Equity Based Compensation

12 Months Ended

Jun. 30, 2022

Share-Based Payment Arrangement [Abstract]

Shareholders' Equity and Share-based Payments

STOCK-BASED COMPENSATION

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

2014 and 2018 Omnibus Incentive Plans

In 2014, the Company’s board of directors adopted, and the holder of a majority of the shares approved, the 2014 Omnibus Incentive Plan (the “2014 Plan”). The 2014 Plan provided 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, restricted stock units (defined below), and restricted stock. In October 2018, the Company’s shareholders approved the 2018 Omnibus Incentive Plan (the “2018 Plan”), and, as a result, new awards may no longer be issued under the 2014 Plan, although it remains in effect as to any previously granted award. The 2018 Plan is substantially similar to the 2014 Plan, except that (a) a total of 15,600,000 shares of Common Stock (subject to adjustment) may be issued under the 2018 Plan, (b) each share of Common Stock issuable under the 2018 Plan pursuant to a restricted stock or restricted stock unit award will reduce the number of reserved shares by 2.25 shares, and (c) the 2018 Plan imposes a limit on the aggregate value of awards that may be made in a single year to a non-employee director. Both the 2014 Plan and the 2018 Plan permit “net settlement” of vested awards, pursuant to which the award holder forfeits a portion of the vested award to satisfy the purchase price (in the case of options), the holder’s withholding tax obligation, if any (in all cases), or both. Where the holder net-settles the tax obligation, the Company pays the amount of the withholding tax to the U.S. government in cash, which is accounted for as an adjustment to Additional Paid in Capital.

Stock Compensation Expense

Stock compensation expense recognized in the consolidated statements of operations was $54 million, $51 million, and $48 million in fiscal 2022, 2021, and 2020, respectively. Stock compensation expense is classified in selling, general, and administrative expenses as well as cost of sales. The Company has elected to account for forfeitures as they occur.

Stock Options

Stock options granted under the 2014 Plan or 2018 Plan, as applicable, during fiscal 2022, 2021, and 2020 represent approximately 183,000, 231,000, and 329,000 shares of Common Stock, respectively. Each stock option granted under the 2014 Plan or 2018 Plan 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, except for a small number of grants that vest based on the achievement of operating performance targets set forth in the award documents.

Methodology and Assumptions

All outstanding stock options have an exercise price per share equal to the fair market value of one share of Common Stock on the date of grant. 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 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 a path dependent-lattice model.

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


	Fiscal Year Ended June 30,
	2022	2021	2020
Expected volatility	37%	27%	23	%	-	24%
Expected life (in years)	3.7	6.25	6.25
Risk-free interest rate	0.7%	0.3%	1.7	%	-	1.9%
Dividend yield	None	None	None

Public trading of the Common Stock commenced only in July 2014, and, as a result, there was only limited relevant historical volatility experience available; therefore, the expected volatility assumptions for fiscal year 2021 and 2020 were 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 did not have a pattern of exercise behavior of option holders, for fiscal years 2021 and 2020, 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. Effective in fiscal year 2022, the expected volatility and expected holding period were based on the historical volatility and historical holding period of the Common Stock of the Company. 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 the grant. The weighted-average grant-date fair value of stock options in fiscal 2022, 2021, and 2020 was $32.07 per share, $24.36 per share, and $15.22 per share, respectively.

The following table summarizes stock option activity and shares subject to outstanding options for the fiscal year ended June 30, 2022:


			Time
	Weighted Average Exercise Price		Number of Shares	Weighted Average Contractual Term	Aggregate Intrinsic Value







Outstanding as of June 30, 2021	$	49.77	1,280,174	4.92	$	74,696,700
Granted	113.00		182,751	—	—
Exercised	42.11		386,456	—	29,329,353
Forfeited	39.43		17,559	—	—
Expired / Canceled	36.97		3,399	—	—
Outstanding as of June 30, 2022	63.74		1,055,511	6.91	47,013,454
Vest and expected to vest as of June 30, 2022	63.74		1,055,511	6.91	47,013,454
Vested and exercisable as of June 30, 2022	$	43.80	437,034	5.76	$	27,748,162

The intrinsic value of the options exercised in fiscal 2022 was $29 million. The total fair value of options vested during the period was $6 million.

The intrinsic value of the options exercised in fiscal 2021 was $64 million. The total fair value of options vested during the period was $7 million.

As of June 30, 2022, $2 million of unrecognized compensation cost related to granted and not forfeited stock options is expected to be recognized as expense over a weighted-average period of approximately 2.6 years.

