Commitments and Contingencies

Commitments

Operating lease rental expense for factories, service and distribution locations, offices, and equipment was as follows:



	Year Ended December 31,
	2012		2011		2010
	(in thousands)
Rental expense	$	17,877	$	18,513	$	15,530

Future minimum lease payments at December 31, 2012, under noncancelable operating leases with initial or remaining terms in excess of one year are as follows:



	Minimum Payments
	(in thousands)
2013	$	17,214
2014	14,267
2015	12,120
2016	9,907
2017	8,021
Beyond 2017	2,968
Future minimum lease payments	$	64,497

Rent expense is recognized straight-line over the lease term, including renewal periods if reasonably assured. We lease most of our sales and distribution locations and administrative offices. Our leases typically contain renewal options similar to the original terms with lease payments that increase based on the consumer price index.

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 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 are as follows:



	December 31, 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 LOCs issued and outstanding	(54,328		)	(44,549		)
Net available for additional borrowings and LOCs	$	465,672		$	295,451

Unsecured multicurrency revolving lines of credit with various financial institutions
Multicurrency revolving line of credit	$	67,308		$	67,968
Standby LOCs issued and outstanding	(29,906		)	(28,733		)
Short-term borrowings⁽²⁾	(851		)	—
Net available for additional borrowings and LOCs	$	36,551		$	39,235

Unsecured surety bonds in force	$	164,820		$	139,954


⁽¹⁾	Refer to 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 December 31, 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, subject to certain exceptions, 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 district court scheduled claim construction proceedings for February and May, 2013. The remainder of the pretrial schedule depends on the date of the final claim construction decision. 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.

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 (the Motion) to the Eastern District of Washington. The Court denied the Motion without prejudice, which allows us to file a new motion and provide additional evidence to the Court in support of the motion. 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:



	Year Ended December 31,
	2012			2011
	(in thousands)
Beginning balance	$	79,536		$	51,283
New product warranties	8,735			8,305
Other changes/adjustments to warranties	4,451			50,104
Claims activity	(38,979		)	(28,565		)
Effect of change in exchange rates	(138		)	(1,591		)
Ending balance	53,605			79,536
Less: current portion of warranty	27,115			52,588
Long-term warranty	$	26,490		$	26,948

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 years ended December 31 is as follows:



	Year Ended December 31,
	2012		2011		2010
	(in thousands)
Total warranty expense	$	13,186	$	49,851	$	38,579

Warranty expense for the year ended December 31, 2012 reflects a $5.3 million adjustment, which reduced a warranty accrual, originally recorded in 2011, as a result of lower than estimated replacements. Warranty expense for the year ended December 31, 2011 reflects a charge of $12.6 million associated with a vendor-supplied component in North America and a charge of $6.6 million resulting from the identification of a specific batch of C&I meters that were manufactured in North America with a misaligned automated solder-feeder. Warranty expense for the year ended December 31, 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 $9.2 million related to certain products in Brazil. Warranty expense for the year ended December 31, 2010 reflects $14.4 million recorded for arbitration claims in Sweden, which were settled in the third quarter of 2010.

Extended Warranty

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



	Year Ended December 31,
	2012			2011
	(in thousands)
Beginning balance	$	24,448		$	14,637
Unearned revenue for new extended warranties	8,832			11,099
Unearned revenue recognized	(1,390		)	(1,233		)
Effect of change in exchange rates	70			(55		)
Ending balance	31,960			24,448
Less: current portion of unearned revenue for extended warranty	2,031			1,305
Long-term unearned revenue for extended warranty within Other long-term obligations	$	29,929		$	23,143

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:



	Year Ended December 31,
	2012		2011		2010
	(in thousands)
Plan costs	$	26,755	$	24,331	$	20,548

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



	December 31, 2012		December 31, 2011
	(in thousands)
IBNR accrual	$	2,552	$	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.