2 0 2 0
F O R M 1 0 K
2 0 2 0 H i g h l i g h t s a n d
A c h i e v e m e n t s
> Advancing the continuum of great care
> Expanding the product portfolio
> Driving expansion to emerging markets
> Driving operational efficiency and
financial performance
Supporting the company’s strat-
egies and financial performance
were several achievements aimed
at advancing patient care, ex-
panding the product portfolio, and
delivering value to stockholders.
2020 highlights included:
3
Expanding into new and emerg-
ing markets, Masimo reached an
agreement to acquire the share
capital of LiDCO Group PLC, a UK
public company, specializing in the
development, manufacturing and
sales of advanced hemodynamic
monitoring devices for critical care
and high risk surgical patients.
This acquisition allows for mea-
surement of crucial physiological
parameters such as cardiac out-
put, stroke volume and systematic
vascular resistance, monitoring the
amount of blood flowing through-
out the body, the requirement for
intravenous fluids, and vasoactive
support to help ensure that the
body’s tissues and organs are ad-
equately oxygenated.
1
2
Advancing Masimo’s goal to help hospitals improve the continuum of great care
toring technologies, Masimo acquired the Connected Care product portfolio
through hospital automation, connectivity, and innovative noninvasive moni-
including DCX™ device connectivity (formerly known as DeviceConX™), VCX™ patient
vitals software (formerly known as VitalsConX™), HBox® connectivity hub, and Shuttle
interface cable from Nanthealth, Inc.
Expanding the respiratory heath portfolio with the acquisition of TNI medical AG, an
innovative ventilation company. This technology will provide clinicians with important
additional tools to address the growing number of people affected by pulmonary dis-
eases and respiratory-related illnesses, including those suffering from COVID-19.
5
With the full market release of
Masimo SafetyNet™, an innovative,
economically scalable cloud-based
patient management solution de-
signed to help clinicians care for
patients remotely in hospital set-
tings and in non-traditional set-
tings and circumstances. Masimo
SafetyNet™ is now available world-
wide to help clinicians and public
health officials combat the global
COVID-19 pandemic.
4
With the latest automation and
connectivity
solution, Masimo
UniView: 60™. UniView: 60™ uses
the Masimo Hospital Automation™
platform to aggregate and display
pertinent patient information on
a digital display just outside each
patient’s room, allowing clinicians
to
familiarize
themselves with
the most relevant details of each
patient’s case at the door in 60
seconds or less before they see
the patient.
6
Developed for the consumer mar-
ket and released in conjunction
with Masimo SafetyNet™, Masimo
Radius T™ represents a paradigm
shift in thermometry by making it
continuous, wearable, and has-
sle-free. Radius T™ measures body
temperature continuously, trans-
mitting data and customizable
temperature notifications to the
user’s smartphone.
2 0 2 0 H i g h l i g h t s a n d
A c h i e v e m e n t s
> Advancing the continuum of great care
> Expanding the product portfolio
> Driving expansion to emerging markets
> Driving operational efficiency and
financial performance
Supporting the company’s strat-
egies and financial performance
were several achievements aimed
at advancing patient care, ex-
panding the product portfolio, and
delivering value to stockholders.
2020 highlights included:
1
2
Advancing Masimo’s goal to help hospitals improve the continuum of great care
toring technologies, Masimo acquired the Connected Care product portfolio
through hospital automation, connectivity, and innovative noninvasive moni-
including DCX™ device connectivity (formerly known as DeviceConX™), VCX™ patient
vitals software (formerly known as VitalsConX™), HBox® connectivity hub, and Shuttle
interface cable from Nanthealth, Inc.
Expanding the respiratory heath portfolio with the acquisition of TNI medical AG, an
innovative ventilation company. This technology will provide clinicians with important
additional tools to address the growing number of people affected by pulmonary dis-
eases and respiratory-related illnesses, including those suffering from COVID-19.
5
With the full market release of
Masimo SafetyNet™, an innovative,
economically scalable cloud-based
patient management solution de-
signed to help clinicians care for
patients remotely in hospital set-
tings and in non-traditional set-
tings and circumstances. Masimo
SafetyNet™ is now available world-
wide to help clinicians and public
health officials combat the global
COVID-19 pandemic.
4
With the latest automation and
connectivity
solution, Masimo
UniView: 60™. UniView: 60™ uses
the Masimo Hospital Automation™
platform to aggregate and display
pertinent patient information on
a digital display just outside each
patient’s room, allowing clinicians
to
familiarize
themselves with
the most relevant details of each
patient’s case at the door in 60
seconds or less before they see
the patient.
3
Expanding into new and emerg-
ing markets, Masimo reached an
agreement to acquire the share
capital of LiDCO Group PLC, a UK
public company, specializing in the
development, manufacturing and
sales of advanced hemodynamic
monitoring devices for critical care
and high risk surgical patients.
This acquisition allows for mea-
surement of crucial physiological
parameters such as cardiac out-
put, stroke volume and systematic
vascular resistance, monitoring the
amount of blood flowing through-
out the body, the requirement for
intravenous fluids, and vasoactive
support to help ensure that the
body’s tissues and organs are ad-
equately oxygenated.
6
Developed for the consumer mar-
ket and released in conjunction
with Masimo SafetyNet™, Masimo
Radius T™ represents a paradigm
shift in thermometry by making it
continuous, wearable, and has-
sle-free. Radius T™ measures body
temperature continuously, trans-
mitting data and customizable
temperature notifications to the
user’s smartphone.
ly hampered by increased freight costs, import duties
and additional costs related to the implementation of
COVID-19 safety protocols. In addition, we contin-
ued to make investments in R&D initiatives that will
enhance our future product portfolio.
In fiscal 2020, we demonstrated our ability to execute
through unprecedented challenges by winning new
customers, entering new markets and expanding our
installed base. We remain steadfast in our commit-
ment to delivering on our long-range goals for revenue
growth and profitability.
Highlights and
Achievements
Fiscal 2020 Financial Highlights
In fiscal 2020, our performance exceeded expecta-
tions despite significant global challenges. We de-
livered product revenue growth of 22%, GAAP EPS
growth of 20% and finished the year with a strong
balance sheet with over $641 million in cash. During
the year, we acquired three companies through all
cash transactions, and we returned more than $111
million to stockholders through share repurchases.
For fiscal 2020, we shipped approximately 472,300
We have now shipped
noninvasive technology boards and monitors, an in-
crease of approximately 226,100 units, or 92% over
approximately 2.2 mil-
the prior year period. As a result, we have now shipped
lion technology boards
approximately 2.2 million technology boards and in-
struments over the last 10 years, representing a 17%
and instruments over
increase over the same metric as last year.
the last 10 years.
We continued to make progress on our cost savings
initiatives, particularly within our global manufactur-
ing and supply chain, through our efforts were slight-
T O T A L R E V E N U E S B Y Y E A R
In thousands of dollars
E P S
In dollars
$1,143,744
$4.14
$936,408
$3.45
$3.44
$738,242
$829,874
$2.23
FY2017
FY2018
FY2019
FY2020
FY2017
FY2018
FY2019
FY2020
O P E R A T I N G P R O F I T
In thousands of dollars
$208
$221
$184
$256
G R O S S P R O F I T %
67.0%
67.1%
66.1%
65.0%
FY2017
FY2018
FY2019
FY2020
FY2017
FY2018
FY2019
FY2020
S A L E S B Y G E O G R A P H Y
S A L E S B Y C H A N N E L
Direct & Distribution 82.0%
OEM 18.0%
United States 66.7%
EMEA 20.9%
Asia and Australia 9.1%
Americas 3.3%
(excluding US)
M A S I - S T O C K P R I C E
$285.00
$265.00
$245.00
$225.00
$205.00
$185.00
$165.00
$145.00
$125.00
9
1
0
0 / 2
2 / 3
1
0
2
0
0
2
0
9 / 2
2 / 2
0
2
0
1 / 2
3 / 3
0
2
0
0
2
0
1 / 2
5 / 3
0 / 2
4 / 3
0 / 2
1 / 3
0
2
0
0 / 2
6 / 3
0
2
0
1 / 2
7 / 3
0
2
0
1 / 2
8 / 3
0
2
0
0 / 2
9 / 3
0
2
0
1 / 2
0
2
0
0 / 2
0
2
0
1 / 2
2 / 3
1
1 / 3
1
0 / 3
1
Highlights and
Achievements
ly hampered by increased freight costs, import duties
and additional costs related to the implementation of
COVID-19 safety protocols. In addition, we contin-
ued to make investments in R&D initiatives that will
enhance our future product portfolio.
In fiscal 2020, we demonstrated our ability to execute
through unprecedented challenges by winning new
customers, entering new markets and expanding our
installed base. We remain steadfast in our commit-
ment to delivering on our long-range goals for revenue
growth and profitability.
Fiscal 2020 Financial Highlights
In fiscal 2020, our performance exceeded expecta-
tions despite significant global challenges. We de-
livered product revenue growth of 22%, GAAP EPS
growth of 20% and finished the year with a strong
balance sheet with over $641 million in cash. During
the year, we acquired three companies through all
cash transactions, and we returned more than $111
million to stockholders through share repurchases.
For fiscal 2020, we shipped approximately 472,300
We have now shipped
noninvasive technology boards and monitors, an in-
crease of approximately 226,100 units, or 92% over
approximately 2.2 mil-
the prior year period. As a result, we have now shipped
lion technology boards
approximately 2.2 million technology boards and in-
struments over the last 10 years, representing a 17%
and instruments over
increase over the same metric as last year.
the last 10 years.
We continued to make progress on our cost savings
initiatives, particularly within our global manufactur-
ing and supply chain, through our efforts were slight-
T O T A L R E V E N U E S B Y Y E A R
In thousands of dollars
E P S
In dollars
$1,143,744
$4.14
$936,408
$3.45
$3.44
$738,242
$829,874
$2.23
FY2017
FY2018
FY2019
FY2020
FY2017
FY2018
FY2019
FY2020
O P E R A T I N G P R O F I T
In thousands of dollars
$208
$221
$184
$256
G R O S S P R O F I T %
67.0%
67.1%
66.1%
65.0%
FY2017
FY2018
FY2019
FY2020
FY2017
FY2018
FY2019
FY2020
S A L E S B Y G E O G R A P H Y
S A L E S B Y C H A N N E L
Direct & Distribution 82.0%
OEM 18.0%
United States 66.7%
EMEA 20.9%
Asia and Australia 9.1%
Americas 3.3%
(excluding US)
M A S I - S T O C K P R I C E
$285.00
$265.00
$245.00
$225.00
$205.00
$185.00
$165.00
$145.00
$125.00
0 / 2
2 / 3
1
9
1
0
0
2
0
0
2
0
9 / 2
2 / 2
0
2
0
1 / 2
3 / 3
0
2
0
0
2
0
1 / 2
5 / 3
0 / 2
4 / 3
0 / 2
1 / 3
0
2
0
0 / 2
6 / 3
0
2
0
1 / 2
7 / 3
0
2
0
1 / 2
8 / 3
0
2
0
0 / 2
9 / 3
0
2
0
1 / 2
0
2
0
0 / 2
0
2
0
1 / 2
2 / 3
1
1 / 3
1
0 / 3
1
G u i d i n g
P r i n c i p l e s
> Remain faithful to your promises
and responsibilities.
> Thrive on fascination and
accomplishment and not on greed
and power.
> Strive to make each year better than
the year before both personally and
for the team.
> Make each day as fun as possible.
> Do what is best for patient care.
O u r R e s p o n s e t o
C O V I D - 1 9
P A N D E M I C
At Masimo, we are committed to supporting
benefit of care teams and patients alike. At
the needs of the medical community—for the
this time there is still much to learn about COVID-19,
Furthermore, the COVID-19 health emergency has
created increased demand for medical supplies—in-
cluding noninvasive monitoring devices, thermometry,
single-use sensors, and home monitoring solutions
but what we do know indicates it is highly contagious
that enable care teams to check in on patients while
and spreads easily between people in close contact
they remain safely quarantined at home.
with one another.
We have scaled up production to meet the increased
While the full scope and true impact of the crisis can-
demand for our products. We are committed, as your
not be predicted, what is clear is the urgent need for
partner in health, to providing solutions care providers
the medical community to prepare for a prolonged
and patients have come to rely on.
outbreak. Our clinical solutions, including noninva-
sive monitoring technologies and ancillary single-use
From everyone at Masimo, we’d like to thank the
medical community for their selfless dedication to
the health and well being of patients around the
The coronavirus (COVID-19) con-
tinues to be a growing health emer-
gency. First responders and care
teams are on the front lines of the
crisis, working directly with patients
and health authorities to contain
the spread and treat vulnerable pa-
products, can help care teams with:
tients—while protecting their own
wellbeing and that of their families.
> Surge capacity management efforts
world. It’s an honor and a privilege to be trusted to
> Home monitoring and telemedicine
serve alongside you.
>
Infection control and prevention
G u i d i n g
P r i n c i p l e s
> Remain faithful to your promises
and responsibilities.
> Thrive on fascination and
accomplishment and not on greed
and power.
> Strive to make each year better than
the year before both personally and
for the team.
> Make each day as fun as possible.
> Do what is best for patient care.
The coronavirus (COVID-19) con-
tinues to be a growing health emer-
gency. First responders and care
teams are on the front lines of the
crisis, working directly with patients
and health authorities to contain
O u r R e s p o n s e t o
C O V I D - 1 9
P A N D E M I C
At Masimo, we are committed to supporting
benefit of care teams and patients alike. At
the needs of the medical community—for the
this time there is still much to learn about COVID-19,
Furthermore, the COVID-19 health emergency has
created increased demand for medical supplies—in-
cluding noninvasive monitoring devices, thermometry,
single-use sensors, and home monitoring solutions
but what we do know indicates it is highly contagious
that enable care teams to check in on patients while
and spreads easily between people in close contact
they remain safely quarantined at home.
with one another.
We have scaled up production to meet the increased
While the full scope and true impact of the crisis can-
demand for our products. We are committed, as your
not be predicted, what is clear is the urgent need for
partner in health, to providing solutions care providers
the medical community to prepare for a prolonged
and patients have come to rely on.
the spread and treat vulnerable pa-
products, can help care teams with:
outbreak. Our clinical solutions, including noninva-
sive monitoring technologies and ancillary single-use
From everyone at Masimo, we’d like to thank the
medical community for their selfless dedication to
the health and well being of patients around the
tients—while protecting their own
wellbeing and that of their families.
> Surge capacity management efforts
world. It’s an honor and a privilege to be trusted to
> Home monitoring and telemedicine
serve alongside you.
>
Infection control and prevention
C O V I D - 1 9 S o l u t i o n s
S e a m l e s s l y E x t e n d e d C a r e f r o m H o s p i t a l t o H o m e
Surge Capacity Management
Rapidly respond to an increase in patient volume:
> Quickly adapt non-clinical spaces into advanced
care environments with a range of out-of-the box
Pulse CO-Oximeters® and vital signs monitors
> Remotely monitor all patients at a glance at a cen-
tralized view station with Patient SafetyNet™
• With Replica™, view and respond to alarms
and alerts from a smartphone, regardless of
location
> Use Early Warning Scores (EWS), configured per
hospital protocol, to quickly assess patient status
> Support patients suffering from pulmonary condi-
tions and respiratory distress with softFlow™, nasal
high-flow therapy that administers warmed and
humidified respiratory gases through a comfort-
able nasal cannula
Home Monitoring and Telemedicine
Masimo supplies a range of advanced remote moni-
toring solutions that help ensure you can monitor with
confidence from a distance, including:
> Secure cloud-based patient management with
Masimo SafetyNet™, which combines tetherless
pulse oximetry with a remote data capture and
surveillance platform
> Compact, hospital-grade portable monitors with
supplemental remote monitoring
> Automated remote care that facilitates the collection
of physiological data and patient responses, while
providing notification and guidance
The COVID-19 pandemic has created increased demand across the
globe surge capacity management support, home monitoring, tele-
medicine solutions, infection control, prevention solutions, support
for screening and clinical management protocols. Masimo supports
surge capacity efforts with a range of noninvasive monitoring and
ancillary single-use solutions that can help care teams prepare for
and manage an influx of patients quickly and efficiently.
Infection Control and Prevention
Innovative solutions help care teams minimize trans-
mission risks and increase clinician and patient safety:
>
Immediately convert existing monitoring plat-
forms to single-patient or non-contact solutions
to minimize cross contamination and help man-
age infection control
> Tetherless Radius PPG™ sensors enable the place-
ment of point-of-care monitors outside of a pa-
tient’s room—ensuring continuous monitoring
from a distance
> Expand visibility of point-of-care monitoring data
with wireless supplemental display solutions such
as Kite® that can be quickly deployed without any
additional IT infrastructure
Remote Home Monitoring Kit
Patients receive a multi-day supply of sensors, along
with access to the Masimo SafetyNet mobile application.
Powered by Masimo SET® measure-through-motion
technology, the tetherless single-patient-use sen-
sor provides continuous respiration rate and oxygen
saturation monitoring, with a second tetherless sen-
sor, Radius T®, for continuous temperature measure-
ments. Patient data is sent securely via Bluetooth® to
the Masimo SafetyNet™ mobile application.
C O V I D - 1 9 S o l u t i o n s
S e a m l e s s l y E x t e n d e d C a r e f r o m H o s p i t a l t o H o m e
Surge Capacity Management
Rapidly respond to an increase in patient volume:
> Quickly adapt non-clinical spaces into advanced
care environments with a range of out-of-the box
Pulse CO-Oximeters® and vital signs monitors
> Remotely monitor all patients at a glance at a cen-
tralized view station with Patient SafetyNet™
• With Replica™, view and respond to alarms
and alerts from a smartphone, regardless of
location
> Use Early Warning Scores (EWS), configured per
hospital protocol, to quickly assess patient status
> Support patients suffering from pulmonary condi-
tions and respiratory distress with softFlow™, nasal
high-flow therapy that administers warmed and
humidified respiratory gases through a comfort-
able nasal cannula
Home Monitoring and Telemedicine
Masimo supplies a range of advanced remote moni-
toring solutions that help ensure you can monitor with
confidence from a distance, including:
> Secure cloud-based patient management with
Masimo SafetyNet™, which combines tetherless
pulse oximetry with a remote data capture and
surveillance platform
> Compact, hospital-grade portable monitors with
supplemental remote monitoring
> Automated remote care that facilitates the collection
of physiological data and patient responses, while
providing notification and guidance
The COVID-19 pandemic has created increased demand across the
globe surge capacity management support, home monitoring, tele-
medicine solutions, infection control, prevention solutions, support
for screening and clinical management protocols. Masimo supports
surge capacity efforts with a range of noninvasive monitoring and
ancillary single-use solutions that can help care teams prepare for
and manage an influx of patients quickly and efficiently.
Infection Control and Prevention
Innovative solutions help care teams minimize trans-
mission risks and increase clinician and patient safety:
>
Immediately convert existing monitoring plat-
forms to single-patient or non-contact solutions
to minimize cross contamination and help man-
age infection control
> Tetherless Radius PPG™ sensors enable the place-
ment of point-of-care monitors outside of a pa-
tient’s room—ensuring continuous monitoring
from a distance
> Expand visibility of point-of-care monitoring data
with wireless supplemental display solutions such
as Kite® that can be quickly deployed without any
additional IT infrastructure
Remote Home Monitoring Kit
Patients receive a multi-day supply of sensors, along
with access to the Masimo SafetyNet mobile application.
Powered by Masimo SET® measure-through-motion
technology, the tetherless single-patient-use sen-
sor provides continuous respiration rate and oxygen
saturation monitoring, with a second tetherless sen-
sor, Radius T®, for continuous temperature measure-
ments. Patient data is sent securely via Bluetooth® to
the Masimo SafetyNet™ mobile application.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-K
________________________________________________________________________
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 001-33642
________________________________________________
MASIMO CORPORATION
(Exact name of registrant as specified in its charter)
_________________________________________________________
DE
(State or Other Jurisdiction of
Incorporation or Organization)
52 Discovery
Irvine , CA
(Address of principal executive offices)
33-0368882
(I.R.S. Employer
Identification Number)
92618
(Zip Code)
(949)
297-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, par value $0.001
Securities registered pursuant to Section 12(g) of the Act:
Trading symbol:
Name of each exchange on which registered:
MASI
None
The Nasdaq Stock Market, LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
☒ Yes ☐ No
☐ Yes ☒ No
☒ Yes ☐ No
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
☐ Yes ☒ No
☐
☒
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the common stock on June 27, 2020, the last business
day of the registrant’s most recently completed second fiscal quarter, as reported on the Nasdaq Global Select Market, was approximately $9.2 billion. Shares of stock held by
officers, directors and 5 percent or more stockholders have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. At January 30, 2021, the registrant had 55,266,559 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K incorporate information by reference from the registrant’s proxy statement for the registrant’s 2021
Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this annual report on Form
10-K.
[THIS PAGE INTENTIONALLY LEFT BLANK.]
MASIMO CORPORATION
FISCAL YEAR 2020 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Business..........................................................................................................................................................................
Risk Factors....................................................................................................................................................................
Unresolved Staff Comments..........................................................................................................................................
Properties........................................................................................................................................................................
Legal Proceedings..........................................................................................................................................................
Mine Safety Disclosures.................................................................................................................................................
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.......................................................................................................................
Selected Financial Data..................................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations........................................
Quantitative and Qualitative Disclosures about Market Risk........................................................................................
Financial Statements and Supplementary Data..............................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................
Controls and Procedures.................................................................................................................................................
Other Information...........................................................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance.............................................................................................
Executive Compensation................................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters....................................................................................................................................
Certain Relationships and Related Transactions and Director Independence................................................................
Principal Accounting Fees and Services........................................................................................................................
PART IV
Exhibits and Financial Statement Schedules..................................................................................................................
Form 10-K Summary.....................................................................................................................................................
Signatures....................................................................................................................................................................................................
.
1
36
63
63
63
63
63
65
67
77
78
78
79
79
79
79
79
79
80
80
84
85
[THIS PAGE INTENTIONALLY LEFT BLANK.]
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from
those expressed or implied by such forward-looking statements. The forward-looking statements are contained principally in
Item 1—“Business,” Item 1A—“Risk Factors” and Item 7—“Management’s Discussion and Analysis of Financial Condition
and Results of Operations” but appear throughout this Annual Report on Form 10-K. Examples of forward-looking statements
include, but are not limited to, any projection or expectation of earnings, revenue or other financial items; the plans, strategies
and objectives of management for future operations; factors that may affect our operating results, including accounting and tax
estimates; our success in pending litigation; new products or services; the demand for our products; our ability to consummate
acquisitions and successfully integrate them into our operations; future capital expenditures; effects of current or future
economic conditions or performance; industry trends and other matters that do not relate strictly to historical facts or
statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as
“anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “opportunity,” “plan,”
“potential,” “predicts,” “seek,” “should,” “will,” or “would,” and similar expressions and variations or negatives of these
words. These forward-looking statements are based on the expectations, estimates, projections, beliefs and assumptions of our
management based on information currently available to management, all of which is subject to change. Such forward-looking
statements are subject to risks, uncertainties and other factors that are difficult to predict and could cause our actual results
and the timing of certain events to differ materially and adversely from future results expressed or implied by such forward-
looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified
below, and those discussed under Item 1A—“Risk Factors” in this Annual Report on Form 10-K. Furthermore, such forward-
looking statements speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or
revise publicly any forward-looking statements to reflect events or circumstances after the date of such statements for any
reason, except as otherwise required by law.
ITEM 1. BUSINESS
Overview
PART I
We are a global medical technology company that develops, manufactures and markets a variety of noninvasive monitoring
technologies and hospital automation solutions. Our mission is to improve patient outcomes and reduce the cost of patient care.
Our patient monitoring solutions generally incorporate a monitor or circuit board, proprietary single-patient use or reusable
sensors, software and/or cables. We provide our products to hospitals, emergency medical service (EMS) providers, home care
providers, long-term care facilities, physician offices, veterinarians and consumers through our direct sales force, distributors
and original equipment manufacturers (OEM) partners. We were incorporated in California in May 1989 and reincorporated in
Delaware in May 1996.
Our core business is Measure-through Motion and Low Perfusion™ pulse oximetry, known as Masimo Signal Extraction
Technology® (SET®) pulse oximetry. Our product offerings have expanded significantly over the years to also include
noninvasive monitoring of blood constituents with an optical signature, optical regional oximetry monitoring, electrical brain
function monitoring, acoustic respiration monitoring, exhaled gas monitoring, nasal high flow ventilation, minimally invasive
neuromodulation technology for pain and addiction reduction, hospital automation and connectivity solutions and home
wellness and monitoring.
These technologies are incorporated into a variety of product platforms designed to meet our customers’ needs. In addition, we
provide our technologies to OEMs in a form factor that is easy to integrate into their patient monitors, defibrillators, infant
incubators and other devices.
Our technology is supported by a substantial intellectual property portfolio that we have built through internal development and,
to a lesser extent, acquisitions and license agreements. We have also exclusively licensed from Cercacor Laboratories, Inc.
(Cercacor) the right to certain OEM rainbow® technologies and to incorporate certain rainbow® technology into our products
intended to be used by professional caregivers, including, but not limited to, hospital caregivers and alternate care facility
caregivers.
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Core Business
Conventional Pulse Oximetry
Pulse oximetry enables the noninvasive measurement of the oxygen saturation level of arterial blood (SpO2), which delivers
oxygen to the body’s tissues. Pulse oximetry also measures pulse rate (PR), which, when measured by electrocardiogram
(ECG), is called heart rate. Pulse oximeters use sensors attached to an extremity, typically the fingertip or certain core body
sites. These sensors contain two light-emitting diodes that transmit red and infrared light from one side of the extremity through
the tissue to a photodetector on the other side of the extremity. The photodetector in the sensor measures the amount of red and
infrared light absorbed by the tissue. A microprocessor then analyzes the changes in light absorption to provide a continuous,
real-time measurement of the amount of oxygen in the patient’s arterial blood. Pulse oximeters typically give audio and visual
alerts, or alarms, when the patient’s arterial blood oxygen saturation level or pulse rate falls outside of a user-designated range.
As a result, clinicians have the opportunity to assess patients who may need immediate treatment to prevent the serious clinical
consequences of hypoxemia, or low arterial blood oxygen saturation levels, and hyperoxemia, or high arterial blood oxygen
levels.
As one of the most common technologies used in and out of hospitals around the world, pulse oximetry has gained widespread
clinical acceptance as a standard patient vital sign measurement because it can give clinicians a warning of possible hypoxemia
or hyperoxemia. SpO2 monitoring of oxygen saturation is critical because hypoxemia can lead to a lack of oxygen in the body’s
tissues, which can be toxic and result in organ damage or death. Pulse oximeters are used in a variety of critical care settings,
including surgery, recovery rooms, intensive care units (ICUs), emergency departments and general care floors, as well as
alternative care settings, such as long-term care facilities, physician offices and the home monitoring of patients with chronic
conditions.
Clinicians also use pulse oximeters to monitor oxygen saturation in premature babies to ensure that appropriate oxygen
saturation levels are maintained. In premature babies, oxygen saturation levels above clinically acceptable limits may lead to a
condition known as retinopathy of prematurity (ROP), which, if left untreated, can lead to permanent eye damage or blindness.
By ensuring that oxygen saturation levels in babies remain within clinically acceptable limits, clinicians believe they can lower
the incidence of ROP.
Conventional pulse oximetry has limitations that can reduce its effectiveness and the quality of patient care. In particular, when
using conventional pulse oximetry, oxygen saturation measurements can be distorted by motion artifact, or patient movement,
and low perfusion, or low arterial blood flow at the measurement site. Motion artifact can cause conventional pulse oximeters to
inaccurately measure the arterial blood oxygen saturation level, due mainly to the effect of movement-induced pulsations of
venous blood, which is at a lower oxygen saturation than arterial blood. Low perfusion can also cause conventional pulse
oximeters to report inaccurate measurements or, in some cases, no measurement at all. In addition, conventional pulse
oximeters cannot distinguish oxygenated hemoglobin from dyshemoglobin, including the most prevalent forms of
dyshemoglobins, carboxyhemoglobin and methemoglobin. As a result, conventional pulse oximeters may report falsely high
oxygen levels when these dyshemoglobins are present in the blood. Furthermore, conventional pulse oximetry readings can also
be impacted by bright light and electrical interference caused by the presence of electrical surgical equipment.
Independent research has shown that over 70% of oxygen saturation alarms outside the operating room are false when
conventional pulse oximetry is used. In the operating room, conventional pulse oximeters can fail to give accurate
measurements due to weak physiological signals or low perfusion. Manufacturers of pulse oximeters have attempted to address
some of these limitations with varying degrees of success. Some competing devices have attempted to minimize the observed
effects of motion artifact by repeating/freezing the last measurement before motion artifact was detected until a new, clean
signal is detected and a new measurement can be displayed. Other competing devices increase the averaging time during
motion, known as long averaging, in an attempt to reduce the observed effect of motion on their measurements. Still other
competing devices extend the audible alarm notification delay, which reduces awareness of inaccurate measurements. These
competing “motion tolerant” or “alarm management” techniques mask the limitations of conventional pulse oximetry. Several
published studies have demonstrated that these also contribute to increased occurrences of undetected true alarms, or events
where hypoxemia occurs but is not detected by the pulse oximeter.
Lastly, because conventional pulse oximetry cannot consistently measure SpO2 and pulse rate in the presence of motion artifact
or low perfusion, its use is limited in lower acuity settings in the hospital, such as in general care areas, where a hospital’s staff-
to-patient ratio is significantly lower and the staff have less tolerance for false alarms.
In addition, two-wavelength pulse oximeters cannot distinguish oxygenated hemoglobin from dyshemoglobin, including the
most prevalent forms of carboxyhemoglobin and methemoglobin. As a result of these dyshemoglobins, pulse oximeters will
report falsely high oxygen levels when they are present in the blood.
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Masimo Difference
Masimo SET® Pulse Oximetry
Masimo SET® was designed to overcome the primary limitations of conventional pulse oximetry by maintaining accuracy in the
presence of motion artifact, low perfusion and weak signal-to-noise situations. Our Masimo SET® platform, which became
available to U.S. hospitals in 1998, is the basis of our pulse oximetry products, and we believe represented the first significant
technological advancement in pulse oximetry since its introduction in the early 1980s. Masimo SET® utilizes five signal
processing algorithms, four of which are proprietary, in parallel to deliver high sensitivity and specificity in the measurement of
arterial blood oxygen saturation levels. Sensitivity is the ability to detect true alarms and specificity is the ability to avoid false
alarms. One of our proprietary processing algorithms, Discrete Saturation Transform®, separates the signal from noise in real
time through the use of adaptive filtering and an iterative sampling technique that tests each possible saturation value for
validity. Masimo SET® signal processing can therefore identify the venous blood and other “noise”, isolate them and extract the
arterial signal.
