The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements and notes included in this report
and with the consolidated financial statements and the notes thereto for the
fiscal year ended December 31, 2021 filed with the Securities and Exchange
Commission (SEC) in our Annual Report on Form 10-K on February 28, 2022 (2021
Annual Report).
The objective of Management’s Discussion and Analysis is to provide our
assessment of the financial condition and results of operations, including an
evaluation of our liquidity and capital resources along with material events
occurring during the year. The discussion and analysis focuses on material
events and uncertainties known to management that are reasonably likely to cause
reported financial information not to be necessarily indicative of future
operating results or of future financial condition. In addition, we address
matters that are reasonably likely, based on management’s assessment, to have a
material impact on future operations. We expect the analysis will enhance a
reader’s understanding of our financial condition, cash flows, and other changes
in financial condition and results of operations.
Documents we provide to the SEC are available free of charge under the Investors
section of our website at www.itron.com as soon as practicable after they are
filed with or furnished to the SEC. In addition, these documents are available
at the SEC’s website (http://www.sec.gov).
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Certain Forward-Looking Statements
This report contains, and our officers and representatives may from time to time
make, “forward-looking statements” within the meaning of the safe harbor
provisions of the U.S. Private Securities Litigation Reform Act of 1995.
Forward-looking statements are neither historical factors nor assurances of
future performance. These statements are based on our expectations about, among
others, revenues, operations, financial performance, earnings, liquidity,
earnings per share, cash flows and restructuring activities including headcount
reductions and other cost savings initiatives. This document reflects our
current strategy, plans and expectations and is based on information currently
available as of the date of this Quarterly Report on Form 10-Q. When we use
words such as “expect”, “intend”, “anticipate”, “believe”, “plan”, “goal”,
“seek”, “project”, “estimate”, “future”, “strategy”, “objective”, “may”,
“likely”, “should”, “will”, “will continue”, and similar expressions, including
related to future periods, they are intended to identify forward-looking
statements. Forward-looking statements rely on a number of assumptions and
estimates. Although we believe the estimates and assumptions upon which these
forward-looking statements are based are reasonable, any of these estimates or
assumptions could prove to be inaccurate and the forward-looking statements
based on these estimates and assumptions could be incorrect. Our operations
involve risks and uncertainties, many of which are outside our control, and any
one of which, or a combination of which, could materially affect our results of
operations and whether the forward-looking statements ultimately prove to be
correct. Actual results and trends in the future may differ materially from
those suggested or implied by the forward-looking statements depending on a
variety of factors. Therefore, you should not rely on any of these
forward-looking statements. Some of the factors that we believe could affect our
results include our ability to execute on our restructuring plans, our ability
to achieve estimated cost savings, the rate and timing of customer demand for
our products, rescheduling of current customer orders, changes in estimated
liabilities for product warranties, adverse impacts of litigation, changes in
laws and regulations, our dependence on new product development and intellectual
property, future acquisitions, changes in estimates for stock-based and bonus
compensation, increasing volatility in foreign exchange rates, international
business risks, uncertainties caused by adverse economic conditions, including,
without limitation those resulting from extraordinary events or circumstances
such as the COVID-19 pandemic and other factors that are more fully described in
Part I, Item 1A: Risk Factors included in our 2021 Annual Report and other
reports on file with the SEC. We undertake no obligation to update or revise any
forward-looking statement, whether written or oral.
Overview
We are a technology and service company, and we are a leader in the Industrial
Internet of Things (IIoT). We offer solutions that enable utilities and
municipalities to safely, securely, and reliably operate their critical
infrastructure. Our solutions include the deployment of smart networks,
software, services, devices, sensors, and data analytics that allow our
customers to manage assets, secure revenue, lower operational costs, improve
customer service, improve safety, and enable efficient management of valuable
resources. Our comprehensive solutions and data analytics address the unique
challenges facing the energy, water, and municipality sectors, including
increasing demand on resources, non-technical loss, leak detection,
environmental and regulatory compliance, and improved operational reliability.
We operate under the Itron brand worldwide and manage and report under three
operating segments: Device Solutions, Networked Solutions, and Outcomes. The
product and operating definitions of the three segments are as follows:
Device Solutions – This segment primarily includes hardware products used for
measurement, control, or sensing that do not have communications capability
embedded for use with our broader Itron systems, i.e., hardware-based products
not part of a complete end-to-end solution. Examples from the Device Solutions
portfolio include: standard endpoints that are shipped without Itron
communications, such as our standard gas, electricity, and water meters for a
variety of global markets and adhering to regulations and standards within those
markets, as well as our heat and allocation products; communicating meters that
are not a part of an Itron end-to-end solution, such as Smart Spec meters; and
the implementation and installation of non-communicating devices.
