UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

February 22, 2018

Date of Report (Date of Earliest Event Reported)

 

ITRON, INC.

(Exact Name of Registrant as Specified in its Charter)

Washington

 

000-22418

 

91-1011792

(State or Other Jurisdiction
of Incorporation)

(Commission File No.)

(IRS Employer
Identification No.)

2111 N. Molter Road, Liberty Lake, WA  99019

(Address of Principal Executive Offices, Zip Code)

(509) 924-9900

(Registrant’s Telephone Number, Including Area Code)

 

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.


Item 2.02

Results of Operations and Financial Condition.

 

On February 28, 2018, Itron Inc. issued a press release announcing its financial results for the three months and full year ended December 31, 2017. A copy of this press release and accompanying financial statements are attached as Exhibit 99.1.

 

Item 2.05

Costs Associated with Exit or Disposal Activities.

 

On February 22, 2018, our Board of Directors (“Board”) approved a restructuring plan (the “2018 Projects”). The 2018 Projects will include activities that continue our efforts to optimize our global supply chain and manufacturing operations, product development, and sales and marketing organizations.  We expect to substantially complete the plan by the end of 2020. We estimate pre-tax restructuring charges of $100 million to $110 million with approximately 20% related to closing or consolidating facilities and non-manufacturing operations and approximately 80% associated with severance and other one-time termination benefits. Of the total estimated charge, approximately 95% will result in cash expenditures. We expect to record the majority of the charges in the first quarter of 2018. The 2018 Projects are expected to result in approximately $45 million to $50 million of annualized savings when substantially complete.

 

 

Many of our 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.

 

Item 5.02

Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

 

On February 22, 2018, Kirby Dyess and Peter Mainz, each members of the Board, informed the Board that they will not stand for re-election and will retire at the Company’s next annual general meeting in the second quarter of 2018. Ms. Dyess also serves as a member of the Corporate Governance Committee and the Compensation Committee. Mr. Mainz also serves as a member of the Compensation Committee and the Value Enhancement Committee. The Company would like to thank each of Ms. Dyess and Mr. Mainz for their many contributions to the Company and wish them the best in their future endeavors.  Upon their departures from the Board, the Board will be reduced from eleven to nine members at the next annual general meeting.

 

Item 9.01

Financial Statements and Exhibits.

(d)  Exhibits.

Exhibit Number  

Description

 
99.1 Press Release dated February 28, 2018.*




*  This exhibit is intended to be furnished and shall not be deemed "filed" for purposes of the Exchange Act.


The information presented in this Current Report on Form 8-K may contain forward-looking statements within in the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our expectations about revenues, operations, financial performance, earnings, earnings per share, cash flows and other financial results. 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. Some of the factors that we believe could affect our results include our ability to execute on our restructuring plan, our ability to achieve estimated cost savings, the rate and timing of customer demand for our products, rescheduling of current customer orders, changes in estimated liabilities for product warranties, adverse impacts of litigation, changes in laws and regulations, our dependence on new product development and intellectual property, future acquisitions, changes in estimates for stock-based and bonus compensation, increasing volatility in foreign exchange rates, international business risks and other factors that are more fully described in our Annual Report on Form 10-K for the year ended December 31, 2016 and other reports on file with the Securities and Exchange Commission. The Company undertakes no obligation to update this information.


SIGNATURE

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

ITRON, INC.

 
 

Dated: February 28, 2018

By:

/s/ Joan S. Hooper

Joan S. Hooper

Senior Vice President and Chief Financial Officer


EXHIBIT INDEX

Exhibit
Number

 

Description

 

99.1

Press release dated February 28, 2018.*




*  This exhibit is intended to be furnished and shall not be deemed "filed" for purposes of the Exchange Act.

Exhibit 99.1

Itron Announces Fourth Quarter and Full Year 2017 Financial Results

Fourth Quarter Revenue Increased 11 Percent Driven by Strength in Smart Solutions

LIBERTY LAKE, Wash.--(BUSINESS WIRE)--February 28, 2018--Itron, Inc. (NASDAQ:ITRI) announced today financial results for its fourth quarter and full year ended Dec. 31, 2017. Highlights for the quarter and full year include:

“Our fourth quarter results reflect strong execution of our strategy as we delivered year-over-year growth in revenue and non-GAAP earnings per share," said Philip Mezey, Itron president and chief executive officer. "The progress we made in the quarter and throughout 2017 provides a solid foundation for 2018 as we optimize our operations and integrate Silver Spring Networks. The integration is progressing as planned with active collaboration across our team, a powerful sense of our shared mission and values and positive support from customers and partners."


