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 and six months ended June 30, stock-based compensation expense and the related tax benefit were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(in thousands)
Stock options	$	511	$	952	$	1,544	$	2,295
Restricted stock units	3,853		3,441		7,404		6,382
Unrestricted stock awards	15		14		190		189
ESPP	164		138		380		255
Total stock-based compensation	$	4,543	$	4,545	$	9,518	$	9,121

Related tax benefit	$	1,257	$	1,324	$	2,659	$	2,732

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

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:



	Employee Stock Options
	Three Months Ended June 30,		Six Months Ended June 30,
	2011⁽¹⁾	2010⁽¹⁾	2011		2010
Dividend yield	—	—	—		—
Expected volatility	—	—	46.6	%	48.7	%
Risk-free interest rate	—	—	2.0	%	2.3	%
Expected life (years)	—	—	4.85		4.61

⁽¹⁾There were no employee stock options granted for the three months ended June 30, 2011 and 2010.

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 date an estimate of the award is 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.

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 June 30, 2011, 2,178,243 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.

A summary of our stock option activity for the six months ended June 30 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, 2010	1,179		$	52.93	5.90	$	22,863
Granted	71		61.97					$	27.18
Exercised	(133	)	41.51			$	4,114
Outstanding, June 30, 2010	1,117		$	54.89	6.04	$	15,391

Exercisable and expected to vest, June 30, 2010	1,104		$	54.73	6.01	$	15,379

Exercisable, June 30, 2010	963		$	52.03	5.61	$	15,241

Outstanding, January 1, 2011	1,102		$	55.21	5.58	$	10,883
Granted	78		56.64					$	23.93
Exercised	(26	)	19.91			$	989
Expired	(1	)	7.00
Outstanding, June 30, 2011	1,153		$	56.13	5.48	$	5,903

Exercisable and expected to vest, June 30, 2011	1,145		$	56.12	5.45	$	5,903

Exercisable, June 30, 2011	1,029		$	55.85	5.05	$	5,903

⁽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 June 30, 2011, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $2.4 million, which is expected to be recognized over a weighted average period of approximately 1.1 years.

Restricted Stock Units

Certain employees and senior management receive restricted stock units as a component of their total compensation. The fair value 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 the participant’s retirement eligible date. For performance awards granted in 2011, the maximum restricted stock units that may become eligible for vesting is 150,000 with a grant date fair value of $56.75.

The following table summarizes restricted stock unit activity for the six months ended June 30:



	Number of Restricted Stock Units		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value⁽¹⁾
	(in thousands)				(in thousands)
Outstanding, January 1, 2010	326
Granted⁽²⁾	210		$	63.52
Released	(75	)			$	4,965
Forfeited	(12	)
Outstanding, June 30, 2010	449

Outstanding, January 1, 2011	588
Granted⁽²⁾	255		$	56.64
Released	(192	)			$	15,007
Forfeited	(5	)
Outstanding, June 30, 2011	646

Expected to vest, June 30, 2011	545				$	26,268


⁽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 2010 and 2011 awards under the Performance Awards Agreement, which are not eligible for vesting as of June 30 of each respective year.

At June 30, 2011, unrecognized compensation expense was $26.0 million, which is expected to be recognized over a weighted average period of approximately 2.2 years.

Unrestricted Stock Awards

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

The following table summarizes unrestricted stock award activity for the three and six months ended June 30:



	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Shares of unrestricted stock issued	276		192		3,453		2,766

Weighted average grant date fair value	$	54.17	$	77.69	$	54.96	$	68.49

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 occurs at the beginning of the subsequent quarter.

The following table summarizes ESPP activity for the three and six months ended June 30:



	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Shares of stock sold to employees⁽¹⁾	25,567		10,736		42,625		23,086

Weighted average fair value per ESPP award⁽²⁾	$	7.22	$	9.27	$	7.88	$	9.95


⁽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 and six months ended June 30.

At June 30, 2011, all compensation cost associated with the ESPP had been recognized. There were approximately 154,000 shares of common stock available for future issuance under the ESPP at June 30, 2011.