Networked Solutions – This segment primarily includes a combination of
communicating devices (e.g., smart meters, modules, endpoints, and sensors),
network infrastructure, and associated application software designed and sold as
a complete solution for acquiring and transporting robust application-specific
data. Networked Solutions includes products and software for the implementation,
installation, and management of communicating devices and data networks.
Examples from the Networked Solutions portfolio include: communicating
measurement, control, or sensing endpoints, such as our Itron OpenWay® Centron
and Riva meters, Itron traditional ERT® technology, Intelis smart gas meters,
500G gas communication modules, 500W water communication modules, GenX
networking infrastructure products and network interface cards (NICs), Smart
City control and management software, Distribution Automation bridge devices,
and specific network control and management software applications. The
Industrial Internet of Things (IIoT) solutions supported by this segment include
automated meter reading (AMR), advanced metering infrastructure (AMI), smart
grid and distribution automation, smart street lighting, and an ever-
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growing set of smart city applications such as traffic management, smart
parking, air quality monitoring, electric vehicle charging, customer engagement,
digital signage, acoustic (e.g., gunshot) detection, and leak detection and
mitigation for both gas and water systems. Our IIoT platform allows all these
industry and smart city applications to be run and managed on a single,
multi-purpose network.
Outcomes – This segment primarily includes our value-added, enhanced software
and services in which we manage, organize, analyze, and interpret data to
improve decision making, maximize operational profitability, drive resource
efficiency, and deliver results for consumers, utilities, and smart cities.
Outcomes places an emphasis on delivering to Itron customers high-value,
turn-key, digital experiences by leveraging the footprint of our Device
Solutions and Networked Solutions segments. The revenues from these offerings
are primarily recurring in nature and would include any direct management of
Device Solutions, Networked Solutions, and other products on behalf of our end
customers. Examples from the Outcomes portfolio include: our meter data
management and analytics offerings; our managed service solutions including
Network-as-a-Service (NaaS) and Platform-as-a-Service (PaaS); forecasting
software and services; our Distributed Energy Management suite of products and
services; our Distributed Intelligence suite of applications and services; and
any consulting-based engagement. Within the Outcomes segment, we also identify
new business models, including performance-based contracting, to drive broader
portfolio offerings across utilities and cities.
We have three measures of segment performance: revenues, gross profit (margin),
and operating income (margin). Intersegment revenues are minimal. Certain
operating expenses are allocated to the operating segments based upon internally
established allocation methodologies. Interest income, interest expense, other
income (expense), the income tax provision (benefit), and certain corporate
operating expenses are neither allocated to the segments nor included in the
measures of segment performance.
Non-GAAP Measures
To supplement our consolidated financial statements, which are prepared in
accordance with accounting principles generally accepted 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 44-46 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.
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Total Company Highlights
Highlights and significant developments for the three months ended March 31,
2022 compared with the three months ended March 31, 2021
•Revenues were $475.3 million compared with $519.6 million in 2021, a decrease
of $44.2 million, or 9%
•Gross margin was 28.4%, compared with 32.2% in 2021
•Operating expenses decreased $7.7 million, or 6%, compared with 2021
•Net income attributable to Itron, Inc. was $0.9 million compared with net
income of $12.6 million in 2021
•GAAP diluted EPS decreased by $0.28 to a diluted income per share of $0.02 in
2022
•Non-GAAP net income attributable to Itron, Inc. was $5.2 million compared with
$21.9 million in 2021
•Non-GAAP diluted EPS was $0.11, a decrease of $0.41 compared with 2021
•Adjusted EBITDA was $18.9 million compared with $49.7 million in 2021
•Total backlog was $3.9 billion and twelve-month backlog was $1.6 billion at
March 31, 2022, compared with $3.4 billion and $1.3 billion at March 31, 2021
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 included one German subsidiary – Itron GmbH along with its business
operations, personnel, and the owned manufacturing facility in Karlsruhe; the
business operations, personnel, and assets associated with the leased
manufacturing facility in Argenteuil, France; and the business and manufacturing
assets maintained at one of our contract manufacturers in North America.
