Edgar Filing: ITRON INC /WA/

ITRI 10Q 3.31.12

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-22418

ITRON, INC.

(Exact name of registrant as specified in its charter)



Washington		91-1011792
(State of Incorporation)		(I.R.S. Employer Identification Number)

2111 N Molter Road, Liberty Lake, Washington 99019

(509) 924-9900

(Address and telephone number of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of March 31, 2012 there were outstanding 39,958,625 shares of the registrant’s common stock, no par value, which is the only class of common stock of the registrant.

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Itron, Inc.

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	Page
PART I: FINANCIAL INFORMATION

Item 1: Financial Statements (Unaudited)

Consolidated Statements of Operations	1

Consolidated Statements of Comprehensive Income (Loss)	2

Consolidated Balance Sheets	3

Consolidated Statements of Cash Flows	4

Notes to Condensed Consolidated Financial Statements	5

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3: Quantitative and Qualitative Disclosures About Market Risk	46

Item 4: Controls and Procedures	47


PART II: OTHER INFORMATION

Item 1: Legal Proceedings	48

Item 1A: Risk Factors	48

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 5: Other Information	48

Item 6: Exhibits	49


SIGNATURE	50

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PART I: FINANCIAL INFORMATION

Item 1: Financial Statements (Unaudited)

ITRON, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



	Three Months Ended March 31,
	2012			2011
	(in thousands, except per share data)
Revenues	$	571,640		$	563,691
Cost of revenues	388,535			378,713
Gross profit	183,105			184,978

Operating expenses
Sales and marketing	49,856			44,478
Product development	44,356			40,142
General and administrative	36,570			34,672
Amortization of intangible assets	11,913			15,597
Restructuring expense	789			—
Total operating expenses	143,484			134,889

Operating income	39,621			50,089
Other income (expense)
Interest income	193			308
Interest expense	(2,437		)	(12,114		)
Other income (expense), net	(2,176		)	(1,590		)
Total other income (expense)	(4,420		)	(13,396		)

Income before income taxes	35,201			36,693
Income tax provision	(9,629		)	(9,567		)
Net income	25,572			27,126
Net income attributable to noncontrolling interests	219			6
Net income attributable to Itron, Inc.	$	25,353		$	27,120

Earnings per common share - Basic	$	0.64		$	0.67
Earnings per common share - Diluted	$	0.63		$	0.66

Weighted average common shares outstanding - Basic	39,913			40,546
Weighted average common shares outstanding - Diluted	40,216			41,045

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ITRON, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)



	Three Months Ended March 31,
	2012		2011
	(in thousands)
Net income	$	25,572	$	27,126
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	28,541		100,447
Unrealized gains (losses) on hedging instruments:
Net unrealized gain (loss) on derivative instruments, designated as cash flow hedges	—		60
Net unrealized gain (loss) on nonderivative hedging instruments	—		(7,810		)
Net hedging loss (gain) reclassified into net income	—		1,442
Pension plan benefit liability adjustment	23		(552		)
Total other comprehensive income (loss), net of tax	28,564		93,587
Total comprehensive income (loss), net of tax	54,136		120,713
Comprehensive income (loss) attributable to noncontrolling interest, net of tax:
Net income attributable to noncontrolling interest	219		6
Foreign currency translation adjustments	—		372
Amounts attributable to noncontrolling interest	219		378
Comprehensive income (loss) attributable to Itron, Inc.	$	53,917	$	120,335

The accompanying notes are an integral part of these consolidated financial statements.

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ITRON, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)



	March 31, 2012			December 31, 2011
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	154,438		$	133,086
Accounts receivable, net	389,178			371,641
Inventories	210,658			195,837
Deferred tax assets current, net	58,727			58,172
Other current assets	87,431			81,618
Total current assets	900,432			840,354

Property, plant, and equipment, net	263,803			262,670
Deferred tax assets noncurrent, net	18,679			22,144
Other long-term assets	30,256			62,704
Intangible assets, net	234,313			239,500
Goodwill	650,996			636,910
Total assets	$	2,098,479		$	2,064,282

LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	245,983		$	246,775
Other current liabilities	57,537			53,734
Wages and benefits payable	82,021			93,730
Taxes payable	14,971			11,526
Current portion of debt	15,000			15,000
Current portion of warranty	48,235			52,588
Unearned revenue	45,263			37,369
Total current liabilities	509,010			510,722

Long-term debt	423,752			437,502
Long-term warranty	29,016			26,948
Pension plan benefit liability	64,432			62,449
Deferred tax liabilities noncurrent, net	29,011			31,699
Other long-term obligations	73,483			73,417
Total liabilities	1,128,704			1,142,737

Commitments and contingencies

Equity
Preferred stock	—			—
Common stock	1,313,316			1,319,222
Accumulated other comprehensive loss, net	(8,596		)	(37,160		)
Accumulated deficit	(349,784		)	(375,137		)
Total Itron, Inc. shareholders' equity	954,936			906,925
Noncontrolling interests	14,839			14,620
Total equity	969,775			921,545
Total liabilities and equity	$	2,098,479		$	2,064,282

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ITRON, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Three Months Ended March 31,
	2012			2011
	(in thousands)
Operating activities
Net income	$	25,572		$	27,126
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	27,227			31,531
Stock-based compensation	4,198			4,975
Amortization of prepaid debt fees	348			1,305
Amortization of convertible debt discount	—			2,643
Deferred taxes, net	(69		)	7,569
Other adjustments, net	863			(2,000		)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable	20,825			24,545
Inventories	(10,994		)	(34,074		)
Other current assets	(7,261		)	(12,058		)
Other long-term assets	1,308			(20,935		)
Accounts payables, other current liabilities, and taxes payable	2,953			11,311
Wages and benefits payable	(13,358		)	(29,383		)
Unearned revenue	9,740			15,693
Warranty	(3,357		)	6,445
Other operating, net	(3,992		)	1,320
Net cash provided by operating activities	54,003			36,013

Investing activities
Acquisitions of property, plant, and equipment	(12,043		)	(11,250		)
Business acquisition, net of cash equivalents acquired	(860		)	(14,829		)
Other investing, net	283			305
Net cash used in investing activities	(12,620		)	(25,774		)

Financing activities
Payments on debt	(13,750		)	(52,919		)
Issuance of common stock	978			1,142
Repurchase of common stock	(10,594		)	—
Other financing, net	140			(589		)
Net cash used in financing activities	(23,226		)	(52,366		)

Effect of foreign exchange rate changes on cash and cash equivalents	3,195			6,062
Increase (decrease) in cash and cash equivalents	21,352			(36,065		)
Cash and cash equivalents at beginning of period	133,086			169,477
Cash and cash equivalents at end of period	$	154,438		$	133,412

Non-cash transactions:
Property, plant, and equipment purchased but not yet paid, net	$	2,517		$	(2,139	)
Fair value of contingent and deferred consideration payable for business acquisition	—			5,108

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net	$	10,270		$	2,680
Interest, net of amounts capitalized	2,088			9,495

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ITRON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(UNAUDITED)

In this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron,” and the “Company” refer to Itron, Inc.

Note 1: Summary of Significant Accounting Policies

We were incorporated in the state of Washington in 1977. We provide a portfolio of products and services to utilities for the energy and water markets throughout the world.

Financial Statement Preparation

The condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q are unaudited and reflect entries necessary for the fair presentation of the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2012 and 2011, the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, and the Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 of Itron, Inc. and its subsidiaries. All entries required for the fair presentation of the financial statements are of a normal recurring nature, except as disclosed.

Certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim results. These condensed consolidated financial statements should be read in conjunction with the 2011 audited financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on February 17, 2012. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.

Basis of Consolidation

We consolidate all entities in which we have a greater than 50% ownership interest or in which we exercise control over the operations. We use the equity method of accounting for entities in which we have a 50% or less investment and exercise significant influence. Entities in which we have less than a 20% investment and where we do not exercise significant influence are accounted for under the cost method. Intercompany transactions and balances have been eliminated upon consolidation.

Noncontrolling Interests

In several of our consolidated international subsidiaries, we have joint venture partners, who are minority shareholders. Although these entities are not wholly-owned by Itron, we consolidate them because we have a greater than 50% ownership interest or because we exercise control over the operations. The noncontrolling interest balance is adjusted each period to reflect the allocation of net income (loss) and other comprehensive income (loss) attributable to the noncontrolling interests, as shown in our Consolidated Statements of Operations and our Consolidated Statements of Comprehensive Income (Loss). The noncontrolling interest balance in our Consolidated Balance Sheets represents the proportional share of the equity of the joint venture entities, which is attributable to the minority shareholders.

Reclassification

Certain prior period amounts have been reclassified to conform to the current classifications in the Consolidated Statements of Operations. These reclassifications relate to certain administrative expenses in North America that were previously allocated to cost of revenues and sales and marketing and product development operating expenses in prior periods but have been reclassified to general and administrative operating expenses to conform to our worldwide presentation. These reclassifications did not have a material impact to gross profit and had no impact on income before income taxes, net income attributable to Itron, Inc., earnings per share, or total equity.

Business Acquisition

In January 2011, we completed the acquisition of Asais S.A.S. and Asais Conseil S.A.S. (collectively Asais), an energy information management software and consulting services provider, located in France. The acquisition consisted of cash and contingent consideration. Additional acquisitions were completed in 2011. These 2011 acquisitions were immaterial to our financial position, results of operations, and cash flows. (See Business Combinations policy below.)

Cash and Cash Equivalents

We consider all highly liquid instruments with remaining maturities of three months or less at the date of acquisition to be cash equivalents. The cash and cash equivalents balance in our Consolidated Balance Sheets includes amounts that reside in our joint

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venture entities. As a result, the minority shareholders of these entities control their proportional share of the cash and cash equivalents balance, and there may be limitations on Itron to repatriate cash to the U.S. from these entities.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded for invoices issued to customers in accordance with our contractual arrangements. Interest and late payment fees are minimal. Unbilled receivables are recorded when revenues are recognized upon product shipment or service delivery and invoicing occurs at a later date. We record an allowance for doubtful accounts representing our estimate of the probable losses in accounts receivable at the date of the balance sheet based on our historical experience of bad debts and our specific review of outstanding receivables. Accounts receivable are written-off against the allowance when we believe an account, or a portion thereof, is no longer collectible.

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out method. Cost includes raw materials and labor, plus applied direct and indirect costs.

Derivative Instruments

For any derivative designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. For any derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded as a component of other comprehensive income (loss) (OCI) and are recognized in earnings when the hedged item affects earnings. For a hedge of a net investment, the effective portion of any unrealized gain or loss from the foreign currency revaluation of the hedging instrument is reported in OCI as a net unrealized gain or loss on derivative instruments. Upon termination of a net investment hedge, the net derivative gain/loss will remain in accumulated OCI until such time when earnings are impacted by a sale or liquidation of the associated operations. Ineffective portions of fair value changes or the changes in fair value of derivative instruments that do not qualify for hedging activities are recognized in other income (expense) in the Consolidated Statements of Operations. We classify cash flows from our derivative programs as cash flows from operating activities in the Consolidated Statements of Cash Flows.

Derivatives are not used for trading or speculative purposes. Our derivatives are with credit worthy multinational commercial banks, with whom we have master netting agreements; however, our derivative positions are not disclosed on a net basis. There are no credit-risk-related contingent features within our derivative instruments. Refer to Note 7 and Note 13 for further disclosures of our derivative instruments and their impact on OCI.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 30 years for buildings and improvements and three to 10 years for machinery and equipment, computers and purchased software, and furniture. Leasehold improvements are capitalized and amortized over the term of the applicable lease, including renewable periods if reasonably assured, or over the useful lives, whichever is shorter. Construction in process represents capital expenditures incurred for assets not yet placed in service. Costs related to internally developed software and software purchased for internal uses are capitalized and are amortized over the estimated useful lives of the assets. Repair and maintenance costs are expensed as incurred. We have no major planned maintenance activities.

We review long-lived assets for impairment whenever events or circumstances indicate the carrying amount of an asset or asset group may not be recoverable. Assets held for sale are classified within other current assets in the Consolidated Balance Sheets, are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Gains and losses from asset disposals and impairment losses are classified within the Consolidated Statement of Operations according to the use of the asset, except those recognized in conjunction with our restructuring activities, which are classified as restructuring expense.

Prepaid Debt Fees

Prepaid debt fees represent the capitalized direct costs incurred related to the issuance of debt and are recorded as noncurrent assets. These costs are amortized to interest expense over the lives of the respective borrowings, including contingent maturity or

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call features, using the effective interest method, or straight-line method when associated with a revolving credit facility. When debt is repaid early, the related portion of unamortized prepaid debt fees is written-off and included in interest expense.

Business Combinations

On the date of acquisition, the assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree are recorded at their fair values. The acquiree's results of operations are also included as of the date of acquisition in our consolidated results. Intangible assets that arise from contractual/legal rights, or are capable of being separated, as well as in-process research and development, are measured and recorded at fair value, and amortized over the estimated useful life. If practicable, assets acquired and liabilities assumed arising from contingencies are measured and recorded at fair value. If not practicable, such assets and liabilities are measured and recorded when it is probable that a gain or loss has occurred and the amount can be reasonably estimated. The residual balance of the purchase price, after fair value allocations to all identified assets and liabilities, represents goodwill. Acquisition-related costs are expensed as incurred. Restructuring costs associated with an acquisition are generally expensed in periods subsequent to the acquisition date, and changes in deferred tax asset valuation allowances and acquired income tax uncertainties, including penalties and interest, after the measurement period are recognized as a component of the provision for income taxes.

Goodwill and Intangible Assets

Goodwill and intangible assets may result from our acquisitions. We use estimates, including estimates of useful lives of intangible assets, the amount and timing of related future cash flows, and fair values of the related operations, in determining the value assigned to goodwill and intangible assets. Our intangible assets have a finite life and are amortized over their estimated useful lives based on estimated discounted cash flows. Intangible assets are tested for impairment at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable.

Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics, including the forecasted discounted cash flows associated with each reporting unit. Prior to 2012, we had four reporting units: Itron North America (INA), Itron International (INL) Electricity, INL Gas, and INL Water. Effective January 1, 2012, our three new reporting units are Electricity, Gas, and Water. Our new Energy operating segment comprises the Electricity and Gas reporting units, while our new Water operating segment comprises the Water reporting unit. In the first quarter of 2012, we reallocated the goodwill from our former INA reporting unit to the three new reporting units based on the relative fair values of the electricity, gas, and water product lines within INA on January 1, 2012. We also reassigned the goodwill from our former INL Electricity, INL Gas, and INL Water reporting units to the new reporting units, Electricity, Gas, and Water, respectively.

