The Company maintains various shareholder-approved, stock-based compensation plans which allow for the issuance of incentive or non-qualified stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units and performance stock units). In the first quarter of 2017, the Company adopted new accounting guidance related to stock-based compensation, see Note 13 for further information regarding the adoption of this standard.

The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations based on their grant date fair values. The Company recognizes the expense using the straight-line attribution method. The stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. The new stock-based compensation accounting guidance offers the option of recognizing forfeitures as they occur or estimating forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has elected to remain consistent with prior periods and estimate forfeitures at the time of grant and, if necessary, revise in subsequent periods in which actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the Company's results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.

The consolidated statements of operations for the three and nine months ended September 30, 2017 and October 1, 2016 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):

		Three Months Ended				Nine Months Ended
		September 30, 2017		October 1, 2016		September 30, 2017		October 1, 2016
Cost of sales		$	726	$	731	$	2,251	$	2,058
Selling and administrative expenses			10,768		6,944		25,558		27,526
Research and development expenses			780		692		2,259		3,020
	Total stock-based compensation	$	12,274	$	8,367	$	30,068	$	32,604

During the nine months ended September 30, 2017 and October 1, 2016, the Company recognized $4 million and $7 million, respectively, of stock-based compensation expense related to the modification of certain stock awards upon the retirement of senior executives.

In determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of non-qualified stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the nine months ended September 30, 2017 and October 1, 2016 is as follows:

	Nine Months Ended
Options Issued and Significant Assumptions Used to Estimate Option Fair Values	September 30, 2017	October 1, 2016
Options issued (in thousands)	217	86
Risk-free interest rate	2.2%	1.5%
Expected life in years	6	5
Expected volatility	0.230	0.286
Expected dividends	-	-

	Nine Months Ended
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	September 30, 2017		October 1, 2016
Exercise price	$	151.24	$	122.65
Fair value	$	40.49	$	34.63

The following table summarizes stock option activity for the plans for the nine months ended September 30, 2017 (in thousands, except per share data):

		Number of Shares	Price per Share					Weighted-Average Exercise Price per Share
Outstanding at December 31, 2016		2,697	$	38.09	to	$	139.51	$	106.55
	Granted	217	$	136.43	to	$	184.89	$	151.24
	Exercised	(751)	$	41.20	to	$	134.37	$	90.28
	Canceled	(43)	$	87.06	to	$	136.43	$	115.82
Outstanding at September 30, 2017		2,120	$	38.09	to	$	184.89	$	116.70

During the nine months ended September 30, 2017, the Company granted eight thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $140.52 per share.

The following table summarizes the unvested restricted stock unit award activity for the nine months ended September 30, 2017 (in thousands, except per share data):

		Shares	Weighted-Average Price per Share
Unvested at December 31, 2016		453	$	110.34
	Granted	106	$	154.31
	Vested	(140)	$	106.06
	Forfeited	(17)	$	116.83
Unvested at September 30, 2017		402	$	123.15

Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.

The Company's performance stock units are equity compensation awards with a market vesting condition based on the Company's Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded.

In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on the performance period of the underlying performance stock units. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted during 2017 is as follows:

Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values		2017
Performance stock units issued in thousands		20
Risk-free interest rate		1.5%
Expected life in years		3
Expected volatility		0.232
Average volatility of peer companies		0.261
Correlation coefficient		0.385
Expected dividends		-

The following table summarizes the unvested performance stock unit award activity for the nine months ended September 30, 2017 (in thousands, except per share data):

		Shares	Weighted-Average Fair Value per Share
Unvested at December 31, 2016		27	$	171.16
	Granted	20	$	198.78
Unvested at September 30, 2017		47	$	184.40