Summary of Fourth Quarter Consolidated Financial Results

(All comparisons made are against the prior year period unless otherwise noted)

Revenue

Total revenue of $551 million increased 11 percent, or 8 percent excluding the impact of changes in foreign currency exchange rates, compared with the fourth quarter of 2016, driven by strong smart solution business and managed services.

By segment, Electricity revenue increased 20 percent driven by higher smart solution deliveries primarily in North America and Europe, Middle East and Africa (EMEA) regions. Gas and Water revenue increased 2 percent and 3 percent, respectively, primarily due to a favorable impact from changes in foreign currency exchange rates.

Gross Margin

Consolidated gross margin of 31.7 percent increased 10 basis points compared with the fourth quarter of 2016, driven by higher volume and mix of smart solutions primarily in the Electricity segment, offsetting lower gross margins in the Gas and Water segments.

Operating Income, Net Income and Earnings per Share (EPS)

GAAP operating income increased to $47 million compared with $31 million in the fourth quarter of 2016. Non-GAAP operating income increased to $55 million compared with $45 million in 2016. GAAP and non-GAAP operating income improved due to increased revenue at a higher gross margin, offsetting modest increases in operating expenses to support new solutions.

GAAP net income attributable to Itron for the quarter was $2 million, or $0.05 per diluted share, compared with net income of $12 million, or $0.30 per diluted share, in 2016. The lower GAAP net income and EPS were due to a charge of $30 million, or $0.77 per share, to recognize estimated impacts on the company's deferred tax assets due to the enactment of the Tax Act.

Non-GAAP net income of $40 million, or $1.01 per diluted share, increased compared with $26 million, or $0.68 per diluted share, in 2016. The increase reflects higher non-GAAP operating income and lower tax expense related to tax audit settlements, adjustments to valuation allowances and the timing and mix of taxable income by jurisdiction. Non-GAAP amounts exclude the charge related to the Tax Act.

Cash Flow

In the fourth quarter, cash provided by operating activities of $77 million and free cash flow of $61 million increased $43 million and $40 million, respectively, compared with the fourth quarter of 2016. Full-year 2017 cash provided by operating activities of $191 million and free cash flow of $142 million increased $76 million and $70 million, respectively, from the prior year. These cash flow increases were primarily driven by improved profitability and changes in working capital.

Other Measures

Bookings of $811 million increased 24 percent compared with the fourth quarter of 2016. Total backlog was $1.8 billion and 12-month backlog was $931 million at the end of the quarter, a year-over-year increase of 6 percent and 22 percent, respectively.


Operational Update

On Feb. 22, 2018, the board of directors approved a new restructuring plan to continue efforts to optimize our global supply chain, manufacturing operations and product development, sales and marketing Organizations. Estimated pre-tax restructuring charges are between $100 and $110 million, the majority of which will be recognized in the first quarter of 2018. The projects under this plan are anticipated to result in approximately $45 to $50 million of annualized savings upon completion. The Company expects to substantially complete projects under this plan by the end of 2020.

Many of our 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.

Financial Guidance

Itron’s guidance for the full year 2018 is as follows:

Itron's guidance for the first quarter of 2018 is as follows:

Guidance assumes an average euro to U.S. dollar foreign currency exchange rate of $1.21 in 2018, diluted weighted average shares outstanding of approximately 40 million for the year, a non-GAAP effective tax rate for the year of approximately 28 percent and total interest expense of approximately $50 million. Operating profitability and Non-GAAP EPS is expected to be weighted to the second half of the year.

The company also confirmed its expectations that the acquisition of Silver Spring Networks will be accretive to gross margin in 2018 and will be accretive to non-GAAP EPS and adjusted EBITDA in 2019.

These assumptions are forward-looking and reflect the estimated impacts of purchase accounting for the acquisition of Silver Spring Networks, adoption of the new revenue accounting standard and the Tax Act on our financial results and are subject to change.