We test goodwill for impairment each year as of October 1, or more frequently should a significant impairment indicator occur. The impairment test involves comparing the fair value of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure for a goodwill impairment loss. This second step revalues all assets and liabilities of the reporting unit to their current fair values and then compares the implied fair value of the reporting unit's goodwill to the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We forecast discounted future cash flows at the reporting unit level using risk-adjusted discount rates and estimated future revenues and operating costs, which take into consideration factors such as existing backlog, expected future orders, supplier contracts, and expectations of competitive and economic environments. We also identify similar publicly traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. These combined fair values are then reconciled to the aggregate market value of our common stock on the date of valuation, while considering a reasonable control premium.

Contingencies

A loss contingency is recorded if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of the ultimate loss. Loss contingencies that we determine to be reasonably possible, but not probable, are disclosed but not recorded. Changes in these factors and related estimates could materially affect our financial position and results of operations. Legal costs to defend against contingent liabilities are expensed as incurred.

Bonus and Profit Sharing

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targets. Although we monitor and accrue expenses quarterly based on our progress toward the achievement of the annual targets, the actual results at the end of the year may require awards that are significantly greater or less than the estimates made in earlier quarters.

Warranty

We offer standard warranties on our hardware products and large application software products. We accrue the estimated cost of new product warranties based on historical and projected product performance trends and costs during the warranty period. Testing of new products in the development stage helps identify and correct potential warranty issues prior to manufacturing. Continuing quality control efforts during manufacturing reduce our exposure to warranty claims. When our quality control efforts fail to detect a fault in one of our products, we experience an increase in warranty claims. We track warranty claims to identify potential warranty trends. If an unusual trend is noted, an additional warranty accrual may be assessed and recorded when a failure event is probable and the cost can be reasonably estimated. Management continually evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. The warranty allowances may fluctuate due to higher than anticipated material, labor, and other costs we may incur to repair or replace projected product failures, and we may incur additional warranty and related expenses in the future with respect to new or established products, which could adversely affect our financial position and results of operations. The long-term warranty balance includes estimated warranty claims beyond one year. Warranty expense is classified within cost of revenues.

Restructuring and Asset Impairments

We record a liability for costs associated with an exit or disposal activity at its fair value in the period in which the liability is incurred. Employee termination benefits considered postemployement benefits are accrued when the obligation is probable and estimable, such as benefits stipulated by human resource policies and practices or statutory requirements. One-time termination benefits are expensed at the date the employee is notified. If the employee must provide future service greater than 60 days, such benefits are expensed ratably over the future service period. For contract termination costs, we record a liability upon the later of when we terminate a contract in accordance with the contract terms or when we cease using the rights conveyed by the contract.

Asset impairments, net, are determined at the asset group level. An impairment may be recorded for assets that are to be abandoned, are to be sold for less than net book value, or are held for sale in which the estimated proceeds are less than the net book value less costs to sell. We may also recognize impairment on an asset group, which is held and used, when the carrying value is not recoverable and exceeds the asset group's fair value. If an asset group is considered a business, the asset group may consist of property, plant, equipment, intangible assets, and goodwill.

Defined Benefit Pension Plans

We sponsor both funded and unfunded defined benefit pension plans for certain international employees. We recognize a liability for the projected benefit obligation in excess of plan assets or an asset for plan assets in excess of the projected benefit obligation. We also recognize the funded status of our defined benefit pension plans on our Consolidated Balance Sheets and recognize as a component of OCI, net of tax, the actuarial gains or losses and prior service costs or credits, if any, that arise during the period but that are not recognized as components of net periodic benefit cost.

Share Repurchase Plan

We may repurchase shares of Itron common stock under a twelve-month program, which was authorized by our Board of Directors on October 24, 2011. Share repurchases are made in the open market or in privately negotiated transactions and in accordance with applicable securities laws. Under applicable Washington State law, shares repurchased are retired and not displayed separately as treasury stock on the financial statements. Instead, the value of the repurchased shares is deducted from common stock.

Revenue Recognition

Revenues consist primarily of hardware sales, software license fees, software implementation, project management services, installation, consulting, and post-sale maintenance support. Revenues are recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.

The majority of our revenue arrangements involve multiple deliverables, which combine two or more of the following: hardware, meter reading system software, installation, and/or project management services. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the delivered item(s) has value to the customer on a standalone basis and delivery/performance of the undelivered item(s) is probable. The total arrangement consideration is allocated among the separate units of accounting based on their relative fair values and the applicable revenue recognition criteria considered for each unit of accounting. The amount allocable to a delivered item is limited to the amount that we are entitled to collect and that is not contingent upon the delivery/performance of additional items. Revenues for each deliverable are then recognized based on the type of deliverable, such as 1) when the products are shipped, 2) services are delivered, 3) percentage-of-completion when implementation services

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are essential to other deliverables in the arrangement, 4) upon receipt of customer acceptance, or 5) transfer of title. The majority of our revenue is recognized when products are shipped to or received by a customer or when services are provided.

We primarily enter into two types of multiple deliverable arrangements, which include a combination of hardware and associated software and services:


•	Arrangements that do not include the deployment of our smart metering systems and technology are recognized as follows:


◦	Hardware revenues are recognized at the time of shipment, receipt by customer, or, if applicable, upon completion of customer acceptance provisions.


◦	If implementation services are essential to the functionality of the associated software, software and implementation revenues are recognized using either the percentage-of-completion methodology of contract accounting if project costs can be reliably estimated or the completed contract methodology if project costs cannot be reliably estimated.


•	Arrangements to deploy our smart metering systems and technology are recognized as follows:


◦	Hardware revenues are recognized at the time of shipment, receipt by customer, or, if applicable, upon completion of customer acceptance provisions.

◦

Revenue from associated software and services is recognized using the units-of-delivery method of contract accounting, as the software is essential to the functionality of the related hardware and the implementation services are essential to the functionality of the associated software. This methodology results in the deferral of costs and revenues as professional services and software implementation commence prior to deployment of hardware.

We also enter into multiple deliverable software arrangements that do not include hardware. For this type of arrangement, revenue recognition is dependent upon the availability of vendor specific objective evidence (VSOE) of fair value for each of the deliverables. The lack of VSOE, or the existence of extended payment terms or other inherent risks, may affect the timing of revenue recognition for software arrangements.

Certain of our revenue arrangements include an extended or noncustomary warranty provision which covers all or a portion of a customer’s replacement or repair costs beyond the standard or customary warranty period. Whether or not the extended warranty is separately priced in the arrangement, a portion of the arrangement’s total consideration is allocated to this extended warranty deliverable. This revenue is deferred and recognized over the extended warranty coverage period. Extended or noncustomary warranties do not represent a significant portion of our revenue.

We allocate consideration to each deliverable in an arrangement based on its relative selling price. We determine selling price using VSOE, if it exists, otherwise we use third-party evidence (TPE). If neither VSOE nor TPE of selling price exists for a unit of accounting, we use estimated selling price (ESP).

VSOE is generally limited to the price charged when the same or similar product is sold separately or, if applicable, the stated renewal rate in the agreement. If a product or service is seldom sold separately, it is unlikely that we can determine VSOE for the product or service. We define VSOE as a median price of recent standalone transactions that are priced within a narrow range. TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately.

If we are unable to establish selling price using VSOE or TPE, we use ESP in the allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact if the product or service were regularly sold by us on a standalone basis. Our determination of ESP involves a weighting of several factors based on the specific facts and circumstances of the arrangement. Specifically, we consider the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts, our ongoing pricing strategy and policies (as evident in the price list established and updated by management on a regular basis), the value of any enhancements that have been built into the deliverable, and the characteristics of the varying markets in which the deliverable is sold. We analyze the selling prices used in our allocation of arrangement consideration on an annual basis. Selling prices are analyzed on a more frequent basis if we experience significant variances in our selling prices or if a significant change in our business necessitates a more timely analysis.

Unearned revenue is recorded when a customer pays for products or services, but the criteria for revenue recognition have not been met as of the balance sheet date. Unearned revenues of $72.4 million and $61.0 million at March 31, 2012 and December 31, 2011 related primarily to professional services and software associated with our smart metering contracts, extended or noncustomary warranty, and prepaid post-contract support. Deferred cost is recorded for products or services for which ownership (typically defined as title and risk of loss) has transferred to the customer, but the criteria for revenue recognition have not been met as of the balance sheet date. Deferred costs were $10.2 million and $11.7 million at March 31, 2012 and December 31, 2011 and are

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recorded within other assets in the Consolidated Balance Sheets.

Hardware and software post-sale maintenance support fees are recognized ratably over the life of the related service contract. Shipping and handling costs and incidental expenses billed to customers are recorded as revenue, with the associated cost charged to cost of revenues. We record sales, use, and value added taxes billed to our customers on a net basis.

Product and Software Development Costs

Product and software development costs primarily include employee compensation and third party contracting fees. We generally do not capitalize product and software development expenses due to the relatively short period of time between technological feasibility and the completion of product and software development, and the immaterial nature of these costs.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options, stock sold pursuant to our Employee Stock Purchase Plan (ESPP), and the issuance of restricted stock units and unrestricted stock awards, based on estimated fair values. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model, which includes assumptions for the dividend yield, expected volatility, risk-free interest rate, and expected life. For ESPP awards, the fair value is the difference between the market close price of our common stock on the date of purchase and the discounted purchase price. For restricted stock units and unrestricted stock awards, the fair value is the market close price of our common stock on the date of grant. We expense stock-based compensation at the date of grant for unrestricted stock awards. For awards with only a service condition, we expense stock-based compensation, adjusted for estimated forfeitures, using the straight-line method over the requisite service period for the entire award. For awards with both performance and service conditions, if probable we expense the stock-based compensation, adjusted for estimated forfeitures, on a straight-line basis over the requisite service period for each separately vesting portion of the award. Excess tax benefits are credited to common stock when the deduction reduces cash taxes payable. When we have tax deductions in excess of the compensation cost, they are classified as financing cash inflows in the Consolidated Statements of Cash Flows.

Income Taxes

We compute our interim income tax provision through the use of an estimated annual effective tax rate (ETR) applied to year-to-date operating results and specific events that are discretely recognized as they occur. In determining the estimated annual ETR, we analyze various factors, including projections of our annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments, are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated annual ETR.

Deferred tax assets and liabilities are recognized based upon anticipated future tax consequences, in each of the jurisdictions in which we operate, attributable to: (1) the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases; and (2) operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The calculation of our tax liabilities involves applying complex tax regulations in different tax jurisdictions to our tax positions. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets if it is not more likely than not that such assets will be realized. We do not record tax liabilities on undistributed earnings of international subsidiaries that are permanently reinvested.

We utilize a two step approach to account for uncertain tax positions. A tax position is first evaluated for recognition based on its technical merits. Tax positions that have a greater than fifty percent likelihood of being realized upon ultimate settlement are then measured to determine amounts to be recognized in the financial statements. This measurement incorporates information about potential settlements with taxing authorities. A previously recognized tax position is derecognized in the first period in which the position no longer meets the more-likely-than-not recognition threshold or upon expiration of the statute of limitations. We classify interest expense and penalties related to uncertain tax positions and interest income on tax overpayments as part of income tax expense.

Foreign Exchange

Our consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries with non-U.S. dollar functional currencies are translated to U.S. dollars at the exchange rates in effect on the balance sheet date, or the last business day of the period, if applicable. Revenues and expenses for each subsidiary are translated to U.S. dollars using a weighted average rate for the relevant reporting period. Translation adjustments resulting from this process are included, net of tax, in OCI. Gains and losses that arise from exchange rate fluctuations for monetary asset and liability balances that are not denominated in

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an entity’s functional currency are included within other income (expense), net in the Consolidated Statements of Operations. Currency gains and losses of intercompany balances deemed to be long-term in nature or designated as a hedge of the net investment in international subsidiaries are included, net of tax, in OCI.

Fair Value Measurements

For assets and liabilities measured at fair value, the GAAP fair value hierarchy prioritizes the inputs used in different valuation methodologies, assigning the highest priority to unadjusted quoted prices for identical assets and liabilities in actively traded markets (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 inputs consist of quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in non-active markets; and model-derived valuations in which significant inputs are corroborated by observable market data either directly or indirectly through correlation or other means (inputs may include yield curves, volatility, credit risks, and default rates).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Due to various factors affecting future costs and operations, actual results could differ materially from these estimates.

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Note 2: Earnings Per Share and Capital Structure

The following table sets forth the computation of basic and diluted earnings per share (EPS):



	Three Months Ended March 31,
	2012		2011
	(in thousands, except per share data)
Net income available to common shareholders	$	25,353	$	27,120

Weighted average common shares outstanding - Basic	39,913		40,546
Dilutive effect of convertible notes	—		—
Dilutive effect of stock-based awards	303		499
Weighted average common shares outstanding - Diluted	40,216		41,045
Earnings per common share - Basic	$	0.64	$	0.67
Earnings per common share - Diluted	$	0.63	$	0.66

Convertible Notes

Our convertible notes, which were repaid/redeemed during the third quarter of 2011, contained a provision that would have required us to settle the principal amount of the convertible notes in cash and settle the remaining conversion obligation (stock price in excess of conversion price) in cash, shares, or a combination thereof. During the periods in which the convertible notes were outstanding, we included in the EPS calculation the amount of shares it would have taken to satisfy the conversion obligation, assuming that all of the convertible notes were converted. The average quarterly closing prices of our common stock were used as the basis for determining the dilutive effect on EPS. The quarterly average closing prices of our common stock for the three months ended March 31, 2011 did not exceed the conversion price of $65.16 and, therefore, did not have an effect on diluted shares outstanding.

Stock-based Awards

For stock-based awards, the dilutive effect is calculated using the treasury stock method. Under this method, the dilutive effect is computed as if the awards were exercised at the beginning of the period (or at time of issuance, if later) and assumes the related proceeds were used to repurchase common stock at the average market price during the period. Related proceeds include the amount the employee must pay upon exercise, future compensation cost associated with the stock award, and the amount of excess tax benefits, if any. Approximately 1.2 million and 657,000 stock-based awards were excluded from the calculation of diluted EPS for the three months ended March 31, 2012 and 2011, respectively, because they were anti-dilutive. These stock-based awards could be dilutive in future periods.

