Note 9. Stock Award Plans and Stock-Based Compensation

Stock Award Plans

The Company grants stock options and restricted stock awards to employees and others. All outstanding stock options of the Company as of March 31, 2018 were granted with an exercise price equal to the fair market value on the date of grant. Outstanding stock options, if not exercised, expire 10 years from the date of grant.

2015 Stock Incentive Plan

The Company’s 2015 Stock Incentive Plan (the “2015 Plan”) authorizes the grant of a variety of equity awards to the Company’s officers, directors, employees, consultants and advisers, including awards of unrestricted and restricted stock, restricted stock units, incentive and nonqualified stock options to purchase shares of common stock, performance share awards and stock appreciation rights. The 2015 Plan provides that options may only be granted at the current market value on the date of grant. Each share of stock issued pursuant to a stock option or stock appreciation right counts as one share against the maximum number of shares issuable under the 2015 Plan, while each share of stock issued pursuant to any other type of award counts as 1.8 shares against the maximum number of shares issuable under the 2015 Plan. The Company’s policy for issuing shares upon exercise of stock options or the vesting of its restricted stock awards and restricted stock units is to issue shares of common stock at the time of exercise or conversion. At March 31, 2018, a total of approximately 2,542,000 shares were available for future issuance under the 2015 Plan.

2008 Stock Incentive Plan

The Company’s 2008 Stock Incentive Plan (the “2008 Plan”) authorizes the grant of a variety of equity awards to the Company’s officers, directors, employees, consultants and advisers, including awards of unrestricted and restricted stock, restricted stock units, incentive and nonqualified stock options to purchase shares of common stock, performance share awards and stock appreciation rights. The 2008 Plan provides that options may only be granted at the current market value on the date of grant. Each share of stock issued pursuant to a stock option or stock appreciation right counts as one share against the maximum number of shares issuable under the 2008 Plan, while each share of stock currently issued pursuant to any other type of award counts as 1.58 shares against the maximum number of shares issuable under the 2008 Plan. The Company’s policy for issuing shares upon exercise of stock options or the vesting of its restricted stock awards and restricted stock units is to issue shares of common stock at the time of exercise or conversion. At March 31, 2018, a total of approximately 270,000 shares were available for future issuance under the 2008 Plan.

Stock-Based Compensation

The following table summarizes stock-based compensation expense by financial statement line item in the Company’s consolidated statements of operations for the fiscal years ended March 31, 2018, 2017 and 2016:

	Fiscal Years Ended March 31,
		2018		2017		2016
	(in $000's)
Cost of revenue	$	1,721	$	1,061	$	895
Research and development		5,895		6,050		3,950
Selling, general and administrative		32,737		25,755		24,208
	$	40,353	$	32,866	$	29,053

The components of stock-based compensation for the fiscal years ended March 31, 2018, 2017 and 2016 were as follows:

	Fiscal Years Ended March 31,
		2018		2017		2016
	(in $000's)
Restricted stock units	$	34,559	$	26,570	$	23,708
Stock options		5,202		5,829		4,866
Employee stock purchase plan		592		467		479
	$	40,353	$	32,866	$	29,053

Stock Options

The following table summarized stock option activity for the fiscal year ended March 31, 2018:

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
	Options			Exercise		Contractual		Value
	(in thousands)			Price		Term (years)		(in thousands)
Outstanding at beginning of period		1,646		$	32.09		5.46
Granted		155			143.52
Exercised		(460	)		20.23
Cancelled and expired		(59	)		98.21
Outstanding at end of period		1,282		$	46.81		5.31	$	313,158
Exercisable at end of period		965		$	24.88		4.29	$	256,891
Options vested and expected to vest at end of period		1,259		$	46.18		5.27	$	308,252

Stock options generally vest and become exercisable annually over three years. The remaining unrecognized stock-based compensation expense for unvested stock option awards at March 31, 2018 was approximately $9.5 million and the weighted-average period over which this cost will be recognized is 2.2 years.

The aggregate intrinsic value of options exercised for fiscal years 2018, 2017 and 2016 was $66.4 million, $74.8 million and $58.6 million, respectively. The total cash received as a result of employee stock option exercises during the fiscal years ended March 31, 2018, 2017 and 2016 was approximately $9.3 million, $10.7 million and $9.8 million, respectively.

The Company estimates the fair value of each stock option granted at the grant date using the Black-Scholes option valuation model. The weighted average grant-date fair values and weighted average assumptions used in the calculation of fair value of options granted during the fiscal years ended March 31, 2018, 2017 and 2016 was as follows:

	Fiscal Years Ended March 31,
		2018			2017			2016
Valuation assumptions:
Weighted average grant-date fair value	$	52.34		$	42.40		$	29.57
Risk-free interest rate		1.87	%		1.41	%		1.55	%
Expected option life (years)		4.07			4.14			4.15
Expected volatility		43.5	%		48.9	%		49.7	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected life of the stock options. Volatility assumptions are calculated based on the historical volatility of the Company’s stock. The Company estimates the expected term of options based on historical exercise experience and estimates of future exercises of unexercised options. An expected dividend yield of zero is used in the option valuation model because the Company does not pay cash dividends and does not expect to pay any cash dividends in the foreseeable future. Forfeitures are recorded as they occur instead of estimating forfeitures that are expected to occur. An accounting policy change was made related to the recording of forfeitures during the quarter ended June 30, 2017 as a result of the adoption of ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” discussed in Note 2.

