EQUITY-BASED COMPENSATION

The Company’s stock-based compensation is comprised of stock options and restricted stock units.

2007 Stock Incentive Plan

Awards issued under the Company’s pre-IPO incentive compensation plan, known as the 2007 PTS Holdings Corp. Stock Incentive Plan, as amended (the "2007 Plan"), were generally issued for the purpose of retaining key employees and directors.

2014 Omnibus Incentive Plan

In connection with the IPO, the Company’s Board of Directors adopted, and the holder of a majority of the shares approved, the 2014 Omnibus Incentive Plan effective July 31, 2014 (the "2014 Plan"). The 2014 Plan provides certain members of management, employees and directors of the Company and its subsidiaries with the opportunity to obtain various incentives, including grants of stock options and restricted stock units. A maximum of 6,700,000 shares of common stock may be issued under the 2014 Plan.

Stock Compensation Expense

Stock compensation expense recognized in the consolidated statements of income was $20.9 million, $10.8 million and $9.0 million in fiscal 2017, 2016 and 2015, respectively. All stock compensation expense is classified in selling, general and administrative expenses along with the wages and other benefits earned by option participants. Stock compensation expense is based on awards expected to vest, the Company has elected to account for forfeitures as they occur.

Stock Options

The Company adopted two forms of non-qualified stock option agreements (each, a "Form Option Agreement") for awards granted under the 2007 Plan. Under the Company’s Form Option Agreement adopted in 2009, a portion of the stock option awards vest in equal annual installments over a five -year period contingent solely upon the participant’s continued employment with the Company, or one of its subsidiaries, another portion of the stock option awards vest over a specified performance period upon achievement of pre-determined operating performance targets over time and the remaining portion of the stock option awards vest upon realization of certain internal rates of return or multiple of investment goals. Under the Company’s other Form Option Agreement, adopted in 2013, a portion of the stock option awards vest over a specified performance period upon achievement of pre-determined operating performance targets over time while the other portion of the stock option awards vest upon realization of a specified multiple of investment goal. The Form Option Agreements include certain forfeiture provisions upon a participant’s separation from service with the Company. Following the IPO, the Company decided not to grant any further awards under the 2007 Plan; however, all outstanding awards granted prior to the IPO remained outstanding in accordance with the terms of the 2007 Plan.

Stock options were also granted under the 2014 Plan during fiscal 2017, 2016 and 2015 for selected executives of the Company, with an aggregate intrinsic value of $5.3 million, $0 and $2.3 million, which represents approximately 516,000, 369,000 and 509,000 shares of common stock for the fiscal 2017, 2016 and 2015 grants, respectively. Each stock option vests in equal annual installments over a four-year period from the date of grant, contingent upon the participant’s continued employment with the Company.

Methodology and Assumptions

All outstanding stock options have an exercise price equal to the fair market value on the date of grant. Stock options outstanding generally vest in equal annual installments over four years from the grant date. All outstanding stock options have a contractual term of 10 years, subject to forfeiture under certain conditions upon separation of employment. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a graded-vesting basis over the vesting period. The fair value of stock options is determined using the Black-Scholes-Merton option pricing model for service and performance based awards, and an adaptation of the Black-Scholes-Merton option valuation model, which takes into consideration the internal rate of return thresholds, for market-based awards. This model adaptation is essentially equivalent to the use of path a dependent-lattice model.

The weighted average of assumptions used in estimating the fair value of stock options granted during each year were as follows:



	Year Ended June 30,
	2017	2016	2015
Expected volatility	25% - 27%	28% - 31%	32%
Expected life (in years)	6.25	6.25	6.25
Risk-free interest rates	1.2% - 1.3%	1.5% - 1.7%	2%
Dividend yield	None	None	None

The Company commenced public trading of its common stock upon its IPO in July 2014 and as a result has limited relevant historical volatility experience; therefore, the expected volatility assumption is based on the historical volatility of the closing share prices of a comparable peer group. The Company selected peer companies from the pharmaceutical industry with similar characteristics, including market capitalization, number of employees and product focus. In addition, since the Company does not have a pattern of exercise behavior of option holders, the Company used the simplified method to determine the expected life of each option, which is the mid-point between the vesting date and the end of the contractual term. The risk-free interest-rate for the expected life of the option is based on the comparable U.S. Treasury yield curve in effect at the time of grant. The weighted-average grant-date fair value of stock options in fiscal 2017, 2016, and 2015 was $7.13 per share, $10.68 per share and $7.23 per share, respectively.

The following table summarizes stock option activity and shares subject to outstanding options for the year ended June 30, 2017:



			Time					Performance					Market
	Weighted				Weighted					Weighted					Weighted
	Average		Number		Average	Aggregate		Number		Average	Aggregate		Number		Average	Aggregate
	Exercise		of		Contractual	Intrinsic		of		Contractual	Intrinsic		of		Contractual	Intrinsic
	Price		shares		Term	Value		shares		Term	Value		shares		Term	Value
Outstanding as of June 30, 2016	$	17.26	1,824,855		6.75	$	8,841,470	796,518		6.46	$	4,323,349	1,785,700		5.07	$	15,130,345
Granted	$	24.42	515,671		—	—		—		—	—		—		—	—
Exercised	$	13.56	(448,477	)	—	6,707,436		(135,766	)	—	1,884,507		(344,101	)	—	6,291,098
Forfeited	$	16.46	(64,400	)	—	—		(37,030	)	—	—		(1,101,531	)	—	—
Expired / Canceled	$	18.78	(6,033	)	—	—		—		—	—		—		—	—
Outstanding as of June 30, 2017	$	20.15	1,821,616		7.13	23,380,986		623,722		5.72	10,587,364		340,068		3.21	7,661,773
Vest and expected to vest as of June 30, 2017	$	20.37	1,821,616		7.13	23,380,986		268,584		5.40	4,709,332		340,068		3.21	7,661,773
Vested and exercisable as of June 30, 2017	$	16.84	723,637		5.60	$	11,895,684	268,584		5.40	$	4,709,332	340,068		3.21	$	7,661,773