Preferred Stock

We have authorized the issuance of 10 million shares of preferred stock with no par value. In the event of a liquidation, dissolution, or winding up of the affairs of the corporation, whether voluntary or involuntary, the holders of any outstanding preferred stock will be entitled to be paid a preferential amount per share to be determined by the Board of Directors prior to any payment to holders of common stock. Shares of preferred stock may be converted into common stock based on terms, conditions, and rates as defined in the Rights Agreement, which may be adjusted by the Board of Directors. There was no preferred stock sold or outstanding at March 31, 2012 and December 31, 2011.

Stock Repurchase Plan

On October 24, 2011, our Board of Directors authorized a twelve-month repurchase program of up to $100 million of our common stock, which will expire on October 23, 2012. Repurchases are made in the open market or in privately negotiated transactions, and in accordance with applicable securities laws. As of March 31, 2012, we have repurchased $40 million of our common stock, with $60 million remaining under the repurchase program.

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Note 3: Certain Balance Sheet Components



Accounts receivable, net	March 31, 2012		December 31, 2011
	(in thousands)
Trade receivables (net of allowance of $5,983 and $6,049)	$	335,633	$	328,845
Unbilled receivables	53,545		42,796
Total accounts receivable, net	$	389,178	$	371,641

At March 31, 2012 and December 31, 2011, $19.0 million and $2.5 million were recorded within trade receivables as billed but not yet paid by customers in accordance with contract retainage provisions. At March 31, 2012 and December 31, 2011, contract retainage amounts that were unbilled and classified as unbilled receivables were $9.2 million and $7.4 million. These contract retainage amounts within trade receivables and unbilled receivables are expected to be collected within the following 12 months.

At March 31, 2012, we had no long-term unbilled receivables or long-term retainage contract receivables as we expect to collect all contract retainage and unbilled receivables within the following 12 months. At December 31, 2011, long-term unbilled receivables and long-term retainage contracts totaled $31.5 million.



Allowance for doubtful account activity	Three Months Ended March 31,
	2012			2011
	(in thousands)
Beginning balance	$	6,049		$	9,045
Provision (release) of doubtful accounts, net	(60		)	(346		)
Accounts written-off	(239		)	(47		)
Effects of change in exchange rates	233			379
Ending balance	$	5,983		$	9,031



Inventories	March 31, 2012		December 31, 2011
	(in thousands)
Materials	$	115,069	$	112,470
Work in process	14,573		16,306
Finished goods	81,016		67,061
Total inventories	$	210,658	$	195,837

Our inventory levels may vary period to period as a result of our factory scheduling and the timing of contract fulfillments, which may include the buildup of finished goods for shipment.

Consigned inventory is held at third-party locations; however, we retain title to the inventory until purchased by the third-party. Consigned inventory, consisting of raw materials and finished goods, was $6.8 million and $7.4 million at March 31, 2012 and December 31, 2011, respectively.



Property, plant, and equipment, net	March 31, 2012			December 31, 2011
	(in thousands)
Machinery and equipment	$	276,719		$	269,611
Computers and purchased software	77,857			74,885
Buildings, furniture, and improvements	147,177			140,064
Land	28,632			26,126
Construction in progress, including purchased equipment	19,936			20,687
Total cost	550,321			531,373
Accumulated depreciation	(286,518		)	(268,703		)
Property, plant, and equipment, net	$	263,803		$	262,670

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Depreciation expense	Three Months Ended March 31,
	2012		2011
	(in thousands)
Depreciation expense	$	15,314	$	15,934

Note 4: Intangible Assets

The gross carrying amount and accumulated amortization of our intangible assets, other than goodwill, are as follows:



	March 31, 2012							December 31, 2011
	Gross Assets		Accumulated Amortization			Net		Gross Assets		Accumulated Amortization			Net
	(in thousands)
Core-developed technology	$	394,375	$	(316,213	)	$	78,162	$	387,606	$	(305,285	)	$	82,321
Customer contracts and relationships	286,978		(140,418		)	146,560		278,581		(131,418		)	147,163
Trademarks and trade names	73,264		(63,877		)	9,387		71,854		(62,206		)	9,648
Other	11,095		(10,891		)	204		11,153		(10,785		)	368
Total intangible assets	$	765,712	$	(531,399	)	$	234,313	$	749,194	$	(509,694	)	$	239,500

A summary of the intangible asset account activity is as follows:



	Three Months Ended March 31,
	2012		2011
	(in thousands)
Beginning balance, intangible assets, gross	$	749,194	$	759,152
Intangible assets acquired	—		10,297
Effect of change in exchange rates	16,518		37,086
Ending balance, intangible assets, gross	$	765,712	$	806,535

Intangible assets of our international subsidiaries are recorded in their respective functional currency; therefore, the carrying amounts of intangible assets increase or decrease, with a corresponding change in accumulated OCI, due to changes in foreign currency exchange rates.

Estimated future annual amortization expense is as follows:



Years ending December 31,	Estimated Annual Amortization
	(in thousands)
2012 (amount remaining at March 31, 2012)	$	35,868
2013	39,476
2014	31,883
2015	26,232
2016	21,631
Beyond 2016	79,223
Total intangible assets, net	$	234,313

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Note 5: Goodwill

Effective January 1, 2012, our reporting segments were changed from two geographic operating segments, Itron North America and Itron International, to two product operating segments, Energy and Water. As a result, we reallocated the goodwill balance as of January 1, 2012 to the reporting units within these two operating segments.

The following table reflects the goodwill balance as of March 31, 2012 and 2011 (in thousands):



	Total Company
Goodwill at January 1, 2011	$	1,209,376
Goodwill acquired	10,083
Effect of change in exchange rates	74,993
Goodwill at March 31, 2011	$	1,294,452

	Total Company		Energy		Water
Balance at January 1, 2012
Goodwill before impairment	$	1,221,757	$	808,601	$	413,156
Accumulated impairment losses	584,847		254,735		330,112
Goodwill, net	636,910		553,866		83,044

Effect of change in exchange rates	14,086		7,061		7,025

Balance at March 31, 2012
Goodwill before impairment	1,226,165		811,447		414,718
Accumulated impairment losses	575,169		250,520		324,649
Goodwill, net	$	650,996	$	560,927	$	90,069

As a result of the significant decline in the price of our shares of common stock at the end of September 2011, our aggregate market value was significantly lower than the aggregate carrying value of our net assets. As a result, we performed an impairment test of our goodwill as of September 30, 2011, and recorded total goodwill impairment charges of $584.8 million in the year ended December 31, 2011. These goodwill impairment charges were associated with our previous reporting units of Itron International Electricity and Itron International Water. The accumulated impairment losses were reallocated to our new operating segments, Energy and Water, effective January 1, 2012.

Goodwill and accumulated impairment losses associated with our international subsidiaries are recorded in their respective functional currency; therefore, the carrying amounts of these balances increase or decrease, with a corresponding change in accumulated OCI, due to changes in foreign currency exchange rates.

Note 6: Debt

The components of our borrowings are as follows:



	March 31, 2012			December 31, 2011
	(in thousands)
2011 credit facility
USD denominated term loan	$	288,752		$	292,502
Multicurrency revolving line of credit	150,000			160,000
Total debt	438,752			452,502
Current portion of long-term debt	(15,000		)	(15,000		)
Long-term debt	$	423,752		$	437,502

Credit Facilities

On August 5, 2011, we entered into an $800 million senior secured credit facility (the 2011 credit facility), which replaced the senior secured credit facility we entered into in 2007 (the 2007 credit facility). The 2011 credit facility consists of a $300 million

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U.S. dollar term loan (the term loan) and a multicurrency revolving line of credit (the revolver) with a principal amount of up to $500 million. Both the term loan and the revolver mature on August 8, 2016 and amounts borrowed under the revolver are classified as long-term. Amounts borrowed under the revolver during the credit facility term may be repaid and reborrowed until the revolver's maturity, at which time the revolver will terminate and all outstanding loans, together with all accrued and unpaid interest, must be repaid. Amounts not borrowed under the revolver are subject to a commitment fee, and paid in arrears on the last day of each fiscal quarter, ranging from 0.20% to 0.40% per annum depending on our total leverage ratio as of the most recently ended fiscal quarter. Amounts repaid on the term loan may not be reborrowed. The 2011 credit facility permits us and certain of our foreign subsidiaries to borrow in U.S. dollars, euros, British pounds, or, with lender approval, other currencies readily convertible into U.S. dollars. All obligations under the 2011 credit facility are guaranteed by Itron, Inc. and material U.S. domestic subsidiaries and are secured by a pledge of substantially all of the assets of Itron, Inc. and material U.S. domestic subsidiaries, including a pledge of 100% of the capital stock of material U.S. domestic subsidiaries and up to 66% of the voting stock (100% of the non-voting stock) of their first-tier foreign subsidiaries. In addition, the obligations of any foreign subsidiary who is a foreign borrower, as defined by the 2011 credit facility, are guaranteed by the foreign subsidiary and by its direct and indirect foreign parents. The 2011 credit facility includes covenants, which contain certain financial ratios and place certain restrictions on the incurrence of debt, investments, and the issuance of dividends. We were in compliance with the debt covenants under the 2011 credit facility at March 31, 2012.

Scheduled principal repayments for the term loan are due quarterly in the amounts of $3.8 million through June 2013, $5.6 million from September 2013 through June 2014, $7.5 million from September 2014 through June 2016, and the remainder due at maturity on August 8, 2016. The term loan may be repaid early in whole or in part, subject to certain minimum thresholds, without penalty.

Under the 2011 credit facility, we elect applicable market interest rates for both the term loan and any outstanding revolving loans. We also pay an applicable margin, which is based on our total leverage ratio (as defined in the credit agreement). The applicable rates per annum may be based on either: (1) the LIBOR rate, plus an applicable margin, or (2) the Alternate Base Rate, plus an applicable margin. The Alternate Base Rate election is equal to the greatest of three rates: (i) the prime rate, (ii) the Federal Reserve effective rate plus 1/2 of 1%, or (iii) one month LIBOR plus 1%. At March 31, 2012, the interest rate for both the term loan and the revolver was 1.50% (the LIBOR rate plus a margin of 1.25%).

Total credit facility repayments were as follows:



	Three Months Ended March 31,
	2012		2011
	(in thousands)
2011 credit facility term loan	$	3,750	$	—
2011 credit facility multicurrency revolving line of credit	10,000		—
2007 credit facility term loans	—		52,919
Total credit facility repayments	$	13,750	$	52,919

At March 31, 2012, $150 million was outstanding under the 2011 credit facility revolver, and $46.8 million was utilized by outstanding standby letters of credit, resulting in $303.2 million available for additional borrowings. On April 2, 2012, we increased the revolver from $500 million to $660 million in accordance with the terms of the 2011 credit facility agreement.

During 2011, unamortized prepaid debt fees of $2.4 million were written-off to interest expense upon payment of the 2007 credit facility. Prepaid debt fees of approximately $6.6 million were capitalized associated with the 2011 credit facility. Unamortized prepaid debt fees were as follows:



	March 31, 2012		December 31, 2011
	(in thousands)
Unamortized prepaid debt fees	$	5,719	$	6,027

Convertible Senior Subordinated Notes

On August 1, 2011, in accordance with the terms of the convertible senior subordinated notes (convertible notes), we repurchased $184.8 million of the convertible notes at their principal amount plus accrued and unpaid interest. On September 30, 2011, we redeemed the remaining $38.8 million of the convertible notes, plus accrued and unpaid interest.

The convertible notes were separated between the liability and equity components using our estimated non-convertible debt borrowing rate at the time the convertible notes were issued, which was determined to be 7.38%. This rate also reflected the effective interest rate on the liability component for all periods during which the convertible notes were outstanding. The carrying

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amount of the equity component of $31.8 million is retained as a permanent component of our shareholders' equity, and no gain or loss was recognized upon derecognition of the convertible notes as the fair value of the consideration transferred to the holders equaled the fair value of the liability component.

The discount on the liability component was fully amortized by the end of the second quarter of 2011.The interest expense relating to both the contractual interest coupon and amortization of the discount on the liability component was as follows:



	Three Months Ended March 31,
	2012		2011
	(in thousands)
Contractual interest coupon	$	—	$	1,398
Amortization of the discount on the liability component	—		2,643
Total interest expense on convertible notes	$	—	$	4,041

Note 7: Derivative Financial Instruments

As part of our risk management strategy, we use derivative instruments to hedge certain foreign currency and interest rate exposures. Refer to Note 1, Note 13, and Note 14 for additional disclosures on our derivative instruments.

The fair values of our derivative instruments are determined using the income approach and significant other observable inputs (also known as “Level 2”), as defined by FASB Accounting Standards Codification (ASC) 820-10-20, Fair Value Measurements. We have used observable market inputs based on the type of derivative and the nature of the underlying instrument. The key inputs used at March 31, 2012 included foreign exchange spot and forward rates, both of which are available in an active market. We have utilized the mid-market pricing convention for these inputs at March 31, 2012. We include the effect of our counterparty credit risk based on current published credit default swap rates when the net fair value of our derivative instruments is in a net asset position. We consider our own nonperformance risk when the net fair value of our derivative instruments is in a net liability position by discounting our derivative liabilities to reflect the potential credit risk to our counterparty through applying a current market indicative credit spread to all cash flows.

The fair values of our derivative instruments determined using the fair value measurement of significant other observable inputs (Level 2) at March 31, 2012 and December 31, 2011 are as follows:



		Fair Value
	Balance Sheet Location	March 31, 2012		December 31, 2011
		(in thousands)
Asset Derivatives
Derivatives not designated as hedging instruments under ASC 815-20
Foreign exchange forward contracts	Other current assets	$	54	$	241

Liability Derivatives
Derivatives not designated as hedging instruments under ASC 815-20
Foreign exchange forward contracts	Other current liabilities	$	91	$	222

OCI during the reporting period for our derivative and nonderivative instruments designated as hedging instruments (collectively, hedging instruments), net of tax, was as follows:



	2012			2011
	(in thousands)
Net unrealized loss on hedging instruments at January 1,	$	(14,380	)	$	(10,034	)
Unrealized gain (loss) on derivative instruments	—			60
Unrealized gain (loss) on a nonderivative net investment hedging instrument	—			(7,810		)
Realized (gains) losses reclassified into net income (loss)	—			1,442
Net unrealized loss on hedging instruments at March 31,	$	(14,380	)	$	(16,342	)

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Following the termination of our net investment hedge in August 2011, the net derivative loss will remain in accumulated OCI until such time when earnings are impacted by a sale or liquidation of the associated foreign operation.

