NOTE 13: Employee Stock Plans

The Company has three share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans for fiscal 2016, 2015, and 2014 was $13.5 million, $10.8 million, and $13.0 million, respectively. The total income tax benefit recognized in the income statement for the share-based compensation arrangement for fiscal 2016, 2015, and 2014 was $3.6 million, $2.7 million, and $3.0 million, respectively.

Employee Stock Purchase Plan

The Company offers an employee stock purchase plan to its employees. The plan qualifies as a noncompensatory employee stock purchase plan under Section 423 of the Internal Revenue Code. Employees are eligible to participate through payroll deductions subject to certain limitations.

The plan has a safe harbor design where shares are purchased by participants at 95% of the fair market value on the purchase date and, therefore, compensation cost is not recorded. During fiscal 2016, employees purchased 24,441 shares at a fair market value price of $71.44 per share. As of September 30, 2016, deductions aggregating $0.5 million were accrued for the purchase of shares on December 15, 2016.

Employee Share-Save Scheme

The Company offers shares under its employee share-save scheme for U.K. employees. This plan allows participants the option to purchase shares at 95% of the market price of the stock as of the beginning of the offering period. The term of these options is three years. At the end of fiscal 2016, the Company had reserved 142,030 shares for issuance under its employee share-save scheme for U.K. employees, leaving a balance of 465,087 shares available for issuance in the future. The share-save scheme is not a “safe-harbor” design, and, therefore, compensation cost is recognized on this plan.

Under the employee share-save scheme, option exercise prices are equal to the fair market value of the Company’s common stock on the date of grant. The Company granted 70,673, 25,984 and 29,242 options in fiscal 2016, 2015, and 2014, respectively. The weighted-average grant date fair value of options granted in fiscal 2016 was $16.65 per share. During fiscal 2016, 1,813 options were exercised at a weighted average exercise price of $65.84.

The fair value of the awards under the employee share-save scheme was estimated using a Black-Scholes pricing model which uses the assumptions noted in the following table. The risk-free rate for the contractual life of the option is based on the U.S. Treasury zero coupon issues in effect the time of grant.

	2016			2015			2014

Volatility		33.21	%		25.80	%		33.69	%
Risk-free interest rate		1.19	%		0.93	%		0.73	%
Expected life (years)	3			3			3
Dividends	0			0			0

Equity Incentive Plan

The Company also provides an equity incentive plan for officers and key employees. At the end of fiscal 2016, the Company had 1,693,557 shares reserved for issuance to officers and key employees, of which 866,158 shares were available to be granted in the future.

Stock Options

The Board of Directors authorized the Compensation Committee to administer awards granted under the equity incentive plan and to establish the terms of such awards. Awards under the equity incentive plan may be granted to eligible employees of the Company over the 10-year period ending March 5, 2023. Options granted generally become exercisable ratably over a period of four years following the date of grant and expire on the tenth anniversary of the grant. Option exercise prices are equal to the fair market value of the Company’s common stock on the date of grant. The weighted-average grant date fair value of the options granted in fiscal 2016 and 2015 was $35.69 per share and $47.85 per share, respectively.

The fair value of each option granted by the Company was estimated using a Black-Scholes pricing model which uses the assumptions noted in the following table. The Company uses historical data to estimate volatility of the Company’s common stock and option exercise and employee termination assumptions. The range of the expected term reflects the results from certain groups of employees exhibiting different behavior. The risk-free rate for the periods within the contractual life of the grant is based upon the U.S. Treasury zero coupon issues in effect at the time of the grant.

	2016	2015	2014

Volatility	33.06 - 40.52%	40.73 - 41.89%	41.87 - 43.17%
Risk-free interest rate	1.61 - 2.24%	1.43 - 2.00%	1.73 - 2.99%
Expected life (years)	5 - 9	5 - 9	5 - 9
Dividends	0	0	0

The following table summarizes the changes in outstanding options granted under the Company’s equity incentive plan:

	2016					2015					2014
				Weighted					Weighted					Weighted
	Shares			Average		Shares			Average		Shares			Average
	Subject to			Exercise		Subject to			Exercise		Subject to			Exercise
	Option			Price		Option			Price		Option			Price
Outstanding, beginning of year		1,363,921		$	68.23		1,367,793		$	60.23		1,829,488		$	51.08
Granted		221,200			90.16		203,200			107.34		207,200			97.61
Exercised		(112,790	)		48.61		(182,322	)		50.94		(618,645	)		45.16
Forfeited/cancelled		(73,375	)		89.91		(24,750	)		74.73		(50,250	)		66.65
Outstanding, end of year		1,398,956		$	72.14		1,363,921		$	68.23		1,367,793		$	60.23
Exercisable, end of year		922,706		$	61.09		826,496		$	55.63		752,943		$	50.36

The aggregate intrinsic value of the option shares outstanding and exercisable at September 30, 2016, was $17.8 million and $17.2 million, respectively.

The number of option shares vested or that were expected to vest at September 30, 2016, was 1.3 million and the aggregate intrinsic value was $17.7 million. The weighted average exercise price and weighted average remaining contractual term of option shares vested or that were expected to vest at September 30, 2016, was $71.12 and 5.5 years, respectively. The weighted-average remaining contractual term of option shares currently exercisable is 4.4 years as of September 30, 2016.

The table below presents stock activity related to stock options exercised in fiscal 2016 and 2015:

In Thousands	2016		2015

Proceeds from stock options exercised	$	8,175	$	11,420
Tax benefits related to stock options exercised		406		1,869
Intrinsic value of stock options exercised		3,195		10,861

Total unrecognized compensation expense for stock options that have not vested as of September 30, 2016, is $7.4 million, which will be recognized over a weighted average period of 1.8 years. The total fair value of option shares vested during the year ended September 30, 2016, was $2.4 million.

The following table summarizes information for stock options outstanding at September 30, 2016:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
Range of Exercise Prices	Shares		Life (years)		Price		Shares		Price

$ 23.66 - 50.00		200,771		2.8	$	39.95		200,771	$	39.95
50.01 - 52.00		189,575		4.4		51.06		189,575		51.06
52.01 - 65.00		321,660		3.7		60.63		300,310		60.63
65.01 - 80.00		190,350		7.1		73.16		93,100		70.37
80.01 - 100.00		313,550		8.0		94.83		87,225		94.37
100.01 - 118.32		183,050		8.0		109.57		51,725		109.72

Restricted Stock Units

The Company granted 37,000 and 28,150 restricted stock units (RSUs) during fiscal 2016 and 2015, respectively. The fair value of each RSU granted by the Company is equal to the fair market value of the Company’s common stock on the date of grant. RSUs granted generally have a three-year cliff vesting schedule.

The following table summarizes the changes in RSUs granted under the Company’s equity incentive plan:

	2016					2015
				Weighted					Weighted
				Average					Average
				Grant Date					Grant Date
	Shares			Fair Value		Shares			Fair Value

Non-vested, beginning of year		117,281		$	85.95		103,971		$	80.01
Granted		37,000			84.70		28,150			105.34
Vested		(48,053	)		75.35		(12,740	)		79.84
Forfeited/cancelled		(6,450	)		94.58		(2,100	)		88.99
Non-vested, end of year		99,778		$	90.04		117,281		$	85.95

Total unrecognized compensation expense for RSUs that have not vested as of September 30, 2016, is $3.4 million, which will be recognized over a weighted average period of 1.7 years.

The table below presents stock activity related to restricted stock units vested in fiscal 2016 and 2015:

In Thousands	2016		2015

Tax benefits related to restricted stock units vested	$	162	$	104
Intrinsic value of restricted stock units vested		3,847		912

Performance Shares

The Company granted 56,275 and 36,800 performance share plan (PSP) shares during fiscal 2016 and 2015, respectively. PSP shares will be paid out in shares of Esterline common stock at the end of the three year performance period. The actual number of shares that will be paid out upon completion of the performance period is based on actual performance and may range from 0% to 300% of the target number of shares.

The following table summarizes the activity in the target PSP shares granted under the Company’s equity incentive plan:

	2016			2015

Non-vested, beginning of year		34,700			-
Granted		56,275			36,800
Vested		-			-
Forfeited/cancelled		(1,700	)		(2,100	)
Non-vested, end of year		89,275			34,700