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		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(in thousands)
Beginning balance		$	34,838			$	41,803			$	38,255			$	32,841
Adjustment of previous acquisition			-				635				-				6,942
New product warranties			1,588				1,267				3,122				3,934
Other changes/adjustments to warranties			1,519				2,388				3,109				4,089
Claims activity			(5,085	)			(3,936	)			(10,721	)			(7,516	)
Effect of change in exchange rates			1,205				27				300				1,894
Ending balance, June 30			34,065				42,184				34,065				42,184
Less: current portion of warranty			20,271				23,693				20,271				23,693
Long-term warranty		$	13,794			$	18,491			$	13,794			$	18,491

 

Total warranty expense, which consists of new product warranties issued and other changes and adjustments to warranties, totaled approximately $3.1 million and $3.7 million for the three months ended June 30, 2009 and 2008, and approximately $6.2 million and $8.0 million for the six months ended June 30, 2009 and 2008, respectively. Warranty expense is classified within cost of revenues.

 

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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. Changes in these factors and related estimates could materially affect our financial position and results of operations.

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 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.

Health Benefits

We are self insured for a substantial portion of the cost of 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 were approximately $5.2 million and $4.3 million for the three months ended June 30, 2009 and 2008, and approximately $10.0 million and $9.4 million for the six months ended June 30, 2009 and 2008, respectively. The IBNR accrual, which is included in wages and benefits payable, was $3.2 million and $3.0 million at June 30, 2009 and December 31, 2008, respectively. 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.

Defined Benefit Pension Plans

We sponsor both funded and unfunded non-U.S. defined benefit pension plans. 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, 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.

Revenue Recognition

Revenues consist primarily of hardware sales, software license fees, software implementation, project management services, installation, consulting, and post-sale maintenance support.

Revenue arrangements with multiple deliverables are divided into separate units of accounting if the delivered item(s) have value to the customer on a standalone basis, there is objective and reliable evidence of fair value of both the delivered and undelivered item(s), 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. For our standard contract arrangements that combine deliverables such as hardware, meter reading system software, installation, and project management services, each deliverable is generally considered a single 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 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) collectibility is reasonably assured. Hardware revenues are generally recognized at the time of shipment, receipt by customer, or, if applicable, upon completion of customer acceptance provisions. For software arrangements with multiple elements, revenue recognition is also dependent upon the availability of vendor-specific objective evidence (VSOE) of fair value for each of the elements. 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. If implementation services are essential to a software arrangement, revenue is recognized using either the percentage-of-completion methodology if project costs can be estimated or the completed contract methodology if project costs cannot be reliably estimated. Hardware and software post-sale maintenance support fees are recognized ratably over the life of the related service contract.

 

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Unearned revenue is recorded when a customer pays for products or services where the criteria for revenue recognition have not been met as of the balance sheet date. 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 for which the criteria for revenue recognition have not been met as of the balance sheet date. Previously recorded unearned revenue and deferred costs are recognized when the applicable revenue recognition criteria are met. 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 in our Consolidated Statements of Operations.

Product and Software Development Costs

Product and software development costs primarily include employee compensation and third party contracting fees. For software we develop to be marketed or sold, we capitalize development costs after technological feasibility is established. 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, we generally do not capitalize product and software development expenses.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options, stock issued pursuant to our Employee Stock Purchase Plan (ESPP), and the issuance of restricted and unrestricted stock awards and units based on estimated fair values. The fair values of stock options and ESPP awards are 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 restricted and unrestricted stock awards and units, the fair value is the market close price of our common stock on the date of grant. We expense stock-based compensation, adjusted for estimated forfeitures, using the straight-line method over the vesting requirement. A substantial portion of our stock-based compensation cannot be expensed for tax purposes. 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.

Loss on Extinguishment of Debt, Net

Upon partial or full redemption of our borrowings, we recognize a gain or loss for the difference between the cash paid and the net carrying amount of the debt. Included in the net carrying amount is any unamortized premium or discount from the original issuance of the debt. Due to the particular characteristics of our convertible notes, upon conversion or derecognition of our senior subordinated convertible notes, we recognize a gain or loss for the difference between the fair value of the consideration transferred to the holder that is allocated to the liability component, which is equal to the fair value of the liability component immediately prior to extinguishment, and the net carrying amount of the liability component (including any unamortized discount and debt issuance costs). In the case of an induced conversion, a loss is recognized for the amount of the fair value of the securities or other consideration transferred to the holder in excess of fair value of the consideration issuable in accordance with the original conversion terms of the debt.

Income Taxes

The two primary objectives related to accounting for income taxes are to 1) recognize the amount of taxes payable or refundable for the current year and 2) recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred income taxes are recorded for the temporary differences between the financial reporting basis and tax basis of our assets and liabilities in each of the tax jurisdictions in which we operate. These deferred income taxes are measured using the tax rates expected to be in effect when the temporary differences reverse. We establish a valuation allowance for the deferred income tax asset when we believe it is more likely than not that a portion of such asset will not be realized. Deferred income tax liabilities have not been recorded on undistributed earnings of international subsidiaries that are permanently reinvested.

We evaluate whether our tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based solely on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We classify interest expense and penalties related to uncertain tax positions and interest income on tax overpayments as components of income tax expense.

Foreign Exchange

Our condensed consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries with a non-U.S. dollar functional currency 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. Gains and losses that arise from exchange rate fluctuations for asset and liability balances that are not denominated in an entity’s functional currency are included 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 accumulated other comprehensive income in shareholders’ equity. Revenues and expenses for these subsidiaries 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 accumulated OCI in shareholders’ equity.

