Commitments and Contingencies

Guarantees and Indemnifications

We are often required to obtain standby letters of credit (LOC’s) or bonds in support of our obligations for customer contracts. These standby LOC’s or bonds typically provide a guarantee to the customer for 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 LOC’s, and bonds are as follows:



	September 30, 2011			December 31, 2010
	(in thousands)
Credit facilities⁽¹⁾
Multicurrency revolving line of credit	$	500,000		$	240,000
Long-term borrowings	(200,000		)	—
Standby LOC’s issued and outstanding	(35,872		)	(43,540		)
Net available for additional borrowings and LOC’s	$	264,128		$	196,460

Unsecured multicurrency revolving lines of credit with various financial institutions
Multicurrency revolving line of credit	$	76,405		$	49,122
Standby LOC’s issued and outstanding	(30,500		)	(21,784		)
Short-term borrowings⁽²⁾	(901		)	(66		)
Net available for additional borrowings and LOC’s	$	45,004		$	27,272

Unsecured surety bonds in force	$	142,336		$	120,109


⁽¹⁾	See Note 6 for details regarding our secured credit facilities.


⁽²⁾	Short-term borrowings are included in “Other current liabilities” on the Consolidated Balance Sheets.

In the event any such standby LOC or bond is called, we would be obligated to reimburse the issuer of the standby LOC or bond; however, we do not believe that any outstanding LOC or bond 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 is recorded 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. Liabilities recorded for legal contingencies at September 30, 2011 were not material to our financial condition or results of operations.

In October, 2010, Transdata Incorporated (Transdata) filed a complaint in the U.S. District Court for the Eastern District of Texas against CenterPoint Energy (CenterPoint), one of our customers, and several other utilities alleging infringement of three patents owned by Transdata related to the use of an antenna in a meter. Pursuant to our contract with CenterPoint, we agreed to indemnify and defend CenterPoint in this lawsuit. The complaint seeks unspecified damages as well as injunctive relief. CenterPoint has denied all of the allegations. We believe these claims are without merit and we intend to vigorously defend our interests. We do not believe this matter will have a material adverse effect on our business or financial condition, although an unfavorable outcome could have a material adverse effect on our results of operations for the period in which such a loss is recognized.

On February 23, 2011, a class action lawsuit was filed in U.S. Federal Court for the Eastern District of Washington alleging a violation of federal securities laws relating to a restatement of our financial results for the quarters ended March 31, June 30, and September 30, 2010. These revisions were made primarily to defer revenue that had been incorrectly recognized on one contract due to a misinterpretation of an extended warranty obligation. The effect was to reduce revenue and earnings in each of the first three quarters of the year. For the first nine months of 2010, total revenue was reduced by $6.1 million and diluted EPS was reduced by $0.11. We believe the facts and legal claims alleged are without merit and we intend to vigorously defend our interests.

In March 2011, a lawsuit was filed in the Superior Court of the State of Washington, in and for Spokane County against certain officers and directors seeking unspecified damages on behalf of Itron, Inc. The complaint alleges that the defendants breached their fiduciary obligations to Itron with respect to the restatement of Itron's financial results for the quarters ended March 31, June 30, and September 30, 2010. This lawsuit is a shareholder derivative action that purports to assert claims on behalf of Itron, Inc. Defendants believe they have valid defenses and intend to defend themselves vigorously.

In June 2011, a lawsuit was filed in the United States District Court for the Eastern District of Texas alleging infringement of three patents owned by EON Corp. IP Holdings, LLC (EON), related to two-way communication networks, network components, and related software platforms. The complaint seeks unspecified damages as well as injunctive relief. We believe these claims are without merit and we intend to vigorously defend our interests. We do not believe this matter will have a material adverse effect on our business or financial condition, although an unfavorable outcome could have a material adverse effect on our results of operations for the period in which the claim is resolved.

Warranty

A summary of the warranty accrual account activity is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Beginning balance	$	62,838		$	49,203		$	51,283		$	33,873
New product warranties	1,512			3,964			5,591			9,660
Other changes/adjustments to warranties	26,263			7,845			40,906			23,438
Reclassification from other current liabilities	—			—			—			2,878
Claims activity	(9,207		)	(9,585		)	(18,422		)	(16,648		)
Effect of change in exchange rates	(2,374		)	2,246			(326		)	472
Ending balance, September 30	79,032			53,673			79,032			53,673
Less: current portion of warranty	50,798			28,232			50,798			28,232
Long-term warranty	$	28,234		$	25,441		$	28,234		$	25,441

Total warranty expense is classified within cost of revenues and consists of new product warranties issued and other changes and adjustments to warranties.

Warranty expense associated with our segments for the three and nine months ended September 30 is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(in thousands)
Itron North America	$	21,850	$	6,575	$	28,364	$	14,990
Itron International	5,925		5,234		9,575		20,986
Total warranty expense	$	27,775	$	11,809	$	37,939	$	35,976

Warranty expense for the three and nine months ended September 30, 2011 for Itron North America reflects an increase in warranty charges of $12.6 million associated with a vendor supplied component and the remainder due to corrective actions for specific customers. Warranty expense for the nine months ended September 30, 2011 for Itron International reflects the benefit of an $8.6 million recovery from a third party, associated with the settlement of product claims in Sweden in 2010. Warranty expense for the nine months ended September 30, 2010 for Itron International included $13.8 million in charges related to the resolution of claims in Sweden.

Extended Warranty

A summary of changes to unearned revenue for extended warranty contracts is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Beginning balance	$	19,109		$	9,665		$	14,637		$	5,870
Unearned revenue for new extended warranties	3,138			2,424			8,286			6,970
Unearned revenue recognized	(283		)	(389		)	(959		)	(1,140		)
Ending balance, September 30	21,964			11,700			21,964			11,700
Less: current portion of unearned revenue for extended warranty	1,162			1,147			1,162			1,147
Long-term unearned revenue for extended warranty within Other long-term obligations	$	20,802		$	10,553		$	20,802		$	10,553

Health Benefits

We are self insured for a substantial portion of the cost of our U.S. employee group health insurance. We purchase insurance from a third party, which provides individual and aggregate stop loss protection for these costs. Each reporting period, we expense the costs of our health insurance plan including paid claims, the change in the estimate of incurred but not reported (IBNR) claims, taxes, and administrative fees (collectively, the plan costs).

Plan costs are as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(in thousands)
Plan costs	$	5,653	$	5,053	$	18,324	$	14,455

IBNR accrual, which is included in wages and benefits payable, are as follows:



	September 30, 2011		December 31, 2010
	(in thousands)
IBNR accrual	$	2,511	$	2,056

Our IBNR accrual and expenses may fluctuate due to the number of plan participants, claims activity, and deductible limits. For our employees located outside of the United States, health benefits are provided primarily through governmental social plans, which are funded through employee and employer tax withholdings.

Restructuring

On October 26, 2011, we announced plans to restructure our manufacturing operations to increase efficiency and lower the cost of manufacturing. See Note 15 for further discussion.

Restructuring costs for the three and nine months ended September 30, 2011 were $1.1 million and $3.0 million, respectively, due primarily to severance costs for positions that were eliminated in the second and third quarters of 2011.