Our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. We have included reconciliations of differences between GAAP and non-GAAP financial measures in our earnings release and financial presentation.
I'd also like to cover our Safe Harbor Statement. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in today's earnings release and the comments made during this call and in the Risk Factors section on our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.
Now please let me introduce Steve Helmbrecht, Itron's CFO, who will start our call.
Steven M. HelmbrechtThank you, Barbara, and good afternoon. I will begin with a summary of our Q2 results on Slide 4, starting with revenue. Second quarter revenue of $575 million was down 5% from Q2 2011 to almost entirely the foreign exchange rates. The average euro-U.S. dollar rate in Q2 was $1.28, compared with $1.44 in Q2 of last year. On Slide 5, you see the stronger dollar reduced revenue by $35 million. Adjusting for the impact of currency, total revenue was about flat compared with last year. The impact of FX on earnings was more muted. The stronger dollar negatively impacted GAAP operating income by $1 million and non-GAAP operating income by about $3 million, compared with last year. Gross margin of 34% was 270 basis points higher due to special -- reduced special warranty expense and operational improvements in both Energy and Water. Lower special warranty expense, primarily in the Energy segment, drove more than half of the margin improvement over last year. Warranty expense in the quarter benefited from a $4.3 million reduction in our warranty reserve related to the satisfaction of a customer warranty issue at a lower cost than originally estimated. Excluding that item, gross margin would have been 33.2%, up 190 basis points over last year and up 115 basis points from Q1 2012.
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