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, and as disclosed in our Current Report on Form 8-K, filed with the SEC on May 24, 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 and six months ended June 30, 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, and 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.

Overview

Revenues for the three and six months ended June 30, 2012 were $579 million and $1.2 billion, compared with $612 million and $1.2 billion for the same periods last year. Fluctuations in foreign currency exchange rates unfavorably impacted revenues by $35 million and $48 million for the three and six months ended June 30, 2012. Aside from the foreign currency translation impact,

revenues increased during these same periods in 2012 due to growth in OpenWay projects and the Water operating segment, offset by decreases in Gas revenue. Gross margin for the second quarter of 2012 was 34.0%, compared with a gross margin of 31.3% for the same period last year. Gross margin for the six months ended June 30, 2012 was 33.0% compared with a gross margin of 32.0% for the corresponding period in 2011. Reduced warranty costs contributed to the gross margin improvement by 1.6 percentage points for the quarter and 0.3 percentage points for the six month period in 2012. Operating expenses increased 5% during the second quarter of 2012, compared with the same period last year, and 6% for the six months ended June 30, 2012 compared with the same period in 2011, primarily due to increased sales and marketing and product development expenses associated with expansion of our sales efforts in developing markets and investment in new and enhanced products, as well as increased restructuring expenses.

For the three and six months ended June 30, 2012, we had a tax provision of 24.7% and 25.9%, based on a percentage of income before tax, as compared with a tax provision (benefit) of (0.2)% and 13.1% for the same periods in 2011. The three and six months ended June 30, 2012 included minimal discrete tax benefits, while the same periods in 2011 included $7.8 million and $7.3 million of net discrete tax benefits primarily due to the reduction of tax reserves for certain international subsidiaries, .

Total backlog was $1.1 billion and twelve-month backlog was $637 million at June 30, 2012.

On May 1, 2012, we completed our acquisition of SmartSynch, Inc. (SmartSynch). The acquisition was financed through borrowings on our multicurrency revolving line of credit and cash on hand. SmartSynch is a provider of smart grid solutions that utilize cellular networks for communications. The acquisition strengthens our cellular communications offerings, and we believe the acquisition brings greater choice to utility customers across the spectrum of smart metering deployments. As part of the acquisition, SmartSynch contributed $60 million in total backlog, $4 million in revenue, and $4.7 million in operating expenses from May 1, 2012.

Our restructuring projects continue 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 $77 million in costs, representing approximately 86% of the total expected costs. Total expected costs increased by approximately $3.5 million to $89 million during the second quarter, primarily due to an environmental remediation obligation related to a manufacturing site and the related testing and monitoring that will be required subsequent to the remediation, as well as losses on the sale of three non-core businesses. As a result of our restructuring activities, we anticipate annualized savings in 2012 of approximately $15 million, primarily in the second half of the year. 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. 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.

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. During the six months ended June 30, 2012, we repurchased 701,690 shares of our common stock for $26 million.

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

                 Three Months Ended June 30,               Six Months Ended June 30,
                2012          2011       % Change       2012            2011        % Change
                  (in thousands)                           (in thousands)
Revenues     $ 579,140     $ 612,401       (5)%     $ 1,150,780     $ 1,176,092       (2)%
Gross Profit $ 196,745     $ 191,951        2%      $   379,850     $   376,929        1%
Gross Margin      34.0 %        31.3 %                     33.0 %          32.0 %



                               Three Months Ended June 30,             Six Months Ended June 30,
                                 2012               2011                2012                2011
                                                         (in thousands)
Revenues by Region
United States and Canada
(North America)            $       292,999     $     285,931     $      577,586        $     560,393
Europe, Middle East, and
Africa (EMEA)                      215,899           250,709            436,855              474,412
Other                               70,242            75,761            136,339              141,287
Total revenues             $       579,140     $     612,401     $    1,150,780        $   1,176,092

