Stock-Based Compensation

12 Months Ended

Dec. 30, 2023

Share-Based Payment Arrangement [Abstract]

20. Stock-Based Compensation

Equity Incentive Plans

2007 Stock Incentive Plan

Effective June 1, 2017, upon the approval and ratification of the Masimo Corporation 2017 Equity Incentive Plan (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.

2017 Equity Incentive 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.

Total stock-based compensation expense under both the 2007 Equity Plan and the 2017 Equity Incentive Plan for the years ended December 30, 2023, December 31, 2022 and January 1, 2022 was $7.0 million, $47.7 million and $44.6 million, respectively.

Additional information related to the Company’s current equity incentive plans, stock-based award activity and valuation of stock-based awards is included below.

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:


	Year Ended December 30, 2023			Year Ended December 31, 2022			Year Ended January 1, 2022
(in millions, except for weighted-average exercise prices)	Shares	Weighted-Average Exercise Price		Shares	Weighted-Average Exercise Price		Shares	Weighted-Average Exercise Price
Options outstanding, beginning of period	2.8	$	83.85	2.9	$	81.38	3.4	$	77.44
Granted	0.1	177.29		0.1	150.91		0.1	250.15
Canceled	—	45.96		(0.1)	162.77		(0.2)	149.11

Exercised	(0.2)	43.22		(0.1)	54.53		(0.4)	53.55
Options outstanding, end of period	2.7	$	87.79	2.8	$	83.85	2.9	$	81.38
Options exercisable, end of period	2.4	$	73.79	2.4	$	65.83	2.2	$	57.09

Total stock option expense for the years ended December 30, 2023, December 31, 2022 and January 1, 2022 was $8.8 million, $11.4 million and $13.0 million, respectively. As of December 30, 2023, the Company had $15.2 million of unrecognized compensation cost related to non-vested stock options that are expected to vest over a weighted-average period of approximately 2.3 years.

The number and weighted-average exercise price of outstanding and exercisable stock options segregated by exercise price ranges were as follows:


	Year Ended December 30, 2023			Year Ended December 31, 2022
(in millions, except range of exercise prices and average remaining contractual life)	Options Outstanding		Options Exercisable	Options Outstanding		Options Exercisable
Range of Exercise Prices	Number of Options	Average Remaining Contractual Life	Number of Options	Number of Options	Average Remaining Contractual Life	Number of Options
$15.00 to $50.00	1.2	1.5	1.2	1.3	2.4	1.3
$50.01 to $80.00	—	2.5	—	0.1	3.7	0.1
$80.01 to $120.00	0.7	3.7	0.7	0.8	4.8	0.7
$120.01 to $160.00	0.4	6.0	0.3	0.4	7.1	0.2
$160.01 to $200.00	0.3	7.0	0.1	0.2	7.2	0.1
$200.01 to $230.00	—	6.5	—	—	7.2	—
$230.01 to $280.00	0.1	7.0	0.1	—	8.0	—
Total	2.7	4.9	2.4	2.8	4.3	2.4

As of December 30, 2023 and December 31, 2022, the weighted-average remaining contractual term of options outstanding was 4.9 years and 4.3 years, respectively. As of December 30, 2023 and December 31, 2022, the weighted-average remaining contractual term of options exercisable with an exercise price less than the closing price of the Company’s common stock was 2.9 years and 3.6 years respectively.

RSUs

The number of RSUs issued and outstanding under all of the Company’s equity plans are as follows:


	Year Ended December 30, 2023			Year Ended December 31, 2022			Year Ended January 1, 2022
(in millions, except for weighted-average grant date fair value)	Units	Weighted-Average Grant Date Fair Value		Units	Weighted-Average Grant Date Fair Value		Units	Weighted-Average Grant Date Fair Value
RSUs outstanding, beginning of period	3.2	$	105.65	3.0	$	104.13	2.9	$	99.66
Granted	0.5	125.44		0.3	148.52		0.1	257.43
Canceled	(0.1)	172.19		(0.1)	168.90		—	204.33

Vested	(0.1)	173.18		—	184.04		—	163.71
RSUs outstanding, end of period	3.5	$	105.87	3.2	$	105.65	3.0	$	104.13

Total RSU expense for the years ended December 30, 2023, December 31, 2022 and January 1, 2022 was $20.1 million, $14.4 million and $9.0 million, respectively. As of December 30, 2023, the Company had $90.7 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, excluding any contingent compensation expense related to certain RSUs that were granted to the Company’s Chairman and CEO in connection with the amendment and restatement of his employment agreement. See “Employment and Severance Agreements” in Note 24, “Commitments and Contingencies” for further details on the CEO’s employment agreement.

