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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 000-22418
ITRON, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1011792
(State of Incorporation) (I.R.S. Employer Identification No.)
2111 N Molter Road, Liberty Lake, Washington 99019
(509) 924-9900
(Address and telephone number of registrant's principal executive offices) 

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, no par valueITRINASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of July 31, 2023, there were outstanding 45,460,228 shares of the registrant's common stock, no par value, which is the only class of common stock of the registrant.



Itron, Inc.
Table of Contents
 
 Page
Item 1A: Risk Factors
Item 6: Exhibits



PART I: FINANCIAL INFORMATION
Item 1:    Financial Statements (Unaudited)
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30,Six Months Ended June 30,
In thousands, except per share data2023202220232022
Revenues
Product revenues$464,803 $359,898 $881,127 $759,708 
Service revenues76,267 71,984 154,561 147,505 
Total revenues541,070 431,882 1,035,688 907,213 
Cost of revenues
Product cost of revenues322,288 265,278 619,631 560,098 
Service cost of revenues44,835 40,499 85,742 85,786 
Total cost of revenues367,123 305,777 705,373 645,884 
Gross profit173,947 126,105 330,315 261,329 
Operating expenses
Sales, general and administrative79,079 72,877 154,600 149,278 
Research and development53,560 45,055 103,125 94,651 
Amortization of intangible assets4,722 6,485 9,770 13,038 
Restructuring874 (3,459)37,483 (9,825)
Loss on sale of business612 194 630 2,415 
Goodwill impairment 38,480  38,480 
Total operating expenses138,847 159,632 305,608 288,037 
Operating income (loss)35,100 (33,527)24,707 (26,708)
Other income (expense)
Interest income1,508 349 3,326 566 
Interest expense(1,977)(1,660)(4,034)(3,252)
Other income (expense), net(333)(1,386)(1,808)(2,075)
Total other income (expense)(802)(2,697)(2,516)(4,761)
Income (loss) before income taxes34,298 (36,224)22,191 (31,469)
Income tax provision(9,195)(641)(9,125)(4,500)
Net income (loss)25,103 (36,865)13,066 (35,969)
Net income attributable to noncontrolling interests902 102 701 92 
Net income (loss) attributable to Itron, Inc.$24,201 $(36,967)$12,365 $(36,061)
Net income (loss) per common share - Basic$0.53 $(0.82)$0.27 $(0.80)
Net income (loss) per common share - Diluted$0.53 $(0.82)$0.27 $(0.80)
Weighted average common shares outstanding - Basic45,435 45,066 45,358 45,042 
Weighted average common shares outstanding - Diluted45,781 45,066 45,677 45,042 
The accompanying notes are an integral part of these consolidated financial statements.
1

ITRON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended June 30,Six Months Ended June 30,
In thousands2023202220232022
Net income (loss)$25,103 $(36,865)$13,066 $(35,969)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
1,940 (20,628)9,165 (27,519)
Foreign currency translation adjustment reclassified to net income (loss) on sale of business   55,436 
Pension benefit obligation adjustment
(107)206 (213)4,476 
Total other comprehensive income (loss), net of tax1,833 (20,422)8,952 32,393 
Total comprehensive income (loss), net of tax26,936 (57,287)22,018 (3,576)
Comprehensive income (loss) attributable to noncontrolling interests, net of tax902 102 701 92 
Comprehensive income (loss) attributable to Itron, Inc.$26,034 $(57,389)$21,317 $(3,668)
The accompanying notes are an integral part of these consolidated financial statements.
2

ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousandsJune 30, 2023December 31, 2022
ASSETS
Current assets
Cash and cash equivalents$232,787 $202,007 
Accounts receivable, net318,809 280,435 
Inventories267,042 228,701 
Other current assets151,349 118,441 
Total current assets969,987 829,584 
Property, plant, and equipment, net132,648 140,123 
Deferred tax assets, net213,777 211,982 
Other long-term assets35,447 39,901 
Operating lease right-of-use assets, net44,642 52,826 
Intangible assets, net55,378 64,941 
Goodwill1,046,759 1,038,721 
Total assets$2,498,638 $2,378,078 
LIABILITIES AND EQUITY
Current liabilities
Accounts payable$234,928 $237,178 
Other current liabilities52,834 42,869 
Wages and benefits payable99,611 89,431 
Taxes payable14,365 15,324 
Current portion of warranty17,847 18,203 
Unearned revenue140,335 95,567 
Total current liabilities559,920 498,572 
Long-term debt, net453,667 452,526 
Long-term warranty7,639 7,495 
Pension benefit obligation59,739 57,839 
Deferred tax liabilities, net853 833 
Operating lease liabilities35,944 44,370 
Other long-term obligations151,989 124,887 
Total liabilities1,269,751 1,186,522 
Equity
Preferred stock, no par value, 10,000 shares authorized, no shares issued or outstanding
  
Common stock, no par value, 75,000 shares authorized, 45,448 and 45,186 shares issued and outstanding
1,803,813 1,788,479 
Accumulated other comprehensive loss, net(85,722)(94,674)
Accumulated deficit(512,967)(525,332)
Total Itron, Inc. shareholders' equity1,205,124 1,168,473 
Noncontrolling interests23,763 23,083 
Total equity1,228,887 1,191,556 
Total liabilities and equity$2,498,638 $2,378,078 
The accompanying notes are an integral part of these consolidated financial statements.
3

