6. Stockholders’ Equity

Stock Compensation

At December 31, 2015 and 2016, the Company had equity-based employee incentive plans. Prior to May 18, 2011, the Company utilized the 2008 Management Incentive Plan (the “2008 MIP”), 2006 Management Incentive Plan (the “2006 MIP”), 2003 Management Incentive Plan (the “2003 MIP”) and 2006 Directors’ Equity Compensation Plan (collectively the “Preexisting Plans”) for grants of stock options, restricted stock, restricted stock units, and stock appreciation rights, to provide incentives to officers, employees and non-employee directors.

On February 18, 2011, the board of directors of the Company approved the 2011 Management Incentive Plan (“2011 MIP”), and the 2011 MIP was approved by the Company’s shareholders at the 2011 Annual Meeting of Shareholders on May 18, 2011. The 2011 MIP provides for the delivery of up to a number of shares equal to (i) 5,000,000 shares of common stock, plus (ii) the number of shares subject to outstanding awards under the Preexisting Plans which become available after shareholder approval of the 2011 MIP as a result of forfeitures, expirations, and in other permitted ways under the share recapture provisions of the 2011 MIP. Delivery of shares under “full-value” awards (awards other than options or stock appreciation rights) will be counted for each share delivered as 2.29 shares against the total number of shares reserved under the 2011 MIP. Upon shareholder approval of the 2011 MIP, no further awards were made under the Preexisting Plans, and any shares that remained available for new awards (i.e., were not committed for outstanding awards) under the Preexisting Plans were not carried forward to the 2011 MIP.

On February 25, 2016, the board of directors of the Company approved the 2016 Management Incentive Plan (“2016 MIP”), and the 2016 MIP was approved by the Company’s shareholders at the 2016 Annual Meeting of Shareholders on May 18, 2016. The 2016 MIP provides for the delivery of up to a number of shares equal to (i) 4,000,000 shares of common stock, plus (ii) the number of shares subject to outstanding awards under the 2011 MIP and Preexisting Plans which become available after shareholder approval of the 2016 MIP as a result of forfeitures, expirations, and in other permitted ways under the share recapture provisions of the 2016 MIP. Delivery of shares under “full-value” awards (awards other than options or stock appreciation rights) will be counted for each share delivered as 1.60 shares against the total number of shares reserved under the 2016 MIP. The 2011 MIP remains in effect and new awards will continue to be granted from the 2011 MIP for participants that are not covered officers under Section 162(m) if the Internal Revenue Code until all shares are depleted.

The 2011 MIP and 2016 MIP provides for awards of stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), stock appreciation rights, cash‑denominated awards and any combination of the foregoing. A restricted stock unit is a notional account representing the right to receive a share of the Company’s Common Stock (or, at the Company’s option, cash in lieu thereof) at some future date. In general, stock options vest ratably on each anniversary over the three years subsequent to grant, and have a ten year life. With the exception of the shares received by the principal owners of Partners Rx and CDMI, RSAs generally vest on the anniversary of the grant. In general, RSUs vest ratably on each anniversary over the three years subsequent to grant, assuming that the associated performance hurdle(s) for that vesting year are met. Stock compensation expense is recognized using an accelerated method over the vesting period based upon the continued employment of the RSU holder and the probability of achievement of the performance hurdle(s). RSUs granted in 2013 and 2014 have performance thresholds based on EPS and return on equity (“ROE”). The PSUs vest over three years and are subject to market-based conditions. At December 31, 2016, 204,858 shares and 4,128,892 shares of the Company’s common stock remain available for future grant under the Company’s 2011 MIP and 2016 MIP, respectively.

On February 27, 2014 the board of directors of the Company approved the 2014 Employee Stock Purchase Plan (“2014 ESPP”), and the 2014 ESPP was approved by the Company’s shareholders at the 2014 Annual Meeting of Shareholders on May 21, 2014. The 2014 ESPP provides for up to 200,000 shares of the Company’s ordinary common stock, plus the number of shares remaining under the 2011 Employee Stock Purchase Plan, to be issued. During the years ended December 31, 2015 and 2016, 39,673 and 48,815 shares of the Company’s common stock were issued under the employee stock purchase plans, respectively. At December 31, 2016, 128,613 shares of the Company’s common stock remain available for future grant under the Company’s 2014 ESPP.

