SHARE-BASED COMPENSATION

Stock Plans

2010 Incentive Award Plan. In April 2010, the Company’s stockholders approved the 2010 Incentive Award Plan (“2010 Plan”). Under this plan, the Company issues nonqualified stock options (“NSOs”) and restricted stock units (“RSUs”) to employees and certain consultants. The 2010 Plan generally permits NSOs to be granted at no less than the fair market value of the common stock on the date of grant, with terms of 10 years from the date of grant. The 2010 Plan expires in 2020. In April 2017, the Company’s stockholders approved an amended and restated 2010 Plan to provide for an increase in the number of shares of common stock reserved for issuance from 21,150,000 to 24,450,000. As of December 31, 2018, approximately 4.1 million shares were reserved for future issuance under the 2010 Plan. A maximum of 1.8 million of these shares can be awarded as RSUs.

2009 Employment Commencement Incentive Plan. In October 2009, the Board adopted the 2009 Employment Commencement Incentive Plan (“New Hire Plan”). The New Hire Plan provides for the shares to be used exclusively for the grant of RSUs and NSOs to new employees (“New Hire Options”), who were not previously employees or non-employee directors of the Company. The Compensation Committee approves all equity awards under the New Hire Plan, which are granted to newly-hired employees once a month on the fifth business day of each month after their hire. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed 10 years.

In April 2015, the Board of Directors amended and restated the New Hire Plan to provide for an increase in the number of shares of common stock authorized for issuance pursuant to awards granted under the New Hire Plan from 3,465,000 to 4,365,000. As of December 31, 2018, approximately 102,000 shares were reserved for future issuance under the New Hire Plan. However, the Company intends to no longer issue grants from the New Hire Plan in the future and plans to instead utilize the 2010 Plan to make grants to new employees.

2000 Equity Incentive Plan. In March 2000, the Board adopted the 2000 Equity Incentive Plan (“2000 Plan”), which took effect upon the closing of the Company’s initial public offering. Under this plan, certain employees, consultants, and non-employee directors could be granted Incentive Stock Options (“ISOs”) and Nonstatutory Stock Options (“NSOs”) to purchase shares of the Company’s common stock. The 2000 Plan permitted ISOs to be granted at an exercise price not less than the fair value on the date of the grant and NSOs at an exercise price not less than 85% of the fair value on the date of grant. Options granted under the 2000 Plan generally expire 10 years from the date of grant and become exercisable upon grant subject to repurchase rights in favor of the Company until vested. The 2000 Plan expired in March 2010. However, options granted prior to the plan’s expiration continue to remain outstanding until their original expiration date.

Employee Option Vesting. The Company makes annual option grants on February 15 (or the next business day if the date is not a business day) and on August 15 (or the next business day if the date is not a business day). The February 15 grants vest 6/48 upon completion of 6 months service and 1/48 per month thereafter. The August 15 stock option grants vest 7/48 at the end of one month and 1/48 per month thereafter through a 3.5-year vesting period.

New Hire Options generally vest 12/48 upon completion of one year service and 1/48 per month thereafter. Option vesting terms are determined by the Board and, in the future, may vary from past practices.

2000 Non-Employee Directors’ Stock Option Plan. In March 2000, the Board of Directors adopted the 2000 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”). In October 2009, the automatic evergreen increase provisions were eliminated so that no further automatic increases will be made to the number of shares reserved for issuance under the Directors’ Plan. In addition, the common stock authorized for issuance under the Directors’ Plan was reduced to 450,000. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed 10 years. Prior to 2016, initial stock option grants to new non-employee directors vest over a three-year period with 12/36 of the shares vesting after one year from the date of grant and 1/36 of the shares vesting monthly thereafter. Annual stock option grants vest one year from the date of the grant. Since 2016, new non-employee directors receive pro-rated stock option grants that vest on the same term as the annual stock option grants. As of December 31, 2018, approximately 0.1 million shares were reserved for future issuance under the Directors’ Plan.

2000 Employee Stock Purchase Plan. In March 2000, the Board adopted the 2000 Employee Stock Purchase Plan (the “ESPP”). Employees are generally eligible to participate in the ESPP if they are customarily employed by the Company for more than 20 hours per week and more than 5 months in a calendar year and are not 5% stockholders of the Company. Under the ESPP, eligible employees may select a rate of payroll deduction up to 15% of their eligible compensation subject to certain maximum purchase limitations. The duration for each offering period is 24 months and is divided into four purchase periods of approximately six months in length. Offerings are concurrent. The purchase price of the shares under the offering is the lesser of 85% of the fair market value of the shares on the offering date or 85% of the fair market value of the shares on the purchase date. A two-year look-back feature in the ESPP causes the offering period to reset if the fair value of the Company’s common stock on the first or last day of the purchase period is less than that on the original offering date. ESPP purchases by employees are settled with newly-issued common stock from the ESPP’s previously authorized and available pool of shares. In April 2017, the Company’s stockholders approved an amended and restated ESPP to provide for an increase in the number of shares of common stock reserved for issuance from 6,090,315 to 7,590,315.

The Company issued 0.2 million, 0.2 million, and 0.2 million shares under the ESPP, representing approximately $46.8 million, $38.3 million, and $32.5 million in employee contributions for the years ended December 31, 2018, 2017, and 2016, respectively. As of December 31, 2018, there were approximately 1.4 million shares reserved for future issuance under the ESPP.

