Itron Announces Third Quarter 2019 Financial Results

LIBERTY LAKE, Wash.--(BUSINESS WIRE)--Itron, Inc. (NASDAQ:ITRI) announced today financial results for its third quarter ended Sept. 30, 2019. Key results for the quarter include (compared with the third quarter of 2018):

• Revenue of $624 million, compared with $596 million;
• Gross margin of 31.5%; compared with 33.1%;
• GAAP net income of $17 million, compared with $20 million;
• GAAP diluted earnings per share (EPS) of $0.42, compared with $0.50;
• Non-GAAP diluted EPS of $1.04, compared with $1.13;
• Adjusted EBITDA of $74 million, compared with $81 million; and
• Total backlog was flat at $3.1 billion.

"We had solid performance in the third quarter," said Tom Deitrich, Itron's president and chief executive officer. "These results were primarily driven by strong demand in our Networked Solutions segment. We continue to see a healthy pipeline of customer activity."

Summary of Third Quarter Consolidated Financial Results

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

Revenue

Total third quarter revenue increased 5% to $624 million, or 7%, excluding the impact of changes in foreign currency exchange rates.

Networked Solutions revenue increased 11% driven by strong customer deliveries in North America. Device Solutions revenue decreased 3% and Outcomes revenue decreased 1%. Excluding the impact of changes in foreign currency exchange rates, the Device Solutions and Outcomes segments were both up 1%.

Gross Margin

Consolidated company gross margin of 31.5% decreased 160 basis points from the prior year due to higher warranty costs and variable compensation, partially offset by restructuring benefits.

Operating Expenses and Operating Income

GAAP operating expenses of $157 million increased $2 million from the prior year due to higher restructuring and product development expenses. Non-GAAP operating expenses of $130 million increased $4 million from the prior year, primarily due to increased variable compensation.

GAAP operating income of $39 million and non-GAAP operating income of $66 million decreased compared with the prior year due to higher operating expenses and the impact of changes in foreign currency exchange rates.

Net Income (loss) and Earnings per Share

The net income attributable to Itron, Inc. for the quarter was $17 million, or $0.42 per diluted share, a decrease from net income of $20 million, or $0.50 per diluted share, in 2018. The decrease was driven by lower operating income in the current period.

Non-GAAP net income, which excludes certain charges including restructuring, acquisition and integration related expenses, corporate transition cost, amortization of intangible assets, amortization of debt placement fees and the income tax effect of those adjustments, was $41 million, or $1.04 per diluted share, compared with $45 million, or $1.13 per diluted share, in 2018. The decrease in non-GAAP EPS was due to lower non-GAAP operating income in the current period.

Cash Flow

Net cash provided by operating activities was $50 million in the third quarter compared with $51 million in the same quarter of 2018. Free cash flow was $32 million in the third quarter compared with $37 million in the prior year. The decrease in cash flow was primarily due to the timing of working capital and capital expenditures.

Other Measures

Total backlog was $3.1 billion and 12-month backlog was $1.4 billion, which are both consistent with the prior year. Bookings in the quarter totaled $609 million.

Earnings Conference Call

Itron will host a conference call to discuss the financial results and guidance contained in this release at 5 p.m. EST on Nov. 4, 2019. 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 Nov. 9, 2019. To access the telephone replay, dial 888-203-1112 or 719-457-0820 and enter passcode 4489487.

About Itron

Itron^® enables utilities and cities to safely, securely and reliably deliver critical infrastructure services to communities in more than 100 countries. Our portfolio of smart networks, software, services, meters and sensors helps our customers better manage electricity, gas and water resources for the people they serve. By working with our customers to ensure their success, we help improve the quality of life, ensure the safety and promote the well-being of millions of people around the globe. Itron is dedicated to creating a more resourceful world. Join us: www.itron.com.

Itron® is 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.