The 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
after the 90-day working capital adjustment period. As of December 31, 2021, we
recognized a pre-tax impairment loss of $34.4 million as well as $3.1 million
for professional services in conjunction with the planned sale to Dresser
(classified within loss on sale of business within the Consolidated Statements
of Operations). In determining the amount of the impairment loss for the assets
of this transaction during the fourth quarter of 2021, we included $59.7 million
of accumulated foreign currency translation losses and $0.9 million in
unrealized loss on defined benefit pension plans, both classified within
accumulated other comprehensive income (AOCI). Upon closing of the sale
transaction in the first quarter of 2022, the then outstanding amounts in AOCI
were reclassified to net income through loss on sale of business for a total of
$55.4 million, with a corresponding reversal of the impairment loss originally
booked in the fourth quarter of 2021. The difference between the amounts
included for the impairment loss in the fourth quarter of 2021 and the first
quarter of 2022 was driven by the change in the euro to U.S. dollar exchange
rate, and operating results for the period owned in 2022.
In the first quarter of 2022, we recognized a loss of $2.2 million related to
changes in the working capital balances and additional professional services The
base sale price of this divestiture was $75.0 million, with adjustments for (1)
pension liabilities assumed by Dresser for related active employees and (2) the
final working capital balance. Cash proceeds from the sale were $55.9 million.
Stock Repurchase Authorization
Effective November 1, 2021, Itron’s Board of Directors authorized a share
repurchase 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. For the three months ended March 31, 2022, 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.
Following the announcement of the program and through March 31, 2022, we
repurchased 405,282 shares at an average share price of $61.67 (excluding
commissions) for a total of $25.0 million.
Credit Facility Amendment
On February 25, 2022, we entered into a fourth amendment to our 2018 credit
facility, which modifies to allow for the addback of non-cash expenses related
to restructuring charges incurred during the quarter ended December 31, 2021 and
also adjusts the maximum total net leverage ratio thresholds for the period
beginning with the first quarter of 2022 through the fourth quarter of 2022 to
allow for increased operational flexibility. The maximum leverage ratio is
increased to 4.75:1 for the first through third quarters of 2022 and 4.50:1 for
the fourth quarter of 2022.
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Impact of COVID-19, Supply Chain Challenges, and the Conflict in Ukraine
The COVID-19 pandemic has had global economic impacts including disrupting
customer demand and global supply chains, resulting in market volatility. The
extent of the recent pandemic and its ongoing impact on our operations is
volatile, but is being monitored closely by our management. During the initial
months of the pandemic our European factories were closed due to government
actions and local conditions, and any further closures that may be imposed on us
could impact our results for 2022. New variants of the virus may cause
previously lifted restrictions to be reinstated, which could result in more
disruptions. Incremental costs we have incurred related to COVID-19, such as
personal protective equipment, increased cleaning and sanitizing of our
facilities, and other such items, have not been material to date. As economies
have reopened, global supply chains have struggled to keep pace with rapidly
changing demand. The resulting supply constraints have manifested across a
variety of areas including mechanical, electrical and logistics portions of the
supply chain, which has impacted our ability to ship products in a timely
manner. In particular, our ability to obtain adequate supply of semiconductor
components has impacted our ability to service recovering customer demand. While
we believe the current imbalance in supply and demand is temporal, the timeline
to recovery is uncertain. Efforts are ongoing with suppliers to increase supply,
including the approval of alternate sources. Recently, inflation in our raw
materials and component costs, freight charges, and labor costs have increased
above historical levels, due to, among other things, the continuing impacts of
the pandemic and uncertain economic environment. We may or may not be able to
fully recover these increased costs through pricing actions with our customers.
At this time, we have not identified any significant decrease in long-term
customer demand for our products and services. However, certain of our customer
projects have experienced delay in deliveries, with revenue originally
forecasted in prior periods shifting to future periods. For more information on
risks associated with the COVID-19 pandemic, please see our risk in Part I, Item
1A, Risk Factors in our 2021 Annual Report.
The COVID-19 pandemic remains a rapidly evolving situation with varying impacts
on the locations in which we do business. Changes in the mix of earnings or
losses from our different geographical operations, as well as any future
enactment of tax legislation and other factors, may result in more volatile
quarterly and annual effective tax rates. The detrimental impacts to financial
results may be partially offset by financial assistance from the U.S. or the
municipalities in which we operate, including employer payroll tax credits for
wages paid to employees who are unable to work during the COVID-19 pandemic.
