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Stock-Based Compensation
 9 Months Ended
Sep. 30, 2023
Share-Based Payment Arrangement [Abstract]  
Stock-Based Compensation
20. Stock-Based Compensation
Total stock-based compensation (benefit) expense for the three months ended September 30, 2023 and October 1, 2022 was $(1.1) million and $13.5 million, respectively. Total stock-based compensation (benefit) expense for the nine months ended September 30, 2023 and October 1, 2022 was $(2.4) million and $41.7 million, respectively. The stock-based compensation benefit amounts for the three month and nine months ended September 30, 2023 reflect adjustments for the expected life-to-date achievement of certain PSUs. The Company reassesses the expected achievement of such PSU awards based upon the achievement of certain pre-established multi-year performance criteria approved by the Board at the date of grant.
As of September 30, 2023, an aggregate of 10.0 million shares of common stock were reserved for future issuance under the Company’s equity plans, of which 3.6 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, 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 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:
Nine Months Ended
September 30, 2023
(in millions, except for weighted-average exercise prices)
SharesWeighted-Average
Exercise Price
Options outstanding, beginning of period2.9 $83.85 
Granted0.1 177.29 
Canceled— 172.15 
Exercised(0.2)43.57 
Options outstanding, end of period2.8 $88.24 
Options exercisable, end of period2.4 $73.68 
Total stock option expense for the three months ended September 30, 2023 and October 1, 2022 was $2.2 million and $2.7 million, respectively. Total stock option expense for the nine months ended September 30, 2023 and October 1, 2022 was $6.8 million and $9.1 million, respectively. As of September 30, 2023, the Company had $17.7 million of unrecognized compensation cost related to non-vested stock options that are expected to vest over a weighted-average period of approximately 2.5 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 30, 2023 was 3.8 years.
RSUs
The number of RSUs issued and outstanding under all of the Company’s equity plans are as follows:
Nine Months Ended
September 30, 2023
(in millions, except for weighted-average grant date fair value amounts)
UnitsWeighted-Average Grant
 Date Fair Value
RSUs outstanding, beginning of period3.1 $105.65 
Granted0.2 172.34 
Expired(0.1)171.52 
Vested(0.1)170.42 
RSUs outstanding, end of period3.1 $107.66 
Total RSU expense for the three months ended September 30, 2023 and October 1, 2022 was $5.0 million and $3.6 million, respectively. Total RSU expense for the nine months ended September 30, 2023 and October 1, 2022 was $14.4 million and $10.7 million, respectively. As of September 30, 2023, the Company had $69.3 million of unrecognized compensation cost related to non-vested RSU awards expected to be recognized and vest over a weighted-average period of approximately 3.7 years.
PSUs
The number of PSUs outstanding under all of the Company’s equity plans are as follows:
Nine Months Ended
September 30, 2023
(in millions, except for weighted-average grant date fair value amounts)UnitsWeighted-Average Grant
 Date Fair Value
PSUs outstanding, beginning of period0.3 $180.04 
Granted(1)
0.1 204.67 
Expired— 139.73 
Vested(0.1)179.42 
PSUs outstanding, end of period0.3 $190.11 
______________
(1)     On February 27, 2023, the Audit Committee approved the weighted payout percentage for the 2020 PSU awards (three-year performance period), which were based upon the actual fiscal 2022 performance against pre-established performance objectives. Included in the granted amount are those additional PSUs earned based on actual performance achieved. These PSUs were originally awarded at target.
During the nine months ended September 30, 2023, the Company awarded 103,803 PSUs that will vest three years from the award date, based on the achievement of certain pre-established multi-year performance criteria approved by the Board. Estimates of stock-based compensation expense for an award with performance conditions are based on the probable outcome of the performance conditions and the cumulative effect of any changes in the probability outcomes is recorded in the period in which the changes occur. If earned, the PSUs granted will vest upon achievement of the performance criteria, which include a relative total shareholder return (TSR) component, in the year following the evaluation and confirmation of the performance achievement criteria. The Company’s TSR is based on the Company’s common stock percentile ranking relative to the constituents of the Nasdaq Composite Index for the performance period beginning on January 1, 2023 and ending on December 31, 2025. The number of shares that may be earned can range from 0% to 200% of the target amount. The fair value of market-based RSUs is determined using a Monte Carlo simulation model, which uses multiple input variables to determine the probability of satisfying the market condition requirements. The fair value of performance-based PSUs is determined using the closing price of the Company’s common stock on the grant date. Based on management’s estimate of the number of units expected to vest, total PSU (benefit) expense for the three months ended September 30, 2023 and October 1, 2022 was $(8.3) million and $7.2 million, respectively. Total PSU (benefit) expense for the nine months ended September 30, 2023 and October 1, 2022 was $(23.6) million and $21.9 million, respectively. The PSU benefit amounts for the three months ended September 30, 2023 relate to adjustments for the expected life-to-date performance of the PSU. As of September 30, 2023, the Company had $10.3 million of unrecognized compensation cost related to non-vested PSU awards expected to be recognized and vest over a weighted-average period of approximately 1.5 years.
Valuation of Stock-Based Award Activity
The fair value of each RSU and PSU is determined based on the closing price of the Company’s common stock on the grant date.
The Black-Scholes option pricing model is used to estimate the fair value of options granted under the Company’s stock-based compensation plans. The range of assumptions used and the resulting weighted-average fair value of options granted at the date of grant were as follows:
Three Months EndedNine Months Ended
September 30,
 2023(1)
October 1,
 2022(1)
September 30,
2023		October 1,
2022
Risk-free interest rate
—%
—%
4.2%
1.0% to 1.9%
Expected term (in years)——5.95.7
Estimated volatility
—%
—%
36.7%
31.2% to 38.9%
Expected dividends—%—%—%—%
Weighted-average fair value of options granted$—$—$75.08$49.69
__________________
(1)    No stock options were granted during the three months ended September 30, 2023 and October 1, 2022.
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 30, 2023 was $67.1 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 30, 2023 was $67.1 million.