SHARE-BASED COMPENSATION

3 Months Ended

Mar. 31, 2023

Share-Based Payment Arrangement [Abstract]

SHARE-BASED COMPENSATIONAs of March 31, 2023, the total number of shares of common stock reserved for issuance under the 2010 Incentive Award Plan was 110,350,000. Approximately 21.2 million shares were reserved for future issuance under the Company’s stock plans, and a maximum of approximately 9.2 million of these shares can be awarded as restricted stock units (“RSUs”).

Restricted Stock Units

A summary of RSUs activity under all stock plans for the three months ended March 31, 2023, is presented as follows (in millions, except per share amounts):


	Shares	Weighted-Average Grant-Date Fair Value
Unvested balance as of December 31, 2022	4.6	$	241.47
RSUs granted	2.2	$	230.07
RSUs vested	(1.5)	$	223.07
RSUs forfeited	—	$	250.75
Unvested balance as of March 31, 2023	5.3	$	241.84

Stock Options

A summary of stock option activity under all stock plans for the three months ended March 31, 2023, is presented as follows (in millions, except per share amounts):


	Stock Options Outstanding
	Number Outstanding	Weighted-Average Exercise Price Per Share
Balance as of December 31, 2022	10.8	$	144.86

Options granted	0.7	$	229.86
Options exercised	(0.6)	$	73.91
Options forfeited/expired	—	$	264.19
Balance as of March 31, 2023	10.9	$	153.45

As of March 31, 2023, options to purchase an aggregate of 8.6 million shares of common stock were exercisable at a weighted average price of $127.98 per share.

Performance Stock Units

In 2022, the Company began granting performance stock units (“PSUs”) to officers and other key employees subject to three-year cliff vesting and pre-established, quantitative goals. Whether any PSUs vest, and the amount that does vest, is tied to completion of service over three years and the achievement of three equally-weighted, quantitative goals that directly align with or help drive the Company’s strategy and long-term total shareholder return.

The 2022 PSU grant metrics are focused on relative total shareholder return (“TSR”), year-over-year da Vinci procedure growth for 2023, and two-year compound annual da Vinci procedure growth for 2024. The 2023 PSU grant metrics are focused on relative TSR, da Vinci and Ion procedure growth in 2024 compared to 2022, and da Vinci and Ion procedure growth in 2025 compared to 2022. The TSR metric is considered a market condition, and the expense is determined at the grant date. The procedure growth metrics are considered performance conditions, and the expense is recorded based on the forecasted performance, which is reassessed each reporting period based on the probability of achieving the performance conditions. The number of shares earned at the end of the three-year period will vary, based on actual performance, from 0% to 125% of the target number of PSUs granted. PSUs are subject to forfeiture if employment terminates prior to the vesting date. PSUs are not considered issued or outstanding shares of the Company.

The Company calculates the fair value for each component of the PSUs individually. The fair value for the component with the TSR metric was determined using Monte Carlo simulation. The fair value per share for the components with the procedure growth metrics is equal to the closing stock price on the grant date.

PSU activity for the three months ended March 31, 2023, was as follows (in millions, except per share amounts):


	Shares	Weighted-Average Grant Date Fair Value Per Share
Unvested balance as of December 31, 2022	0.1	$	299.32
Granted	0.1	$	235.84
Vested	—	$	—
Performance change	—	$	—
Forfeited	—	$	—
Unvested balance as of March 31, 2023	0.2	$	256.44

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (“ESPP”), employees purchased approximately 0.3 million shares for $59.9 million and approximately 0.2 million shares for $47.8 million during the three months ended March 31, 2023, and 2022, respectively.

Share-based Compensation Expense

The following table summarizes share-based compensation expense for the three months ended March 31, 2023, and 2022 (in millions):


	Three Months Ended March 31,
	2023		2022
Cost of sales – products (before capitalization)	$	23.0	$	18.7
Amounts capitalized into inventory (1)	(18.8)		—
Amounts recognized in income for amounts previously capitalized in inventory	12.6		—
Cost of sales – products	$	16.8	$	18.7
Cost of sales – services	7.0		5.6
Total cost of sales	23.8		24.3
Selling, general, and administrative	66.7		60.3
Research and development	50.1		36.8
Share-based compensation expense before income taxes	140.6		121.4
Income tax benefit	28.0		27.2
Share-based compensation expense after income taxes	$	112.6	$	94.2

(1) Share-based compensation expense subject to capitalization into inventory was not material during the quarter ended March 31, 2022, and, therefore, not recorded. The Company commenced capitalization of share-based compensation expense into inventory during the quarter ended December 31, 2022, on a prospective basis.

The Black-Scholes-Merton option pricing model is used to estimate the fair value of stock options granted under the Company’s share-based compensation plans and the rights to acquire stock granted under the ESPP. The weighted-average estimated fair values of stock options and the rights to acquire stock under the ESPP, as well as the weighted-average assumptions used in calculating the fair values of stock options and the rights to acquire stock under the ESPP that were granted during the three months ended March 31, 2023, and 2022, were as follows:


	Three Months Ended March 31,
	2023	2022
Stock Options
Risk-free interest rate	4.8%	1.6%
Expected term (in years)	3.4	3.5
Expected volatility	34%	35%
Fair value at grant date	$72.13	$80.80


ESPP
Risk-free interest rate	4.7%	0.8%
Expected term (in years)	1.2	1.2
Expected volatility	35%	37%
Fair value at grant date	$79.33	$88.85