor costs have increased above historical levels, due to, among other things, the continuing impacts of the pandemic and uncertain economic environment. We may or may not be able to fully recover these increased costs through pricing actions with our customers. At this time, we have not identified any significant decrease in long-term customer demand for our products and services. However, certain of our customer projects have experienced delay in deliveries, with originally forecasted 2021 revenue pushed to future periods. For more information on risks associated with the COVID-19 pandemic, please see our risk in Part I, Item 1A, Risk Factors. 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. 29 Table of Contents Other benefits, including options to defer payroll tax payments and additional deductions, resulted in reduced cash payments in 2020 but increased cash outlays during 2021. Total Company GAAP and Non-GAAP Highlights and Endpoints Under Management [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["In thousands, except margin and per share data","2021","","% Change","","2020"],["GAAP"],["Revenues"],["Product revenues","$","1,678,195","","","(11)%","","$","1,889,173"],["Service revenues","303,377","","","7%","","284,177"],["Total revenues","1,981,572","","","(9)%","","2,173,350"],["Gross profit","573,169","","","(5)%","","602,167"],["Operating expenses","652,468","","","7%","","612,562"],["Operating income (loss)","(79,299)","","","NM","","(10,395)"],["Other income (expense)","(44,511)","","","(4)%","","(46,244)"],["Income tax benefit (provision)","45,512","","","NM","","(238)"],["Net loss attributable to Itron, Inc.","(81,255)","","","NM","","(57,955)"],["Non-GAAP(1)"],["Non-GAAP operating expenses","$","497,604","","","6%","","$","470,028"],["Non-GAAP operating income","75,565","","","(43)%","","132,139"],["Non-GAAP net income attributable to Itron, Inc.","78,103","","","4%","","75,253"],["Adjusted EBITDA","115,211","","","(35)%","","178,399"],["GAAP Margins and EPS"],["Gross margin"],["Product gross margin","26.6","%","","","","25.4","%"],["Service gross margin","41.6","%","","","","42.8","%"],["Total gross margin","28.9","%","","","","27.7","%"],["Operating margin","(4.0)","%","","","","(0.5)","%"],["Net loss per common share - Basic","$","(1.83)","","","","","$","(1.44)"],["Net loss per common share - Diluted","$","(1.83)","","","","","$","(1.44)"],["Non-GAAP EPS (1)"],["Non-GAAP diluted EPS","$","1.75","","","","","$","1.85"]] [[/GREPCENT_TABLE]] (1)These measures exclude certain expenses that we do not believe are indicative of our core operating results. See pages 43-46 for information about these non-GAAP measures and reconciliations to the most comparable GAAP measures. Definition of an Endpoint Under Management An "endpoint under management" is a unique endpoint, or data from that endpoint, which Itron manages via our networked platform or a third party's platform that is connected to one or multiple types of endpoints. Itron's management of an endpoint occurs when on behalf of our client, we manage one or more of the physical endpoints, operating system, data, application, data analytics, and/or outcome deriving from this unique endpoint. Itron has the ability to monitor and/or manage endpoints or the data from the endpoints via NaaS, Software-as-a-Service (SaaS), and/or a licensed offering at a remote location designated by our client. Our offerings typically, but not exclusively, provide an Itron product or Itron certified partner product to our clients that has the capability of one-way communication or two-way communication of data that may include remote product configuration and upgradability. Examples of these offerings include our Temetra, OpenWay®, OpenWay® Riva and Gen X. 30 Table of Contents 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 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: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["Units in thousands","2021","","2020","","2019"],["Endpoints under management","82,354","","","74,184","","","64,719"]] [[/GREPCENT_TABLE]] 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: [[GREPCENT_TABLE]] [["","","","","","Effect of Changes in Foreign Currency Exchange Rates","","Constant Currency Change","","Total Change"],["","Year Ended December 31,"],["In thousands","2021","","2020"],["Total Company"],["Revenues","$","1,981,572","","","$","2,173,350","","","$","32,020","","","$","(223,798)","","","$","(191,778)"],["Gross profit","573,169","","","602,167","","","4,227","","","(33,225)","","","(28,998)"]] [[/GREPCENT_TABLE]] Revenues Revenues decreased $191.8 million in 2021 compared with 2020. We have been unfavorably impacted by COVID-19 related global component constraints, which limited our ability to fulfill customer demand. Product revenues decreased $211.0 million in 2021 and service revenues increased $19.2 million in 2021 as compared with 2020. Device Solutions decreased by $48.9 million; Networked Solutions decreased by $156.8 million; and Outcomes increased by $13.9 million when compared with the same period last year. Changes in currency exchange rates favorably impacted revenues by $32.0 million in 2021, primarily in Device Solutions. No single customer represented more than 10% of total revenues for the years ended December 31, 2021 and 2020. Our 10 largest customers accounted for 25% of total revenues in 2021 and 33% of total revenues in 2020. Gross Margin Gross margin was 28.9% for 2021, compared with 27.7% in 2020. We were favorably impacted by product and solution mix and improved operating efficiencies in 2021 compared with 2020. Product sales gross margin increased to 26.6% in 2021 from 25.4% in 2020. Gross margin on service revenues decreased to 41.6% from 42.8% in 2020. Refer to Operating Segment Results section below for further detail on total company revenues and gross margin. 31 Table of Contents Operating Expenses The actual results of and effects of changes in foreign currency exchange rates on operating expenses were as follows: [[GREPCENT_TABLE]] [["","","","Effect of Changes in Foreign Currency Exchange Rates","","Constant Currency Change","","Total Change"],["","Year Ended December 31,"],["In thousands","2021","","2020"],["Total Company"],["Sales, general and administrative","$","300,520","","","$","276,920","","","$","5,400","","","$","18,200","","","$","23,600"],["Research and development","197,235","","","194,101","","","2,259","","","875","","","3,134"],["Amortization of intangible assets","35,801","","","44,711","","","339","","","(9,249)","","","(8,910)"],["Restructuring","54,623","","","37,013","","","510","","","17,100","","","17,610"],["Loss on sale of business","64,289","","","59,817","","","3,330","","","1,142","","","4,472"],["Total operating expenses","$","652,468","","","$","612,562","","","$","11,838","","","$","28,068","","","$","39,906"]] [[/GREPCENT_TABLE]] Operating expenses increased $39.9 million for the year ended December 31, 2021 as compared with the same period in 2020. This was primarily due to higher variable compensation of $23.1 million in 2021 (classified within sales, general and administrative expenses and research and development expenses), as well as $17.6 million in restructuring related to the 2021 Projects. The loss on the sale of business of $64.3 million in 2021 includes the impairment resulting from the sale of certain of our Gas device manufacturing and business operations in Europe and North America to Dresser and an increase to the loss related to the 2020 Latin America divestiture. The loss on the sale of our Latin America business in 2020 was $59.8 million. The increases were partially offset by a decrease of $8.9 million in amortization of intangible assets. See Item 8: Financial Statements and Supplementary Data, Note 18: Sale of Businesses and Note 13: Restructuring for more details. Other Income (Expense) The following table shows the components of other income (expense): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["In thousands","2021","","% Change","","2020"],["Interest income","$","1,557","","","(48)%","","$","2,998"],["Amortization of prepaid debt fees","(18,253)","","","NM","","(4,130)"],["Other interest expense","(10,385)","","","(74)%","","(39,871)"],["Interest expense","(28,638)","","","(35)%","","(44,001)"],["Other income (expense), net","(17,430)","","","NM","","(5,241)"],["Total other income (expense)","$","(44,511)","","","(4)%","","$","(46,244)"]] [[/GREPCENT_TABLE]] Total other income (expense) for the year ended December 31, 2021 was a net expense of $44.5 million compared with $46.2 million in 2020. The change in other income (expense), net, for the year ended December 31, 2021 as compared with the same period in 2020 was primarily the result of lower interest costs of $14.6 million for the senior notes, $9.7 million for the term loan, and $4.7 million for the revolving credit. The decrease was offset by a $14.1 million increase related to a write-off of prepaid debt fees in 2021 associated with the repayment of senior notes and the term loan as well as increased amortization of prepaid debt fees, and a $11.7 million increase related to the 2021 extinguishment of debt that is included in other income (expense). Income Tax Provision Our income tax (benefit) provision was $(45.5) million and $0.2 million for the years ended December 31, 2021 and 2020. Our tax rate for the year ended December 31, 2021 differed from the U.S. federal statutory tax rate of 21% due primarily to a tax benefit of $34.4 million related largely to the release of a valuation allowance on U.S. foreign tax credit deferred tax assets that were utilized in the current year. The 2021 tax benefit reflects the impact of certain transfers of business activities and assets that result in a prospective shift of income from international operations to the U.S. Other rate drivers include losses in jurisdictions for which no benefit is recognized because of valuation allowances on deferred tax assets, the level of profit or losses in domestic and international jurisdictions, a benefit related to excess stock-based compensation, and uncertain tax positions. 32 Table of Contents For additional discussion related to income taxes, see Item 8: Financial Statements and Supplementary Data, Note 11: Income Taxes. Operating Segment Results For a description of our operating segments, refer to Part I, Item 1: Business, Our Operating Segments included in this Annual Report on Form 10-K. The following tables and discussion highlight significant changes in trends or components of each operating segment: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["In thousands","2021","","% Change","","2020"],["Segment revenues"],["Device Solutions","$","645,104","","","(7)%","","$","693,995"],["Networked Solutions","1,092,631","","","(13)%","","1,249,402"],["Outcomes","243,837","","","6%","","229,953"],["Total revenues","$","1,981,572","","","(9)%","","$","2,173,350"],["","Year Ended December 31,"],["","2021","","2020"],["In thousands","GrossProfit","","GrossMargin","","Gross Profit","","Gross Margin"],["Segment gross profit and margin"],["Device Solutions","$","99,355","","","15.4%","","$","86,859","","","12.5%"],["Networked Solutions","378,633","","","34.7%","","432,906","","","34.6%"],["Outcomes","95,181","","","39.0%","","82,402","","","35.8%"],["Total gross profit and margin","$","573,169","","","28.9%","","$","602,167","","","27.7%"],["","Year Ended December 31,"],["In thousands","2021","","% Change","","2020"],["Segment operating expenses"],["Device Solutions","$","42,138","","","(9)%","","$","46,090"],["Networked Solutions","124,199","","","\u2014%","","124,807"],["Outcomes","44,550","","","28%","","34,783"],["Corporate unallocated","441,581","","","9%","","406,882"],["Total operating expenses","$","652,468","","","7%","","$","612,562"],["","Year Ended December 31,"],["","2021","","2020"],["In thousands","OperatingIncome(Loss)","","OperatingMargin","","Operating Income (Loss)","","Operating Margin"],["Segment operating income (loss) and operating margin"],["Device Solutions","$","57,217","","","8.9%","","$","40,769","","","5.9%"],["Networked Solutions","254,434","","","23.3%","","308,099","","","24.7%"],["Outcomes","50,631","","","20.8%","","47,619","","","20.7%"],["Corporate unallocated","(441,581)","","","NM","","(406,882)","","","NM"],["Total operating income (loss) and operating margin","$","(79,299)","","","(4.0)%","","$","(10,395)","","","(0.5)%"]] [[/GREPCENT_TABLE]] 33 Table of Contents Device Solutions: The effects of changes in foreign currency exchange rates and the constant currency changes in certain Device Solutions segment financial results were as follows: [[GREPCENT_TABLE]] [["","","","","","Effect of Changes in Foreign Currency Exchange Rates","","Constant Currency Change","","Total Change"],["","Year Ended December 31,"],["In thousands","2021","","2020"],["Device Solutions Segment"],["Revenues","$","645,104","","","$","693,995","","","$","21,085","","","$","(69,976)","","","$","(48,891)"],["Gross profit","99,355","","","86,859","","","2,407","","","10,089","","","12,496"],["Operating expenses","42,138","","","46,090","","","616","","","(4,568)","","","(3,952)"]] [[/GREPCENT_TABLE]] Revenues Revenues decreased by $48.9 million in 2021, or 7%, compared with 2020. The decrease was mainly due to component shortages resulting in unfulfilled customer demand. The decrease was partially offset by $21.1 million due to the effect of changes in foreign currency. Gross Margin Gross margin was 15.4% in 2021 compared with 12.5% in 2020. The 290 basis point increase was primarily due to favorable product mix and lower manufacturing inefficiencies. Operating Expenses Operating expenses decreased $4.0 million, or 9%. The decrease was primarily a result of a $5.0 million decrease in research and development costs, offset by a $1.0 million increase in marketing costs. Networked Solutions: The effects of changes in foreign currency exchange rates and the constant currency changes in certain Networked Solutions segment financial results were as follows: [[GREPCENT_TABLE]] [["","","","","","Effect of Changes in Foreign Currency Exchange Rates","","Constant Currency Change","","Total Change"],["","Year Ended December 31,"],["In thousands","2021","","2020"],["Networked Solutions Segment"],["Revenues","$","1,092,631","","","$","1,249,402","","","$","7,166","","","$","(163,937)","","","$","(156,771)"],["Gross profit","378,633","","","432,906","","","387","","","(54,660)","","","(54,273)"],["Operating expenses","124,199","","","124,807","","","222","","","(830)","","","(608)"]] [[/GREPCENT_TABLE]] Revenues Revenues decreased by $156.8 million, or 13%, in 2021 compared with 2020. The change was primarily due to global component shortages, which limited our ability to ship all our customer demand. Lower product revenue of $174.2 million was partially offset by higher maintenance service revenue of $17.4 million. Gross Margin Gross margin was 34.7% in 2021 compared with 34.6% in 2020. The increase of 10 basis points was primarily due to favorable product mix, partially offset by inefficiencies related to component shortages. Operating Expenses Operating expenses decreased by $0.6 million in 2021 compared with 2020. The decrease was primarily driven by reduced investment in research and development. 