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, 2012			December 31, 2011
	(in thousands)
Credit facilities⁽¹⁾
Multicurrency revolving line of credit	$	660,000		$	500,000
Long-term borrowings	(140,000		)	(160,000		)
Standby LOC’s issued and outstanding	(49,410		)	(44,549		)
Net available for additional borrowings and LOC’s	$	470,590		$	295,451

Unsecured multicurrency revolving lines of credit with various financial institutions
Multicurrency revolving lines of credit	$	63,500		$	67,968
Standby LOC’s issued and outstanding	(29,571		)	(28,733		)
Short-term borrowings⁽²⁾	(834		)	—
Net available for additional borrowings and LOC’s	$	33,095		$	39,235

Unsecured surety bonds in force	$	154,047		$	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 September 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, 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, 2011, 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 issued 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. 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 purported class action lawsuit was filed in U.S. District Court for the Eastern District of Washington alleging violations 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 of the restatement was to reduce revenue and earnings in each of the first three quarters of 2010. As a result of the restatement, total revenue for the first nine months of 2010 was reduced by $6.1 million and diluted EPS was reduced by $0.11. On August 22, 2011, the lead plaintiff in the federal securities lawsuit filed a consolidated complaint, which defendants moved to dismiss. On September 11, 2012, the U.S. District Court for the Eastern District of Washington granted defendants' motion to dismiss in its entirety and dismissed all claims against all defendants asserted in the consolidated complaint. On October 30, 2012, the lead plaintiff dismissed its complaint with prejudice, and the Court subsequently approved Plaintiffs' voluntary dismissal with prejudice.

In March 2011, a lawsuit was filed in the Superior Court of the State of Washington in and for Spokane County against certain current or former 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 had been stayed pending the outcome of the motion to dismiss in the federal securities lawsuit referred to above, but, as a result of the September 11, 2012 dismissal order, the stay has been lifted. Defendants intend to seek dismissal of this purported derivative action, and the Superior Court has set a schedule for briefing and hearing the motion to dismiss. Briefing on the motion to dismiss will be completed in April 2013, and the Superior Court has scheduled a hearing on the motion to dismiss for May 2013. Defendants believe they have valid defenses to this derivative action 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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in thousands)
Beginning balance	$	66,368		$	62,838		$	79,536		$	51,283
New product warranties	1,996			1,512			7,632			5,591
Other changes/adjustments to warranties	(1,552		)	26,263			509			40,906
Claims activity	(12,050		)	(9,207		)	(31,625		)	(18,422		)
Effect of change in exchange rates	925			(2,374		)	(365		)	(326		)
Ending balance, September 30	55,687			79,032			55,687			79,032
Less: current portion of warranty	32,834			50,798			32,834			50,798
Long-term warranty	$	22,853		$	28,234		$	22,853		$	28,234

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 nine months ended September 30 is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
	(in thousands)
Total warranty expense	$	444	$	27,775	$	8,141	$	37,939

Warranty expense for the nine months ended September 30, 2012 reflects a $5.0 million adjustment, which reduced a warranty accrual, originally recorded in 2011, as a result of lower than estimated replacements. Warranty expense for the three and nine month ended September 30, 2011 reflects a warranty charge of $12.6 million associated with a vendor supplied component in North America. Warranty expense for the nine months ended September 30, 2011 also 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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in thousands)
Beginning balance	$	29,011		$	19,109		$	24,448		$	14,637
Unearned revenue for new extended warranties	2,080			3,138			7,269			8,286
Unearned revenue recognized	(351		)	(283		)	(982		)	(959		)
Effect of change in exchange rates	95			—			100			—
Ending balance, September 30	30,835			21,964			30,835			21,964
Less: current portion of unearned revenue for extended warranty	1,800			1,162			1,800			1,162
Long-term unearned revenue for extended warranty within Other long-term obligations	$	29,035		$	20,802		$	29,035		$	20,802

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,
	2012		2011		2012		2011
	(in thousands)
Plan costs	$	7,441	$	5,653	$	20,319	$	18,324

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



	September 30, 2012		December 31, 2011
	(in thousands)
IBNR accrual	$	3,050	$	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.