Stock-Based Compensation

The total stock-based compensation expense for the six months ended July 1, 2017 and July 2, 2016 was $6.1 million and $6.2 million, respectively. As of July 1, 2017, an aggregate of 14.5 million shares of common stock were reserved for future issuance under the Company’s equity plans, of which 4.6 million shares were available for future grant under the Masimo Corporation 2017 Equity Incentive Plan (2017 Equity Plan). Additional information related to the Company’s current equity incentive plans, stock-based award activity and valuation of stock-based awards is included below.

Equity Incentive Plans

2017 Equity Incentive Plan

On June 1, 2017, the Company’s stockholders ratified and approved the 2017 Equity Plan. The 2017 Equity Plan permits the grant of stock options, restricted stock, restricted stock units (RSUs), stock appreciation rights, performance share units (PSUs), performance shares, performance bonus awards and other stock or cash awards to employees, directors and consultants of the Company and employees and consultants of any parent or subsidiary of the Company. The aggregate number of shares that may be awarded under the 2017 Equity Plan is 5.0 million shares.

The 2017 Equity Plan provides that equity awards issued under the 2017 Equity Plan must generally vest over a period of not less than one year following the date of grant. The exercise price per share of each option granted under the 2017 Equity Plan may not be less than the fair market value of a share of the Company’s common stock on the date of grant, which is generally equal to the closing price of the Company’s common stock on the NASDAQ Global Select Market on the grant date.

2007 Stock Incentive Plan

Effective June 1, 2017, upon the approval and ratification of the 2017 Equity Plan, the Company’s 2007 Stock Incentive Plan (2007 Equity Plan) terminated, provided that awards outstanding under the 2007 Equity Plan will continue to be governed by the terms of that plan. In addition, upon the effectiveness of the 2017 Equity Plan, an aggregate of 5.0 million shares of the Company’s common stock registered under prior registration statements for issuance pursuant to the 2007 Equity Plan were deregistered and concurrently registered under the 2017 Equity Plan.

Stock-Based Award Activity

Stock Options

The number and weighted-average exercise price of options issued and outstanding under all of the Company’s equity plans are as follows (in thousands, except for exercise prices):



	Six Months Ended July 1, 2017
	Shares		Average Exercise Price
Options outstanding, beginning of period	8,521		$	28.56
Granted	281		88.64
Canceled	(109	)	32.03
Exercised	(1,745	)	27.58
Options outstanding, end of period	6,948		$	31.19
Options exercisable, end of period	4,082		$	26.42

Total stock option expense for the three and six months ended July 1, 2017 was $2.5 million and $5.5 million, respectively. As of July 1, 2017, the Company had $28.7 million of unrecognized compensation cost related to non-vested stock options that are expected to vest over a weighted average period of approximately 3.4 years. The weighted-average remaining contractual term of options outstanding with an exercise price less than the closing price of the Company’s common stock as of July 1, 2017 was 5.9 years. The weighted-average remaining contractual term of options exercisable, with an exercise price less than the closing price of the Company’s common stock as of July 1, 2017 was 4.5 years.

RSUs

The number of RSUs issued and outstanding under all of the Company’s equity plans are as follows (in thousands, except for grant date fair value amounts):



	Six Months Ended July 1, 2017
	Units		Weighted Average Grant Date Fair Value
RSUs outstanding, beginning of period	2,706		$	41.45
Granted	33		86.42
Canceled	(25	)	85.79
Expired	—		—
Vested	(6	)	43.09
RSUs outstanding, end of period	2,708		$	41.59

Total RSU expense for the three and six months ended July 1, 2017 was $0.1 million and $0.2 million, respectively. As of July 1, 2017, the Company had $0.6 million of unrecognized compensation cost related to non-vested RSU awards expected to be recognized and vest over a weighted-average period of approximately 0.9 years.

On July 27, 2017, in connection with the First Amendment to November 4, 2015 Amended and Restated Employment Agreement (First Amendment), the Company and Mr. Kiani agreed to, among other things modify certain vesting provisions related to the previous award of 2.7 million RSUs to the Company’s Chairman and Chief Executive Officer (see “Employment and Severance Agreements” in Note 14 to these condensed consolidated financial statements for further details).

PSUs

The number of PSUs outstanding under all of the Company’s equity plans are as follows (in thousands, except for grant date fair value amounts):



	Six Months Ended July 1, 2017
	Units	Weighted Average Grant Date Fair Value
PSUs outstanding, beginning of period	—	$	—
Granted	240	90.87
Canceled	—	—
Expired	—	—
Vested	—	—
PSUs outstanding, end of period	240	$	90.87

During the second quarter of 2017, the Company awarded 240,000 PSUs that will vest in part over time based on the achievement of certain 2017 performance criteria approved by the Board. If earned, 20% of the PSUs granted will vest upon achievement of the performance criteria and the remaining award will vest in equal installments at the beginning of each of the following four years after the year in which the performance achievement level has been determined. The number of shares that may be earned can range from 0% to 100% of the target amount; therefore, the maximum number of shares that can be issued under these awards is 240,000. Total PSU expense for both the three and six months ended July 1, 2017 was $0.6 million. As of July 1, 2017, the Company had $13.9 million of unrecognized compensation cost related to non-vested PSU awards expected to be recognized and vest over a weighted-average period of approximately 2.6 years.

Valuation of Stock-Based Award Activity

The Black-Scholes option pricing model is used to estimate the fair value of options granted under the Company’s stock-based compensation plans. The range of assumptions used and the resulting weighted-average fair value of options granted at the date of grant were as follows:



	Three Months Ended		Six Months Ended
	July 1, 2017	July 2, 2016	July 1, 2017	July 2, 2016
Risk-free interest rate	1.8% to 2.0%	1.1% to 1.5%	1.8% to 2.2%	1.1% to 1.9%
Expected term (in years)	5.5	5.7	5.5	5.7
Estimated volatility	29.8% to 30.3%	31.7% to 32.8%	29.7% to 30.3%	31.7% to 35.7%
Expected dividends	0%	0%	0%	0%
Weighted-average fair value of options granted	$28.58	$14.7	$27.82	$13.24

The aggregate intrinsic value of options is calculated as the positive difference, if any, between the market value of the Company’s common stock on the date of exercise or the respective period end, as appropriate, and the exercise price of the options. The aggregate intrinsic value of options outstanding with an exercise price less than the closing price of the Company’s common stock as of July 1, 2017 was $417.0 million. The aggregate intrinsic value of options exercisable with an exercise price less than the closing price of the Company’s common stock as of July 1, 2017 was $264.4 million. The aggregate intrinsic value of options exercised during the six months ended July 1, 2017 was $108.6 million.

The fair value of each RSU and PSU award is determined based on the closing price of the Company’s common stock on the grant date, or the modification date, if any.