The performance of Masimo SET® pulse oximetry has been evaluated in more than 100 independent studies and thousands of
clinical evaluations. We believe that Masimo SET® is trusted by clinicians to safely monitor in excess of approximately 200
million patients each year and has been chosen as the primary pulse oximeter technology used by nine of the top ten hospitals
according to the 2020-2021 U.S. News & World Report Best Hospitals Honor Roll. Compared to conventional pulse oximeters,
during patient motion and low perfusion, Masimo SET® provides measurements when other pulse oximeters cannot,
significantly reduces false alarms (improved specificity), and accurately detects true alarms (improved sensitivity). Clinical
studies have shown that the use of Masimo SET® pulse oximetry, in conjunction with modified clinical protocols, has helped
clinicians reduce ROP in neonates and improve screening for newborns with critical congenital heart disease (CCHD). Clinical
studies have also shown a reduction in rapid response activations and ICU transfers when Masimo SET® is used to continuously
monitor patients on general wards. Additionally, researchers have found that the use of Masimo SET® is associated with
reduced ventilator weaning time and arterial blood gas measurements in the ICU.
Our pulse oximetry technology is contained on a circuit board which can be placed inside a standalone pulse oximetry monitor,
placed inside OEM multiparameter monitors, or included as part of an external “Board-in-Cable” solution that is plugged into a
port on an OEM or other device. All of these solutions use our proprietary single-patient-use or reusable sensors and cables. We
sell our products to end-users through our direct sales force and through certain distributors, as well as to our OEM partners, for
incorporation into their products. In 2013, we also began selling our pulse oximetry products in the consumer market.
To complement our Masimo SET® platform, we have developed a wide range of proprietary single-patient-use (disposable) and
multi-patient-use (reusable) sensors, cables and other accessories designed specifically to work with Masimo SET® software and
hardware. Our single-patient-use sensors offer several advantages over reusable sensors, including improved performance,
cleanliness, increased comfort and greater reliability. In addition, our neonatal adhesive sensors have been designed to exhibit
greater durability compared to competitive sensors. Although our technology platforms operate solely with our proprietary
sensor lines, our sensors have the capability to work with certain competitive pulse oximetry monitors through the use of
adapter cables.
Adhesive sensors are single-patient-use items, but the U.S. Food and Drug Administration (FDA) allows third parties to
reprocess pulse oximetry sensors. In response to some hospitals’ requests to implement environmentally friendly or “green”
products, we offer sensor reprocessing as well as sensor recycling programs.
Masimo rainbow SET® Platform
Since introducing Masimo SET®, we have continued to innovate by introducing noninvasive measurements that go beyond
arterial blood oxygen saturation and pulse rate. Our Masimo rainbow SET® platform leverages our Masimo SET® technology
and incorporates licensed rainbow® technology to enable real-time monitoring of additional noninvasive measurements. Our
rainbow SET® platform includes our rainbow SET® Pulse CO-Oximetry products, which we believe are the first devices cleared
by the FDA to noninvasively and continuously monitor additional hemoglobin species that were previously only measurable
using intermittent invasive procedures using multiple wavelengths of light.
In addition to SpO2, PR, perfusion index (Pi), Pleth Variability Index (PVi®) and respiration rate from the pleth (RRp®),
rainbow® Pulse CO-Oximetry has the unique ability to measure and distinguish oxygenated hemoglobins from the
dyshemoglobins that are incapable of transporting oxygen, carboxyhemoglobin (SpCO®) and methemoglobin (SpMet®). Besides
the ability to measure SpCO® and SpMet®, the Masimo rainbow SET® platform also allows for the noninvasive and continuous
monitoring of total hemoglobin concentration (SpHb®) as well as the monitoring of arterial oxygen saturation, in the presence of
carboxyhemoglobin and methemoglobin, known as fractional arterial oxygen saturation (SpfO2
™).
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Additionally, the rainbow SET® platform also allows for the calculation of Oxygen Content (SpOC™) and Oxygen Reserve
Index™ (ORi™). SpfO2
™ and ORi™ have received CE Marking, but are not currently available for sale in the U.S.
We believe that Masimo rainbow® Pulse CO-Oximetry products will become widely adopted for the noninvasive monitoring of
these measurements in the future. We also believe that the addition of acoustic respiration rate (RRa®), using our rainbow
Acoustic Monitoring® technology, will strengthen the clinical demand for noninvasive and continuous monitoring using our
rainbow® platform, especially in the growing general floor market.
Products with our MX circuit board contain our Masimo SET® pulse oximetry technology as well as circuitry to support
rainbow® measurements. At the time of purchase, or at any time in the future, our customers and our OEMs’ customers have the
option of purchasing additional rainbow® software measurements, which allow such customers to incrementally expand their
patient monitoring systems with a cost-effective solution. To date, over thirty-eight companies have released rainbow SET®
equipped products or announced rainbow® integration plans.
Measurements
SpHb®
Hemoglobin is the oxygen-carrying component of red blood cells (RBCs). Hemoglobin measurement is one of the most
frequent invasive laboratory measurements in the world, and is often measured as part of a complete blood count (CBC), which
measures multiple other blood components. A low hemoglobin status is a condition called anemia. As a chronic disorder,
anemia can be treated by iron supplements, diet changes or drugs that increase the production of RBCs. As an acute disorder
resulting from bleeding, anemia requires either stoppage of the bleeding or a blood transfusion in order to sustain organ
function and life.
SpHb® is available as a continuous or a spot-check measurement. Continuous SpHb® monitoring provides real-time visibility
into hemoglobin levels and the changes, or lack of changes, in hemoglobin levels, which can otherwise only be measured
through intermittent, invasive blood testing. SpHb® monitoring is not intended to be used as the sole basis for making diagnosis
or treatment decisions, but continuous SpHb® monitoring may help clinicians to trend hemoglobin in real time between invasive
blood samples.
SpOC™
The oxygen content of blood is a function of both oxygen saturation and hemoglobin levels. SpOC™ provides a more complete
picture of a patient’s oxygenation status by combining noninvasive and continuous measurements of both hemoglobin and
oxygen saturation levels into a single calculation.
SpCO®
Carbon monoxide (CO) is a colorless, odorless and tasteless gas that is undetectable by humans and is often unknowingly
inhaled from combustion fumes, or during fires by victims and first responders. CO poisoning is the leading cause of accidental
poisoning death in the U.S. and is responsible for up to 50,000 emergency department visits and 500 unintentional deaths
annually. CO, when bound to hemoglobin cells, prevents those cells from carrying oxygen. Elevated CO levels may cause
severe neurological damage, permanent heart damage or death. Screening for elevated CO levels in the emergency department
is critical, as symptoms of CO poisoning in patients may be misdiagnosed because such symptoms are similar to the flu.
CO levels in the blood can be measured using a laboratory CO-Oximeter, which requires a patient or a patient’s blood sample to
be transported to a hospital with laboratory CO-Oximetry capability. Additional delays occur if a patient needs hyperbaric
oxygen therapy, which often requires transfer to yet another medical center with hyperbaric capability. Outside the hospital,
laboratory measurements of carboxyhemoglobin are not considered feasible. Historically, this meant that CO levels in the blood
could not be assessed in environments in which such assessment would be very useful, such as in the home or as part of the
medical evaluation of first responders potentially exposed to CO at the scene of a fire.
While SpCO® is not intended to replace invasive carboxyhemoglobin tests, when used with other clinical variables, SpCO® may
help clinicians identify elevated CO levels and help determine additional test and treatment options. Multiple leading
emergency first responder associations, including the National Association of Emergency Medical Technicians, the National
Association of EMS Educators, the International Association of Fire Fighters and the International Association of Fire Chiefs,
have educated their members on the benefits of noninvasive CO measurement when exposure is suspected or when an
individual presents symptoms that could indicate elevated CO levels.
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SpMet®
Methemoglobin in the blood leads to a dangerous condition known as methemoglobinemia, which occurs as a reaction to some
common drugs used in hospitals and outpatient procedures. Methemoglobinemia reduces the amount of oxygen bound to
hemoglobin for delivery to tissues and forces normal hemoglobin to bind more tightly to oxygen, releasing less oxygen to the
tissues.
Methemoglobinemia may go unrecognized or be subject to delayed diagnosis, increasing risk to the patient. Commonly
prescribed drugs can introduce methemoglobin into the blood and cause methemoglobinemia. Some of the 30 drugs that are
known to cause methemoglobinemia include benzocaine, a local anesthetic routinely used in procedures ranging from
endoscopy to surgery; inhaled nitric oxide, routinely used in the Neonatal Intensive Care Unit; nitroglycerin, used to treat
cardiac patients; and dapsone, used to treat infections for immune-deficient patients such as Human Immunodeficiency Virus
(HIV) patients. Warnings, cautions and alerts regarding the clinical significance and prevalence of methemoglobinemia have
been generated by the FDA, the Veterans Administration, the Institute for Safe Medication Practices and the National Academy
of Clinical Biochemistry. The American Academy of Pediatrics recommends monitoring methemoglobin levels in infants who
receive nitric oxide therapy. While SpMet® is not intended to replace invasive methemoglobin tests, when used with other
clinical variables, SpMet® may help clinicians identify elevated methemoglobin levels and help determine additional test and
treatment options.
PVi®
PVi® is a measure of the dynamic changes in the Perfusion Index (Pi) that occur during the respiratory cycle. The calculation is
accomplished by measuring changes in Pi over a time interval where one or more complete respiratory cycles have occurred.
PVi® is displayed as a percentage. The lower the number, the less variability there is in Pi over a respiratory cycle. PVi® may
show changes that reflect physiologic factors such as vascular tone, circulating blood volume and intrathoracic pressure
excursions. When used with other clinical variables, PVi® may help clinicians assess fluid responsiveness in surgical and
intensive care patients who are mechanically ventilated and help determine other treatment options. In August 2020, PVi®
received FDA 510(k) clearance as a continuous, noninvasive, dynamic indicator of fluid responsiveness in select populations of
mechanically ventilated adult patients.
RPVi™
Rainbow® Pleth Variability Index (RPVi™) is a multi-wavelength version of PVi® that is designed to provide enhanced
specificity to changes in fluid volume compared to PVi®. Similar to PVi®, RPVi™ is displayed as a percentage and is calculated
by measuring changes in Pi over a time interval where one or more complete respiratory cycles have occurred. The lower the
number, the less variability there is in Pi over a respiratory cycle, which indicates more fluid in the body. RPVi™ has received
the CE Mark, but is not currently available for sale in the U.S.
RRp®
Respiration rate is defined as the number of breaths per minute. Changes in respiration rate provide an early warning sign of
deterioration in patient condition. A low respiration rate is indicative of respiratory depression and high respiration rate is
indicative of patient distress. Current methods of monitoring respiration rate include end tidal carbon dioxide (EtCO2)
monitoring, which requires a nasal cannula be inserted in the patient’s nose or a mask to be worn, and therefore has low patient
compliance; and impedance monitoring, which is considered unreliable and requires the placement of ECG electrodes on the
chest. RRp® allows clinicians to noninvasively and continuously measure and monitor respiration rate using a standard Masimo
SET® pulse oximetry sensor or rainbow® Pulse CO-Oximetry sensor. RRp® is determined by the variations in the
plethysmograph waveform due to respiration, although the measurement is not possible in all patients or conditions and may
not immediately indicate changes in respiration rate. RRp® has received the CE Mark, as well as FDA 510(k) clearance when
used in healthcare settings with the MightySat® Rx fingertip SET® pulse oximeter. RRp® is also available in the U.S. for use by
consumers for general health and wellness purposes as part of our MightySat® fingertip pulse oximeter.
In March 2020, RRp® received FDA 510(k) clearance for continuous RRp® monitoring of adult and pediatric patients with
Rad-97®, Radical-7® and Radius-7® Pulse Co-Oximeters®. With this clearance, both continuous and spot-check RRp® are now
available in the U.S. and supported in a variety of pulse oximetry sensors and configurations, including a non-cabled, tetherless,
wearable Radius PPG™.
RRa®
Our sound-based monitoring technology, rainbow Acoustic Monitoring® (RAM®), enables RRa® and provides continuous and
noninvasive monitoring of respiration rate. For patients requiring accurate and sensitive respiration rate monitoring, we believe
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that RRa® better detects pauses in breathing than respiration rate measurements from other technologies such as EtCO2
monitoring and RRp®. RRa® also provides an important visual indication of breathing through a displayed acoustic waveform.
Multiple clinical studies have shown that the noninvasive measurement of acoustic respiration rate provides as good or better
respiration rate monitoring accuracy as EtCO2 monitoring, and can reliably detect episodes of respiratory pause, defined as the
cessation of breathing for 30 seconds or more. When used with other clinical variables, RRa® may help clinicians assess
respiratory depression and respiratory distress earlier and more often to help determine treatment options and potentially enable
earlier interventions.
SpfO2™
™, pulse oximeters could only measure and display functional SpO2 oxygen saturation. Therefore,
Prior to our debut of SpfO2
when patients had elevated carboxyhemoglobin and/or elevated methemoglobin, the displayed functional SpO2 oxygen
saturation overestimated the actual oxygen saturation value. SpfO2
arterial oxygenation assessment in patients with elevated dyshemoglobins, common throughout the hospital and pre-hospital
setting, compared to functional oxygen saturation, and may also allow earlier interventions and more timely therapeutic
decisions. SpfO2
™ has received the CE Mark, but is not currently available for sale in the U.S.
™, or fractional oxygen saturation, allows more precise
ORi™
ORi™ provides real-time visibility to oxygenation status in moderate hyperoxic range, which we define as a patient’s oxygen
“reserve”. ORi™ can be trended and has optional alarms to notify clinicians of changes in a patient’s oxygen reserve. When this
technology is used with SpO2 monitoring, ORi™ may extend the continuous and noninvasive visibility of a patient’s oxygen
status into ranges previously unmonitored in this fashion. ORi™ may also be of value in patients receiving supplemental oxygen,
such as those in surgery, under conscious sedation or in the ICU, as ORi™ is represented as an “index” parameter with a unit-
less scale between 0.00 and 1.00. Furthermore, ORi™ may provide an advance warning of an impending hypoxic state, or an
indication of an unintended hyperoxic state, when evaluated in conjunction with the partial pressure of oxygen (PaO2). In this
way, ORi™ may assist in determining the need for proactive interventions to avoid hypoxia or unintended hyperoxia. ORi™ has
received the CE Mark, but is not currently available for sale in the U.S.
Other Noninvasive Measurements
Following the introduction of our rainbow SET® platform, we have continued to expand our technology offerings by
introducing additional noninvasive measurements and technologies to create new market opportunities in both hospital and non-
hospital care settings.
SedLine® Brain Function Monitoring
Brain function monitoring is most commonly used during surgery to help clinicians avoid over-titration and under-titration of
anesthesia and sedation. SedLine® brain function monitoring technology measures the brain’s electrical activity by detecting
EEG signals. In contrast to whole-scalp EEG monitoring, which is used for diagnostic purposes, this form of EEG monitoring is
often referred to as processed EEG monitoring or brain function monitoring. Brain function monitors display the patient’s EEG
waveforms, but these may be difficult for clinicians to interpret. With SedLine® technology, EEG signals are processed and
displayed as a single number called the Patient State Index (PSi), which gives a continuous quantitative indication of the
patient’s depth of anesthesia and sedation. SedLine® brain function monitoring technology also displays raw EEG waveforms,
the PSi trend and a Density Spectral Array view, which allows clinicians to compare EEG power in both sides of the brain over
time to facilitate the detection of asymmetrical activity and agent-specific effects on the EEG signal.
SedLine® brain function monitoring technology is available on Root® through the use of a Masimo Open Connect® (MOC-9®)
connectivity port. The Root® patient monitoring and connectivity platform integrates rainbow® and SET® measurements with
measurement technologies, such as SedLine®.
NomoLine® Capnography and Gas Monitoring
We offer a portfolio of capnography and gas monitoring products ranging from external “plug-in-and-measure” capnography
and gas analyzers, integrated modules, handheld capnograph and capnometer devices and capnography sampling lines.
Our NomoLine® capnography sampling lines are available in more than 40 configurations of airway adapter sets and cannulas
for use in a variety of clinical scenarios on both intubated and non-intubated adult, pediatric, infant and neonatal patients, in
both low and high humidity configurations, facilitating easy to use sidestream capnography and gas monitoring. These products
have the ability to measure multiple expired gases, such as carbon dioxide (CO2), nitrous oxide (N2O), oxygen (O2) and other
anesthetic agents. In addition, respiration rate is calculated from the CO2 waveform.
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These measurements are possible through either mainstream monitoring, which samples gases from a ventilated patient’s
breathing circuit, or sidestream monitoring, which samples gases from a breathing circuit in mechanically ventilated patients or
through a cannula or mask in spontaneously breathing patients. These capnography and gas measurements are standard-of-care
in many hospital environments, such as operating rooms and ICUs, during procedural sedation. NomoLine® capnography
sampling lines have received FDA 510(k) clearance.
O3® Organ Oximetry
O3® organ or Regional Oximetry, also known as tissue or cerebral oximetry, uses near-infrared spectroscopy (NIRS) to provide
continuous measurement of tissue oxygen saturation (rSO2) to help detect regional hypoxemia, or oxygen deficits in specific
tissues such as the brain, that pulse oximetry alone cannot detect under certain conditions. In addition, O3® sensors, in
conjunction with our Root® monitor, can automate the differential analysis of regional to central oxygen saturation derived from
SET® pulse oximeters. O3® monitoring involves applying O3® Regional Oximetry sensors to the forehead and connecting the
O3® MOC-9® module to a Root® monitor through one of its three MOC-9® ports.
O3® Regional Oximetry has received the CE Mark and FDA 510(k) clearance for use in adult and pediatric patients. In June
2019, we announced FDA 510(k) clearance for use of O3® in infant and neonatal patients. In August 2020, O3® Regional
Oximetry received 510(k) clearance for expanded use in monitoring somatic tissue oxygenation saturation in all patient
populations and monitoring relative changes in hemoglobin, oxyhemoglobin and deoxyhemoglobin in adult brains. With this
FDA 510(k) clearance, O3® Regional Oximetry is now indicated for use in both cerebral and somatic applications, both in the
U.S. and in CE Mark countries, for all patient populations.
Advanced Hemodynamic Monitoring Solutions
In December 2020, we acquired a majority ownership stake of LiDCO Group, PLC, which specializes in hemodynamic
monitoring solutions. With this acquisition, we will be able to provide clinicians with access to patients’ cardiac output, stroke
volume and systemic vascular resistance, which are used to assess preload and afterload, to help determine the current state of a
patient’s hemodynamic stability and whether any interventions are needed to optimize the delivery of oxygen to the tissues.
Hemodynamic monitoring solutions is also used to monitor the response to therapies such as vasopressors, inotropes and fluids.
The Masimo Hospital AutomationTM Platform
Patient SafetyNet™(1)
Patient SafetyNet™, our patient surveillance, remote monitoring and clinician notification solution, works in concert with our
bedside and ambulatory monitoring devices to facilitate the supplemental monitoring of the oxygen saturation, pulse rate,
perfusion index, hemoglobin, methemoglobin and respiration rate of up to 200 patients simultaneously from a single server.
Patient SafetyNet™ offers an intuitive and powerful user interface with trending, real-time waveform capability at a central
station, as well as remote clinician notification via pager, voice-over-IP phone or smart-phones. Patient SafetyNet™ also features
an Adaptive Connectivity Engine™ (ACE™) that enables two-way, HL-7 based connectivity to clinical/hospital information
systems. The ACE™ significantly reduces the time and complexity to integrate and validate custom HL-7 implementations, and
demonstrates our commitment to innovation that automates patient care with open, scalable and standards-based connectivity
architecture.
Patient SafetyNet™ Series 5000, along with Hospital Automation™ Connectivity, Iris® Gateway, Kite®, UniView™, UniView : 60™,
and MyView® through the Root® patient monitoring and connectivity platform, offers a new level of interoperability designed to
enhance clinician workflows and reduce the cost of care in a variety of hospital settings, including operating rooms and the
general care floors.
Patient SafetyNet™ Series 5000 with Iris® ports enables Root® to assimilate data from all devices connected to the patient,
thereby acting as a comprehensive in-room patient monitor and connectivity hub. Alarms and alerts for all devices are
seamlessly forwarded to the patient’s clinician and device data can be transferred to the patient’s electronic medical record
(EMR). The patient-centric user interface of the Patient SafetyNet™ Series 5000 displays near real-time data from all devices
with Kite®, providing a single unified dashboard of patient information. To simplify documentation of patient data, Root®
enables clinicians to easily verify and send patient vitals and Early Warning Scores (EWS), as well as all connected medical
device information data, to the EMR directly from Root®. An interface between the Patient SafetyNet™ Series 5000 and the
hospital admission, discharge and transfer (ADT) system allows clinicians to receive ADT information on Root® for positive
patient identification at the bedside.
______________
(1) The use of the trademark Patient SafetyNet™ is under license from the University HealthSystem Consortium.
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An interface between the Patient SafetyNet™ Series 5000 and the hospital admission, discharge and transfer (ADT) system
allows clinicians to receive ADT information on Root® for positive patient identification at the bedside. Clinicians can also
manually enter additional data on the Root® device, including temperature, blood pressure, level of consciousness, pain score
and urine output.
In a series of studies published between 2010 and 2020 by Dartmouth-Hitchcock Medical Center, clinicians using Masimo
SET® and Patient SafetyNet™ identified patient distress earlier, which decreased rapid response team activations, ICU transfers
and ICU days. Per these studies, over ten years, there were zero preventable deaths or brain damage due to opioid-induced
respiratory depression in monitored patients. In addition, we believe these studies demonstrated that the use of Masimo SET®
and Patient SafetyNet™ can result in significant cost savings.
Hospitals and other care centers may determine that they can reduce their costs by moving less critically ill patients from the
ICU to the general care floors where they can be continuously and accurately monitored in a more cost-effective manner. We
believe that the advanced performance of the Masimo SET® platform coupled with reliable, cost-effective and easy-to-use
wireless remote monitoring will allow hospitals to create continuous surveillance solutions on general care floors where patients
are at risk of avoidable adverse events and where direct patient observation by skilled clinicians is considered cost prohibitive.
Kite®
Kite® provides a supplemental display of data from a Masimo device on a compatible smart television and allows clinicians to
configure the display differently than that of the connected Masimo device. Kite® integrates into existing hospital infrastructures
where a supplementary display may be beneficial, such as the operating room.
UniView™
UniView™, an integrated display of real-time data and alarms from multiple Masimo and third-party devices, designed to reduce
clinician cognitive overload and improve patient safety. UniView™ promotes data sharing and team coordination among
multiple clinicians. UniView™ brings together data from a variety of sources – such as patient monitors, ventilators, anesthesia
gas machines, and IV pumps – and provides a supplementary display for them, clearly organized, on one or more large, central
monitors, so that all clinicians can simultaneously view and act upon the same, comprehensive real-time patient status and
historical trends.
UniView : 60™
UniView : 60™ uses the Masimo Hospital Automation™ platform to aggregate and display pertinent patient information on a
digital display just outside each patient’s room, allowing clinicians to familiarize themselves with the most relevant details of
each patient’s case at the door in 60 seconds or less before they see the patient.
Replica™
Replica™, working in conjunction with Patient SafetyNet™, is a mobile application for smart phones and tablets that provides for
supplemental remote monitoring and clinician notification. Replica™ was developed to allow clinicians to view continuous
monitoring data for multiple patients, as well as view and respond to alarms and alerts, all from their smart phones, regardless
of location.
MyView®
MyView® is a wireless, presence-detection system that enables the display of customized clinical profiles on Masimo devices,
such as Root®, Radical-7® and the Patient SafetyNet™ View Station. When a clinician approaches the device, a clinician-worn
MyView® badge signals the device to display a preselected set of parameters and waveforms tailored to the individual
clinician’s preferences.
MyView® gives clinicians the ability to receive and review medical device information in a manner that is most conducive to
optimizing their workflow, while the presence mapping data collected by all the Masimo devices can provide insight into how
clinicians spend time with patients. This provides nursing leadership and management the opportunity to examine analytical
data on patient-clinician interactions and optimize workflows across the unit, hospital and hospital system.
Patient SafetyNet™ Surveillance
Patient SafetyNet™ Surveillance is a software option that provides real-time video images of a patient’s room, including the
patient and connected monitoring devices, adding existing communication technology to central monitoring. Two-way audio is
available to allow the caregiver to listen to and communicate with the patient. The system utilizes the existing hospital
information technology network, precluding the installation of additional infrastructure.
8
Connectivity
Despite medical technology advances, the lack of device communication and integration creates risks to patient safety in
hospitals around the world. Without device interoperability, critical patient information can go unnoticed, leaving clinicians
unaware and patients at risk. Existing approaches for device interoperability require separate hardware, software and/or network
infrastructure, which can clutter the patient room, increase complexity, burden IT management and increase costs. To address
these challenges, we introduced Iris® connectivity in our Root® patient monitoring and connectivity platform. Iris® connectivity
enables multiple standalone third-party devices such as intravenous pumps (IV), ventilators, hospital beds and other patient
monitors to connect through Root®, enabling display, notification and documentation to the EMR through Masimo Patient
SafetyNet™.
The addition of Iris® connectivity to Root® and Patient SafetyNet™ provides multiple advantages to hospitals, such as allowing
standalone device information to be remotely viewed at a Patient SafetyNet™ view station, transmitted through notification
systems to clinicians regardless of location or sent to electronic health record systems. This may enhance patient assessment,
clinical workflows and decision support. In addition, bringing data from disparate devices together facilitates more integrated
patient care and provides a flexible and cost-effective platform, while avoiding installation of separate costly systems and
potentially reducing costs by leveraging existing network infrastructure.
Nasal High Flow Ventilation
With the acquisition of TNI medical AG (TNI®) in March 2020, we added TNI softFlow® technology to our product portfolio.
The TNI softFlow® technology provides respiratory support by generating a precisely regulated, stable high flow of room air or
a mix of room air and oxygen through the nose of the patient by means of thin nasal prongs. Controlled oxygen supply ensures
oxygenation while, at the same time, the respiratory airways are humidified. A stable air flow is essential for treating
hypoxemic and hypercapnic respiratory failure. Together with the TNI applicator, the TNI Flow generator provides a constant
air flow and in doing so, it is completely independent of external pneumatic systems. Due to this, the TNI softFlow® technology
is able to treat respiratory insufficiency and allows therapy at home in a manner that is as reliable and efficient as in the
hospital.
Neuromodulation Solution
Bridge™ is the first FDA-cleared, drug-free, non-surgical device to use neuromodulation to aid in the reduction of symptoms
associated with opioid withdrawal. Bridge™ can be used for patients experiencing opioid withdrawal symptoms, while
undergoing treatment for opioid use disorder when initiating treatment, transitioning to naltrexone or tapering off medication-
assisted treatment. In addition, we believe Bridge™ may reduce pain and addiction-related side-effects. Bridge™ is a small
electrical nerve stimulator device that contains a battery-powered chip and wires that are applied percutaneously around a
patient’s ear. It requires a prescription and is offered to qualified healthcare professionals with training. Bridge™ has been
granted a FDA 510(k) de novo classification.
Coronavirus-2019 (COVID-19) Response and Telehealth Solutions
Masimo SafetyNet™
In an effort to help clinicians and public health officials combat the COVID-19 pandemic, we developed the Masimo
SafetyNet™ solution. The Masimo SafetyNet™ solution provides continuous tetherless pulse oximetry and respiration rate
monitoring coupled with a patient surveillance platform. We announced the full market release of the Masimo SafetyNet™
solution in April 2020, and it is available worldwide.
In addition, we announced a partnership with Samsung Electronics America (Samsung) to make the Masimo SafetyNet™ Patient
App available on select Samsung smartphones, pre-installed and pre-configured.
Masimo SafetyNet-OPEN™
As the COVID-19 pandemic continues, companies and organizations worldwide struggle to find the appropriate balance
between reopening and keeping people safe by reducing the risk of infection. Masimo SafetyNet-OPEN™ was designed to help
businesses, governments and schools more responsibly manage employee and student health and safety during the COVID-19
pandemic. Masimo SafetyNet-OPEN™ helps address certain challenges of reopening responsibly and safely with a
comprehensive, flexible, and easy-to-deploy continuous monitoring solution that, in conjunction with clinical guidance from
partner hospitals, helps manage prevention, early identification, and recovery monitoring. As a global leader in noninvasive
patient monitoring technologies and advanced connectivity and automation solutions, we believe we are uniquely positioned to
provide organizations with tools to assist them in reopening safely.
9
Our Strategy
Our mission is to develop technologies that improve patient outcomes and reduce the cost of patient care. We intend to continue
to grow our business and improve our market position by pursuing the following strategies:
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Continue to Expand our Market Share in Pulse Oximetry. We grew our product revenue to $1,143.7 million in 2020 from
$738.2 million in 2017, representing a three-year compound annual growth rate of 15.7%. This growth can be attributed to
continued expansion of our core SET® pulse oximeter customer base, higher revenues from rainbow® Pulse CO-Oximetry,
NomoLine® capnography and other new technologies, and our expanding list of OEM partners. We supplement our direct
sales to hospitals and other low-acuity healthcare facilities through various U.S. and international distributors. Combined
sales through our direct and distributor sales channels increased to $958.8 million, or 83.8% of product revenue in 2020,
from $644.7 million, or 87.3% of product revenue, in 2017. As the healthcare industry shifts toward hospitals, physicians
and providers being rewarded by payers based on the quality and value of the services (as opposed to the volume of fee-
for-service transactions), we expect to see more hospitals gravitate towards technologies like Masimo SET® that have a
proven track record of improving patient care.
Expand the Pulse Oximetry Market to Other Patient Care Settings. Many patients die due to unintended opioid overdoses
after surgery while on general care floors. We believe the ability to continuously and accurately monitor patients outside of
critical care settings, including the general, medical and surgical floors of the hospital, is currently an unmet medical need
that has the potential to significantly improve patient care and increase the size of the pulse oximetry market.
In addition, we believe the ability of Masimo SET® to accurately monitor and address the limitations of conventional pulse
oximetry has enabled us, and will continue to enable us, to expand into non-critical care settings, and therefore,
significantly expand the market for our products. To further support our expansion into the general care areas, we market
Patient SafetyNet™, which enables continuous monitoring of up to 200 patients’ SpO2, PR, RRp® and with rainbow SET®,
noninvasive monitoring of hemoglobin and other advanced measurements. We believe that Patient SafetyNet™, when
combined with Masimo SET® pulse oximetry and RAM® or capnography, offers a clinically proven and cost-effective
approach to continuous post-operative monitoring. Outside of the hospital setting, patients could die due to unintentional
opioid overdose, even when opioids are being taken for short duration, such as after surgery, and as prescribed by a
physician. We believe that in the home setting, accurate monitoring with Masimo SET® may help reduce the risk of opioid
overdose by alerting family members and others when opioids have slowed a patient’s breathing and caused a significant
drop in oxygen saturation.
Expand the Use of rainbow® Technology in Hospital Settings. We believe the noninvasive measurements of rainbow® Pulse
CO-Oximetry (SpHb®, SpCO®, SpMet®, PVi®, SpfO2
measurements, provide an excellent opportunity to help our customers improve patient care while reducing their overall
cost of care.
™, SpOC™ and ORi™), RAM® and Halo Ion®, as well as future
Expand the Use of rainbow® Technology in Non-Hospital Settings. We believe the noninvasive measurement of
hemoglobin, SpHb®, creates a significant opportunity in markets such as physician offices, emergency departments and
blood donation centers; and the noninvasive measurement of carboxyhemoglobin, SpCO®, creates a significant opportunity
in the fire/alternate care market.