Stock Options

Summarized information related to the Company’s stock options for the years ended December 31, 2014, 2015 and 2016 is as follows:


	2014			2015
		Weighted			Weighted
		Average			Average
		Exercise			Exercise
	Options	Price		Options	Price
Outstanding, beginning of period	4,010,146	$	47.23	3,321,063	$	50.58
Granted	769,636		59.62	1,004,321		62.65
Forfeited	(267,028)		53.74	(244,658)		60.25
Exercised	(1,191,691)		44.45	(1,140,886)		47.41
Outstanding, end of period	3,321,063		50.58	2,939,840		55.13


	2016
				Weighted
				Average
		Weighted		Remaining	Aggregate
		Average		Contractual	Intrinsic
		Exercise		Term	Value
	Options	Price		(in years)	(in thousands)
Outstanding, beginning of period	2,939,840	$	55.13
Granted	501,960		64.10
Forfeited	(104,680)		57.23
Exercised	(493,943)		50.60
Outstanding, end of period	2,843,177	$	57.42	6.80	$	50,684
Vested and expected to vest at end of period	2,821,794	$	57.38	6.79	$	50,417
Exercisable, end of period	1,612,850	$	53.76	5.55	$	34,658

The aggregate intrinsic value in the table above represents the total pre‑tax intrinsic value (based upon the difference between the Company’s closing stock price on the last trading day of 2016 of $75.25 and the exercise price) for all in‑the‑money options as of December 31, 2016. This amount changes based on the fair market value of the Company’s common stock.

The total pre‑tax intrinsic value of options during the years ended December 31, 2014, 2015 and 2016 was $19.7 million, $21.8 million, and $9.3 million, respectively.

The weighted average grant date fair value per share of substantially all stock options granted during the years ended December 31, 2014, 2015 and 2016 was $13.49, $13.69 and $15.05, respectively, as estimated using the Black‑Scholes‑Merton option pricing model based on the following weighted average assumptions:


	2014		2015		2016
Risk-free interest rate	1.16	%	1.28	%	1.16	%
Expected life	4	years	4	years	4	years
Expected volatility	26.20	%	25.03	%	27.75	%
Expected dividend yield	0.00	%	0.00	%	0.00	%

For the years ended December 31, 2014, 2015 and 2016, expected volatility was based on the historical volatility of the Company’s stock price.

As of December 31, 2016, there was $10.9 million of total unrecognized compensation expense related to nonvested stock options that is expected to be recognized over a weighted average remaining recognition period of 1.72 years. The total fair value of options vested during the year ended December 31, 2016 was $9.3 million.

In the years ended December 31, 2014 and 2015, $3.2 million and $4.1 million, respectively, of benefits of tax deductions in excess of recognized stock compensation expense were realized and as such were reported as financing cash flows. For the year ended December 31, 2015, the net change to additional paid‑in capital related to tax benefits (deficiencies) was $3.5 million which primarily consists of the $4.1 million of excess tax benefits offset by $0.6 million of tax deficiencies. For the year ended December 31, 2014, the net change to additional paid‑in capital related to tax benefits (deficiencies) was $3.0 million which primarily consists of the $3.2 million of excess tax benefits offset by $0.3 million of tax deficiencies. These tax benefits were reported as a financing cash flow, rather than as an operating cash flow.

In the year ended December 31, 2016, the net tax benefit from excess tax deductions was $0.8 million, which consists of $1.0 million of excess tax benefits offset by $0.2 million of tax deficiencies. Due to the adoption of ASU 2016-09 in 2016, this net tax benefit reduced income tax expense rather than being recorded as a change in additional paid-in-capital. Consistent with the adoption of this provision, the net tax benefit for the year ended December 31, 2016 is reported as an operating cash flow, rather than a financing cash flow.

Restricted Stock Awards

Summarized information related to the Company’s nonvested RSAs for the years ended December 31, 2014, 2015 and 2016 is as follows:


	2014			2015			2016
		Weighted			Weighted			Weighted
		Average			Average			Average
		Grant Date			Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value		Shares	Fair Value
Outstanding, beginning of period	192,165	$	56.59	1,626,827	$	57.66	1,109,622	$	57.88
Awarded (1)	1,451,231		57.75	20,115		67.12	77,744		65.52
Vested	(16,569)		52.82	(537,320)		57.56	(571,894)		58.03
Forfeited	—		—	—		—	—		—
Outstanding, ending of period	1,626,827		57.66	1,109,622		57.88	615,472		58.71

(1)

December 31, 2014 includes 1,433,946 shares associated with the CDMI acquisition. December 31, 2016 includes 60,069 shares associated with the AFSC acquisition.

As of December 31, 2016, there was $18.1 million of unrecognized stock compensation expense related to nonvested restricted stock awards. This cost is expected to be recognized over a weighted‑average period of 0.93 years.