Other benefits, including options to defer payroll tax payments and additional
deductions, resulted in reduced cash payments in 2020, but increased cash
outlays during 2021 and into 2022.
While we have limited direct business exposure in Russia, Belarus and Ukraine,
the Russian military actions and the resulting sanctions could adversely affect
the global economy, as well as further disrupt the supply chain. A major
disruption in the global economy and supply chain could have a material adverse
effect on our business, prospects, financial condition, results of operations,
and cash flows. The extent and duration of the military action, sanctions, and
resulting market and/or supply disruptions are impossible to predict, but could
be substantial.
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Total Company GAAP and Non-GAAP Highlights and Unit Shipments:
Three Months Ended March 31,
In thousands, except margin and per
share data 2022 2021 % Change
GAAP
Revenues
Product revenues $ 399,810 $ 442,804 (10)%
Service revenues 75,521 76,770 (2)%
Total revenues 475,331 519,574 (9)%
Gross profit 135,224 167,044 (19)%
Operating expenses 128,405 136,104 (6)%
Operating income 6,819 30,940 (78)%
Other income (expense) (2,064) (12,699) (84)%
Income tax provision (3,859) (4,661) (17)%
Net loss attributable to Itron, Inc. 906 12,603 (93)%
Non-GAAP(1)
Non-GAAP operating expenses $ 125,935 $ 128,096 (2)%
Non-GAAP operating income 9,289 38,948 (76)%
Non-GAAP net income attributable to
Itron, Inc. 5,171 21,947 (76)%
Adjusted EBITDA 18,894 49,723 (62)%
GAAP Margins and Earnings Per Share
Gross margin
Product gross margin 26.3 % 30.5 %
Service gross margin 40.0 % 41.6 %
Total gross margin 28.4 % 32.2 %
Operating margin 1.4 % 6.0 %
Net income per common share – Basic $ 0.02 $
0.30
Net income per common share – Diluted $ 0.02 $
0.30
Non-GAAP Earnings Per Share(1)
Non-GAAP diluted EPS $ 0.11 $
0.52
(1)These measures exclude certain expenses that we do not believe are indicative
of our core operating results. See pages 44-46 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.
This metric primarily includes Itron or third-party endpoints deployed within
the electricity, water, and gas utility industries, as well as within cities and
municipalities around the globe. Endpoints under management also include smart
communication modules and network interface cards (NICs) within Itron’s
platforms. At times, these NICs are communicating modules that were sold
separately from an Itron product directly to our customers or to third party
manufacturers for use in endpoints such as
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electric, water, and gas meters; streetlights and other types of IIoT sensors
and actuators; sensors and other capabilities that the end customer would like
Itron to connect and manage on their behalf.
The “endpoint under management” metric only accounts for the specific, unique
endpoint itself, though that endpoint may have multiple applications, services,
outcomes, and higher margin recurring offerings associated with it. This metric
does not reflect the multi-application value that can be derived from the
individual endpoint itself. Additionally, this metric excludes those endpoints
that are non-communicating, non-Itron system hardware component sales or
licensed applications that Itron does not manage the unit or the data from that
unit directly.
While the one-time sale of the platform and endpoints are primarily delivered
via our Networked Solutions segment, our enhanced solutions, on-going
monitoring, maintenance, software, analytics, and distributed intelligent
applications are predominantly recognized in our Outcomes segment. We would
anticipate the opportunity to increase our penetration of Outcomes applications,
software, and managed applications will increase as our endpoints under
management increases. Management believes using the endpoints under management
metric enhances insight to the strategic and operational direction of our
Networked Solutions and Outcomes segments to serve clients for years after their
one-time installation of an endpoint.
A summary of our endpoints under management is as follows:
As of March 31,
Units in thousands 2022 2021
Endpoints under management 83,156 71,388
Results of Operations
Revenues and Gross Margin
The actual results of and effects of changes in foreign currency exchange rates
on revenues and gross profit were as follows:
Effect of Changes
in Foreign Constant
Three Months Ended March 31, Currency Exchange Currency
In thousands 2022 2021 Rates Change Total Change
Total Company
Revenues $ 475,331 $ 519,574 $ (11,767) $ (32,476) $ (44,243)
Gross profit 135,224 167,044 (2,475) (29,345) (31,820)
Revenues – Three months ended March 31, 2022 vs. Three months ended March 31,
2021
Total revenues decreased $44.2 million, or 9%, compared with the same period in
2021. We have been unfavorably impacted by global component constraints, which
limited our ability to fulfill customer demand. Product revenues decreased by
$43.0 million and service revenues decreased $1.2 million. Device Solutions
decreased by $33.2 million; Networked Solutions decreased by $9.5 million; and
Outcomes decreased by $1.5 million when compared with the same period last year.
