NOTE 5: STOCK-BASED COMPENSATION

Adtalem maintains two stock-based incentive plans: the Amended and Restated Incentive Plan of 2005 and the Fourth Amended and Restated Incentive Plan of 2013. Under these plans, directors, key executives and managerial employees are eligible to receive incentive stock or nonqualified options to purchase shares of Adtalem’s common stock. The Fourth Amended and Restated Incentive Plan of 2013 and the Amended and Restated Incentive Plan of 2005 also permit the granting of stock appreciation rights, RSUs, performance based RSUs and other stock and cash-based compensation. Although options remain outstanding under the 2005 incentive plan, no further stock-based grants will be issued under this plan. The Fourth Amended and Restated Incentive Plan of 2013 and the Amended and Restated Incentive Plan of 2005 are administered by the Compensation Committee of the Board. Options are granted for terms of up to ten years and can vest immediately or over periods of up to five years. The requisite service period is equal to the vesting period. The option price under the plans is the fair market value of the shares on the date of the grant.

Stock-based compensation expense is measured at the grant date based on the fair value of the award. Adtalem accounts for stock-based compensation granted to retirement eligible employees that fully vests upon an employee’s retirement under the non-substantive vesting period approach. Under this approach, the entire stock-based compensation expense is recognized at the grant date for stock-based grants issued to retirement eligible employees. For non-retirement eligible employees, stock-based compensation expense is recognized as expense over the employee requisite service period. We account for forfeitures of outstanding but unvested grants in the period they occur.

As of June 30, 2019, 7,102,656 authorized but unissued shares of common stock were reserved for issuance under Adtalem’s stock-based incentive plans.

The following is a summary of options activity for the year ended June 30, 2019:


				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
	Number of	Exercise		Contractual	Value
	Options	Price		Life (in Years)	(in thousands)
Outstanding at July 1, 2018	1,806,133	$	32.88
Granted	129,025		49.01
Exercised	(412,544)		42.47
Forfeited	(16,157)		39.49
Expired	(17,979)		51.60
Outstanding at June 30, 2019	1,488,478		31.33	6.63	$	21,378
Exercisable at June 30, 2019	664,180	$	30.32	5.06	$	10,179

The total intrinsic value of options exercised for the fiscal years ended 2019, 2018 and 2017 was $4.4 million, $11.4 million and $6.2 million, respectively.

The fair value of Adtalem’s stock option awards was estimated using a binomial model. This model uses historical cancellation and exercise experience of Adtalem to determine the option value. It also takes into account the illiquid nature of employee options during the vesting period.

The weighted average estimated grant date fair value of options granted at market price under Adtalem’s stock-based incentive plans during fiscal years 2019, 2018 and 2017 was $20.96, $14.63 and $9.09, per share, respectively. The fair value of Adtalem’s stock option grants was estimated assuming the following weighted average assumptions:


	Fiscal Year
	2019		2018		2017
Expected Life (in Years)	6.50		6.68		6.88
Expected Volatility	39.60	%	41.45	%	42.41	%
Risk-free Interest Rate	2.73	%	1.95	%	1.41	%
Dividend Yield	0.00	%	0.00	%	1.19	%
Pre-vesting Forfeiture Rate	NA		NA		10.00	%

The expected life of the options granted is based on the weighted average exercise life with age and salary adjustment factors from historical exercise behavior. Adtalem’s expected volatility is computed by combining and weighting the implied market volatility, the most recent volatility over the expected life of the option grant and Adtalem’s long-term historical volatility. On February 16, 2017, Adtalem discontinued payment of cash dividends, resulting in the elimination of a dividend yield from the assumptions. The pre-vesting stock option forfeiture rate for fiscal year 2017 was based on Adtalem’s historical stock option forfeiture experience. With the adoption of ASU 2016‑09 on July 1, 2017, we account for forfeitures as they occur. Therefore, no forfeiture rate applies for fiscal years 2018 and 2019.

If factors change and different assumptions are employed in the valuation of stock-based grants in future periods, the stock-based compensation expense that Adtalem records may differ significantly from what was recorded in previous periods.

During fiscal year 2019, Adtalem granted 217,960 RSUs to selected employees and directors. Of these, 65,160 are performance-based RSUs and 152,800 are non-performance-based RSUs. Performance-based RSUs are earned by the recipients over a three-year period based on achievement of certain mission-based goals, academic goals, return on invested capital and free cash flow per share. Certain awards are subject to achievement of a minimum level of Adtalem’s earnings before interest, taxes, depreciation and amortization. Non-performance-based RSUs are subject to restrictions which lapse ratably over one, three or four-year periods on the grant anniversary date based on the recipient’s continued service on the Board, employment with Adtalem or upon retirement. During the restriction period, the recipient of the non-performance-based RSUs has the right to receive dividend equivalents, if any. This right does not pertain to the performance-based RSUs. The following is a summary of RSU activity for the year ended June 30, 2019:


		Weighted
		Average
	Number of	Grant Date
	RSUs	Fair Value
Outstanding at July 1, 2018	1,226,958	$	28.31
Granted	217,960		49.57
Vested	(473,012)		27.66
Forfeited	(93,876)		34.47
Outstanding at June 30, 2019	878,030	$	34.86

The weighted average estimated grant date fair value of RSUs granted at market price under Adtalem’s stock-based incentive plans during fiscal years 2019, 2018 and 2017 was $49.57, $34.67 and $23.92, per share, respectively.

The following table shows total stock-based compensation expense included in the Consolidated Statements of Income (in thousands):


	Year Ended June 30,
	2019		2018		2017
Cost of Educational Services	$	1,239	$	4,464	$	5,312
Student Services and Administrative Expense		11,978		9,487		11,288
Restructuring Expense		—		548		—
		13,217		14,499		16,600
Income Tax Benefit		(4,685)		(5,829)		(5,819)
Net Stock-Based Compensation Expense	$	8,532	$	8,670	$	10,781

As of June 30, 2019, $17.8 million of total pre-tax unrecognized stock-based compensation expense related to unvested grants is expected to be recognized over a weighted average period of 2.1 years. The total fair value of options and RSUs vested during the years ended June 30, 2019, 2018 and 2017 was approximately $14.9 million, $14.8 million and $13.9 million, respectively.

There was no capitalized stock-based compensation cost at each of June 30, 2019 and 2018.

Adtalem has an established practice of issuing new shares of common stock to satisfy stock-based grant exercises. However, Adtalem also may issue treasury shares to satisfy stock-based grant exercises under certain of its stock-based incentive plans.