Stock-Based Compensation

3 Months Ended

Sep. 30, 2022

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

Stock-Based Compensation

17. 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, which are administered by the Compensation Committee of the Board. Under these plans, directors, key executives, and managerial employees are eligible to receive incentive or nonqualified stock options to purchase shares of Adtalem’s common stock, and also permit the granting of stock appreciation rights, restricted stock units (“RSUs”), performance-based RSUs, and other stock and cash-based compensation. Although options remain outstanding under the 2005 incentive plan, no further grants will be issued under this plan. We issue options

generally with a four-year graduated vesting from the grant date and expire ten years from the grant date. The option price under the plans is the fair market value of the shares on the date of the grant. The Compensation Committee of the Board determined to no longer grant stock options beginning with the fiscal year 2023 stock-based grant awards.

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 unvested awards in the period they occur.

As of September 30, 2022, 2,892,138 shares were authorized for issuance but not issued or subject to outstanding awards under Adtalem’s stock-based incentive plans.

The following is a summary of options activity for the three months ended September 30, 2022:

				Weighted-Average
				Remaining	Aggregate
	Number of	Weighted-Average		Contractual Life	Intrinsic Value
	Options	Exercise Price		(in years)	(in thousands)
Outstanding as of July 1, 2022	1,144,372	$	35.36
Exercised	(47,809)		25.96
Expired	(1,575)		18.60
Outstanding as of September 30, 2022	1,094,988		35.80	6.2	$	2,792
Exercisable as of September 30, 2022	820,207	$	35.74	5.4	$	2,338

The total intrinsic value of options exercised for the three months ended September 30, 2022 and 2021 was $0.6 million and $6.6 million, respectively.

The fair value of Adtalem’s options was estimated using a binomial model. This model uses historical cancellation and exercise experience of Adtalem to determine the option value. It also considers 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 three months of fiscal year 2022 was $14.72 per share. No stock options were granted during the three months of fiscal year 2023. The fair value of Adtalem’s option grants was estimated assuming the following weighted-average assumptions:

	Fiscal Year
	2022
Expected life (in years)	6.56
Expected volatility	39.99	%
Risk-free interest rate	0.94	%
Dividend yield	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.

During the first three months of fiscal year 2023, Adtalem granted 281,550 RSUs to selected employees, all of which were non-performance-based RSUs. Our annual grant of performance-based RSUs are expected to be granted later in fiscal year 2023. We issue performance-based RSUs generally with a three-year cliff vest from the grant date. The final number of shares issued under performance-based RSUs is based on metrics approved by the Compensation Committee of the Board. Prior to fiscal year 2023, we issued non-performance-based RSUs generally with a four-year graduated vesting from the grant date. Beginning in fiscal year 2023, we issue non-performance-based RSUs generally with a three-year

graduated vesting from the grant date. We also regularly issue RSUs to our Board members with a one-year cliff vest from the grant date. 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 three months ended September 30, 2022:

		Weighted-Average
	Number of	Grant Date
	RSUs	Fair Value
Unvested as of July 1, 2022	1,171,692	$	35.05
Granted	281,550		39.53
Vested	(254,743)		38.31
Forfeited	(48,135)		38.65
Unvested as of September 30, 2022	1,150,364	$	35.27

The weighted-average estimated grant date fair values of RSUs granted at market price under Adtalem’s stock-based incentive plans during the first three months of fiscal years 2023 and 2022 were $39.53 and $36.87, per share, respectively.

Stock-based compensation expense, which is included in student services and administrative expense, and the related income tax benefit were as follows (in thousands):

	Three Months Ended
	September 30,
	2022		2021
Stock-based compensation	$	6,145	$	9,711
Income tax benefit		(1,682)		(1,420)
Stock-based compensation, net of tax	$	4,463	$	8,291

As of September 30, 2022, $22.6 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 2.5 years. The total fair value of options and RSUs vested during the three months ended September 30, 2022 and 2021 was $12.0 million and $12.0 million, respectively. There was no capitalized stock-based compensation cost as of each of September 30, 2022, June 30, 2022, and September 30, 2021. Adtalem issues new shares of common stock to satisfy option exercises and RSU vests.