11. Share-based Compensation

The following table presents share-based compensation expense included in our Consolidated Statements of Operations:


	Three Months Ended						Six Months Ended
	January 31,						January 31,
(in millions)	2016			2015			2016			2015
Cost of product sales	$	0.1		$	0.1		$	0.3		$	0.3
Cost of engineering sales		0.1			0.1			0.1			0.1
Research and product development		0.6			0.6			1.1			1.3
Selling and marketing		0.3			0.4			0.7			0.7
General and administrative		0.7			1.2			2.0			2.6

Total share-based compensation expense before tax		1.8			2.4			4.2			5.0
Income tax effect		(0.5	)		(0.7	)		(1.2	)		(1.5	)

Share-based compensation expense included in net income	$	1.3		$	1.7		$	3.0		$	3.5

Stock options

We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and our expected annual dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

No stock options were granted during the three and six months ended January 31, 2016. The fair value of each option granted during the three and six months ended January 31, 2015 was estimated on the grant date using the Black-Scholes valuation model with the following assumptions:


	Three Months Ended			Six Months Ended
	January 31,			January 31,
	2015			2015
Expected option term in years (1)		5.31			5.31
Expected volatility (2)		28.2	%		29.3	%
Risk-free interest rate (3)		1.65	%		1.82	%
Expected annual dividend yield (4)		0.54	%		0.56	%
Weighted average grant date fair value	$	19.89		$	19.95

(1)	The expected option term was estimated using historical data.

(2)	The expected volatility for each grant is determined based on the review of the average of historical daily price changes of our common stock over the expected option term.

(3)	The risk-free interest rate is determined based on the yield of zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption.

(4)	The expected annual dividend yield is calculated by dividing the expected annual dividends by the stock price on the date of grant.

The total intrinsic value of options exercised during the three and six months ended January 31, 2016 was $0.2 million and $0.5 million, respectively.

As of January 31, 2016, 250,157 stock options were vested or expected to vest and 175,748 stock options were exercisable. These options have a weighted average exercise price of $68.91 and $66.90, respectively, aggregate intrinsic value of $1.5 million and $1.4 million, respectively, and a weighted average remaining contractual term of 4.30 years and 3.87 years, respectively.

Restricted stock and restricted stock units

We estimate the fair value of restricted stock and restricted stock units, or RSU’s, that vest based on service conditions using the quoted closing price of our common stock on the date of grant. Share-based compensation expense is amortized over each award’s vesting period on a straight-line basis for all awards with service and performance conditions that vest at the end of the performance cycle, while the accelerated method applies to other awards with both service and performance conditions.

For our non-GAAP earnings per share, or EPS, performance-based awards, the compensation cost is amortized over the performance period on a straight-line basis, net of forfeitures, because such awards vest only at the end of the performance period. The compensation cost is based on the number of shares that are deemed probable of vesting at the end of the three-year performance cycle. This probability assessment is done each quarter and changes in estimates can result in significant expense fluctuations due to the cumulative catch-up adjustment. We estimate the fair value of the non-GAAP EPS performance-based awards using the quoted closing price of our common stock on the date of grant.

For our relative total shareholder return, or TSR, performance-based awards, which are based on market performance of our stock as compared to an industry peer group, the compensation cost is amortized over the performance period on a straight-line basis net of forfeitures, because the awards vest only at the end of the measurement period and the probability of actual shares expected to be earned is considered in the grant date valuation. As a result, the expense is not adjusted to reflect the actual shares earned. We estimate the fair value of the TSR performance-based awards using the Monte-Carlo simulation model.

We granted 1,711 and 24,821 relative total shareholder return, or TSR, performance-based awards and 2,320 and 32,444 non-GAAP earnings per share, or EPS, performance-based awards during the three and six months ended January 31, 2016, respectively. The fair value of our non-GAAP EPS performance-based awards was estimated using the quoted closing price of our common stock on the date of grant. The fair value of our TSR performance-based awards at the date of grant was estimated using the Monte-Carlo simulation model with the following assumptions:


	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2016			2015			2016			2015
Stock price (1)	$	81.90		$	73.91		$	84.06		$	71.34
Expected volatility (2)		27.6	%		28.4	%		26.4	%		29.4	%
Risk-free interest rate (3)		1.16	%		0.83	%		1.04	%		1.00	%
Expected annual dividend yield (4)		0.00	%		0.00	%		0.00	%		0.00	%
Weighted average grant date fair value of time-based restricted stock awards	$	81.90		$	74.06		$	83.99		$	71.22
Weighted average grant date fair value of performance based restricted stock awards	$	100.82		$	82.49		$	98.81		$	78.42

(1)	The stock price is the closing price of our common stock on the date of grant.

(2)	The expected volatility for each grant is determined based on the historical volatility for the peer group companies and our common stock over a period equal to the remaining term of the performance period from the date of grant for all awards.

(3)	The risk-free interest rate is determined based on the yield of zero-coupon U.S. Treasury securities for a period that is commensurate with the performance period.

(4)	Dividends are considered reinvested when calculating TSR. The dividend yield is therefore considered to be 0%.

The total fair value of restricted stock units, or RSU’s, that vested during the three and six months ended January 31, 2016 was $2.4 million and $4.4 million, respectively.

As of January 31, 2016, the unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options and restricted stock was $14.2 million. This cost will be recognized over an estimated weighted average amortization period of 1.4 years and assumes target performance for the non-GAAP EPS performance-based RSU’s.