Expand the Use of Root® in Hospital Settings. We believe Root® represents a powerful new paradigm in patient monitoring
because it enhances our rainbow® and SET® measurements with multiple specialty parameters, including SedLine® brain
function monitoring, O3® Regional Oximetry, and NomoLine® capnography and gas monitoring, and enables open-
architecture connectivity in an integrated, clinician-centric hub. Our Hospital Automation™ integration platform for Root®
provides a conduit to the patient’s EMR for a range of clinical devices that may otherwise remain disconnected, and
therefore, unable to communicate their information. Hospital Automation™, in conjunction with the Iris® ports found on
Root®, offers clinical utility and flexibility by collecting device information from multiple sources and making it available
to clinicians in one networked place, akin to an airplane cockpit. Complementary innovations like the Radius-7® wearable,
wireless monitor foster an environment of safety without sacrificing patient mobility or comfort. Radius-7® provides
patients in medical-surgical units with mobility, allowing them to visit common areas and labs, all while being
continuously monitored around the clock. Root® is acuity-adaptable, meaning it can be configured for any care area, and is
competitively priced.
Expand Hospital Automation and Connectivity in Hospital Settings. We believe we can improve and automate the
continuum of care through our connectivity platform by reducing complexity by integrating data from multiple disparate
monitors and therapeutic devices through Root® and Iris® Gateway; by deploying decision support algorithms like Halo
ION®; by saving time through semi-automated and automated bedside vital signs measurement and documentation with
10
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Patient SafetyNet™; by keeping patients connected with their care providers through Masimo SafetyNet™ and Rad 97® when
they are discharged from hospitals; by improving data interpretation through adaptable and intuitive displays like
UniView™, UniView : 60™ and MyView®; and through remote monitoring via Patient SafetyNet™ and Replica™.
Utilize our Customer Base and OEM Relationships to Market Masimo rainbow SET®, O3®, SedLine® and Capnography
Products Incorporating Licensed rainbow® Technology. We currently sell rainbow SET® products through our direct sales
force and distributors. We include our MX circuit boards in our pulse oximeters and also sell them to our OEM partners.
Our MX circuit boards are equipped with circuitry to support rainbow® Pulse CO-Oximetry measurements that can be
activated at time of sale or through a subsequent software upgrade. We believe that, over time, the clinical need for these
measurements, along with our installed customer base, will help drive the adoption of our rainbow® Pulse CO-Oximetry
products.
Continue to Innovate and Maintain Our Technology Leadership Position. We invented and pioneered the first pulse
oximeter to accurately measure arterial blood oxygen saturation level and pulse rate in the presence of motion artifact and
low perfusion. In addition, we launched our rainbow SET® platform that enabled what we believe is the first noninvasive
monitoring of carboxyhemoglobin, methemoglobin and hemoglobin, as well as PVi®, all of which were previously only
available with invasive and/or complicated testing. Furthermore, we believe that our introduction of RRa® with RAM®
technology represented the first platform to enable noninvasive and continuous respiration monitoring through an easy-to-
use single-patient adhesive acoustic sensor. Finally, we believe that our recent introduction of ORi™ may provide advance
warning of an impending hypoxic state, or an indication of an unintended hyperoxic state.
Expand Masimo technology into the personal health consumer market. Our first general wellness and personal health
consumer market application was the MightySat®, a fingertip pulse oximeter with five important health and breathing
measurements that was targeted at sports, fitness and relaxation. These values include: O2, PR, RRp®, PI and PVI®. In 2020,
we launched four additional products for the consumer market.
We released the Radius T°™, a means to monitor a loved one’s fever in a hassle-free continuous manner; Masimo Sleep™, a
means to help you understand what is going on in your body that may be impacting your sleep; Bridge™, the first FDA-
cleared, drug-free, non-surgical device to use neuromodulation to aid in the reduction of symptoms associated with opioid
withdrawal; and finally, SafetyNet-OPEN™, a remote patient management solution for tracking key vital signs at the
organizational level.
Expand the Masimo product portfolio through strategic investments and acquisitions. In 2020, we successfully completed
three strategic acquisitions and an exclusive license agreement, all of which are currently being integrated into our product
portfolio. We continually evaluate new and exciting opportunities to expand our product portfolio. After we have applied
both our strategic and financial filters, we pursue the opportunities that we believe will add stockholder value, can be
successfully integrated within our business and show positive potential to achieve our short and long-term financial
forecasts.
We plan to continue to innovate and develop new technologies and products, internally and through our collaboration with
Cercacor, from whom we currently license certain rainbow® technologies. Our future growth strategy is also closely tied to our
focus on international expansion opportunities. Since 2007, we have continued to expand our sales and marketing presence in
Europe, Asia, Asia Pacific, Middle East, Canada and Latin America. We have accomplished this by both additional staffing and
adding or expanding sales offices in many of these territories. By centralizing a portion of our international operations,
including sales management, marketing, customer support, planning, logistics and administrative functions, in Neuchâtel,
Switzerland, we believe we have developed a more efficient and scalable international organization that is capable of being
even more responsive to the business needs of our international customers under this centralized management structure.
Our Products and Markets
We develop, manufacture and market patient monitoring technologies that incorporate a monitor or circuit board and sensors,
including proprietary single-patient-use and reusable sensors and patient cables. In addition, we offer remote alarm/monitoring
solutions, software and connectivity solutions.
The following chart summarizes our principal product components and principal markets and methods of distribution:
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Patient Monitoring Solutions:
Description:
Circuit Boards and Modules
(e.g., MX-5, MSX (shown below), MS-2011, MS-2013, MS-2040,
uSpO2®, SedLine®, ISA™ and IRMA™)
Use:
Distribution
Channel:
• Signal processing
apparatus for all
Masimo technology
platforms
• Mainstream and
sidestream
capnography and gas
monitoring
• Incorporated and
sold to OEM
partners who
incorporate our
circuit boards into
their patient
monitoring systems
Description:
Use:
Distribution
Channel:
Monitors and Devices
(e.g., Radical-7®, Rad-97® (both shown below), Rad-67®, Rad-57®, Root®,
Rad-8®, Rad-5®, Radius-7®, Rad-G™,, TIR-1™,)
• Sold directly to end-
users and through
distributors and in
some cases to our
OEM partners who
sell to end-users
• Bedside, handheld and
wireless monitoring
devices that
incorporate Masimo
SET® with and
without licensed
Masimo rainbow
SET® technology,
noninvasive blood
pressure and
capnography.
12
Description:
Use:
Distribution
Channel:
Patient Monitoring and Connectivity Platform
(e.g., Root®, Radius-7® and Root® with NIBP (shown below))
• Sold directly to end-
users and through
distributors
• Sold directly to end-
users and through
distributors
• Displays
measurements from
Masimo’s Radical-7®
(connected or hand
carried) or Radius-7®
(patient-worn)
• Provides additional
specialty
measurements from
Masimo or third-
party-developed
applications through
Masimo Open
Connect® (MOC-9®)
• Integrates noninvasive
blood pressure
(NIBP) and
temperature
• Connects third-party
devices such as IV
pumps, ventilators,
beds and other patient
monitors to automate
data transfer to the
EMR
Description:
Use:
Distribution
Channel:
Sensors
(e.g., SET®, rainbow® Pulse CO-Oximetry, rainbow Acoustic
Monitoring® Sensors, RD SedLine™, TFA-1®, RD SET®, RD rainbow
SET®, O3® Pediatric, RD rainbow Lite SET®, rainbow® DCI®-Mini,
Centroid™, Radius PPG™ (last six shown below))
• Sold directly to end-
users and through
distributors and to
OEM partners who
sell to end-users
• Extensive line of both
single-patient,
reusable and rainbow®
sensors
• Patient cables, as well
as adapter cables that
enable the use of our
sensors on certain
competitors’ monitors
13
Description:
Use:
Distribution
Channel:
Sensors - (Continued)
Description:
Use:
Distribution
Channel:
Line Filters and Mainstream Adapters for Capnography and Gas
Monitoring
(e.g., NomoLine® Cannula with Radius PCG™ Capnograph with
disposable adapter, IRMA CO2, IRMA AX+, and EMMA® (shown
below))
• Line of disposables to
measure gas
parameters using
mainstream and
sidestream
capnography
• Sold directly to end-
users and through
distributors and to
OEM partners who
sell to end-users
14
Description:
Use:
Distribution
Channel:
Proprietary Measurements
(e.g., SpHb®, SpCO®, SpMet®, PVi®, RRa®, RRp®, ORi™, 3D Alarms®
and Adaptive Threshold Alarm)
• rainbow®
measurements and
other proprietary
features
• Sold directly to end-
users and through
OEM partners who
sell to new and
existing end-users
Description:
Use:
Distribution
Channel:
Hospital Automation™ and Connectivity Suite
(e.g., Iris® Connectivity, Iris® Gateway, Patient SafetyNet™,
UniView™, and UniView : 60™, Replica™, Iris® Analytics, and Halo
ION® (shown below))
• Sold directly to end-
users
• Software and hardware
enabling third-party
devices to connect
through Patient
SafetyNet™ and to
document data in the
EMR
15
Description:
Use:
Distribution
Channel:
Hospital Automation and Connectivity Suite - (Continued)
16
Description:
Use:
Distribution
Channel:
Hospital Automation and Connectivity Suite - (Continued)
• Sold directly to end-
users
• Network-linked, wired
or wireless, multiple
patient floor
monitoring solutions
• Standalone wireless
alarm notification
solutions
• Home-based patient
engagement and
remote data capture
platform
• Sold directly to end-
users and through
distributors
Description:
Use:
Distribution
Channel:
Nasal High Flow Ventilation
(e.g. TNI softFlow® 50 and TNI softFlow® junior(shown below))
• Intensive care and
inpatient care in
clinics as well as
home care
• Sold directly to end-
users and through
distributors
17
Description:
Use:
Distribution
Channel:
Home Wellness and Monitoring
(e.g. Radius T°™, Masimo Sleep™, MightySat® with PVi® and RRp®, and
iSpO2
®)
• Sold directly to
consumers through
the Masimo
Personal Health
website and
through consumer
retailers
• Disposable
thermometers,
disposable fingertip
sensors for sleep
monitoring, fingertip
pulse oximeter, or
pulse oximeter cable
and sensor for use
with an iPhone, iPad,
iPod touch and select
Android smart phones
Circuit Boards
Masimo SET® MS Circuit Boards. Our Masimo SET® MS circuit boards perform all signal processing and other pulse oximetry
functions incorporating the Masimo SET® platform. Our MS circuit boards are included in our proprietary monitors or sold to
our OEM partners for incorporation into their monitors. Once incorporated into a pulse oximeter, the MS circuit boards perform
all data acquisition processing and report the pulse oximetry measurements to the host monitor. The circuit boards and related
software interface directly with our proprietary sensors to calculate SpO2, PR and Pi. Our latest MSX family of circuit boards
provide Masimo SET® SpO2, PR, and Pi in a variety of small form factors with a typical power consumption of only 45
milliwatts.
® Cable/Board. Our SET® technology-in-a-cable contains the low power (MS-2040) technology in a reduced size,
uSpO2
allowing it to be embedded into patient cables as part of the sensor connector. This allows the uSpO2
® cable/board to interface
with monitoring devices externally via an existing communications port in instances where internal integration of a traditional
Masimo SET® technology board is not feasible. The uSpO2
Motion and Low Perfusion™ pulse oximetry found in our other products, with a typical power consumption of less than 45
milliwatts.
® cable/board provides the same Masimo SET® Measure-through
Masimo rainbow SET® MX Circuit Boards. Our circuit board is the foundation for our Masimo rainbow® Pulse CO-Oximetry
and rainbow Acoustic Monitoring® platform, utilizing certain technology that is licensed from Cercacor. The MX circuit boards
offer the full functionality of our rainbow® technology, which includes noninvasive measurements for SpHb®, SpOC™,
SpCO®, SpMet®, PVi® and RRa®, in addition to providing Measure-through Motion and Low Perfusion™ SET® pulse oximetry
measurements SpO2, PR and Pi measurement capabilities of Masimo SET® pulse oximetry. Customers can choose to purchase
additional measurements beyond SpO2, PR and Pi at the time of sale or at any time in the future through a field-installed
software upgrade.
Our MX-5 OEM circuit board deploys a technology platform that utilizes approximately half the power of previously available
rainbow® circuit boards to deliver rainbow® Pulse CO-Oximetry noninvasive measurement performance. In addition to its lower
power demands, the MX-5 adds dynamic power utilization to scale the MX-5’s power draw based upon the combination of
parameters being monitored to permit even longer battery run-times.
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Monitors / Devices
Root®. Root® is a powerful patient monitoring and connectivity platform that integrates our rainbow® and SET® measurements
with multiple additional specialty measurements through MOC-9® open architecture technology in an integrated, clinician-
centric platform. The first MOC-9® technologies developed by Masimo were SedLine® brain function monitoring, NomoLine®
capnography and gas monitoring and O3® Regional Oximetry. Root® with NomoLine® capnography, SedLine® brain function
monitoring, wireless communication and Iris® connectivity for third-party medical devices has received FDA 510(k) clearance.
O3® Regional Oximetry has received the CE Mark and FDA 510(k) clearance.
Early Warning Signs (EWS) for Root® aggregates information from multiple vital signs and clinical observations to generate a
score that represents the potential degree of patient deterioration. There are several EWS protocols, such as the Pediatric Early
Warning Score (PEWS), Modified Early Warning Score (MEWS) and National Early Warning Score (NEWS). These various
scores require vital signs contributors such as oxygen saturation, pulse rate, respiration rate, body temperature and systolic
blood pressure along with contributors input by clinicians, such as level of consciousness, use of supplemental oxygen and
urine output. The weighting and number of contributors differ depending upon which EWS protocol is used. Root® can be
customized for various predefined EWS protocols, or hospitals can configure their own set of required contributors, and their
relative weights, to create an EWS unique to their care environment.
Our MOC-9® partnerships enable third parties to utilize Root®’s open architecture and built-in connectivity to independently
develop, obtain regulatory approvals, and commercialize their own external MOC-9® module. Alternatively, third parties can
develop Masimo Open Connect Control™ (MOC-C™) applications for Root® using the MOC-9® software development kit (SDK).
While we support the development efforts of our MOC® partners as needed, and help increase awareness of the availability of
non-Masimo MOC-9® modules and MOC-C™ applications, our MOC-9® partners use their existing distribution channels to sell
their MOC-9® modules or MOC-C™ applications to customers.
Pathway™, a newborn oxygenation visualization mode for Root®, provides clinicians with a way to visualize a hospital’s
recommended resuscitation protocol for a newborn’s oxygen saturation while continuously monitoring SpO2 and PR during the
first ten minutes after birth. Use of Pathway™ is intended to help streamline clinician workflow and improve protocol adherence
during this critical period.
Radical-7®. The Radical-7® Pulse CO-Oximeter® is a wireless touchscreen device that incorporates our MX circuit board to
allow upgradeable rainbow SET® measurements and offers three-in-one capability. The Radical-7® can be used as:
•
•
•
•
a standalone device for bedside monitoring;
a detachable, battery-operated handheld unit for easy portable monitoring;
an integrated device as part of the Root® patient monitoring and connectivity platform; and
a monitor interface via SatShare®, a proprietary technology allowing our products to work with certain competitor products,
to upgrade existing conventional multiparameter patient monitors to Masimo SET® while displaying rainbow®
measurements on the Radical-7® itself.
With its wide-ranging flexibility, Radical-7® can continuously monitor a patient from the ambulance, to the emergency room, to
the operating room, to the general floor and beyond, until the patient is discharged. Radical-7® delivers the accuracy and
reliability of Masimo rainbow SET® with multi-functionality, ease of use and the availability of measurement upgrades for
existing monitors.
Radius-7®. Radius-7® for the Root® patient monitoring and connectivity platform is the first and only wearable, wireless monitor
with rainbow SET® technology, enabling continuous monitoring and early identification of clinical deterioration while still
allowing patients the freedom of movement. With Bluetooth® and Wi-Fi wireless connectivity, Radius-7® with Root® can alert
clinicians at the bedside or remotely, through Masimo Patient SafetyNet™, of critical changes in a patient’s SpO2 and PR, even
during states of motion and low perfusion, as well as RRa® and additional rainbow SET® measurements. Radius-7® with Root®
has received both CE Mark and FDA 510(k) clearance.
Radius PPG™. Radius PPG™ is a tetherless sensor solution powered by Masimo SET® that represents a significant breakthrough
in patient monitoring. Radius PPG™ eliminates the need for a cabled connection to a pulse oximetry monitor, allowing patients
to move freely and comfortably while still being continuously monitored reliably and accurately. Via wireless connection,
measurements are displayed on Masimo host devices or third-party multi-parameter monitors with integrated Masimo
technology. Coupled with the proven benefits of Masimo SET® Measure-through Motion and Low Perfusion™ pulse oximetry,
Radius PPG™ is ideally suited for use anywhere patients can benefit from mobility. Radius PPG™ is also available as part of the
Masimo SafetyNet™ remote patient management solution designed for at home use.
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Radius VSM™. Radius VSM™ is a wearable, tetherless vital signs monitor that provides the ability to monitor a wide variety of
physiological measurements, including continuous SET® Pulse Oximetry, noninvasive blood pressure, body temperature,
respiration rate and ECG. Designed on a wearable, modular platform, Radius VSM™ features can be scaled to accommodate
surges in patient volume and for use across the continuum of patient care, based upon each patient’s needs and level of acuity.
For additional versatility, Radius VSM™ can operate as a self-contained device or be used wirelessly with Masimo bedside
monitors and patient surveillance systems, automating the integration of expanded monitoring and the transfer of continuous
monitoring data to EMRs. Radius VSM™ has received the CE Mark, and has been released in limited European markets.
Radius PCG™. Radius PCG™ is a portable-real-time capnograph with wireless Bluetooth® connectivity. Radius PCG™ connects
with Root® to provide seamless, tetherless mainstream capnography for patients of all ages. Radius PCG™ has received the CE
Mark.
Rad-97®. Rad-97® is a versatile standalone Pulse CO-Oximeter® that features a 1080p HD color display with user-friendly multi-
touch navigation and Masimo SET® Measure-through Motion and Low Perfusion™ pulse oximetry technology that can be used
to measure SpO2, PR, PVi® and Pi rainbow SET® measurements such as SpHb®, SpOC™, SpCO®, SpMet® and RRa® can also be
enabled. Rad-97® is the smallest Masimo bedside device currently capable of monitoring the full rainbow SET® platform. An
optional integrated camera allows remote clinicians to interact with patients at home over live audio and video. With its built-in
enterprise Wi-Fi capability, Rad-97® has the ability to connect wirelessly from the home to supplemental patient monitoring
systems, including Patient SafetyNet™, facilitating automatic data transfer to hospital EMR systems. Rad-97® has received the
CE Mark and FDA 510(k) clearance, including an additional Rad-97® configuration with integrated NomoLine® capnography.
Rad-97® has also received FDA 501(k) clearance for home use, bringing hospital-grade technology to the home in a single
integrated device that is a monitoring, connectivity and telecommunications hub.
Rad-97® NIBP. Rad-97® NIBP includes an integrated port that allows clinicians to connect a blood pressure cuff inflation hose
directly to the device. Designed for reliability and patient comfort, Rad-97® NIBP is compatible with both disposable and
reusable cuffs for a variety of patient types. Rad-97® NIBP enables clinicians to measure arterial blood pressure for adult,
pediatric and neonatal patients, with three measurement modes: spot-check, automatic interval (which measures blood pressure
routinely, at a desired interval) and stat interval (which continually measures blood pressure for a desired duration).
Rad-67®. Rad-67®, our handheld Pulse CO-Oximeter®, is a compact, portable spot-check device that offers Masimo SET®
Measure-through Motion and Low Perfusion™ pulse oximetry technology with SpO2, PR and Pi measurements and upgradeable
rainbow® noninvasive monitoring technology for SpHb®. With the universal reusable rainbow® DCI®-mini sensor, Rad-67®
features Next Generation SpHb® technology. The Rad-67® with next generation SpHb® technology has received the CE Mark
and FDA 510(k) clearance.
Rad-57®. Rad-57® is a fully featured handheld Pulse CO-Oximeter® that provides continuous, noninvasive measurement of
SpO2, PR, PVi® and Pi with the ability to upgrade to SpHb®, SpCO®, SpMet® and SpOC™. Its rugged and lightweight design
makes it applicable for use in hospital and field settings, specifically for fire departments and emergency medical service units.
Rad-8®. Rad-8® is a bedside pulse oximeter featuring Masimo SET® Measure-through Motion and Low Perfusion™ pulse
oximetry technology with SpO2, PR and Pi measurement, but without the ability to update to rainbow® technology. Rad-8® is an
affordable, low-cost design with a streamlined feature set.
Rad-5® & Rad-5v®. Rad-5® and Rad-5v® were Masimo’s first dedicated lightweight, user-configurable, handheld pulse oximeters
to provide Masimo SET® Measure-through Motion and Low Perfusion™ technology with SpO2, PR and Pi measurements, but
without the ability to upgrade to rainbow® technology.
Rad-G™. Rad-G™ is a low-cost, rugged, handheld pulse oximetry device with a rechargeable battery and LCD display. It uses
Masimo SET® Measure-through Motion and Low Perfusion™ pulse oximetry technology to measure SpO2, PR, Pi, PVi® and
RRp®. Rad-G™ was designed primarily for use in pneumonia screening, spot-checking, and continuous measurement of SpO2
and RRp® in low-resource settings. Rad-G™ has received FDA 510(k) clearance.
Pronto®. Pronto® is a handheld noninvasive multiparameter testing device that uses Masimo rainbow SET® technology to
provide spot-check measurement of SpO2, PR, Pi and SpHb® in both hospitals (i.e., emergency departments) and remote settings
such as physician offices.
SatShare®. Our SatShare® technology enables a conventional monitor to receive continuous measurement updates using Masimo
SET® through a simple cable connection from the back of Radical-7® to the sensor input port on the conventional monitor. No
software upgrades or new modules are necessary for the upgrade, which can be completed in minutes.
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SatShare® allows hospitals to standardize the technology and sensors used throughout the hospital while allowing them to gain
the more accurate monitoring capabilities using Masimo SET®, as well as other additional functionality, in a cost-effective
manner. SatShare® technology has facilitated many hospital-wide conversions of previously installed competitor monitors to
Masimo SET®.
In addition, Masimo rainbow SET® measurements such as SpHb® are available to clinicians on the Radical-7® itself while the
device is being used in SatShare® mode.
MightySat® Rx. MightySat® Rx is a fingertip pulse oximeter that incorporates Masimo SET® Measure-through Motion and Low
Perfusion™ pulse oximetry technology, which measures and displays SpO2, PR and Pi with the option to add PVi® and RRp®.
The MightySat® Rx has received the CE Mark and FDA 510(k) clearance. The RRp® measurement on the MightySat® Rx
fingertip pulse oximeter has received the CE Mark. MightySat® Rx also received FDA 510(k) clearance of spot-check RRp®
measurement.
® Rx. The iSpO2
® Rx pulse oximeter combines a fingertip sensor, cable and pulse oximeter in a lightweight, portable
iSpO2
device that connects directly to a smart device for displaying measurements. iSpO2
Motion and Low Perfusion™ pulse oximetry technology to measure SpO2, PR and Pi. The Masimo Professional Health app,
available for both iOS® and Android® devices, allows clinicians to track, trend and download patient data. iSpO2
received the CE Mark, but is not currently available for sale in the U.S.
® Rx uses Masimo SET® Measure-through
® Rx has
SedLine® MOC-9® Module. Our SedLine® MOC-9® module for Root® is an EEG-based continuous brain function monitor that
provides information about a patient’s response to anesthesia. Our Next Generation SedLine® enhances PSi to make it less
susceptible to EMG interference and to improve performance in low-power EEG cases.
O3® MOC-9® Module. Our O3® MOC-9® module for Root® uses NIRS to detect regional hypoxemia by continuously measuring
tissue oxygen saturation (rSO2), automating the differential analysis of regional to central oxygen saturation.
NomoLine® Capnography and Gas Monitoring. Our gas analyzers, IRMA™ and ISA™, are available through Root® MOC-9®
modules via OEM integration or through an emergency capnometer (EMMA®). These analyzers enable our customers to benefit
from CO2, N2O, O2 and anesthetic agent monitoring in many hospital environments.
TIR-1™. Our non-contact clinical-grade infrared thermometer with Bluetooth® connectivity provides forehead temperature
measurement across all patient populations. The non-contact module reduces the risk for patient cross-contamination while also
reducing costs and waste by eliminating the need for probe covers and other disposables. The Bluetooth® technology automates
data transfer to a connected Masimo device, such as Root®, enabling streamlined integration into the bedside device and EMR.
Sensors
Sensors and Cables. We have developed one of the broadest lines of single-patient-use (disposable), reusable and rainbow®
sensors and cables. In total, we have over 150 different types of sensors designed to meet virtually every clinical need. Masimo
SET® sensors are uniquely designed to reduce interference from physiological and non-physiological noise. Our proprietary
technology platforms operate only with our proprietary sensor lines. However, through the use of adapter cables, our sensors
can be connected to certain competitor pulse oximetry monitors. We sell our sensors and cables to end-users directly or through
our distributors and OEM partners.
Our single-patient-use sensors offer several advantages over reusable sensors, including improved performance, cleanliness,
increased comfort and greater reliability. Our reusable sensors are primarily used for short-term, spot-check monitoring.
RD SET®, RD rainbow SET®, and RD rainbow Lite SET®. Our RD family of sensors is designed to maximize patient comfort,
optimize clinician workflow and reduce material waste. RD sensors are lightweight with no moving parts and a flat, soft cable
with smooth edges. RD sensors are available in fold-over and wrap-around styles for a variety of patient types and clinical
scenarios.
SofTouch™ Sensors. SofTouch™ sensors are designed with less or no adhesive for patients with compromised skin conditions.
SofTouch™ sensors are available as single-patient sensors for newborns and multi-site reusable sensors for pediatrics and adults.
Trauma and Newborn Sensors. We have developed two specialty sensor lines, for trauma and resuscitation situations, as well as
for newborns. These sensors contain an identifier that automatically sets the pulse oximeter to its maximum sensitivity and
fastest settings, and allow for quick application, even in wet and slippery environments. Additionally, we introduced low-profile
sensors LNCS® and M-LNCS® Neo, NeoPt and Inf sensors to monitor oxygen saturation in newborns. These sensors are smaller
and thinner, making them significantly more comfortable for patients and easier for clinicians to apply.
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Blue® Sensors. We believe our Blue® Sensors are the first FDA-cleared sensors to accurately monitor arterial blood oxygen
saturation levels in cyanotic infants and children with abnormally low oxygen saturation levels.
E1® Ear Sensor. We believe that our E1® Ear Sensor is the first single-patient-use ear sensor that can be placed securely in the
ear conchae, allowing clinicians to combine Masimo SET® performance and central monitoring to provide quick access and
responsive assessment of oxygenation. The E1® Ear Sensor is designed for field emergency medical services utilization.
TFA-1® Adhesive Forehead Sensor. We designed our TFA-1® forehead sensor for hospitals desiring forehead monitoring using a
disposable sensor. TFA-1® combines Masimo SET® performance with quick access and responsive oxygenation assessment.
rainbow® Sensors. We developed these proprietary, multi-wavelength sensors for use with our rainbow® Pulse CO-Oximetry
products. In contrast to traditional sensors that only have the capability to monitor SpO2, and PR, our rainbow® sensors can also
monitor SpCO®, SpMet® and SpHb®. Our licensed rainbow SET® sensors are the only sensors that are compatible with our
licensed rainbow SET® products. Rainbow® sensors are available in single-patient-use, and reusable spot-check sensor types.
The rainbow® DCI®-mini is the first noninvasive hemoglobin spot-check sensor for infants and small children (weight 3 to 30
kg). Paired with our handheld Pronto® or Rad-67® devices, the rainbow® DCI®-mini sensors are designed to help clinicians
quickly and easily spot-check hemoglobin levels in infants and small children, which may facilitate the identification of anemia.
When paired with Rad-67®, the rainbow® DCI®-mini enables Next Generation SpHb® measurements. The rainbow® DCI®-mini
has received the CE Mark in Japan and Europe, but is not currently available for sale in the U.S. The rainbow® Super DCI®-mini
sensor allows for the ability to measure SpHb®, SpCO®, SpMet® and SpO2 on the same noninvasive reusable sensor. The
rainbow® Super DCI®-mini has received the CE Mark in Europe and Ministry of Health, Labour and Welfare (MHLW) approval
in Japan, but is not currently available for sale in the U.S.
rainbow Acoustic® Sensors. We believe we were the first to market a continuous respiration rate monitoring technology based
on an acoustic sensor placed on the patient’s neck. Our rainbow Acoustic® sensors detect the sounds associated with breathing
and convert the sounds into continuous respiration rate using proprietary signal processing that is based on Masimo SET®.
RAS-45, our single-use acoustic respiration sensor for RAM®, is designed to facilitate placement on and improve attachment to
the neck. RAS-45 operates with Masimo MX circuit boards to measure RRa® and display an acoustic respiration wave form.
Like the RAS-125c sensor, RAS-45 operates with Masimo MX technology boards to measure RRa®, display the acoustic
respiration wave form and optionally allow clinicians to listen to the sound of breathing. Both the RAS-45 and RAS-125c are
available in CE marked countries and the U.S. for adult and pediatric patients who weigh more than 10 kg. RAS-45 has
received FDA 510(k) clearance and the CE Mark.
SedLine® Sensor. Used with the SedLine® MOC-9® module for the Root® patient monitoring and connectivity platform, the
SedLine® sensor is a disposable sensor that collects EEG data for our SedLine® monitor. RD SedLine™ sensors feature a
repositioned, color-coded sensor-cable connection that lies comfortably on the patient’s head and soft foam pads to reduce
discomfort upon application to the patient.
O3® Sensors. Used with the O3® MOC-9® module for the Root® patient monitor, each O3® sensor contains four light-emitting
diodes and two detectors to continuously measure rSO2. Our pediatric application of O3® regional oximetry with the O3®
pediatric sensor for both adult patients and pediatric patients weighing more than 5 kg (11 lbs) and less than 40 kg (88 lbs) has
received FDA 510(k) clearance. O3® sensors for use with infants and neonatal patients has also received FDA 510(k) clearance.
Centroid™. Centroid™ is a wearable wireless patient orientation, activity and respiration rate sensor. Centroid™ helps clinicians
monitor a patient’s position to avoid preventable pressure ulcers and can alert clinicians to sudden movements such as fall-like
events. In addition, Centroid™ detects chest movements to continuously provide respiration rate, providing clinicians with
additional data that may inform care decisions. Centroid™ pairs with the Root® platform using Bluetooth® to track a patient’s
posture, orientation and activity. The data transmitted by Centroid™ can be displayed in various formats on Root®, giving
clinicians multiple ways to assess adherence to protocols regarding tissue stress and to tailor care to the specific needs of each
patient.
Proprietary Measurements and Features
All of our monitors shipped since January 2006, including Radical-7® and certain future OEM products, that incorporate the
MX circuit board will allow purchases of software for rainbow® measurements, as well as other future measurements. Our
current rainbow® measurements include SpHb®, SpCO®, SpMet®, SpOC™ ORi™, Pi, PR, PVi®, RPVi™, RRp®, SpfO2
™ and RRa®.