Cash Flow Hedges

As a result of our floating rate debt, we are exposed to variability in our cash flows from changes in the applicable interest rate index. Historically, we have entered into interest rate swaps to achieve a fixed rate of interest on the hedged portion of the debt in order to reduce variability in cash flows.

In 2007, we entered into a pay fixed 6.59% receive three-month Euro Interbank Offered Rate (EURIBOR), plus 2%, amortizing interest rate swap to convert a significant portion of our euro denominated variable-rate term loan to fixed-rate debt, plus or minus the variance in the applicable margin from 2%, through December 31, 2012. The objective of this swap was to protect us from increases in the EURIBOR base borrowing rates. The swaps did not protect us from changes to the applicable margin under our credit agreement. Throughout the duration of the hedging relationship, this cash flow hedge was expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. Consequently, effective changes in the fair value of the interest rate swap were recorded as a component of OCI and were recognized in earnings when the hedged item affected earnings. The amounts paid or received on the hedge were recognized as adjustments to interest expense. In August 2011, we repaid our 2007 credit facility, which included the euro-denominated term loan. In conjunction with the debt repayment, we paid $2.9 million to terminate the related interest rate swap and the accumulated loss in OCI was reclassified to interest expense.

In 2010, we entered into two interest rate swaps with one-year terms, which each converted $100 million of our U.S. dollar term loan from a floating LIBOR interest rate to fixed interest rates of 2.11% and 2.15%, respectively. These swaps expired on June 30, 2011 and did not include the additional interest rate margin applicable to our term debt.

We will continue to monitor and assess our interest rate risk and may institute additional interest rate swaps or other derivative instruments to manage such risk in the future.

The before-tax effect of our cash flow derivative instruments on the Consolidated Balance Sheets and the Consolidated Statements of Operations for the three months ended March 31 are as follows:



Derivatives in ASC 815-20 Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)					Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Derivatives in ASC 815-20 Cash Flow Hedging Relationships						Location	Amount					Location	Amount
	2012		2011				2012		2011				2012		2011
	(in thousands)						(in thousands)						(in thousands)
Three Months Ended March 31,
Interest rate swap contracts	$	—	$	(2,328	)	Interest expense	$	—	$	(2,383	)	Interest expense	$	—	$	(49	)

Net Investment Hedge

We are exposed to foreign exchange risk through our international subsidiaries. As a result of our acquisition of an international company in 2007, we entered into a euro denominated term loan, which exposed us to fluctuations in the euro foreign exchange rate. Therefore, we designated this foreign currency denominated term loan as a hedge of our net investment in international operations. The non-functional currency term loan was revalued into U.S. dollars at each balance sheet date, and the changes in value associated with currency fluctuations were recorded as adjustments to long-term debt with offsetting gains and losses recorded in OCI. The loan was repaid in full in August 2011 as part of our repayment of the 2007 credit facility. The net derivative loss will remain in accumulated OCI until such time when earnings are impacted by a sale or liquidation of the associated foreign operation.

The before tax and net of tax effects of our net investment hedge nonderivative financial instrument on OCI for the three months ended March 31 are as follows:



Nonderivative Financial Instruments in ASC 815-20 Net Investment Hedging Relationships	Euro Denominated Term Loan Designated as a Hedge of Our Net Investment in International Operations
	Three Months Ended March 31,
	2012		2011
	(in thousands)
Gain (loss) recognized in OCI on derivative (Effective Portion)
Before tax	$	—	$	(12,580	)
Net of tax	$	—	$	(7,810	)

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Derivatives Not Designated as Hedging Relationships

We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third-party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recorded to other income and expense. We enter into monthly foreign exchange forward contracts (a total of 145 contracts were entered into during the three months ended March 31, 2012), which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with certain of these balances. The notional amounts of the contracts ranged from $120,000 to $37 million, offsetting our exposures from the euro, British pound, Canadian dollar, Australian dollar, Brazilian real, and various other currencies.

The effect of our foreign exchange forward derivative instruments on the Consolidated Statements of Operations for the three months ended March 31 is as follows:



Derivatives Not Designated as Hedging Instrument under ASC 815-20	Gain (Loss) Recognized on Derivatives in Other Income (Expense)
	Three Months Ended March 31,
	2012			2011
	(in thousands)
Foreign exchange forward contracts	$	(177	)	$	(2,082	)

Note 8: Defined Benefit Pension Plans

We sponsor both funded and unfunded defined benefit pension plans for our international employees, primarily in Germany, France, Italy, Indonesia, and Spain, offering death and disability, retirement, and special termination benefits. The defined benefit obligation is calculated annually by using the projected unit credit method. The measurement date for the pension plans was December 31, 2011.

Our defined benefit pension plans are denominated in the functional currencies of the respective countries in which the plans are sponsored; therefore, the balances increase or decrease, with a corresponding change in OCI, due to changes in foreign currency exchange rates. Amounts recognized on the Consolidated Balance Sheets consist of:



	March 31, 2012			December 31, 2011
	(in thousands)
Plan assets in other long-term assets	$	(477	)	$	(449	)
Current portion of pension plan liability in wages and benefits payable	2,626			2,621
Long-term portion of pension plan liability	64,432			62,449
Net pension plan benefit liability	$	66,581		$	64,621

Our asset investment strategy focuses on maintaining a portfolio using primarily insurance funds, which are accounted for as investments and measured at fair value, in order to achieve our long-term investment objectives on a risk adjusted basis. Our general funding policy for these qualified pension plans is to contribute amounts sufficient to satisfy regulatory funding standards of the respective countries for each plan. We contributed $321,000 and $354,000 to the defined benefit pension plans for the three months ended March 31, 2012 and 2011, respectively. The timing of when contributions are made can vary by plan and from year to year. For 2012, assuming that actual plan asset returns are consistent with our expected rate of return, and that interest rates remain constant, we expect to contribute approximately $524,000 to our defined benefit pension plans. We contributed $520,000 to the defined benefit pension plans for the year ended December 31, 2011.

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Net periodic pension benefit costs for our plans include the following components:



	Three Months Ended March 31,
	2012			2011
	(in thousands)
Service cost	$	738		$	617
Interest cost	926			917
Expected return on plan assets	(85		)	(80		)
Amortization of actuarial net loss (gain)	2			14
Amortization of unrecognized prior service costs	17			18
Net periodic benefit cost	$	1,598		$	1,486

Note 9: Stock-Based Compensation

We record stock-based compensation expense for awards of stock options, stock sold pursuant to our ESPP, and the issuance of restricted stock units and unrestricted stock awards. We expense stock-based compensation primarily using the straight-line method over the vesting requirement period. For the three months ended March 31, stock-based compensation expense and the related tax benefit were as follows:



	Three Months Ended March 31,
	2012		2011
	(in thousands)
Stock options	$	272	$	1,033
Restricted stock units	3,516		3,551
Unrestricted stock awards	205		175
ESPP	205		216
Total stock-based compensation	$	4,198	$	4,975

Related tax benefit	$	1,189	$	1,402

We issue new shares of common stock upon the exercise of stock options or when vesting conditions on restricted stock units are fully satisfied.

Subject to stock splits, dividends, and other similar events, 3,500,000 shares of common stock are reserved and authorized for issuance under our 2010 Stock Incentive Plan (Stock Incentive Plan). Awards consist of stock options, restricted stock units, and unrestricted stock awards. At March 31, 2012, 1,371,152 shares were available for grant under the Stock Incentive Plan.

Stock Options

Options to purchase our common stock are granted to employees and the Board of Directors with an exercise price equal to the market close price of the stock on the date the Board of Directors approves the grant. Options generally become exercisable in three equal annual installments beginning one year from the date of grant and generally expire 10 years from the date of grant. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated based on our historical experience and future expectations.

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The fair values of stock options granted were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:



	Three Months Ended March 31,
	2012		2011
Dividend yield	—		—
Expected volatility	42.7	%	46.6	%
Risk-free interest rate	0.9	%	2.0	%
Expected life (years)	5.14		4.85

Expected volatility is based on a combination of historical volatility of our common stock and the implied volatility of our traded options for the related expected life period. We believe this combined approach is reflective of current and historical market conditions and an appropriate indicator of expected volatility. The risk-free interest rate is the rate available as of the award date on zero-coupon U.S. government issues with a term equal to the expected life of the award. The expected life is the weighted average expected life of an award based on the period of time between the date the award is granted and the estimated date the award will be fully exercised. Factors considered in estimating the expected life include historical experience of similar awards, contractual terms, vesting schedules, and expectations of future employee behavior. We have not paid dividends in the past and do not plan to pay dividends in the foreseeable future.

A summary of our stock option activity for the three months ended March 31 is as follows:



	Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value ⁽¹⁾		Weighted Average Grant Date Fair Value
	(in thousands)				(years)	(in thousands)
Outstanding, January 1, 2011	1,102		$	55.21	5.58	$	10,883
Granted	78		56.64					$	23.93
Exercised	(18	)	19.46			$	737
Expired	(1	)	7.00
Outstanding, March 31, 2011	1,161		$	55.89	5.70	$	10,774

Exercisable, March 31, 2011	988		$	53.58	5.18	$	10,774

Expected to vest, March 31, 2011	163		$	69.69	8.63	$	—

Outstanding, January 1, 2012	1,109		$	55.97	4.51	$	2,323
Granted	54		48.23					$	18.64
Exercised	(13	)	21.60			$	280
Expired	(1	)	48.51
Outstanding, March 31, 2012	1,149		$	56.00	4.42	$	4,638

Exercisable, March 31, 2012	1,023		$	56.93	3.81	$	4,400

Expected to vest, March 31, 2012	116		$	48.50	9.39	$	219

⁽¹⁾

The aggregate intrinsic value of outstanding stock options represents amounts that would have been received by the optionees had all in- the-money options been exercised on that date. Specifically, it is the amount by which the market value of Itron’s stock exceeded the exercise price of the outstanding in-the-money options before applicable income taxes, based on our closing stock price on the last business day of the period. The aggregate intrinsic value of stock options exercised during the period is calculated based on our stock price at the date of exercise.

As of March 31, 2012, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $2.2 million, which is expected to be recognized over a weighted average period of approximately 2.1 years.

Restricted Stock Units

Certain employees and senior management receive restricted stock units as a component of their total compensation. The fair value

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of a restricted stock unit is the market close price of our common stock on the date of grant. Restricted stock units generally vest over a three year period. Compensation expense, net of forfeitures, is recognized over the vesting period.

Subsequent to vesting, the restricted stock units are converted into shares of our common stock on a one-for-one basis and issued to employees. We are entitled to an income tax deduction in an amount equal to the taxable income reported by the employees upon vesting of the restricted stock units.

The restricted stock units issued under the Long Term Performance Restricted Stock Unit Award Agreement (Performance Award Agreement) are determined based on the attainment of annual performance goals after the end of the calendar year performance period. During the year, if management determines that it is probable that the targets will be achieved, compensation expense, net of forfeitures, is recognized on a straight-line basis over the annual performance and subsequent vesting period for each separately vesting portion of the award. Performance awards typically vest and are released in three equal installments at the end of each year following attainment of the performance goals. For U.S. participants who retire during the performance period, a pro-rated number of restricted stock units (based on the number of days of employment during the performance period) immediately vest based on the attainment of the performance goals as assessed after the end of the performance period. During the vesting period, unvested restricted stock units immediately vest at the date of retirement for U.S. participants who retire during that period. For U.S. participants who are or will become retirement eligible during either the annual performance or vesting period, compensation expense is accelerated and recognized over the greater of the performance period (one year) or through the participant’s retirement eligible date. For performance awards granted in 2012, the maximum restricted stock units that may become eligible for vesting is 208,000 with a grant date fair value of $44.07.

The following table summarizes restricted stock unit activity for the three months ended March 31:



	Number of Restricted Stock Units		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value⁽¹⁾
	(in thousands)				(in thousands)
Outstanding, January 1, 2011	588
Granted⁽²⁾	253		$	56.67
Released	(127	)			$	8,857
Forfeited	(2	)
Outstanding, March 31, 2011	712

Outstanding, January 1, 2012	625
Granted⁽²⁾	374		$	48.23
Released	(168	)			$	10,976
Forfeited	(14	)
Outstanding, March 31, 2012	817

Expected to vest, March 31, 2012	733				$	33,290


⁽¹⁾	The aggregate intrinsic value is the market value of the stock, before applicable income taxes, based on the closing price on the stock release dates or at the end of the period for restricted stock units expected to vest.


⁽²⁾	These restricted stock units do not include the respective 2011 and 2012 awards under the Performance Award Agreement, which are not eligible for vesting as of March 31 of each respective year.

At March 31, 2012, unrecognized compensation expense on restricted stock units was $32.3 million, which is expected to be recognized over a weighted average period of approximately 2.3 years.

Unrestricted Stock Awards

We grant unrestricted stock awards to our Board of Directors as part of their compensation. Awards are fully vested and expensed when granted. The fair value of unrestricted stock awards is the market close price of our common stock on the date of grant.

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The following table summarizes unrestricted stock award activity for the three months ended March 31:



	Three Months Ended March 31,
	2012		2011
Shares of unrestricted stock granted	5,453		3,177

Weighted average grant date fair value	$	37.55	$	55.03

Employee Stock Purchase Plan

Under the terms of the ESPP, employees can deduct up to 10% of their regular cash compensation to purchase our common stock at a 15% discount from the fair market value of the stock at the end of each fiscal quarter, subject to other limitations under the plan. The sale of the stock to the employees occurs at the beginning of the subsequent quarter.

The following table summarizes ESPP activity for the three months ended March 31:



	Three Months Ended March 31,
	2012		2011
Shares of stock sold to employees⁽¹⁾	23,057		17,058

Weighted average fair value per ESPP award⁽²⁾	$	6.81	$	8.47


⁽¹⁾	Stock sold to employees during each fiscal quarter under the ESPP is associated with the offering period ending on the last day of the previous fiscal quarter.


⁽²⁾	Relating to awards associated with the offering period during the three months ended March 31.

