Note 11. Stockholders’ Equity and Stock-Based Compensation

Options and Employee Stock Purchase Plan (“ESPP”) Awards

The fair value of each option and ESPP award is estimated on the grant date using the Black-Scholes valuation model and the assumptions noted in the following table. The expected lives of options granted were calculated using the simplified method allowed by the Staff Accounting Bulletin No. 107, Share-Based Payment. The risk-free rates were based on the U.S Treasury rates in effect during the corresponding period of grant. The expected volatility was based on the historical volatility of the Company’s stock price. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.

	Six Months Ended
	June 30, 2018	July 1, 2017
Employee Stock Purchase Plan:
Expected life	0.5 years	0.5 years
Volatility	27.2%	35.2%
Risk free interest rate	1.61%	0.65%
Dividends	—	—

No stock options were awarded during the six months ended June 30, 2018 and July 1, 2017.

A summary of activity of stock options during the six months ended June 30, 2018 is as follows:

	Number of Shares Outstanding (Options)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in Thousands)
Options
Outstanding at December 30, 2017		216,326		$	16.82		1.76	$	4,405
Exercised		(72,602	)		16.57
Cancelled		—			—
Outstanding at June 30, 2018		143,724			16.94		1.28		2,654
Exercisable at June 30, 2018		143,724		$	16.94		1.28	$	2,654

The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $35.41 as of June 29, 2018, the last trading day of the quarter, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the three months ended June 30, 2018 and July 1, 2017 was $0.6 million and $0.6 million, respectively, and during the six months ended June 30, 2018 and July 1, 2017 was $1.1 million and $1.5 million, respectively.

Restricted Stock Units (“RSUs”)

Time-based RSUs are valued using the market value of the Company’s common stock on the date of grant, assuming no expectation of dividends paid.

A summary of activity for RSUs during the six months ended June 30, 2018 is as follows:

Summary of activity for RSUs	Number of RSUs			Weighted Average Fair Value
Outstanding RSUs as of December 30, 2017		790,299		$	22.46
Granted		387,089			36.57
Released		(288,145	)		20.62
Cancelled		(110,294	)		24.50
Outstanding RSUs as of June 30, 2018		778,949		$	29.86

Market-Based Performance Stock Units (“PSUs”)

In addition to granting RSUs that vest on the passage of time only, the Company granted PSUs to certain executives. The PSUs vest in three tranches over one, two and three years based on the relative performance of the Company’s stock during those periods, compared to a peer group over the same period. If target stock price performance is achieved, 66.7% of the shares of the Company’s stock subject to the PSUs will vest and up to a maximum of 100% of the shares subject to the PSUs will vest if the maximum stock price performance is achieved for each tranche.

A summary of activity for PSUs for the six months ended June 30, 2018 is as follows:

Summary of activity for PSUs	Number of PSUs			Weighted Average Fair Value
Outstanding PSUs as of December 30, 2017		129,950		$	15.60
Granted		63,133			24.54
Released		(47,929	)		12.14
Cancelled		(32,991	)		25.92
Outstanding PSUs as of June 30, 2018		112,163		$	19.25

The preceding table reflects the maximum awards that can be achieved upon full vesting.

Valuation of PSUs

On the date of grant, the Company estimated the fair value of PSUs using a Monte Carlo simulation model. The assumptions for the valuation of PSUs are summarized as follows:

	2018 Award		2017 Award
Grant Date Fair Value Per Share	$20.73-$25.18		$	26.75
Weighted-average assumptions/inputs:
Expected Dividend		—		—
Range of risk-free interest rates	2.39%-2.63%		1.40%
Range of expected volatilities for peer group	22%-66%		23%-62%

Stock-based Compensation Expense

Stock-based compensation expense for all share-based payment awards made to the Company’s employees and directors pursuant to the employee stock option and employee stock purchase plans by function were as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Cost of products	$	133	$	215	$	231	$	412
Cost of service		186		157		341		302
Research and development		506		355		983		754
Selling		737		528		1,270		1,067
General and administrative		1,117		908		2,192		1,792
Total stock-based compensation expense related to employee stock options and employee stock purchases	$	2,679	$	2,163	$	5,017	$	4,327