Stock-Based Compensation

9 Months Ended

Sep. 26, 2020

Share-based Payment Arrangement [Abstract]

18. Stock-Based Compensation

Total stock-based compensation expense for the three months ended September 26, 2020 and September 28, 2019 was $11.9 million and $10.9 million, respectively. Total stock-based compensation expense for the nine months ended September 26, 2020 and September 28, 2019 was $36.4 million and $29.6 million, respectively. As of September 26, 2020, an aggregate of 11.8 million shares of common stock were reserved for future issuance under the Company’s equity plans, of which 4.4 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, RSUs, stock appreciation rights, 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. Upon its effectiveness, an aggregate of 5.0 million shares were available for issuance under the 2017 Equity Plan. In May 2020, the Company’s stockholders approved an increase of 2.5 million shares to the 2017 Equity Plan. The aggregate number of shares that may be awarded under the 2017 Equity Plan is 7.5 million shares. The 2017 Equity Plan provides that at least 95% of the equity awards issued under the 2017 Equity Plan must 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 weighted-average exercise prices):


	Nine Months Ended September 26, 2020
	Shares	Weighted-Average Exercise Price
Options outstanding, beginning of period	5,212	$	54.23
Granted	387	186.07
Canceled	(199)	125.70
Exercised	(1,316)	31.17
Options outstanding, end of period	4,084	$	70.68
Options exercisable, end of period	2,602	$	43.35

Total stock option expense for the three months ended September 26, 2020 and September 28, 2019 was $3.8 million and $3.7 million, respectively. Total stock option expense for the nine months ended September 26, 2020 and September 28, 2019 was $11.9 million and $11.0 million, respectively. As of September 26, 2020, the Company had $45.0 million of unrecognized compensation cost related to non-vested stock options that are expected to vest over a weighted-average period of approximately 2.9 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 September 26, 2020 was 5.8 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 September 26, 2020, was 4.7 years.

RSUs

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


	Nine Months Ended September 26, 2020
	Units	Weighted-Average Grant Date Fair Value
RSUs outstanding, beginning of period	2,797	$	96.85
Granted	86	186.57
Canceled	(4)	153.71
Expired	—	—
Vested	(27)	134.78
RSUs outstanding, end of period	2,852	$	99.10

Total RSU expense for the three months ended September 26, 2020 and September 28, 2019 was $1.5 million and $0.9 million, respectively. Total RSU expense for the nine months ended September 26, 2020 and September 28, 2019 was $4.0 million and $1.9 million, respectively. As of September 26, 2020, the Company had $21.7 million of unrecognized compensation cost related to non-vested RSU awards expected to be recognized and vest over a weighted-average period of approximately 4.0 years.

PSUs

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


	Nine Months Ended September 26, 2020
	Units	Weighted-Average Grant Date Fair Value
PSUs outstanding, beginning of period	412	$	102.22
Granted	97	179.42
Canceled	(7)	122.13
Expired	—	—
Vested	(29)	90.69
PSUs outstanding, end of period	473	$	118.47

During the nine months ended September 26, 2020, the Company awarded 97,000 PSUs that will vest three years from the award date, based on the achievement of certain 2022 performance criteria approved by the Board. If earned, the PSUs granted will vest upon achievement of the performance criteria 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 200% of the target amount; therefore, the maximum number of shares that can be issued under these awards is twice the original award of 97,000 PSUs or 194,000 shares. Based on management’s estimate of the number of units expected to vest, total PSU expense for the three months ended September 26, 2020 and September 28, 2019 was $6.6 million and $6.3 million, respectively. Based on management’s estimate of the number of units expected to vest, total PSU expense for the nine months ended September 26, 2020 and September 28, 2019 was $20.5 million and $16.7 million, respectively. As of September 26, 2020, the Company had $44.7 million of unrecognized compensation cost related to non-vested PSU awards expected to be recognized and vest over a weighted-average period of approximately 1.1 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

Nine Months Ended

September 26,
2020

September 28,
2019

September 26,
2020

September 28,
2019

Risk-free interest rate

0.2% to 0.3%

1.4%to 1.9%

0.2% to 1.7%

1.4% to 2.6%

Expected term (in years)

5.1

5.2

5.1

5.2

Estimated volatility

32.7% to 33.6%

28.7% to 29.3%

26.9% to 35.5%

28.3% to 30.0%

Expected dividends

Weighted-average fair value of options granted

$66.24

$44.14

$50.39

$42.01

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 September 26, 2020 was $634.3 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 September 26, 2020 was $475.0 million. The aggregate intrinsic value of options exercised during the three months ended September 26, 2020 was $17.9 million. The aggregate intrinsic value of options exercised during the nine months ended September 26, 2020 was $215.4 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.