Restricted Stock Units

Summarized information related to the Company’s nonvested RSUs for the years ended December 31, 2014, 2015 and 2016 is as follows:


	2014			2015			2016
		Weighted			Weighted			Weighted
		Average			Average			Average
		Grant Date			Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value		Shares	Fair Value
Outstanding, beginning of period	194,913	$	50.21	156,695	$	54.88	231,088	$	61.53
Awarded	76,306		60.39	187,272		63.42	51,521		64.87
Vested	(91,510)		49.53	(79,036)		52.82	(53,839)		63.32
Forfeited	(23,014)		54.86	(33,843)		61.54	(28,592)		63.34
Outstanding, ending of period	156,695		54.88	231,088		61.53	200,178		61.65

As of December 31, 2016, there was $5.8 million of unrecognized stock compensation expense related to nonvested restricted stock units. This cost is expected to be recognized over a weighted-average period of 1.52 years.

Performance-Based Restricted Stock Units

Summarized information related to the Company’s nonvested PSUs for the years ended December 31, 2015 and 2016 is as follows:


	2015			2016
		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding, beginning of period	—	$	—	36,938	$	85.00
Awarded	43,900		85.00	69,691		97.22
Vested	—		—	—		—
Forfeited	(6,962)		85.00	(3,652)		91.89
Outstanding, end of period	36,938		85.00	102,977		93.03

The weighted average estimated fair value of the PSUs granted in year ended December 31, 2015 was $85.00, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of 1%, and expected volatility of 15% to 52% (average of 28%). The PSUs will entitle the grantee to receive a number of shares of the Company’s Common Stock determined over a three-year performance period ending on December 31, 2017 and vesting on March 4, 2018, the settlement date, provided the grantee remains in the service of the Company on the settlement date. The Company expenses the cost of these awards ratably over the requisite service period. The number of shares for which the PSUs will be settled will be a percentage of shares for which the award is targeted and will depend on the Company’s total shareholder return (as defined below), expressed as a percentile ranking of the Company’s total shareholder return as compared to the Company’s peer group (as defined below). The number of shares for which the PSUs will be settled vary from zero to 200 percent of the shares specified in the grant. Total shareholder return is determined by dividing the average share value of the Company’s Common Stock over the 30 trading days preceding January 1, 2018 by the average share value of the Company’s Common Stock over the 30 trading days beginning on January 1, 2015, with a deemed reinvestment of any dividends declared during the performance period. The Company’s peer group includes 54 companies which comprise the S&P Health Care Services Industry Index, which was selected by the Compensation Committee of the Company’s Board of Directors and includes a range of healthcare companies operating in several business segments.

The weighted average estimated fair value of the PSUs granted in the year ended December 31, 2016 was $97.22, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of 1%, and expected volatility of 16% to 81% (average of 32%). The PSUs granted in the year ended December 31, 2016, will entitle the grantee to receive a number of shares of the Company’s common stock determined over a three-year performance period ending on December 31, 2018 and vesting on March 3, 2019, the settlement date, provided the grantee remains in the service of the Company on the settlement date. The Company expenses the cost of these awards ratably over the requisite service period. The number of shares for which the PSUs will be settled will be a percentage of shares for which the award is targeted and will depend on the Company’s total shareholder return (as defined below), expressed as a percentile ranking of the Company’s total shareholder return as compared to the Company’s peer group (as defined below). The number of shares for which the PSUs will be settled vary from zero to 200 percent of the shares specified in the grant. Total shareholder return is determined by dividing the average share value of the Company’s common stock over the 30 trading days preceding January 1, 2019 by the average share value of the Company’s common stock over the 30 trading days beginning on January 1, 2016, with a deemed reinvestment of any dividends declared during the performance period. The Company’s peer group includes 56 companies which comprise the S&P Health Care Services Industry Index, which was selected by the compensation committee of the Company’s board of directors and includes a range of healthcare companies operating in several business segments.

As of December 31, 2016, there was $6.1 million of unrecognized stock compensation expense related to nonvested PSUs. This cost is expected to be recognized over a weighted‑average period of 1.97 years.

Income per Common Share Attributable to Magellan Health, Inc.

The following table reconciles income (numerator) and shares (denominator) used in the Company’s computations of net income per share for the years ended December 31, 2014, 2015 and 2016 (in thousands, except per share data):


	2014		2015		2016
Numerator:
Net income attributable to Magellan Health, Inc.	$	79,404	$	31,413	$	77,879
Denominator:
Weighted average number of common shares outstanding—basic		26,689		24,865		23,181
Common stock equivalents—stock options		495		316		289
Common stock equivalents—RSAs		155		626		593
Common stock equivalents—RSUs		14		33		45
Common stock equivalents—PSUs		—		35		45
Common stock equivalents—employee stock purchase plan		2		2		3
Weighted average number of common shares outstanding—diluted		27,355		25,877		24,156
Net income attributable to Magellan Health, Inc. per common share—basic	$	2.98	$	1.26	$	3.36
Net income attributable to Magellan Health, Inc. per common share—diluted	$	2.90	$	1.21	$	3.22

The weighted average number of common shares outstanding for the years ended December 31, 2014, 2015 and 2016 was calculated using outstanding shares of the Company’s common stock. Common stock equivalents included in the calculation of diluted weighted average common shares outstanding for the years ended December 31, 2014, 2015 and 2016 represent stock options to purchase shares of the Company’s common stock, restricted stock awards, restricted stock units and stock purchased under the ESPP.