Restricted Stock Units. Equity awards granted to employees and non-employee directors include a mix of stock options and RSUs. The RSUs to employees vest in one-fourth increments annually over a four-year period. Prior to 2016, initial RSUs granted to new non-employee directors are vested in one-third increments over a three-year period. Annual RSU grants to non-employee directors vest one year from the date of grant. Since 2016, new non-employee directors receive pro-rated RSU grants that vest on the same term as the annual RSU grants. The number of shares issued on the date the RSUs vest is net of the minimum statutory tax withholdings, which are paid in cash to the appropriate taxing authorities on behalf of the Company’s employees.

Stock Option Information

Option activity during fiscal 2018 under all the stock plans was as follows (in millions, except per share amounts):



	Stock Options Outstanding
	Number Outstanding		Weighted Average Exercise Price Per Share
Balance at December 31, 2017	7.2		$	164.16
Options granted	0.6		$	475.38
Options exercised	(1.5	)	$	126.52
Options forfeited/expired	(0.1	)	$	237.05
Balance at December 31, 2018	6.2		$	200.79

The aggregate intrinsic value of stock options exercised under the Company’s stock plans determined as of the date of option exercise was $526.6 million, $379.9 million, and $273.3 million during the years ended December 31, 2018, 2017, and 2016, respectively. Cash received from option exercises and employee stock purchase plans for the years ended December 31, 2018, 2017, and 2016, was $236.6 million, $415.5 million, and $580.9 million, respectively. The income tax benefit from stock options exercised was $87.0 million for the year ended December 31, 2018.

The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2018 (number of shares and aggregate intrinsic value in millions):



	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (1)		Number of Shares	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (1)
$31.96 - $127.91	1.4	2.7	$	115.05			1.4		$	115.05
$128.30 - $168.41	1.3	4.6	$	156.67			1.3		$	156.62
$169.42 - $178.39	1.4	5.6	$	174.50			1.2		$	174.17
$178.75 - $283.51	1.2	6.2	$	214.60			0.9		$	207.77
$310.67 - $548.71	0.9	9.1	$	423.33			0.2		$	388.12
Total	6.2	5.4	$	200.79	$	1,727.7	5.0	4.7	$	168.62	$	1,554.5


(1)	The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $478.92 at December 31, 2018, which would have been received by the option holders had all in-the-money option holders exercised their options as of that date.

As of December 31, 2018, a total of 6.1 million shares of stock options vested and expected to vest had a weighted average remaining contractual life of 5.3 years, an aggregate intrinsic value of $1,715.2 million, and a weighted average exercise price of $197.45.

Restricted Stock Units Information

RSU activity for the year ended December 31, 2018, was as follows (in millions, except per share amounts):



	Shares		Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2017	2.1		$	209.55
Granted	0.8		$	431.11
Vested	(0.8	)	$	195.67
Forfeited	(0.1	)	$	277.10
Unvested balance at December 31, 2018	2.0		$	295.70

As of December 31, 2018, 1.8 million shares of RSUs were expected to vest with an aggregate intrinsic value of $879.4 million. The aggregate vesting date fair value of RSUs vested was $334.3 million, $144.2 million, and $65.3 million during the years ended December 31, 2018, 2017, and 2016, respectively.

Share-Based Compensation Expense

The following table summarizes share-based compensation expense (in millions):



	Years Ended December 31,
	2018		2017		2016
Cost of sales—products	$	36.4	$	28.1	$	25.2
Cost of sales—services	16.8		14.0		12.4
Total cost of sales	53.2		42.1		37.6
Selling, general and administrative	133.2		111.8		97.4
Research and development	76.2		56.0		43.0
Share-based compensation expense before income taxes	262.6		209.9		178.0
Income tax effect	54.3		49.2		56.1
Share-based compensation expense after income taxes	$	208.3	$	160.7	$	121.9

The Black-Scholes option pricing model is used to estimate the fair value of stock options granted under the Company’s share-based compensation plans and rights to acquire stock granted under the Company’s employee stock purchase plan. The weighted average estimated fair values of stock options, the rights to acquire stock granted, and RSUs, as well as the weighted average assumptions used in calculating the fair values of stock options and rights to acquire stock under the ESPP that were granted during the years ended December 31, 2018, 2017, and 2016, were as follows:



	Years Ended December 31,
STOCK OPTION PLANS	2018			2017			2016
Risk-free interest rate	2.7		%	1.8		%	1.1		%
Expected term (years)	4.3			4.1			4.2
Volatility	33		%	25		%	26		%
Fair value at grant date	$	146.30		$	67.03		$	47.06
EMPLOYEE STOCK PURCHASE PLAN
Risk-free interest rate	2.1		%	1.2		%	0.6		%
Expected term (years)	1.3			1.2			1.2
Volatility	32		%	28		%	30		%
Fair value at grant date	$	135.84		$	79.77		$	57.57
RESTRICTED STOCK UNITS
Fair value at grant date	$	431.11		$	249.34		$	184.59

As share-based compensation expense recognized in the Consolidated Statements of Income during the years ended December 31, 2018, 2017, and 2016, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

As of December 31, 2018, there were a total of $91.6 million, $373.5 million, and $11.6 million of total unrecognized compensation expense related to unvested stock options, restricted stock units, and employee stock purchases, respectively. The unrecognized compensation expense is expected to be recognized over a weighted average period of 2.3 years for unvested stock options, 2.2 years for unvested restricted stock units, and 0.9 years for rights granted to acquire common stock under the ESPP.