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Eve™. Eve™ is our newborn screening software application for our Radical-7® Pulse CO-Oximeter®, is designed to help clinicians
more effectively and efficiently screen newborns for CCHD. In the Radical-7® Pulse CO-Oximeter®, Eve™ automates the
screening steps with animated instruction, including sensor application, measurement selection and screening result
determination. Eve™ is intended to provide consistent application of the screening protocol to reduce method-and operator-
induced variability and improve efficiency by automating the data capture and comparison between readings. Eve™ has received
CE Marking, but is currently not available for sale in the U.S.
X-Cal®
Sensor and cable failures can prevent pulse oximeters from providing the patient safety advantages that continuous pulse
oximetry monitoring is intended to provide. Our X-Cal® technology enhances patient safety and improves clinician efficiency
by preserving system quality, performance and reliability and reducing the chances of bad or inferior sensors and cables being
used on patients. X-Cal® technology enhances the benefits of Masimo’s pulse oximetry by incorporating the means to track the
expected monitoring life of our sensors and cables and provides appropriate user messaging on the host monitor.
X-Cal® addresses three common problems experienced by clinicians using an integrated Masimo system, including:
•
Patient safety may be compromised by using counterfeit Masimo sensors and cables because they are not produced with
comparable components, do not provide proper shielding from ambient interferences, create electrostatic noise caused by
motion, do not have our quality and performance controls, and are not tested or warranted to work within a Masimo
system;
• We design our sensors and cables to last well beyond their warranty period and customer feedback indicates our sensors
and cables last significantly longer than competing products, but cable and sensor reliability may still be compromised
when used beyond their intended life, affecting patient care and causing clinicians and biomedical engineers to spend time
troubleshooting intermittent cable and sensor issues; and
• We believe that third-party reprocessed pulse oximetry sensors introduce challenges in the clinical environment due to
potential quality issues. In fact, we believe that most third-party reprocessed sensors do not indicate that they are capable of
performing in the same conditions as Masimo Measure-through Motion and Low Perfusion™ sensors or in neonatal
applications, key performance requirements available with Masimo SET® sensors. To the best of our knowledge, no third-
party company has attempted to reprocess rainbow SET® sensors.
The Masimo Hospital Automation Platform and Iris® Connectivity
Masimo Patient SafetyNet™. Patient SafetyNet™ is a supplemental remote monitoring and clinician notification system that
routes bedside-generated alarms through a server to a qualified clinician’s handheld paging device in real-time. Each system
can support up to 200 bedside monitors and can either be integrated into a hospital’s existing IT infrastructure or operate as a
stand-alone wireless network.
Iris®. Iris® connectivity ports on Root®. allows third-party devices, such as intravenous pumps and ventilators, to connect to
Root® enabling display of measurements and notification on the Root® monitor, with the ability to document results in the EMR
through Masimo Patient SafetyNet™.
Iris® Gateway. Iris® Gateway bridges the gap between device data generated at the patient bedside and documentation in patient
data management systems by automatically transferring data from medical devices to EMRs, improving productivity and
reducing the likelihood of transcription errors.
Iris® Device Management System (Iris® DMS). Iris® DMS is an automation and connectivity solution designed to streamline
management of Masimo devices used throughout a hospital system. Iris® DMS is designed to address the challenges of
maintaining many patient monitors in a complex hospital environment. Iris® DMS securely connects over a hospital’s existing
network to all connected Masimo devices to provide an easy-to-use dashboard that allows biomedical engineers and IT
professionals to view detailed diagnostic information about connected Masimo devices at a glance, without the need to
physically interact with each device. Iris® DMS supports remote software upgrades to ensure all devices stay up to date, easily
and efficiently.
Analytics and Reporting
Trace™ is the first data visualization and reporting software compatible with the full capabilities of the Root® patient monitoring
and connectivity platform, including Radical-7® and Radius-7® Pulse CO-Oximeters®, Root® with integrated noninvasive blood
pressure and temperature, and connected MOC-9® modules such as SedLine® brain function monitoring, ISA™ and ISA™ OR+
capnography, and O3® Regional Oximetry. Trace™ can create insightful, easy-to-read patient reports that include parameter
23
trends, histograms, event annotations, and key statistics. Trace™ can communicate with Masimo devices via high-speed wired or
wireless connections, with the ability to transfer up to 96 hours of patient data.
Iris® Analytics is a supplemental tool that works in conjunction with the Masimo Hospital Automation™ platform to generate
customizable alarm analytics, individual patient reports, and even hospital-wide reports across the continuum of care.
Halo ION®. Halo ION® is a comprehensive, scalable and customizable continuous early warning score. Halo ION® allows
clinicians to aggregate trend data from as few as three physiological parameters (for example, SpO2, PR and PI), and as many as
are available, including data from EMRs, into a single continuous early warning score. Each patient’s Halo ION® score is
displayed on the Masimo Patient SafetyNet™ Supplemental Remote Monitoring and Clinician Notification System as a number
ranging from zero to 100, helping to streamline clinicians’ patient assessment workflow.
Hospital-to-Home and Wellness
Masimo SafetyNet™ is a home-based patient engagement and remote care automation platform. Originally named Doctella™,
Masimo SafetyNet™ provides a complete end-to-end home care solution, allowing clinicians to create and manage treatment
plans, patient schedules and patient data flow using automated, customizable CarePrograms™, home device data aggregation,
and a web-based provider dashboard. CarePrograms™ are delivered to patients’ smartphones via an app (available for both iOS®
and Android® devices) and dynamically update based on patient input, including both self-reported data and physiological data
collected by connected monitoring devices. Masimo SafetyNet™ was developed in the wake of the COVID-19 pandemic to
assist with hospital surge capacity and provide clinicians a secure cloud-based platform to remotely manage a patient’s health.
Powered by Masimo SET® Measure-through Motion and Low Perfusion™ technology, the tetherless single-patient-use sensor
(Radius PPG™) provides continuous respiration rate and oxygen saturation monitoring, with a second tetherless sensor, Radius T
°™, for continuous temperature measurements. Patient data is sent securely via Bluetooth to the Masimo SafetyNet™ mobile
application.
Radius T°™ Continuous Thermometer is a wearable wireless thermometer that continuously and seamlessly measures
temperatures using a small, inconspicuous, wearable sensor that can be easily applied to anyone from children to elderly adults
with no action needed after initial application to the skin. Radius T°™ eliminates manual measurements while providing
continuous insight into changes in the user's temperature and helps users understand which way their temperature is trending. In
addition, Radius T°™ uses proprietary algorithms to provide body temperature measurements, for users five years or older, that
approximate oral temperature, not just external skin temperature, with laboratory accuracy within ±0.1°C, whereas other
thermometry solutions typically have laboratory accuracy within ±0.2°C.
Masimo Sleep™ was designed to help consumers better understand the quality of their sleep. Masimo Sleep™ is fueled by the
same expertise in signal processing and sensor development that drives our hospital products used by leading institutions to
monitor millions of patients a year.
MightySat®, our fingertip pulse oximeter for personal use provides SpO2, PR and Pi measurements for health and wellness
applications. MightySat®, which is also available with RRp® and PVi®, provides measurements in a compact, battery-powered
design with a large color screen that can be rotated for real-time display of the measurements. Bluetooth® wireless functionality
enables measurement display via a free, downloadable Masimo Personal Health application on iOS® and Android® mobile
devices, as well as the ability to trend and communicate measurements, including the Apple Health Kit. MightySat® is available
through consumer retailers and directly from Masimo, and is intended for general health and wellness use only. MightySat® is
not intended for medical use.
® is a personal use pulse oximeter that combines a fingertip sensor, cable and pulse oximeter in a lightweight, portable
® uses Measure-through Motion and Low
iSpO2
device that connects directly to a smart device for displaying measurements. iSpO2
Perfusion™ SET® technology to measure SpO2, PR and Pi. The Masimo Personal Health app, available for both iOS® and
Android® devices, allows users to track, trend and download their data, as well as share it with the Apple Health app. iSpO2
® is
available through consumer retailers and directly from Masimo and is intended for general health and wellness use only. iSpO2
is not intended for medical use.
®
Cercacor Laboratories, Inc.
Cercacor is an independent entity spun-off from us to our stockholders in 1998. Joe Kiani, our Chairman and Chief Executive
Officer, is also the Chairman and Chief Executive Officer of Cercacor. We are a party to a cross-licensing agreement with
Cercacor, which was amended and restated effective January 1, 2007 (the Cross-Licensing Agreement), which governs each
party’s rights to certain intellectual property held by the two companies.
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The following table outlines our rights under the Cross-Licensing Agreement relating to specific end-user markets and the
related technology applications of specific measurements.
Measurements
Vital Signs(1)
Non-Vital Signs(2)
______________
End-User Markets
Professional Caregiver and
Alternate Care Market
Masimo
(owns)
Masimo
(exclusive license)
Patient and Pharmacist
Cercacor
(non-exclusive license)
Cercacor
(owns or exclusive license)
(1)
(2)
Vital signs measurements include, but are not limited to, SpO2, peripheral venous oxygen saturation, mixed venous oxygen saturation,
fetal oximetry, sudden infant death syndrome, ECG, blood pressure (noninvasive blood pressure, invasive blood pressure and
continuous noninvasive blood pressure), temperature, respiration rate, CO2, pulse rate, cardiac output, EEG, perfusion index, depth of
anesthesia, cerebral oximetry, tissue oximetry and/or EMG, and associated features derived from these measurements, such as 3D
alarm®, PVi® and other features.
Non-vital signs measurements include the body fluid constituents other than vital signs measurements and include, but are not limited
to, carbon monoxide, methemoglobin, blood glucose, hemoglobin and bilirubin.
Our License to Cercacor. We granted Cercacor an exclusive, perpetual and worldwide license, with sublicense rights, to use our
Masimo SET® technology, including all improvements, for the monitoring of non-vital signs measurements and to develop and
sell devices incorporating Masimo SET® for monitoring non-vital signs measurements in the “Cercacor Market”. The Cercacor
Market consists of any product market in which a product is intended to be used by a patient or pharmacist rather than a
professional medical caregiver regardless of the particular location of the sale, including sales to doctors, hospitals, alternate
care market professionals or otherwise, provided the product is intended to be recommended, or resold, for use by the patient or
pharmacist. We also granted Cercacor a non-exclusive, perpetual and worldwide license, with sublicense rights, to use Masimo
SET® for the measurement of vital signs in the Cercacor Market. In exchange, Cercacor pays us a 10% royalty on the amount of
vital signs sensors and accessories sold by Cercacor.
Cercacor’s License to us. We exclusively license from Cercacor the right to make and distribute products in the “Masimo
Market” that utilize rainbow® technology for the measurement of carbon monoxide, methemoglobin, fractional arterial oxygen
saturation, and hemoglobin, which includes hematocrit. The Masimo Market consists of any product market where the product
is intended to be used by a professional medical caregiver, including hospital caregivers, surgicenter caregivers, paramedic
vehicle caregivers, doctors’ offices caregivers, alternate care facility caregivers and vehicles where alternative care services are
provided.
We also have the option to obtain exclusive licenses to make and distribute products in the Masimo Market that utilize rainbow®
technology for the monitoring of other non-vital signs measurements, including blood glucose. We have 180 days after proof of
feasibility to exercise the above-referenced option to obtain a license for the measurement of blood glucose for an additional
$2.5 million and licenses for other non-vital signs measurements for an additional $0.5 million each. The licenses are exclusive
until the later of 20 years from the grant of the applicable license or the expiration of the last patent included in the rainbow®
technology related to the applicable measurements. To date, we have developed and commercially released devices that
measure carbon monoxide, methemoglobin and hemoglobin using licensed rainbow® technology. We also make and distribute
products that monitor respiration rate via rainbow Acoustic Monitoring®, which is a Masimo-developed rainbow® technology
and, therefore, is not required to be licensed from Cercacor.
Our license to use rainbow® technology for these measurements in these markets is exclusive on the condition that we continue
to pay Cercacor royalties on our products incorporating rainbow® technology, subject to certain minimum aggregate royalty
thresholds, and that we use commercially reasonable efforts to develop or market products incorporating the licensed rainbow®
technology. The royalty is up to 10% of the rainbow® royalty base, which includes handhelds, tabletop and multiparameter
devices. Handheld products incorporating rainbow® technology carry a 10% royalty rate. For other products, only the
proportional amount attributable to that portion of our devices used to monitor non-vital signs measurements, rather than to
monitor vital signs measurements, and sensors and accessories for measuring only non-vital sign parameters are included in the
10% rainbow® royalty base. For multiparameter devices, the rainbow® royalty base includes the percentage of the revenue based
on the number of rainbow®-enabled measurements.
For hospital contracts where we place equipment and enter into a sensor contract, we pay a royalty to Cercacor on the total
sensor contract revenue based on the ratio of rainbow®-enabled devices to total devices. Pursuant to the terms of the license, we
are subject to certain specific annual minimum aggregate royalty payment obligations of $5.0 million per year.
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Change in Control. The Cross-Licensing Agreement provides that, upon a change in control:
•
•
•
if the surviving or acquiring entity ceases to use “Masimo” as a company name and trademark, all rights to the “Masimo”
trademark will be assigned to Cercacor;
the option to license technology developed by Cercacor for use in blood glucose monitoring will be deemed automatically
exercised and a $2.5 million license fee for this technology will become immediately payable to Cercacor; and
the minimum aggregate annual royalties payable to Cercacor for carbon monoxide, methemoglobin, fractional arterial
oxygen saturation, hemoglobin and/or glucose will increase to $15.0 million per year until the exclusivity period of the
agreement ends, plus up to $2.0 million for each additional measurement with no maximum ceiling for non-vital sign
measurements.
For purposes of the Cross-Licensing Agreement, a change in control includes any of the following with respect to us or
Cercacor:
•
•
•
•
the sale of all or substantially all of either company’s assets to a non-affiliated third-party;
the acquisition by a non-affiliated third-party of 50% or more of the voting power of either company;
Joe Kiani, our Chief Executive Officer and the Chief Executive Officer of Cercacor, resigns or is terminated from his
position with either company; or
the merger or consolidation of either company with a non-affiliated third-party.
Ownership of Improvements. Any improvements to Masimo SET® or rainbow® technology made by Cercacor, by us, or jointly
by Cercacor with us or with any third-party that relates to non-vital signs monitoring, and any new technology acquired by
Cercacor, is and will be owned by Cercacor. Any improvements to the Masimo SET® platform or rainbow® technology made by
Cercacor, by us, or jointly by Cercacor with us or with any third-party that relates to vital signs monitoring, and any new
technology acquired by us, is and will be owned by us. However, for both non-vital signs and vital signs monitoring, any
improvements to the technology, excluding acquired technology, will be assigned to the other party and will be subject to the
terms of the licenses granted under the Cross-Licensing Agreement. Any new non-vital signs monitoring technology utilizing
Masimo SET® that we develop will be owned by Cercacor and will be subject to the same license and option fees as if it had
been developed by Cercacor. Also, we will not be reimbursed by Cercacor for our expenses relating to the development of any
such technology.
Other Agreements with Cercacor. We have also entered into various other agreements with Cercacor, including an
Administrative Services Agreement, a Consulting Services Agreement and a Sublease Agreement. See Note 3 to our
accompanying consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for
additional information on these agreements and other transactions with Cercacor.
Government Regulation
As a global medical technology company, we are subject to significant government regulation, compliance requirements, fees
and costs, both in the U.S. and abroad. These regulatory requirements subject our products and our business to numerous risks
that are specifically discussed within “Risks Related to Our Regulatory Environment” under Part I, Item 1A—“Risk Factors”
within this Annual Report on Form 10-K. A summary of certain critical aspects of our regulatory environment is included
below.
Product Clearance and Approval Requirements
Many of our products are regulated by numerous government agencies, the most significant of which are the U.S. FDA, the
national authorities in the European Union (EU) and the United Kingdom (UK), and MHLW in Japan. In addition, there are
government agencies that regulate our products in other countries, whose requirements vary substantially from country to
country. These agencies require us to comply with laws that regulate the design, development, clinical trials, testing,
manufacture, packaging, labeling, storage, distribution, import, export and promotion of many of our products.
In the U.S., unless an exemption applies, each medical device that we wish to market in the U.S. must, generally, first receive
from the FDA either clearance of a 510(k) premarket notification or approval of a premarket application (PMA). In some cases,
the device may be authorized by FDA through the de novo classification process. The FDA’s 510(k) clearance process requires
us to show that our new medical device is substantially equivalent to a legally marketed “predicate” medical device and usually
takes from four to nine months, but it may take longer. The PMA process requires us to demonstrate through valid scientific
evidence that there is reasonable assurance of safety and effectiveness of the device for its intended use.
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The PMA process is much more costly, lengthy and uncertain than the process of obtaining 510(k) clearance. Both 510(k) and
PMA submissions are subject to user fees. The FDA determines the appropriate process based on the risk classification of the
medical device. There are three classifications, from Class I to Class III. The majority of our current regulated products have
been deemed Class II devices, requiring 510(k) clearance, while some have been deemed Class I devices.
Most of our OEM partners are required to obtain clearance or approval of their devices that incorporate Masimo’s technologies,
like Masimo SET® technology, Masimo rainbow SET® technology, Masimo Board-in-Cable technology, or are used with
Masimo’s sensors. We generally grant our OEM partners a right to cross-reference the 510(k) submission files from our cleared
Masimo SET® circuit boards, sensors, cables and notification systems.
In the EU, medical devices are currently subject to the Medical Devices Directive 93/42/EEC (MDD). Under the MDD, a
medical device may only be placed on the market within the EU if it conforms to certain “essential requirements”. Key
requirements include that a medical device achieves its intended performance and does not compromise the clinical condition or
safety of patients or the safety and health of users and others, and bears the CE Mark. A medical device that conforms to such
essential requirements can bear a CE Mark, which allows the device to be placed on the market throughout the EU. Each
medical device that we wish to market in the EU must conform to these requirements.
Conformity is determined through an assessment procedure, which depends upon the risk classification of the device. For our
EU medical devices, conformity assessment generally involves a notified body. Notified bodies are often private entities that
are authorized or licensed by government authorities to perform, or otherwise have oversight over, such assessments. Notified
bodies may also review a manufacturer’s quality systems. If the conformity assessment is successfully completed, the
manufacturer may apply a CE Mark to the product. This allows the general commercializing of a product in the EU. However,
the product can also be subject to local registration requirements depending on the country.
On May 26, 2021, the existing MDD will be repealed and replaced by the Medical Devices Regulation (EU) 2017/745 (MDR).
The MDR is similar to the MDD, though it includes significantly more stringent requirements, notably stronger conformity
assessment procedures, greater control over notified bodies and their standards, increased transparency, and more robust device
vigilance requirements. The MDR will apply to the medical devices we commercialize in the EU after May 26, 2021.
However, the MDR is subject to certain transitional periods that enable certain notified body certificates to remain valid beyond
2021. For some of our devices, this could be as late as May 2024.
The UK exited the EU on December 31, 2020 (Brexit). The UK does not intend to implement the MDR into the laws of Great
Britain (England, Scotland and Wales). Northern Ireland is an exception where the MDR will continue to apply. Great Britain
instead introduced a new, standalone medical devices framework. Currently, this aligns closely to the MDD. Instead of a CE
mark, medical devices marketed in Great Britain must bear a UKCA mark. However, EU CE marks will continue to be
recognized in Great Britain until June 30, 2023, as will certificates issued by EU-recognized notified bodies. This arrangement
is not reciprocated in the EU. Each medical device that we wish to market in the UK must comply with the national laws in the
UK, which going forward may differ from the laws in the EU.
Continuing FDA Regulation
Clinical trials involving medical devices are subject to FDA regulation. Among other requirements, clinical trial sponsors must
comply with requirements related to informed consent, Institutional Review Board (IRB) approval, monitoring, reporting,
record-keeping, labeling and promotion. If the study involves a significant risk device, the sponsor must obtain FDA approval
of an investigational device exemption in addition to IRB approval prior to beginning the study. Information regarding certain
device clinical trials must also be submitted to a public database maintained by the National Institutes of Health.
After a device is approved and placed on the market, numerous regulatory requirements continue to apply. These regulatory
requirements include, but are not limited to, the following: product listing and establishment registration; adherence to the
Quality System Regulation (QSR) which requires stringent testing, control, documentation and other quality assurance
procedures for the design, manufacture, storage and handling of devices; labeling requirements and FDA prohibitions against
the promotion of off-label uses or indications; adverse event and device malfunction reporting; post-approval restrictions or
conditions, including post-approval clinical trials or other required testing; post-market surveillance requirements; the FDA’s
recall authority, whereby it can ask for, or require, the recall of products from the market; and requirements relating to
voluntary corrections or removals. Device manufacturers are subject to announced and unannounced inspections by the FDA to
evaluate compliance with these requirements.
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Advertising and Promotion
Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal
Trade Commission (FTC) and by federal and state regulatory and enforcement authorities, including the Department of Justice,
the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general.
Although physicians are permitted to use their medical judgment to use medical devices for indications other than those cleared
or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for
cleared or approved uses. Other companies’ promotional activities for their FDA-regulated products have been the subject of
FTC enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. FTC enforcement
actions often result in consent decrees that constrain future actions. In addition, under the federal Lanham Act and similar state
laws, competitors and others can initiate litigation relating to advertising claims.
Import and Export Requirements
To import a device, the importer must file an entry notice and bond with the United States Bureau of Customs and Border
Protection (CBP). All devices are subject to FDA examination before release from CBP. Any article that appears to be in
violation of the Federal Food, Drug and Cosmetics Act (FDCA) may be refused admission and a notice of detention and
hearing may be issued. If the FDA ultimately refuses admission, the CBP may issue a notice for redelivery and, if a company
fails to redeliver the goods or otherwise satisfy CBP and the FDA with respect to their disposition, may assess liquidated
damages for up to three times the value of the lot. The CBP also imposes its own regulatory requirements on the import of our
products, including inspection and possible sanctions for noncompliance.
Products exported from the United States are subject to foreign countries’ import requirements and the exporting requirements
of the FDA or European regulating bodies, as applicable. In particular, international sales of medical devices manufactured in
the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful
performance standards, are subject to FDA export requirements.
Foreign countries often require, among other things, a Certificate of Foreign Government (CFG) for export. To obtain a CFG,
the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in
the United States and that the manufacturing facilities were in compliance with the FDA’s QSR regulations at the time of the
last FDA inspection.
Conflict Minerals and Supply Chain
We are subject to certain SEC rules adopted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act
concerning “conflict minerals” (generally tin, tantalum, tungsten and gold), From January 1, 2021, similar rules are in force in
the EU. Certain of these conflict minerals are used in the manufacture of our products. Although the U.S. rules are being
challenged in court, in their present form they require us to investigate the source of any conflict minerals necessary to the
production or functionality of our products. If any such conflict minerals originated in the Democratic Republic of the Congo or
adjoining countries (the DRC region), we must undertake comprehensive due diligence to determine whether such minerals
financed or benefited armed groups in the DRC region. Since our supply chain is complex, our ongoing compliance with these
rules could affect the pricing, sourcing and availability of conflict minerals used in the manufacture of our products.
We are also subject to disclosure requirements regarding abusive labor practices in portions of our supply chain under the
California Transparency in Supply Chains Act.
Environmental
Our manufacturing processes involve the use, generation and disposal of solid wastes, hazardous materials and hazardous
wastes, including silicone adhesives, solder and solder paste, sealants, epoxies and various solvents such as methyl ethyl ketone,
acetone and isopropyl alcohol. As such, we are subject to stringent federal, state and local laws relating to the protection of the
environment, including those governing the use, handling and disposal of hazardous materials and wastes. Products that we sell
in Europe are subject to regulation in EU markets under the Restriction of Hazardous Substances Directive (RoHS). RoHS
prohibits companies from selling products which contain certain hazardous materials, including lead, mercury, cadmium,
chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In addition, the EU’s
Regulation-Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very
high concern in products.
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Future environmental laws may require us to alter our manufacturing processes, thereby increasing our manufacturing costs.
We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable
environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely
eliminated.
Health Care Fraud and Abuse
In the U.S., there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes or
other remuneration in exchange for the referral of patients or other health-related business.
For example, the Federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)) prohibits anyone from, among other things,
knowingly and willfully offering, paying, soliciting or receiving any bribe, kickback or other remuneration intended to induce
the referral of patients for, or the purchase, order or recommendation of, health care products and services reimbursed by a
federal health care program, including Medicare and Medicaid. Recognizing that the federal anti-kickback law is broad and
potentially applicable to many commonplace arrangements, Congress and the Office of Inspector General (OIG) within the
Department of Health and Human Services have created statutory “exceptions” and regulatory “safe harbors”. Exceptions and
safe harbors exist for a number of arrangements relevant to our business, including, among other things, payments to bona fide
employees, certain discount and rebate arrangements, and certain payment arrangements involving Group Purchasing
Organizations (GPOs).
Although an arrangement that fits into one or more of these exceptions or safe harbors is immune from prosecution,
arrangements that do not fit squarely within an exception or safe harbor do not necessarily violate the law, but the OIG or other
government enforcement authorities may examine the practice to determine whether it involves the sorts of abuses that the
statute was designed to combat. Violations of this federal law can result in significant penalties, including imprisonment,
monetary fines and assessments, and exclusion from Medicare, Medicaid and other federal health care programs. Exclusion of a
manufacturer, like us, would preclude any federal health care program from paying for its products. In addition to the federal
anti-kickback law, many states have their own laws that are analogous to the federal anti-kickback law, but may apply
regardless of whether any federal or state health care program business is involved.
Federal and state anti-kickback laws may affect our sales, marketing and promotional activities, educational programs, pricing
and discount practices and policies, and relationships with health care providers by limiting the kinds of arrangements we may
have with hospitals, alternate care market providers, GPOs, physicians, payers and others in a position to purchase or
recommend our products.
Federal and state false claims laws prohibit anyone from presenting, or causing to be presented, claims for payment to third-
party payers that are false or fraudulent. For example, the Federal Civil False Claims Act (31 U.S.C. § 3729 et seq.) imposes
liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or
fraudulent claim for payment by a federal health care program, including Medicaid and Medicare. Some suits filed under the
False Claims Act, known as “qui tam” actions, can be brought by a “whistleblower” or “relator” on behalf of the government
and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Manufacturers, like
us, can be held liable under false claims laws, even if they do not submit claims to the government, where they are found to
have caused submission of false claims by, among other things, providing incorrect coding or billing advice about their
products to customers that file claims, or by engaging in kickback arrangements or off-label promotion with customers that file
claims. A number of states also have false claims laws, and some of these laws may apply to claims for items or services
reimbursed under Medicaid and/or commercial insurance. Sanctions under these federal and state fraud and abuse laws may
include civil monetary penalties and criminal fines, exclusion from government health care programs and imprisonment.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) created new federal crimes, including health care
fraud and false statements related to health care matters. The health care fraud statute prohibits, among other things, knowingly
and willfully executing a scheme to defraud any health care benefit program, including those offered by private payers. The
false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material
fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health
care benefits, items or services. A violation of either statute is a felony and may result in fines, imprisonment and other
significant penalties.
The Physician Payment Sunshine Act (Sunshine Act), which was enacted by Congress as part of the ACA, requires medical
device companies to track and publicly report, with limited exceptions, all payments and transfers of value to physicians and
teaching hospitals in the U.S. Companies are required to track payments made and to report such payments to the government
by March 31 of each year. Several states have similar requirements. Beginning in 2022, the reporting requirement will also
apply to advance practice nurses and physician assistants.
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The Foreign Corrupt Practices Act of 1977 and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit
companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or
retaining business.
Due to the breadth of some of these laws, it is possible that some of our current or future practices might be challenged under
one or more of these laws. In addition, there can be no assurance that we would not be required to alter one or more of our
practices to be in compliance with these laws. Evolving interpretations of current laws or the adoption of new federal or state
laws or regulations could adversely affect many of the arrangements we have with customers and physicians. Therefore, our
risk of being found in violation of these laws is increased by the fact that some of these laws are broad and open to
interpretation.
Data Privacy and Protection of Health and Other Personal Information
Data protection legislation is becoming increasingly common in the United States at both the federal and state level. For
example, the California Consumer Privacy Act of 2018 (CCPA), which became effective on January 1, 2020, requires us to
make disclosures to consumers about our data collection, use and sharing practices, allows consumers to opt out of certain data
sharing with third parties, and provides a cause of action for data breaches. The CCPA, together with the newly passed
Consumer Privacy Rights Act, which is effective beginning January 1, 2023, is the most comprehensive data privacy law in the
United States, and could be the precursor to other similar legislation in other states or at the federal level. Internationally, the
General Data Protection Regulation (GDPR) took effect in May 2018 within the European Economic Area (EEA) and many
EEA jurisdictions. Other jurisdictions outside of the EEA have also adopted their own data privacy and protection laws. We
have implemented, and continue to implement, procedures and processes to comply with these regulations and, as international
data privacy and protection laws continue to evolve, and as new regulations, interpretive guidance and enforcement information
become available, we may incur incremental costs to modify our business practices to comply with these requirements. In
addition, our internal control policies and procedures may not always protect us from reckless or criminal acts committed by
our employees or agents.
In addition, numerous federal, state and international laws and regulations, including HIPAA and GDPR, govern the collection,
use and disclosure of patient-identifiable, protected health information (PHI) and other personal information. In the U.S.,
HIPAA applies to covered entities, which include most healthcare facilities that purchase and use our products, and their
business associates. The HIPAA Privacy Rule restricts the use and disclosure of PHI, and requires covered entities and their
business associates to safeguard that information and to provide certain rights to individuals with respect to that information.
The HIPAA Security Rule establishes detailed requirements for safeguarding PHI transmitted or stored electronically.
Although we are not a covered entity, we are sometimes deemed by our customers to be a business associate of covered entities
due to activities that we perform for or on behalf of covered entities, such as training customers on the use of our products or
investigating product performance. As business associates, we are subject to many of the requirements of HIPAA and could be
directly subject to HIPAA civil and criminal enforcement and the associated penalties for violation of the Privacy, Security and
Breach Notification Rules.
The HIPAA standards also apply to the use and disclosure of PHI for research and generally require the covered entity
performing the research to obtain the written authorization of the research subject (or an appropriate waiver) before providing
that subject’s PHI to sponsors like us for purposes related to the research. These covered entities also typically impose
contractual limitations on our use and disclosure of the PHI they disclose to us. We may be required to make costly system
modifications to comply with the privacy and security requirements that will be imposed on us and our failure to comply may
result in liability and adversely affect our business. Other countries also have, or are developing, laws governing the collection,
use and transmission of health information, and these laws could create liability for us or increase our cost of doing business.
Third-Party Reimbursement
Health care providers, including hospitals, that purchase our products generally rely on third-party payers, including the
Medicare and Medicaid programs and private payers, including indemnity insurers and managed care plans, to cover and
reimburse all or part of the cost of the products and the procedures in which they are used. As a result, demand for our products
is dependent in part on the coverage and reimbursement policies of these payers. No uniform coverage or reimbursement policy
for medical technology exists among all third-party payers, and coverage and reimbursement can differ significantly from payer
to payer.
The Centers for Medicare & Medicaid Services (CMS) is the federal agency responsible for administering the Medicare
program. Along with its contractors, CMS establishes the coverage and reimbursement policies for the Medicare program.