Changes in exchange rates unfavorably impacted total revenues by $11.8 million,
of which $9.5 million unfavorably impacted Device Solutions.
Gross Margin – Three months ended March 31, 2022 vs. Three months ended
March 31, 2021
Gross margin was 28.4%, compared with 32.2% in 2021. We were unfavorably
impacted by input cost increases, manufacturing inefficiencies related to
component shortages, and product mix changes in 2022 compared with 2021. Product
sales gross margin decreased to 26.3%, compared with 30.5% in 2021. Gross margin
on service revenues decreased to 40.0%, compared with 41.6% in 2021.
Refer to Operating Segment Results section below for further detail on total
company revenues and gross margin.
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Operating Expenses
The actual results of and effects of changes in foreign currency exchange rates
on operating expenses were as follows:
Effect of
Changes in
Foreign
Three Months Ended March 31, Currency Constant
Exchange Currency
In thousands 2022 2021 Rates Change Total Change
Total Company
Sales, general and
administrative $ 76,401 $ 75,992 $ (2,157) $ 2,566 $ 409
Research and development 49,596 51,727 (420) (1,711) (2,131)
Amortization of intangible
assets 6,553 8,973 (101) (2,319) (2,420)
Restructuring (6,366) (1,980) 176 (4,562) (4,386)
Loss on sale of business 2,221 1,392 (45) 874 829
Total operating expenses $ 128,405 $ 136,104 $ (2,547) $ (5,152) $ (7,699)
Operating expenses decreased $7.7 million for the first quarter of 2022 as
compared with the same period in 2021. This was primarily the result of a
reduction of $4.4 million in restructuring, a $2.4 million decrease in
amortization of intangible assets, and a $2.1 million decrease in research and
development expenses.
Other Income (Expense)
The following table shows the components of other income (expense):
Three Months Ended March 31,
In thousands 2022 2021 % Change
Interest income $ 217 $ 542 (60)%
Amortization of prepaid debt fees (839) (2,695) (69)%
Other interest expense (753) (7,780) (90)%
Interest expense (1,592) (10,475) (85)%
Other income (expense), net (689) (2,766) (75)%
Total other income (expense) $ (2,064) $ (12,699) (84)%
Total other income (expense) for the three months ended March 31, 2022 was a net
expense of $2.1 million, compared with net expense of $12.7 million in the same
period in 2021. The lower total expense for the three months ended March 31,
2022, as compared with the same period in 2021, was primarily driven by lower
interest costs of $5.0 million for bonds and $2.0 million for the term loan, as
well as a $1.9 million decrease in amortization of prepaid debt fees and a $1.7
million charge for the extinguishment of debt in 2021, which is included in
other income (expense), net.
Income Tax Provision
For the three months ended March 31, 2022, our income tax expense was $3.9
million compared with income tax expense of $4.7 million for the same period in
2021. Our tax rate for the three months ended March 31, 2022 of 81%, differed
from the federal statutory rate of 21% due to losses in jurisdictions for which
no benefit is recognized because of valuation allowances on deferred tax assets,
the forecasted mix of earnings in domestic and international jurisdictions,
GILTI (Global Intangible Low-Taxed Income) tax, net of Section 250 deduction
(largely driven by research and development capitalization), discrete tax
expense related to the Dresser divestiture, an expense related to stock-based
compensation, and uncertain tax positions. Our tax rate for the three months
ended March 31, 2021 of 26% differed from the federal statutory rate of 21%
primarily due to losses in jurisdictions for which no benefit is recognized
because of valuation allowances on deferred tax assets, the forecasted mix of
earnings in domestic and international jurisdictions, a benefit related to
stock-based compensation, and uncertain tax positions.