 

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Fair Value Measurements

The 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). For fair value measurements using Level 3 inputs, a reconciliation of the beginning and ending balances is required. FSP FAS 157-2, Effective Date of FASB Statement 157, which delayed the effective date of SFAS 157, Fair Value Measurements (SFAS 157) for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), became effective as of January 1, 2009.

 

        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.

Reclassifications

See Change in Accounting Principle for the impact of the adoption of FSP 14-1.

New Accounting Pronouncements

SFAS 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162, establishes the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental GAAP. The Codification is effective for interim and annual periods ending after September 15, 2009 and is not intended to modify existing GAAP. As of July 1, 2009 for Itron, only one level of authoritative GAAP exists, other than guidance issued by the SEC. All other accounting literature is non-authoritative. We will include Codification references in our September 30, 2009 Quarterly Report on Form 10-Q.

In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which amends SFAS 132(R), Employer’s Disclosures about Pensions and Other Postretirement Benefits, to require additional fair value disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. This FSP is effective for our December 31, 2009 Annual Report on Form 10-K.

In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R). This Statement requires an enterprise to perform additional analyses to assess variable interest entities (VIE’s) and the enterprise’s involvement with these entities, as well provide additional disclosures. SFAS 167 will be effective for Itron on January 1, 2010. We do not expect SFAS 167 to have a material impact to our consolidated financial statements.

 

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		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(in thousands, except per share data)
Net income (loss) available to common shareholders		$	15,289			$	11,089			$	(4,440	)		$	12,042
Weighted average common shares outstanding - Basic			37,776				32,796				36,968				31,746
Dilutive effect of stock-based awards			354				833				-				764
Dilutive effect of convertible notes			-				1,696				-				1,531
Weighted average common shares outstanding - Diluted			38,130				35,325				36,968				34,041
Basic earnings (loss) per common share		$	0.40			$	0.34			$	(0.12	)		$	0.38
Diluted earnings (loss) per common share		$	0.40			$	0.31			$	(0.12	)		$	0.35

 

Accounts receivable, net		At June 30,				At December 31,
		2009				2008
		(in thousands)
Trade receivables (net of allowance of $7,271 and $5,954)		$	291,533			$	306,593
Unbilled revenue			19,805				14,685
Total accounts receivable, net		$	311,338			$	321,278

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(in thousands)
Beginning balance		$	5,213			$	5,765			$	5,954			$	5,920
Provision for doubtful accounts			2,008				576				1,890				743
Accounts charged off			(339	)			(74	)			(636	)			(556	)
Effects of change in exchange rates			389				141				63				301
Ending balance, June 30		$	7,271			$	6,408			$	7,271			$	6,408

Inventories		At June 30,				At December 31,
		2009				2008
		(in thousands)
Materials		$	84,402			$	85,153
Work in process			17,024				14,556
Finished goods			64,359				64,501
Total inventories		$	165,785			$	164,210

Property, plant, and equipment, net		At June 30,				At December 31,
		2009				2008
		(in thousands)
Machinery and equipment		$	251,937			$	217,740
Computers and purchased software			64,717				62,525
Buildings, furniture, and improvements			128,469				134,316
Land			36,624				36,130
Total cost			481,747				450,711
Accumulated depreciation			(169,279	)			(142,994	)
Property, plant, and equipment, net		$	312,468			$	307,717

 

		At June 30, 2009												At December 31, 2008
		Gross Assets				Accumulated Amortization				Net				Gross Assets				Accumulated Amortization				Net
		(in thousands)
Core-developed technology		$	392,842			$	(215,180	)		$	177,662			$	394,912			$	(188,953	)		$	205,959
Customer contracts and relationships			298,805				(73,459	)			225,346				299,928				(56,966	)			242,962
Trademarks and trade names			76,322				(51,397	)			24,925				76,766				(45,851	)			30,915
Other			24,582				(22,886	)			1,696				24,630				(22,580	)			2,050
Total intangible assets		$	792,551			$	(362,922	)		$	429,629			$	796,236			$	(314,350	)		$	481,886

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(in thousands)
Beginning balance, intangible assets, gross		$	762,268			$	863,290			$	796,236			$	895,979
Adjustment of previous acquisitions			-				-				-				(70,048	)
Effect of change in exchange rates			30,283				759				(3,685	)			38,118
Ending balance, intangible assets, gross		$	792,551			$	864,049			$	792,551			$	864,049

During 2008, intangible assets were adjusted by $70.0 million based on our completion of the fair value assessment associated with the Actaris Metering Systems SA (Actaris) acquisition in 2007.

Intangible assets are recorded in the functional currency of our international subsidiaries; therefore, the carrying amount of intangible assets increase or decrease, with a corresponding change in accumulated other comprehensive income, due to changes in foreign currency exchange rates. Intangible asset amortization expense was $24.2 million and $31.5 million for the three months ended June 30, 2009 and 2008, and $47.7 million and $62.7 million for the six months ended June 30, 2009 and 2008, respectively.

Estimated future annual amortization expense is as follows:

In 2009, we made refinements to our management reporting and geographic reporting structure between our International and North America operations. Itron North America now includes sales of gas and water meters in North America, which were previously part of Itron International. The allocation of goodwill to our reporting units is based on our current segment reporting structure; therefore we have reallocated $57.5 million between the operating segments. Historical segment information has been restated from the segment information previously provided to conform to our current segment reporting structure after the refinement.

In 2009, $2.1 million of contingent consideration became payable associated with two acquisitions in 2006, which is reflected as an adjustment of previous acquisitions.

In 2008, the adjustment of previous acquisitions represents an adjustment to goodwill associated with the 2007 Actaris acquisition based on our final determination of fair values of certain assets acquired and liabilities assumed.

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