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Because a large percentage of our products are used in the treatment of elderly or disabled individuals who are Medicare
beneficiaries, Medicare’s coverage and reimbursement policies are particularly significant to our business. In addition, private
payers often follow the coverage and reimbursement policies of Medicare.
In general, Medicare will cover a medical product or procedure when the product or procedure is included within a statutory
benefit category and is reasonable and necessary for the diagnosis or treatment of an illness or injury, or to improve the
functioning of a malformed body part. Even if the medical product or procedure is considered medically necessary and
coverage is available, Medicare may place restrictions on the circumstances where it provides coverage. For example, several
Medicare local contractors have issued policies that restrict coverage for pulse oximetry in hospital inpatient and outpatient
settings to a limited number of conditions, including limiting coverage to patients who (i) exhibit signs of acute respiratory
dysfunction, (ii) have chronic lung disease, severe cardiopulmonary disease or neuromuscular disease involving the muscles of
respiration, (iii) are under treatment with a medication with known pulmonary toxicity, or (iv) have sustained multiple trauma
or complaints of acute chest pain.
Reimbursement for our products may vary not only by the type of payer involved but also based upon the setting in which the
product is furnished and utilized. For example, Medicare payment may be made, in appropriate cases, for patient stays in the
hospital inpatient and in outpatient settings involving the use of our products. Medicare generally reimburses hospitals based
upon prospectively determined amounts. For hospital inpatient stays, the prospective payment generally is determined by the
patient’s condition and other patient data and procedures performed during the inpatient stay, using a classification system
known as Medicare Severity Diagnosis-Related Groups (MS-DRGs). Prospective rates are adjusted for, among other things,
regional differences, co-morbidity and complications. Hospitals generally do not receive separate Medicare reimbursement for
the specific costs of purchasing our products for use in the inpatient setting. Rather, Medicare reimbursement for these costs is
deemed to be included within the prospective payments made to hospitals for the inpatient services in which the products are
utilized.
In contrast, some differences may be seen in the reimbursement for use of our products in hospital outpatient departments. In
this setting, Medicare payments also are generally made under a prospective payment system based on the ambulatory payment
classifications (APCs) under which individual items and procedures are categorized. Hospitals receive the applicable APC
payment rate for the procedure regardless of the actual cost for such treatment. Some outpatient services such as oximetry
services do not receive separate reimbursement. Rather, their reimbursement is deemed packaged into the APC for an
associated procedure and the payment for that APC does not vary whether or not the packaged procedure is performed. Some
procedures also are paid through composite APCs, which are APCs that establish a payment rate that applies when a specific
combination of services is provided.
Reimbursement for certain pulse oximetry monitoring services, including those using our products, may be separately payable
when they are the only service provided to the patient on that day, packaged if provided with certain critical care services, or
reimbursed through a composite APC when provided in connection with certain other services.
Because payments through the Prospective Payment System in both the hospital inpatient and outpatient settings are based on
predetermined rates and may be less than a hospital’s actual costs in furnishing care, hospitals have incentives to lower their
operating costs by utilizing products that will reduce the length of inpatient stays, decrease labor or otherwise lower their costs.
If hospitals cannot obtain adequate coverage and reimbursement for our products, or the procedures in which they are used, we
cannot be certain that they will purchase our products, despite the clinical benefits and opportunity for cost savings that we
believe can be derived from their use.
Our success with rainbow SET® technologies in U.S. settings of care with reimbursable monitoring procedures, such as hospital
emergency departments, hospital procedure labs, and physician offices may largely depend on the ability of providers to receive
reimbursement for such procedures. While private insurance payers often follow Medicare coverage and payment, we cannot be
certain of this and, in many cases, cannot control the coverage or payment rates that private insurance payers put in place. In
addition, the potential amendment, repeal or judicial invalidation of the ACA, and/or the enactment of other legislation or
regulations, could affect future payment for services involving the use of our products.
Our success in non-U.S. markets depends largely upon the availability of coverage and reimbursement from the third-party
payers through which health care providers are paid in those markets. Health care payment systems in non-U.S. markets vary
significantly by country, and include single-payer government managed systems, as well as systems in which private payers and
government managed systems exist side-by-side. Our ability to achieve market acceptance or significant sales volume in
international markets we enter will be dependent in large part on the availability of reimbursement for procedures performed
using our products under health care payment systems in such markets.
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Other U.S. and Foreign Regulation
We and our OEM partners also must comply with numerous federal, state and local laws, as well as laws in other jurisdictions,
relating to matters such as safe working conditions, manufacturing practices, environmental protection, fire hazard control and
hazardous substance disposal. We cannot be sure that we will not be required to incur significant costs to comply with these
laws and regulations in the future or that these laws or regulations will not hurt our business, financial condition and results of
operations. Unanticipated changes in existing regulatory requirements or adoption of new requirements could hurt our business,
financial condition and results of operations.
Markets
Competitive Conditions
The medical device industry is highly competitive and many of our competitors have substantially greater financial, technical,
marketing and other resources than we do. While we regard any company that sells pulse oximeters as a potential customer, we
also recognize that the companies selling pulse oximeters on an OEM basis and/or pulse oximetry sensors are also potential
competitors. Our primary competitor, Medtronic plc (Medtronic, formerly Covidien Ltd.), currently holds a substantial share of
the pulse oximetry market.
In addition, large technology companies that have not historically operated in the healthcare or medical device space, such as
Alphabet, Apple, Samsung and others, have developed or may develop products and technologies that may compete with our
current or future products and technologies in the consumer and clinical marketplaces.
Medtronic sells its own brand of Nellcor pulse oximeters to end-users, sells pulse oximetry modules to other monitoring
companies on an OEM basis, and licenses to certain OEMs the right to make their pulse oximetry platforms compatible with
their sensors. We also face substantial competition from larger medical device companies, including companies that develop
products that compete with our proprietary Masimo SET® and our OEM partners. We believe that a number of companies have
announced products that claim to offer motion-tolerant accuracy. In addition, some of our patents have expired and others will
expire over time in accordance with the laws of the jurisdiction in which they were issued.
We believe that the principal competitive factors in the market for pulse oximetry products include:
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accurate monitoring during both patient motion and low perfusion;
ability to introduce other clinically beneficial measurements related to oxygenation and respiration, such as noninvasive
and continuous oxygen reserve index and hemoglobin;
competitive pricing;
brand recognition and perception of innovation abilities;
sales and marketing capability;
access to hospitals which are members of GPOs;
access to integrated delivery networks;
access to OEM partners; and
patent protection.
Market Demand
We currently sell all of our medical products both directly to hospitals and the alternate care market via our sales force and
various distributors in the U.S. and around the world, including Europe, the Middle East, Asia, Latin America, Canada and
Australia. We sell our non-medical/consumer products through e-commerce Internet sites such as
www.masimopersonalhealth.com and www.amazon.com.
Our sales and marketing strategy for pulse oximetry has been, and will continue to be, focused on building end-user awareness
of the clinical and cost-saving benefits of our technologies. Our sales representatives’ primary focus is to facilitate the
conversion of competitor accounts to our Masimo SET® pulse oximetry and rainbow SET® Pulse CO-Oximetry® products, to
expand the use of Masimo SET® and Patient SafetyNet™ on the general floor and to create and expand the use of rainbow®
measurements in both critical care and non-critical care areas. In addition to sales representatives, we employ clinical specialists
to work with our sales representatives to educate end-users on the benefits of Masimo SET® and assist with the introduction and
implementation of our technology and products to their sites.
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For the year ended January 2, 2021, two just-in-time distributors, Medline Industries and Cardinal Health, represented
approximately 11.5% and 10.1%, respectively, of our total revenue. These were the only two customers that represented 10% or
more of our revenue for the year ended December 28, 2019. Importantly, these two distributors take and fulfill orders from our
direct customers, many of which have signed long-term sensor purchase agreements with us. If a specific just-in-time
distributor is unable to fulfill these orders, the orders would be redirected to other distributors or fulfilled directly by us.
Additionally, we sell certain of our products through our OEM partners who incorporate our technologies into their monitors
and sometimes resell our sensors to their installed base. Our OEM agreements allow us to expand the availability of our
technologies through the sales and distribution channels of each OEM partner. To facilitate clinician awareness of Masimo
technologies, our OEM partners have generally agreed to place the applicable Masimo trademark prominently on their
instruments.
In order to facilitate our U.S. direct sales to hospitals, we have signed contracts with what we believe to be the five largest
national GPOs in the U.S., based on the total volume of negotiated purchases. In return for the GPOs putting our products on
contract, we have agreed to pay the GPOs a percentage of our revenue from their member hospitals. In 2020 and 2019, revenue
from the sale of our pulse oximetry products to hospitals that are associated with GPOs amounted to $564.0 million and $517.6
million, respectively.
Resources
Intellectual Property
We believe that in order to maintain a competitive advantage in the marketplace, we must develop and maintain protection of
the proprietary aspects of our technology. We rely on a combination of patent, trademark, trade secret, copyright and other
intellectual property rights and measures to protect our intellectual property.
We have developed a patent portfolio internally, and, to a lesser extent, through acquisitions and licensing, that covers many
aspects of our product offerings. As of January 2, 2021, we had approximately 800 issued patents and approximately
500 pending applications in the U.S., Europe, Japan, Australia, Canada and other countries throughout the world. Our patents
expire in accordance with the laws of the particular jurisdiction in which they were issued, which sometimes change.
Additionally, as of January 2, 2021, we owned approximately 90 U.S. registered trademarks and approximately 300 foreign
registered trademarks, as well as trade names that we use in conjunction with the sale of our products. Our trademarks are
perpetually renewable.
Under the Cross-Licensing Agreement, we and Cercacor have agreed to allocate proprietary ownership of technology
developed based on the functionality of the technology. We will have proprietary ownership, including ownership of all patents,
copyrights and trade secrets, of all technology related to the noninvasive monitoring of vital signs measurements, and Cercacor
will have proprietary ownership of all technology related to the noninvasive monitoring of non-vital signs measurements. We
also rely upon trade secrets, continuing technological innovations and licensing opportunities to develop and maintain our
competitive position.
We seek to protect our trade secrets and proprietary know-how, in part, with confidentiality agreements with consultants,
vendors and employees, although we cannot be certain that the agreements will not be breached or that we will have adequate
remedies for any breach.
There are risks related to our intellectual property rights. For further detail on these risks, see “Risks Related to Our Intellectual
Property” under Item 1A—“Risk Factors” in this Annual Report on Form 10-K.
Research and Product Development
We believe that ongoing research and development efforts are essential to our success. Our research and development efforts
focus primarily on continuing to enhance our technical expertise in pulse oximetry, expanding our noninvasive monitoring of
other measurements and developing remote alarm and monitoring solutions.
Although we and Cercacor each have separate research and development projects, we collaborate with Cercacor on multiple
research and development activities related to rainbow® technology and other technologies. Under the Cross-Licensing
Agreement, the parties have agreed to allocate proprietary ownership of technology developed by either party based on the
functionality of the technology. We will have proprietary rights to all technology related to the noninvasive measurement of
vital signs measurements, and Cercacor will have proprietary ownership of all technology related to the noninvasive monitoring
of non-vital signs measurements.
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Manufacturing
Our strategy is to manufacture products in-house when it is efficient and cost-effective for us to do so. We currently
manufacture our bedside and handheld pulse oximeters, our full line of disposable and reusable sensors and most of our patient
cables in-house or through captive contract maquiladora operations. We maintain an approximate 70,700 square foot
manufacturing facility in Irvine, California, and two separate manufacturing facilities in Mexicali and San Luis Rio Colorado,
Mexico that have combined square footage of approximately 333,400 square feet. All three of these facilities are International
Organization for Standardization (ISO) 13485:2016 certified. We also maintain an approximate 86,500 square foot facility in
Hudson, New Hampshire, a portion of which is used to manufacture advanced light emitting diodes and other advanced
component-level technologies.
We will continue to utilize third-party contract manufacturers for products and subassemblies that can be more efficiently
manufactured by these parties, such as our circuit boards. We monitor our third-party manufacturers and perform inspections
and product tests at various steps in the manufacturing cycle to ensure compliance with our specifications. We also do full
functional testing of our circuit boards.
For raw materials, we and our contract manufacturers rely on sole source suppliers for some components, including digital
signal processor chips and analog-to-digital converter chips. We and our contract manufacturers have taken steps to minimize
the impact of a shortage or stoppage of shipments of digital signal processor chips or analog to digital converter chips,
including maintaining a safety stock of inventory and designing software that may be easily ported to another digital signal
processor chip.
We believe that our sources of supply for components and raw materials are adequate. In the event of a delay or disruption in
the supply of sole source components, we believe that we and our contract manufacturers will be able to locate additional
sources of these sole source components on commercially reasonable terms and without experiencing material disruption in our
business or operations. We have agreements with certain major suppliers and each agreement provides for varying terms with
respect to contract expiration, termination and pricing. Most of these agreements allow for termination upon specified notice,
ranging from four to twelve months, to the non-terminating party. Certain of these agreements with our major suppliers allow
for pricing adjustments, each agreement provides for annual pricing negotiation, and one agreement also guarantees us the most
favorable pricing offered by the supplier to any of its other customers.
Human Capital Resources
Core to our long-term strategy for human capital is attracting, developing and retaining the best talent globally with the right
skills to drive our future success. We consider our employees to be our greatest assets and the greatest strength behind our
innovation and success. We seek to attract and retain highly-talented, experienced and well-educated individuals to support our
long-term growth and profitability goals.
Our success and future growth is largely dependent on our ability to retract, retain and develop a diverse workforce at all levels
of the organization. To succeed, we have developed key recruitment and retention strategies that we focus on as part of our
overall management of our business. These include:
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Compensation. Our compensation programs are designed to align the compensation of our employees with their
performance and to provide the proper incentives to attract and retain employees while motivating them to achieve
superior results. The structure of our compensation programs balance incentive earnings for both short-term and long-
term performance.
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Our executive compensation is aligned with stockholder interests by aligning pay-for-performance metrics.
▪ We utilize nationally-recognized compensation consultants to evaluate our executive compensation benefit
programs and provide benchmarking against our peer groups.
▪ We provide employee wages that are competitive and consistent with employee positions, experience, skills,
knowledge and geography.
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Our annual increases and cash incentives are based on market and awarded based on merit.
▪ We offer a wide variety of benefits, including health insurance, paid time off, retirement plans, and voluntary
benefits such as financial and personal wellness benefits, etc.
• Health and Safety. We are committed to the safety and well-being of our employees. In response to the COVID-19
pandemic, we implemented changes to our business in an effort to protect our employees and customers and in support
of the health and safety protocols. A large majority of our workforce has been working remotely since March 2020, and
we instituted safety protocols and procedures for our essential employees who continue to work on site.
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We installed plexiglass partitions for our manufacturing/assemblies facilities and implemented extensive cleaning
sanitation procedures for our both manufacturing/assembly facilities and our general administration and sales facilities.
Developing Leaders of Tomorrow/Succession Planning. We are committed to identifying and developing the talents
of our next generation of leaders. Our executive management team conducts an annual organization and leadership
review of all business leaders, focusing on our high-performing and high potential talent, diversity, and the succession
planning for critical roles.
Employee Feedback and Retention. In November 2020, we were certified as a Great Place to Work®, earning a positive
response of 84%, proving that we have created an amazing employee experience. To assess and improve employee
retention and engagement, we survey employees with the assistance of third-party consultants, and take actions to
address areas of employee concerns. The average tenure of our employee is approximately 5.5 years and more than 20%
of our employees have been employed by us for more than ten years.
Diversity. Our workforce grew at a faster pace than past years, increasing from approximately 1,600 full-time employees
and approximately 3,700 dedicated contract personnel worldwide as of December 28, 2019 to 2,000 full-time employees
and approximately 4,200 dedicated contract personnel worldwide as of January 2, 2021. Of our full-time employees,
approximately 65% were male and approximately 35% were female, and women represented approximately 27% of our
management/leadership roles. Minorities represented approximately 49% of our U.S. workforce, of which minorities
accounted for approximately 39% of the employees in our management/leadership roles.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, are available free of charge at our website, www.masimo.com, as soon as reasonably practicable after electronically
filing such reports with the SEC. Any information contained on, or that can be accessed through, our website is not
incorporated by reference into, nor is it in any way a part of, this Annual Report on Form 10-K.
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ITEM 1A. RISK FACTORS
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered.
The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we presently deem less significant may also impair our business operations. If any of the following risks
come to fruition, our business, financial condition, results of operations and future growth prospects would likely be materially
and adversely affected. In these circumstances, the market price of our common stock could decline, and you could lose all or
part of your investment.
Summary of Material Risk Factors
Below is a summary of the principal factors that make an investment in our securities speculative or risky. This summary does
not address all of the risks that we face. Additional discussion of the risks summarized in this summary, and other risks that we
face, can be found following this summary and should be carefully considered together with all of the other information
appearing in this Annual Report on Form 10-K.
• We currently derive the majority of our revenue from our Masimo SET® platform, Masimo rainbow SET® platform and
related products. If these technologies and related products do not continue to achieve market acceptance, our business,
financial condition and results of operations would be adversely affected.
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Some of our products are in development or have been recently introduced into the market and may not achieve market
acceptance, which could limit our growth and adversely affect our business, financial condition and results of
operations.
Our ability to commercialize new products, new or improved technologies and additional applications for Masimo
SET® and our licensed rainbow® technology is limited to certain markets by our Cross-Licensing Agreement with
Cercacor Laboratories, Inc. (Cercacor), which may impair our growth and adversely affect our business, financial
condition and results of operations.
• We face competition from other companies, many of which have substantially greater resources than we do. If we do
not successfully develop and commercialize enhanced or new products that remain competitive with products or
alternative technologies developed by others, we could lose revenue opportunities and customers, and our ability to
grow our business would be impaired, adversely affecting our financial condition and results of operations.
• We depend on our domestic and international OEM partners for a portion of our revenue. If they do not devote
sufficient resources to the promotion of products that use our technologies, our business would be harmed.
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If we fail to maintain or develop relationships with GPOs, sales of our products would decline.
Inadequate levels of coverage or reimbursement from governmental or other third-party payers for our products, or for
procedures using our products, may cause our revenue to decline or prevent us from realizing revenues from future
products.
Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of existing
market participants from certain markets, which could have an adverse effect on our business, results of operations or
financial condition.
Our customers may reduce, delay or cancel purchases due to a variety of factors, such as lower hospital census levels
or third-party guidelines, which could adversely affect our business, financial condition and results of operations.
The loss of any large customer or distributor, or any cancellation or delay of a significant purchase by a large
customer, could reduce our net sales and harm our operating results.
Counterfeit Masimo sensors and third-party medical device reprocessors that reprocess our single-patient-use sensors
may harm our reputation. Also, these counterfeit and third-party reprocessed sensors, as well as genuine Masimo
reprocessed sensors, are sold at lower prices than new Masimo sensors and could cause our revenue to decline, which
may adversely affect our business, financial condition and results of operations.
If the patents we own or license, or our other intellectual property rights, do not adequately protect our technologies,
we may lose market share to our competitors and be unable to operate our business profitably.
If third parties claim that we infringe their intellectual property rights, we may incur liabilities and costs and may have
to redesign or discontinue selling certain products.
• We believe competitors may currently be violating and may in the future violate our intellectual property rights. As a
result, we may initiate litigation to protect and enforce our intellectual property rights, which may result in substantial
expense and may divert management’s attention from implementing our business strategy.
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Our failure to obtain and maintain FDA clearances or approvals on a timely basis, or at all, would prevent us from
commercializing our current, upgraded, or new products in the U.S., which could severely harm our business.
• We may be subject to or otherwise affected by federal and state healthcare laws, including fraud and abuse laws, and
could face substantial penalties if we are unable to fully comply with these laws.
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Legislative and regulatory changes in the healthcare industry could have a negative impact on our financial
performance. Furthermore, our business, financial condition, results of operations and cash flows could be
significantly and adversely affected by healthcare reform legislation in the U.S. or in our key international markets.
The failure of our OEM partners to obtain required FDA clearances or approvals for products that incorporate our
technologies could have a negative impact on our revenue.
If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems
with our products, these products could be subject to restrictions or withdrawal from the market.
Failure to obtain regulatory authorizations in foreign jurisdictions may prevent us from marketing our products abroad.
• Modifications to our marketed devices may require new regulatory clearances or premarket approvals, or may require
us to cease marketing or to recall the modified devices until clearances or approvals are obtained.
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Regulatory reforms may impact our ability to develop and commercialize our products and technologies.
If our products cause or contribute to a death or serious injury, or malfunction in a way that would likely cause or
contribute to a death or serious injury, we will be subject to medical device reporting regulations, and may need to
initiate voluntary corrective actions such as the recall of our products.
Promotion of our products using claims that are off-label, unsubstantiated, false or misleading could subject us to
substantial penalties.
The regulatory environment governing information, cybersecurity and privacy laws is increasingly demanding and
continues to evolve.
Our business, financial condition and results of operations may be adversely affected by the COVID-19 pandemic.
If we are unable to obtain key materials and components from sole or limited source suppliers, we will not be able to
deliver our products to customers.
If our essential employees who are unable to telework become ill or otherwise incapacitated, our operations may be
adversely impacted.
Future strategic initiatives, including acquisitions of businesses and strategic investments, could negatively affect our
business, financial condition and results of operations if we fail to integrate the acquired businesses successfully into
our existing operations or achieve the desired results of our investment.
Our credit agreement contains certain covenants and restrictions that may limit our flexibility in operating our
business.
• We may experience conflicts of interest with Cercacor with respect to business opportunities and other matters.
• We will be required to assign to Cercacor and pay Cercacor for the right to use certain products and technologies we
develop that relate to the monitoring of non-vital sign parameters, including improvements to Masimo SET®.
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In the event that the Cross-Licensing Agreement is terminated for any reason, or Cercacor grants a license to rainbow®
technology to a third-party, our business would be adversely affected.
• We may not be able to commercialize our products incorporating licensed rainbow® technology cost-effectively or
successfully.
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Rights provided to Cercacor in the Cross-Licensing Agreement may impede a change in control of our company.
Concentration of ownership of our stock among our existing directors, executive officers and principal stockholders
may prevent new investors from influencing significant corporate decisions.
Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent a change in
control of our company, prevent attempts to replace or remove current management and reduce the market price of our
stock.
Our bylaws provide that the state or federal courts located within the State of Delaware are the exclusive forum for
substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a
favorable judicial forum for disputes with us or our directors, officers or employees.
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Risks Related to Our Revenues
We currently derive the majority of our revenue from our Masimo SET® platform, Masimo rainbow SET® platform and
related products. If these technologies and related products do not continue to achieve market acceptance, our business,
financial condition and results of operations would be adversely affected.
We are highly dependent upon the continued success and market acceptance of our proprietary Masimo SET® and Masimo
rainbow SET® technologies that serve as the basis of our primary product offerings. Continued market acceptance of products
incorporating these technologies will depend upon us continuing to provide evidence to the medical community that our
products are cost-effective and offer significantly improved performance compared to conventional pulse oximeters. Healthcare
providers that currently have significant investments in competitive pulse oximetry products may be reluctant to purchase our
products. If hospitals and other healthcare providers do not believe our Masimo SET® and Masimo rainbow SET® platforms are
cost-effective, safe or more accurate or reliable than competitive pulse oximetry products, they may not buy our products in
sufficient quantities to enable us to generate revenue growth from the sale of these products. In addition, allegations regarding
the safety and effectiveness of our products, whether or not substantiated, may impair or impede the acceptance of our products.
Some of our products are in development or have been recently introduced into the market and may not achieve market
acceptance, which could limit our growth and adversely affect our business, financial condition and results of
operations.
Many of our noninvasive measurement technologies are considered disruptive. These technologies have performance levels that
we believe are acceptable for many clinical environments but may be insufficient in others. In addition, these technologies may
perform better in some patients and settings than others. Over time, we hope to continue to improve the performance of these
technologies and educate the clinical community on how to properly evaluate them. If we are successful in these endeavors, we
expect these technologies will become more useful in more environments and will become more widely adopted. Our product
portfolio continues to expand, and we are investing significant resources to enter into, and in some cases create, new markets
for these products. We are continuing to invest in sales and marketing resources to achieve market acceptance of these products,
but are unable to guarantee that our technologies will achieve general market acceptance.
The degree of market acceptance of these products will depend on a number of factors, including:
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perceived clinical benefits from our products;
perceived cost effectiveness of our products;
perceived safety and effectiveness of our products;
reimbursement available through government and private healthcare programs for using some of our products; and
introduction and acceptance of competing products or technologies.
If our products do not gain market acceptance or if our customers prefer our competitors’ products, our potential revenue
growth would be limited, which would adversely affect our business, financial condition and results of operations.
On March 30, 2020, we acquired TNI medical AG (TNI®) and added TNI softFlow® technology to our product portfolio. The
TNI softFlow® technology provides respiratory support by generating a precisely regulated, stable high flow of room air or a
mix of room air and oxygen. The TNI softFlow® technology is our first therapeutic product. We may not be able to achieve
market acceptance of the TNI softFlow® technology, and any potential revenue from the TNI softFlow® technology could be
limited, which would adversely affect our business, financial condition and results of operations.
In December 2020, we acquired a majority ownership of LiDCO Group, PLC, and added hemodynamic monitoring solutions to
our product portfolio. The hemodynamic monitoring solutions provide clinicians with access to patients’ cardiac output, stroke
volume and systemic vascular resistance. We may not be able to achieve market acceptance of the hemodynamic monitoring
solutions, and any potential revenue from it could be limited, which would adversely affect our business, financial condition
and result of operations.
Our ability to commercialize new products, new or improved technologies and additional applications for Masimo SET®
and our licensed rainbow® technology is limited to certain markets by our Cross-Licensing Agreement with Cercacor
Laboratories, Inc. (Cercacor), which may impair our growth and adversely affect our business, financial condition and
results of operations.
Since 1998, we have been a party to a cross-licensing agreement with Cercacor, (as amended, the Cross-Licensing Agreement),
under which we granted Cercacor:
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an exclusive, perpetual and worldwide license, with sublicense rights, to use all Masimo SET® technology owned by us,
including all improvements to this technology, for the monitoring of non-vital signs parameters and to develop and sell
devices incorporating Masimo SET® for monitoring non-vital signs parameters in any product market in which a product is
intended to be used by a patient or pharmacist rather than by a professional medical caregiver, which we refer to as the
Cercacor Market; and
a non-exclusive, perpetual and worldwide license, with sublicense rights, to use all Masimo SET® technology owned by us
for measurement of vital signs in the Cercacor Market.
Non-vital signs measurements consist of body fluid constituents other than vital signs measurements, including, but not limited
to, carbon monoxide, methemoglobin, blood glucose, hemoglobin and bilirubin. Under the Cross-Licensing Agreement, we are
only permitted to sell devices utilizing Masimo SET® for the monitoring of non-vital signs parameters in markets where the
product is intended to be used by a professional medical caregiver, including, but not limited to, hospital caregivers and
alternate care facility caregivers, rather than by a patient or pharmacist, which we refer to as the Masimo Market. Accordingly,
our ability to commercialize new products, new or improved technologies and additional applications for Masimo SET® is
limited. In particular, our inability to expand beyond the Masimo Market may limit our ability to maintain or increase our
revenue and impair our growth.
Pursuant to the Cross-Licensing Agreement, we have licensed from Cercacor the right to make and distribute products in the
Masimo Market that utilize rainbow® technology for certain noninvasive measurements. As a result, the opportunity to expand
the market for our products incorporating rainbow® technology is also limited, which could limit our ability to maintain or
increase our revenue and impair our growth.
We face competition from other companies, many of which have substantially greater resources than we do. If we do not
successfully develop and commercialize enhanced or new products that remain competitive with products or alternative
technologies developed by others, we could lose revenue opportunities and customers, and our ability to grow our
business would be impaired, adversely affecting our financial condition and results of operations.
The medical device industry is intensely competitive and is significantly affected by new product introductions and other
market activities of industry participants. A number of our competitors have substantially greater capital resources, larger
product portfolios, larger customer bases, larger sales forces and greater geographic presence, have established stronger
reputations with specific customers, and have built relationships with Group Purchasing Organizations and other hospital
purchasing groups (collectively, GPOs) that may be more effective than ours. Our Masimo SET® platform faces additional
competition from companies developing products for use with third-party monitoring systems, as well as from companies that
currently market their own pulse oximetry monitors. In addition, competitors with larger product portfolios than ours are
engaging in bundling practices, whereby they offer increased discounts to hospitals that purchase their requirements for a
variety of different products from the competitor, including products that we do not offer, effectively pricing their competing
products at a loss.
Continuing technological advances and new product introductions within the medical device industry place our products at risk
of obsolescence. For example, in September 2020, Apple, Inc. announced that its Apple Watch Series 6 includes a pulse
oximetry monitoring feature, which may compete with certain of our existing products and products in development, including
the consumer versions of our iSpO2
® and MightySat® pulse oximeters. Our long-term success depends upon the development
and successful commercialization of new products, new or improved technologies and additional applications for our existing
technologies. The research and development process is time-consuming and costly and may not result in products or
applications that we can successfully commercialize. In particular, we may not be able to successfully commercialize our
products for applications other than arterial blood oxygen saturation and pulse rate monitoring, such as for respiration rate,
hemoglobin, carboxyhemoglobin and methemoglobin monitoring. In addition, we may not be able to develop and successfully
commercialize new products and technologies that we acquire. For example, in March 2020, we acquired TNI® and added TNI
softFlow® technology to our product portfolio. As this is our first therapeutic product, we may not be able to successfully
commercialize the TNI softFlow® technology for respiratory support applications. Also, in December 2020, we acquired
majority ownership of LiDCO Group, PLC, and added hemodynamic monitoring solutions to our product portfolio. As these
are our first therapeutic and hemodynamic monitoring solutions, we may not be able to successfully commercialize or obtain
market acceptance of these products.
If we do not successfully adapt our products and applications both within and outside these measurements, we could lose
revenue opportunities and customers. Furthermore, one or more of our competitors may develop products that are substantially
equivalent to those of our products that are cleared or approved for use, or those of our original equipment manufacturer (OEM)
partners, in which case a competitor of ours may use our products or those of our OEM partners as predicate devices to more
quickly obtain regulatory clearance or approval of their competing products. Competition could result in pressure from our
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customers to reduce the price of our products and could cause them to place fewer orders for our products, which could, in turn,
cause a reduction in our revenues and product gross margins, thereby adversely impacting our business, financial condition and
results of operations.
Some of the world’s largest technology companies that have not historically operated in the healthcare or medical device space,
such as Alphabet Inc., Apple Inc., Samsung Electronics Co., Ltd. and others, have developed or may develop products and
technologies that may compete with our current or future products and technologies. These companies have substantially
greater capital, research and development, and sales resources than we have. If we are unable to successfully compete against
them, our financial performance could decline.
We depend on our domestic and international OEM partners for a portion of our revenue. If they do not devote
sufficient resources to the promotion of products that use our technologies, our business would be harmed.
We are, and will continue to be, dependent upon our domestic and international OEM partners for a portion of our revenue
through their marketing, selling and distribution of certain of their products that incorporate our technologies. Although we
expect that our OEM partners will accept and actively market, sell and distribute products that incorporate our technologies,
they may not do so. Because products that incorporate our technologies may represent a relatively small percentage of business
for some of our OEM partners, they may have less incentive to promote these products over other products that do not
incorporate these technologies.
