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Share-Based Compensation | 12 Months Ended
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Dec. 31, 2019
Share-based Payment Arrangement [Abstract] |
Share-Based Compensation | 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 2029. In April 2019, 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 24,450,000 to 28,450,000. As of December 31, 2019, approximately 5.9 million shares were reserved for future issuance under the 2010 Plan. A maximum of 2.6 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. The New Hire Plan expired in October 2019 and, therefore, there are no shares reserved for future issuance under the New Hire Plan. However, awards granted prior to the plan's expiration continue to remain outstanding until their original expiration date. 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 of 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 of 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 vested 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 vested 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, 2019, approximately 0.1 million shares were reserved for future issuance under the Directors’ Plan. However, the Company no longer intends to issue grants from the Directors’ Plan in the future and instead plans to utilize the 2010 Plan to make grants to non-employee directors. 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 Com pany issued 0.2 million, 0.2 million, and 0.2 million shares und er the ESPP, representing a pproximately $56.4 million, $46.8 million, and $38.3 million in employee contributions for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, there were approximately 1.2 million share s 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. The RSUs to existing non-employee directors vest one year from the date of grant or at the next Annual Shareholders Meeting, whichever comes first. 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 2019 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, 2018 |  |  | 6.2 |  |  | $ | 200.79 |
Options granted |  |  | 0.6 |  |  | $ | 523.30 |
Options exercised |  |  | (1.3) |  |  | $ | 159.46 |
Options forfeited/expired |  |  | (0.1) |  |  | $ | 381.82 |
Balance at December 31, 2019 |  |  | 5.4 |  |  | $ | 246.64 |
The aggregate intrinsic value of stock options exercised under the Company’s stock plans determined as of the date of option exercise was $512.0 million, $526.6 million, and $379.9 million during the years ended December 31, 2019, 2018, and 2017, respectively. Cash received from option exercises and employee stock purchase plans for the years ended December 31, 2019, 2018, and 2017, was $272.8 million, $236.6 million, and $415.5 million, respectively. The income tax benefit from stock options exercised was $109.7 million for the year ended December 31, 2019. The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2019 (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)
$86.88-$148.03 |  | 1.1 |  |  | 2.8 |  | $ | 127.46 |  |  |  |  | 1.1 |  |  |  |  | $ | 127.46 |  |  |
$150.50-$172.44 |  | 1.4 |  |  | 3.6 |  | $ | 166.28 |  |  |  |  | 1.4 |  |  |  |  | $ | 166.29 |  |  |
$172.76-$231.00 |  | 1.2 |  |  | 5.1 |  | $ | 194.42 |  |  |  |  | 1.2 |  |  |  |  | $ | 193.89 |  |  |
$231.11-$505.36 |  | 1.1 |  |  | 8.1 |  | $ | 376.53 |  |  |  |  | 0.5 |  |  |  |  | $ | 334.67 |  |  |
$508.19-$585.57 |  | 0.6 |  |  | 9.0 |  | $ | 536.41 |  |  |  |  | 0.1 |  |  |  |  | $ | 531.66 |  |  |
Total |  | 5.4 |  |  | 5.3 |  | $ | 246.64 |  |  | $ | 1,844.4 |  |  | 4.3 |  |  | 4.4 |  | $ | 195.76 |  |  | $ | 1,702.4 |
(1)The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $591.15 at December 31, 2019, 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, 2019, a total of 5.2 million shares of stock options vested and expected to vest had a weighted-average remaining contractual life of 5.2 years, an aggregate intrinsic value of $1,833.1 million, and a weighted-average exercise price of $241.65. Restricted Stock Units Information RSU activity for the year ended December 31, 2019, was as follows (in millions, except per share amounts):
| Shares |  | Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2018 | 2.0 |  |  | $ | 295.70 |
Granted | 0.8 |  |  | 541.36
Vested | (0.8) |  |  | 258.87
Forfeited | (0.1) |  |  | 382.52
Unvested balance at December 31, 2019 | 1.9 |  |  | 410.09
As of December 31, 2019, 1.7 million shares of RSUs were expected to vest with an aggregate intrinsic value of $1,032 million. The aggregate vesting date fair value of RSUs vested was $433.2 million, $334.3 million, and $144.2 million during the years ended December 31, 2019, 2018, and 2017, respectively. Share-Based Compensation Expense The following table summarizes share-based compensation expense (in millions):
| Years Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | 2017
Cost of sales—products | $ | 46.6 |  |  | $ | 36.4 |  |  | $ | 28.1 |
Cost of sales—services | 20.4 |  |  | 16.8 |  |  | 14.0 |
Total cost of sales | 67.0 |  |  | 53.2 |  |  | 42.1 |
Selling, general and administrative | 169.5 |  |  | 133.2 |  |  | 111.8 |
Research and development | 101.4 |  |  | 76.2 |  |  | 56.0 |
Share-based compensation expense before income taxes | 337.9 |  |  | 262.6 |  |  | 209.9 |
Income tax effect | 70.2 |  |  | 54.3 |  |  | 49.2 |
Share-based compensation expense after income taxes | $ | 267.7 |  |  | $ | 208.3 |  |  | $ | 160.7 |
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 under the ESPP, 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, 2019, 2018, and 2017, were as follows:
| Years Ended December 31, |  |  |  |
STOCK OPTION PLANS | 2019 |  | 2018 |  | 2017
Risk-free interest rate | 2.0 | % |  | 2.7 | % |  | 1.8 | %
Expected term (years) | 4.1 |  | 4.3 |  | 4.1
Volatility | 30 | % |  | 33 | % |  | 25 | %
Fair value at grant date | $ | 142.53 |  |  | $ | 146.30 |  |  | $ | 67.03 |
EMPLOYEE STOCK PURCHASE PLAN |  |  |  |  |
Risk-free interest rate | 2.1 | % |  | 2.1 | % |  | 1.2 | %
Expected term (years) | 1.2 |  | 1.3 |  | 1.2
Volatility | 29 | % |  | 32 | % |  | 28 | %
Fair value at grant date | $ | 148.99 |  |  | $ | 135.84 |  |  | $ | 79.77 |
RESTRICTED STOCK UNITS |  |  |  |  |
Fair value at grant date | $ | 541.36 |  |  | $ | 431.11 |  |  | $ | 249.34 |
As share-based compensation expense recognized in the Consolidated Statements of Income during the years ended December 31, 2019, 2018, and 2017, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. As of December 31, 2019, there was a total of $110.1 million, $493.6 million, and $31.4 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 2.5 years for unvested stock options, 2.2 years for unvested restricted stock units, and 1.4 years for rights granted to acquire common stock under the ESPP.

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