Stock-Based Compensation

6 Months Ended

Jul. 03, 2021

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

8 Stock-Based Compensation

The Company maintains various stockholder-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 May 2020, the Company’s stockholders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of July 3, 2021, the 2020 Plan had 6.6 million shares available for grant in the form of incentive or

non-qualified

stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units or other types of awards (e.g. restricted stock units and performance stock units). The Company issues new shares of common stock upon exercise of stock options or restricted stock unit conversion. Under the 2020 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 2020 Plan is scheduled to terminate on May 13, 2030. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, restricted stock units and performance stock units may be issued under the 2020 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of July 3, 2021, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.

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 July 3, 2021 and June 27, 2020 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 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Cost of sales	$	727	$	635	$	1,360	$	1,205
Selling and administrative expenses		5,274		7,352		11,694		14,725
Research and development expenses		1,290		939		2,542		2,192

Total stock-based compensation	$	7,291	$	8,926	$	15,596	$	18,122

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 July 3, 2021 and June 27, 2020 are as follows:


	Six Months Ended
Options Issued and Significant Assumptions Used to Estimate Option Fair Values	July 3, 2021			June 27, 2020
Options issued in thousands		159			227
Risk-free interest rate		0.8	%		1.4	%
Expected life in years		6			6
Expected volatility		32.5	%		26.5	%
Expected dividends		—			—


	Six Months Ended
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	July 3, 2021		June 27, 2020
Exercise price	$	280.92	$	216.08
Fair value	$	91.42	$	61.70

The following table summarizes stock option activity for the plans for the six months ended July 3, 2021 (in thousands, except per share data):


	Number of Shares			Exercise Price per Share					Weighted-Average Exercise Price per Share
Outstanding at December 31, 2020		1,067		$	75.94	to	$	238.52	$	179.59
Granted		159		$	250.15	to	$	346.56	$	280.92
Exercised		(230	)	$	99.22	to	$	238.52	$	168.39
Canceled		(228	)	$	139.51	to	$	224.37	$	194.59

Outstanding at July 3, 2021		768		$	75.94	to	$	346.56	$	199.21

Restricted Stock

During the six months ended July 3, 2021, the Company granted four thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $250.15.

Restricted Stock Units

The following table summarizes the unvested restricted stock unit award activity for the six months ended July 3, 2021 (in thousands, except per share data):


	Shares			Weighted-Average Grant Date Fair Value per Share
Unvested at December 31, 2020		271		$	202.00
Granted		88		$	282.94
Vested		(81	)	$	182.26
Forfeited		(14	)	$	220.23

Unvested at July 3, 2021		264		$	234.07

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. Beginning with the grants made in 2020, the vesting conditions for performance stock units now include a performance condition based on future sales growth.

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 July 3, 2021 and June 27, 2020 are as follows:


	Six Months Ended
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values	July 3, 2021			June 27, 2020
Performance stock units issued (in thousands)		41			58
Risk-free interest rate		0.2	%		1.3	%
Expected life in years		2.9			2.9
Expected volatility		38.7	%		25.1	%
Average volatility of peer companies		34.7	%		26.1	%
Correlation coefficient		45.8	%		36.6	%
Expected dividends		—			—

The following table summarizes the unvested performance stock unit award activity for the six months ended July 3, 2021 (in thousands, except per share data):


	Shares			Weighted-Average Fair Value per Share
Unvested at December 31, 2020		95		$	230.36
Granted		41		$	315.98
Vested		(5	)	$	242.94
Forfeited		(39	)	$	229.78

Unvested at July 3, 2021		92		$	268.08