STOCK-BASED COMPENSATION

Stock-based compensation expense - all related to employees and members of the Board of Directors - recognized under the authoritative guidance was as follows:



	Years Ended December 31,
	2018		2017		2016
	(In thousands)
Selling, general and administrative	$	18,721	$	19,785	$	15,829
Research and development	1,609		1,273		1,048
Cost of goods sold	449		492		433
Total stock-based compensation expense	20,779		21,550		17,310
Total estimated tax benefit related to stock-based compensation expense	10,430		15,448		10,569
Net effect on net income	$	10,349	$	6,102	$	6,741

Estimated tax benefit related to stock-based compensation expense for the year ended December 31, 2018 does not include adjustments related to the effect of 2017 Tax Act.

EMPLOYEE STOCK PURCHASE PLAN

The purpose of the Employee Stock Purchase Plan (the “ESPP”) is to provide eligible employees of the Company with the opportunity to acquire shares of common stock at periodic intervals by means of accumulated payroll deductions. The ESPP is a non-compensatory plan. Under the ESPP, a total of 3.0 million shares of common stock are reserved for issuance. These shares will be made available either from the Company’s authorized but unissued shares of common stock or from shares of common stock reacquired by the Company as treasury stock. At December 31, 2018, 2.0 million shares remain available for purchase under the ESPP. During the years ended December 31, 2018, 2017 and 2016, the Company issued 16,721 shares, 12,168 shares and 12,494 shares under the ESPP for $0.7 million, $0.6 million and $0.5 million, respectively.

EQUITY AWARD PLANS

As of December 31, 2018, the Company had stock options, restricted stock awards, performance stock awards, contract stock awards and restricted stock unit awards outstanding under three plans, the 2000 Equity Incentive Plan (the “2000 Plan”), the 2001 Equity Incentive Plan (the “2001 Plan”), and the 2003 Equity Incentive Plan (the “2003 Plan,” and collectively, (the “Plans”)).

In May 2010 and May 2017, the stockholders of the Company approved amendments to the 2003 Plan to increase by 3.5 million and 1.7 million, respectively, the number of shares of common stock that may be issued under the 2003 Plan. The Company has reserved 4.0 million shares under each of the 2000 Plan and the 2001 Plan, and 14.7 million shares under the 2003 Plan. The Plans permit the Company to grant incentive and non-qualified stock options, stock appreciation rights, restricted stock, contract stock, performance stock, or dividend equivalent rights to designated directors, officers, employees and associates of the Company.

Stock options issued under the Plans become exercisable over specified periods, generally within four years from the date of grant for officers and employees, and within one year from the date of the grant for members of the Board of Directors. The awards generally expire eight years from the grant date for employees and from six to ten years for directors and certain executive officers. Restricted stock issued under the Plans vests ratably over specified periods, generally three years after the date of grant.

In connection with the separation of SeaSpine on July 1, 2015 and in accordance with the Employee Matters Agreement, the Company made certain adjustments to the exercise price and number of share-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the separation. Stock options issued in 2015 prior to the separation converted to those of the entity where the employee is working post-separation. Stock options issued prior to 2015 converted to both Integra and SeaSpine options such that the holders received stock options in both companies. The exercise price of these outstanding awards was adjusted to preserve the value of the awards immediately prior to the separation. Performance stock, restricted stock, and contract stock were adjusted for all employees holding outstanding awards to provide holders performance stock, restricted stock, and contract stock in the company that employs such employee following the separation. The adjustments to the Company's stock-based compensation awards resulted in an increase in incremental fair value of $4.4 million, of which $0.0 million, $0.3 million and $0.7 million was recorded during the year ended December 31, 2018, 2017 and 2016, respectively.

Stock Options

The Company values stock option grants using the binomial distribution model. Management believes that the binomial distribution model is preferable to the Black-Scholes model because it is a more flexible model that gives consideration to the impact of non-transferability and vesting provisions in valuing employee stock options.