Restricted Stock Units

The following table summarizes restricted stock unit activity for the fiscal year ended March 31, 2018:

	Number of Shares			Weighted Average Grant Date Fair Value
	(in thousands)			(per share)
Restricted stock units at beginning of period		1,056		$	80.50
Granted		296		$	137.40
Vested		(372	)	$	53.40
Forfeited		(100	)	$	98.47
Restricted stock units at end of period		880		$	109.01

Restricted stock units generally vest annually over three years. The remaining unrecognized compensation expense for outstanding restricted stock units, including performance-based awards, as of March 31, 2018 was $32.2 million and the weighted-average period over which this cost will be recognized is 1.8 years.

The weighted average grant-date fair value for restricted stock units granted during the fiscal years ended March 31, 2018, 2017 and 2016 was $137.40, $97.43 and $87.45 per share, respectively. The total fair value of restricted stock units vested in fiscal years 2018, 2017 and 2016 was $51.0 million, $51.3 million and $39.6 million, respectively.

Performance and Market-Based Awards

Restricted stock units include certain awards that vest subject to certain performance and market-based criteria. The remaining unrecognized compensation expense for outstanding performance and market-based restricted stock units as of March 31, 2018 was $14.5 million and the weighted-average period over which this cost will be recognized is 1.8 years.

Performance-Based Awards

In May 2017, performance-based awards of restricted stock units for the potential issuance of 159,000 shares of common stock were issued to certain executive officers and employees, which vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. The Company met the prescribed performance milestones in fiscal 2018 such that the remaining outstanding 152,000 shares of common stock as of March 31, 2018 will vest subject to service requirements for vesting for these employees and stock-based compensation expense is being recognized accordingly over the employee’s service term.

In May 2016, performance-based awards of restricted stock units for the potential issuance of 190,890 shares of common stock were issued to certain executive officers and employees, which vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. The Company met a portion of the prescribed performance milestones in fiscal 2017 such that the remaining outstanding 82,000 shares of common stock as of March 31, 2018 will vest subject to service requirements for vesting for these employees and stock-based compensation expense is being recognized accordingly over the employee’s service term.

In May 2015, performance-based awards of restricted stock units for the potential issuance of 183,940 shares of common stock were issued to certain executive officers and employees, which vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. The Company met the prescribed performance milestones in fiscal 2016 such that the remaining outstanding 55,000 shares of common stock as of March 31, 2018 will vest subject to service requirements for vesting for these employees and stock-based compensation expense is being recognized accordingly over the employee’s service term.

Market-Based Awards

In June 2015, the Company awarded certain executive officers a total of up to 322,980 market-based restricted share units, of which 281,530 units remain outstanding. These restricted stock units will vest and result in the issuance of common stock based on continuing employment and the relative ranking of the total shareholder return, or TSR of the Company’s common stock in relation to the TSR of the component companies in the S&P Health Care Equipment Select Industry Index over a three-year performance period based on a comparison of average closing stock prices between June 2015 and June 2018. The actual number of market-based restricted stock units that may be earned can range from 0% to 300% of the target number of shares. One-half of the market-based restricted stock units earned will vest in June 2018 and the remaining restricted stock units will vest one year thereafter provided the executive officers are still employed with the Company.

In November 2016, the Company awarded an executive officer a total of up to 41,526 restricted stock units. The restricted stock units are subject to both performance-and time-based vesting. These restricted stock units will vest and result in the issuance of common stock based on continuing employment, the Company achieving positive net profits measured in the aggregate over the first four full fiscal quarters following the grant date and the relative ranking of the TSR of the Company’s common stock in relation to the TSR of the component companies in the S&P Health Care Equipment Select Industry Index over a three-year performance period based on a comparison of average closing stock prices in June 2015 and June 2018. The actual number of restricted stock units that may be earned ranges from 0% to 100% of the target number of shares. One-half of the restricted stock units will potentially vest in June 2018 based on performance criteria described above and the remaining half of the restricted stock units will vest one year thereafter.

The Company used a Monte Carlo simulation model to estimate the grant-date fair value of the restricted stock units granted in June 2015 and November 2016. The fair value related to the restricted stock units is being recorded as stock compensation expense over the period from date of grant to June 2019 regardless of the actual TSR outcome achieved.

The table below sets forth the assumptions used to value the market-based awards and the estimated grant-date fair value:

	June 2015 Awards				November 2016 Awards
Risk-free interest rate			1.10	%			0.90	%
Dividend yield			0	%			0	%
Remaining performance period (years)			0.21				0.21
Expected volatility			47.2	%			50.6	%
Estimated grant date fair value (per share)	$	93.49 - 107.10			$	62.55
Target performance (number of shares)			107,660				41,526

Employee Stock Purchase Plan

The Company has an employee stock purchase plan, or ESPP. Under the ESPP, eligible employees, including officers and directors, who have completed at least three months of employment with the Company or its subsidiaries who elect to participate in the purchase plan instruct the Company to withhold a specified amount of the employee’s income each payroll period during a six-month payment period (the periods April 1—September 30 and October 1—March 31). On the last business day of each six-month payment period, the amount withheld is used to purchase shares of the Company’s common stock at an exercise price equal to 85% of the lower of its market price on the first business day or the last business day of the payment period.