11.

Share-Based Compensation

The Company provides compensation benefits to certain key employees under several share-based plans providing for employee stock options and/or performance-accelerated restricted shares (restricted shares), and to non-employee directors under a non-employee directors compensation plan.

Stock Option Plans

The Company’s stock option awards have generally been subject to graded vesting over a three-year service period. All outstanding options were granted at prices equal to fair market value at the date of grant. Beginning in fiscal 2004, the options granted have had a five-year contractual life from date of issuance. The Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award.

The fair value of each option award is estimated as of the date of grant using the Black-Scholes option pricing model. Expected volatility is based on historical volatility of ESCO’s stock calculated over the expected term of the option. The Company utilizes historical company data to develop its expected term assumption. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.

Information regarding stock options awarded under the option plans is as follows:

	FY 2014				FY 2013				FY 2012
			Estimated				Estimated				Estimated
			Weighted				Weighted				Weighted
	Shares		Avg. Price		Shares		Avg. Price		Shares		Avg. Price
October 1,		67,350	$	37.39		125,816		36.29		435,054		35.58
Granted		—		—		—		—		—		—
Exercised		—	$	—		(51,116)		34.70		(100,872)		14.98
Cancelled		(67,350)	$	37.39		(7,350)		37.30		(208,366)		45.18
September 30,		—	$	—		67,350		37.39		125,816		36.29
At September 30,
Reserved for future grant		500,000				500,000				1,301,090
Exercisable		—	$	—		67,350		37.39		125,149		36.31

The aggregate intrinsic value of stock options exercised during 2013 and 2012 was $0.3 million and $2 million, respectively; no stock options were exercised during 2014. No stock options were granted during 2014, 2013 or 2012, and no stock options were outstanding at September 30, 2014.

Performance-Accelerated Restricted Share Awards

The performance-accelerated restricted shares (restricted shares) have a five-year term with accelerated vesting if certain targets based on market conditions are achieved. In these cases, if it is probable that the performance condition will be met, the Company recognizes compensation cost on a straight-line basis over the shorter performance period; otherwise, it will recognize compensation cost over the longer service period. Compensation cost for the majority of the outstanding restricted share awards is being recognized over the shorter performance period as it is probable the performance condition will be met. The restricted share award grants were valued at the stock price on the date of grant. Pretax compensation expense related to the restricted share awards for continuing operations was $4.1 million, $4 million and $3.8 million for the fiscal years ended September 30, 2014, 2013 and 2012, respectively.

The following summary presents information regarding outstanding restricted share awards as of September 30, 2014, and changes during the period then ended:

			Weighted
	Shares		Average Price
Nonvested at September 30, 2013		425,245	$	33.29
Granted		109,404		33.12
Vested		(168,809)		35.13
Cancelled		(33,500)		34.08
Nonvested at September 30, 2014		332,340	$	32.23

Non-Employee Directors Plan

The non-employee directors compensation plan provides to each non-employee director a retainer of 900 common shares per quarter. Compensation expense related to the non-employee director grants was $0.7 million, $0.6 million and $0.6 million for the years ended September 30, 2014, 2013 and 2012, respectively.

Total Share-Based Compensation

The total share-based compensation cost that has been recognized in results of operations and included within SG&A from continuing operations was $4.8 million, $4.6 million and $4.4 million for the years ended September 30, 2014, 2013 and 2012, respectively. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $1.3 million, $1.3 million and $1.6 million for the years ended September 30, 2014, 2013 and 2012, respectively. The Company has elected to use tax law ordering rules when calculating the income tax benefit associated with its share-based payment arrangements. In addition, the Company elected to use the simplified method of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized. As of September 30, 2014, there was $4.7 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.5 years.