At March 31, 2012, all compensation cost associated with the ESPP had been recognized. There were approximately 74,000 shares of common stock available for future issuance under the ESPP at March 31, 2012.

Note 10: Income Taxes

Our tax provisions (benefits) as a percentage of income (loss) before tax typically differ from the federal statutory rate of 35%, and may vary from period to period, due to fluctuations in the forecasted mix of earnings in domestic and international jurisdictions, new or revised tax legislation and accounting pronouncements, tax credits, state income taxes, adjustments to valuation allowances, and interest expense and penalties related to uncertain tax positions, among other items.

For the three months ended March 31, 2012, we had a tax provision of 27%, based on a percentage of income before tax, as compared with a tax provision of 26% for the same period in 2011.

Our tax provisions in 2012 and 2011 differ from the federal statutory rate due to projected earnings in tax jurisdictions with rates lower than 35%, the benefit of certain interest expense deductions, and an election under U.S. Internal Revenue Code Section 338 with respect to a foreign acquisition in 2007.

We classify interest expense and penalties related to unrecognized tax liabilities and interest income on tax overpayments as components of income tax expense. The net interest and penalties expense (benefit) recognized is as follows:



	Three Months Ended March 31,
	2012		2011
	(in thousands)
Net interest and penalties expense (benefit)	$	287	$	(5	)

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Accrued interest and penalties recorded are as follows:



	March 31, 2012		December 31, 2011
	(in thousands)
Accrued interest	$	4,172	$	3,781
Accrued penalties	2,868		2,766

Unrecognized tax benefits related to uncertain tax positions and the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate are as follows:



	March 31, 2012		December 31, 2011
	(in thousands)
Unrecognized tax benefits related to uncertain tax positions	$	25,473	$	24,737
The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate	25,109		24,451

We believe it is reasonably possible that our unrecognized tax benefits may decrease by approximately $8.5 million within the next twelve months due to the expiration of the statute of limitations, and completion of examinations by taxing authorities. At March 31, 2012, we are not able to reasonably estimate the timing of future cash flows relating to our uncertain tax positions.

Note 11: 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:



	March 31, 2012			December 31, 2011
	(in thousands)
Credit facilities⁽¹⁾
Multicurrency revolving line of credit	$	500,000		$	500,000
Long-term borrowings	(150,000		)	(160,000		)
Standby LOC’s issued and outstanding	(46,786		)	(44,549		)
Net available for additional borrowings and LOC’s	$	303,214		$	295,451

Unsecured multicurrency revolving lines of credit with various financial institutions
Multicurrency revolving line of credit	$	62,968		$	67,968
Standby LOC’s issued and outstanding	(27,305		)	(28,733		)
Net available for additional borrowings and LOC’s	$	35,663		$	39,235

Unsecured surety bonds in force	$	151,213		$	139,954


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

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.

On April 2, 2012, we increased the revolver from $500 million to $660 million in accordance with the terms of the 2011 credit facility agreement.

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

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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 March 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), two customers 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 17th, the Oklahoma court stayed the litigation pending the resolution of re-examination proceedings in the United States Patent and Trademark Office (U.S. PTO). All claims on two of the three asserted patents currently stand rejected in those proceedings. For the remaining asserted patent, on May 2, 2012, the U.S. PTO issued a notice indicating that certain of the original claims, and new claims, have been determined to be patentable by TransData. 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 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 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. 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.

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Warranty

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



	Three Months Ended March 31,
	2012			2011
	(in thousands)
Beginning balance, January 1	$	79,536		$	51,283
New product warranties	2,129			1,883
Other changes/adjustments to warranties	5,831			9,012
Claims activity	(11,320		)	(4,447		)
Effect of change in exchange rates	1,075			1,432
Ending balance, March 31	77,251			59,163
Less: current portion of warranty	48,235			26,260
Long-term warranty	$	29,016		$	32,903

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 months ended March 31 is as follows:



	Three Months Ended March 31,
	2012		2011
	(in thousands)
Total warranty expense	$	7,960	$	2,337

Warranty expense for the three months ended March 31, 2011 reflects the benefit of an $8.6 million insurance recovery associated with the settlement of product claims in Sweden in 2010.

Extended Warranty

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



	Three Months Ended March 31,
	2012			2011
	(in thousands)
Beginning balance, January 1	$	24,448		$	14,637
Unearned revenue for new extended warranties	2,946			2,933
Unearned revenue recognized	(300		)	(377		)
Effect of change in exchange rates	46			—
Ending balance, March 31	27,140			17,193
Less: current portion of unearned revenue for extended warranty	1,445			1,126
Long-term unearned revenue for extended warranty within Other long-term obligations	$	25,695		$	16,067

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 March 31,
	2012		2011
	(in thousands)
Plan costs	$	5,661	$	6,744

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



	March 31, 2012		December 31, 2011
	(in thousands)
IBNR accrual	$	2,462	$	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.

Note 12: Restructuring

During the fourth quarter of 2011, we announced the approval of projects to restructure our manufacturing operations to increase efficiency and lower our cost of manufacturing. We began implementing these projects in the fourth quarter of 2011, and we expect to substantially complete these projects by the end of 2013.

Certain projects are subject to a variety of labor and employment laws, rules, and regulations, which could result in a delay in implementing projects at some locations. Future real estate market conditions may impact the timing of our ability to sell some of the manufacturing facilities we have designated for closure and disposal. This may delay the completion of the restructuring projects beyond 2013.

The total expected costs of $85.5 million for the restructuring projects did not change from the total expected costs at December 31, 2011. The total expected restructuring costs, the costs recognized in prior periods, the restructuring costs recognized during the three months ended March 31, 2012, and the remaining restructuring costs as of March 31, 2012 are as follows:



	Total Expected Costs at March 31, 2012		Costs Recognized in Prior Periods		Costs Recognized During the Three Months Ended March 31, 2012		Remaining Costs to be Recognized at March 31, 2012
	(in thousands)
Employee severance costs	$	52,031	$	42,530	$	539	$	8,962
Asset impairments	25,547		25,144		—		403
Other restructuring costs	7,913		408		250		7,255
Total	$	85,491	$	68,082	$	789	$	16,620

Segments:
Energy	$	62,603	$	51,873	$	603	$	10,127
Water	17,491		15,321		18		2,152
Corporate unallocated	5,397		888		168		4,341
Total	$	85,491	$	68,082	$	789	$	16,620

Other restructuring costs includes expenses to exit the facilities once the operations in those facilities have ceased. Costs associated with restructuring activities are generally presented as restructuring expense in the Consolidated Statements of Operations, except for certain costs associated with inventory write-downs, which are classified within cost of revenues, and accelerated depreciation expense, which is recognized according to the use of the asset.

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The following table summarizes the activity within the restructuring related balance sheet accounts during the three months ended March 31, 2012:



	Accrued Employee Severance			Asset Impairments & Net Loss (Gain) on Sale or Disposal		Other Accrued Costs			Total
	(in thousands)
Beginning balance, January 1, 2012	$	28,168		$	—	$	399		$	28,567
Costs incurred and charged to expense	539			—		250			789
Cash payments	(3,337		)	—		(498		)	(3,835		)
Non-cash items	—			—		—			—
Effect of change in exchange rates	786			—		—			786
Ending balance, March 31, 2012	$	26,156		$	—	$	151		$	26,307

Asset impairments are determined at the asset group level. There were no asset impairments recognized during the three months ended March 31, 2012.

The current and long-term portions of the restructuring related liability balance as of March 31, 2012 were $25.9 million and $400,000, which are classified within other current liabilities and other long-term liabilities, respectively, on the Consolidated Balance Sheets.

There were no significant long-lived assets that were recognized at fair value during the three months ended March 31, 2012.

As a result of our restructuring activities, we expect to achieve annualized cost savings of approximately $30 million by the end of 2013. In the second half of 2012, we anticipate savings of approximately $15 million. Revenues and net operating income from the activities we will exit are not material to our operating segments or consolidated results.

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Note 13: Other Comprehensive Income (Loss)

OCI is reflected as a net increase (decrease) to shareholders’ equity and is not reflected in our results of operations. The before-tax amount, income tax (provision) benefit, and net-of-tax amount related to each component of other comprehensive income (loss) during the reporting periods were as follows:



	Three Months Ended March 31,
	2012			2011
	(in thousands)
Before-tax amount
Foreign currency translation adjustment	$	28,702		$	100,792
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges	—			55
Net unrealized gain (loss) on a nonderivative net investment hedging instrument	—			(12,580		)
Net hedging (gain) loss reclassified into net income	—			2,328
Pension plan benefits liability adjustment	19			(778		)
Total other comprehensive income (loss), before tax	28,721			89,817

Tax (provision) benefit
Foreign currency translation adjustment	(161		)	(345		)
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges	—			5
Net unrealized gain (loss) on a nonderivative net investment hedging instrument	—			4,770
Net hedging (gain) loss reclassified into net income	—			(886		)
Pension plan benefits liability adjustment	4			226
Total other comprehensive income (loss) tax (provision) benefit	(157		)	3,770

Net-of-tax amount
Foreign currency translation adjustment	28,541			100,447
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges	—			60
Net unrealized gain (loss) on a nonderivative net investment hedging instrument	—			(7,810		)
Net hedging (gain) loss reclassified into net income	—			1,442
Pension plan benefits liability adjustment	23			(552		)
Total other comprehensive income (loss), net of tax	$	28,564		$	93,587

Accumulated other comprehensive income (loss), net of tax, was $(8.6) million at March 31, 2012 and $(37.2) million at December 31, 2011. These amounts include adjustments for foreign currency translation, the unrealized gain (loss) on our hedging instruments, the hedging gain (loss), and the pension liability adjustment as indicated above.

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Note 14: Fair Values of Financial Instruments

The fair values at March 31, 2012 and December 31, 2011 do not reflect subsequent changes in the economy, interest rates, and other variables that may affect the determination of fair value.



	March 31, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets			(in thousands)
Cash and cash equivalents	$	154,438	$	154,438	$	133,086	$	133,086
Foreign exchange forwards	54		54		241		241

Liabilities
2011 credit facility
USD denominated term loan	$	288,752	$	292,894	$	292,502	$	296,856
Multicurrency revolving line of credit	150,000		152,975		160,000		163,269
Foreign exchange forwards	91		91		222		222

The following methods and assumptions were used in estimating fair values:

Cash and cash equivalents: Due to the liquid nature of these instruments, the carrying value approximates fair value (Level 1).

2011 Credit Facility - term loan and multicurrency revolving line of credit: The term loan and revolver are not traded publicly. The fair value is calculated using a discounted cash flow model with significant inputs that are corroborated by observable market data, including estimates of incremental borrowing rates for debt with similar terms, maturities, and credit profiles (Level 2). Refer to Note 6 for a further discussion of our debt.

Derivatives: See Note 7 for a description of our methods and assumptions in determining the fair value of our derivatives, which were determined using significant other observable inputs (Level 2).

Note 15: Segment Information

As part of the global reorganization we announced in the first quarter of 2011, Itron is now managed and reporting under two operating segments, Energy and Water. A transition to the new organizational structure, including changes to operations and financial and operational management systems, was completed in the first quarter of 2012. Therefore, financial reporting as of and for the three months ended March 31, 2012 is based on the new operating segments, Energy and Water. Prior period segment information has been recast to reflect our new operating segments.

The Energy operating segment includes our global electricity and gas businesses, while the Water operating segment includes our global water and heat businesses.

We have three measures of segment performance: revenue, gross profit (margin), and operating income (margin). Our operating segments have distinct products, and therefore intersegment revenues are minimal. Corporate operating expenses, interest income, interest expense, other income (expense), and income tax provision (benefit) are not allocated to the segments, nor included in the measure of segment profit or loss. In addition, we allocate only certain production assets and intangible assets to our operating segments. We do not manage the performance of the segments on a balance sheet basis.

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Segment Products



Energy	Standard electricity (electromechanical and electronic) and gas meters; advanced electricity and gas meters and communication modules; smart electricity meters; smart electricity and gas communication modules; prepayment systems, including smart key, keypad, and smart card communication technologies; advanced systems including handheld, mobile, and fixed network collection technologies; smart network technologies; meter data management software; knowledge application solutions; and professional services including implementation, installation, consulting, and analysis.

Water	Standard water and heat meters; advanced and smart water meters and communication modules; advanced systems including handheld, mobile, and fixed network collection technologies; meter data management software; knowledge application solutions; and professional services including implementation, installation, consulting/analysis, and system management.

Revenues, gross profit, and operating income associated with our segments were as follows:



	Three Months Ended March 31,
	2012			2011
	(in thousands)
Revenues
Energy	$	437,747		$	431,816
Water	133,893			131,875
Total Company	$	571,640		$	563,691

Gross profit
Energy	$	134,603		$	137,584
Water	48,502			47,394
Total Company	$	183,105		$	184,978

Operating income (loss)
Energy	$	38,164		$	43,168
Water	15,937			16,854
Corporate unallocated	(14,480		)	(9,933		)
Total Company	39,621			50,089
Total other income (expense)	(4,420		)	(13,396		)
Income before income taxes	$	35,201		$	36,693

One customer represented more than 10% of total Company revenues for the three months ended March 31, 2012, while no customer represented more than 10% of total Company revenues during the same period in 2011. Two customers each accounted for more than 10% of the Energy operating segment revenues for each of the three months periods ended March 31, 2012 and 2011. No single customer represented more than 10% of the Water operating segment revenues for the three months ended March 31, 2012 and 2011.

Revenues by region were as follows:



	Three Months Ended March 31,
	2012		2011
	(in thousands)
United States and Canada	$	284,587	$	274,462
Europe, Middle East, and Africa	220,956		223,703
Other	66,097		65,526
Total revenues	$	571,640	$	563,691

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Depreciation and amortization expense associated with our segments was as follows:



	Three Months Ended March 31,
	2012		2011
	(in thousands)
Energy	$	20,656	$	23,555
Water	6,556		7,975
Corporate Unallocated	15		1
Total Company	$	27,227	$	31,531

Note 16: Subsequent Events

Credit Facility

On April 2, 2012, we increased the revolver from $500 million to $660 million in accordance with the terms of the 2011 credit facility agreement. There were no other changes to the 2011 credit facility agreement. The expanded multicurrency revolving line of credit provides us with increased flexibility and liquidity for the acquisition of SmartSynch, Inc. and for general corporate purposes.

