9. Share-based Compensation

12 Months Ended

Dec. 31, 2020

Share-based Payment Arrangement, Noncash Expense [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments

9. SHARE-BASED COMPENSATION/EQUITY AWARD AND PURCHASE PLANS

Equity Award Plan

We have the 2017 Incentive Award Plan (2017 Plan) for officers and certain other employees. The 2017 Plan authorizes the grant of stock options, restricted stock, restricted stock units, and other types of equity awards to employees. Stock options are granted at exercise prices not less than the fair market value of the underlying common stock on the date of grant and have a maximum term of 10 years. We may issue stock options for either Class A or Class B common stock. Prior to September 2020 grants, equity awards granted vest in increments of 20% per year on the yearly anniversary date of the grant. Starting in September 2020, equity awards granted vest in increments of 25% per year on the yearly anniversary date of the grant.

A total of 2,108,050 shares have been reserved for issuance of equity awards under the 2017 Plan and may be of either Class A or Class B common stock. At December 31, 2020, there were 1,451,617 shares available to be granted.

Employee Stock Purchase Plans

Our 2011 Employee Stock Purchase Plan (2011 ESPP) provides that eligible employees may contribute up to the greater of 10% of their compensation or $25,000 annually towards the quarterly purchase of our Class A common stock. The employees’ purchase price is 85% of the lesser of the fair market value of the stock on the first business day or the last business day of each calendar quarter. We have authorized the sale of 1,300,000 shares of Class A common stock under the 2011 ESPP.

Share-Based Compensation

Included in our share-based compensation expense is the cost related to stock option grants, ESPP stock purchases and restricted stock unit awards. Share-based compensation expense is allocated to Cost of goods sold, Selling, general and administrative expense, and Research and development expense in the Consolidated Statements of Income.

For the year ended December 31, 2020, we recognized share-based compensation expense of $41.6 million of which $3.4 million was allocated to Cost of goods sold, $31.8 million was allocated to Selling general and administrative expense, and $6.4 million was allocated to Research and development expense. For the year ended December 31, 2019, we recognized share-based compensation expense of $35.6 million of which $2.9 million was allocated to Cost of goods sold, $27.9 million was allocated to Selling general and administrative expense, and $4.8 million was allocated to Research and development expense. For the year ended December 31, 2018, we recognized share-based compensation expense of $27.8 million, of which $2.3 million was allocated to Cost of goods sold, $22.0 million was allocated to Selling general and administrative expense, and $3.5 million was allocated to Research and development expense. The income tax benefit related to share-based compensation expense was $6.0 million, $5.6 million and $4.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. We did not capitalize any share-based compensation expense in inventory as it was immaterial.

The tax benefit from equity awards vested or exercised during the years ended December 31, 2020, 2019 and 2018 was $11.2 million, $5.4 million, and $5.4 million, respectively.

For equity awards, we amortize the fair value on a straight-line basis. All equity awards are amortized over the requisite service periods of the awards, which are generally the vesting periods. We recognize forfeitures as they occur.

Stock Options

The weighted-average fair value of stock options granted was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:


	Year Ended December 31,
	2020			2019			2018
Expected volatility	27		%	22		%	22		%
Risk-free interest rate	0.31		%	1.69		%	2.85		%
Expected life (in years)	7.4			7.5			7.6
Expected dividend	—			—			—
Weighted-average fair value of options granted	$	153.32		$	93.96		$	105.94

Expected volatility is based on the historical volatilities of our common stock for a period equal to the stock option’s expected life. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life represents the number of years that we estimate, based primarily on historical experience, that the options will be outstanding prior to exercise. We do not anticipate paying any cash dividends in the future and therefore use an expected dividend yield of zero.

The following table summarizes stock option activity:


	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding, December 31, 2019	344,522	$	162.23
Granted	22,527	$	524.30
Exercised	(66,085)	$	112.96
Forfeited	(15,841)	$	269.64
Outstanding, December 31, 2020	285,123	$	196.29	4.64	$	110.2

Unvested, December 31, 2020	73,126	$	364.07	8.35	$	16.0
Exercisable, December 31, 2020	211,997	$	138.42	3.36	$	94.2

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The total intrinsic value on the date of exercise of stock options exercised during the years ended December 31, 2020, 2019 and 2018 was approximately $24 million, $12 million and $8 million, respectively.

Cash received from stock options exercised during the years ended December 31, 2020, 2019 and 2018 was $3.8 million, $2.6 million and $0.5 million, respectively.

As of December 31, 2020, there was $7.0 million of total unrecognized compensation cost from stock options. This amount is expected to be recognized in the future over a remaining weighted-average period of approximately three years.

Restricted Stock Units

Restricted stock units are rights to receive shares of company stock. The fair value of a restricted stock unit is the market value as determined by the closing price of the stock on the day of grant.

The following table summarizes restricted stock unit activity:


	Restricted Stock Units	Weighted- Average Grant-Date Fair Value		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding, December 31, 2019	469,942	$	279.14
Granted	112,162	$	523.64
Vested	(132,745)	$	246.88
Forfeited	(62,976)	$	280.97
Outstanding, December 31, 2020	386,383	$	360.90	1.85	$	225.2

The total fair value of restricted stock units vested for the years ended December 31, 2020, 2019 and 2018 was $65.0 million, $44.8 million and $40 million, respectively. As of December 31, 2020, there was approximately $125.6 million of total unrecognized compensation cost related to restricted stock units. This amount is expected to be recognized over a remaining weighted-average period of approximately three years.

Employee Stock Purchase Plans

The fair value of the employees’ purchase rights under the 2011 ESPP was estimated using a Black-Scholes model with the following weighted-average assumptions:


	Year Ended December 31,
	2020			2019			2018
Expected volatility	41		%	31		%	27		%
Risk-free interest rate	0.5		%	2.25		%	1.82		%
Expected life (in years)	0.25			0.25			0.25
Expected dividend	—			—			—
Weighted-average fair value
of purchase rights	$	94.93		$	60.39		$	55.04

The major assumptions are primarily based on historical data. Volatility is based on the historical volatilities of our common stock for a period equal to the expected life of the purchase rights. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. We do not anticipate paying any cash dividends in the future and therefore use an expected dividend yield of zero.

We sold 47,548 shares for total employee contributions of $16.4 million, 58,717 shares for total employee contributions of $14.3 million and 63,464 shares for total employee contributions of $13.6 million under the 2011 ESPP to employees for the years ended December 31, 2020, 2019 and 2018, respectively. At December 31, 2020, 551,983 shares remain authorized and available for issuance under the 2011 ESPP.