A reconciliation of forward-looking non-GAAP diluted EPS to the GAAP diluted EPS has not been provided because we are unable to predict with reasonable certainty the potential amount or timing of restructuring and acquisition and integration related expenses and their related tax effects without unreasonable effort. These items are uncertain, depend on various factors and could have a material impact on GAAP results for the guidance period.


Earnings Conference Call

Itron will host a conference call to discuss the financial results and guidance contained in this release at 5:00 p.m. EDT on Feb. 28, 2018. The call will be webcast in a listen-only mode. Webcast information and conference call materials will be made available 10 minutes before the start of the call and will be accessible on Itron’s website at http://investors.itron.com/events.cfm. A replay of the audio webcast will be made available at http://investors.itron.com/events.cfm. A telephone replay of the conference call will be available through Mar. 5, 2018. To access the telephone replay, dial (888) 203-1112 (domestic) or (719) 457-0820 (international) and enter passcode 3052187.

About Itron

Itron is a world-leading technology and services company dedicated to the resourceful use of energy and water. We provide comprehensive solutions that measure, manage and analyze energy and water. Our broad product portfolio includes electricity, gas, water and thermal energy measurement devices and control technology; communications systems; software; as well as managed and consulting services. With thousands of employees supporting nearly 8,000 customers in more than 100 countries, Itron applies knowledge and technology to better manage energy and water resources. Together, we can create a more resourceful world. Join us: www.itron.com.

Itron® and OpenWay® are registered trademarks of Itron, Inc. All third party trademarks are property of their respective owners and any usage herein does not suggest or imply any relationship between Itron and the third party unless expressly stated.

Forward Looking Statements

This release contains forward-looking statements within in the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our expectations about revenues, operations, financial performance, earnings, earnings per share and cash flows. 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. Some of the factors that we believe could affect our results include 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 and other factors that are more fully described in our Annual Report on Form 10-K for the year ended Dec. 31, 2016 and other reports on file with the Securities and Exchange Commission. Itron undertakes no obligation to update or revise any information in this press release.

Non-GAAP Financial Information

To supplement our consolidated financial statements presented 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, 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. The company believes 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. Our non-GAAP financial measures may be different from those reported by other companies. A more detailed discussion of why we use non-GAAP financial measures, the limitations of using such measures, and reconciliations between non-GAAP and the nearest GAAP financial measures are included in this press release.


ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
       
(Unaudited, in thousands, except per share data)
Three Months Ended
December 31,
Twelve Months Ended
December 31,
2017   2016 2017   2016
Revenues
Product revenues $ 492,863 $ 451,174 $ 1,813,925 $ 1,830,070
Service revenues 57,913     44,539   204,272     183,116  
Total revenues 550,776     495,713   2,018,197     2,013,186  
Cost of revenues
Product cost of revenues 339,114 311,023 1,205,548 1,239,152
Services cost of revenues 36,911     28,027   137,495     113,714  
Total cost of revenues 376,025     339,050   1,343,043     1,352,866  
 
Gross profit 174,751 156,663 675,154 660,320
 
Operating expenses
Sales and marketing 43,007 39,846 170,008 158,883
Product development 43,438 40,123 169,977 168,209
General and administrative 36,466 32,034 156,540 162,815
Amortization of intangible assets 5,641 6,110 20,785 25,112
Restructuring (999 )   7,796   6,418     49,090  
Total operating expenses 127,553     125,909   523,728     564,109  
 
Operating income 47,198 30,754 151,426 96,211
Other income (expense)
Interest income 658 271 2,126 865
Interest expense (3,133 ) (2,604 ) (11,581 ) (10,948 )
Other income (expense), net (270 )   (427 ) (7,396 )   (1,501 )
Total other income (expense) (2,745 )   (2,760 ) (16,851 )   (11,584 )
 
Income before income taxes 44,453 27,994 134,575 84,627
Income tax provision (42,079 )   (15,325 ) (74,326 )   (49,574 )
Net income 2,374 12,669 60,249 35,053
Net income attributable to noncontrolling interests 594     1,020   2,951     3,283  
Net income attributable to Itron, Inc. $ 1,780     $ 11,649   $ 57,298     $ 31,770  
 
 
Earnings per common share - Basic $ 0.05     $ 0.30   $ 1.48     $ 0.83  
Earnings per common share - Diluted $ 0.05     $ 0.30   $ 1.45     $ 0.82  
 