34 Table of Contents Outcomes: The effects of changes in foreign currency exchange rates and the constant currency changes in certain Outcomes segment financial results were as follows: [[GREPCENT_TABLE]] [["","","","","","Effect of Changes in Foreign Currency Exchange Rates","","Constant Currency Change","","Total Change"],["","Year Ended December 31,"],["In thousands","2021","","2020"],["Outcomes Segment"],["Revenues","$","243,837","","","$","229,953","","","$","3,769","","","$","10,115","","","$","13,884"],["Gross profit","95,181","","","82,402","","","1,433","","","11,346","","","12,779"],["Operating expenses","44,550","","","34,783","","","60","","","9,707","","","9,767"]] [[/GREPCENT_TABLE]] Revenues Revenues increased $13.9 million, or 6%, in 2021 compared with 2020. This increase was driven by increased software license sales and managed and professional services. Gross Margin Gross margin increased to 39.0% in 2021 compared with 35.8% for last year. The 320 basis point increase was driven by favorable solutions mix and increased cost efficiencies. Operating Expenses Operating expenses increased $9.8 million, or 28%, in 2021. This increase was primarily related to increased research and development investment of $7.6 million and higher product marketing expenses of $2.2 million. Corporate unallocated: Operating expenses not directly associated with an operating segment are classified as Corporate unallocated. These expenses increased $34.7 million in 2021 as compared with 2020. This was primarily the result of increases in sales, general and administrative expenses and research and development expenses of $21.5 million driven by higher variable compensation in 2021, and an increase of $17.6 million in restructuring expense due to the 2021 Projects. A loss on sale of business in 2021 of $64.3 million includes the impairment resulting from the sale of certain of our Gas device manufacturing and business operations in Europe and North America to Dresser and an increase to the loss related to the 2020 Latin America divestiture. The Latin America divestiture was a $59.8 million loss on sale of business in 2020. Amortization of intangible assets decreased $8.9 million as compared with 2020. See Item 8: Financial Statements and Supplementary Data, Note 18: Sale of Businesses and Note 13: Restructuring for more details. Financial Condition Cash Flow Information: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["In thousands","2021","","2020","","2019"],["Cash provided by operating activities","$","154,794","","","$","109,514","","","$","172,840"],["Cash used in investing activities","(34,884)","","","(41,036)","","","(48,180)"],["Cash used in financing activities","(152,887)","","","(11,576)","","","(97,519)"],["Less: Cash classified within assets held for sale","(9,750)","","","\u2014","","","\u2014"],["Effect of exchange rates on cash and cash equivalents","(1,627)","","","127","","","435"],["Increase (decrease) in cash and cash equivalents","$","(44,354)","","","$","57,029","","","$","27,576"]] [[/GREPCENT_TABLE]] Cash, cash equivalents, and restricted cash at December 31, 2021 was $162.6 million compared with $206.9 million at December 31, 2020. The $44.4 million decrease in cash and cash equivalents in the 2021 period was primarily the result of net repayment of debt and acquisitions of property, plant, and equipment, partially offset by cash flows from operating activities. 35 Table of Contents Operating activities Cash provided by operating activities in 2021 was $45.3 million higher than in 2020. This increase was primarily due to lower variable compensation payouts and lower interest payments, which was partially offset by a greater net loss. Investing activities Cash used in investing activities during 2021 was $6.2 million lower than in 2020. This decrease in use of cash was primarily related to $11.5 million less purchase of property, plant, and equipment, offset by net cash used for business acquisition. Financing activities Net cash used in financing activities during 2021 was $152.9 million, compared with net cash used in 2020 of $11.6 million. In March 2021, we received $389.4 million from issuance of common stock related to the equity offering, after deducting underwriters' discounts of the offering, purchased $84.1 million of the convertible note hedge contracts, and proceeds of $45.3 million from the sale of warrants. Also in March 2021, we closed the sale of the Convertible Notes with gross proceeds of $460 million, which was used to pay off the outstanding term loan balance. In April 2021, we repaid the senior notes totaling $410 million (including $10 million early repayment premium) with proceeds from the equity offering and cash on hand. In 2021, we had net repayments of debt of $486.1 million, cash payments for prepaid debt fees were $12.0 million, and repurchased $8.0 million of our stock. In 2020, we paid down our debt of $14.1 million. Cash classified within assets held for sale Cash classified within assets held for sale was $9.8 million as of December 31, 2021, which is related to the sale of assets to Dresser, which closed on February 28, 2022. Effect of exchange rates on cash and cash equivalents The effect of exchange rates on the cash balances of currencies held in foreign denominations resulted in a decrease of $1.6 million in 2021 and an increase of $0.1 million in 2020. Our foreign currency exposure relates to non-U.S. dollar denominated balances in our international subsidiary operations. Free cash flow (Non-GAAP) To supplement our Consolidated Statements of Cash Flows presented on a GAAP basis, we use the non-GAAP measure of free cash flow to analyze cash flows generated from our operations. The presentation of non-GAAP free cash flow is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity. We calculate free cash flows, using amounts from our Consolidated Statements of Cash Flows, as follows: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["In thousands","2021","","2020"],["Cash provided by operating activities","$","154,794","","","$","109,514"],["Acquisitions of property, plant, and equipment","(34,682)","","","(46,208)"],["Free cash flow","$","120,112","","","$","63,306"]] [[/GREPCENT_TABLE]] Free cash flow increased due to higher operating cash flow and lower spending for property, plant, and equipment. See the cash flow discussion of operating activities above. 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. We expect existing cash, cash flows from operations, and access to capital markets to continue to be sufficient to fund our operating activities and cash commitments, such as debt maturities, and material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. Stock Offering 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 $389.4 million, after deducting underwriters' discounts of the offering, and we closed the sale of the Convertible Notes in a private placement to qualified institutional buyers, resulting in net proceeds to us of $448.5 million after deducting initial purchasers' discounts of the offering. Concurrently with the issuance of the Convertible Notes, we entered into the Convertible 36 Table of Contents Note Hedge Transactions and Warrant Transactions. For further description of these transactions, refer to Item 8: Financial Statements and Supplementary Data, Note 6: Debt and Note 7: Derivative Financial Instruments. 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. At December 31, 2021, no amount was outstanding under the 2018 credit facility revolver, and $64.4 million was utilized by outstanding standby letters of credit, resulting in $435.6 million available for additional borrowings or standby letters of credit under the revolver. At December 31, 2021, $235.6 million was available for additional standby letters of credit under the letter of credit sub-facility and no amounts were outstanding under the swingline sub-facility. Amounts borrowed under the revolver may be repaid and reborrowed until the revolver's maturity on October 18, 2024, at which time all outstanding loans together with all accrued and unpaid interest must be repaid. On March 12, 2021, we closed the sale of $460 million in Convertible Notes in a private placement to qualified institutional buyers. The Convertible Notes do not bear regular interest, and the 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. For further description of our borrowings, refer to Item 8: Financial Statements and Supplementary Data, Note 6: Debt. See Item 8: Financial Statements and Supplementary Data, Note 7: Derivative Financial Instruments. for further details of the Convertible Note Hedge Transactions and Warrant Transactions. For a description of our letters of credit and performance bonds, and the amounts available for additional borrowings or letters of credit under our lines of credit, including the revolver that is part of our credit facility, refer to Item 8: Financial Statements and Supplementary Data, Note 12: Commitments and Contingencies. 