ITRON, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
Common StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Itron, Inc. Shareholders' EquityNoncontrolling InterestsTotal Equity
In thousandsSharesAmount
Balances at January 1, 202345,186 $1,788,479 $(94,674)$(525,332)$1,168,473 $23,083 $1,191,556 
Net loss(11,836)(11,836)(201)(12,037)
Other comprehensive income (loss), net of tax7,119 7,119 7,119 
Distributions to noncontrolling interests(21)(21)
Net stock issued and repurchased219 607 607 607 
Stock-based compensation expense6,919 6,919 6,919 
Balances at March 31, 202345,4051,796,005 (87,555)(537,168)1,171,282 22,861 1,194,143 
Net income24,201 24,201 902 25,103 
Other comprehensive income (loss), net of tax1,833 1,833 1,833 
Net stock issued and repurchased43 1,033 1,033 1,033 
Stock-based compensation expense6,775 6,775 6,775 
Balances at June 30, 202345,448 $1,803,813 $(85,722)$(512,967)$1,205,124 $23,763 $1,228,887 

Common StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Itron, Inc. Shareholders' EquityNoncontrolling InterestsTotal Equity
In thousandsSharesAmount
Balances at January 1, 202245,152 $1,779,775 $(148,098)$(515,600)$1,116,077 $26,682 $1,142,759 
Net income (loss)906 906 (10)896 
Other comprehensive income (loss), net of tax52,815 52,815 52,815 
Net stock issued and repurchased165 784 784 784 
Stock-based compensation expense6,127 6,127 6,127 
Stock repurchased program(280)(16,629)(16,629)(16,629)
Balances at March 31, 202245,0371,770,057 (95,283)(514,694)1,160,080 26,672 1,186,752 
Net income (loss)(36,967)(36,967)102 (36,865)
Other comprehensive income (loss), net of tax(20,422)(20,422)(20,422)
Distributions to noncontrolling interests(3,784)(3,784)
Net stock issued and repurchased33 1,014 1,014 1,014 
Stock-based compensation expense6,405 6,405 6,405 
Balances at June 30, 202245,070 $1,777,476 $(115,705)$(551,661)$1,110,110 $22,990 $1,133,100 
The accompanying notes are an integral part of these consolidated financial statements.
4

ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
In thousands20232022
Operating activities
Net income (loss)$13,066 $(35,969)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of intangible assets28,368 33,251 
Non-cash operating lease expense8,141 8,234 
Stock-based compensation13,694 12,532 
Amortization of prepaid debt fees1,820 1,720 
Deferred taxes, net(2,509)(4,061)
Loss on sale of business630 2,415 
Goodwill impairment 38,480 
Restructuring, non-cash922 (817)
Other adjustments, net(199)194 
Changes in operating assets and liabilities, net of acquisition and sale of business:
Accounts receivable(34,681)28,924 
Inventories(36,466)(13,592)
Other current assets(33,554)(10,688)
Other long-term assets5,595 (3,134)
Accounts payable, other current liabilities, and taxes payable4,670 (16,611)
Wages and benefits payable9,040 (22,264)
Unearned revenue42,919 36,093 
Warranty(440)(2,501)
Restructuring31,181 (23,448)
Other operating, net(9,208)(6,102)
Net cash provided by operating activities42,989 22,656 
Investing activities
Net proceeds (payments) related to the sale of business(772)55,933 
Acquisitions of property, plant, and equipment(12,498)(10,663)
Business acquisitions, net of cash and cash equivalents acquired 23 
Other investing, net50 1,722 
Net cash provided by (used in) investing activities(13,220)47,015 
Financing activities
Issuance of common stock1,641 1,797 
Repurchase of common stock (16,972)
Prepaid debt fees(517)(695)
Other financing, net(354)(4,206)
Net cash provided by (used in) financing activities770 (20,076)
Effect of foreign exchange rate changes on cash and cash equivalents241 (3,674)
Increase in cash and cash equivalents30,780 45,921 
Cash and cash equivalents at beginning of period202,007 162,579 
Cash and cash equivalents at end of period$232,787 $208,500 
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net$20,653 $7,062 
Interest785 717 
The accompanying notes are an integral part of these consolidated financial statements.
5

ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(UNAUDITED)
In this Quarterly Report on Form 10-Q, the terms "we", "us", "our", "Itron", and the "Company" refer to Itron, Inc. and its subsidiaries.

Note 1:    Summary of Significant Accounting Policies

Financial Statement Preparation
The consolidated financial statements presented in this Quarterly Report on Form 10-Q are unaudited and reflect entries necessary for the fair presentation of the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and 2022, Consolidated Statements of Equity for the three months ended June 30, 2023 and 2022 and March 31, 2023 and 2022, the Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022, and the Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022, of Itron, Inc. and its subsidiaries. All entries required for the fair presentation of the financial statements are of a normal recurring nature, except as disclosed. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results expected for the full year or for any other period.

Certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been partially or completely omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) regarding interim results. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2022 filed with the SEC in our Annual Report on Form 10-K on February 27, 2023 (2022 Annual Report). There have been no significant changes in financial statement preparation or significant accounting policies since December 31, 2022.

Risks and Uncertainties
Global economic impacts, such as the COVID-19 pandemic and the Ukraine conflict, may create disruption in customer demand and global supply chains, resulting in market volatility, which our management continues to monitor. In the aftermath of these types of events global supply chains struggle to keep pace with rapidly changing demand. While recently improving from 2022 levels, our ability to obtain adequate supply of semiconductor components has impacted our ability to service customer demand. Temporal imbalance in supply and demand creates business uncertainties that include costs and availability. Efforts continue 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 uncertain economic environment. We may or may not be able to fully recover these increased costs through pricing actions with our customers. Currently, we have not identified any significant decrease in long-term customer demand for our products and services. Certain of our customer projects have experienced delays in deliveries, with revenues originally forecasted in prior periods shifting to future periods.

While we have limited direct business exposure in areas with current conflict, such as Russia, Belarus, and Ukraine, military actions globally and any 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, and our management continues to monitor these events closely.

6

Reclassification
In the Consolidated Statements of Cash Flows, the following reclassifications have been made to prior year amounts to conform to current year presentation of restructuring liabilities:

Six Months Ended June 30, 2022
In thousandsAs Previously ReportedAdjustmentsAs Reclassified
Changes in operating assets and liabilities, net of acquisitions and sale of business:
Accounts payable, other current liabilities, and taxes payable$(24,604)$7,993 $(16,611)
Restructuring (23,448)(23,448)
Other operating, net(21,557)15,455 (6,102)

Recently Adopted Accounting Standards
In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-08 amending Business Combination: (Topic 805), which was necessary due to 2014-09, Revenue from Contracts with Customers (Topic 606). The FASB issued this Update to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to (1) recognition of an acquired contract liability and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. We adopted this amendment as of the effective date of January 1, 2023. These amendments are to be applied prospectively to business combinations occurring on or after the effective date of the amendments. We currently plan to apply the practical expedients as needed for any future acquisitions. The practical expedients cover contracts that were modified prior to acquisition date as well as determining which date an acquirer would have to determine the standalone selling price of each performance obligation in an acquired contract.

Note 2:    Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (EPS):
Three Months Ended June 30,Six Months Ended June 30,
In thousands, except per share data2023202220232022
Net income (loss) available to common shareholders$24,201 $(36,967)$12,365 $(36,061)
Weighted average common shares outstanding - Basic45,435 45,066 45,358 45,042 
Dilutive effect of stock-based awards346  319  
Dilutive effect of convertible notes    
Weighted average common shares outstanding - Diluted45,781 45,066 45,677 45,042 
Net income (loss) per common share - Basic$0.53 $(0.82)$0.27 $(0.80)
Net income (loss) per common share - Diluted$0.53 $(0.82)$0.27 $(0.80)

Stock-based Awards
For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase our common stock at the average market price during the period. Related proceeds include the amount the employee must pay upon exercise and the future compensation cost associated with the stock award. Approximately 0.4 million stock-based awards were excluded from the calculation of diluted EPS for both the three and six months ended June 30, 2023 because they were anti-dilutive. Approximately 0.9 million and 0.8 million stock-based awards were excluded from the calculation of diluted EPS for the three and six months ended June 30, 2022 because they were anti-dilutive. These stock-based awards could be dilutive in future periods.

7

Convertible Notes and Warrants
For our convertible notes issued in March 2021, the dilutive effect is calculated using the if-converted method. We are required, pursuant to the indenture governing our convertible notes, to settle the principal amount of the convertible notes in cash and may elect to settle the remaining conversion obligation (stock price in excess of conversion price) in cash, shares, or a combination thereof. Under the if-converted method, we include the number of shares required to satisfy the remaining conversion obligation, assuming all the convertible notes were converted. The average closing prices of our common stock for the quarter ended June 30, 2023 were used as the basis for determining the dilutive effect on EPS. The quarterly average closing prices for our common stock did not exceed the conversion price of $126.00, and therefore all associated shares were anti-dilutive.

In conjunction with the issuance of the convertible notes, we sold warrants to purchase 3.7 million shares of Itron common stock. The warrants have a strike price of $180.00 per share. For calculating the dilutive effect of the warrants, we use the treasury stock method. With this method, we assume exercise of the warrants at the beginning of the period, or at time of issuance if later, and the issuance of common stock upon exercise. Proceeds from the exercise of the warrants are assumed to be used to repurchase shares of our stock at the average market price during the period. The incremental shares, representing the number of shares assumed to be exercised with the warrants less the number of shares repurchased, are included in diluted weighted average common shares outstanding. For periods where the warrants strike price of $180.00 per share is greater than the average share price of Itron stock for the period, the warrants would be anti-dilutive. For the three and six months ended June 30, 2023, the quarterly average closing prices of our common stock did not exceed the warrant strike price and therefore 3.7 million shares were considered anti-dilutive.