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Beginning January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminates the
option to deduct research and development expenditures currently and requires
taxpayers to capitalize and amortize them over five or fifteen years. Although
Congress is considering legislation that would defer the capitalization and
amortization requirement, there is no assurance that the provision will be
repealed or otherwise modified. As a result of research and development
conducted outside of the U.S., we expect additional GILTI (Global Intangible
Low-Taxed Income) tax, net of Section 250 deduction for 2022. The income tax
provision has been prepared according to this currently enacted tax legislation,
but a change in tax law with regards to capitalization of research and
development expenditures would have a material beneficial impact on our annual
effective tax rate.
For additional discussion related to income taxes, see Item 1: Financial
Statements (Unaudited), Note 10: Income Taxes included in this Quarterly Report
on Form 10-Q.
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Operating Segment Results
For a description of our operating segments, refer to Item 1: Financial
Statements (Unaudited), Note 15: Segment Information included in this Quarterly
Report on Form 10-Q. The following tables and discussion highlight significant
changes in trends or components of each operating segment:
Three Months Ended March 31,
In thousands 2022 2021 % Change
Segment revenues
Device Solutions $ 139,565 $ 172,781 (19)%
Networked Solutions 278,820 288,314 (3)%
Outcomes 56,946 58,479 (3)%
Total revenues $ 475,331 $ 519,574 (9)%
Three Months Ended March 31,
2022 2021
Gross Gross Gross Gross
In thousands Profit Margin Profit Margin
Segment gross profit and margin
Device Solutions $ 21,806 15.6% $ 32,296 18.7%
Networked Solutions 91,351 32.8% 112,759 39.1%
Outcomes 22,067 38.8% 21,989 37.6%
Total gross profit and margin $ 135,224 28.4% $ 167,044 32.2%
Three Months Ended March 31,
In thousands 2022 2021 % Change
Segment operating expenses
Device Solutions $ 10,228 $ 10,595 (3)%
Networked Solutions 30,344 33,468 (9)%
Outcomes 13,726 11,653 18%
Corporate unallocated 74,107 80,388 (8)%
Total operating expenses $ 128,405 $ 136,104 (6)%
Three Months Ended March 31,
2022 2021
Operating Operating Operating Operating
In thousands Income (Loss) Margin Income (Loss) Margin
Segment operating income (loss) and
operating margin
Device Solutions $ 11,578 8.3% $ 21,701 12.6%
Networked Solutions 61,007 21.9% 79,291 27.5%
Outcomes 8,341 14.6% 10,336 17.7%
Corporate unallocated (74,107) NM (80,388) NM
Total operating income and operating
margin $ 6,819 1.4% $ 30,940 6.0%
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Device Solutions
The effects of changes in foreign currency exchange rates and the constant
currency changes in certain Device Solutions segment financial results were as
follows:
Effect of
Changes in
Foreign
Three Months Ended March 31, Currency Constant
Exchange Currency
In thousands 2022 2021 Rates Change Total Change
Device Solutions Segment
Revenues $ 139,565 $ 172,781 $ (9,469) $ (23,747) $ (33,216)
Gross profit 21,806 32,296 (2,202) (8,288) (10,490)
Operating expenses 10,228 10,595 (272) (95) (367)
Revenues – Three months ended March 31, 2022 vs. Three months ended March 31,
2021
Revenues decreased $33.2 million, or 19%. Changes in foreign currency exchange
rates unfavorably impacted revenues by $9.5 million. Revenue decreased over the
prior year due to the impact of component shortages, which limited our ability
to fulfill customer demand, in addition to the discontinuation of some legacy
products and the sale of certain Gas product lines to Dresser during the first
quarter of 2022.
Gross Margin – Three months ended March 31, 2022 vs. Three months ended
March 31, 2021
For the three months ended March 31, 2022, gross margin was 15.6%, compared with
18.7% for the same period in 2021. The 310 basis point decrease over the prior
year was primarily due to manufacturing inefficiencies related to component
shortages, and higher input costs.
Operating Expenses – Three months ended March 31, 2022 vs. Three months ended
March 31, 2021
Operating expenses in 2022 compared with the same period in 2021 decreased $0.4
million, or 3%, due to lower sales and marketing expenses.