SmartSynch, Inc. Acquisition

On May 1, 2012, we completed our acquisition of 100% of SmartSynch, Inc. (SmartSynch). SmartSynch is a provider of point-to-point smart grid solutions that utilize cellular networks for communications. The acquisition strengthens Itron's cellular communications offering, and the Company believes the acquisition brings greater choice to utility customers across the spectrum of smart metering deployments.

The purchase price of SmartSynch, before adjustments for changes in working capital, was $100 million in cash. All other business combination disclosures are not available, due to the proximity of the acquisition to the issuance of these financial statements. During the first quarter of 2012, we incurred $2 million of costs related to this acquisition.

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ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron,” and the “Company” refer to Itron, Inc.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes included in this report and with our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (SEC) on February 17, 2012.

Documents we provide to the SEC are available free of charge under the Investors section of our website at www.itron.com as soon as practicable after they are filed with or furnished to the SEC. In addition, these documents are available at the SEC’s website (http://www.sec.gov) and at the SEC’s Headquarters at 100 F Street, NE, Washington, DC 20549, or by calling 1-800-SEC-0330.

Certain Forward-Looking Statements

This document contains forward-looking statements concerning our operations, financial performance, revenues, earnings growth, liquidity, and other items. This document reflects our current plans and expectations and is based on information currently available as of the date of this Quarterly Report on Form 10-Q. When we use the words “expect,” “intend,” “anticipate,” “believe,” “plan,” “project,” “estimate,” “future,” “objective,” “may,” “will,” “will continue,” and similar expressions, they are intended to identify forward-looking statements. Forward-looking statements rely on a number of assumptions and estimates. These assumptions and estimates could be inaccurate and cause our actual results to vary materially from expected results. Risks and uncertainties include 1) the rate and timing of customer demand for our products, 2) rescheduling or cancellations of current customer orders and commitments, 3) changes in estimated liabilities for product warranties and/or litigation, 4) our dependence on customers' acceptance of new products and their performance, 5) competition, 6) changes in domestic and international laws and regulations, 7) changes in foreign currency exchange rates and interest rates, 8) international business risks, 9) our own and our customers' or suppliers' access to and cost of capital, 10) future business combinations, and 11) other factors. You should not solely rely on these forward-looking statements as they are only valid as of the date of this Quarterly Report on Form 10-Q. We do not have any obligation to publicly update or revise any forward-looking statement in this document. For a more complete description of these and other risks, refer to Item 1A: “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which was filed with the SEC on February 17, 2012.

Results of Operations

We derive the majority of our revenues from sales of products and services to utilities. Our products and services include hardware, software, managed services, and consulting. Cost of revenues includes materials, labor, overhead, warranty expense, and distribution and documentation costs for software.

As part of our global reorganization that was announced in the first quarter of 2011, we now manage and report under two operating segments, Energy and Water. A transition to the new organizational structure, including changes to operations and financial and operational management systems, was completed in the first quarter of 2012. Therefore, financial reporting as of and for the three months ended March 31, 2012 is based on the new operating segments, Energy and Water. Prior period segment information has been recast to reflect our new operating segments.

The Energy operating segment includes our global electricity and gas businesses, while the Water operating segment includes our global water and heat businesses.

We have three measures of segment performance: revenue, gross profit (margin), and operating income (margin). Our operating segments have distinct products, and therefore intersegment revenues are minimal. Corporate operating expenses, interest income, interest expense, other income (expense), and income tax provision (benefit) are neither allocated to the segments, nor included in the measure of segment profit or loss.

Overview

Revenues for the three months ended March 31, 2012 were $572 million, compared with $564 million for the same period last year. Fluctuations in foreign currency exchange rates unfavorably impacted revenues by $13 million. The increase in revenues was due to growth in both the Energy and Water operating segments. Gross margin for the first quarter of 2012 was 32.0%, compared with a gross margin of 32.8% for the same period last year. During the first quarter of 2011, we recognized a benefit of $8.6 million from an insurance recovery for a warranty claim, which positively impacted the gross margin by 1.5 percentage

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points. Operating expenses increased 6% during the first three months of 2012, compared with the same time last year, primarily due to increased sales and marketing and product development associated with expansion of our sales efforts in developing markets and investment in new and enhanced products for the smart grid market.

Total backlog was $1.2 billion and twelve-month backlog was $760 million at March 31, 2012.

Our restructuring projects continue to progress as planned and we expect to substantially complete these projects by the end of 2013. Since the announcement of the projects during the fourth quarter of 2011, we have incurred $69 million in costs, representing approximately 80% of the total expected costs. As a result of our restructuring activities, we anticipate savings of approximately $15 million in the second half of 2012. We expect to achieve annualized cost savings of approximately $30 million by the end of 2013. Certain projects are subject to a variety of labor and employment laws, rules, and regulations, which could result in a delay in implementing projects at some locations. Future real estate market conditions may impact the timing of our ability to sell some of the manufacturing facilities we have designated for closure and disposal, potentially delaying the completion of the restructuring projects beyond 2013.

Net debt repayments during the three months ended March 31, 2012 were $13.8 million, bringing the total debt outstanding to $438.8 million at March 31, 2012. On April 2, 2012, we increased our multicurrency revolving line of credit (revolver) from $500 million to $660 million in accordance with the terms of the 2011 credit facility agreement. The expanded revolver will provide increased flexibility and liquidity, including for the acquisition of SmartSynch, Inc., which closed on May 1, 2012.

Total Company Revenues, Gross Profit and Margin, and Unit Shipments



	Three Months Ended March 31,
	2012			2011			% Change
	(in thousands)
Revenues	$	571,640		$	563,691		1%
Gross Profit	$	183,105		$	184,978		(1)%
Gross Margin	32.0		%	32.8		%



	Three Months Ended March 31,
	2012		2011
	(in thousands)
Revenues by region
United States and Canada (North America)	$	284,587	$	274,462
Europe, Middle East, and Africa (EMEA)	220,956		223,703
Other	66,097		65,526
Total revenues	$	571,640	$	563,691

Revenues

Revenues for the three months ended March 31, 2012 were $572 million, compared with $564 million for the same period last year. The net translation effect of our operations denominated in foreign currencies resulted in an unfavorable impact to revenues of $13 million. The increase in revenues was due to growth in both the Energy and Water operating segments. Energy revenues increased in the first quarter of 2012, compared with the same time last year, due to smart gas module shipments in North America and increased electric product shipments in EMEA and Asia-Pacific. OpenWay project revenues in North America increased $3 million, compared with the same time last year. Revenue growth in the Water segment was driven by increased meter shipments in Latin America and Europe. A more detailed analysis of these fluctuations is provided in Operating Segment Results.

One customer, BC Hydro and Power Authority, accounted for 11% of total Company revenues during the first quarter of 2012. No single customer represented more than 10% of total revenues for the first quarter of 2011. Our 10 largest customers accounted for 33% and 32% of total revenues for the first quarters of 2012 and 2011, respectively.

Gross Margins

Gross margin for the first quarter of 2012 was 32.0%, compared with a gross margin of 32.8% for the same period last year. During the first quarter of 2011, we recognized a benefit of $8.6 million from an insurance recovery for a warranty claim, which positively impacted the gross margin by 1.5 percentage points. During the first quarter of 2012, compared with the first quarter of 2011, we also incurred lower special warranty expense. A more detailed analysis of these fluctuations is provided in Operating Segment

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Results.

Meter and Module Summary

We classify meters into three categories:


•	Standard metering – no built-in remote reading communication technology


•	Advanced metering – one-way communication of meter data


•	Smart metering – two-way communication including remote meter configuration and upgrade (consisting primarily of our OpenWay® technology)

Advanced and smart meter communication modules can be sold separately from the meter. A summary of our total electricity, gas, water & heat meter and communication module shipments is as follows:



	Three Months Ended March 31,
	2012	2011
	(units in thousands)
Meters
Standard	4,880	4,870
Advanced and smart	2,250	1,890
Total meters	7,130	6,760

Stand-alone communication modules
Advanced and smart	1,590	1,430

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Operating Segment Results

For a description of our operating segments, refer to Item 1: “Financial Statements Note 15: Segment Information”.



	Three Months Ended March 31,
	2012			2011		% Change
Segment Revenues	(in thousands)
Energy
Electricity	$	284,460		$	275,571	3%
Gas	153,287			156,245		(2)%
Total Energy	437,747			431,816		1%
Water	133,893			131,875		2%
Total revenues	$	571,640		$	563,691	1%

	Three Months Ended March 31,
	2012					2011
	Gross Profit			Gross Margin		Gross Profit			Gross Margin
Segment Gross Profit and Margin	(in thousands)					(in thousands)
Energy	$	134,603		30.7%		$	137,584		31.9%
Water	48,502			36.2%		47,394			35.9%
Total gross profit and margin	$	183,105		32.0%		$	184,978		32.8%

	Three Months Ended March 31,
	2012					2011
	Operating Income (Loss)			Operating Margin		Operating Income (Loss)			Operating Margin
Segment Operating Income (Loss) and Operating Margin	(in thousands)					(in thousands)
Energy	$	38,164		9%		$	43,168		10%
Water	15,937			12%		16,854			13%
Corporate unallocated	(14,480		)			(9,933		)
Total Company	$	39,621		7%		$	50,089		9%

Energy:

Revenues - Three months ended March 31, 2012 vs. Three months ended March 31, 2011

Electricity revenues increased $8.9 million, or 3%, for the three months ended March 31, 2012, compared with the same period last year. For the first quarter of 2012, OpenWay project revenues in North America increased by $9.9 million and prepayment meter shipments increased in Asia-Pacific and Europe, partially offset by $4.6 million for the translation effect of our operations denominated in foreign currencies as compared to the U.S. dollar.

Gas revenues decreased $3.0 million, or 2%, for the three months ended March 31, 2012, compared with the same period last year, primarily driven by lower OpenWay project revenues of $6.9 million and by a decrease of $3.9 million for the translation effect of our operations denominated in foreign currencies as compared to the U.S. dollar, partially offset by increased shipments of smart gas communication modules in North America.

Two customers each represented more than 10% of the Energy operating segment revenues in the three months ended March 31, 2012 and 2011.

Gross Margin - Three months ended March 31, 2012 vs. Three months ended March 31, 2011

Gross margin was 30.7% for the three months ended March 31, 2012, compared with a gross margin of 31.9% for the same period last year. For the three months ended March 31, 2011, the gross margin was positively impacted by two percentage points as the result of an $8.6 million insurance recovery associated with the settlement of product claims in Sweden in 2010. Excluding this benefit, warranty charges decreased in the first quarter of 2012 as compared to the first quarter of 2011.

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Operating Expenses - Three months ended March 31, 2012 vs. Three months ended March 31, 2011

Energy operating expenses increased $2.0 million, or 2%, for the three months ended March 31, 2012, compared with the same period last year, primarily due to increased sales and marketing and product development costs for development of new and enhanced products for the smart grid, partially offset by scheduled decreases in amortization of intangible assets. Operating expenses as a percentage of revenues were 22% for the three months ended March 31, 2012, consistent with same period last year.

Water:

Revenues - Three months ended March 31, 2012 vs. Three months ended March 31, 2011

Revenues increased $2.0 million, or 2%, for the three months ended March 31, 2012, compared with the same period last year. Excluding the translation effect of a stronger U.S. dollar against most foreign currencies in the first quarter of 2012, as compared to the first quarter of 2011, revenues increased 5%. The increase was driven primarily by increased meter shipments in Latin America and Europe.

No single customer represented more than 10% of the Water operating segment revenues in the three months ended March 31, 2012 and 2011.

Gross Margin - Three months ended March 31, 2012 vs. Three months ended March 31, 2011

Water gross margin increased to 36.2% for the three months ended March 31, 2012, compared with a gross margin of 35.9% for the same period last year, primarily as a result of increased meter shipments and increased sales of products with higher gross margins.

Operating Expenses - Three months ended March 31, 2012 vs. Three months ended March 31, 2011

Operating expenses for the three months ended March 31, 2012 increased by $2.0 million over the first quarter of 2011. Increases in sales and marketing and product development costs for smart and advanced meter products were partially offset by scheduled decreases in amortization of intangible assets. Operating expenses, as a percentage of revenue, was 24% compared to 23% for the same period last year.

Corporate unallocated:

Operating expenses not directly associated with an operating segment are classified as “Corporate unallocated.” These expenses increased $4.5 million in the three months ended March 31, 2012, compared with the same period last year. The increase was primarily due to acquisition related expenses of $2.0 million for the SmartSynch acquisition, which was announced in February 2012, and which closed on May 1, 2012. In addition, we incurred approximately $2.1 million in preliminary planning costs, prior to application development, for our global enterprise resource planning (ERP) software initiative that we expect to commence in the second half of 2012 and in training costs as we position the company for increased effectiveness and efficiency and higher performance.

Bookings and Backlog of Orders

Bookings for a reported period represent customer contracts and purchase orders received during the period that have met certain conditions, such as regulatory and/or contractual approval. Total backlog represents committed but undelivered contracts and purchase orders at period-end. Twelve-month backlog represents the portion of total backlog that we estimate will be recognized as revenue over the next 12 months. Backlog is not a complete measure of our future revenues as we also receive significant book-and-ship orders. Bookings and backlog may fluctuate significantly due to the timing of large project awards. In addition, annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. Beginning total backlog, plus bookings, minus revenues, will not equal ending total backlog due to miscellaneous contract adjustments, foreign currency fluctuations, and other factors.



Quarter Ended	Quarterly Bookings		Ending Total Backlog		Ending 12-Month Backlog
	(in millions)
March 31, 2012	$	488	$	1,221	$	760
December 31, 2011	515		1,296		766
September 30, 2011	441		1,439		901
June 30, 2011	483		1,622		1,049
March 31, 2011	681		1,747		989

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Information on bookings by our operating segments is as follows:



Quarter Ended	Total Bookings		Energy		Water
	(in millions)
March 31, 2012	$	488	$	341	$	147
December 31, 2011	515		400		115
September 30, 2011	441		317		124
June 30, 2011	483		345		138
March 31, 2011	681		547		134

When we sign project agreements to deploy our meter and communication systems, we include these contracts in bookings and backlog when regulatory approvals are received and/or contractual conditions are satisfied. For the quarter ended March 31, 2011, bookings included an OpenWay contract for $268 million with BC Hydro.

