Share-based Compensation | 9 Months Ended |
Apr. 30, 2014 |
Share-based Compensation | ' |
12. Share-based Compensation |
On January 29, 2010, our stockholders approved a share-based compensation plan named the “2009 Stock Incentive Plan”, or 2009 Plan, which provided for the issuance of up to 1,600,000 shares of common stock. Stockholders approved amendments to the 2009 Plan on January 23, 2012 and January 21, 2014 which included increasing the number of shares available for issuance to 2,200,000 and 4,453,518, respectively. |
On November 4, 1985, our stockholders approved an employee stock purchase plan named the “Employee Stock Purchase Plan”, or ESPP, of up to 700,000 shares of common stock. Stockholders approved amendments to the ESPP on January 21, 1986, October 9, 1997, and October 15, 2002. On January 21, 2014, our stockholders approved amendments to the ESPP which included expanding the employees eligible to participate to include “highly compensated employees” as well as increasing the maximum value of stock that each employee can purchase from $2,600 to $12,500 in each of the two payment periods per year. |
Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period, net of forfeitures. |
The following table presents share-based compensation expense included in our condensed consolidated statements of operations: |
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| | For the Three Months Ended | | | For the Nine Months Ended | |
April 30, | April 30, |
(in millions) | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Cost of product sales | | $ | 0.1 | | | $ | 0.2 | | | $ | 0.5 | | | $ | 0.6 | |
Cost of engineering sales | | | 0.1 | | | | 0.2 | | | | 0.3 | | | | 0.9 | |
Research and product development | | | 0.5 | | | | 0.3 | | | | 2 | | | | 1.5 | |
Selling and marketing | | | 0.3 | | | | 0.2 | | | | 0.9 | | | | 0.7 | |
General and administrative | | | 1.9 | | | | 1.1 | | | | 5 | | | | 4.3 | |
Total share-based compensation expense before tax | | | 2.9 | | | | 2 | | | | 8.7 | | | | 8 | |
Income tax effect | | | (0.9 | ) | | | (0.5 | ) | | | (2.7 | ) | | | (2.5 | ) |
Share-based compensation expense included in net income | | $ | 2 | | | $ | 1.5 | | | | 6 | | | $ | 5.5 | |
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. |
We had no material grants of stock options during the three months ended April 30, 2014. The fair value of each option granted during the three and nine months ended April 30, 2014 and 2013 was estimated on the grant date using the Black-Scholes valuation model with the following assumptions: |
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| | For the Three Months Ended | | | For the Nine Months Ended | |
| | April 30, | | | April 30, | |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Expected option term in years (1) | | | 5.31 | | | | 5.47 | | | | 5.37 | | | | 5.42 | |
Expected volatility (2) | | | 35.1 | % | | | 41 | % | | | 38.6 | % | | | 41 | % |
Risk-free interest rate (3) | | | 1.51 | % | | | 0.91 | % | | | 1.77 | % | | | 0.8 | % |
Expected annual dividend yield (4) | | | 0.42 | % | | | 0.52 | % | | | 0.52 | % | | | 0.57 | % |
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-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 weighted average grant date fair value of stock options that were granted during the three and nine months ended April 30, 2014 was $30.80 and $27.55, respectively. The weighted average grant date fair value of stock options that were granted during the three and nine months ended April 30, 2013 was $27.90 and $25.25, respectively. |
The total intrinsic value of options exercised during the three and nine months ended April 30, 2014, was $0.1 million and $1.7 million, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date exercise price. |
As of April 30, 2014, 402,950 stock options were vested or expected to vest and 177,567 stock options were exercisable. These options have a weighted average exercise price of $63.34, and $55.67, respectively, aggregate intrinsic value of $5.0 million and $3.5 million, respectively, and a weighted average remaining contractual term of 5.12 years and 4.10 years, respectively. |
We estimate the fair value of ESPP shares using the Black-Scholes valuation model. For the three and nine months ended April 30, 2014 and 2013, the financial impact from ESPP shares was immaterial. |
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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 conditions, while the graded vesting method applies to all 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, 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 95 TSR and 124 non-GAAP EPS performance-based awards during the three months ended April 30, 2014. We granted 413 TSR and 537 non-GAAP EPS performance-based awards during the three months ended April 30, 2013. 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: |
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| | For the Three Months Ended | | | For the Nine Months Ended | |
April 30, | April 30, |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Stock Price (1) | | $ | 94.32 | | | $ | 70.04 | | | $ | 77.14 | | | $ | 70.04 | |
Expected volatility (2) | | | 27.5 | % | | | 28 | % | | | 27.6 | % | | | 28 | % |
Risk-free interest rate (3) | | | 0.46 | % | | | 0.32 | % | | | 0.82 | % | | | 0.32 | % |
Expected annual dividend yield (4) | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
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-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 weighted average grant date fair value of time-based restricted stock awards that were granted during the three and nine months ended April 30, 2014 was $95.49 and $82.46, respectively. The weighted average grant date fair value of performance-based restricted stock awards that were granted during the three and nine months ended April 30, 2014 was $117.61 and $93.85, respectively. |
The total fair value of restricted stock shares that vested during the three and nine month periods ended April 30, 2014 was $0.7 million and $20.8 million, respectively. |
As of April 30, 2014, the unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options and restricted stock was $13.4 million. This cost will be recognized over an estimated weighted average amortization period of 1.5 years and assumes target performance for the non-GAAP EPS performance-based RSU’s. |