Convertible Note Hedge Transactions
In connection with the issuance of the convertible notes, we entered into privately negotiated call option contracts on our common stock (the convertible note hedge transactions) with certain commercial banks (the Counterparties). The convertible note hedge transactions cover, subject to anti-dilution adjustments substantially similar to those in the convertible notes, approximately 3.7 million shares of our common stock, the same number of shares initially underlying the convertible notes, at a strike price of approximately $126.00, subject to customary adjustments. The convertible note hedge transactions will expire upon the maturity of the convertible notes, subject to earlier exercise or termination. Exercise of the convertible note hedge transactions would reduce the number of shares of our common stock outstanding and therefore would be anti-dilutive.

Note 3:    Certain Balance Sheet Components

A summary of accounts receivable from contracts with customers is as follows:
Accounts receivable, net
In thousandsJune 30, 2023December 31, 2022
Trade receivables (net of allowance of $4,694 and $4,863)
$284,598 $249,771 
Unbilled receivables34,211 30,664 
Total accounts receivable, net$318,809 $280,435 

Allowance for credit losses account activityThree Months Ended June 30,Six Months Ended June 30,
In thousands2023202220232022
Beginning balance$4,782 $5,598 $4,863 $5,730 
Provision for (release of) doubtful accounts, net52 619 (39)518 
Accounts written-off, net(178)(322)(244)(244)
Effect of change in exchange rates38 (265)114 (374)
Ending balance$4,694 $5,630 $4,694 $5,630 

Inventories
In thousandsJune 30, 2023December 31, 2022
Raw materials$217,508 $182,118 
Work in process11,120 8,386 
Finished goods38,414 38,197 
Total inventories$267,042 $228,701 
8

Property, plant, and equipment, net
In thousandsJune 30, 2023December 31, 2022
Machinery and equipment$314,495 $306,699 
Computers and software121,873 119,670 
Buildings, furniture, and improvements131,247 130,301 
Land8,700 8,566 
Construction in progress, including purchased equipment18,800 19,403 
Total cost595,115 584,639 
Accumulated depreciation(462,467)(444,516)
Property, plant, and equipment, net$132,648 $140,123 

Depreciation expenseThree Months Ended June 30,Six Months Ended June 30,
In thousands2023202220232022
Depreciation expense$9,183 $9,929 $18,598 $20,213 

Note 4:    Intangible Assets and Liabilities

The gross carrying amount and accumulated amortization (accretion) of our intangible assets and liabilities, other than goodwill, were as follows:
June 30, 2023December 31, 2022
In thousandsGrossAccumulated
(Amortization) Accretion
NetGrossAccumulated
(Amortization) Accretion
Net
Intangible Assets
Core-developed technology$500,663 $(496,838)$3,825 $498,601 $(492,782)$5,819 
Customer contracts and relationships326,723 (277,206)49,517 322,360 (265,503)56,857 
Trademarks and trade names72,931 (71,043)1,888 72,156 (70,101)2,055 
Other12,019 (11,871)148 12,017 (11,807)210 
Total intangible assets
$912,336 $(856,958)$55,378 $905,134 $(840,193)$64,941 
Intangible Liabilities
Customer contracts and relationships$(23,900)$23,900 $ $(23,900)$23,900 $ 

A summary of intangible assets and liabilities activity is as follows:
Six Months Ended June 30,
In thousands20232022
Intangible assets, gross beginning balance$905,134 $928,422 
Effect of change in exchange rates7,202 (22,306)
Intangible assets, gross ending balance$912,336 $906,116 
Intangible liabilities, gross beginning balance$(23,900)$(23,900)
Effect of change in exchange rates  
Intangible liabilities, gross ending balance$(23,900)$(23,900)

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

9

Estimated future annual amortization is as follows:
Year Ending December 31,Estimated Annual Amortization
In thousands
2023 (amount remaining at June 30, 2023)$9,230 
202415,100 
202514,356 
202610,342 
20275,629 
Thereafter721 
Total intangible assets subject to amortization$55,378 

Note 5:    Goodwill

The following table reflects changes in the carrying amount of goodwill for the six months ended June 30, 2023:
In thousandsDevice SolutionsNetworked SolutionsOutcomesTotal Company
Goodwill balance at January 1, 2023$ $899,887 $138,834 $1,038,721 
Effect of change in exchange rates 6,975 1,063 8,038 
Goodwill balance at June 30, 2023$ $906,862 $139,897 $1,046,759 

Note 6:    Debt

The components of our borrowings were as follows:
In thousandsJune 30, 2023December 31, 2022
Credit facility
Multicurrency revolving line of credit$ $ 
Convertible notes460,000 460,000 
Total debt460,000 460,000 
Less: unamortized prepaid debt fees - convertible notes6,333 7,474 
Long-term debt, net $453,667 $452,526 

Credit Facility
Our current credit facility, initially entered on January 5, 2018 (as amended, the 2018 credit facility), originally provided for committed credit facilities in the amount of $1.2 billion U.S. dollars. This facility now consists of a multicurrency revolving line of credit (the revolver) with a principal amount of up to $500 million. The revolver also contains a $300 million standby letter of credit sub-facility and a $50 million swingline sub-facility. The $650 million U.S. dollar term loan included in the original facility was fully repaid in August 2021.