Restricted Stock and Restricted Stock Units

The Company may grant to employees and members of its board of directors under the 2018 Plan (and formerly granted under the 2014 Plan) shares of restricted stock and units each representing the right to one share of Common Stock (“restricted

stock units”). Since the IPO, the Company has granted to employees and directors restricted stock units and restricted stock that vest over specified periods as well as restricted stock units and restricted stock that have certain performance-related vesting requirements (“performance stock units” and “performance stock,” respectively). The restricted stock and restricted stock units granted during fiscal 2022 and 2021 had grant date fair values aggregating $57 million and $47 million, respectively, which represent approximately 535,000 and 502,000 shares of Common Stock, respectively. Under the 2014 Plan or 2018 Plan, as appropriate, the performance stock and performance stock units vest upon achieving Company financial performance metrics established at the outset of the three-year performance period associated with each grant. The metrics for the fiscal 2020, 2021, and 2022 performance stock and performance stock unit grants were based on performance against a mix of adjusted EPS targets and relative total shareholder return (“RTSR”) targets. Note that adjusted EPS is calculated as a quotient of tax-effected Adjusted EBITDA by the weighted average number of fully diluted shares, a financial measure that is not defined under U.S. GAAP and is subject to important limitations. The performance stock and performance stock units vest following the end of their respective three-year performance periods upon a determination of achievement relative to the targets. Each quarter during the period in which the performance stock and performance stock 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 number of shares actually earned at the end of the three-year period for the fiscal 2020, 2021 and 2022 grants will vary, based only on actual performance, from 0% to 200%, or from 0% to 150%, of the target number of performance stock or performance stock units specified on the date of grant, in the case of adjusted EPS and RTSR grants, respectively. Time-based restricted stock units and restricted stock generally vest on the second or third anniversary of the date of grant, subject to the participant’s continued employment with the Company.

Methodology and Assumptions - Expense Recognition and Grant Date Fair Value

The fair values of (a) time-based restricted stock units and restricted stock are recognized as expense on a cliff-vesting schedule over the applicable vesting period and (b) performance shares and performance share units are re-assessed quarterly as discussed above.

The grant date fair values of both time-based and performance-based shares and units are determined based on the number of shares subject to the grants and the fair value of the Common Stock on the dates of the grants, as determined by the closing market prices.

Time-Based Restricted Stock Units and Restricted Stock

The following table summarizes activity in unvested time-based restricted stock units and restricted stock for the fiscal year ended June 30, 2022:


	Time-Based Units and Shares	Weighted Average Grant-Date Fair Value




Unvested as of June 30, 2021	764,356	$	65.54
Granted	324,091	117.52
Vested	292,945	52.11
Cancelled/forfeited/adjusted	73,064	96.04
Unvested as of June 30, 2022	722,438	91.42

Adjusted EPS and RTSR-Based Performance Share Units and Performance Shares

The following table summarizes activity in unvested performance share units and performance shares for the fiscal year ended June 30, 2022:


	Performance-Based Units and Shares	Weighted Average Grant-Date Fair Value




Target Number Unvested as of June 30, 2021	392,095	$	58.16
Target Number Granted	103,946	113.57
Target Number Vested	168,325	43.84
Target Number Cancelled/forfeited/adjusted	21,970	88.57
Target Number Unvested as of June 30, 2022	305,746	$	83.75

Valuation of RTSR Performance Shares and Performance Share Units

The fair value of each RTSR performance share unit and performance share 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 and performance shares granted during each year were as follows:


	Fiscal Year Ended June 30,
	2022				2021
Expected volatility	39	%	-	41%	39	%	-	42%
Expected life (in years)	2.4		-	2.9	2.4		-	2.9
Risk-free interest rates	0.3	%	-	1.5%	0.1	%	-	0.2%
Dividend yield	None				None

The following table summarizes activity in unvested RTSR performance share units and performance shares for the fiscal year ended June 30, 2022


	RTSR Units and Shares	Weighted Average Grant-Date Fair Value




Target Number Unvested as of June 30, 2021	327,028	$	68.92
Target Number Granted	107,197	110.34
Target Number Vested	132,565	47.70
Target Number Cancelled/forfeited/adjusted	20,345	95.70
Target Number Unvested as of June 30, 2022	281,315	$	91.04

As of June 30, 2022, $57 million of unrecognized compensation cost related to restricted stock and restricted stock units (including performance shares and performance share units, respectively) is expected to be recognized as expense over a weighted-average period of approximately 1.8 years. The weighted-average grant-date fair value of restricted stock and restricted stock units in fiscal 2022, 2021, and 2020 was $109.63 per share, $94.19 per share, and $57.17 per share, respectively. The fair value of restricted stock units vested in fiscal 2022, 2021, and 2020 was $33 million, $39 million, and $35 million, respectively.