In determining the value of stock options granted, the Company considered that it has never paid cash dividends and does not currently intend to pay cash dividends, and thus has assumed a 0% dividend yield. Expected volatilities are based on the historical volatility of the Company’s stock price. The expected life of stock options is estimated based on historical data on exercise of stock options, post-vesting forfeitures and other factors to estimate the expected term of the stock options granted. The risk-free interest rates are derived from the U.S. Treasury yield curve in effect on the date of grant for instruments with a remaining term similar to the expected life of the options. The Company adopted ASU 2016-09 and elected to account for forfeitures as they occur.

The following weighted-average assumptions were used in the calculation of fair value:



	Years Ended December 31,
	2018	2017	2016
Dividend yield	0%	0%	0%
Expected volatility	28%	30%	29%
Risk free interest rate	2.79%	2.18%	1.94%
Expected life of option from grant date	8 years	8 years	8 years

The following table summarizes the Company’s stock option activity.



			Weighted Average Exercise Price		Weighted Average Contractual Term in Years	Aggregate Intrinsic Value

	Shares
Stock Options	(In thousands)					(In thousands)
Outstanding at January 1, 2018	1,739		$	23.84
Granted	140		56.23
Exercised	(426	)	20.57
Forfeited or Expired	(5	)	—
Outstanding at December 31, 2018	1,448		$	27.91	3.79	$	26,451
Vested or expected to vest at December 31, 2018	1,448		$	27.91	3.79	$	26,451
Exercisable at December 31, 2018	1,117		$	22.47	3.01	$	25,278

The intrinsic value of options exercised for the years ended December 31, 2018, 2017 and 2016 were $16.9 million, $16.2 million and $9.7 million, respectively. The weighted average grant date fair value of options granted during the years ended December 31, 2018, 2017 and 2016 was $21.78, $16.95 and $12.48, respectively. Cash received from option exercises was $9.4 million, $9.8 million and $10.5 million, for the years ended December 31, 2018, 2017 and 2016, respectively. The realized tax benefit from options exercised were $3.1 million, $6.2 million and $3.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.

As of December 31, 2018, there was approximately $4.1 million of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted-average period of approximately two years.

Awards of Restricted Stock, Performance Stock and Contract Stock

The following table summarizes the Company’s awards of restricted stock, performance stock and contract stock for the year ended December 31, 2018.




	Restricted Stock Awards				Performance Stock and Contract Stock Awards
	Shares		Weighted Average Grant Date Fair Value Per Share		Shares		Weighted Average Grant Date Fair Value Per Share


	(In thousands)				(In thousands)
Unvested, January 1, 2018	451		$	37.79	172		$	33.61
Granted	261		56.77		164		56.23
Adjustments for performance achievement related to award target	—		—		40		21.42
Cancellations	(56	)	45.51		(14	)	—
Released	(239	)	37.13		(203	)	55.81
Vested but not released	—		—		(74	)	42.94
Unvested, December 31, 2018	417		$	48.97	85		$	45.56

The Company recognized $18.1 million, $18.5 million and $15.6 million in expense related to such awards during the years ended December 31, 2018, 2017 and 2016, respectively. The total fair market value of shares vested and released in 2018, 2017 and 2016 was $24.8 million, $22.2 million and $16.2 million, respectively. Vested awards include shares that have been fully earned but had not been delivered as of December 31, 2018.

Performance stock awards have performance features associated with them. Performance stock, restricted stock and contract stock awards generally have requisite service periods of three years. The fair value of these awards is being expensed on a straight-line basis over the vesting period.

As of December 31, 2018, there was approximately $20.2 million of total unrecognized compensation costs related to unvested restricted stock, performance stock and contract stock awards. These costs are expected to be recognized over a weighted-average period of approximately two years.

At December 31, 2018, there are approximately 0.5 million vested Restricted Units and 0.2 million vested performance share units held by various employees for which the related shares have not yet been issued. The final determination of the number of shares to be issued in respect of an award based on achievement of pre-defined performance metrics is made by the Company's Compensation Committee of the Board of Directors.

At December 31, 2018, there were approximately 3.0 million shares available for grant under the Plans.

The Company capitalized into inventory, share based compensation costs of $0.4 million, $0.5 million and $0.5 million for the years ended December 31, 2018, 2017 and 2016, respectively. Such share-based compensation was recognized as cost of goods sold when related inventory was sold.