The 2018 credit facility permits us and certain of our foreign subsidiaries to borrow in U.S. dollars, euros, or, with lender approval, other currencies readily convertible into U.S. dollars. All obligations under the 2018 credit facility are guaranteed by Itron, Inc. and material U.S. domestic subsidiaries and are secured by a pledge of substantially all of the assets of Itron, Inc. and material U.S. domestic subsidiaries. This includes a pledge of 100% of the capital stock of material U.S. domestic subsidiaries and up to 66% of the voting stock (100% of the non-voting stock) of first-tier foreign subsidiaries. In addition, the obligations of any foreign subsidiary who is a foreign borrower, as defined by the 2018 credit facility, are guaranteed by the foreign subsidiary and by its direct and indirect foreign parents. The 2018 credit facility includes debt covenants, which contain certain financial thresholds and place certain restrictions on the incurrence of debt, investments, and the issuance of dividends. We were in compliance with the debt covenants under the 2018 credit facility at June 30, 2023.

Under the 2018 credit facility, we elect applicable market interest rates for both the term loan and any outstanding revolving loans. We also pay an applicable margin, which is based on our total net leverage ratio as defined in the credit agreement. The applicable rates per annum may be based on either: (1) the LIBOR rate or EURIBOR rate (subject to a floor of 0%), plus an applicable margin, or (2) the Alternate Base Rate, plus an applicable margin. The Alternate Base Rate election is equal to the greatest of three rates: (i) the prime rate, (ii) the Federal Reserve effective rate plus 0.50%, or (iii) one-month LIBOR plus
10

1.00%. The cessation of LIBOR occurred in June 2023. On November 23, 2022, we amended the 2018 credit facility to replace the LIBOR rate with the Term Secured Overnight Financing Rate (SOFR) as the base interest rate. On February 21, 2023, we entered into a sixth amendment to the 2018 credit facility. This amendment modifies provisions to allow for the addback for debt covenant calculations of non-recurring cash expenses related to restructuring charges incurred during the quarter ended March 31, 2023.

At June 30, 2023, there were no outstanding loan balances under the credit facility, and $61.6 million was utilized by outstanding standby letters of credit, resulting in $438.4 million available for additional borrowings or standby letters of credit within the revolver. At June 30, 2023, $238.4 million was available for additional standby letters of credit under the letter of credit sub-facility, and no amounts were outstanding under the swingline sub-facility.

Convertible Notes
On March 12, 2021, we closed the sale of the convertible notes in a private placement to qualified institutional buyers, resulting in net proceeds to us of $448.5 million after deducting initial purchasers' discounts of the offering. The convertible notes do not bear regular interest, and the principal amount does not accrete. The convertible notes will mature on March 15, 2026, unless earlier repurchased, redeemed, or converted in accordance with their terms. No sinking fund is provided for the convertible notes.

The initial conversion rate of the convertible notes is 7.9365 shares of our common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $126.00 per share. The conversion rate of the convertible notes is subject to adjustment upon the occurrence of certain specified events. In addition, upon the occurrence of a make-whole fundamental change (as defined in the indenture governing the convertible notes) or upon a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder that elects to convert its convertible notes in connection with such make-whole fundamental change or notice of redemption, as the case may be.

Prior to the close of business on the business day immediately preceding December 15, 2025, the convertible notes are convertible at the option of the holders only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business-day period after any five consecutive trading-day period (the measurement period) in which the trading price per $1,000 principal amount of convertible notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; (3) upon the occurrence of specified corporate events; or (4) upon redemption by us. On or after December 15, 2025, until the close of business on the second scheduled trading day immediately preceding March 15, 2026, holders of the convertible notes may convert all or a portion of their notes at any time. Upon conversion, we will pay cash up to the aggregate principal amount of convertible notes to be converted and pay and/or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the convertible notes being converted.

On or after March 20, 2024 and prior to December 15, 2025, we may redeem for cash all or part of the convertible notes, at our option, if the last reported sales price of common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related notice of the redemption. The redemption price of each convertible note to be redeemed will be the principal amount of such note, plus accrued and unpaid special interest, if any. Upon the occurrence of a fundamental change (as defined in the indenture governing the convertible notes), subject to a limited exception described in the indenture governing the convertible notes, holders may require us to repurchase all or a portion of their notes for cash at a price equal to plus accrued and unpaid special interest to, but not including, the fundamental change repurchase date (as defined in the indenture governing the convertible notes).

The convertible notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsubordinated debt and senior in right of payment to any future debt that is expressly subordinated in right of payment to the convertible notes. The convertible notes will be effectively subordinated to any of our existing and future secured debt to the extent of the assets securing such indebtedness. The convertible notes will be structurally subordinated to all existing debt and any future debt and any other liabilities of our subsidiaries.
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Debt Maturities
The amount of required minimum principal payments on our long-term debt in aggregate over the next five years is as follows:
Year Ending December 31,Minimum Payments
In thousands
2023 (amount remaining at June 30, 2023)$ 
2024 
2025 
2026460,000 
2027 
Thereafter 
Total minimum payments on debt$460,000 

Note 7:    Derivative Financial Instruments

As part of our risk management strategy, we use derivative instruments to hedge certain foreign currencies. Refer to Note 13: Shareholders' Equity and Note 14: Fair Value of Financial Instruments for additional disclosures on our derivative instruments.