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, with an estimated $17 million in cash payments remaining as of December 31, 2021. On October 29, 2021, our Board of Directors approved a restructuring plan (the 2021 Projects), which in conjunction with the announcement of the sale of certain of our Gas device manufacturing operations, (refer to Item 8: Financial Statements and Supplementary Data, Note 18: Sale of Businesses), includes activities to drive reductions in certain locations and functional support areas. These projects are to be substantially complete by the end of 2024. Itron recognized pre-tax restructuring charges of $60.7 million. Of the total charge, approximately $55 million will result in cash expenditures, and the remainder to non-cash impairment charges. Once the 2021 Projects are substantially completed, Itron estimates $15 million to $20 million in annualized savings. Certain of Itron's employees are represented by unions or works councils, which requires consultation, and potential restructuring projects may be subject to regulatory approval, both of which could impact the timing of planned savings in certain jurisdictions. For the year ended December 31, 2021, we paid out a net $29.7 million related to all our restructuring projects. As of December 31, 2021, $85.0 million was accrued for these restructuring projects, of which $29.7 million is expected to be paid within the next 12 months. For further details regarding our restructuring activities, refer to Item 8: Financial Statements and Supplementary Data, Note 13: Restructuring. Reserve of Receivables from Sale of Business On June 25, 2020, we closed on the sale of five subsidiaries comprising our manufacturing and sales operations in Latin America to buyers led by Instalación Profesional y Tecnologías del Centro S.A. de C.V., a Mexican company doing business as Accell in Brazil (Accell), through the execution of various definitive stock purchase agreements. The total sales price of $35.0 million included deferred payments of $21.1 million for working capital, which was to be paid in full by December 31, 2020, as evidenced by a promissory note, and the remainder in cash ($4.5 million) and other deferred consideration. In January 2021, we agreed to extend the payment terms on the remaining outstanding working capital balance of $18.4 million. Accell had agreed to make monthly payments, including interest, through September 2022, under which we received full payments for 37 Table of Contents January through March and partial payments in April and May (totaling $3.8 million including $0.7 million in interest). Based on Accell's failure to make timely payments, continued requests to defer payments significantly beyond the original maturity of the working capital note, and the unfavorable impact of the COVID-19 pandemic on the Latin American markets, we determined to fully reserve the working capital and other deferred consideration in the second quarter of 2021. Stock Repurchase Authorization Effective November 1, 2021, Itron's Board of Directors authorized a share repurchase program of up to $100 million of our common stock over an 18-month period (the 2021 Stock Repurchase Program). Repurchases are made in the open market or in privately negotiated transactions, and in accordance with applicable securities laws. Following the announcement of the program and through December 31, 2021, we repurchased 125,314 shares at an average share price of $64.05 (excluding commissions) for a total of $8.0 million. Subsequent to December 31, 2021, we repurchased 279,968 shares of our common stock under the 2021 Stock Repurchase Program. The average price paid per share was $60.60 (excluding commissions) for total of $17.0 million. Other contractual obligations and commitments Operating lease obligations are disclosed in Item 8: Financial Statements and Supplementary Data, Note 19: Leases and do not include common area maintenance charges, real estate taxes, and insurance charges for which we are obligated. Amounts due under operating lease liabilities for the next twelve months are $19.2 million and beyond the next twelve months are $62.5 million. We regularly enter into standard purchase orders in the ordinary course of business that may obligate us to purchase materials and other items but which may not yet qualify for recognition in our Consolidated Balance Sheets. Purchase orders and other purchase obligations can include open-ended agreements that provide for estimated quantities over an extended delivery period. At December 31, 2021, purchase orders and other purchase obligations were $607.7 million, which includes capital expenditures of $18.2 million. The purchase orders may include durations longer than one year, but these long-term agreements generally contain termination clauses that could require payment if the commitments were canceled, and as such the total above is considered short-term as of December 31, 2021. Other long-term liabilities consist of warranty obligations, estimated pension benefit payments, and other obligations. Estimated pension benefit payments include amounts to be paid from our assets for unfunded plans and reflect expected future service. The following table summarizes our known obligations to make future payments pursuant to certain contracts as of December 31, 2021. [[GREPCENT_TABLE]] [["In thousands","","Next 12 months","","Beyond the next 12 months"],["Warranty obligations","","$","18,406","","","$","13,616"],["Estimated pension benefit payments","","4,294","","","87,863"]] [[/GREPCENT_TABLE]] The period of cash settlement for long-term unrecognized tax benefits, which include accrued interest and penalties, cannot be reasonably estimated with the respective taxing authorities. For further information on defined benefit pension plans, income taxes, warranty obligations, and unearned revenue for extended warranties, see Item 8: Financial Statements and Supplementary Data, Note 8: Defined Benefit Pension Plans, Note 11: Income Taxes, Note 12: Commitments and Contingencies, and Note 17: Revenues. Income Tax Our tax provision as a percentage of income before tax typically differs from the U.S. federal statutory rate of 21%. Changes in our actual tax rate are subject to several factors, including fluctuations in operating results, new or revised tax legislation and accounting pronouncements, changes in the level of business in domestic and foreign jurisdictions, research and development tax credits, state income taxes, adjustments to valuation allowances, settlement of tax audits, and uncertain tax positions, among other items. Changes in tax laws, valuation allowances, and unanticipated tax liabilities could significantly impact our tax rate. 38 Table of Contents Our cash income tax payments were as follows: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["In thousands","2021","","2020"],["U.S. federal taxes paid (refunded)","$","\u2014","","","$","(6,816)"],["State income taxes paid","817","","","914"],["Foreign and local income taxes paid","6,256","","","8,590"],["Total income taxes paid","$","7,073","","","$","2,688"]] [[/GREPCENT_TABLE]] Based on current projections, we expect to pay, net of refunds, approximately $11 million in U.S. federal and state taxes and $6 million in foreign and local income taxes in 2022. As of December 31, 2021, there was $56.0 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 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. Other Liquidity Considerations In several of our consolidated international subsidiaries, we have joint venture partners who are minority shareholders. Although these entities are not wholly-owned by Itron, Inc., we consolidate them because we have a greater than 50% ownership interest and/or because we exercise control over the operations. The noncontrolling interest balance in our Consolidated Balance Sheets represents the proportional share of the equity of the joint venture entities, which is attributable to the minority shareholders. At December 31, 2021, $26.7 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. As of December 31, 2021, we expect to pay approximately $35 million for variable compensation in cash during the first quarter of 2022. 