STOCK-BASED COMPENSATION

9 Months Ended

Mar. 31, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

NOTE 4: 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 March 31, 2019, 7,131,350 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 nine months ended March 31, 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		(405,810	)		42.75
Forfeited		-			-
Expired		(19,429	)		51.65
Outstanding at March 31, 2019		1,509,919			31.37		6.89	$	23,301
Exercisable at March 31, 2019		592,407		$	31.60		5.09	$	9,103

The total intrinsic value of options exercised for the nine months ended March 31, 2019 and 2018 was $4.2 million and $10.7 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 the first nine months of fiscal years 2019 and 2018 was $20.96 and $14.63, per share, respectively. The fair value of Adtalem’s stock option grants was estimated assuming the following weighted average assumptions:

	Fiscal Year
	2019			2018
Expected Life (in Years)		6.50			6.68
Expected Volatility		39.60	%		41.45	%
Risk-free Interest Rate		2.73	%		1.95	%
Dividend Yield		0.00	%		0.00	%

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.

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 the first nine months of 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 nine months ended March 31, 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		(450,484	)		27.86
Forfeited		(79,958	)		33.26
Outstanding at March 31, 2019		914,476		$	33.45

The weighted average estimated grant date fair value of RSUs granted at market price under Adtalem’s stock-based incentive plans during the first nine months of fiscal years 2019 and 2018 was $49.57 and $34.34, per share, respectively.

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

	Three Months Ended March 31,						Nine Months Ended March 31,
	2019			2018			2019			2018
Cost of Educational Services	$	279		$	876		$	976		$	3,510
Student Services and Administrative Expense		2,729			1,861			9,393			7,459
Restructuring Expense		-			-			-			548
		3,008			2,737			10,369			11,517
Income Tax Benefit		(692	)		(554	)		(3,930	)		(4,655	)
Net Stock-Based Compensation Expense	$	2,316		$	2,183		$	6,439		$	6,862

As of March 31, 2019, $21.5 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 2.3 years. The total fair value of options and RSUs vested during the nine months ended March 31, 2019 and 2018 was approximately $13.7 million and $14.3 million, respectively.

There was no capitalized stock-based compensation cost at each of March 31, 2019, June 30, 2018 and March 31, 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.