Derivatives Not Designated as Hedging Relationships
We are exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recognized within other income (expense) in our Consolidated Statements of Operations. We enter into monthly foreign exchange forward contracts, which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with currency exposures. As of June 30, 2023, a total of 35 contracts were offsetting our exposures from the euro, pound sterling, Indonesian rupiah, Canadian dollar, Australian dollar and various other currencies, with notional amounts ranging from $97,000 to $41.8 million.

We will continue to monitor and assess our interest rate and foreign exchange risk and may institute additional derivative instruments to manage such risk in the future.

Note 8:    Defined Benefit Pension Plans

We sponsor both funded and unfunded defined benefit pension plans offering death and disability, retirement, and special termination benefits for certain of our international employees, primarily in Germany, France, Indonesia, India, and Italy. The defined benefit obligation is calculated annually by using the projected unit credit method. The measurement date for the pension plans was December 31, 2022.

Amounts recognized on the Consolidated Balance Sheets consist of:
In thousandsJune 30, 2023December 31, 2022
Assets
Plan assets in other long-term assets$161 $162 
Liabilities
Current portion of pension benefit obligation in wages and benefits payable$3,894 $3,400 
Long-term portion of pension benefit obligation59,739 57,839 
Pension benefit obligation, net$63,472 $61,077 

Our asset investment strategy focuses on maintaining a portfolio using primarily insurance funds, which are accounted for as investments and measured at fair value, in order to achieve our long-term investment objectives on a risk-adjusted basis. Our general funding policy for these qualified pension plans is to contribute amounts sufficient to satisfy regulatory funding standards of the respective countries for each plan.

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Net periodic pension benefit cost for our plans includes the following components:
Three Months Ended June 30,Six Months Ended June 30,
In thousands2023202220232022
Service cost$636 $708 $1,240 $1,502 
Interest cost721 423 1,433 866 
Expected return on plan assets(89)(80)(176)(163)
Amortization of prior service costs15 18 30 36 
Amortization of actuarial net loss(122)196 (243)431 
Net periodic benefit cost$1,161 $1,265 $2,284 $2,672 

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

Note 9:    Stock-Based Compensation

We grant stock-based compensation awards, including restricted stock units, phantom stock, and unrestricted stock units, under the Second Amended and Restated 2010 Stock Incentive Plan (Stock Incentive Plan). Prior to December 31, 2020, stock options were also granted as part of the stock-based compensation awards. In the Stock Incentive Plan, we have 12,123,538 shares of common stock authorized for issuance subject to stock splits, dividends, and other similar events, and at June 30, 2023, 3,418,336 shares were available for grant. We issue new shares of common stock upon the exercise of stock options or when vesting conditions on restricted stock units are fully satisfied. These shares are subject to a fungible share provision such that the authorized share available for grant is reduced by (i) one share for every one share subject to a stock option or share appreciation right granted under the Plan and (ii) 1.7 shares for every one share of common stock that was subject to an award other than an option or share appreciation right.

We also award phantom stock units, which are settled in cash upon vesting and accounted for as liability-based awards, with no impact to the shares available for grant.

In addition, we maintain the Employee Stock Purchase Plan (ESPP), for which 544,060 shares of common stock were available for future issuance at June 30, 2023. In May 2023, the shareholders authorized, via a proxy approval, the reallocation of 500,000 reserved shares from the shares available for grant in the Stock Incentive Plan to the ESPP.

ESPP activity and stock-based grants other than stock options and restricted stock units were not significant for the three and six months ended June 30, 2023 and 2022.

Stock-Based Compensation Expense
Total stock-based compensation expense and the related tax benefit were as follows:
Three Months Ended June 30,Six Months Ended June 30,
In thousands2023202220232022
Stock options$20 $278 $80 $562 
Restricted stock units6,516 5,869 13,099 11,453 
Unrestricted stock awards239 258 515 517 
Phantom stock units1,147 582 1,924 772 
Total stock-based compensation$7,922 $6,987 $15,618 $13,304 
Related tax benefit$1,670 $1,434 $3,373 $2,803 

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Stock Options
A summary of our stock option activity is as follows:
SharesWeighted
Average Exercise
Price per Share
Weighted Average
Remaining
Contractual Life
Aggregate
Intrinsic Value
Weighted
Average Grant
Date Fair Value
In thousandsYearsIn thousands
Outstanding, January 1, 2022393 $61.18 5.9$4,737 
Granted  $ 
Exercised   
Forfeited(2)87.27 
Canceled(8)78.84 
Outstanding, June 30, 2022383 $60.69 5.4$1,729 
Outstanding, January 1, 2023381 $60.63 4.8$1,892 
Granted  $ 
Exercised(5)55.49 73 
Forfeited  
Canceled  
Outstanding, June 30, 2023376 $60.70 4.4$5,494 
Exercisable, June 30, 2023373 $60.66 4.4$5,456 

At June 30, 2023, total unrecognized stock-based compensation expense related to nonvested stock options was $22,000, which is expected to be recognized over a weighted average period of approximately 0.4 years.