Revenues
Revenues decreased $33.3 million and $25.3 million, or 5% and 2%, for the three and six months ended June 30, 2012, compared with the same periods last year. The net translation effect of our operations denominated in foreign currencies resulted in an unfavorable impact to revenues of $35.1 million and $47.6 million for the three and six months ended June 30, 2012, compared with the same periods in 2011. Aside from the foreign currency translation impact, revenues increased for the three and six months ended June 30, 2012, driven by increased OpenWay project revenue in North America and growth in the Water segment, offset by a decrease in Gas revenue. 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 three and six months ended June 30, 2012, while no single customer accounted for more than 10% of total revenues for the same periods in 2011. Our 10 largest customers accounted for 30% and 32% of total revenues for the three and six months ended June 30, 2012, and 30% and 31% for the three and six months ended June 30, 2011, respectively.

Gross Margins
Gross margin for the second quarter of 2012 was 34.0%, compared with a gross margin of 31.3% for the same period last year. For the six months ended June 30, 2012, gross margin was 33.0% compared with 32.0% in the same period in 2011. Gross margin improved over the prior year for the quarter and first six months primarily due to lower warranty costs, which positively impacted gross margin by 1.6 percentage points in the quarter and 0.3 percentage points in the six month period, improved gross margin on OpenWay projects, product mix, and lower manufacturing costs in both the Energy and Water segments. A more detailed analysis of these fluctuations is provided in Operating Segment 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 June 30,       Six Months Ended June 30,
                                       2012             2011            2012            2011
                                                       (units in thousands)
Meters
Standard                                  4,620          5,070            9,500          9,940
Advanced and smart                        2,160          2,040            4,410          3,930
Total meters                              6,780          7,110           13,910         13,870

Stand-alone communication modules
Advanced and smart                        1,960          1,850            3,550          3,280

Operating Segment Results

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

                            Three Months Ended June 30,                                          Six Months Ended June 30,
                      2012             2011            % Change                           2012              2011            % Change
Segment
Revenues                 (in thousands)                                                      (in thousands)
Energy
Electricity     $      283,484     $   291,230           (3)%                       $       567,944     $   566,801            -%
Gas                    161,114         183,185          (12)%                               314,401         339,430           (7)%
Total Energy           444,598         474,415           (6)%                               882,345         906,231           (3)%
Water                  134,542         137,986           (2)%                               268,435         269,861           (1)%
Total revenues  $      579,140     $   612,401           (5)%                       $     1,150,780     $ 1,176,092           (2)%

                                   Three Months Ended June 30,                                          Six Months Ended June 30,
                              2012                              2011                              2012                              2011
                     Gross             Gross            Gross            Gross            Gross             Gross            Gross           Gross
                     Profit           Margin            Profit          Margin           Profit            Margin            Profit          Margin
Segment Gross
Profit and       (in thousands)                     (in thousands)                   (in thousands)                      (in thousands)
Margin
Energy          $      148,951         33.5%       $      144,753        30.5%      $       283,554         32.1%       $      282,337       31.2%
Water                   47,794         35.5%               47,198        34.2%               96,296         35.9%               94,592       35.1%
Total gross
profit and
margin          $      196,745         34.0%       $      191,951        31.3%      $       379,850         33.0%       $      376,929       32.0%

                                   Three Months Ended June 30,                                          Six Months Ended June 30,
                              2012                              2011                              2012                              2011
                   Operating         Operating        Operating        Operating        Operating         Operating        Operating       Operating
                 Income (Loss)        Margin        Income (Loss)       Margin        Income (Loss)        Margin        Income (Loss)       Margin
Segment
Operating
Income (Loss)    (in thousands)                     (in thousands)                   (in thousands)                      (in thousands)
and Operating
Margin
Energy          $       47,069          11%        $       45,463         10%       $        85,233          10%        $       88,631        10%
Water                   11,666          9%                 13,755         10%                27,603          10%                30,609        11%
Corporate
unallocated            (12,672 )                          (11,133 )                         (27,152 )                          (21,066 )
Total Company   $       46,063          8%         $       48,085         8%        $        85,684          7%         $       98,174         8%