Weighted average common shares outstanding - Basic 38,745 38,283 38,655 38,207
Weighted average common shares outstanding - Diluted 39,530 39,028 39,387 38,643
 

ITRON, INC.
SEGMENT INFORMATION
       
(Unaudited, in thousands)
Three Months Ended
December 31,
Twelve Months Ended
December 31,
2017   2016 2017   2016
Revenues
Electricity $ 293,714 $ 245,589 $ 1,022,939 $ 938,374
Gas 138,933 135,769 533,624 569,476
Water 118,129     114,355   461,634     505,336  
Total Company $ 550,776     $ 495,713   $ 2,018,197     $ 2,013,186  
 
Gross profit
Electricity $ 96,726 $ 71,837 $ 318,953 $ 282,677
Gas 44,267 46,907 191,303 205,063
Water 33,758     37,919   164,898     172,580  
Total Company $ 174,751     $ 156,663   $ 675,154     $ 660,320  
 
Operating income
Electricity $ 41,937 $ 17,195 $ 93,566 $ 68,287
Gas 16,357 18,002 74,206 66,813
Water 4,236 8,559 44,494 37,266
Corporate unallocated (15,332 )   (13,002 ) (60,840 )   (76,155 )
Total Company $ 47,198     $ 30,754   $ 151,426     $ 96,211  
 
 
METER AND MODULE SUMMARY
 
(Units in thousands)
Three Months Ended
December 31,
Year Ended
December 31,
2017   2016 2017   2016
Meters
Standard 3,740 3,520 15,740 15,540
Smart 2,790     2,440   10,390     9,340  
Total meters 6,530     5,960   26,130     24,880  
 
Stand-alone communication modules
Smart 1,840     1,510   6,250     5,980  
 

ITRON, INC.
CONSOLIDATED BALANCE SHEETS
   
(Unaudited, in thousands)
December 31, 2017   December 31, 2016
ASSETS
Current assets
Cash and cash equivalents $ 176,274 $ 133,565
Accounts receivable, net 398,029 351,506
Inventories 193,835 163,049
Other current assets 81,604     84,346  
Total current assets 849,742 732,466
 
Property, plant, and equipment, net 200,768 176,458
Deferred tax assets, net 49,971 94,113
Restricted cash 311,010
Other long-term assets 43,666 50,129
Intangible assets, net 95,228 72,151
Goodwill 555,762     452,494  
Total assets $ 2,106,147     $ 1,577,811  
 
LIABILITIES AND EQUITY
Current liabilities
Accounts payable $ 262,166 $ 172,711
Other current liabilities 56,736 43,625
Wages and benefits payable 90,505 82,346
Taxes payable 16,100 10,451
Current portion of debt 19,688 14,063
Current portion of warranty 21,150 24,874
Unearned revenue 41,438     64,976  
Total current liabilities 507,783 413,046
 
Long-term debt 593,572 290,460
Long-term warranty 13,712 18,428
Pension benefit obligation 95,717 84,498
Deferred tax liabilities, net 1,525 3,073
Other long-term obligations 88,206     117,953  
Total liabilities 1,300,515 927,458
 
Equity
Common stock 1,294,767 1,270,467
Accumulated other comprehensive loss, net (170,478 ) (229,327 )
Accumulated deficit (337,873 )   (409,536 )
Total Itron, Inc. shareholders' equity 786,416 631,604
Non-controlling interests 19,216     18,749  
Total equity 805,632     650,353  
Total liabilities and equity $ 2,106,147     $ 1,577,811  
 

ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
(Unaudited, in thousands)
Year Ended
December 31,
2017   2016
Operating activities
Net income $ 60,249 $ 35,053
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 63,215 68,318
Stock-based compensation 21,407 18,035
Amortization of prepaid debt fees 1,067 1,076
Deferred taxes, net 50,667 13,790
Restructuring, non-cash (2,297 ) 7,188
Other adjustments, net 3,673 4,309
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (17,573 ) (27,162 )
Inventories (16,242 ) 22,343
Other current assets 8,112 20,705
Other long-term assets 11,230 (339 )
Accounts payable, other current liabilities, and taxes payable 78,463 (37,312 )
Wages and benefits payable 1,926 7,808
Unearned revenue (41,309 ) (25,810 )
Warranty (10,554 ) (10,246 )
Other operating, net (20,680 )   18,086  
Net cash provided by operating activities 191,354 115,842
 