Cautionary Note Regarding Forward-Looking Statements

This release contains "forward-looking statements" within in 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 relate to our expectations about, among others, revenues, operations, financial performance, earnings, earnings per share, cash flows and restructuring activities including headcount reductions and other cost savings initiatives. 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 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 Dec. 31, 2018 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, 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, 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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues
Product revenues	$	552,897		$	525,716		$	1,663,794		$	1,578,740
Service revenues	71,577			70,246			210,293			210,333
Total revenues	624,474			595,962			1,874,087			1,789,073
Cost of revenues
Product cost of revenues	389,778			357,194			1,176,913			1,106,586
Service cost of revenues	38,292			41,671			122,293			128,958
Total cost of revenues	428,070			398,865			1,299,206			1,235,544
Gross profit	196,404			197,097			574,881			553,529
Operating expenses
Sales, general and administrative	83,666			89,556			264,640			332,833
Research and development	50,612			47,239			150,551			162,298
Amortization of intangible assets	16,095			17,960			48,185			53,699
Restructuring	6,592			666			7,685			82,908
Total operating expenses	156,965			155,421			471,061			631,738
Operating income (loss)	39,439			41,676			103,820			(78,209		)
Other income (expense)
Interest income	517			431			1,379			1,725
Interest expense	(12,868		)	(14,171		)	(39,899		)	(44,320		)
Other income (expense), net	(2,759		)	(2,434		)	(6,463		)	(2,598		)
Total other income (expense)	(15,110		)	(16,174		)	(44,983		)	(45,193		)
Income (loss) before income taxes	24,329			25,502			58,837			(123,402		)
Income tax benefit (provision)	(6,152		)	(5,715		)	(20,692		)	1,692
Net Income (loss)	18,177			19,787			38,145			(121,710		)
Net income (loss) attributable to noncontrolling interests	1,330			(95		)	3,759			1,417
Net income (loss) attributable to Itron, Inc.	$	16,847		$	19,882		$	34,386		$	(123,127	)
Net income (loss) per common share - Basic	$	0.43		$	0.51		$	0.87		$	(3.14	)
Net income (loss) per common share - Diluted	$	0.42		$	0.50		$	0.86		$	(3.14	)
Weighted average common shares outstanding - Basic	39,478			39,340			39,508			39,177
Weighted average common shares outstanding - Diluted	39,903			39,909			39,884			39,177

ITRON, INC.
SEGMENT INFORMATION
(Unaudited, in thousands)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Product revenues
Device Solutions	$	211,096		$	216,371		$	644,254		$	693,544
Networked Solutions	330,487			297,726			978,259			852,819
Outcomes	11,314			11,619			41,281			32,377
Total Company	$	552,897		$	525,716		$	1,663,794		$	1,578,740
Service revenues
Device Solutions	$	2,253		$	3,879		$	8,573		$	12,219
Networked Solutions	25,734			22,782			70,305			66,193
Outcomes	43,590			43,585			131,415			131,921
Total Company	$	71,577		$	70,246		$	210,293		$	210,333
Total revenues
Device Solutions	$	213,349		$	220,250		$	652,827		$	705,763
Networked Solutions	356,221			320,508			1,048,564			919,012
Outcomes	54,904			55,204			172,696			164,298
Total Company	$	624,474		$	595,962		$	1,874,087		$	1,789,073
Gross profit
Device Solutions	$	40,945		$	46,484		$	122,451		$	148,831
Networked Solutions	135,406			133,057			388,717			359,588
Outcomes	20,053			17,556			63,713			45,110
Total Company	$	196,404		$	197,097		$	574,881		$	553,529
Operating income (loss)
Device Solutions	$	27,905		$	33,019		$	81,717		$	105,721
Networked Solutions	105,637			103,998			298,994			265,882
Outcomes	10,843			6,372			35,620			9,966
Corporate unallocated	(104,946		)	(101,713		)	(312,511		)	(459,778		)
Total Company	$	39,439		$	41,676		$	103,820		$	(78,209	)

ITRON, INC.
METER AND MODULE SUMMARY
(Unaudited, Units in thousands)
	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Itron Endpoints
Standard endpoints ^(1)	5,420	5,760	16,460	17,400
Networked endpoints ^(1)	3,940	3,720	12,180	11,190
Total endpoints	9,360	9,480	28,640	28,590

^(1)

As of the second quarter of 2019, we have refined the definition of a standard endpoint to more closely align to the segment performance of Device Solution and Networked Solutions as reported in the Operating Segment Results section below. The quantities presented for the three and nine months ended September 30, 2018 and for the three months ended March 31, 2019, as included in the nine-month period for 2019, have been recast to align with the refined definitions of standard and networked endpoints. The total endpoints shipped for each period is unchanged.

ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
	September 30, 2019			December 31, 2018
ASSETS
Current assets
Cash and cash equivalents	$	140,938		$	120,221
Accounts receivable, net	468,477			437,161
Inventories	231,081			220,674
Other current assets	126,527			118,085
Total current assets	967,023			896,141
Property, plant, and equipment, net	225,658			226,551
Deferred tax assets, net	59,332			64,830
Restricted cash	762			2,056
Other long-term assets	44,998			45,288
Operating lease right-of-use assets, net	78,386			—
Intangible assets, net	202,321			257,583
Goodwill	1,097,408			1,116,533
Total assets	$	2,675,888		$	2,608,982
LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	315,394		$	309,951
Other current liabilities	62,017			70,136
Wages and benefits payable	117,409			88,603
Taxes payable	18,026			14,753
Current portion of debt	38,750			28,438
Current portion of warranty	38,018			47,205
Unearned revenue	94,989			93,621
Total current liabilities	684,603			652,707
Long-term debt	930,394			988,185
Long-term warranty	15,864			13,238
Pension benefit obligation	88,374			91,522
Deferred tax liabilities, net	1,445			1,543
Operating lease liabilities	67,024			—
Other long-term obligations	126,268			127,739
Total liabilities	1,913,972			1,874,934
Equity
Common stock	1,335,353			1,334,364
Accumulated other comprehensive loss, net	(207,054		)	(196,305		)
Accumulated deficit	(391,010		)	(425,396		)
Total Itron, Inc. shareholders' equity	737,289			712,663
Non-controlling interests	24,627			21,385
Total equity	761,916			734,048
Total liabilities and equity	$	2,675,888		$	2,608,982

ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
	Nine Months Ended September 30,
	2019			2018
Operating activities
Net income (loss)	$	38,145		$	(121,710	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of intangible assets	85,691			92,428
Amortization of operating lease right-of-use assets	13,847			—
Stock-based compensation	21,064			23,069
Amortization of prepaid debt fees	3,686			5,825
Deferred taxes, net	4,990			(13,141		)
Restructuring, non-cash	(2,147		)	569
Other adjustments, net	(6,121		)	(30		)
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable	(39,385		)	7,774
Inventories	(15,762		)	(10,072		)
Other current assets	(10,494		)	(9,797		)
Other long-term assets	7,945			3,817
Accounts payable, other current liabilities, and taxes payable	(4,063		)	4,494
Wages and benefits payable	30,220			2,166
Unearned revenue	6,746			27,869
Warranty	(5,506		)	3,167
Other operating, net	(756		)	50,955
Net cash provided by operating activities	128,100			67,383
Investing activities
Acquisitions of property, plant, and equipment	(44,570		)	(42,493		)
Business acquisitions, net of cash equivalents acquired	—			(803,075		)
Other investing, net	9,977			(181		)
Net cash used in investing activities	(34,593		)	(845,749		)
Financing activities
Proceeds from borrowings	50,000			761,938
Payments on debt	(100,313		)	(332,297		)
Issuance of common stock	7,117			8,283
Repurchase of common stock	(25,000		)	—
Prepaid debt fees	(175		)	(24,042		)
Other financing, net	(5,221		)	(5,526		)
Net cash provided by (used in) financing activities	(73,592		)	408,356
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash	(543		)	(6,175		)
Increase (decrease) in cash, cash equivalents, and restricted cash	19,372			(376,185		)
Cash, cash equivalents, and restricted cash at beginning of period	122,328			487,335
Cash, cash equivalents, and restricted cash at end of period	$	141,700		$	111,150

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, free cash flow and constant currency. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and other companies may define such measures differently. For more information on these non-GAAP financial measures please see the table captioned “Reconciliations of Non-GAAP Financial Measures to the 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 acquisition and integration related expenses, restructuring charges or goodwill impairment charges. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. We believe these non-GAAP financial measures are useful to investors because they provide greater transparency with respect to key metrics used by management in its financial and operational decision making and because they are used by our institutional investors and the analyst community to analyze the health of our business.

Non-GAAP operating expenses and non-GAAP operating income - We define non-GAAP operating expenses as operating expenses excluding certain expenses related to the amortization of intangible assets, restructuring, acquisition and integration, corporate transition costs, 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, corporate transition costs, 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, amortization of debt placement fees, restructuring, corporate transition costs, acquisition and integration, goodwill impairment, 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.