Energy:

Revenues - Three months ended June 30, 2012 vs. Three months ended June 30, 2011 Electricity revenues decreased $7.7 million, or 3%, for the three months ended June 30, 2012, compared with the same period last year. In 2012, OpenWay project revenues in North America increased by $6.0 million from the same period in 2011, offset by decreases in Latin America, EMEA, and Asia-Pacific and by $13.0 million for the currency translation effect of our operations denominated in foreign currencies.

Gas revenues decreased $22.1 million, or 12%, for the three months ended June 30, 2012, compared with the same period last year, as the result of $10.6 million in lower shipments of smart gas communication modules in North America, due to normal period-to-period fluctuations in the timing of customer projects, and $10.9 million for the currency translation effect of our operations denominated in foreign currencies.

One customer represented 15% of the Energy operating segment revenues in the three and six months ended June 30, 2012, and one customer represented 12% and 11% of the Energy operating segment revenues in the three and six months ended June 30, 2011.

Revenues - Six months ended June 30, 2012 vs. Six months ended June 30, 2011 Electricity revenues for the first six months of 2012 were essentially flat when compared with the same period in 2011. In 2012, OpenWay project revenues in North America increased by $15.9 million from the same period in 2011, offset by decreases in Latin America and EMEA and by $17.6 million for the currency translation effect of our operations denominated in foreign currencies.

Gas revenues decreased $25.0 million, or 7%, for the six months ended June 30, 2012, compared with the same period last year, primarily due to $7.5 million in lower OpenWay project revenues in North America and $14.7 million for the currency translation effect of our operations denominated in foreign currencies.

Gross Margin - Three months ended June 30, 2012 vs. Three months ended June 30, 2011
Gross margin was 33.5% for the three months ended June 30, 2012, compared with a gross margin of 30.5% for the same period last year. During the second quarter of 2012, gross margin was positively impacted by warranty costs, which were $9.3 million lower when compared with the same period in 2011, and reduced product costs as a result of our restructuring and global procurement projects, which were initiated in the fourth quarter of 2011. The lower warranty costs were primarily driven by a $4.3 million adjustment recorded in the second quarter of 2012, which reduced a warranty accrual, originally recorded in 2011, as a result of lower than estimated replacements.

Gross Margin - Six months ended June 30, 2012 vs. Six months ended June 30, 2011 Gross margin was 32.1% for the six months ended June 30, 2012, compared with a gross margin of 31.2% for the corresponding period in 2011. Gross margin was positively impacted warranty costs, which were $3.8 million lower when compared with the six months ended June 30, 2011, product mix, and reduced costs as a result of our restructuring and global procurement projects, which were initiated in the fourth quarter of 2011. The lower warranty costs were primarily driven by a $4.3 million adjustment recorded in the second quarter of 2012, which reduced a warranty accrual, originally recorded in 2011, as a result of lower than estimated replacements.

Operating Expenses - Three months ended June 30, 2012 vs. Three months ended June 30, 2011
Energy operating expenses increased $2.6 million, or 3%, for the three months ended June 30, 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, as well as $2.2 million in restructuring expense. These increases were offset by scheduled decreases in amortization of intangible assets and the foreign currency translation impact of $5.6 million. Operating expenses as a percentage of revenues were 23% for the three months ended June 30, 2012, compared with 21% for the same period last year. Operating expenses related to SmartSynch were $4.7 million subsequent to the acquisition on May 1, 2012.