Investing activities
Acquisitions of property, plant, and equipment (49,495 ) (43,543 )
Business acquisitions, net of cash equivalents acquired (99,386 ) (951 )
Other investing, net 702     (3,034 )
Net cash used in investing activities (148,179 ) (47,528 )
 
Financing activities
Proceeds from borrowings 335,000 15,877
Payments on debt (29,063 ) (79,119 )
Issuance of common stock 3,609 2,891
Other financing, net (7,587 )   (2,672 )
Net cash provided by (used in) financing activities 301,959 (63,023 )
 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash 8,636     (2,744 )
Increase in cash, cash equivalents, and restricted cash 353,770 2,547
Cash, cash equivalents, and restricted cash at beginning of period 133,565     131,018  
Cash, cash equivalents, and restricted cash at end of period $ 487,335     $ 133,565  
 

About Non-GAAP Financial Measures

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

We use these non-GAAP financial measures for financial and operational decision making and/or as a means for determining executive compensation. Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance and ability to service debt by excluding certain expenses that may not be indicative of our recurring core operating results. These non-GAAP financial measures facilitate management’s internal comparisons to our historical performance as well as comparisons to our competitors’ operating results. Our executive compensation plans exclude non-cash charges related to amortization of intangibles and certain discrete cash and non-cash charges such as purchase accounting adjustments, restructuring charges or goodwill impairment charges, and the impact of the Tax Cuts and Jobs Act ("Tax Act"). 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, acquisition and integration, and goodwill impairment. We define non-GAAP operating income as operating income excluding the expenses related to the amortization of intangible assets, restructuring, acquisition and integration, and goodwill impairment. 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 GAAP operating income.


Non-GAAP net income and non-GAAP diluted EPS - We define non-GAAP net income as net income attributable to Itron, Inc. excluding the expenses associated with amortization of intangible assets, restructuring, acquisition and integration, goodwill impairment, amortization of debt placement fees, impact from the Tax Act and the tax effect of excluding these expenses. We define non-GAAP diluted EPS as non-GAAP net income divided by the weighted average shares, on a diluted basis, outstanding during each period. 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 (a) minus interest income, (b) plus interest expense, depreciation and amortization, restructuring, acquisition and integration related expense, goodwill impairment and (c) excluding income tax provision or benefit. Management uses adjusted EBITDA as a performance measure for executive compensation. A limitation to using adjusted EBITDA is that it does not represent the total increase or decrease in the cash balance for the period and the measure includes some non-cash items and excludes other non-cash items. Additionally, the items that we exclude in our calculation of adjusted EBITDA may differ from the items that our peer companies exclude when they report their results. We compensate for these limitations by providing a reconciliation of this measure to GAAP net income.

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

Constant currency - We refer to the impact of foreign currency exchange rate fluctuations in our discussions of financial results, which references the differences between the foreign currency exchange rates used to translate operating results from local currencies 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.

The accompanying tables have more detail on the GAAP financial measures that are most directly comparable to the non-GAAP financial measures and the related reconciliations between these financial measures.


ITRON, INC.
RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
TO THE MOST DIRECTLY COMPARABLE GAAP FINANCIAL MEASURES
       
(Unaudited, in thousands, except per share data)
 
TOTAL COMPANY RECONCILIATIONS Three Months Ended December 31, Twelve Months Ended December 31,
2017   2016 2017   2016
NON-GAAP NET INCOME & DILUTED EPS
GAAP net income attributable to Itron, Inc. $ 1,780 $ 11,649 $ 57,298 $ 31,770
Amortization of intangible assets 5,641 6,110 20,785 25,112
Amortization of debt placement fees 241 245 966 987
Restructuring (999 ) 7,796 6,418 49,090
Acquisition and integration related (recovery) expense 3,095 5 17,139 (197 )
Tax Cuts and Jobs Act adjustment 30,424 30,424
Income tax effect of non-GAAP adjustments (391 )   608   (12,544 )   (8,478 )
Non-GAAP net income attributable to
Itron, Inc.
$ 39,791     $ 26,413   $ 120,486     $ 98,284  
 
