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Stock-Based Compensation | 6 Months Ended
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Jul. 01, 2017
Stock-Based Compensation [Abstract] |
Stock-Based Compensation | 8 Stock-Based Compensation The Company maintains various shareholder-approved, stock-based compensation plans which allow for the issuance of incentive or non-qualified stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units and performance stock units). In the first quarter of 2017, the Company adopted new accounting guidance related to stock-based compensation, see Note 13 for further information regarding the adoption of this standard. The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations based on their grant date fair values. The Company recognizes the expense using the straight-line attribution method. The stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. The new stock-based compensation accounting guidance offers the option of recognizing forfeitures as they occur or estimating forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has elected to remain consistent with prior periods and estimate forfeitures at the time of grant and, if necessary, revise in subsequent periods in which actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the Company's results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period. The consolidated statements of operations for the three and six months ended July 1, 2017 and July 2, 2016 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):
|  |  | Three Months Ended |  | Six Months Ended
|  |  | July 1, 2017 |  | July 2, 2016 |  | July 1, 2017 |  | July 2, 2016
Cost of sales |  | $ | 787 |  | $ | 656 |  | $ | 1,525 |  | $ | 1,327
Selling and administrative expenses |  |  | 7,602 |  |  | 6,613 |  |  | 14,790 |  |  | 20,582
Research and development expenses |  |  | 750 |  |  | 1,127 |  |  | 1,479 |  |  | 2,328
| Total stock-based compensation |  | $ | 9,139 |  | $ | 8,396 |  | $ | 17,794 |  | $ | 24,237
During the six months ended July 2, 2016, the Company recognized $7 million of stock-based compensation expense related to the modification of certain stock awards upon the retirement of senior executives. Stock Options In determining the fair value of the stock options, the Compan y makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of non-qualified stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the six months ended July 1, 2017 and July 2, 2016 are as follows:
|  | Six Months Ended
Options Issued and Significant Assumptions Used to Estimate Option Fair Values |  | July 1, 2017 |  | July 2, 2016
Options issued (in thousands) |  | 207 |  | 86
Risk-free interest rate |  | 2.2% |  | 1.5%
Expected life in years |  | 6 |  | 5
Expected volatility |  | 0.232 |  | 0.286
Expected dividends |  | - |  | -
|  | Six Months Ended
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant |  | July 1, 2017 |  | July 2, 2016
Exercise price |  | $ | 149.74 |  | $ | 122.65
Fair value |  | $ | 40.39 |  | $ | 34.63
T he following table summarizes stock option activity for the plans for the six months ended July 1, 2017 (in thousands, except per share data):
|  |  |  | Number of Shares |  | Price per Share |  | Weighted-Average Exercise Price
Outstanding at December 31, 2016 |  | 2,697 |  | $ | 38.09 | to | $ | 139.51 |  | $ | 106.55
| Granted |  | 207 |  | $ | 136.43 | to | $ | 154.33 |  | $ | 149.74
| Exercised |  | (619) |  | $ | 41.20 | to | $ | 134.37 |  | $ | 88.36
| Canceled |  | (44) |  | $ | 87.06 | to | $ | 136.43 |  | $ | 114.38
Outstanding at July 1, 2017 |  | 2,241 |  | $ | 38.09 | to | $ | 154.33 |  | $ | 115.41
Restricted Stock During the six months ended July 1, 2017, the Company granted seven thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $136.43 per share. Restricted Stock Units The following table summarizes the unvested restricted stock unit award activity for the six months ended July 1, 2017 (in thousands, except for per share data):
|  |  | Shares |  | Weighted-Average Price
Unvested at December 31, 2016 |  | 453 |  | $ | 110.34
| Granted |  | 106 |  | $ | 154.23
| Vested |  | (131) |  | $ | 105.18
| Forfeited |  | (15) |  | $ | 115.34
Unvested at July 1, 2017 |  | 413 |  | $ | 123.06
Restricted stock units are generally granted annually in February and vest in equal annual insta llments over a five-year period. Performance Stock Units The Company's performance stock units are equity compensation awards with a market vesting condition based on the Company's Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded. In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on the performance period of the underlying performance stock units. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted during 2017 is as follows:
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values |  | 2017
Performance stock units issued in thousands |  | 20
Risk-free interest rate |  | 1.5%
Expected life in years |  | 3
Expected volatility |  | 0.232
Average volatility of peer companies |  | 0.261
Correlation coefficient |  | 0.385
Expected dividends |  | -
The following table summarizes the unvested performance stock unit award activity for the three months ended July 1, 2017 (in thousands, except for per share data):
|  |  | Shares |  | Weighted-Average Fair Value
Unvested at December 31, 2016 |  | 27 |  | $ | 171.16
| Granted |  | 20 |  | $ | 198.78
Unvested at July 1, 2017 |  | 47 |  | $ | 184.40

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- Definition The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 40 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=65895303&loc=d3e17540-113929 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 50 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=68057994&loc=d3e25284-112666 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB Topic 14) -URI http://asc.fasb.org/extlink&oid=27013229&loc=d3e301413-122809 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5070-113901 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5047-113901 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5444-113901 + Details
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