Restricted Stock Units
The following table summarizes restricted stock unit activity:
In thousands, except fair valueNumber of
Restricted Stock Units
Weighted
Average Grant
Date Fair Value
Aggregate
Intrinsic Value
Outstanding, January 1, 2022430 
Granted356 $53.47 
Released (1)
(157)$8,430 
Forfeited(45)
Outstanding, June 30, 2022584 
Outstanding, January 1, 2023528 $66.39 
Granted442 56.37 
Released (1)
(222)72.56 $1,236 
Forfeited(19)63.89 
Outstanding, June 30, 2023729 58.70 
Vested but not released, June 30, 202314 $1,001 
(1)    Shares released is presented as gross shares and does not reflect shares withheld by us for employee payroll tax obligations.

At June 30, 2023, total unrecognized compensation expense on restricted stock units was $43.3 million, which is expected to be recognized over a weighted average period of approximately 1.9 years.

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The weighted average assumptions used to estimate the fair value of performance-based restricted stock units granted with a service and market condition and the resulting weighted average fair value are as follows:
Six Months Ended June 30,
20232022
Expected volatility50.0 %55.7 %
Risk-free interest rate4.6 %1.7 %
Expected term (years)2.22.9
Weighted average fair value$59.52 $57.88 

Note 10: Income Taxes

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

Our tax rate for the three and six months ended June 30, 2023 of 27% and 41%, respectively, differed from the federal statutory rate of 21% due to the impact of valuation allowances on deferred tax assets, the forecasted mix of earnings in domestic and international jurisdictions, U.S. taxation of foreign earnings including GILTI (Global Intangible Low Taxed Income) tax, net of Section 250 deduction (largely driven by research and development capitalization), Subpart F income, an expense related to stock-based compensation, tax credits, and uncertain tax positions.

Our tax rate for the three and six months ended June 30, 2022 of (2)% and (14)%, respectively, differed from the federal statutory rate of 21% due to the impact of valuation allowances on deferred tax assets, the forecasted mix of earnings in domestic and international jurisdictions, GILTI (Global Intangible Low-Taxed Income) and Subpart F tax, net of Section 250 deduction (largely driven by research and development capitalization), discrete tax expense related to the Dresser divestiture, a discrete tax benefit due to goodwill impairment, an expense related to stock-based compensation, tax credits, and uncertain tax positions.

Beginning January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five or fifteen years, dependent upon the geography in which the expenditures are incurred. Although Congress has considered legislation that would defer, modify, or repeal the capitalization and amortization requirement, as of quarter end no such deferral has been passed. The income tax provision has been prepared according to currently enacted tax legislation.

In August 2022, the Inflation Reduction Act was signed into law, which made a number of changes to the Internal Revenue Code, including adding a 1% excise tax on stock buybacks by publicly traded corporations and a 15% minimum tax on adjusted financial statement income of certain large companies. We are subject to the new 1% excise tax beginning January 1, 2023, but the amount will vary depending upon various factors. The 15% minimum tax only applies to corporations with average book income in excess of $1 billion, therefore it is not currently applicable.

The Organization for Economic Cooperation and Development (OECD) Pillar 2 global minimum tax rules are intended to apply for tax years beginning in 2024. On February 1, 2023, the FASB staff noted that they believe that the Pillar 2 tax would be an alternative minimum tax and therefore deferred tax assets would not need to be recognized related to this parallel taxing system. On February 2, 2023, the OECD issued administrative guidance providing transition and safe harbor rules around the implementation of the Pillar 2 global minimum tax. Under a transitional safe harbor released July 17, 2023, the undertaxed profits rule (UTPR) top-up tax in the jurisdiction of a company's ultimate parent entity will be zero for each fiscal year of the transition period, if that jurisdiction has a corporate tax rate of at least 20%. The safe harbor transition period will apply to fiscal years beginning on or before December 31, 2025 and ending before December 31, 2026. The Company is closely monitoring developments and evaluating the impacts these new rules will have on our tax rate, including eligibility to qualify for these safe harbor rules.
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We classify interest expense and penalties related to unrecognized tax liabilities and interest income on tax overpayments as components of income tax expense. The net interest and penalties expense amounts recognized were as follows:
Three Months Ended June 30,Six Months Ended June 30,
In thousands2023202220232022
Net interest and penalties expense$556 $446 $806 $616 

Accrued interest and penalties recognized were as follows:
In thousandsJune 30, 2023December 31, 2022
Accrued interest$8,633 $7,575 
Accrued penalties464 567 

Unrecognized tax benefits related to uncertain tax positions and the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate were as follows:
In thousandsJune 30, 2023December 31, 2022
Unrecognized tax benefits related to uncertain tax positions$126,045 $130,144 
The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate
126,038 130,137 

At June 30, 2023, we are under examination by certain tax authorities. We believe we have appropriately accrued for the expected outcome of all tax matters and do not currently anticipate that the ultimate resolution of these examinations will have a material adverse effect on our financial condition, future results of operations, or cash flows.

Based upon the timing and outcome of examinations, litigation, the impact of legislative, regulatory, and judicial developments, and the impact of these items on the statute of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those recognized within the next 12 months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.

We file income tax returns in various jurisdictions. The material jurisdictions where we are subject to examination include, among others, the United States, France, Germany, Italy, Indonesia, and the United Kingdom.

