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Stock-Based Compensation

12 Months Ended

Dec. 31, 2023

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

14 Stock-Based Compensation

In May 2020, the Company’s shareholders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of December 31, 2023, the 2020 Plan has 6.3 million shares available for grant in the form of incentive or

non-qualified

stock options, stock appreciation rights (“SARs”), restricted stock 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, restricted stock unit conversion or performance 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 December 31, 2023, the Company had stock

options

, restricted stock and restricted and performance stock unit awards o

utstanding.

In May 2009, the Company’s shareholders approved the 2009 Employee Stock Purchase Plan, under which eligible employees may contribute up

% of their earnings toward the quarterly purchase of the

Company’s

common stock.

The plan makes available

0.8

million shares of the Company’s common stock, which includes the remaining shares available under the 1996 Employee Stock Purchase Plan. As of December 31, 2023,

1.7

million shares have been issued under both the 2009 and 1996 Employee Stock Purchase Plans. Each plan period lasts

three months

beginning on January

, April 1, July 1 and October 1 of each year.

The purchase price for each share of stock is the lesser of 90% of the market price on the first day of the plan period or 100% of the market price on the last day of the plan period.

Stock-based compensation expense related to this plan was $

million for each of the years ended December 31, 2023, 2022 and 2021.

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 years ended December 31, 2023, 2022 and 2021 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):


	2023		2022		2021
Cost of sales	$	2,014	$	3,498	$	2,500
Selling and administrative expenses		31,012		32,192		21,727
Research and development expenses		3,842		6,874		5,691

Total stock-based compensation	$	36,868	$	42,564	$	29,918

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 twelve months ended December 31, 2023, 2022 and 2021 are as follows:


Options Issued and Significant Weighted-Average Assumptions Used to Estimate Option Fair Values	2023			2022			2021
Options issued in thousands		132			138			160
Risk-free interest rate		3.9	%		2.0	%		0.8	%
Expected life in years		6			6			6
Expected volatility		31.1	%		30.7	%		32.4	%
Expected dividends		—			—			—


Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	2023		2022		2021
Exercise price	$	331.76	$	321.15	$	281.33
Fair value	$	126.73	$	107.99	$	91.48

The following table summarizes stock option activity for the plans for the twelve months ended December 31, 2023 (in thousands, except per share data):


	Number of Shares			Exercise Price per Share					Weighted- Average Exercise Price per Share
Outstanding at December 31, 2022		597		$	99.22	to	$	371.64	$	238.43
Granted		132		$	253.64	to	$	345.59	$	331.76
Exercised		(99	)	$	99.22	to	$	314.98	$	178.31
Canceled		(43	)	$	195.75	to	$	345.59	$	291.54

Outstanding at December 31, 2023		587		$	113.88	to	$	371.64	$	265.17

The following table details the options outstanding at December 31, 2023 by range of exercise prices (in thousands, except per share data):


Exercise Price Range	Number of Shares Outstanding		Weighted- Average Exercise Price		Remaining Contractual Life of Options Outstanding		Number of Shares Exercisable		Weighted- Average Exercise Price
$113.88 to $235.06		192	$	187.37		4.7		150	$	181.57
$235.07 to $303.64		166	$	267.95		6.8		80	$	262.92
$303.65 to $371.64		229	$	328.38		8.6		29	$	331.66

Total		587	$	265.17		6.8		259	$	223.37

During 2023, 2022 and 2021, the total intrinsic value of the stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $11 million, $

31 million and $43 million, respectively. The total cash received from the exercise of these stock options was $18 million, $32 million and $46 million for the year

ended December 31, 2023, 2022 and 2021, respectively.

The aggregate intrinsic value of the outstanding stock options at December 31, 2023 was $39 million. There were 0.3 million options exercisable at December 31, 2023, 2022 and 2021. The weighted-average exercise prices of options exercisable at December 31, 2023, 2022 and 2021 were $223.37, $188.21 and $162.09, respectively. The weighted-average remaining contractual life of the exercisable outstanding stock options at December 31, 2023 was 5.1 years. The aggregate intrinsic value of stock options exercisable as of December 31, 2023 was $28 million.

At December 31, 2023, the Company had 0.6 million stock options that are vested and expected to vest. The intrinsic value, weighted-average exercise price and remaining contractual life of the vested and expected to vest stock options were $39 million, $264.78 and 6.7 years, respectively, at December 31, 2023.

The amount of compensation costs recognized for the year

ended December 31, 2023, 2022 and 2021 on the stock options expected to vest were $10 million, $8 million and $7 million, respectively. As of December 31, 2023, there were $25 million of total unrecognized compensation costs related to unvested stock option awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.4 years.

Restricted Stock

During the years ended December 31, 2023, 2022 and 2021, the Company granted

three

thousand,

three

thousand and

four

thousand shares of restricted stock, respectively. The weighted-average fair value per share on the grant date of the restricted stock granted in 2023, 2022 and 2021 was $

341.04

, $

363.44

and $

256.28

, respectively. The Company has recorded $

million of compensation expense in each of the years ended December 31, 2023, 2022 and 2021 related to the restricted stock grants. As of December 31, 2023, the Company had

three

thousand unvested shares of restricted stock outstanding, which have been fully expensed.

Restricted Stock Units

The following table summarizes the unvested restricted stock unit award activity for the twelve months ended December 31, 2023 (in thousands, except per share data):


	Shares			Weighted-Average Grant Date Fair Value per Share
Unvested at December 31, 2022		238		$	273.60
Granted		100		$	319.28
Vested		(74	)	$	254.61
Forfeited		(29	)	$	288.50

Unvested at December 31, 2023		235		$	297.18

Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period. The amount of compensation costs recognized for the years ended December 31, 2023, 2022 and 2021 on the restricted stock units expected to vest were $19 million, $19 million and $17 million, respectively. As of December 31, 2023, there were $50 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.3 years

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, includ

ing vola

tility 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 years ended December 31, 2023, 2022 and 2021 are as follows:


Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values	2023			2022			2021
Performance stock units issued in thousands		45			40			41
Risk-free interest rate		4.8	%		1.6	%		0.2	%
Expected life in years		2.9			2.9			2.9
Expected volatility		33.3	%		25.4	%		38.7	%
Average volatility of peer companies		32.8	%		34.5	%		34.7	%
Correlation Coefficient		38.2	%		43.0	%		45.8	%
Expected dividends		—			—			—

The following table summarizes the unvested performance stock unit award activity for the twelve months ended December 31, 2023 (in thousands, except per share data):


	Shares			Weighted-Average Fair Value per Share

Unvested at December 31, 2022		111		$	297.55
Granted		45		$	338.02
Vested		(46	)	$	208.35
Forfeited		(17	)	$	307.03
Change in performance shares in the year due to exceeding performance targets		15		$	205.72

Unvested at December 31, 2023		108		$	337.22

The amount of compensation costs recognized for the years ended December 31, 2023, 2022 and 2021 on the performance stock units expected to vest were $5 million, $13 million and $3 million, respectively. As of December 31, 2023, there were $15 million of total unrecognized compensation costs related to the performance stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 1.9 years.