In addition, some of our OEM partners offer products that compete with ours and also may be involved in intellectual property
disputes with us. Therefore, we cannot guarantee that our OEM partners, or any company that may acquire any of our OEM
partners, will vigorously promote products incorporating our technologies. The failure of our OEM partners to successfully
market, sell or distribute products incorporating our technologies, the termination of OEM agreements, the loss of OEM
partners or the inability to enter into future OEM partnership agreements would have a material adverse effect on our business,
financial condition and results of operations.
If we fail to maintain or develop relationships with GPOs, sales of our products would decline.
Our ability to sell our products to hospitals depends, in part, on our relationships with GPOs. Many existing and potential
customers for our products are members of GPOs. GPOs negotiate pricing arrangements and contracts with medical supply
manufacturers and distributors that may include provisions for sole sourcing and bundling, which generally reduce the choices
available to the hospitals.
These negotiated prices are made available to a GPO’s members. If we are not one of the providers selected by a GPO, the
GPO’s members may be less likely or unlikely to purchase our products. If a GPO has negotiated a strict sole source, market
share compliance or bundling contract for another manufacturer’s products, we may be prohibited from making sales to
members of such GPO for the duration of such contractual arrangement. Shipments of our pulse oximetry products to customers
that are members of GPOs represent approximately 75% of our U.S. product sales. Our failure to renew our contracts with
GPOs may cause us to lose market share and could have a material adverse effect on our business, financial condition and
results of operations. In addition, if we are unable to develop new relationships with GPOs, our competitive position would
likely suffer and our opportunities to grow our revenues and business would be harmed.
Inadequate levels of coverage or reimbursement from governmental or other third-party payers for our products, or for
procedures using our products, may cause our revenue to decline or prevent us from realizing revenues from future
products.
Sales of our products depend in part on the reimbursement and coverage policies of governmental and private healthcare
payers. The lack of adequate coverage and reimbursement for our products or the procedures in which our products are used
may deter customers from purchasing our products.
We cannot guarantee that governmental or third-party payers will reimburse or begin reimbursing a customer for the cost of our
products or the procedures in which our products are used. For example, some insurance carriers have issued policies denying
coverage for transcutaneous hemoglobin measurement on the grounds that the technology is investigational in the outpatient
setting. Other payers are continuing to investigate our products to determine if they will provide reimbursement for the use of
such products.
These trends could lead to pressure to reduce prices for our current and future products, hinder our ability to obtain market
adoption, cause a decrease in the size of the market or potentially increase competition, any of which could have a material
adverse effect on our business, financial condition and results of operations.
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We do not control payer decision-making with respect to coverage and payment levels for our products. Additionally, we
expect many payers to continue to explore cost-containment strategies (e.g., comparative and cost-effectiveness analyses, so-
called “pay-for-performance” programs implemented by various public government healthcare programs and private third-party
payers, and expansion of payment bundling initiatives, and other such methods that shift medical cost risk to providers) that
may potentially impact coverage and/or payment levels for our current products or products we develop in the future.
Outside of the U.S., reimbursement systems vary by country. These systems are often subject to the same pressures to curb
rising healthcare costs and control healthcare expenditures as those in the U.S. In addition, as economies of emerging markets
develop, these countries may implement changes in their healthcare delivery and payment systems. If adequate levels of
reimbursement from third-party payers outside of the U.S. are not obtained, sales of our products outside of the U.S. may be
adversely affected.
Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of existing
market participants from certain markets, which could have an adverse effect on our business, results of operations or
financial condition.
Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators,
regulators and third-party payers to curb these costs have resulted in a consolidation trend in the healthcare industry to
aggregate purchasing power. As the healthcare industry consolidates, competition to provide products and services to industry
participants has become, and will continue to become, more intense. This has resulted in, and will likely continue to result in,
greater pricing pressures and the exclusion of certain existing market participants from important market segments as GPOs,
independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions
for hospitals.
We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures
will continue to impact the worldwide healthcare industry, resulting in further business consolidations and alliances among our
customers, which may reduce competition, exert further downward pressure on the prices of our products and adversely impact
our business, financial condition and results of operations.
Our customers may reduce, delay or cancel purchases due to a variety of factors, such as lower hospital census levels or
third-party guidelines, which could adversely affect our business, financial condition and results of operations.
Our customers are facing growing levels of uncertainties, including variations in overall hospital census for paying patients and
the impact of such census variations on hospital budgets. As a result, many hospitals are reevaluating their entire cost structure,
including the amount of capital they allocate to medical device technologies and products.
In addition, certain of our products, including our rainbow® measurements such as carbon monoxide, methemoglobin and
hemoglobin, that are sold with upfront license fees and more complex and expensive sensors, could also be impacted by
hospital budget reductions. Any reductions in capital spending budgets by hospitals could have a significant negative impact on
our OEM customers who, due to their traditionally larger capital equipment sales model, could see declines in purchases from
their hospital customers. This, in turn, could reduce our board sales to our OEM customers.
From time to time, states and other local regulatory authorities may issue guidelines regarding the appropriate scope and use of
our products. For example, some of our noninvasive monitoring devices may be subject to authorization by individual states as
part of the Emergency Medical Services (EMS) scope of practice procedures. A lack of inclusion into scope of practice
procedures may limit adoption of our products.
Additionally, increases in demand resulting from global medical crises such as the COVID-19 pandemic may be short lived. If
the increased demand results in a stockpiling of our products by, or excess inventory at, our customers, future orders may be
delayed or canceled until such on-hand inventory is consumed.
The loss of any large customer or distributor, or any cancellation or delay of a significant purchase by a large customer,
could reduce our net sales and harm our operating results.
We have a concentration of OEM, distribution and direct customers. For example, sales to two just-in-time distributors each
represented 10% or more of our product sales for the fiscal year ended January 2, 2021. We cannot provide any assurances that
we will retain our current customers, groups of customers or distributors, or that we will be able to attract and retain additional
customers in the future. If for any reason we were to lose our ability to sell to a specific group or class of customers or through
a distributor, we could experience a significant reduction in revenue, which would adversely impact our operating results.
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Our sales could also be negatively affected by any rebates, discounts or fees that are required by, or offered to, GPOs and
customers, including wholesalers or distributors. Additionally, some of our just-in-time distributors have been demanding
higher fees, which we may be forced to pay in order to continue to offer products to our customers or which may force us to
distribute our products directly to our customers. The loss of any large customer or distributor, or an increase in distributor fees,
could have a material adverse effect on our business, financial condition and results of operations.
Our royalty and other revenue has historically consisted primarily of royalties received from Medtronic plc (Medtronic) related
to its U.S. sales, and more recently, revenue from non-recurring engineering (NRE) services for a certain OEM customer.
However, Medtronic is no longer required to pay us royalties and we have completed the majority of our contracted NRE
services. We have not replaced this royalty and NRE services revenue with similar revenues, and such loss of revenue had an
adverse effect on our results of operations for the fiscal year ended January 2, 2021.
Counterfeit Masimo sensors and third-party medical device reprocessors that reprocess our single-patient-use sensors
may harm our reputation. Also, these counterfeit and third-party reprocessed sensors, as well as genuine Masimo
reprocessed sensors, are sold at lower prices than new Masimo sensors and could cause our revenue to decline, which
may adversely affect our business, financial condition and results of operations.
We believe that other entities are manufacturing and selling counterfeit Masimo sensors. In addition, certain medical device
reprocessors have been collecting our used single-patient-use sensors from hospitals and then reprocessing, repackaging and
reselling those sensors to hospitals. These counterfeit and third-party reprocessed sensors are sold at lower prices than new
Masimo sensors. Our experience with both these counterfeit sensors and third-party reprocessed sensors is that they provide
inferior performance, increased sensor consumption, reduced comfort and a number of monitoring problems. Notwithstanding
these limitations, some of our customers have indicated a willingness to purchase some of their sensor requirements from these
counterfeit manufacturers and third-party reprocessors in an effort to reduce their sensor costs.
These counterfeit and reprocessed sensors have led and may continue to lead to confusion with our genuine Masimo products,
have reduced and may continue to reduce our revenue, and, in some cases, have harmed and may continue to harm our
reputation if customers conclude incorrectly that these counterfeit or reprocessed sensors are original Masimo sensors.
In addition, we have expended a significant amount of time and expense investigating issues caused by counterfeit and
reprocessed sensors, troubleshooting problems stemming from such sensors, educating customers about why counterfeit and
reprocessed sensors do not perform to their expectations, enforcing our proprietary rights against the counterfeit manufacturers
and reprocessors, and enforcing our contractual rights under our contracts.
In response to these counterfeit sensors and third-party reprocessors, we have incorporated X-Cal® technology into certain
products to ensure our customers get the performance they expect by using genuine Masimo sensors and that such sensors do
not continue to be used beyond their useful life. However, some customers may object to the X-Cal® technology, potentially
resulting in the loss of customers and revenues.
We also offer our own Masimo reprocessed sensors, which meet the same performance specifications as our new Masimo
sensors, to our customers. Reprocessed sensors sold by us are also offered at a lower price and, therefore, may reduce certain
customer demand for our new sensors. As a result, increased sales of our own Masimo reprocessed sensors may result in lower
revenues, which could negatively impact our business, financial condition and results of operations.
Risks Related to Our Intellectual Property
If the patents we own or license, or our other intellectual property rights, do not adequately protect our technologies, we
may lose market share to our competitors and be unable to operate our business profitably.
Our success depends significantly on our ability to protect our rights to the technologies used in our products. Our utilization of
patent protection, trade secrets and a combination of copyright and trademark laws, as well as nondisclosure, confidentiality and
other contractual arrangements, to protect our intellectual property afford us only limited protection and may not adequately
protect our rights or permit us to gain or maintain any competitive advantage.
Certain of our patents related to our technologies have begun to expire. Upon the expiration of our issued or licensed patents,
we generally lose some of our rights to exclude competitors from making, using, selling or importing products using the
technology based on the expired patents. Furthermore, in recent years, the U.S. Supreme Court has ruled on several patent cases
and several laws have been enacted that, in certain situations, potentially narrow the scope of patent protection available and
weaken the rights of patent owners. There can be no assurance that we will be successful in securing additional patents on
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commercially desirable improvements, that such additional patents will adequately protect our innovations or offset the effect of
expiring patents, or that competitors will not be able to design around our patents.
In addition, third parties may challenge our issued patents through procedures such as Inter-Partes Review (IPR). In many IPR
challenges, the U.S. Patent and Trademark Office (PTO) cancels or significantly narrows issued patent claims. IPR challenges
could increase the uncertainties and costs associated with the maintenance, enforcement and defense of our issued and future
patents and could have a material adverse effect on our business, financial condition and results of operations.
We also utilize unpatented proprietary technology and know-how and often rely on confidentiality agreements and intellectual
property assignment agreements with our employees, OEM partners, independent distributors and consultants to protect such
unpatented proprietary technology and know-how. However, such agreements may not be enforceable or may not provide
meaningful protection for our proprietary information in the event of unauthorized use or disclosure or other breaches of the
agreements, or in the event that our competitors discover or independently develop similar or identical designs or other
proprietary information.
We rely on the use of registered and common law trademarks with respect to the brand names of some of our products.
Common law trademarks provide less protection than registered trademarks. Loss of rights in our trademarks could adversely
affect our business, financial condition and results of operations.
If third parties claim that we infringe their intellectual property rights, we may incur liabilities and costs and may have
to redesign or discontinue selling certain products.
Searching for existing intellectual property rights may not reveal important intellectual property and our competitors may also
have filed for patent protection, which may not be publicly-available information, or claimed trademark rights that have not
been revealed through our searches. In addition, some of our employees were previously employed at other medical device
companies.
We may be subject to claims that our employees have disclosed, or that we have used, trade secrets or other proprietary
information of our employees’ former employers.
Our efforts to identify and avoid infringing on third parties’ intellectual property rights may not always be successful. Any
claims of patent or other intellectual property infringement against us, even those without merit, could:
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be expensive and time-consuming to defend and result in payment of significant damages to third parties;
force us to stop making or selling products that incorporate the intellectual property;
require us to redesign, reengineer or rebrand our products, product candidates and technologies;
require us to enter into royalty agreements that would increase the costs of our products;
require us to indemnify third parties pursuant to contracts in which we have agreed to provide indemnification for
intellectual property infringement claims;
divert the attention of our management and other key employees; and
result in our customers or potential customers deferring or limiting their purchase or use of the affected products impacted
by the claims until the claims are resolved;
any of which could have a material adverse effect on our business, financial condition and results of operations. In addition,
new patents obtained by our competitors could threaten the continued commercialization of our products in the market even
after they have already been introduced.
We believe competitors may currently be violating and may in the future violate our intellectual property rights. As a
result, we may initiate litigation to protect and enforce our intellectual property rights, which may result in substantial
expense and may divert management’s attention from implementing our business strategy.
We believe that the success of our business depends, in part, on obtaining patent protection for our products and technologies,
defending our patents and preserving our trade secrets. We were previously involved in significant litigation to protect our
patent positions related to some of our pulse oximetry signal processing patents that resulted in various settlements. We believe
some of the new market entrants in the healthcare and monitoring space, including some of the world’s largest technology
companies, may be infringing our intellectual property, and we may be required to engage in additional litigation to protect our
intellectual property in the future. In addition, we believe that certain individuals who previously held high level technical and
clinical positions with us misappropriated our intellectual property for the benefit of themselves and other companies.
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For example, on January 9, 2020, we initiated litigation against Apple Inc. for infringement of a number of patents, for trade
secret misappropriation and for ownership and correction of inventorship of a number of Apple Inc. patents that list one of our
former employees as an inventor. Our ongoing and future litigation could result in significant additional costs and further divert
the attention of our management and key personnel from our business operations and the implementation of our business
strategy and may not be successful or adequate to protect our intellectual property rights.
Risks Related to Our Regulatory Environment
Our failure to obtain and maintain FDA clearances or approvals on a timely basis, or at all, would prevent us from
commercializing our current, upgraded or new products in the U.S., which could severely harm our business.
Unless an exemption applies, each medical device that we market in the U.S. must first undergo premarket review pursuant to
the Federal Food, Drug, and Cosmetic Act (FDCA) by receiving clearance of a 510(k) premarket notification, receiving
clearance through the de novo classification review process or obtaining approval of a premarket approval (PMA) application.
Even if regulatory clearance or approval of a product is granted, the U.S. Food and Drug Administration (FDA) may clear or
approve our products only for limited indications for use. Additionally, the FDA may not grant 510(k) clearance on a timely
basis, if at all, for new products or new uses that we propose for Masimo SET® or licensed rainbow® technology.
The traditional FDA 510(k) clearance process for our products has generally taken between four to nine months. However, our
more recent experience and interactions with the FDA, along with information we have received from other medical device
manufacturers, suggests that, in some cases, the FDA is requiring applicants to provide additional or different information and
data for 510(k) clearance than it had previously required, and that the FDA may not rely on approaches that it had previously
accepted to support 510(k) clearance. As a result, FDA 510(k) clearance can be delayed for our products in some cases.
To support our product applications to the FDA, we frequently are required to conduct clinical testing of our products. Such
clinical testing must be conducted in compliance with FDA requirements pertaining to human research. Among other
requirements, we must obtain informed consent from study subjects and approval by institutional review boards before such
studies may begin. We must also comply with other FDA requirements such as monitoring, record-keeping, reporting and the
submission of information regarding certain clinical trials to a public database maintained by the National Institutes of Health.
In addition, if the study involves a significant risk device, we are required to obtain the FDA’s approval of the study under an
Investigational Device Exemption (IDE). Compliance with these requirements can require significant time and resources. In
addition, public health emergencies and other extraordinary circumstances may disrupt the conduct of our clinical trials. If the
FDA determines that we have not complied with such requirements, the FDA may refuse to consider the data to support our
applications or may initiate enforcement actions.
Even though 510(k) clearances have been obtained, if safety or effectiveness problems are identified with our pulse oximeters
incorporating Masimo SET® and licensed rainbow® technology, patient monitor devices, sensors, cables and other products, we
may need to initiate a recall of such devices. Furthermore, our new products or significantly modified marketed products could
be denied 510(k) clearance and be required to undergo the more burdensome PMA or de novo classification review processes.
The process of obtaining a de novo classification or PMA approval is much more costly, lengthy and uncertain than the process
for obtaining 510(k) clearance.
De novo classification review generally takes six months to one year from the time of submission of the de novo request,
although it can take longer. Approval of a PMA generally takes one year from the time of submission of the PMA, but may be
longer.
® and MightySat® pulse oximeters that are not intended for medical use. Some of our
We sell consumer versions of our iSpO2
products or product features may not be subject to the 510(k) process and/or other regulatory requirements in accordance with
specific FDA guidance and policies, such as the FDA guidance related to mobile medical applications. In addition, some of our
products or product features may not be subject to device regulation pursuant to Section 520(o) of the FDCA, which excludes
certain software functions from the statutory definition of a device. In addition, we may market certain products pursuant to
enforcement discretion policies the FDA has recently announced to address the need for these products as a result of the
COVID-19 pandemic. Such policies only remain in effect during the public health emergency, such that we will need to seek
clearance or approval of such products to continue marketing these products at the end of the COVID-19 pandemic. If the FDA
changes its policies or concludes that our marketing of these products is not in accordance with its current policies and/or
Section 520(o) of the FDCA, we may be required to seek clearance or approval of these devices through the 510(k), de novo
classification review or PMA processes.
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The failure of our OEM partners to obtain required FDA clearances or approvals for products that incorporate our
technologies could have a negative impact on our revenue.
Our OEM partners are required to obtain their own FDA clearances in the U.S. for most products incorporating Masimo
technologies. The FDA clearances we have obtained may not make it easier for our OEM partners to obtain clearances of
products incorporating these technologies, or the FDA may not grant clearances on a timely basis, if at all, for any future
products incorporating Masimo technologies that our OEM partners propose to market.
If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems
with our products, these products could be subject to restrictions or withdrawal from the market.
Our products, along with the manufacturing processes, labeling and promotional activities for our products, are subject to
continual review and periodic inspections by the FDA and other regulatory bodies. Among other requirements, we and certain
of our suppliers are required to comply with the FDA’s Quality System Regulation (QSR), which governs the methods and
documentation of the design, control testing, production, component suppliers control, quality assurance, complaint handling,
labeling control, packaging, storage and shipping of our products. The FDA enforces the QSR through announced and
unannounced inspections. We are also subject to similar state requirements and licenses.
In addition to the FDA, from time to time we are subject to inspections by the California Food and Drug Branch, international
regulatory authorities and other similar governmental agencies. The standards used by these regulatory authorities are complex
and may differ from those used by the FDA.
Failure by us or one of our suppliers to comply with statutes and regulations administered by the FDA and other regulatory
bodies or failure to adequately respond to any FDA Form 483 observations, any California Food and Drug Branch notices of
violation or any similar reports could result in, among other things, any of the following:
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warning letters or untitled letters issued by the FDA;
fines, civil penalties, in rem forfeiture proceedings, injunctions, consent decrees and criminal prosecution;
import alerts;
unanticipated expenditures to address or defend such actions;
delays in clearing or approving, or refusal to clear or approve, our products;
withdrawals or suspensions of clearance or approval of our products or those of our third-party suppliers by the FDA or
other regulatory bodies;
product recalls or seizures;
orders for physician notification or device repair, replacement or refund;
interruptions of production or inability to export to certain foreign countries; and
operating restrictions.
If any of these items were to occur, it would harm our reputation and adversely affect our business, financial condition and
results of operations.
Failure to obtain regulatory authorizations in foreign jurisdictions may prevent us from marketing our products
abroad.
We currently market and intend to continue to market our products internationally. Outside of the U.S., we can generally
market a product only if we receive a marketing authorization (and/or meet certain pre-marketing requirements) and, in some
cases, pricing approval, from the appropriate regulatory authorities. The regulatory registration/licensing process varies among
international jurisdictions and may require additional or different product testing than required to obtain FDA clearance. FDA
clearance does not ensure new product registration/licensing by foreign regulatory authorities, and we may be unable to obtain
foreign regulatory registration/licensing on a timely basis, if at all.
In addition, clearance by one foreign regulatory authority does not ensure clearance by any other foreign regulatory authority or
by the FDA. If we fail to receive necessary approvals to commercialize our products in foreign jurisdictions on a timely basis,
or at all, our business, financial condition and results of operations could be adversely affected.
Furthermore, foreign regulatory requirements may change from time to time, which could adversely affect our ability to market
new products, and/or continue to market existing products, internationally. Certain significant changes in the international
regulatory landscape have recently taken place or will take place in the near future.
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These include the new EU Medical Devices Regulation (EU) 2017/745 (MDR) coming into effect from May 26, 2021 and a
new regulatory regime applying in the UK from January 1, 2021 as a result of the UK’s exit from the EU on December 31,
2020 (Brexit).
Modifications to our marketed devices may require new regulatory clearances or premarket approvals, or may require
us to cease marketing or to recall the modified devices until clearances or approvals are obtained.
We have made modifications to our devices in the past and we may make additional modifications in the future. Any
modification to a device that is cleared by the FDA that could significantly affect its safety or effectiveness or that could
constitute a major change in its intended use would require a new clearance or approval and certain modifications to devices
cleared or approved by foreign regulatory authorities may also require a new clearance or approval.
We may not be able to obtain such clearances or approvals in a timely fashion, or at all. Delays in obtaining future clearances
would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would have an
adverse effect on our business, financial condition and results of operations.
For device modifications that we conclude do not require a new regulatory clearance or approval, we may be required to recall
and to stop marketing the modified devices if the government agency disagrees with our conclusion and requires new
clearances or approvals for the modifications. This could have an adverse effect on our business, financial condition and results
of operations.
During the COVID-19 pandemic, the FDA has issued enforcement policies under which the agency has said it will not require
clearance of a new 510(k) for certain modifications to 510(k)-cleared non-invasive vital-sign patient monitoring devices.
However, these policies remain in effect only during the COVID-19 pandemic. Manufacturers that make modifications
pursuant to these policies will need to stop marketing the modifications at the end of the COVID-19 pandemic unless the
manufacturer receives 510(k) clearance for the modifications.
Regulatory reforms may impact our ability to develop and commercialize our products and technologies.
From time to time, legislation is drafted and introduced by governments that could significantly change the statutory provisions
governing the clearance or approval, manufacture and marketing of medical devices. For example, in August 2017, Congress
enacted the FDA Reauthorization Act of 2017 (FDARA). FDARA reauthorized the FDA to collect device user fees, including a
new user fee for de novo classification requests, and contained substantive amendments to the device provisions of the FDCA.
Among other changes, FDARA required that the FDA update and revise its processes for scheduling inspections of device
establishments, communicating about those inspections with manufacturers and providing feedback on the manufacturer’s
responses to Form 483s. The statute also required that the FDA study the impact of device servicing, including third-party
services, and created a new process for device sponsors to request classification of accessory devices as part of the PMA
application for the parent device or to request a separate classification of accessory devices.
In addition, regulations and guidance are often revised or reinterpreted by the government agency in ways that may
significantly affect our business or products. Future regulatory changes could make it more difficult for us to obtain or maintain
approval to develop and commercialize our products and technologies. Public health emergencies may also prompt temporary
or permanent regulatory reforms that could change the processes governing the clearance or approval, manufacture and
marketing of medical devices.
In the EU, for example, the new Medical Devices Regulation (EU) 2017/745 (MDR) will apply to our medical devices from
May 26, 2021. The MDR will require medical devices and their manufacturers to comply with more stringent standards than
before. The MDR also imposes new and enhanced obligations on importers and distributors of medical devices in the EU.
Although the MDR is subject to certain transitional periods, both we and others involved in the distribution and
commercialization of our medical devices in the EU will need to comply with more stringent EU rules.
Due to Brexit, from January 1, 2021, a new regulatory framework applies to medical devices commercialized in Great Britain
(England, Scotland and Wales). This is now separate to the regime in the EU. Although certain transition periods apply until
June 30, 2023, the medical devices we intend to commercialize in Great Britain will need to conform to different requirements
than the requirements in the EU. These factors are likely to add more complexity to our regulatory compliance obligations in
Europe and our ability to commercialize medical devices in European markets.
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If our products cause or contribute to a death or serious injury, or malfunction in a way that would likely cause or
contribute to a death or serious injury, we will be subject to medical device reporting regulations, and may need to
initiate voluntary corrective actions such as the recall of our products.
Regulatory agencies in many countries require us to report anytime our products cause or contribute to a death or serious injury,
or malfunction in a way that would likely cause or contribute to a death or serious injury. For example, under the FDA medical
device reporting regulations, we are required to report to the FDA any incident in which a product of ours may have caused or
contributed to a death or serious injury or in which a product of ours malfunctioned and, if the malfunction were to recur, would
be likely to cause or contribute to death or serious injury. In addition, all manufacturers placing medical devices on the market
in the European Union (EU) are legally required to report any serious or potentially serious incidents involving devices
produced or sold by the manufacturer to the relevant authority in those jurisdictions where any such incident occurred.
The FDA and similar foreign regulatory authorities have the authority to require the recall of our commercialized products in
the event of material deficiencies or defects in, for example, design, labeling or manufacture. The FDA must find that there is a
reasonable probability that the device would cause serious adverse health consequences or death in order to require a recall.
The standard for recalling deficient products may be different in foreign jurisdictions. Manufacturers may, under their own
initiative, recall a product if any material deficiency in a device is found or they become aware of a safety issue involving a
marketed product. A government-mandated or voluntary recall by us or by one of our distributors could occur as a result of
component failures, manufacturing errors, design or labeling defects or other deficiencies and issues.
We may initiate certain field actions, such as a correction or removal of our products in the future. Any correction or removal
initiated by us to reduce a health risk posed by our device, or to remedy a violation of the FDCA or other regulations caused by
the device that may present a risk to health, must be reported to the FDA. If the FDA subsequently determines that a report was
required for a correction or removal of our products that we did not believe required a report, we could be subject to
enforcement actions.
Any recalls of our products or enforcement actions would divert managerial and financial resources and could have an adverse
effect on our financial condition and results of operations. In addition, given our dependence upon patient and physician
perceptions, any negative publicity associated with any recalls could materially and adversely affect our business, financial
condition, results of operations and growth prospects.
Promotion of our products using claims that are off-label, unsubstantiated, false or misleading could subject us to
substantial penalties.
Obtaining 510(k) clearance permits us to promote our products for the uses cleared by the FDA. Use of a device outside its
cleared or approved indications is known as “off-label” use. Physicians may use our products off-label because the FDA does
not restrict or regulate a physician’s choice of treatment within the practice of medicine. While we may request additional
cleared indications for our current products, the FDA may deny those requests, require additional expensive clinical data to
support any additional indications or impose limitations on the intended use of any cleared product as a condition of clearance.
If the FDA determines that our products were promoted for off-label use or that false, misleading or inadequately substantiated
promotional claims have been made by us or our OEM partners, it could request that we or our OEM partners modify those
promotional materials or take regulatory or enforcement actions, including the issuance of an untitled letter, warning letter,
injunction, seizure, civil fine and criminal penalties. While certain U.S. courts have held that truthful, non-misleading, off-label
information is protected under the First Amendment under certain circumstances, the FDA continues to take the position that
off-label promotion is subject to enforcement action.
It is also possible that other federal, state or foreign enforcement authorities may take action if they consider our
communications, including promotional or training materials, to constitute promotion of an uncleared or unapproved use. If not
successfully defended, enforcement actions related to off-label promotion could result in significant fines or penalties under
other statutory authorities, such as laws prohibiting false claims for reimbursement. In any such event, our reputation could be
damaged, adoption of our products could be impaired and we could be subject to extensive fines and penalties.
Additionally, we must have adequate substantiation for the claims we make for our products. If any of our claims are
determined to be false, misleading or deceptive, our products could be considered misbranded under the FDCA or in violation
of the Federal Trade Commission Act. We could also face lawsuits from our competitors under the Lanham Act alleging that
our marketing materials are false or misleading.
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The regulatory environment governing information, cybersecurity and privacy laws is increasingly demanding and
continues to evolve.
Personal privacy and data security have become significant issues in the U.S., Europe and many other jurisdictions where we
offer our products. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to
remain uncertain for the foreseeable future.
Certain U.S. laws, such as the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), govern the
transmission, security and privacy of individually identifiable information that we may obtain or have access to in connection
with the operation of our business, including the conduct of clinical research trials or other research studies that may provide us
with access to sensitive health and other personal information. We may be required to make costly system modifications to
comply with these data privacy and security requirements. In addition, if we do not properly comply with applicable laws and
regulations related to the protection of this information, we could be subject to criminal or civil sanctions. The California
Consumer Privacy Act of 2018 (CCPA), which became effective on January 1, 2020, requires us to make new disclosures to
consumers about our data collection, use and sharing practices.
The CCPA also allows consumers to opt out of certain data sharing with third parties, and provides a new cause of action for
data breaches with the possibility of significant statutory damage awards as well as injunctive or declaratory relief if there has
been unauthorized access, theft or disclosure of personal information due to failure to implement reasonable security
procedures. The impact of the CCPA on our business is yet to be determined, but it could result in increased operating expenses
as well as additional exposure to the risk of litigation by or on behalf of consumers.
The CCPA is the most comprehensive data privacy regulation to date in the United States, and could be the precursor to similar
legislation in other states or at the federal level. Internationally, the General Data Protection Regulation (GDPR) took effect in
May 2018 within the European Economic Area (EEA) and many EEA jurisdictions have also adopted their own data privacy
and protection laws in addition to the GDPR. Furthermore, other international jurisdictions, including Singapore, South Korea,
China, Brazil, Mexico and Australia, have also implemented laws relating to data privacy and protection. Although we believe
that we are complying with the GDPR and similar laws, these laws are still relatively new. Therefore, as international data
privacy and protection laws continue to evolve, and as new regulations, interpretive guidance and enforcement information
become available, we may incur incremental costs to modify our business practices to comply with these requirements. In
addition, our internal control policies and procedures may not always protect us from reckless or criminal acts committed by
our employees or agents.
Violations of these laws, or allegations of such violations, could subject us to monetary and non-monetary penalties for
noncompliance, disrupt our operations, involve significant management distraction, subject us to class action lawsuits and result
in a material adverse effect on our business, financial condition and results of operations.
We may be subject to or otherwise affected by federal and state healthcare laws, including fraud and abuse laws, and
could face substantial penalties if we are unable to fully comply with these laws.
Healthcare fraud and abuse laws potentially applicable to our operations include, but are not limited to:
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the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully offering, paying, soliciting
or receiving any bribe, kickback or other remuneration intended to induce the purchase, order or recommendation of an
item or service reimbursable under a federal healthcare program (such as the Medicare or Medicaid programs);
the federal False Claims Act and other federal laws which prohibit, among other things, knowingly and willfully
presenting, or causing to be presented, claims for payment from Medicare, Medicaid, other government payers or other
third-party payers that are false or fraudulent;
the Physician Payments Sunshine Act, which requires medical device companies to track and publicly report, with limited
exceptions, all payments and transfers of value to physicians and teaching hospitals in the U.S.; and
state laws analogous to each of the above federal laws, such as state anti-kickback and false claims laws that may apply to
items or services reimbursed by governmental programs and non-governmental third-party payers, including commercial
insurers.