For interim periods, beginning the first quarter of 2019, the budgeted annual effective tax rate (AETR) is used, adjusted for any discrete items, as defined in ASC 740 - Income Taxes. The budgeted AETR is determined at the beginning of the fiscal year. The AETR is revised throughout the year based on changes to our full-year forecast. If the revised AETR increases or decreases by 200 basis points or more from the budgeted AETR due to changes in the full-year forecast during the year, the revised AETR is used in place of the budgeted AETR beginning with the quarter the 200 basis point threshold is exceeded and going forward for all subsequent interim quarters in the year. We continue to assess the AETR based on latest forecast throughout the year and use the most recent AETR anytime it increases or decreases by 200 basis points or more from the prior interim period.

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, corporate transition costs, 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 (loss).

Free cash flow - We define free cash flow as net cash provided by (used in) 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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
NON-GAAP NET INCOME & DILUTED EPS
GAAP income (loss) attributable to Itron, Inc.	$	16,847		$	19,882		$	34,386		$	(123,127	)
Amortization of intangible assets	16,095			17,960			48,185			53,699
Amortization of debt placement fees	1,240			1,178			3,555			5,693
Restructuring	6,592			666			7,685			82,908
Corporate transition cost	57			—			1,613			—
Acquisition and integration related expense	3,834			10,079			24,593			83,874
Income tax effect of non-GAAP adjustments^(1)	(3,269		)	(4,719		)	(16,131		)	(32,451		)
Non-GAAP net income attributable to Itron, Inc.^(1)	$	41,396		$	45,046		$	103,886		$	70,596
Non-GAAP diluted EPS ^(1)	$	1.04		$	1.13		$	2.60		$	1.77
Weighted average common shares outstanding - Diluted	39,903			39,909			39,884			39,825
ADJUSTED EBITDA
GAAP income (loss) attributable to Itron, Inc.	$	16,847		$	19,882		$	34,386		$	(123,127	)
Interest income	(517		)	(431		)	(1,379		)	(1,725		)
Interest expense	12,868			14,171			39,899			44,320
Income tax provision (benefit)	6,152			5,715			20,692			(1,692		)
Depreciation and amortization of intangible assets	28,623			30,449			85,691			92,428
Restructuring	6,592			666			7,685			82,908
Corporate transition cost	57			—			1,613			—
Acquisition and integration related expense	3,834			10,079			24,593			83,874
Adjusted EBITDA	$	74,456		$	80,531		$	213,180		$	176,986
FREE CASH FLOW
Net cash provided by operating activities	$	50,037		$	50,504		$	128,100		$	67,383
Acquisitions of property, plant, and equipment	(18,059		)	(13,184		)	(44,570		)	(42,493		)
Free Cash Flow	$	31,978		$	37,320		$	83,530		$	24,890
NON-GAAP OPERATING INCOME
GAAP operating income (loss)	$	39,439		$	41,676		$	103,820		$	(78,209	)
Amortization of intangible assets	16,095			17,960			48,185			53,699
Restructuring	6,592			666			7,685			82,908
Corporate transition cost	57			—			1,613			—
Acquisition and integration related expense	3,834			10,079			24,593			83,874
Non-GAAP operating income	$	66,017		$	70,381		$	185,896		$	142,272
NON-GAAP OPERATING EXPENSES
GAAP operating expenses	$	156,965		$	155,421		$	471,061		$	631,738
Amortization of intangible assets	(16,095		)	(17,960		)	(48,185		)	(53,699		)
Restructuring	(6,592		)	(666		)	(7,685		)	(82,908		)
Corporate transition cost	(57		)	—			(1,613		)	—
Acquisition and integration related expense	(3,834		)	(10,079		)	(24,593		)	(83,874		)
Non-GAAP operating expenses	$	130,387		$	126,716		$	388,985		$	411,257

(1)

The income tax effect of non-GAAP adjustments is calculated using the statutory tax rates for the relevant jurisdictions, provided no valuation allowance exists. If a valuation allowance exists, there is no tax impact to the non-GAAP adjustment. Effective for the first quarter of 2019, we use the budgeted annual effective tax rate (AETR) for interim periods, with adjustments for discrete items, as defined in ASC 740 - Income Taxes. This method impacts interim periods only and does not impact full year tax results, as any difference between the budgeted or revised AETR and the actual AETR for non-GAAP adjustments would be recognized in the fourth quarter of the year. If the revised methodology had been applied in the third quarter of 2018, non-GAAP net income would have decreased by $4.8 million to $40.2 million, and diluted non-GAAP EPS would have decreased by $0.12 to $1.01. If the methodology had been applied in the nine months ended September 30, 2018 non-GAAP net income would have increased by $1 million to $71.5 million, and diluted non-GAAP EPS would have increased by $0.03 to $1.80.