EQUITY BASED COMPENSATION

Stock Options

Under the company’s incentive plans, stock options are typically granted at prices equal to the fair value on the date of grant and have a maximum term of 10 years. Stock options generally vest over a three-year period from the date of grant. No stock options were granted or exercised during fiscal year 2014. During fiscal year 2013, the company granted 350,000 stock options to the Chief Executive Officer as a hiring incentive. These options vest based on the satisfaction of certain service and market performance conditions. The fair value of this option award was $1.3 million at the grant date with a derived service period of 12 months. No stock options were granted during fiscal year 2012.

The following is a rollforward of stock options for fiscal year 2014 (shares in thousands, exercise price and remaining contractual term represent weighted averages and aggregate intrinsic values in millions):



	Shares		Exercise Price		Remaining Contractual Life (years)	Aggregate Intrinsic Value
Outstanding — beginning of year	864		$	12.27
Cancelled or expired	(214	)	18.19
Outstanding — end of year	650		$	10.32	3.0	—
Exercisable — end of year	533		$	10.79	2.7	—

The following table provides additional information about outstanding stock options at September 30, 2014 (shares in thousands, exercise price represents a weighted average):



	Outstanding				Exercisable
	Shares	Remaining Contractual Life (years)	Exercise Price		Shares	Exercise Price
$8.00 to $12.00	350	4.0	$	8.22	233	$	8.22
$12.01 to $16.00	300	1.8	12.78		300	12.78
Total	650				533

Stock-based compensation is measured at the grant date based on the fair value of the award and is generally recognized as expense ratably on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. No compensation cost is ultimately recognized for awards for which employees do not render the requisite service and are forfeited.

Compensation expense is recognized for the non-vested portion of previously issued stock options. During fiscal year 2014, the company recognized $1.2 million in compensation expense associated with the expensing of stock options. Compensation expense associated with the expensing of stock options was not significant in fiscal years 2013. No compensation expense associated with the expensing of stock options was recognized in fiscal year 2012. No options were exercised in fiscal years 2014, 2013 and 2012.

The fair market value of the service and market performance-based option award was determined using the Monte Carlo simulation method. The Monte Carlo simulation method is subject to variability as several factors utilized must be estimated, including the derived service period, which is estimated based on the company’s judgment of likely future stock price performance as well as the company’s stock price volatility. The weighted-average fair value of options granted in fiscal year 2013 was $3.69 per share. The fair value of each option was estimated using following assumptions:



	2013
Risk-free interest rate	1.7	%
Expected dividend yield	—	%
Expected volatility	60.4	%
Expected life (years)	5.0

Restricted Stock and Restricted Units

The company has granted shares of restricted stock and restricted share units to certain employees and non-employee members of the Board of Directors in accordance with the existing plans. The company measures the grant price fair value of these stock-based awards at the market price of the company’s common stock as of the date of the grant. Employee awards typically vest at the end of three years and are subject to continued employment by the employee. Compensation cost associated with stock-based awards is recognized ratably over the vesting period. Cash dividends on the restricted stock, if any, are reinvested in additional shares of common stock during the vesting period.

In fiscal years 2014, 2013 and 2012, the company granted 218,816, 1,003,723, and 1,325,447 shares of restricted share units, respectively. The grant date weighted average fair value of these shares was $9.23, $4.43, and $6.14 for shares granted in fiscal years 2014, 2013 and 2012, respectively. The number of non-vested restricted shares and restricted share units as of September 30, 2014 was 2,038,853. The per share weighted average fair value of these non-vested shares was $7.16.

As of September 30, 2014, there was $2 million of total unrecognized compensation costs related to non-vested restricted shares and restricted share units. These costs are expected to be recognized over a weighted average period of one year. Total compensation expense recognized for restricted stock and restricted share units was $4 million for fiscal year 2014, $5 million in fiscal year 2013, and $6 million in fiscal year 2012.

Performance Share Units

The company has granted performance share units to all executives eligible to participate in the long-term incentive plan. The company measures the grant price fair value of these units based awards at the market price of the company’s common stock as of the date of the grant. Compensation cost associated with these stock based awards is recognized ratably over the vesting period.

On November 7, 2013, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock upon achievement of certain performance and time vesting criteria. The fair value of each share unit is $7.97, the company’s share price on the grant date of December 1, 2013. The number of shares that vest will be between 0% and 200% of the estimated grant date amount of 1.5 million shares. The plan allows for incremental performance share units to be issued for executive promotions on a quarterly basis.

The actual number of performance share units that will vest will depend upon the company’s performance relative to the established M2016 goals for the three-year performance period of October 1, 2013 to September 30, 2016, measured at the end of the performance period. The number of potential performance units will depend on meeting the established M2016 goals at the following weights: 50% associated with achieving the Adjusted EBITDA margin targets, 25% associated with reducing net debt including retirement benefit liabilities targets, and 25% associated with generating incremental booked revenue targets.

There were 1.8 million performance share units granted during fiscal 2014, of which 1,634,561 were not vested as of September 30, 2014. The per share weighted average fair value of the performance share units was $8.27 as of September 30, 2014.

For the year ended September 30, 2014, compensation cost recognized related to the performance share units was $4 million. As of September 30, 2014, there were $10 million of total unrecognized compensation costs related to non-vested performance share unit equity compensation arrangements. These costs are expected to be recognized over a weighted average period of 2 years.