If we are found to have violated any such laws or other similar governmental regulations, including their foreign counterparts,
that are directly or indirectly applicable to us, we may be subject to penalties, including civil and criminal penalties, damages,
fines, exclusion of our products from reimbursement under Medicare, Medicaid and other federal healthcare programs, and the
curtailment or restructuring of our operations.
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Any penalties could adversely affect our ability to operate our business and our financial results. Any action against us for
violation of these laws, even if we successfully defend against such action, could cause us to incur significant legal expenses
and divert our management’s attention from the operation of our business.
Legislative and regulatory changes in the healthcare industry could have a negative impact on our financial
performance. Furthermore, our business, financial condition, results of operations and cash flows could be significantly
and adversely affected by healthcare reform legislation in the U.S. or in our key international markets.
Changes in the healthcare industry in the U.S. and abroad could adversely affect the demand for our products and the way in
which we conduct our business. For example, the Patient Protection and Affordable Care Act (the ACA), enacted in 2010,
required most individuals to have health insurance, established new regulations on health plans, created insurance-pooling
mechanisms and reduced Medicare spending on services provided by hospitals and other providers.
The long-term viability of the ACA, and its impact on our business and results of operations, remains uncertain. There have
also been recent U.S. Congressional actions to repeal and replace the ACA, and future actions are expected. For example, the
Tax Cuts and Jobs Act of 2017 (TCJA), among other things, eliminated the individual mandate requiring most Americans
(other than those who qualify for a hardship exemption) to carry a minimum level of health coverage effective January 1, 2019.
In December 2018, a federal district court judge in Texas found the ACA’s individual mandate to be unconstitutional; and
therefore, the entire law to be invalid. In December 2019, the Fifth Circuit affirmed the ruling regarding the individual mandate
but remanded the case to the district court for additional analysis of the question of severability and whether portions of the law
remain valid. In November 2020, the U.S. Supreme Court heard the case and is expected to issue an opinion by June 2021.
Although we cannot predict the ultimate content or timing of any healthcare reform legislation or court challenges to the ACA,
potential changes resulting from any amendment, repeal, replacement or invalidation of these programs, including any
reduction in the future availability of healthcare insurance benefits, may decrease the number of people who are insured, which
could adversely affect our business and future results of operations.
Our medical devices and business activities are subject to rigorous regulation by the FDA and other federal, state and
international governmental authorities. These authorities and members of Congress have been increasing their scrutiny over the
medical device industry. In recent years, Congress, the Department of Justice, the Office of Inspector General of the
Department of Health and Human Services and the Department of Defense have issued subpoenas and other requests for
information to medical device manufacturers, primarily related to financial arrangements with healthcare providers, regulatory
compliance and marketing and product promotional practices. Furthermore, certain state governments have enacted legislation
to limit and/or increase transparency of interactions with healthcare providers, pursuant to which we are required by law to
disclose payments and other transfers of value to healthcare providers licensed by certain states.
We anticipate that the government will continue to scrutinize our industry closely, and any new regulations or statutory
provisions could result in delays or increased costs during the periods of product development, clinical trials and regulatory
review and approval, as well as increased costs to assure compliance.
Risks Related to Our Business and Operations
Our business, financial condition and results of operations may be adversely affected by the COVID-19 pandemic.
In December 2019, COVID-19 was reported to have surfaced in Wuhan, China and has since spread to many other countries,
including the United States, where we have our principal executive offices and principal operations, Switzerland, where we
have our international headquarters, and Mexico, where we have significant manufacturing operations. Government-imposed
travel restrictions have resulted, and may continue to result, in direct operational and administrative disruptions to our domestic
and foreign facilities. In addition, quarantines, shelter-in-place and similar orders by local governments have impacted and
could further impact the productivity of our manufacturing, engineering, sales and administrative staff and facilities in the
United States and other countries. Our operations would be disrupted if any of our employees or employees of our business
partners were suspected of having contracted COVID-19, which could require quarantine of some or all such employees or
closure of our facilities for disinfection.
If the current pace of the COVID-19 pandemic cannot be slowed and the spread of the virus is not contained, our business
operations could be further delayed or interrupted. We expect that government and health authorities may announce new or
extend existing restrictions, which could require us to make further adjustments to our operations in order to comply with any
such restrictions. We may also experience limitations in employee resources. In addition, global supply chains and the timely
availability of raw materials and products may be materially disrupted by quarantines, factory slowdowns or shutdowns, border
closings and travel restrictions resulting from the COVID-19 pandemic.
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The adverse effects of the COVID-19 pandemic on our business could be material in future periods, particularly if there are
significant and prolonged economic slowdowns in regions where we derive a significant amount of our revenue or profit, or
where our suppliers are located, or if we are forced to close facilities and limit or cease manufacturing operations for extended
periods of time. Although we are currently experiencing an increase in the demand for our products, we could experience
delays in receipt of customer payments. In addition, our ability to fulfill orders placed with us within the order’s specified time
line and for the cost we estimated when we accepted the order may be negatively affected.
Furthermore, we are unable to determine if the increase we are experiencing in the demand for our products is being driven by
increased usage of our products or the stockpiling of our products by our customers, the latter of which could result in the delay
or cancellation of future orders until such on-hand inventory is consumed. These factors could lead to a reduction in revenues,
unfavorable gross margin impact due to product mix, and/or a delay in cash flows in future periods and have a material adverse
effect on our business, financial condition and results of operations.
The COVID-19 pandemic has also led to extreme volatility in capital markets and a decline in interest rates, and has adversely
affected, and may continue to adversely affect, the market price of our common stock. While the potential economic impact
brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, a continued or widespread
pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in
the future negatively affect our liquidity. The extent to which COVID-19 impacts our business and financial results continues to
depend on numerous evolving factors that we are not able to accurately predict.
If our essential employees who are unable to telework become ill or otherwise incapacitated, our operations may be
adversely impacted.
As a medical device manufacturer, we believe we fall within a “critical essential infrastructure” sector, specifically the
“Healthcare/Public Health” sector, and we are considered exempt under various stay at home/shelter in place orders (Stay at
Home Orders), including the Blueprint for a Safer Economy first implemented in August 2020 and the Stay Home Order in
effect since March 2020, each of which places certain restrictions on persons and businesses in California. Accordingly, our
employees in California and other locations may continue to work because of the importance of our operations to the health and
well-being of citizens in the states in which we operate. Consistent with these Stay at Home Orders, we have implemented
telework policies wherever possible for appropriate categories of “nonessential” employees. “Essential” employees that are
unable to telework continue to work at our facilities. We have implemented a number of safety measures for our facilities,
including social distancing, face covering, temperature checking and increased sanitation standards. We are following guidance
from the Center for Disease Control and the Occupational Safety and Health Administration regarding suspension of
nonessential travel, self-isolation recommendations for employees returning from certain geographic areas, confirmed reports of
any COVID-19 diagnosis among our employees and the return of such employees to our workplace. Pursuant to updated
guidance from the Equal Employment Opportunity Commission, we are engaging in limited and appropriate inquiries of
employees regarding potential COVID-19 exposure, based on the direct threat that such exposure may present to our workforce.
While we have developed and implemented, and continue to develop and implement, health and safety guidelines in an effort to
try to mitigate the negative impact of COVID-19, there can be no assurances that our measures will be sufficient to protect our
employees in our workplace or that our employees will not otherwise be exposed to COVID-19 outside of our workplace. If a
number of our essential employees become ill, incapacitated or are otherwise unable to continue working during the current or
any future epidemic, our operations may be adversely impacted.
We may experience conflicts of interest with Cercacor with respect to business opportunities and other matters.
Prior to our initial public offering in August 2007, our stockholders owned 99% of the outstanding shares of capital stock of
Cercacor, and we believe that a number of our stockholders, including certain of our directors and executive officers, continue
to own shares of Cercacor stock. Joe Kiani, our Chairman and Chief Executive Officer (CEO), is also the Chairman and CEO of
Cercacor.
Due to the interrelated nature of Cercacor with us, conflicts of interest may arise with respect to transactions involving business
dealings between us and Cercacor, potential acquisitions of businesses or products, the development and ownership of
technologies and products, the sale of products, markets and other matters in which our best interests and the best interests of
our stockholders may conflict with the best interests of the stockholders of Cercacor. In addition, we and Cercacor may disagree
regarding the interpretation of certain terms in the Cross-Licensing Agreement. We cannot guarantee that any conflict of
interest will be resolved in our favor, or that, with respect to our transactions with Cercacor, we will negotiate terms that are as
favorable to us as if such transactions were with another third-party.
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We will be required to assign to Cercacor and pay Cercacor for the right to use certain products and technologies we
develop that relate to the monitoring of non-vital sign parameters, including improvements to Masimo SET®.
Under the Cross-Licensing Agreement, if we develop certain products or technologies that relate to the noninvasive monitoring
of non-vital sign parameters, including improvements to Masimo SET® for the noninvasive monitoring of non-vital sign
parameters, we would be required to assign these developments to Cercacor and then license the technology back from
Cercacor in consideration for upfront payments and royalty obligations to Cercacor. Therefore, these products and technologies
would be deemed to have been developed or improved exclusively by Cercacor.
In addition, we will not be reimbursed by Cercacor for our expenses relating to the development or improvement of any such
products or technologies, which expenses may be significant. As a result of these terms, we may not generate any revenue from
the further development of certain products and technologies for the monitoring of non-vital sign parameters, including
improvements to Masimo SET®, which could adversely affect our business, financial condition and results of operations.
In the event that the Cross-Licensing Agreement is terminated for any reason, or Cercacor grants a license to rainbow®
technology to a third-party, our business would be adversely affected.
Cercacor owns all of the proprietary rights to certain rainbow® technology developed with our proprietary Masimo SET® for
products intended to be used in the Cercacor Market, and all rights to any non-vital signs measurement for which we do not
exercise an option pursuant to the Cross-Licensing Agreement. In addition, Cercacor has the right to terminate the Cross-
Licensing Agreement or grant licenses covering rainbow® technology to third parties if we breach certain terms of the
agreement, including any failure to meet our minimum royalty payment obligations or failure to use commercially reasonable
efforts to develop or market products incorporating licensed rainbow® technology. If we lose our exclusive license to rainbow®
technology, we would lose the ability to prevent others from making, using, selling or importing products using rainbow®
technology in our market. As a result, we would likely be subject to increased competition within our market, and Cercacor or
competitors who obtain a license to rainbow® technology from Cercacor would be able to offer related products.
We may not be able to commercialize our products incorporating licensed rainbow® technology cost-effectively or
successfully.
As a result of the royalties that we must pay to Cercacor, it is generally more expensive for us to make products that incorporate
licensed rainbow® technology than products that do not include licensed rainbow® technology.
We cannot assure you that we will be able to sell products incorporating licensed rainbow® technology at a price the market is
willing to accept. If we cannot commercialize our products incorporating licensed rainbow® technology successfully, we may
not be able to generate sufficient product revenue from these products to be profitable, which could adversely affect our
business, financial condition and results of operations.
Rights provided to Cercacor in the Cross-Licensing Agreement may impede a change in control of our company.
Under the Cross-Licensing Agreement, a change in control includes the resignation or termination of Joe Kiani from his
position as CEO of either Masimo or Cercacor. A change in control also includes other customary events, such as the sale or
merger of Masimo or Cercacor to a non-affiliated third-party or the acquisition of 50% or more of the voting power of Masimo
or Cercacor by a non-affiliated third-party. In the event we undergo a change in control, we are required to immediately pay a
$2.5 million fee to exercise an option to license technology developed by Cercacor for use in blood glucose monitoring.
Additionally, our per product royalties payable to Cercacor will become subject to specified minimums, and the minimum
aggregate annual royalties for licensed rainbow® measurements payable to Cercacor related to carbon monoxide,
methemoglobin, fractional arterial oxygen saturation, hemoglobin and blood glucose will increase to $15.0 million, plus up to
$2.0 million for other rainbow® measurements. Also, if the surviving or acquiring entity ceases to use “Masimo” as a company
name and trademark following a change in control, all rights to the “Masimo” trademark will automatically be assigned to
Cercacor. This could delay or discourage transactions involving an actual or potential change in control of us, including
transactions in which our stockholders might otherwise receive a premium for their shares over our then-current trading price.
In addition, our requirement to assign all future improvements for non-vital signs to Cercacor could impede a change in control
of our company.
If we are unable to obtain key materials and components from sole or limited source suppliers, we will not be able to
deliver our products to customers.
We depend on certain sole or limited source suppliers for certain key materials and components, including digital signal
processor chips and analog-to-digital converter chips, for our noninvasive patient monitoring solutions.
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These suppliers are located around the world, and the production and shipment of such materials and components may be
constrained globally due to the COVID-19 pandemic. We may experience manufacturing problems related to these suppliers
and other outside sources if such suppliers fail to develop, manufacture or ship products and components to us on a timely
basis, or provide us with products and components that do not meet our quality standards and required quantities. In addition,
from time to time there have been industry-wide shortages of certain components that we use in our noninvasive blood
constituent patient monitoring solutions. We may also experience price increases for materials or components, with no
guarantee that such increases can be passed along to our customers, which could adversely impact our gross margins.
If any of these problems occur, we may be unable to obtain substitute sources for these products and components on a timely
basis or on terms acceptable to us, which could harm our ability to manufacture our own products and components profitably or
on time.
Future strategic initiatives, including acquisitions of businesses and strategic investments, could negatively affect our
business, financial condition and results of operations if we fail to integrate the acquired businesses successfully into our
existing operations or achieve the desired results of our investment.
We have acquired several businesses since our inception and we may acquire additional businesses in the future. Future
acquisitions may require debt or equity financing, which could be dilutive to our existing stockholders or reduce our earnings
per share. Even if we complete acquisitions, there are many factors that could affect whether such acquisition will be beneficial
to our business, including, without limitation:
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payment of above-market prices for acquisitions and higher than anticipated acquisition costs;
issuance of common stock as part of the acquisition price or a need to issue stock options or other equity to newly-hired
employees of target companies, resulting in dilution of ownership to our existing stockholders;
reduced profitability if an acquisition is not accretive to our business over either the short-term or the long-term;
difficulties in integrating any acquired companies, personnel, products and other assets into our existing business;
delays in realizing the benefits of the acquired company, products or other assets;
regulatory challenges;
cybersecurity and compliance-related issues;
diversion of our management’s time and attention from other business concerns;
limited or no direct prior experience in new markets or countries we may enter;
unanticipated issues dealing with unfamiliar suppliers, service providers or other collaborators of the acquired company;
higher costs of integration than we anticipated;
write-downs or impairments of goodwill or other intangible assets associated with the acquired company;
difficulties in retaining key employees of the acquired business who are necessary to manage these acquisitions;
negative impacts on our relationships with our employees, clients or collaborators;
litigation or other claims in connection with the acquisition; and
changes in the overall financial model as certain acquired companies may have a different revenue, gross profit margin or
operating expense profile.
Further, our ability to benefit from future acquisitions and/or external strategic investments depends on our ability to
successfully conduct due diligence, negotiate acceptable terms, evaluate prospective opportunities and bring acquired
technologies and/or products to market at acceptable margins and operating expense levels. For example, in March 2020, we
acquired TNI® and added TNI softFlow® technology to our product portfolio. In addition, in December 2020, we acquired a
majority of ownership of LiDCO Group, PLC, which specializes in hemodynamic monitoring solutions.
As these are our first therapeutic and hemodynamic monitoring solutions, the integration of these technologies may require
substantial management time and attention and may divert attention and resources from other important areas, including our
existing business and product lines, and we may not be able to sell the TNI softFlow® technology and hemodynamic monitoring
solutions at acceptable margins and operating expense levels. Our failure in any of these tasks could result in unforeseen
liabilities associated with an acquired company, acquiring a company on unfavorable terms or selecting and eventually
acquiring a suboptimal acquisition target.
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We may also discover deficiencies in internal controls, data adequacy and integrity, product quality, regulatory compliance,
product liabilities or other undisclosed liabilities that we did not uncover prior to our acquisition or investment, which could
result in us becoming subject to penalties, other liabilities or asset impairments. In addition, if we do not achieve the anticipated
benefits of an acquisition or other external investment as rapidly as expected, or at all, investors or analysts may downgrade our
stock.
We also expect to continue to carry out internal strategic initiatives that we believe are necessary to grow our revenues and
expand our business, both in the U.S. and abroad. For example, we have continued to invest in international expansion
programs designed to increase our worldwide presence and take advantage of market expansion opportunities around the world.
Although we believe our investments in these initiatives continue to be in the long-term best interests of Masimo and our
stockholders, there are no assurances that such initiatives will yield favorable results for us. Accordingly, if these initiatives are
not successful, our business, financial condition and results of operations could be adversely affected.
If these risks materialize, our stock price could be materially adversely affected. Any difficulties in the integration of acquired
businesses or unexpected penalties, liabilities or asset impairments in connection with such acquisitions or investments could
have a material adverse effect on our business, financial condition and results of operations.
Our credit agreement contains certain covenants and restrictions that may limit our flexibility in operating our
business.
Our credit agreement dated December 17, 2018 (Credit Facility) with JPMorgan Chase Bank, N.A., as Administrative Agent
and a Lender, and Bank of the West, a Lender, contains various affirmative covenants and restrictions that limit our ability to
engage in specified types of transactions, including:
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incurring specified types of additional indebtedness (including guarantees or other contingent obligations);
paying dividends on, repurchasing or making distributions in respect of our common stock or making other restricted
payments, subject to specified exceptions;
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selling or transferring certain assets;
creating certain liens;
consolidating, merging, selling or otherwise disposing of all or substantially all of our assets; and
entering into certain transactions with any of our affiliates.
In addition, under our Credit Facility, we are required to satisfy and maintain specified financial ratios and other affirmative
covenants. Our ability to meet those financial ratios and affirmative covenants could be affected by events beyond our control
and, therefore, we cannot be assured that we will be able to continue to satisfy these requirements. A breach of any of these
ratios or covenants could result in a default under our Credit Facility. Upon the occurrence of an event of default, the Lenders
could elect to declare all amounts outstanding under the Credit Facility immediately due and payable, terminate all
commitments to extend further credit and pursue legal remedies for recovery, all of which could adversely affect our business
and financial condition. See Note 15 to our accompanying condensed consolidated financial statements included in Part I, Item
1 of this Annual Report on Form 10-K for additional information on our Credit Facility.
Risks Related to Our Stock
Concentration of ownership of our stock among our existing directors, executive officers and principal stockholders may
prevent new investors from influencing significant corporate decisions.
As of January 2, 2021, our current directors and executive officers and their affiliates, in the aggregate, beneficially owned
approximately 9.4% of our outstanding stock. Subject to any fiduciary duties owed to our other stockholders under Delaware
law, these stockholders may be able to exercise significant influence over matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions, and will have some control over our management and
policies.
Some of these persons or entities may have interests that are different from yours. For example, these stockholders may support
proposals and actions with which you may disagree or which are not in your best interests.The concentration of ownership
could delay or prevent a change in control of us, or otherwise discourage a potential acquirer from attempting to obtain control
of us, which in turn could reduce the price of our stock.
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In addition, these stockholders could use their voting influence to maintain our existing management and directors in office or
support or reject other management and Board proposals that are subject to stockholder approval, such as amendments to our
employee stock plans and approvals of significant financing transactions.
Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent a change in
control of our company, prevent attempts to replace or remove current management and reduce the market price of our
stock.
Provisions in our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition involving us
that our stockholders may consider favorable. For example, our certificate of incorporation authorizes our Board to issue up to
5.0 million shares of “blank check” preferred stock. As a result, without further stockholder approval, our Board has the
authority to attach special rights, including voting and dividend rights, to this preferred stock, including pursuant to a
stockholder rights plan. With these rights, preferred stockholders could make it more difficult for a third-party to acquire us. In
addition, our certificate of incorporation provides for a staggered Board, whereby directors serve for three-year terms, with one-
third of the directors coming up for reelection each year. A staggered Board will make it more difficult for a third-party to
obtain control of our Board through a proxy contest, which may be a necessary step in an acquisition of us that is not favored by
our Board.
We are also subject to anti-takeover provisions under the General Corporation Law of the State of Delaware. Under these
provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for
three years without special approval, which could discourage a third-party from making a takeover offer and could delay or
prevent a change in control of us. For purposes of these provisions, an “interested stockholder” generally means someone
owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting
stock during the past three years, subject to certain exceptions as described in the General Corporation Law of the State of
Delaware.
Our bylaws provide that the state or federal courts located within the State of Delaware are the exclusive forum for
substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a
favorable judicial forum for disputes with us or our directors, officers or employees.
Our bylaws provide that the state or federal courts located within the State of Delaware are the sole and exclusive forum for: (i)
any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by
any of our directors, officers or other employees or stockholders to our stockholders, (iii) any action asserting a claim against us
arising pursuant to the General Corporation Law of the State of Delaware, our certificate of incorporation or our bylaws or as to
which the General Corporation Law of the State of Delaware confers jurisdiction on the Court of Chancery of the State of
Delaware, or (iv) any action asserting a claim governed by the internal affairs doctrine. However, this choice of forum provision
does not apply to (a) actions in which the Court of Chancery in the State of Delaware concludes that an indispensable party is
not subject to the jurisdiction of Delaware courts, or (b) actions in which a federal court has assumed exclusive jurisdiction to a
proceeding. This choice of forum provision is not intended to apply to any actions brought under the Securities Act of 1933, as
amended (the Securities Act), or the Securities Exchange Act of 1934, as amended (the Exchange Act). Section 27 of the
Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the
Exchange Act or the rules and regulations thereunder.
As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the
Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. This choice of forum provision may
limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers or other employees or stockholders, which may discourage such lawsuits against us and our directors, officers and other
employees or stockholders.
Furthermore, the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been
challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or
unenforceable.
If a court were to find the choice of forum provision in our bylaws to be inapplicable or unenforceable in an action, we may
incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business,
financial condition and results of operations.
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General Risk Factors
The laws of foreign countries may not adequately protect our intellectual property rights.
Intellectual property protection laws in foreign countries differ substantially from those in the U.S. If we fail to apply for
intellectual property protection in foreign countries, or if we cannot adequately protect our intellectual property rights in these
foreign countries, our competitors may be able to compete more effectively against us, which could adversely affect our
competitive position, as well as our business, financial condition and results of operations.
We may experience significant fluctuations in our periodic financial results and may not maintain our current levels of
profitability in the future.
Our operating results have fluctuated in the past and are likely to fluctuate in the future. Many of the countries in which we
operate, including the U.S. and several of the members of the EU, have experienced and continue to experience uncertain
economic conditions resulting from global as well as local factors. In addition, continuing strength and growth in the U.S.
economy may raise the probability of inflationary pressures and contribute to future interest rate volatility.
Our business or financial results may be adversely impacted by these uncertain economic conditions, including: adverse
changes in interest rates, foreign currency exchange rates, tax laws or tax rates; inflation; contraction in the availability of credit
in the marketplace due to legislation or other economic conditions, which may potentially impair our ability to access the
capital markets on terms acceptable to us or at all; and the effects of government initiatives to manage economic conditions.
We are also unable to predict how changing global economic conditions or potential global health concerns such as the
COVID-19 pandemic will affect our critical customers, suppliers and distributors. Any negative impact of such matters on our
critical customers, suppliers or distributors may also have an adverse impact on our results of operations or financial condition.
Our expense levels are based, in part, on our expectations regarding future revenue levels and are relatively fixed in the short
term. As a result, if our revenue for a particular period was below our expectations, we would not be able to proportionately
reduce our operating expenses for that period. Any revenue shortfall would have a disproportionately negative effect on our
operating results for the period.
In addition, the methods, estimates and judgments that we use in applying our accounting policies are, by their nature, are
subject to substantial risks, uncertainties and assumptions. Factors may arise over time that lead us to change our methods,
estimates and judgments, the impact of which could significantly affect our results of operations. See “Critical Accounting
Estimates” contained in Part I, Item 2 of this Annual Report on Form 10-K.
Recent accounting changes related to our embedded leases within certain deferred equipment agreements have also resulted in
the acceleration of the timing related to our recognition of revenue and expenses associated with certain equipment provided to
customers at no up-front charge. Since we cannot control the timing of when our customers will request us to deliver such
equipment, our revenue and costs with respect to leased equipment could vary substantially in any given quarter or year, which
could further increase quarterly or annual fluctuations within our financial results.
Due to these and other factors, you should not rely on our results for any one quarter as an indication of our future performance.
If our operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop
suddenly and significantly.
Future changes in accounting pronouncements and tax laws, or the interpretation thereof, could have a significant
impact on our reported results, and may affect our historical reporting of previous transactions.
New accounting pronouncements or taxation rules, and evolving interpretations thereof, have occurred and are likely to occur in
the future. For example, in recent years, the Financial Accounting Standards Board issued new accounting standards that impact
our reporting of revenue and expenses, including Accounting Standards Codification (ASC) Topic 606, Revenue from
Contracts with Customers and ASC Topic 842, Leases. Changes made by these new accounting standards not only apply
prospectively, but depending on the method of adoption, may also recast previously reported results.
For additional information related to the impact of new accounting pronouncements, please see Note 2 to our accompanying
condensed consolidated financial statements included in Part I, Item 1 of this Annual Report on Form 10-K.
In addition, the TCJA, which went into effect in December 2017, made changes to the corporate tax rate, business-related
deductions and taxation of foreign earnings, among others, U.S. federal and state regulatory and standard-setting bodies
continue to issue guidance and regulations related to the TCJA that could have a material financial statement impact on our
effective tax rate in future periods. The implementation by us of new practices and processes designed to comply with, and
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benefit from, the TCJA and its rules and regulations could require us to make substantial changes to our business practices,
allocate additional resources, and increase our costs, which could negatively affect our business, results of operations and
financial condition.
If we lose the services of our key personnel, or if we are unable to attract and retain other key personnel, we may not be
able to manage our operations or meet our growth objectives.
We are highly dependent on our senior management, especially Joe Kiani, our CEO, and other key officers. We are also heavily
dependent on our engineers and field sales team, including sales representatives and clinical specialists. The loss of the services
of members of our key personnel, including as a result of the COVID-19 pandemic, or the inability to attract and retain
qualified personnel in the future could prevent the implementation and completion of our objectives, including the development
and introduction of our products. In general, our key personnel may terminate their employment at any time and for any reason
without notice, unless the individual is a participant in our 2007 Severance Protection Plan, in which case the individual has
agreed to provide us with six months’ notice if such individual decides to voluntarily resign. We do not maintain any “key
person” life insurance policies with respect to any of our key personnel.
We are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if
adversely decided or settled, could materially and adversely affect our business, financial condition and results of
operations.
We are, and may in the future become, party to litigation, regulatory proceedings or other disputes. In general, claims made by
or against us in disputes and other legal or regulatory proceedings can be expensive and time-consuming to bring or defend
against, requiring us to expend significant resources and divert the efforts and attention of our management and other personnel
from our business operations. These potential claims may include but are not limited to personal injury and class action
lawsuits, intellectual property claims and regulatory investigations relating to the advertising and promotional claims about our
products and employee claims against us based on, among other things, discrimination, harassment or wrongful termination.
Any one of these claims, even those without merit, may divert our financial and management resources that would otherwise be
used to benefit the future performance of our operations. Any adverse determination against us in these proceedings, or even the
allegations contained in the claims, regardless of whether they are ultimately found to be without merit, may also result in
settlements, injunctions or damages that could have a material adverse effect on our business, financial condition and results of
operations.
Changes to government immigration regulations may materially affect our workforce and limit our supply of qualified
professionals, or increase our cost of securing workers.
We recruit professionals on a global basis and must comply with the immigration laws in the countries in which we operate,
including the U.S. Some of our employees are working under Masimo-sponsored temporary work visas, including H1-B visas.
Statutory law limits the number of new H1-B temporary work permit petitions that may be approved in a fiscal year.
Furthermore, there is a possibility that the current U.S. immigration visa program may be significantly overhauled, and the
number of H1-B visas available, as well as the process to obtain them, may be subject to significant change. Any resulting
changes to this visa program could impact our ability to recruit, hire and retain qualified skilled personnel. If we are unable to
obtain work visas in sufficient quantities or at a sufficient rate for a significant period of time, our business, operating results
and financial condition could be adversely affected. On June 22, 2020, President Trump signed an executive order temporarily
halting certain work visa programs, including the H1-B visa program. The executive order took effect on June 24, 2020 and was
extended in December 2020 to remain in effect until March 31, 2021. While the executive order does not impact current
employees that are working under Masimo-sponsored temporary work visas, including H1-B visas, the executive order could
impact our ability to recruit and hire qualified skilled personnel.
The risks inherent in operating internationally, including the purchase, sale and shipment of our components and
products across international borders, may adversely impact our business, financial condition and results of operations.
We currently derive approximately 33% of our net sales from international operations. In addition, we purchase a portion of our
raw materials and components from international sources. The sale and shipment of our products across international borders,
as well as the purchase of materials and components from international sources, subject us to extensive U.S. and foreign
governmental trade regulations, including those related to conflict minerals. Compliance with such regulations is costly and we
could be exposed to potentially significant penalties if we are found not to be in compliance with such regulations. Any failure
to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited
to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of
export privileges, seizure of shipments, restrictions on certain business activities, and exclusion or debarment from government
contracting. For example, we have had sales of medical products destined for Iran.
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Although these activities have not been financially material to our business, financial condition or results of operations, and
were undertaken in accordance with general licenses authorizing such activities issued by the U.S. Treasury Department’s
Office of Foreign Assets Control, we may not be successful in ensuring compliance with limitation or restrictions on business in
Iran or any other countries subject to economic sanctions and embargoes imposed by the United States. Also, the failure to
comply with applicable legal and regulatory obligations could result in the disruption of our shipping, manufacturing and sales
activities. Any material decrease in our international sales would adversely affect our business, financial condition and results
of operations.
In June 2016, the United Kingdom (UK) held a referendum pursuant to which voters elected to leave the EU, commonly
referred to as Brexit. The UK formally left the EU on January 31, 2020 and began a transition period that ended on December
31, 2020. Although the long-term effects of Brexit have yet to be seen, and the UK is in the process of negotiating trade deals
with other countries, Brexit has created additional uncertainties that may ultimately result in new regulatory costs and
challenges for medical device companies and increased restrictions on imports and exports throughout Europe, which could
adversely affect our ability to conduct and expand our operations in Europe and which may have an adverse effect on our
business, financial condition and results of operations. Additionally, Brexit may increase the possibility that other countries
may decide to leave the EU in the future.
In addition, our international operations expose us and our representatives, agents and distributors to risks inherent in operating
in foreign jurisdictions. These risks include, but are not limited to:
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the imposition of additional U.S. and foreign governmental controls or regulations;
the imposition of costly and lengthy new export licensing requirements;
a shortage of high-quality sales people and distributors;
the loss of any key personnel that possess proprietary knowledge, or who are otherwise important to our success in certain
international markets;
changes in duties and tariffs, license obligations and other non-tariff barriers to trade;
the imposition of new trade restrictions;
the imposition of restrictions on the activities of foreign agents, representatives and distributors;
compliance with foreign tax laws, regulations and requirements;
pricing pressure;
changes in foreign currency exchange rates;
laws and business practices favoring local companies;
political instability and actual or anticipated military or political conflicts;
financial and civil unrest worldwide;
outbreaks of illnesses, pandemics or other local or global health issues;
the inability to collect amounts paid by foreign government customers to our appointed foreign agents;
longer payment cycles, increased credit risk and different collection remedies with respect to receivables; and
difficulties in enforcing or defending intellectual property rights.