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 Item 1A: Risk Factors, as well as Item 7A: Quantitative and Qualitative Disclosures About Market Risk. Contingencies Refer to Item 8: Financial Statements and Supplementary Data, Note 12: Commitments and Contingencies. Critical Accounting Estimates and Policies Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Our critical accounting policies include revenue recognition, warranty, restructuring, income taxes, business combinations, goodwill and intangible assets, defined benefit pension plans, contingencies, and stock-based compensation. Refer to Item 8: Financial Statements and Supplementary Data, Note 1: Summary of Significant Accounting Policies for further disclosures regarding accounting policies and new accounting pronouncements. 39 Table of Contents Revenue Recognition Many of our revenue arrangements involve multiple performance obligations, consisting of hardware, software, and professional services such as implementation, project management, installation, and consulting services. These arrangements require us to determine the standalone selling price of the promised goods or services underlying each performance obligation and then allocate the total arrangement consideration among the separate performance obligations based on their relative standalone selling price. Revenues for each performance obligation are then recognized upon transfer of control to the customer at a point in time as products are shipped or received by a customer, or over time as services are delivered. The majority of our revenue is recognized at a point in time when products are shipped to or received by a customer. Certain contracts that contain multiple performance obligations may contain customer-specific terms and conditions that govern service level commitments, transfer of control, and variable consideration that may involve complex accounting considerations. Professional services revenues are recognized over time. We measure progress towards satisfying these performance obligations using input methods, most commonly based on the costs incurred in relation to the total expected costs to provide the service. The estimate of expected costs to provide services requires judgment. Cost estimates take into consideration past history and the specific scope requested by the customer and are updated quarterly. Other variables impacting our estimate of costs to complete include length of time to complete, changes in wages, subcontractor performance, supplier information, and business volume assumptions. Changes in underlying assumptions and estimates may adversely or favorably affect financial performance. If we estimate that the completion of a performance obligation will result in a loss, then the loss is recognized in the period in which the loss becomes evident. We reevaluate the estimated loss through the completion of the performance obligation and adjust the estimated loss for changes in facts and circumstances. Many of our contracts with customers include variable consideration, which can include liquidated damage provisions, rebates and volume and early payment discounts, or software licenses sold where the amount of consideration is dependent on the number of endpoints deployed. We estimate variable consideration using the expected value method, taking into consideration contract terms, historical customer behavior, and historical sales. Some of our contracts with customers contain clauses for liquidated damages related to the timing of delivery or milestone accomplishments, which could become material in an event of failure to meet the contractual deadlines. At the inception of the arrangement and on an ongoing basis, we evaluate the probability of having to pay liquidated damages and the magnitude of such damages. In the case of liquidated damages, we also take into consideration progress towards meeting contractual milestones, including whether milestones have not been achieved, specified rates, if applicable, stated in the contract, and history of paying liquidated damages to the customer or similar customers. Certain of our revenue arrangements include an extended or customer-specific warranty provision that covers all or a portion of a customer's replacement or repair costs beyond the standard warranty period. Whether or not the extended warranty is separately priced in the arrangement, a portion of the arrangement's total consideration is allocated to this extended warranty deliverable. This revenue is deferred and recognized over the extended warranty coverage period. Extended or customer-specific warranties do not represent a significant portion of our revenue. We allocate consideration to each performance obligation in an arrangement based on its relative standalone selling price. For goods or services where we have observable standalone sales, the observable standalone sales are used to determine the standalone selling price. For the majority of our goods and services, we do not have observable standalone sales. As a result, we estimate the standalone selling price using either the adjusted market assessment approach or the expected cost plus a margin approach. Approaches used to estimate the standalone selling price for a given good or service maximize the use of observable inputs and consider several factors, including our pricing practices, costs to provide a good or service, the type of good or service, and availability of other transactional data, among others. We determine the estimated standalone selling prices of goods or services used in our allocation of arrangement consideration on an annual basis or more frequently if there is a significant change in our business or if we experience significant variances in our transaction prices. Our contracts may be modified to add, remove, or change existing performance obligations or change contract price. The accounting for modifications to our contracts involves assessing whether the products or services added to an existing contract are distinct and whether the pricing is at the standalone selling price. Products or services added that are not distinct are accounted for as if it were part of the existing contract. The effect of the modification on the transaction price and on the measure of progress is recognized as an adjustment to revenue as of the date of the modification (i.e., on a cumulative catch-up basis). Those products or services that are distinct are accounted for prospectively, either as a separate contract if the additional services are priced at the standalone selling price, or as a termination of the existing contract and creation of a new contract if not priced at the standalone selling price. 