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Note 11:    Commitments and Contingencies

Guarantees and Indemnifications
We are often required to obtain standby letters of credit (LOCs) or bonds in support of our obligations for customer contracts. These standby LOCs or bonds typically provide a guarantee to the customer for our future performance, which usually covers the installation phase of a contract and may, on occasion, cover the operations and maintenance phase of outsourcing contracts.

Our available lines of credit, outstanding standby LOCs, and bonds were as follows:
In thousandsJune 30, 2023December 31, 2022
Credit facility
Multicurrency revolving line of credit$500,000 $500,000 
Standby LOCs issued and outstanding(61,555)(55,990)
Net available for additional borrowings under the multicurrency revolving line of credit$438,445 $444,010 
Net available for additional standby LOCs under sub-facility$238,445 $244,010 
Unsecured multicurrency revolving lines of credit with various financial institutions
Multicurrency revolving lines of credit$85,513 $81,781 
Standby LOCs issued and outstanding(18,820)(22,530)
Short-term borrowings  
Net available for additional borrowings and LOCs$66,693 $59,251 
Unsecured surety bonds in force$271,202 $285,754 

In the event any such standby LOC or bond were called, we would be obligated to reimburse the issuer of the standby LOC or bond; however, as of August 3, 2023, we do not believe any outstanding standby LOCs or bonds will be called.

We generally provide an indemnification related to the infringement of any patent, copyright, trademark, or other intellectual property right on software or equipment within our sales contracts, which indemnifies the customer from, and pays the resulting costs, damages, and attorney's fees awarded against a customer with respect to, such a claim provided that (a) the customer promptly notifies us in writing of the claim and (b) we have the sole control of the defense and all related settlement negotiations. We may also provide an indemnification to our customers for third-party claims resulting from damages caused by the negligence or willful misconduct of our employees/agents in connection with the performance of certain contracts. The terms of our indemnifications generally do not limit the maximum potential payments. It is not possible to predict the maximum potential amount of future payments under these or similar agreements.

Legal Matters
We are subject to various legal proceedings and claims of which the outcomes are subject to significant uncertainty. Our policy is to assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required, if any, for these contingencies is made after an analysis of each known issue. A liability would be recognized and charged to operating expense when we determine that a loss is probable and the amount can be reasonably estimated. Additionally, we disclose contingencies for which a material loss is reasonably possible, but not probable.

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Warranty
A summary of the warranty accrual account activity is as follows:
Three Months Ended June 30,Six Months Ended June 30,
In thousands2023202220232022
Beginning balance$24,831 $30,835 $25,698 $32,022 
New product warranties1,817 968 3,447 2,434 
Other adjustments and expirations, net723 (107)34 (65)
Claims activity(1,943)(2,338)(3,930)(4,772)
Effect of change in exchange rates58 (649)237 (910)
Ending balance25,486 28,709 25,486 28,709 
Less: current portion of warranty17,847 17,378 17,847 17,378 
Long-term warranty$7,639 $11,331 $7,639 $11,331 

Total warranty expense is classified within cost of revenues and consists of new product warranties issued, costs related to insurance and supplier recoveries, other changes and adjustments to warranties, and customer claims. Warranty expense was as follows:
Three Months Ended June 30,Six Months Ended June 30,
In thousands2023202220232022
Total warranty expense$2,540 $861 $3,481 $2,369 

Note 12:    Restructuring

2023 Projects
On February 23, 2023, our Board of Directors approved a restructuring plan (the 2023 Projects). The 2023 Projects include activities that continue Itron's efforts to optimize its global supply chain and manufacturing operations, sales and marketing organizations, and other overhead. These projects are to be substantially complete by early 2025.

The total expected restructuring costs, the restructuring costs recognized, and the remaining expected restructuring costs related to the 2023 Projects were as follows:
In thousandsTotal Expected Costs at June 30, 2023Costs Recognized in Prior PeriodsCosts Recognized During the Six Months Ended June 30, 2023Expected Remaining Costs to be Recognized at June 30, 2023
Employee severance costs$36,994 $ $36,994 $ 
Asset impairments & net loss (gain) on sale or disposal1,132  1,132  
Other restructuring costs6,546  1,319 5,227 
Total
$44,672 $ $39,445 $5,227 

2021 Projects
On October 29, 2021, our Board of Directors approved a restructuring plan (the 2021 Projects), which in conjunction with the announcement of the sale of certain Gas product lines from our Device Solutions manufacturing and business operations in Europe and North America to Dresser, includes activities to drive reductions in certain locations and functional support areas. These projects are expected to be substantially complete by the end of 2024.

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The total expected restructuring costs, the restructuring costs recognized, and the remaining expected restructuring costs related to the 2021 Projects were as follows:
In thousandsTotal Expected Costs at June 30, 2023Costs Recognized in Prior PeriodsAdjustments Recognized During the Six Months Ended June 30, 2023Expected Remaining Costs to be Recognized at June 30, 2023
Employee severance costs$37,344 $38,359 $(1,015)$ 
Asset impairments & net loss (gain) on sale or disposal8,389 8,599 (210) 
Other restructuring costs5,540 3,084 56