ITRON, INC. : Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of Operations (type 10-Q)

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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