In fiscal 2017, participants exercised options to purchase approximately 304,000 net settled shares, resulting in $5.4 million of cash paid on behalf of participants for withholding taxes. The intrinsic value of the options exercised in fiscal 2017 was $14.9 million. The total fair value of options vested during the period was $4.0 million.

In fiscal 2016, participants exercised options to purchase approximately 212,000 net settled shares, resulting in $6.4 million of cash paid on behalf of participants for withholding taxes. The intrinsic value of the options exercised in fiscal 2016 was $12.2 million. The total fair value of options vested during the period was $3.1 million.

As of June 30, 2017, $2.7 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of approximately 2.5 years.

Restricted Stock Units

Restricted stock units under the 2014 Plan may be granted to members of management and directors. The Company has granted to members of management restricted stock units that vest over specified periods of time as well as restricted stock units that have certain performance-related vesting requirements ("performance share units"). The restricted stock units granted for fiscal 2017 and 2016 had a grant date fair value of $24.8 million and $19.8 million, respectively, which represents approximately 984,000 and 607,000 shares of common stock, respectively. Under the 2014 Plan, the performance share units vest based on achieving Company financial performance metrics established at the outset of each three-year performance period. The metrics for the fiscal 2015 grant are a mix of cumulative revenue and cumulative Adjusted EBITDA targets. The metrics for the fiscal 2016 and 2017 grants are a mix of earnings-per-share ("EPS") targets and relative total shareholder return ("RTSR") targets. The performance share units vest following the end of the three-year performance period upon a determination of achievement relative to the targets. Each quarter during the period in which the performance share units are outstanding, the Company estimates the likelihood of such achievement by the end of the performance period in order to determine the probability of vesting. The time-based restricted stock units awards vest on the third anniversary of the date of grant subject to the participant’s continued employment with the Company.

Methodology and Assumptions

The grant-date fair value of restricted stock units is recognized as expense on a cliff-vesting schedule over the vesting period of two to three years. This fair value is determined based on the number of shares subject to the grant and the fair value of the Company’s common stock on the date of grant, as determined by the closing market price.

Time-Based Restricted Stock Units

The following table summarizes activity in unvested time-based restricted stock units for the year ended June 30, 2017:



	Time-Based Units	Weighted Average Grant-Date Fair Value
Unvested as of June 30, 2016	504,096	$	25.96
Granted	549,271	25.08
Vested	35,878	30.57
Forfeited	102,578	25.18
Unvested as of June 30, 2017	914,911	$	25.34

EPS Performance Share Units

The following table summarizes activity in unvested EPS performance share units for the year ended June 30, 2017:



	EPS Units	Weighted Average Grant-Date Fair Value
Unvested as of June 30, 2016	505,425	$	25.16
Granted	224,097	24.61
Vested	—	—
Forfeited	68,922	26.74
Unvested as of June 30, 2017	660,600	$	24.81

RTSR Performance Share Units

The fair value of the RTSR performance share units is determined using the Monte Carlo pricing model because the number of shares to be awarded is subject to a market condition. The Monte Carlo simulation is a generally accepted statistical technique used to simulate a range of possible future outcomes. Because the valuation model considers a range of possible outcomes, compensation cost is recognized regardless of whether the market condition is actually satisfied.

The assumptions used in estimating the fair value of the RTSR performance share units granted during each year were as follows:



	Year Ended June 30,
	2017	2016
Expected volatility	32 % - 35%	25%
Expected life (in years)	2.4 - 2.9	2.84
Risk-free interest rates	0.85% - 1.36%	0.94%
Dividend yield	None	None

The following table summarizes activity in unvested RTSR performance share units for the year ended June 30, 2017:



	RTSR Units	Weighted Average Grant-Date Fair Value
Unvested as of June 30, 2016	132,656	$	37.17
Granted	210,971	26.14
Vested	—	—
Forfeited	36,993	31.17
Unvested as of June 30, 2017	306,634	$	30.30

In fiscal 2017, participants vested and settled 33,000 net settled shares, resulting in $0.0 million of cash paid on behalf of participants for withholding taxes. In fiscal 2016, participants vested and settled 181,000 net settled shares, resulting in $2.3 million of cash paid on behalf of participants for withholding taxes.

As of June 30, 2017, $20.6 million of unrecognized compensation cost related to restricted stock units is expected to be recognized as expense over a weighted-average period of approximately 1.9 years. The weighted-average grant-date fair value of restricted stock units in fiscal years 2017, 2016 and 2015 was $25.20, $32.82 and $21.49, respectively. The fair value of restricted stock units vested in fiscal 2017, 2016 and 2015 was $1.1 million, $1.2 million and $0.6 million, respectively.