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:



	June 30, 2012			December 31, 2011
	(in thousands)
Credit facilities⁽¹⁾
Multicurrency revolving line of credit	$	660,000		$	500,000
Long-term borrowings	(170,000		)	(160,000		)
Standby LOC’s issued and outstanding	(50,874		)	(44,549		)
Net available for additional borrowings and LOC’s	$	439,126		$	295,451

Unsecured multicurrency revolving lines of credit with various financial institutions
Multicurrency revolving lines of credit	$	63,652		$	67,968
Standby LOC’s issued and outstanding	(29,684		)	(28,733		)
Short-term borrowings⁽²⁾	(310		)	—
Net available for additional borrowings and LOC’s	$	33,658		$	39,235

Unsecured surety bonds in force	$	149,674		$	139,954


⁽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 June 30, 2012 were not material to our financial condition or results of operations.

In 2010 and 2011, Transdata Incorporated (Transdata) filed lawsuits against three of our customers, CenterPoint Energy (CenterPoint), TriCounty Electric Cooperative, Inc. (Tri-County), and San Diego Gas & Electric Company (San Diego), a customer of recently acquired SmartSynch, Inc., 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 contractual obligations with our customers, we agreed to indemnify and defend them in these lawsuits. The complaints seek unspecified damages as well as injunctive relief. CenterPoint, Tri-County, and San Diego have denied all of the substantive allegations and filed counterclaims seeking a declaratory judgment that the patents are invalid and not infringed. In December 2011, the Judicial Panel on Multi-District Litigation consolidated all of these cases in the Western District of Oklahoma for pretrial proceedings. On April 17, 2012, the Oklahoma court stayed the litigation pending the resolution of re-examination proceedings in the United States Patent and Trademark Office (U.S. PTO). The U.S. PTO has indicated that it will issue re-examination certificates confirming the patentability of the original claims and allowing certain new claims added by TransData. The stay of the litigation has been lifted by the district court and the parties are currently negotiating a proposed schedule. 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. On August 22, 2011, the lead plaintiff filed a consolidated complaint, which the defendants moved to dismiss. The decision on the Motion to Dismiss is pending. 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. This purported derivative action has been stayed pending the outcome of the Motion to Dismiss in the class action lawsuit pending in U.S. Federal Court for the Eastern District of Washington. 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. On July 16, 2012, Itron filed a Motion to Sever and Transfer Venue to the Eastern District of Washington. The decision on this motion is pending. 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 June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(in thousands)
Beginning balance	$	77,251		$	59,163		$	79,536		$	51,283
New product warranties	3,507			2,196			5,636			4,079
Other changes/adjustments to warranties	(3,770		)	5,631			2,061			14,643
Claims activity	(8,255		)	(4,768		)	(19,575		)	(9,215		)
Effect of change in exchange rates	(2,365		)	616			(1,290		)	2,048
Ending balance, June 30	66,368			62,838			66,368			62,838
Less: current portion of warranty	42,861			29,999			42,861			29,999
Long-term warranty	$	23,507		$	32,839		$	23,507		$	32,839

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 for the three and six months ended June 30 is as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012		2011
	(in thousands)
Total warranty expense	$	(263	)	$	7,827	$	7,697	$	10,164

Warranty expense for the three and six months ended June 30, 2012 reflects a $4.3 million adjustment, which reduced a warranty accrual, originally recorded in 2011, as a result of lower than estimated replacements. Warranty expense for the six months ended June 30, 2011 reflects the benefit of an $8.6 million insurance recovery associated with the settlement of product claims in Sweden in 2010, and a warranty charge of $7.7 million related to certain products in Brazil.

Extended Warranty

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(in thousands)
Beginning balance	$	27,140		$	17,193		$	24,448		$	14,637
Unearned revenue for new extended warranties	2,243			2,215			5,189			5,148
Unearned revenue recognized	(331		)	(299		)	(631		)	(676		)
Effect of change in exchange rates	(41		)	—			5			—
Ending balance, June 30	29,011			19,109			29,011			19,109
Less: current portion of unearned revenue for extended warranty	1,572			1,160			1,572			1,160
Long-term unearned revenue for extended warranty within Other long-term obligations	$	27,439		$	17,949		$	27,439		$	17,949

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 June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
Plan costs	$	7,217	$	5,927	$	12,878	$	12,671

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



	June 30, 2012		December 31, 2011
	(in thousands)
IBNR accrual	$	2,581	$	2,460

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.