Operating Expenses

The following table details our total operating expenses in dollars and as a percentage of revenues:



	Three Months Ended March 31,
	2012		% of Revenues	2011		% of Revenues
	(in thousands)			(in thousands)
Sales and marketing	$	49,856	9%	$	44,478	8%
Product development	44,356		8%	40,142		7%
General and administrative	36,570		6%	34,672		6%
Amortization of intangible assets	11,913		2%	15,597		3%
Restructuring	789		—%	—		—%
Total operating expenses	$	143,484	25%	$	134,889	24%

Operating expenses increased $8.6 million for the three months ended March 31, 2012, compared with the same period last year. Changes in foreign currency exchange rates decreased operating expenses by $3.2 million in the first quarter of 2012. The overall increase in operating expenses includes $2.0 million in costs related to the SmartSynch acquisition and $2.1 million for preliminary planning costs, prior to application development, for our global ERP software initiative and for training costs as we position the company for greater effectiveness and efficiency and higher performance. In addition, sales and marketing and product development costs in the Energy and Water segments increased for new and enhanced products and the pursuit of smart grid and other opportunities. These increases were partially offset by a scheduled decrease in amortization of intangible assets.

Other Income (Expense)

The following table shows the components of other income (expense):



	Three Months Ended March 31,
	2012			2011
	(in thousands)
Interest income	$	193		$	308
Interest expense	(2,089		)	(10,809		)
Amortization of prepaid debt fees	(348		)	(1,305		)
Other income (expense), net	(2,176		)	(1,590		)
Total other income (expense)	$	(4,420	)	$	(13,396	)

Interest income: Interest income is generated from our cash and cash equivalents. Interest rates have continued to remain low.

Interest expense: Interest expense continues to decline each period as a result of our declining principal balance of debt outstanding and lower interest rates on our 2011 credit facility, compared to the rates on the 2007 credit facility, which was outstanding during the first quarter of 2011. Total debt was $438.8 million and $573.2 million at March 31, 2012 and March 31, 2011, respectively.

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Amortization of prepaid debt fees: Amortization of prepaid debt fees for the three months ended March 31, 2012 was lower than the same periods last year due to higher prepayments in the first quarter of 2011 as compared to the first quarter of 2012. Refer to Item 1: “Financial Statements Note 6: Debt” for additional details related to our long-term borrowings.

Other income (expense), net: Other expenses, net, consist primarily of unrealized and realized foreign currency gains and losses due to balances denominated in a currency other than the reporting entity's functional currency and other non-operating income (expenses). Foreign currency losses, net of hedging, were $1.0 million for the three months ended March 31, 2012, compared with net foreign currency losses of $1.2 million in the same period last year.

Financial Condition

Cash Flow Information:



	Three Months Ended March 31,
	2012			2011
	(in thousands)
Operating activities	$	54,003		$	36,013
Investing activities	(12,620		)	(25,774		)
Financing activities	(23,226		)	(52,366		)
Effect of exchange rates on cash and cash equivalents	3,195			6,062
Increase (decrease) in cash and cash equivalents	$	21,352		$	(36,065	)

Cash and cash equivalents was $154.4 million at March 31, 2012, compared with $133.1 million at December 31, 2011.

Operating activities

Cash provided by operating activities during the three months ended March 31, 2012 was $18.0 million higher, compared with the same period in 2011, primarily due to lower bonus and profit sharing payments and lower build-up of finished goods and raw materials inventory during the three months ended March 31, 2012.

Investing activities

Cash used in investing activities during the three months ended March 31, 2012 was $13.2 million lower, compared with the same period in 2011. The decrease in cash used in investing activities is primarily due to the Asais business acquisition in the first quarter of 2011.

Financing activities

Net cash used in financing activities during the three months ended March 31, 2012 was $29.1 million lower, compared with the same period in 2011. Repayments on borrowings were $13.8 million, compared with $52.9 million during the same period in 2011. On October 24, 2011, our Board of Directors authorized a repurchase program of up to $100 million of our common stock through October 23, 2012. We repurchased $10.6 million of our common stock during the first quarter of 2012. Refer to Part II Item 2: "Unregistered Sale of Equity Securities and Use of Proceeds" for additional details related to our share repurchase program.

Effect of exchange rates on cash and cash equivalents

The effect of exchange rates on the cash balances of currencies held in foreign denominations for the three months ended March 31, 2012 was an increase of $3.2 million, compared with an increase of $6.1 million for the same period in 2011.

Off-balance sheet arrangements:

We have no off-balance sheet financing agreements or guarantees as defined by Item 303 of Regulation S-K at March 31, 2012 and December 31, 2011 that we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.

Liquidity and Capital Resources:

Our principal sources of liquidity are cash flows from operations, borrowings, and sales of common stock. Cash flows may fluctuate and are sensitive to many factors including changes in working capital and the timing and magnitude of capital expenditures and payments on debt. Working capital, which represents current assets less current liabilities, was $391.4 million at March 31, 2012, compared with $329.6 million at December 31, 2011.

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Borrowings

In August 2011, we entered into an $800 million senior secured credit facility (the 2011 credit facility). The 2011 credit facility consists of a $300 million U.S. dollar term loan and a multicurrency revolving line of credit (the revolver) with a principal amount of up to $500 million. At March 31, 2012, $150 million was outstanding under the revolver, and $46.8 million was utilized by outstanding standby letters of credit, resulting in $303.2 million available for additional borrowings.

On April 2, 2012, we increased the revolver from $500 million to $660 million in accordance with the terms of the 2011 credit facility agreement. The expanded revolver provides us with increased flexibility and liquidity for the acquisition of SmartSynch, Inc. and for general corporate purposes.

For further description of the term loan and the revolver under our 2011 credit facility, refer to Item 1: “Financial Statements, Note 6: Debt”.

For a description of our letters of credit and performance bonds, and the amounts available for additional borrowings or letters of credit under our lines of credit, including the revolver that is part of our 2011 credit facility, refer to Item 1: “Financial Statements, Note 11: Commitments and Contingencies”.

Share Repurchase

On October 24, 2011, our Board of Directors authorized a repurchase program of up to $100 million of our common stock through October 23, 2012. Repurchases are made in the open market or in privately negotiated transactions and in accordance with applicable securities laws. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time without prior notice. During the three months ended March 31, 2012, we repurchased $10.6 million of our common stock, which represents 282,090 shares at an average price per share of $37.56. As of March 31, 2012, we have repurchased $40 million of our common stock, with $60 million remaining under the repurchase program. Refer to Part II, Item 2: "Unregistered Sales of Equity Securities and Use of Proceeds" for additional information related to our share repurchase program.

Restructuring

We expect to incur pre-tax restructuring charges totaling approximately $85 million. A substantial portion of these charges was recognized in the fourth quarter of 2011, and $26.3 million was accrued at March 31, 2012 and is expected to be paid throughout 2012 and the first half of 2013. Restructuring costs of $1 million were recorded during the three months ended March 31, 2012, primarily associated with severance accruals. As a result of our restructuring activities, in 2012, we anticipate savings of approximately $15 million. We expect to achieve annualized cost savings of approximately $30 million by the end of 2013. Certain projects are subject to a variety of labor and employment laws, rules, and regulations which could result in a delay in implementing projects at some locations. Future real estate market conditions may impact the timing of our ability to sell some of the manufacturing facilities we have designated for closure and disposal. This may delay the completion of the restructuring projects beyond 2013. For further details regarding our restructuring activities, refer to Item 1: “Financial Statements, Note 12: Restructuring”.

Other Liquidity Considerations

Our net deferred tax assets consist primarily of tax credits and net operating loss carryforwards. The utilization of some of the net operating loss carryforwards are limited by Internal Revenue Code Section 382. Based on current projections we expect to pay approximately $20.7 million in U.S. federal and state taxes and $23.3 million in local and foreign taxes in 2012. For a discussion of our tax provision (benefit) and unrecognized tax benefits, see Item 1: “Financial Statements, Note 10: Income Taxes”.

As of March 31, 2012, there was $34.8 million of cash and cash equivalents held by foreign subsidiaries that could be repatriated, if necessary to fund U.S. operations. Tax is one of the many factors that we consider in the management of global cash. Included in the determination of the tax costs in repatriating foreign cash into the United States are the amount of earnings and profits in a particular jurisdiction, withholding taxes that would be imposed, and available foreign tax credits. Accordingly, the amount of taxes that we would need to accrue and pay to repatriate foreign cash could vary significantly.

In several of our consolidated international subsidiaries, we have joint venture partners, who are minority shareholders. Although these entities are not wholly-owned by Itron, Inc, we consolidate them because we have a greater than 50% ownership interest or because we exercise control over the operations. The noncontrolling interest balance in our Consolidated Balance Sheets represents the proportional share of the equity of the joint venture entities, which is attributable to the minority shareholders. Approximately $17 million of our consolidated cash balance at March 31, 2012 resides in our joint venture entities. As a result, the minority

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shareholders of these entities control their proportional share of this cash balance, and there may be limitations on Itron to repatriate cash to the U.S. from these entities.

For a description of our funded and unfunded non-U.S. defined benefit pension plans and our expected 2012 contributions, refer to Item 1: “Financial Statements, Note 8: Defined Benefit Pension Plans”.

For a description of our bonus and profit sharing plans, including the amounts accrued at March 31, 2012 and the expected timing of payment, refer to Bonus and Profit Sharing within Critical Accounting Estimates below.

General Liquidity Overview

We expect to grow through a combination of internal new product development, licensing technology from and to others, distribution agreements, partnership arrangements, and acquisitions of technology or other companies. We expect these activities to be funded with existing cash, cash flow from operations, borrowings, and the sale of common stock or other securities. We believe existing sources of liquidity will be sufficient to fund our existing operations and obligations for the next 12 months and into the foreseeable future, but offer no assurances. Our liquidity could be affected by unforeseen changes in the energy and water industries, competitive pressures, changes in estimated liabilities for product warranties and/or litigation, future business combinations, capital market fluctuations, international risks, and other factors described under “Risk Factors” within Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which was filed with the SEC on February 17, 2012, as well as “Quantitative and Qualitative Disclosures About Market Risk” within Item 3 of Part I included in this Quarterly Report on Form 10-Q.

Contingencies

Refer to Item 1: “Financial Statements, Note 11: Commitments and Contingencies”.

Critical Accounting Estimates

Revenue Recognition

The majority of our revenue arrangements involve multiple deliverables, which require us to determine the fair value of each deliverable and then allocate the total arrangement consideration among the separate deliverables based on the relative fair value percentages. Revenues for each deliverable are then recognized based on the type of deliverable, such as 1) when the products are shipped, 2) services are delivered, 3) percentage-of-completion when implementation services are essential to other deliverables in the arrangements, 4) upon receipt of customer acceptance, or 5) transfer of title. A majority of our revenue is recognized when products are shipped to or received by a customer or when services are provided.

Fair value represents the estimated price charged if an element were sold separately. If the fair value of any undelivered element included in a multiple deliverable arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and services have been performed, or until the fair value can be objectively determined for any remaining undelivered elements. We review our fair values on an annual basis or more frequently if a significant trend is noted.

If implementation services are essential to a software arrangement, revenue is recognized using either the percentage-of-completion methodology if project costs can be reliably estimated or the completed contract methodology if project costs cannot be reliably estimated. The estimation of costs through completion of a project is subject to many variables such as the length of time to complete, changes in wages, subcontractor performance, supplier information, and business volume assumptions. Changes in underlying assumptions/estimates may adversely or positively affect financial performance.

We allocate consideration to each deliverable in an arrangement based on its relative selling price. We determine selling price using vendor specific objective evidence (VSOE), if it exists, otherwise third-party evidence (TPE). If neither VSOE nor TPE of selling price exists for a unit of accounting, we use estimated selling price (ESP).

TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately.

If we are unable to establish selling price using VSOE or TPE, we use ESP in the allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact if the product or service were sold by us on a standalone basis. Our determination of ESP involves a weighting of several factors based on the specific facts and circumstances of the arrangement. Specifically, we consider the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts, our ongoing pricing strategy and policies (as evident in the price list established and updated by management on a regular basis), the value of any enhancements that have been built into the deliverable, and the characteristics of the varying markets in which the deliverable is sold. We analyze the selling prices used in our allocation of arrangement consideration on an annual basis. Selling prices are analyzed on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.

Warranty

We offer standard warranties on our hardware products and large application software products. We accrue the estimated cost of new product warranties based on historical and projected product performance trends and costs during the warranty period. Testing of new products in the development stage helps identify and correct potential warranty issues prior to manufacturing. Continuing quality control efforts during manufacturing reduce our exposure to warranty claims. When our quality control efforts fail to detect a fault in one of our products, we experience an increase in warranty claims. We track warranty claims to identify potential warranty trends. If an unusual trend is noted, an additional warranty accrual may be assessed and recorded when a failure event is probable and the cost can be reasonably estimated. When new products are introduced, our process relies on historical averages until sufficient data are available. As actual experience becomes available, it is used to modify the historical averages to ensure the expected warranty costs are within a range of likely outcomes. Management continually evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. The warranty allowances may fluctuate due to changes in estimates for material, labor, and other costs we may incur to repair or replace projected product failures, and we may incur additional warranty and related expenses in the future with respect to new or established products, which could adversely affect our gross margin. The long-term warranty balance includes estimated warranty claims beyond one year.

Restructuring and Asset Impairments

We record a liability for costs associated with an exit or disposal activity at its fair value in the period in which the liability is incurred. Employee termination benefits considered postemployment benefits are accrued when the obligation is probable and estimable, such as benefits stipulated by human resource policies and practices or statutory requirements. One-time termination benefits are expensed at the date the employee is notified. If the employee must provide future service greater than 60 days, such benefits are expensed ratably over the future service period. For contract termination costs, we record a liability upon the later of when we terminate a contract in accordance with the contract terms or when we cease using the rights conveyed by the contract.

In determining restructuring projects, we analyze our future operating requirements, including the required headcount by business functions and facility space requirements. Our restructuring costs and any resulting accruals involve significant estimates using the best information available at the time the estimate are made. Our estimates involve a number of risks and uncertainties, some of which are beyond our control, including future real estate market conditions and local labor and employment laws, rules, and regulations. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and asset impairment charges could be materially different, either higher or lower, than those we have recorded.

Income Taxes

The calculation of our annual estimated effective tax rate requires significant judgment and is subject to several factors, including fluctuations in the forecasted mix of earnings in domestic and international jurisdictions, new or revised tax legislation and accounting pronouncements, tax credits, state income taxes, adjustments to valuation allowances, and interest expense and penalties related to uncertain tax positions, among other items. Changes in tax laws and unanticipated tax liabilities could significantly impact our tax rate.

