11. Share-based Compensation

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


	Three Months Ended April 30,						Nine Months Ended April 30,
(in millions)	2015			2014			2015			2014
Cost of product sales	$	0.2		$	0.1		$	0.5		$	0.5
Cost of engineering sales		0.1			0.1			0.2			0.3
Research and product development		0.7			0.5			2.0			2.0
Selling and marketing		0.4			0.3			1.1			0.9
General and administrative		2.0			1.9			4.6			5.0
Total share-based compensation expense before tax		3.4			2.9			8.4			8.7
Income tax effect		(1.0	)		(0.9	)		(2.5	)		(2.7	)
Share-based compensation expense included in net income	$	2.4		$	2.0		$	5.9		$	6.0

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.

We granted 78,846 stock options during the nine months ended April 30, 2015. We did not grant any stock options during the three months ended April 30, 2015. The fair value of each option granted during the nine months ended April 30, 2015 and during the three and nine months ended April 30, 2014 was estimated on the grant date using the Black-Scholes valuation model with the following assumptions:


	Three Months Ended					Nine Months Ended
	April 30,					April 30,
	2015		2014			2015			2014
Expected option term in years (1)		-		5.31			5.31			5.37
Expected volatility (2)		-		35.1	%		29.3	%		38.6	%
Risk-free interest rate (3)		-		1.51	%		1.82	%		1.77	%
Expected annual dividend yield (4)		-		0.42	%		0.56	%		0.52	%
Weighted average grant date fair value		-	$	30.80		$	19.95		$	27.55

(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 for periods equal to the expected term of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant.

(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 nine months ended April 30, 2015 was $2.5 million and $4.2 million, respectively.

As of April 30, 2015, 295,878 stock options were vested or expected to vest and 143,207 stock options were exercisable. These options have a weighted average exercise price of $68.50 and $63.52, respectively, aggregate intrinsic value of $4.7 million and $3.0 million, respectively, and a weighted average remaining contractual term of 5.07 years and 4.37 years, respectively.

Restricted stock and restricted stock units

We granted 206 and 28,455 relative total shareholder return, or TSR, performance-based awards and 265 and 36,641 non-GAAP earnings per share, or EPS, performance-based awards during the three and nine months ended April 30, 2015, 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 April 30,						Nine Months Ended April 30,
	2015			2014			2015			2014
Stock price (1)	$	87.50		$	94.32		$	71.33		$	77.14
Expected volatility (2)		27.6	%		27.5	%		29.3	%		27.6	%
Risk-free interest rate (3)		0.83	%		0.46	%		1.00	%		0.82	%
Expected annual dividend yield (4)		0.00	%		0.00	%		0.00	%		0.00	%
Weighted average grant date fair value of performance based restricted stock awards	$	127.52		$	117.61		$	88.00		$	93.85

(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 for periods equal to the performance period is based on the U.S. Treasury yield curve in effect at the time of grant.

(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 nine months ended April 30, 2015 was $1.1 million and $6.5 million, respectively.

As of April 30, 2015, the unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options and restricted stock was $12.7 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.