Networked Solutions
The effects of changes in foreign currency exchange rates and the constant
currency changes in certain Networked Solutions segment financial results were
as follows:
Effect of
Changes in
Foreign
Three Months Ended March 31, Currency Constant
Exchange Currency
In thousands 2022 2021 Rates Change Total Change
Networked Solutions Segment
Revenues $ 278,820 $ 288,314 $ (1,358) $ (8,136) $ (9,494)
Gross profit 91,351 112,759 172 (21,580) (21,408)
Operating expenses 30,344 33,468 (57) (3,067) (3,124)
Revenues – Three months ended March 31, 2022 vs. Three months ended March 31,
2021
Revenues decreased $9.5 million, or 3%, compared with 2021. The change was
primarily due to global component shortages, which limited our ability to
fulfill customer demand, partially offset by the timing of customer projects.
Product revenue was lower by $9.4 million.
Gross Margin – Three months ended March 31, 2022 vs. Three months ended
March 31, 2021
Gross margin decreased to 32.8% for the period ending March 31, 2022, compared
with 39.1% in 2021. The 630 basis point decrease was primarily driven by higher
input costs and manufacturing inefficiencies related to component shortages.
Operating Expenses – Three months ended March 31, 2022 vs. Three months ended
March 31, 2021
Operating expenses decreased $3.1 million, or 9%, in 2022 compared with the same
period in 2021. The decrease was primarily related to reduced research and
development expenses.
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Outcomes
The effects of changes in foreign currency exchange rates and the constant
currency changes in certain Outcomes segment financial results were as follows:
Effect of
Changes in
Foreign
Three Months Ended March 31, Currency
Exchange Constant
In thousands 2022 2021 Rates Currency Change Total Change
Outcomes Segment
Revenues $ 56,946 $ 58,479 $ (941) $ (592) $ (1,533)
Gross profit 22,067 21,989 (445) 523 78
Operating expenses 13,726 11,653 (30) 2,103 2,073
Revenues – Three months ended March 31, 2022 vs. Three months ended March 31,
2021
Revenues decreased $1.5 million, or 3%, compared with 2021. This decrease was
driven by a decrease in product sales, software licensing, and consulting
services.
Gross Margin – Three months ended March 31, 2022 vs. Three months ended
March 31, 2021
Gross margin increased to 38.8% for the first quarter of 2022, compared with
37.6% for the same period last year. The 120 basis point increase was driven by
more favorable services mix and other cost efficiencies.
Operating Expenses – Three months ended March 31, 2022 vs. Three months ended
March 31, 2021
Operating expenses for the 2022 period increased $2.1 million, compared with the
same period last year. The increase was primarily related to increased research
and development investment of $1.7 million.
Corporate Unallocated
Corporate Unallocated Expenses – Three months ended March 31, 2022 vs. Three
months ended March 31, 2021
Operating expenses not directly associated with an operating segment are
classified as Corporate unallocated. These expenses decreased $6.3 million, or
8%, for the three months ended March 31, 2022 compared with the same period in
2021. This was primarily the result of $4.4 million in reduced restructuring
charges related to the plan announced in 2021 and a $2.4 million decrease in
amortization of intangible assets.
Bookings and Backlog of Orders
Bookings for a reported period represent customer contracts and purchase orders
received during the period for hardware, software, and services that have met
certain conditions, such as regulatory and/or contractual approval. Total
backlog represents committed but undelivered products and services for contracts
and purchase orders at period-end. Twelve-month backlog represents the portion
of total backlog that we estimate will be recognized as revenue over the next 12
months. Backlog is not a complete measure of our future revenues as we also
receive significant book-and-ship orders, as well as frame contracts. Bookings
and backlog may fluctuate significantly due to the timing of large project
awards. In addition, annual or multi-year contracts are subject to rescheduling
and cancellation by customers due to the long-term nature of the contracts.
Beginning total backlog, plus bookings, minus revenues, will not equal ending
total backlog due to miscellaneous contract adjustments, foreign currency
fluctuations, and other factors. Total bookings and backlog include certain
contracts with termination for convenience clause, which will not agree to the
total transaction price allocated to the remaining performance obligations
disclosed in Item 1: Financial Statements (Unaudited), Note 16: Revenues
included in this Quarterly Report on Form 10-Q.
Ending Ending
Quarterly Total 12-Month
Quarter Ended Bookings Backlog Backlog
In millions
March 31, 2022 $ 417 $ 3,897 $ 1,557
December 31, 2021 1,076 4,017 1,539
September 30, 2021 395 3,433 1,442
June 30, 2021 596 3,530 1,378
March 31, 2021 688 3,421 1,293
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During the first quarter of 2022, we reduced our total backlog by $55.7 million
in order to reflect the sale of certain Gas product lines to Dresser, effective
February 28, 2022.
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