Operating Expenses - Six months ended June 30, 2012 vs. Six months ended June 30, 2011
For the first half of 2012, Energy operating expenses increased $4.6 million, or 2%, compared with the first half of 2011, primarily due to increased sales and marketing and product development costs for development of new and enhanced products and $2.8 million in increased restructuring expenses, partially offset by scheduled decreases in amortization of intangible assets. Foreign currency translation favorably impacted operating expenses by $7.7 million during the six months ended June 30, 2012. Operating expenses as a percentage of revenues were 22% for the six months ended June 30, 2012, compared with 21% for the same period last year.

Water:

Revenues - Three months ended June 30, 2012 vs. Three months ended June 30, 2011 Revenues decreased $3.4 million, or 2%, for the three months ended June 30, 2012, compared with the same period last year. Excluding the translation effect of a stronger U.S. dollar against most foreign currencies in the second quarter of 2012, as compared with the second quarter of 2011, revenues increased 6%. The increase was driven primarily by higher communication module shipments in North America, as well as increased product shipments in Latin America and Asia-Pacific.

Revenues - Six months ended June 30, 2012 vs. Six months ended June 30, 2011 Water revenues decreased $1.4 million, or 1%, for the six months ended June 30, 2012, compared with the same period last year. The translation effect of foreign currencies to the U.S. dollar had an unfavorable impact of $15.2 million in the first half of 2012. Excluding the translation effect of a stronger U.S. dollar against most foreign currencies in the six months ended June 30, 2012, revenue increased 5%. Sales of communication modules increased in North America, and product shipments increased in Latin America and Asia-Pacific.

No single customer represented more than 10% of the Water operating segment revenues in the three and six months ended June 30, 2012 and 2011.

Gross Margin - Three months ended June 30, 2012 vs. Three months ended June 30, 2011
Water gross margin increased to 35.5% for the three months ended June 30, 2012, compared with a gross margin of 34.2% for the same period last year, primarily as a result of favorable product mix, increased meter and module shipments, lower materials costs, and manufacturing efficiencies.

Gross Margin - Six months ended June 30, 2012 vs. Six months ended June 30, 2011 For the first half of 2012, gross margin increased to 35.9% from 35.1% in the same period in 2011 driven by favorable product mix, increased meter and module shipments, lower materials costs, and manufacturing efficiencies.

Operating Expenses - Three months ended June 30, 2012 vs. Three months ended June 30, 2011
Operating expenses for the three months ended June 30, 2012 increased by $2.7 million over the second quarter of 2011. Increases in sales and marketing and product development costs for smart and advanced meter products and $3.6 million in higher restructuring costs were partially offset by scheduled decreases in amortization of intangible assets and $2.8 million for the foreign currency translation impact of the stronger U.S. dollar. Operating expenses, as a percentage of revenue, were 27% compared with 24% for the same period last year.

Operating Expenses - Six months ended June 30, 2012 vs. Six months ended June 30, 2011
Operating expenses increased $4.7 million for the six months ended June 30, 2012 over the first half of 2011. In 2012, increases in sales and marketing and product development costs for smart and advanced meter products along with $3.6 million in increased restructuring expenses were partially offset by scheduled decreases in amortization of intangible assets and $3.8 million for the foreign currency translation impact of the stronger U.S. dollar. Operating expenses, as a percentage of revenue, was 26% compared with 24% 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 $1.5 million and $6.1 million in the three and six months ended June 30, 2012, compared with the same period last year. The increases were primarily due to acquisition related expenses for the SmartSynch acquisition of $900,000 and $2.9 million for the three and six months ended June 30, 2012. In addition, we incurred approximately $660,000 and $2.8 million during the second quarter and the first half of 2012 for management training and development costs in connection with the implementation of our new organization and for 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.

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.

                                     Ending       Ending
                      Quarterly       Total      12-Month
Quarter Ended          Bookings      Backlog     Backlog
                                 (in millions)
June 30, 2012        $       447    $  1,122    $     637
March 31, 2012               488       1,221          760
December 31, 2011            515       1,296          766
. . .