For the years ended December 31, 2014, 2015 and 2016, the Company had additional potential dilutive securities outstanding representing 0.7 million, 1.3 million and 1.5 million options, respectively, that were not included in the computation of dilutive securities because they were anti‑dilutive for such periods. Had these shares not been anti‑dilutive, all of these shares would not have been included in the net income per common share calculation as the Company uses the treasury stock method of calculating diluted shares.

Stock Repurchases

The Company’s board of directors has previously authorized a series of stock repurchase plans. Stock repurchases for each such plan could be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate. Each stock repurchase program could be limited or terminated at any time without prior notice.

On October 25, 2011, the Company’s board of directors approved a new stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 25, 2013. On July 24, 2013 the Company’s board of directors approved an increase and extension of the stock repurchase plan which authorized the Company to purchase up to $300 million of its outstanding stock through October 25, 2015. On November 21, 2014, the Company reached aggregate purchases of $300 million and the program was completed. Pursuant to this program, the Company made purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):


	Total Number	Average
	of Shares	Price Paid		Aggregate
Period	Purchased	per Share		Cost
November 11, 2011 - December 31, 2011	671,776	$	48.72	$	32.7
January 1, 2012 - December 31, 2012	459,252		50.27		23.1
January 1, 2013 - December 31, 2013	1,159,871		51.83		60.1
January 1, 2014 - November 21, 2014	3,183,306		57.82		184.1
	5,474,205			$	300.0

On October 22, 2014, the Company’s board of directors approved a new stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 22, 2016. On October 21, 2015, the Company reached aggregate purchases of $200 million and the program was completed. Pursuant to this program, the Company made purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):


	Total Number	Average
	of Shares	Price Paid		Aggregate
Period	Purchased	per Share		Cost
November 24, 2014 - December 31, 2014	232,170	$	60.65	$	14.1
January 1, 2015 - October 21, 2015	3,153,156		58.96		185.9
	3,385,326			$	200.0

On October 26, 2015, the Company’s board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 26, 2017. Pursuant to this program, the Company made purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):


	Total Number	Average
	of Shares	Price Paid		Aggregate
Period	Purchased	per Share		Cost
October 26, 2015 - December 31, 2015	345,044	$	53.46	$	18.4
January 1, 2016 - December 31, 2016	1,828,183		58.40		106.8
	2,173,227			$	125.2

The Company made no share repurchases from January 1, 2017 through February 22, 2017.

Recent Sales of Unregistered Securities

On March 31, 2014, the Company and CDMI, LLC entered into a purchase agreement pursuant to which on April 30, 2014 the sellers and key management of CDMI purchased 1,433,946 shares of the Company’s restricted stock for a total purchase price of $80.0 million. The aggregate number of shares issued was determined by dividing $80.0 million by the volume weighted average trading prices per share of Magellan’s ordinary common stock on the NASDAQ as reported by Bloomberg US L.P. using its “Volume at Price” function over the five trading days ended on the trading day prior to the closing of the purchase agreement. The shares received by such sellers and key management of CDMI are subject to vesting over 42 months with 25% vesting after 18 months and 75% vesting after 42 months, conditioned on continued employment. The shares were issued to the sellers and key management of CDMI in a private placement pursuant to Section 4(a)(2) of the Securities Act.

On May 15, 2016, the Company and AFSC entered into a purchase agreement pursuant to which on July 1, 2016 the sellers and key management of AFSC purchased 60,069 shares of the Company’s restricted stock for a total purchase price of $4.0 million. The aggregate number of shares issued was determined by dividing $4.0 million by the average trading prices per share of Magellan’s ordinary common stock on the NASDAQ over the five trading days ended on the trading day prior to the execution of the purchase agreement. The shares received by such sellers and key management of AFSC are subject to vesting over two years with 50% vesting on the first anniversary of the acquisition and 50% vesting on the second anniversary of the acquisition, conditioned on continued employment with the Company on the applicable vesting dates.. The shares were issued to the sellers and key management of AFSC in a private placement pursuant to Section 4(a)(2) of the Securities Act.