We record valuation allowances to reduce deferred tax assets to the extent we believe it is more likely than not that a portion of such assets will not be realized. In making such determinations, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and our ability to carry back losses to prior years. We are required to make assumptions and judgments about potential outcomes that lie outside

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management’s control. Our most sensitive and critical factors are the projection, source, and character of future taxable income. Although realization is not assured, management believes it is more likely than not that deferred tax assets will be realized. The amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced or current tax planning strategies are not implemented.

We are subject to audit in multiple taxing jurisdictions in which we operate. These audits may involve complex issues, which may require an extended period of time to resolve. We believe we have recorded adequate income tax provisions and reserves for uncertain tax positions.

In evaluating uncertain tax positions, we consider the relative risks and merits of positions taken in tax returns filed and to be filed, considering statutory, judicial, and regulatory guidance applicable to those positions. We make assumptions and judgments about potential outcomes that lie outside management’s control. To the extent the tax authorities disagree with our conclusions and depending on the final resolution of those disagreements, our actual tax rate may be materially affected in the period of final settlement with the tax authorities.

Inventories

Items are removed from inventory using the first-in, first-out method. Inventories include raw materials, sub-assemblies, and finished goods. Inventory amounts include the cost to manufacture the item, such as the cost of raw materials, labor, and other applied direct and indirect costs. We also review idle facility expense, freight, handling costs, and wasted materials to determine if abnormal amounts should be recognized as current-period charges. We review our inventory for obsolescence and marketability. If the estimated market value, which is based upon assumptions about future demand and market conditions, falls below the original cost, the inventory value is reduced to the market value. If technology rapidly changes or actual market conditions are less favorable than those projected by management, inventory write-downs may be required. Our inventory levels may vary period to period as a result of our factory scheduling and timing of contract fulfillments.

Goodwill and Intangible Assets

Goodwill and intangible assets may result from our acquisitions. We use estimates, including estimates of useful lives of intangible assets, the amount and timing of related future cash flows, and fair values of the related operations, in determining the value assigned to goodwill and intangible assets. Our intangible assets have finite lives and are amortized over their estimated useful lives based on estimated discounted cash flows. Intangible assets are tested for impairment at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable.

As a result of the considerable decline in the price of our shares of common stock in 2011, our aggregate market value was significantly lower than the aggregate carrying value of our net assets. Therefore, we performed an interim impairment test of our

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goodwill as of September 30, 2011, which resulted in a goodwill write-down of $584.8 million in 2011. The goodwill impairment did not affect the debt covenants under the Company's existing credit facility.

The goodwill impairment before the reorganization into the new reporting units was associated with two reporting units from the Itron International operating segment. The goodwill balance before and after the goodwill impairment was as follows:



	September 30, 2011
Reporting Unit	Before Impairment		Impairment		After Impairment
	(in thousands)
Itron International - Electricity	$	363,626	$	254,735	$	108,891
Itron International - Water	389,308		330,112		59,196
			$	584,847

Following the allocation of goodwill from the previous reporting units to the new reporting units (Electricity, Gas, and Water) on January 1, 2012, the fair value of each reporting unit exceeded the carrying value by a minimum of 35%.

Changes in market demand, fluctuations in the economies in which we operate, the volatility and decline in the worldwide equity markets, and a further decline in our market capitalization could negatively impact the remaining carrying value of our goodwill, which could have a significant effect on our current and future results of operations and financial condition.

Derivative Instruments

All derivative instruments, whether designated in hedging relationships or not, are recorded on the Consolidated Balance Sheets at fair value as either assets or liabilities. The components and fair values of our derivative instruments are determined using the fair value measurements of significant other observable inputs (also known as “Level 2”), as defined by U.S. generally accepted accounting principles. We include the effect of our counterparty credit risk based on current published credit default swap rates when the net fair value of our derivative instruments is in a net asset position and the effect of our own nonperformance risk when the net fair value of our derivative instruments is in a net liability position. Level 2 inputs consist of quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in non-active markets; and model-derived valuations in which significant inputs are corroborated by observable market data either directly or indirectly through correlation or other means (inputs may include yield curves, volatility, credit risks, and default rates). Derivatives are not used for trading or speculative purposes. Our derivatives are with major international financial institutions, with whom we have master netting agreements; however, our derivative positions are not disclosed on a net basis. There are no credit-risk-related contingent features within our derivative instruments.

Defined Benefit Pension Plans

We sponsor both funded and unfunded defined benefit pension plans for our international employees, primarily in Germany, France, Italy, Indonesia, and Spain. We recognize a liability for the projected benefit obligation in excess of plan assets or an asset for plan assets in excess of the projected benefit obligation. We also recognize the funded status of our defined benefit pension plans on our Consolidated Balance Sheets and recognize as a component of other comprehensive income (OCI), net of tax, the actuarial gains or losses and prior service costs or credits, if any, that arise during the period but are not recognized as components of net periodic benefit cost.

Several economic assumptions and actuarial data are used in calculating the expense and obligations related to these plans. The assumptions are updated annually at December 31 and include the discount rate, the expected remaining service life, the expected rate of return on plan assets, and rate of future compensation increase. The discount rate is a significant assumption used to value our pension benefit obligation. We determine a discount rate for our plans based on the estimated duration of each plan’s liabilities. For our euro denominated defined benefit pension plans, which represent 92% of our benefit obligation, we use two discount rates, (separated between shorter and longer duration plans), using a hypothetical yield curve developed from euro-denominated AA-rated corporate bond issues, partially weighted for market value, with minimum amounts outstanding of €250 million for bonds with less than 10 years to maturity and €50 million for bonds with 10 or more years to maturity, and excluding 10% of the highest and lowest yielding bonds within each maturity group. The discount rates derived for our shorter duration euro denominated plans (less than 10 years) and longer duration plans (greater than 10 years) were 4.50% and 5.25%, respectively. The weighted average discount rate used to measure the projected benefit obligation for all of the plans at December 31, 2011 was 5.51%. A change of 25 basis points in the discount rate would change our pension benefit obligation by approximately $2.3 million. The financial and actuarial assumptions used at December 31, 2011 may differ materially from actual results due to changing market and economic conditions and other factors. These differences could result in a significant change in the amount of pension expense recorded in future periods. Gains and losses resulting from changes in actuarial assumptions, including the discount rate, are recognized in OCI in the period in which they occur.

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Our general funding policy for these qualified pension plans is to contribute amounts at least sufficient to satisfy funding standards of the respective countries for each plan. Refer to Item 1: “Financial Statements, Note 8: Defined Benefit Pension Plans” for our expected contributions for 2012.

Bonus and Profit Sharing

We have various employee bonus and profit sharing plans, which provide award amounts for the achievement of annual financial and nonfinancial targets. If management determines it probable that the targets will be achieved and the amounts can be reasonably estimated, a compensation accrual is recorded based on the proportional achievement of the financial and nonfinancial targets. Although we monitor and accrue expenses quarterly based on our estimated progress toward the achievement of the annual targets, the actual results at the end of the year may require awards that are significantly greater or less than the estimates made in earlier quarters. For the three months ended March 31, 2012, we accrued $6.6 million for such awards, compared with $7.3 million in the same period in 2011. Awards are typically distributed in the first quarter of the following year.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based awards made to employees and directors, including awards of stock options, stock sold pursuant to our Employee Stock Purchase Plan (ESPP), and the issuance of restricted stock units and unrestricted stock awards, based on estimated fair values. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model, which includes assumptions for the dividend yield, expected volatility, risk-free interest rate, and expected life. In valuing our stock options, significant judgment is required in determining the expected volatility of our common stock and the expected life that individuals will hold their stock options prior to exercising. Expected volatility is based on the historical and implied volatility of our own common stock. The expected life of stock option grants is derived from the historical actual term of option grants and an estimate of future exercises during the remaining contractual period of the option. While volatility and estimated life are assumptions that do not bear the risk of change subsequent to the grant date of stock options, these assumptions may be difficult to measure as they represent future expectations based on historical experience. Further, our expected volatility and expected life may change in the future, which could substantially change the grant-date fair value of future awards of stock options and ultimately the expense we record. For ESPP awards, the fair value is the difference between the market close price of our common stock on the date of purchase and the discounted purchase price. For restricted stock units and unrestricted stock awards, the fair value is the market close price of our common stock on the date of grant. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results and future estimates may differ substantially from our current estimates. We expense stock-based compensation at the date of grant for unrestricted stock awards. For awards with only a service condition, we expense stock-based compensation, adjusted for estimated forfeitures, using the straight-line method over the requisite service period for the entire award. For awards with both performance and service conditions, we expense the stock-based compensation, adjusted for estimated forfeitures, on a straight-line basis over the requisite service period for each separately vesting portion of the award. Excess tax benefits are credited to common stock when the deduction reduces cash taxes payable. When we have tax deductions in excess of the compensation cost, they are classified as financing cash inflows in the Consolidated Statements of Cash Flows.

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Item 3:	Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, we are exposed to interest rate and foreign currency exchange rate risks that could impact our financial position and results of operations. As part of our risk management strategy, we may use derivative financial instruments to hedge certain foreign currency and interest rate exposures. Our objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, therefore reducing the impact of volatility on earnings or protecting the fair values of assets and liabilities. We use derivative contracts only to manage existing underlying exposures. Accordingly, we do not use derivative contracts for trading or speculative purposes.

Interest Rate Risk

We are exposed to interest rate risk through our variable rate debt instruments. At March 31, 2012, 100% of our borrowings are at variable rates.

The table below provides information about our financial instruments that are sensitive to changes in interest rates and the scheduled minimum repayment of principal and weighted average interest rates at March 31, 2012. Weighted average variable rates in the table are based on implied forward rates in the Reuters U.S. dollar yield curve as of March 31, 2012 and our estimated leverage ratio, which determines our additional interest rate margin at March 31, 2012.



	2012			2013			2014			2015			2016			Total
	(in thousands)
Variable Rate Debt
Principal: U.S. dollar term loan	$	11,250		$	18,750		$	26,250		$	30,000		$	202,502		$	288,752
Average interest rate	1.55		%	1.71		%	2.12		%	2.71		%	3.24		%

Principal: Multicurrency revolving line of credit	$	—		$	—		$	—		$	—		$	150,000		$	150,000
Average interest rate	1.55		%	1.71		%	2.12		%	2.71		%	3.24		%

Based on a sensitivity analysis as of March 31, 2012, we estimate that, if market interest rates average one percentage point higher in 2012 than in the table above, our financial results in 2012 would not be materially impacted.

We continually monitor and assess our interest rate risk and may institute additional interest rate swaps or other derivative instruments to manage such risk in the future (refer to Item 1: "Financial Statements, Note 7: Derivative Financial Instruments").

Foreign Currency Exchange Rate Risk

We conduct business in a number of countries. As a result, over half of our revenues and operating expenses are denominated in foreign currencies, which expose our account balances to movements in foreign currency exchange rates that could have a material effect on our financial results. Our primary foreign currency exposure relates to non-U.S. dollar denominated transactions in our international subsidiary operations, the most significant of which is the euro. Revenues denominated in functional currencies other than the U.S. dollar were 56% of total revenues for the three months ended March 31, 2012, compared with 55% for the same period in 2011.

We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third-party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recorded to other income and expense. We enter into monthly foreign exchange forward contracts (a total of 145 contracts were entered into during the three months ended March 31, 2012), not designated for hedge accounting, with the intent to reduce earnings volatility associated with certain of these balances. The notional amounts of the contracts ranged from $120,000 to $37 million, offsetting our exposures from the euro, British pound, Canadian dollar, Australian dollar, Brazilian real, and various other currencies.

In future periods, we may use additional derivative contracts to protect against foreign currency exchange rate risks.

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Item 4:	Controls and Procedures

(a)

Evaluation of disclosure controls and procedures. At March 31, 2012, an evaluation was performed under the supervision and with the participation of our Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of March 31, 2012, the Company’s disclosure controls and procedures were effective to ensure the information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

(b)

Changes in internal controls over financial reporting. We are in the process of upgrading our global enterprise resource planning software systems. As a part of this effort, during the three months ended March 31, 2012, we implemented an Oracle suite of financial applications for financial consolidations and management reporting. This update has resulted in changes to our internal controls over financial reporting. Management is taking the necessary steps to update the design and documentation of internal control processes and procedures relating to the system update to supplement and complement existing internal controls. Management will continue to monitor, evaluate, and update the related processes and internal controls as necessary during the post-implementation period to ensure adequate internal control over financial reporting.

Other than as described above, there have been no changes in our internal control over financial reporting during the three months ended March 31, 2012 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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PART II: OTHER INFORMATION



Item 1:	Legal Proceedings

There were no material changes, as defined by Item 103 of Regulation S-K, during the first quarter of 2012.



Item 1A:	Risk Factors

There were no material changes to risk factors during the first quarter of 2012 from those previously disclosed in Item 1A: "Risk Factors" of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which was filed with the SEC on February 17, 2012.



Item 2:	Unregistered Sale of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

The table below summarizes information about the company's purchases of its shares of common stock, based on settlement date, during the quarterly period ended March 31, 2012.



Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share⁽²⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
					(in thousands)
January 1 through January 31	282,090	$	37.56	282,090	$	59,978
February 1 through February 29	—	—		—	59,978
March 1 through March 31	—	—		—	59,978
Total	282,090	$	37.56	282,090


⁽¹⁾	On October 24, 2011, our Board of Directors authorized a twelve-month repurchase program of up to $100 million of our common stock, which will expire on October 23, 2012. Repurchases are made in the open market or in privately negotiated transactions, and in accordance with applicable securities laws. No shares were purchased outside of this plan.


⁽²⁾	Includes commissions.



Item 5:	Other Information

(a) No information was required to be disclosed in a report on Form 8-K during the first quarter of 2012 that was not reported.

(b) Not applicable.

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Item 6:	Exhibits




Exhibit Number		Description of Exhibits

31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase

101.DEF *		XBRL Taxonomy Extension Definition Linkbase

101.LAB*		XBRL Taxonomy Extension Label Linkbase

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase



*	Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	ITRON, INC.

May 3, 2012	By:	/s/ STEVEN M. HELMBRECHT
Date		Steven M. Helmbrecht
		Sr. Vice President and Chief Financial Officer