Non-GAAP diluted EPS $ 1.01     $ 0.68   $ 3.06     $ 2.54  
 
Weighted average common shares outstanding - Diluted 39,530     39,028   39,387     38,643  
 
ADJUSTED EBITDA
GAAP net income attributable to Itron, Inc. $ 1,780 $ 11,649 $ 57,298 $ 31,770
Interest income (658 ) (271 ) (2,126 ) (865 )
Interest expense 3,133 2,604 11,581 10,948
Income tax provision 42,079 15,325 74,326 49,574
Depreciation and amortization 17,215 16,755 63,215 68,318
Restructuring (999 ) 7,796 6,418 49,090
Acquisition and integration related (recovery) expense 3,095     5   17,139     (197 )
Adjusted EBITDA $ 65,645     $ 53,863   $ 227,851     $ 208,638  
 
FREE CASH FLOW
Net cash provided by operating activities $ 76,853 $ 33,961 $ 191,354 $ 115,842
Acquisitions of property, plant, and equipment (16,002 )   (12,980 ) (49,495 )   (43,543 )
Free Cash Flow $ 60,851     $ 20,981   $ 141,859     $ 72,299  
 
NON-GAAP OPERATING INCOME
GAAP operating income $ 47,198 $ 30,754 $ 151,426 $ 96,211
Amortization of intangible assets 5,641 6,110 20,785 25,112
Restructuring (999 ) 7,796 6,418 49,090
Acquisition and integration related (recovery) expense 3,095     5   17,139     (197 )
Non-GAAP operating income $ 54,935     $ 44,665   $ 195,768     $ 170,216  
 
NON-GAAP OPERATING EXPENSES
GAAP operating expenses $ 127,553 $ 125,909 $ 523,728 $ 564,109
Amortization of intangible assets (5,641 ) (6,110 ) (20,785 ) (25,112 )
Restructuring 999 (7,796 ) (6,418 ) (49,090 )
Acquisition and integration related recovery (expense) (3,095 )   (5 ) (17,139 )   197  
Non-GAAP operating expenses $ 119,816     $ 111,998   $ 479,386     $ 490,104  
 

ITRON, INC.
RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
TO THE MOST DIRECTLY COMPARABLE GAAP FINANCIAL MEASURES
       
(Unaudited, in thousands)
 
SEGMENT RECONCILIATIONS Three Months Ended
December 31,
  Twelve Months Ended
December 31,
2017   2016 2017   2016
NON-GAAP OPERATING INCOME - ELECTRICITY
Electricity - GAAP operating income $ 41,937 $   17,195 $ 93,566 $ 68,287
Amortization of intangible assets 3,268 3,223 11,618 13,273
Restructuring (1,359 ) 2,283 198 7,694
Acquisition and integration related (recovery) expense 471     5   10,258     (197 )
Electricity - Non-GAAP operating income $ 44,317     $   22,706   $ 115,640     $ 89,057  
 
NON-GAAP OPERATING INCOME - GAS
Gas - GAAP operating income $ 16,357 $ 18,002 $ 74,206 $ 66,813
Amortization of intangible assets 1,388 1,568 5,349 6,456
Restructuring 496     3,754   5,213     25,744  
Gas - Non-GAAP operating income $ 18,241     $   23,324   $ 84,768     $ 99,013  
 
NON-GAAP OPERATING INCOME - WATER
Water - GAAP operating income $ 4,236 $ 8,559 $ 44,494 $ 37,266
Amortization of intangible assets 985 1,319 3,818 5,383
Restructuring 254     651   700     13,116  
Water - Non-GAAP operating income $ 5,475     $   10,529   $ 49,012     $ 55,765  
 
NON-GAAP OPERATING INCOME - CORPORATE UNALLOCATED
Corporate unallocated - GAAP operating loss $ (15,332 ) $ (13,002 ) $ (60,840 ) $ (76,155 )
Restructuring (390 ) 1,108 307 2,536
Acquisition and integration related expense 2,624       6,881      
Corporate unallocated - Non-GAAP operating loss $ (13,098 )   $   (11,894 ) $ (53,652 )   $ (73,619 )

CONTACT:
Itron, Inc.
Barbara Doyle, 509-891-3443
Vice President, Investor Relations
or
Rebecca Hussey, 509-891-3574
Manager, Investor Relations