PSUs

The number of PSUs outstanding under all of the Company’s equity plans are as follows:


	Year Ended December 30, 2023				Year Ended December 31, 2022				Year Ended January 1, 2022
(in millions, except for weighted-average grant date fair value)	Units		Weighted-Average Grant Date Fair Value		Units		Weighted-Average Grant Date Fair Value		Units	Weighted-Average Grant Date Fair Value
PSUs outstanding, beginning of period	0.3		$	180.04	0.3		$	168.68	0.4	$	120.28
Granted(1)	0.1	(1)	204.67		0.3	(1)	145.49		0.2	250.73
Canceled	—		155.98		(0.1)		139.73		—	166.84

Vested	(0.1)		179.42		(0.2)		127.46		(0.3)	86.95
PSUs outstanding, end of period	0.3		$	190.04	0.3		$	180.04	0.3	$	168.68

(1) On February 27, 2023, the Audit Committee approved the weighted payout percentage for the 2019 PSU awards (three-year performance period), which were based upon the Company’s actual fiscal year 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 year ended January 1, 2022, the Company awarded 69,000 PSUs that will vest three years from the award date, based on the achievement of certain fiscal year 2023 performance criteria approved by the Compensation Committee. 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 69,000 PSUs, or 138,000 shares.

During the year ended December 31, 2022, the Company awarded 162,562 PSUs that will vest three years from the award date, based on the achievement of certain fiscal year 2024 performance criteria approved by the Compensation Committee. 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 162,562 PSUs, or 325,124 shares.

During the year ended December 30, 2023, the Company awarded 103,000 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 years ended December 30, 2023, December 31, 2022 and January 1, 2022 was $(21.9) million, $21.9 million and $22.6 million, respectively. The PSU benefit amounts for the years ended December 30, 2023, December 31, 2022 and January 1, 2022 relate to adjustments for the expected life-to-date performance of the PSU. As of December 30, 2023, the Company had $7.2 million of unrecognized compensation cost related to non-vested PSU awards expected to be recognized and vest over a weighted-average period of approximately 1.3 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:

Year Ended
December 30,
2023

Year Ended
December 31,
2022

Year Ended
January 1,
2022

Risk-free interest rate

3.6% to 4.2%

1.0% to 1.9%

0.3% to 0.9%

Expected term (in years)

5.1 years to 5.9 years

5.1 years to 5.7 years

5.1 years to 5.6 years

Estimated volatility

31.6% to 36.7%

31.2% to 38.9%

30.9% to 34.7%

Expected dividends

Weighted-average fair value of options granted

$75.08 per share

$49.69 per share

$75.72 per share

Risk-free interest rate. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a remaining term approximately equal to the expected term of the Company’s stock options.

Expected term. The expected term represents the average period that the Company’s stock options are expected to be outstanding. The expected term is based on both the Company’s specific historical option exercise experience, as well as expected term information available from a peer group of companies with a similar vesting schedule.

Estimated volatility. The estimated volatility is the amount by which the Company’s share price is expected to fluctuate during a period. The Company’s estimated volatilities for the years ended December 30, 2023, December 31, 2022 and January 1, 2022 are based on historical and implied volatilities of the Company’s share price over the expected term of the option.

Expected dividends. The Board may from time to time declare, and the Company may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law. Any determination to declare and pay dividends will be made by the Board and will depend upon the Company’s results of operations, earnings, capital requirements, financial condition, business prospects, contractual restrictions and other factors deemed relevant by the Board. In the event a dividend is declared, there is no assurance with respect to the amount, timing or frequency of any such dividends. The dividend declared in 2012 was deemed to be a special dividend and there is no assurance that special dividends will be declared again during the expected term. Based on this uncertainty and unknown frequency, for the years ended December 30, 2023, December 31, 2022 and January 1, 2022, no dividend rate was used in the assumptions to calculate the stock-based compensation expense.

The Company has elected to recognize stock-based compensation expense on a straight-line basis over the requisite service period for the entire award, net of forfeitures. Forfeitures of stock-based awards are recognized as they occur. The total fair value of all options that vested during the years ended December 30, 2023, December 31, 2022 and January 1, 2022 was $9.5 million, $12.4 million and $15.2 million, respectively.

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 December 30, 2023 was $123.3 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 December 30, 2023 was $123.3 million. The aggregate intrinsic value of options exercised during the years ended December 30, 2023, December 31, 2022 and January 1, 2022 was $19.0 million, $14.6 million and $84.7 million, respectively.

The total income tax benefit recognized in the consolidated statements of operations for stock-based compensation expense was $2.9 million, $2.5 million and $16.4 million for the years ended December 30, 2023, December 31, 2022 and January 1, 2022, respectively.

The following table presents the total stock-based compensation expense that is included in each functional line item of the consolidated statements of operations:


(in millions)	Year Ended December 30, 2023		Year Ended December 31, 2022		Year Ended January 1, 2022
Cost of goods sold	$	1.1	$	1.0	$	0.8
Selling, general and administrative	(1.5)		32.9		31.3
Research and development	7.4		13.8		12.5
Total	$	7.0	$	47.7	$	44.6