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).

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. 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 June 30, 2018 and July 1, 2017 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
	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Cost of sales	$	603	$	787	$	1,208	$	1,525
Selling and administrative expenses		7,639		7,602		16,123		14,790
Research and development expenses		837		750		1,640		1,479

Total stock-based compensation	$	9,079	$	9,139	$	18,971	$	17,794

Stock Options

In determining the fair value of the stock options, the Company 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 June 30, 2018 and July 1, 2017 are as follows:


	Six Months Ended
Options Issued and Significant Assumptions Used to Estimate Option Fair Values	June 30, 2018			July 1, 2017
Options issued in thousands		140			207
Risk-free interest rate		2.7	%		2.2	%
Expected life in years		6			6
Expected volatility		0.232			0.232
Expected dividends		—			—

	Six Months Ended
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	June 30, 2018			July 1, 2017
Exercise price	$	205.97		$	149.74
Fair value	$	58.26		$	40.39

The following table summarizes stock option activity for the plans for the six months ended June 30, 2018 (in thousands, except per share data):


	Number of Shares			Exercise Price per Share		Weighted-Average Exercise Price per Share
Outstanding at December 31, 2017		2,039		$	38.09 to $194.26	$	124.41
Granted		140		$	192.62 to $208.47	$	205.97
Exercised		(305	)	$	38.09 to $154.33	$	101.09
Canceled		(137	)	$	98.21 to $154.33	$	126.04

Outstanding at June 30, 2018		1,737		$	38.09 to $208.47	$	134.95

Restricted Stock

During the six months ended June 30, 2018, the Company granted four thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $195.69.

Restricted Stock Units

The following table summarizes the unvested restricted stock unit award activity for the six months ended June 30, 2018 (in thousands, except per share data):


	Shares			Weighted-Average Fair Value per Share
Unvested at December 31, 2017		374		$	124.81
Granted		88		$	208.26
Vested		(116	)	$	117.35
Forfeited		(12	)	$	118.07

Unvested at June 30, 2018		334		$	149.63

Restricted stock units are generally granted annually in February and vest in equal annual installments 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 the six months ended June 30, 2018 and July 1, 2017 are as follows:


	Six Months Ended
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values	June 30, 2018			July 1, 2017
Performance stock units issued (in thousands)		16			20
Risk-free interest rate		2.0	%		1.5	%
Expected life in years		2.8			3.0
Expected volatility		0.234			0.232
Average volatility of peer companies		0.258			0.261
Correlation coefficient		0.372			0.385
Expected dividends		—			—

The following table summarizes the unvested performance stock unit award activity for the six months ended June 30, 2018 (in thousands, except per share data):


	Shares			Weighted-Average Fair Value per Share
Unvested at December 31, 2017		64		$	196.29
Granted		16		$	253.44
Forfeited		(5	)	$	188.45

Unvested at June 30, 2018		75		$	209.00