40 Table of Contents Warranty We offer standard warranties on our hardware products and large application software products. We accrue the estimated cost of product warranties based on historical and projected product performance trends and costs during the warranty period. Testing of new products in the development stage helps identify and correct potential warranty issues prior to manufacturing. Quality control efforts during manufacturing reduce our exposure to warranty claims. When testing or quality control efforts fail to detect a fault in our products, we may experience an increase in warranty claims. We track warranty claims to identify potential warranty trends. If an unusual trend is identified, an additional warranty accrual would be recognized if a failure event is probable and the cost can be reasonably estimated. When new products are introduced, our process relies on historical averages of similar products until sufficient data are available. As actual experience on new products becomes available, it is used to modify the historical averages to ensure the expected warranty costs are within a range of likely outcomes. Management regularly evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. The warranty allowances may fluctuate due to changes in estimates for material, labor, and other costs we may incur to repair or replace projected product failures, and we may incur additional warranty and related expenses in the future with respect to new or established products, which could adversely affect our financial position and results of operations. Restructuring We recognize a liability for costs associated with an exit or disposal activity under a restructuring project at its fair value in the period in which the liability is incurred. Employee termination benefits considered post-employment benefits are accrued when the obligation is probable and estimable, such as benefits stipulated by human resource policies and practices or statutory requirements. One-time termination benefits are recognized at the date the employee is notified. If the employee must provide future service greater than 60 days, such benefits are recognized ratably over the future service period. For contract termination costs, we recognize a liability upon the later of when we terminate a contract in accordance with the contract terms or when we cease using the rights conveyed by the contract. Asset impairments associated with a restructuring project are determined at the asset group level. An impairment may be recognized for assets that are to be abandoned, are to be sold for less than net book value, or are held for sale in which the estimated proceeds are less than the net book value less costs to sell. We may also recognize impairment on an asset group, which is held and used, when the carrying value is not recoverable and exceeds the asset group's fair value. If an asset group is considered a business, a portion of our goodwill balance is allocated to it based on relative fair value. If the sale of an asset group under a restructuring project results in proceeds that exceed the net book value of the asset group, the resulting gain is recognized within restructuring expense in the Consolidated Statements of Operations. In determining restructuring charges, we analyze our future operating requirements, including the required headcount by business functions and facility space requirements. Our restructuring costs and any resulting accruals involve significant estimates using the best information available at the time the estimates are made. Our estimates involve a number of risks and uncertainties, some of which are beyond our control, including real estate market conditions and local labor and employment laws, rules, and regulations. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and asset impairment charges could be materially different, either higher or lower, than those we have recognized. Income Taxes We estimate income tax expense in each of the taxing jurisdictions in which we operate. Changes in our actual tax rate are subject to several factors, including fluctuations in operating results, new or revised tax legislation and accounting pronouncements, changes in the level of business in domestic and foreign jurisdictions, research and development tax credits, state income taxes, adjustments to valuation allowances, settlement of tax audits, and uncertain tax positions, among other items. Changes in tax laws, valuation allowances, and unanticipated tax liabilities could significantly impact our tax rate. We recognize valuation allowances to reduce deferred tax assets to the extent we believe it is more likely than not that a portion of such assets will not be realized. In making such determinations, we consider all available favorable and unfavorable evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and our ability to carry back losses to prior years. We are required to make assumptions and judgments about potential outcomes that lie outside our control. Our most sensitive and critical factors are the projection, source, and character of future taxable income. Although realization is not assured, management believes it is more likely than not that deferred tax assets, net of valuation allowance, will be realized. The amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced or current tax planning strategies are not implemented. 41 Table of Contents We are subject to audits in multiple taxing jurisdictions in which we operate. These audits may involve complex issues, which may require an extended period of time to resolve. We believe we have recognized adequate income tax provisions and reserves for uncertain tax positions. In evaluating uncertain tax positions, we consider the relative risks and merits of positions taken in tax returns filed and to be filed, considering statutory, judicial, and regulatory guidance applicable to those positions. We make assumptions and judgments about potential outcomes that lie outside management's control. To the extent the tax authorities disagree with our conclusions and depending on the final resolution of those disagreements, our actual tax rate may be materially affected in the period of final settlement with the tax authorities. Goodwill and Intangible Assets Goodwill and intangible assets may result from our business acquisitions. Intangible assets may also result from the purchase of assets and intellectual property where we do not acquire a business. We use estimates, including estimates of useful lives of intangible assets, the amount and timing of related future cash flows, and fair values of the related operations, in determining the value assigned to goodwill and intangible assets. Our finite-lived intangible assets are amortized over their estimated useful lives based on estimated discounted cash flows. In-process research and development is considered an indefinite-lived intangible asset and is not subject to amortization until the associated projects are completed or terminated. Finite-lived intangible assets are tested for impairment at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable. Indefinite-lived intangible assets are tested for impairment annually, when events or changes in circumstances indicate the asset may be impaired, or when their useful lives are determined to be no longer indefinite. Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics, including the forecast discounted cash flows associated with each reporting unit. Each reporting unit corresponds with its respective operating segment. We test goodwill for impairment each year as of October 1, or more frequently should a significant impairment indicator occur. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, we first evaluate the long-lived assets within the reporting unit for impairment and then recognize a goodwill impairment loss in an amount equal to any excess. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We forecast discounted future cash flows at the reporting unit level using risk-adjusted discount rates and estimated future revenues and operating costs, which take into consideration factors such as existing backlog, expected future orders, supplier contracts, and expectations of competitive, business and economic environments. We also identify similar publicly traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. These combined fair values are then reconciled to the aggregate market value of our common stock on the date of valuation, while considering a reasonable control premium. Changes in market demand, fluctuations in the markets in which we operate, the volatility and decline in the worldwide equity markets, and a decline in our market capitalization could unfavorably impact the remaining carrying value of our goodwill, which could have a significant effect on our current and future results of operations and financial position. Defined Benefit Pension Plans We sponsor both funded and unfunded defined benefit pension plans for our international employees, primarily in Germany, France, Indonesia, India, and Italy. We recognize a liability for the projected benefit obligation in excess of plan assets or an asset for plan assets in excess of the projected benefit obligation. We also recognize the funded status of our defined benefit pension plans on our Consolidated Balance Sheets and recognize as a component of other comprehensive income (loss) (OCI), net of tax, the actuarial gains or losses and prior service costs or credits, if any, which arise during the period but are not recognized as components of net periodic benefit cost. Several economic assumptions and actuarial data are used in calculating the expense and obligations related to these plans. The assumptions are updated annually at December 31 and include the discount rate, the expected remaining service life, the expected rate of return on plan assets, and the rate of future compensation increases. The discount rate is a significant assumption used to value our pension benefit obligation. We determine a discount rate for our plans based on the estimated duration of each plan's liabilities. For euro denominated defined benefit pension plans, which represent 91% of our projected 42 Table of Contents benefit obligation, we use discount rates with consideration of the duration of each of the plans, using a hypothetical yield curve developed from euro-denominated AA-rated corporate bond issues. These bonds are assigned different weights to adjust their relative influence on the yield curve, and the highest and lowest yielding 10% of bonds are excluded within each maturity group. The discount rates used, depending on the duration of the plans, were between 0.50% and 1.25%. The weighted average discount rate used to measure the projected benefit obligation for all of the plans at December 31, 2021 was 1.66%. A change of 25 basis points in the discount rate would change our projected benefit obligation by approximately $5.0 million. The financial and actuarial assumptions used at December 31, 2021 may differ materially from actual results due to changing market and economic conditions and other factors. These differences could result in a significant change in the amount of pension expense recognized in future periods. Contingencies A loss contingency is recognized if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of the ultimate loss. Loss contingencies that we determine to be reasonably possible, but not probable, are disclosed but not recognized. Changes in these factors and related estimates could materially affect our financial position and results of operations. Legal costs to defend against contingent liabilities are recognized as incurred. Stock-Based Compensation We grant various stock-based compensation awards to our officers, employees, and Board of Directors with service, performance, and market vesting conditions, including restricted stock units, phantom stock units, and unrestricted stock units (awards). Prior to December 31, 2020, stock options were also granted as part of the stock-based compensation awards. We measure and recognize compensation expense for all awards based on estimated fair values. For awards with only a service condition, we expense stock-based compensation using the straight-line method over the requisite service period for the entire award. For awards with service and performance conditions, if vesting is probable, we expense the stock-based compensation on a straight-line basis over the requisite service period for each separately vesting portion of the award. For awards with a market condition, we expense the fair value over the requisite service period. We measure and recognize compensation expense for all stock-based compensation based on estimated fair values. The fair value of unrestricted stock awards with no market conditions is the market close price of our common stock on the date of grant. For restricted stock units with market conditions, the fair value is estimated at the date of award using a Monte Carlo simulation model, which includes assumptions for dividend yield and expected volatility for our common stock and the common stock for companies within the Russell 3000 index, as well as the risk-free interest rate and expected term of the awards. For phantom stock units, fair value is the market close price of our common stock at the end of each reporting period. For stock options, the fair value was estimated at the date of grant using the Black-Scholes option-pricing model, which included assumptions for the expected volatility, risk-free interest rate, expected term and dividend yield. In valuing our restricted stock units with a market condition and stock options, significant judgment is required in determining the expected volatility of our common stock and the expected life that individuals will hold their stock options prior to exercising. The volatility for our restricted stock units with a market condition is based on the historical volatility of our own stock and the stock for companies comprising the market index within the market condition. The expected volatility for stock options was based on the historical and implied volatility of our own common stock. The expected life of stock option grants was derived from the historical actual term of option grants and an estimate of future exercises during the remaining contractual period of the option. While volatility and estimated life are assumptions that do not bear the risk of change subsequent to the grant date, these assumptions may be difficult to measure as they represent future expectations based on historical experience. Further, our expected volatility and expected life may change in the future, which could substantially change the grant-date fair value of future awards and ultimately the expense we recognize. Actual results and future estimates may differ substantially from our current estimates. Non-GAAP Measures 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 a reconciliation of each non-GAAP measure to the most comparable financial measure prepared and presented in accordance with GAAP, please see the table captioned Reconciliations of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures. 43 Table of Contents We use these non-GAAP financial measures for financial and operational decision making and/or as a means for determining executive compensation. Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance and ability to service debt by excluding certain expenses that may not be indicative of our recurring core operating results. These non-GAAP financial measures facilitate management's internal comparisons to our historical performance, as well as comparisons to our competitors' operating results. Our executive compensation plans exclude non-cash charges related to amortization of intangibles and certain discrete cash and non-cash charges, such as acquisition and integration related expenses, loss on sale of business, or restructuring charges. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. We believe these non-GAAP financial measures are useful to investors because they provide greater transparency with respect to key metrics used by management in its financial and operational decision making and because they are used by our institutional investors and the analyst community to analyze the health of our business. Non-GAAP operating expenses and non-GAAP operating income – We define non-GAAP operating expenses as operating expenses excluding certain expenses related to the amortization of intangible assets, restructuring, loss on sale of business, corporate transition cost, and acquisition and integration. We define non-GAAP operating income as operating income (loss) excluding the expenses related to the amortization of intangible assets, restructuring, loss on sale of business, corporate transition cost, and acquisition and integration. Acquisition and integration related expenses include costs, which are incurred to affect and integrate business combinations, such as professional fees, certain employee retention and salaries related to integration, severances, contract terminations, travel costs related to knowledge transfer, system conversion costs, and asset impairment charges. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of expenses that are related to acquisitions and restructuring projects. By excluding these expenses, we believe that it is easier for management and investors to compare our financial results over multiple periods and analyze trends in our operations. For example, in certain periods, expenses related to amortization of intangible assets may decrease, which would improve GAAP operating margins, yet the improvement in GAAP operating margins due to this lower expense is not necessarily reflective of an improvement in our core business. There are some limitations related to the use of non-GAAP operating expenses and non-GAAP operating income versus operating expenses and operating income calculated in accordance with GAAP. We compensate for these limitations by providing specific information about the GAAP amounts excluded from non-GAAP operating expense and non-GAAP operating income and evaluating non-GAAP operating expense and non-GAAP operating income together with GAAP operating expense and operating income. Non-GAAP net income and non-GAAP diluted EPS – We define non-GAAP net income as net income (loss) attributable to Itron, Inc. excluding the expenses associated with amortization of intangible assets, amortization of debt placement fees, debt extinguishment, restructuring, loss on sale of business, corporate transition cost, acquisition and integration, and the tax effect of excluding these expenses. We define non-GAAP diluted EPS as non-GAAP net income divided by diluted weighted-average shares outstanding during the period calculated on a GAAP basis and then reduced to reflect the anti-dilutive impact of the convertible note hedge transaction entered into in connection with the 0% Convertible Notes due 2026 issued in March 2021. We consider these financial measures to be useful metrics for management and investors for the same reasons that we use non-GAAP operating income. The same limitations described above regarding our use of non-GAAP operating income apply to our use of non-GAAP net income and non-GAAP diluted EPS. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP measures and evaluating non-GAAP net income and non-GAAP diluted EPS together with GAAP net income attributable to Itron, Inc. and GAAP diluted EPS. Adjusted EBITDA – We define adjusted EBITDA as net income (loss) (a) minus interest income, (b) plus interest expense, depreciation and amortization, debt extinguishment, restructuring, loss on sale of business, corporate transition cost, acquisition and integration, and (c) excluding income tax provision or benefit. Management uses adjusted EBITDA as a performance measure for executive compensation. A limitation to using adjusted EBITDA is that it does not represent the total increase or decrease in the cash balance for the period and the measure includes some non-cash items and excludes other non-cash items. Additionally, the items that we exclude in our calculation of adjusted EBITDA may differ from the items that our peer companies exclude when they report their results. We compensate for these limitations by providing a reconciliation of this measure to GAAP net income (loss). Free cash flow – We define free cash flow as net cash provided by operating activities less cash used for acquisitions of property, plant and equipment. We believe free cash flow provides investors with a relevant measure of liquidity and a useful basis for assessing our ability to fund our operations and repay our debt. The same limitations described above regarding our use of adjusted EBITDA apply to our use of free cash flow. We compensate for these limitations by providing specific information regarding the GAAP amounts and reconciling to free cash flow. 44 Table of Contents 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. 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. 45 Table of Contents [[GREPCENT_TABLE]] [["TOTAL COMPANY RECONCILIATIONS","Year Ended December 31,"],["In thousands, except per share data","2021","","2020"],["NON-GAAP OPERATING EXPENSES"],["","GAAP operating expenses","$","652,468","","","$","612,562"],["","","Amortization of intangible assets","(35,801)","","","(44,711)"],["","","Restructuring","(54,623)","","","(37,013)"],["","","Loss on sale of business","(64,289)","","","(59,817)"],["","","Corporate transition cost","\u2014","","","33"],["","","Acquisition and integration","(151)","","","(1,026)"],["","Non-GAAP operating expenses","$","497,604","","","$","470,028"],["NON-GAAP OPERATING INCOME"],["","GAAP operating loss","$","(79,299)","","","$","(10,395)"],["","","Amortization of intangible assets","35,801","","","44,711"],["","","Restructuring","54,623","","","37,013"],["","","Loss on sale of business","64,289","","","59,817"],["","","Corporate transition cost","\u2014","","","(33)"],["","","Acquisition and integration","151","","","1,026"],["","Non-GAAP operating income","$","75,565","","","$","132,139"],["NON-GAAP NET INCOME & DILUTED EPS"],["","GAAP net loss attributable to Itron, Inc.","$","(81,255)","","","$","(57,955)"],["","","Amortization of intangible assets","35,801","","","44,711"],["","","Amortization of debt placement fees","18,078","","","3,954"],["","","Debt extinguishment","11,681","","","\u2014"],["","","Restructuring","54,623","","","37,013"],["","","Loss on sale of business","64,289","","","59,817"],["","","Corporate transition cost","\u2014","","","(33)"],["","","Acquisition and integration","151","","","1,026"],["","","Income tax effect of non-GAAP adjustments (1)","(25,265)","","","(13,280)"],["","Non-GAAP net income attributable to Itron, Inc.","$","78,103","","","$","75,253"],["","Non-GAAP diluted EPS","$","1.75","","","$","1.85"],["","Non-GAAP weighted average common shares outstanding - Diluted","44,617","","","40,571"],["ADJUSTED EBITDA"],["","GAAP net loss attributable to Itron, Inc.","$","(81,255)","","","$","(57,955)"],["","","Interest income","(1,557)","","","(2,998)"],["","","Interest expense","28,638","","","44,001"],["","","Income tax (benefit) provision","(45,512)","","","238"],["","","Debt extinguishment","11,681","","","\u2014"],["","","Depreciation and amortization","84,153","","","97,290"],["","","Restructuring","54,623","","","37,013"],["","","Loss on sale of business","64,289","","","59,817"],["","","Corporate transition cost","\u2014","","","(33)"],["","","Acquisition and integration","151","","","1,026"],["","Adjusted EBITDA","$","115,211","","","$","178,399"],["FREE CASH FLOW"],["","","Net cash provided by operating activities","$","154,794","","","$","109,514"],["","","Acquisitions of property, plant, and equipment","(34,682)","","","(46,208)"],["","Free Cash Flow","$","120,112","","","$","63,306"]] [[/GREPCENT_TABLE]] (1)The income tax effect of non-GAAP adjustments is calculated using the statutory tax rates for the relevant jurisdictions if no valuation allowance exists. If a valuation allowance exists, there is no tax impact to the non-GAAP adjustment. 46 Table of Contents