The U.S. government has recently initiated substantial changes in U.S. trade policy and U.S. trade agreements, including the
initiation of tariffs on certain foreign goods. In response to these tariffs, certain foreign governments instituted or are
considering imposing tariffs on certain U.S. goods. In addition, the U.S. has recently negotiated new trade agreements that
could impact us, including the United States-Mexico-Canada Agreement (USMCA), which went into force on July 1, 2020 and
replaced the North American Free Trade Agreement. A trade war, trade barriers or other governmental actions related to tariffs,
international trade agreements, import or export restrictions or other trade policies could adversely impact demand for our
products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, therefore, adversely affect our
business, financial condition and results of operations.
The U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit
companies and their intermediaries from promising or making improper payments to non-U.S. officials for the purpose of
obtaining an advantage to secure or retain business. Because of the predominance of government-sponsored healthcare systems
around the world, many of our customer relationships outside of the U.S. are with governmental entities and are therefore
subject to such anti-bribery laws.
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We have adopted policies and practices that help us ensure compliance with these anti-bribery laws. However, such policies and
practice may require us to invest in additional monitoring resources or forgo certain business opportunities in order to ensure
global compliance with these laws.
Our operations may be adversely impacted by our exposure to risks related to foreign currency exchange rates.
We market our products in certain foreign markets through our subsidiaries and other international distributors.
As a result, events that result in global economic uncertainty could significantly affect our results of operations in the form of
gains and losses on foreign currency transactions and potential devaluation of the local currencies of our customers relative to
the U.S. Dollar.
While a majority of our sales are transacted in U.S. Dollars, some of our sales agreements with foreign customers provide for
payment in currencies other than the U.S. Dollar. These foreign currency revenues, when converted into U.S. Dollars, can vary
depending on the approximation of the exchange rates applied during a respective period. Similarly, certain of our foreign
subsidiaries transact business in their respective country’s local currency, which is also their functional currency. In addition,
certain production costs related to our manufacturing operations in Mexico are denominated in Mexican Pesos. As a result,
expenses of these foreign subsidiaries and certain production costs, when converted into U.S. Dollars, can vary depending on
average monthly exchange rates during a respective period.
We are also exposed to foreign currency gains or losses on outstanding foreign currency denominated receivables and payables,
as well as cash deposits. When converted to U.S. Dollars, these receivables, payables and cash deposits can vary depending on
the monthly exchange rates at the end of the period. In addition, certain intercompany transactions may give rise to realized and
unrealized foreign currency gains or losses based on the currency underlying such intercompany transactions. Accordingly, our
operating results are subject to fluctuations in foreign currency exchange rates.
The balance sheets of our foreign subsidiaries whose functional currency is not the U.S. Dollar are translated into U.S. Dollars
at the rate of exchange at the balance sheet date and the statements of operations and cash flows are translated into U.S. Dollars
using an approximation of the average monthly exchange rates applicable during the period. Any foreign currency exchange
gain or loss as a result of translating the balance sheets of our foreign subsidiaries whose functional currency is not the U.S.
Dollar is included in equity as a component of accumulated other comprehensive income (loss).
We currently do not hedge our foreign currency exchange rate risk. As a result, changes in foreign exchange rates could have a
material adverse effect on our business, financial condition and results of operations. For additional information related to our
foreign currency exchange rate risk, please see Quantitative and Qualitative Disclosures about Market Risk in Part I, Item 3 of
this Annual Report on Form 10-K.
We currently manufacture our products at a limited number of locations and any disruption to, expansion of, or
changes in trade programs related to such manufacturing operations could adversely affect our business, financial
condition and results of operations.
We rely on manufacturing facilities in California, New Hampshire and Mexico that may be affected by natural or man-made
disasters. Earthquakes are of particular significance since some of our facilities are located in earthquake-prone areas.
We are also vulnerable to damage from other types of disasters, including power loss, attacks from extremist or terrorist
organizations, epidemics, communication failures, fire, floods and similar events. Our facilities and the manufacturing
equipment we use to produce our products would be difficult to replace and could require substantial time to repair if significant
damage were to result from any of these occurrences.
If one of our manufacturing facilities was affected by a natural or man-made disaster, we would be forced to rely on third-party
manufacturers if we could not shift production to our other manufacturing facilities. Furthermore, our insurance for damage to
our property and the disruption of our business from casualties may not be sufficient to cover all of our potential losses and may
not continue to be available to us on acceptable terms, or at all. If the lease for any of our leased facilities is terminated, we are
unable to renew any of our leases or we are otherwise forced to seek alternative facilities, or if we voluntarily expand one or
more of our manufacturing operations to new locations, we may incur additional transition costs and experience a disruption in
the supply of our products until the new facilities are available and operating. Additionally, we have occasionally experienced
seasonality among our manufacturing workforce, and if we continue to experience such seasonality or other workforce
shortages or otherwise have issues retaining employees at our manufacturing facilities, we may not be able to meet our
customers’ demands.
58
Our global manufacturing and distribution are dependent upon our manufacturing facilities in Mexico, and the expedient
importation of raw materials and exportation of finished goods between the U.S. and Mexico. Undue delays and/or closures of
the proximal cross-border transit facilities, or any restrictions by the U.S. federal administration related to the movement of
goods across the U.S. and Mexico border, may adversely affect our ability to fulfill orders and supply our healthcare provider
customers with essential replenishment supplies, as well as adversely impact our business, operating results and financial
condition.
In addition, our manufacturing facilities in Mexico are authorized to operate under the Mexican Maquiladora (IMMEX)
program. The IMMEX program allows us to import certain items from the U.S. into Mexico duty-free, provided that such
items, after processing, are exported from Mexico within a stipulated timeframe. Maquiladora status, which is renewed
periodically, is subject to various restrictions and requirements, including compliance with the terms of the IMMEX program
and other local regulations. Failure to comply with the IMMEX program regulations, including any changes thereto, could
increase our manufacturing costs and adversely affect our business, operating results and financial condition.
If we do not accurately forecast customer demand, we may hold suboptimal inventory levels that could adversely affect
our business, financial condition and results of operations.
If we are unable to meet the demand of our customers, our customers may cancel orders or purchase products from our
competitors, which could reduce our revenue and gross profit margin. Conversely, if product demand decreases, we may be
unable to timely adjust our manufacturing cost structure, resulting in excess capacity, which would lower gross product
margins. Similarly, if we are unable to forecast demand accurately, we could be required to record charges related to excess or
obsolete inventory, which would also lower our gross margin.
If we fail to comply with the reporting obligations of the Securities Exchange Act of 1934, as amended, or if we fail to
maintain adequate internal control over financial reporting, our business, results of operations and financial condition
and investors’ confidence in us could be adversely affected.
We are required to prepare and disclose certain information under the Securities Exchange Act of 1934, as amended, in a timely
manner and meet our reporting obligations in their entirety, and our failure to do so could subject us to penalties under federal
securities laws and regulations of The Nasdaq Stock Market LLC, expose us to lawsuits and restrict our ability to access
financing on favorable terms, or at all.
If we fail to maintain adequate internal controls over financial reporting, we may not be able to conclude on an ongoing basis
that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act.
Moreover, any material weakness in our internal control environment could result in the loss of investor confidence in the
reliability of our financial statements, which in turn could harm our business, negatively impact the trading price of our stock,
and adversely affect investors’ confidence in our company and our ability to access capital markets for financing.
Changing laws and increasingly complex corporate governance and public disclosure requirements could have an
adverse effect on our business and operating results.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the California Transparency in Supply Chains Act, the
UK Modern Slavery Act and new regulations issued by the SEC and The Nasdaq Stock Market LLC, have created, and will
create, additional compliance requirements for us. For example, the Dodd-Frank Act includes provisions regarding, among
other things, advisory votes on named executive officer compensation and “conflict minerals” reporting. Complying with these
rules and regulations has increased and will increase our legal and financial compliance costs, make some activities more
difficult, time-consuming or costly and increase demand on our systems and resources. As a result, management’s attention
may be diverted from other business concerns, which could adversely affect our business, financial condition and results of
operations. We may also need to hire additional employees or engage outside consultants to comply with these requirements,
which will increase our costs and expenses. To maintain high standards of corporate governance and public disclosure, we have
invested in, and intend to continue to invest in, reasonably necessary resources to comply with evolving standards.
In addition, stockholder litigation surrounding executive compensation and disclosure of executive compensation has increased
with the passage of the Dodd-Frank Act. Furthermore, our stockholders may not continue to approve our advisory vote on
named executive officer compensation that is being voted on by our stockholders annually pursuant to the Dodd-Frank Act.
59
If we are involved in a lawsuit related to compensation matters or any other matters not covered by our directors’ and officers’
liability insurance, we may incur significant expenses in defending against such lawsuits, or be subject to significant fines or
required to take significant remedial actions, each of which could adversely affect our business, financial condition and results
of operations.
If product liability claims are brought against us, we could face substantial liability and costs.
Our products are predominantly used in patient care and expose us to product liability claims and product recalls, including, but
not limited to, those that may arise from unauthorized off-label use, malfunctions, design flaws or manufacturing defects related
to our products or the use of our products with incompatible components or systems. In addition, as we continue to expand our
product portfolio, we may enter or create new markets, including consumer markets, that may expose us to additional product
liability risks. For example, with the acquisition of TNI® in March 2020, we added TNI softFlow® technology to our product
portfolio. While this technology provides efficient, quiet and comfortable respiratory support to patients, it may present
increased risk of infection to caregivers.
We cannot be certain that our product liability insurance will be sufficient to cover any or all damages for product liability
claims that may be brought against us in the future. Furthermore, we may not be able to obtain or maintain insurance in the
future at satisfactory rates or in adequate amounts to protect us against any product liability claims.
Additionally, the laws and regulations regarding product liability are constantly evolving, both through the passage of new
legislation at the state and federal levels and through new interpretations of existing legislation. For example, in February 2017,
the Washington Supreme Court determined that, under the Washington Product Liability Act, medical device manufacturers
have a duty to warn hospitals of any potential risks posed by their products. As the legal and regulatory landscape surrounding
product liability change, we may become exposed to greater liability than currently anticipated.
Any losses that we may suffer from product liability claims, and the effect that any product liability litigation may have upon
the reputation and marketability of our technology and products, together with the corresponding diversion of the attention of
our key employees, may subject us to significant damages and could adversely affect our business, financial condition and
results of operations.
We may incur environmental and personal injury liabilities related to certain hazardous materials used in our
operations.
Certain manufacturing processes for our products may involve the storage, use, generation and disposal of certain hazardous
materials and wastes, including silicone adhesives, solder and solder paste, sealants, epoxies and various solvents such as
methyl ethyl ketone, acetone and isopropyl alcohol. As a result, we are subject to certain environmental laws, as well as certain
other laws and regulations, that restrict the materials that can be used in our products or in our manufacturing processes. For
example, products that we sell in Europe are subject to regulation in the EU markets under the Restriction of the Use of
Hazardous Substances Directive (RoHS). RoHS prohibits companies from selling products that contain certain hazardous
materials in EU member states.
In addition, the EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances
of very high concern in products. Compliance with such regulations may be costly and, therefore, we may incur significant
costs to comply with these laws and regulations.
In addition, new environmental laws may further affect how we manufacture our products, how we use, generate or dispose of
hazardous materials and waste, or further affect what materials can be used in our products. Any required changes to our
operations may increase our manufacturing costs, detrimentally impact the performance of our products, add greater testing
lead-times for product introductions or have other similar effects.
In connection with our research and manufacturing activities, we use, and our employees may be exposed to, materials that are
hazardous to human health, safety or the environment. The risk of accidental injury to our employees or contamination from
these materials cannot be eliminated, and we could be held liable for any resulting damages, the related liability for which could
exceed our reserves. We do not specifically insure against environmental liabilities. If an enforcement action were to occur, our
reputation and our business and financial condition may be harmed, even if we were to prevail or settle the action on terms
favorable to us.
60
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that
technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.
Increased global cybersecurity vulnerabilities, cybersecurity threats and sophisticated and targeted cybersecurity attacks pose a
risk to the security of Masimo’s systems and networks, including the confidentiality, availability and integrity of any underlying
information and data, and those of our customers, partners, suppliers and third-party service providers. Our ability to effectively
manage and maintain our internal business information, and to ship products to customers and invoice them on a timely basis,
depends significantly on our enterprise resource planning system and other information systems.
Portions of our information technology systems may experience interruptions, delays or cessations of service or produce errors
in connection with ongoing systems implementation work. In addition, interfaces between our products and our customers’
computer networks could provide additional opportunities for cybersecurity attacks on us and our customers. The techniques
used to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of
the world. Cybersecurity attacks in particular are evolving and include, but are not limited to, threats, malicious software,
ransom ware, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions
in systems, misappropriation of confidential or otherwise protected information and corruption of data. As a result, there can be
no assurance that our protective measures will prevent or detect security breaches that could have a significant impact on our
business, reputation, financial condition and results of operations.
The failure of these systems to operate or integrate effectively with other internal, customer, supplier or third-party service
provider systems and to protect the underlying information technology system and data integrity, including from cyber-attacks,
intrusions or other breaches or unauthorized access of these systems, or any failure by us to remediate any such attacks or
breaches, may also result in damage to our reputation or competitiveness, delays in product fulfillment and reduced efficiency
of our operations, and could require significant capital investments to remediate any such failure, problem or breach, all of
which could adversely affect our business, financial condition and results of operations.
Discontinuation, reform or replacement of LIBOR and other benchmark rates, or uncertainty related to the potential
for any of the foregoing, may adversely affect our business.
The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out the London Inter-Bank Offered Rate
(LIBOR) by the end of 2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The
discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable impact on
contractual mechanics in the credit markets or cause disruption to the broader financial markets. Uncertainty as to the nature of
such potential discontinuation, reform or replacement may also negatively impact interest expense related to borrowings under
our Credit Facility.
Borrowings under our Credit Facility bear interest, at our election, either at the Alternate Base Rate (as defined in the Credit
Facility), or at the Adjusted LIBO Rate (as defined in the Credit Facility), which is derived from LIBOR. We may in the future
pursue amendments to our Credit Facility to provide for a transition mechanism or other reference rate in anticipation of
LIBOR’s discontinuation, but we may not be able to reach agreement with our lenders on any such amendments. As a result,
additional financing to replace any then-outstanding LIBOR-based debt may be unavailable, more expensive or restricted by the
terms of such outstanding indebtedness.
Our stock price may be volatile, and your investment in our stock could suffer a decline in value.
There has been and could continue to be significant volatility in the market price and trading volume of equity securities. For
example, our closing stock price ranged from $148.38 to $271.35 per share from December 29, 2019 to January 2, 2021.
Factors contributing to our stock price volatility may include our financial performance, as well as broader economic, political
and market factors, including the COVID-19 pandemic. In addition to the other risk factors previously discussed in this Annual
Report on Form 10-K, there are many other factors that we may not be able to control that could have a significant effect on our
stock price. These include, but are not limited to:
•
•
•
•
•
•
•
actual or anticipated fluctuations in our operating results or future prospects;
our announcements or our competitors’ announcements of new products;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
strategic actions by us or our competitors, such as acquisitions or restructurings;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidance, interpretations or principles;
changes in our growth rates or our competitors’ growth rates;
61
•
•
•
•
•
•
•
•
developments regarding our patents or proprietary rights or those of our competitors;
ongoing legal proceedings;
our inability to raise additional capital as needed;
concerns or allegations as to the safety or efficacy of our products;
changes in financial markets or general economic conditions, including the effects of recession or slow economic growth in
the U.S. and abroad;
effects of public health crises, epidemics and pandemics, such as the COVID-19 pandemic;
sales of stock by us or members of our management team, our Board of Directors (Board) or certain institutional
stockholders; and
changes in stock market analyst recommendations or earnings estimates regarding our stock, other comparable companies
or our industry generally.
Therefore, you may not be able to resell your shares at or above the price you paid for them.
Our investors could experience substantial dilution of their investments as a result of subsequent exercises of our
outstanding options, vesting of outstanding restricted stock units (RSUs) and performance stock units (PSUs), or the
grant of future equity awards by us.
As of January 2, 2021, approximately 11.1 million shares of our common stock were reserved for issuance under our equity
incentive plans, of which approximately 3.4 million shares were subject to options outstanding at such date at a weighted-
average exercise price of $77.44 per share, approximately 2.9 million shares were subject to outstanding RSUs, approximately
0.4 million shares were subject to outstanding PSUs and approximately 4.4 million shares were available for future awards
under our 2017 Equity Incentive Plan. Over the past 36 months, we have experienced higher rates of stock option exercises
compared to many earlier periods, and this trend may continue. To the extent outstanding options are exercised or outstanding
RSUs or PSUs vest, our existing stockholders may incur dilution. We rely on equity awards to motivate current employees and
to attract new employees. The grant of future equity awards by us to our employees and other service providers may further
dilute our stockholders.
Future resales of our stock, including those by our insiders and a few investment funds, may cause our stock price to
decline.
A significant portion of our outstanding shares are held by our directors, our executive officers and a few investment funds.
Resales by these stockholders of a substantial number of such shares, announcements of any proposed resale of substantial
amounts of our stock or the perception that substantial resales may be made, could significantly reduce the market price of our
stock. Some of our directors and executive officers have entered into Rule 10b5-1 trading plans pursuant to which they have
arranged to sell shares of our stock from time to time in the future. Generally, these sales require public filings. Actual or
potential sales by these insiders, including those under a pre-arranged Rule 10b5-1 trading plan, could be interpreted by the
market as an indication that the insider has lost confidence in our stock and reduce the market price of our stock.
We have registered and expect to continue to register shares reserved under our equity plans pursuant to Registration
Statements on Form S-8. All shares issued pursuant to a Registration Statement on Form S-8 can be freely sold in the public
market upon issuance, subject to restrictions on our affiliates under Rule 144. If a large number of these shares are sold in the
public market, the sales could reduce the trading price of our stock.
We may elect not to declare cash dividends on our stock, may elect to only pay dividends on an infrequent or irregular
basis, or may elect not to make any additional stock repurchases. As a result, any return on your investment may be
limited to the value of our stock. In addition, the payment of any future dividends or the repurchase of our stock might
limit our ability to pursue other growth opportunities.
Our Board may from time to time declare, and we may pay, dividends on our outstanding shares in the manner and upon the
terms and conditions provided by law. However, we may elect to retain all future earnings for the operation and expansion of
our business, rather than paying cash dividends on our stock. In addition, under certain circumstances, our Credit Facility may
limit our ability to pay cash dividends, repurchase our common stock or make other distributions to stockholders. Any payment
of cash dividends on our stock will be at the discretion of our Board and will depend upon our results of operations, earnings,
capital requirements, financial condition, business prospects, contractual restrictions and other factors deemed relevant by our
Board. In the event our Board declares any dividends, there is no assurance with respect to the amount, timing or frequency of
any such dividends.
62
Any repurchase of our common stock under the stock repurchase plan authorized by our Board in July 2018 (2018 Repurchase
Program) will be at the discretion of a committee comprised of our CEO and Chief Financial Officer, and will depend on
several factors, including, but not limited to, results of operations, capital requirements, financial conditions, available capital
from operations or other sources and the market price of our common stock. Therefore, there is no assurance with respect to the
amount, price or timing of any such repurchases. We may elect to retain all future earnings for the operation and expansion of
our business, rather than repurchasing additional outstanding shares. For additional information related to our 2018 Repurchase
Program, please see Note 17 to our accompanying condensed consolidated financial statements included in Part I, Item 1 of this
Annual Report on Form 10-K.
In the event we pay dividends, or make any stock repurchases in the future, our ability to finance any material expansion of our
business, including through acquisitions, investments or increased capital spending, or to fund our operations, may be limited.
In addition, any repurchases we may make in the future may not prove to be at optimal prices. Our Board may modify or amend
the 2018 Repurchase Program, or adopt a new stock repurchase program, at any time at its discretion without stockholder
approval.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We own two facilities in Irvine, California with combined square footage of approximately 314,400 that house our corporate
headquarters and the majority of our U.S. research and development activities. We also own approximately 86,500 square feet
of property in Hudson, New Hampshire, which is used to develop and manufacture advanced light emitting diodes and other
advanced component-level technologies, as well as warehousing and administrative operations. Additionally, we own
approximately 79,300 square feet of property in Neuchatel, Switzerland, that houses our international headquarters.
We continue to lease and occupy various other buildings in California and other locations in the U.S. approximating a total of
168,800 square feet for product manufacturing, warehousing, distribution and sales support operations. These leases expire
from February 2022 through September 2030. We also operate multiple facilities in Mexicali and San Luis Rio Colorado,
Mexico with combined square footage of approximately 333,400 square feet, which are used for manufacturing and
warehousing our products under a shelter labor agreement with Industrial Vallera de Mexicali, S.A. de C.V. (IVEMSA).
IVEMSA leases these manufacturing facilities directly from the owners of the properties under separate agreements that are
guaranteed by us. These leases expire in August 2024.
We also lease and occupy various other facilities throughout the world to operate our business. We believe that our existing
facilities are adequate to meet our needs and that existing needs and future growth can be accommodated by purchasing or
leasing alternative or additional space.
ITEM 3. LEGAL PROCEEDINGS
The information set forth in Note 21 to our accompanying consolidated financial statements under the caption “Litigation”
included in Part IV, Item 15(a) of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our stock is traded on the Nasdaq Global Select Market under the symbol “MASI”. As of February 16, 2021, the closing price
of our stock was $273.52 per share, and the number of stockholders of record, excluding persons whose stock is in nominee or
“street name” accounts through brokers, was 18.
63
Dividend Policy
We have historically not paid dividends to our stockholders. Any determination to declare and pay dividends will be made by
our Board and will depend upon our results of operations, earnings, capital requirements, financial condition, business
prospects, contractual restrictions and other factors deemed relevant by our Board. In addition, under certain circumstances, our
Credit Facility may limit our ability to pay cash dividends. In the event a dividend is declared, there is no assurance with respect
to the amount, timing or frequency of any such dividends. The dividend declared in 2012 was deemed to be a special dividend
and there is no assurance that special dividends will be declared again during the expected term.
Stock Performance Graph
The following stock performance graph and related information shall not be deemed “soliciting material” or to be “filed” with
the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange
Act, except to the extent that we specifically incorporate it by reference into such filing.
The following stock performance graph compares total stockholder returns for our common stock from January 2, 2016 through
January 2, 2021 against the Nasdaq Market Composite Index and Nasdaq Medical Equipment Index, assuming a $100
investment made on January 2, 2016. Each of the two comparative measures of cumulative total return assumes reinvestment of
dividends. The stock performance shown on the graph below is not necessarily indicative of future price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Masimo Corporation, the Nasdaq Market Composite Index, and
the Nasdaq Medical Equipment Index
$700
$600
$500
$400
$300
$200
$100
$0
01/02/16
12/31/16
12/30/17
12/29/2018
12/28/2019
1/2/2021
Masimo Corporation
Nasdaq Composite
Nasdaq Medical Equipment
*$100 invested on 1/2/2016 in stock or in index, including reinvestment of dividends. Indexes calculated on month-end basis.
64
Repurchases and Withholdings of Issuer Securities
In July 2018, our Board of Directors (Board) approved a new stock repurchase program, authorizing us to purchase up to 5.0
million additional shares of its common stock over a period of up to three years (Repurchase Program). The Repurchase
Program became effective in September 2018. We expect to fund the Repurchase Program through its available cash, cash
expected to be generated from future operations and other potential sources of capital. The Repurchase Program can be carried
out at the discretion of a committee comprised of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
through open market purchases, one or more Rule 10b5-1 trading plans, block trades and privately negotiated transactions. Any
repurchases under the Repurchase Plan are subject to the availability of stock, general market conditions, the trading price of
the stock, available capital, alternative uses for capital and our financial performance. During the year ended January 2, 2021,
we repurchased approximately 0.5 million shares under the Repurchase Program at an average cost of $242.40 per share,
totaling approximately $110.5 million. The total remaining shares authorized for repurchase under the Repurchase Program
approximated 4.3 million shares as of January 2, 2021.
Issuer Repurchases and Withholdings of Equity Securities
During the three months ended January 2, 2021, we effected stock repurchases pursuant to the Repurchase Program. Shares
repurchased by us or withheld to satisfy tax withholding obligations during each fiscal month of the quarter ended January 2,
2021 were as follows:
Period
Total Number
of Shares
Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs(1)
September 27, 2020 to October 24, 2020..................
— $
October 25, 2020 to November 21, 2020..................
November 22, 2020 to January 2, 2021....................
317,950
135,512
Total.....................................................................
453,462 $
—
242.35
244.37
242.95
—
—
—
—
4,722,518
4,404,568
4,269,056
4,269,056
_____________
(1)
In July 2018, our board of directors authorized the Repurchase Program, whereby we may repurchase up to 5.0 million shares of our common stock. The
Repurchase Program can be carried out at the discretion of a committee comprised of our CEO and CFO through open market purchases, one or more
Rule 10b5-1 trading plans, block trades and privately negotiated transactions.
During the year ended January 2, 2021, we satisfied certain U.S. federal and state tax withholding obligations due upon the
vesting of equity grants by withholding shares of our common stock, with an aggregate fair market value on the date of vesting
equal to the tax withholding obligations, from the shares of our common stock actually issued in connection with such award.
Shares withheld to satisfy tax withholding obligations for the year ended January 2, 2021 and December 28, 2019 were as
follows (in thousands, except per share amounts):
Three Months Ended
Year Ended
January 2,
2021(1)
December 28,
2019
January 2,
2021(1)
December 28,
2019
Shares withheld......................................................
Average cost per share...........................................
Value of shares withheld........................................
$
$
8,464
252.72 $
2,139 $
—
— $
— $
18,750 ‘(1)
203.01
3,807
$
$
1
105.52
123
_____________
(1) Also included here is the option cost due upon the exercise of stock options that was paid by delivering the shares previously owned by the participant.
ITEM 6.
SELECTED FINANCIAL DATA
The following tables reflect selected financial data derived from our consolidated financial statements for each of the last five
years. The consolidated statement of operations data for the years ended January 2, 2021, December 28, 2019 and December
29, 2018 and the consolidated balance sheet data as of January 2, 2021 and December 28, 2019 were derived from our audited
consolidated financial statements included in this Annual Report on Form 10-K.
65
The consolidated statement of operations data for the years ended December 30, 2017 and December 31, 2016, and the
consolidated balance sheet data as of December 29, 2018, December 30, 2017 and December 31, 2016 were derived from our
audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Historical results are not
necessarily indicative of future results.
We adopted Accounting Standards Codification (ASC) Topic 842, Leases (ASC 842), effective December 30, 2018, using the
modified retrospective approach and applying the current-period adjustment method of adoption. Pursuant to such adoption
method, all periods beginning on or after December 30, 2018 are presented under ASC 842 with a cumulative effect adjustment
to the opening balance sheet as of the first day of fiscal year 2019, and all prior period amounts are not adjusted and continue to
be reported in accordance with the legacy accounting requirements under ASC Topic 840, Leases. See Note 2 to our
accompanying consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for
additional information related to our adoption of this new accounting standard.
The selected financial data set forth below should be read in conjunction with our consolidated financial statements, the related
notes and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included
elsewhere in this Annual Report on Form 10-K.
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Year Ended
December 30,
2017(1)
Year Ended
December 31,
2016(1)
(in thousands, except per share amounts)
Statement of Operations:
Revenue:
Product..................................................................... $ 1,143,744 $
Royalty and other revenue.......................................
Total revenue...................................................................
Cost of goods sold...........................................................
Gross profit.....................................................................
Operating expenses:
—
1,143,744
400,679
743,065
936,408 $
1,429
937,837
308,665
629,172
829,874 $
28,415
858,289
283,397
574,892
738,242 $
52,006
790,248
268,216
522,032
Selling, general and administrative..........................
Research and development......................................
Litigation settlement, award and/or defense
costs.........................................................................
Total operating expenses.................................................
Operating income............................................................
Non-operating income (expense)....................................
Income before provision for income taxes......................
Provision for income taxes..............................................
Net income including noncontrolling interest.................
Net loss attributable to noncontrolling interest...............
Net income attributable to Masimo Corporation
stockholders.................................................................... $
Net income per share attributable to Masimo
Corporation stockholders:
369,057
118,659
(474)
487,242
255,823
7,913
263,736
23,454
240,282
20
314,661
93,295
—
407,956
221,216
12,950
234,166
37,950
196,216
—
285,417
81,006
425
366,848
208,044
5,732
213,776
20,233
193,543
—
273,011
65,234
—
338,245
183,787
2,013
185,800
61,011
124,789
—
240,302 $
196,216 $
193,543 $
124,789 $
311,097
Basic......................................................................... $
Diluted..................................................................... $
4.39 $
4.14 $
3.67 $
3.44 $
3.70 $
3.45 $
2.42 $
2.23 $
6.28
5.85
Weighted-average number of common shares:
Basic.........................................................................
Diluted.....................................................................
54,700
58,037
53,434
57,100
52,296
56,039
51,516
55,874
49,530
53,195
66
673,962
38,936
712,898
234,560
478,338
254,707
57,686
(270,000)
42,393
435,945
(2,429)
433,516
122,419
311,097
—
January 2,
2021
December 28,
2019
December 29,
2018
(in thousands)
December 30,
2017(1)
December 31,
2016(1)
Balance Sheet Data:
Cash, cash equivalents and short-term
investments...................................................................... $
Working capital...............................................................
Total assets......................................................................
Total debt.........................................................................
Total equity.....................................................................
641,447 $
687,687 $
552,490 $
315,302 $
305,970
867,329
823,843
642,722
1,712,552
1,396,128
1,154,818
—
—
—
430,041
905,436
—
289,830
814,352
71
1,407,640
1,167,874
969,065
724,025
584,177
______________
(1) Certain information presented as of and for the periods ended December 30, 2017 and December 31, 2016 have been previously restated to reflect the full
retrospective application of Accounting Standards Update (ASU) No. 2014-09, Revenue (Topic 606): Revenue from Contracts with Customers (ASU
2014-09), as of December 31, 2017. Information presented as of and for the period ended January 2, 2016 has not been restated and continues to reflect
the prior revenue recognition guidance pursuant to ASC Topic 605, Revenue Recognition.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read this discussion together with the financial statements, related notes and other financial information included in
this Annual Report on Form 10-K. The following discussion may contain predictions, estimates and other forward-looking
statements that involve a number of risks and uncertainties, including those discussed under Item 1A—“Risk Factors” and
elsewhere in this Annual Report on Form 10-K. These risks could cause our actual results to differ materially from any future
performance suggested below.
Executive Overview
We are a global medical technology company that develops, manufactures and markets a variety of noninvasive monitoring
technologies and hospital automation solutions. Our mission is to improve patient outcomes and reduce the cost of patient care.
Our patient monitoring solutions generally incorporate a monitor or circuit board, proprietary single-patient use or reusable
sensors, software and/or cables. We provide our products to hospitals, emergency medical service (EMS) providers, home care
providers, long-term care facilities, physician offices, veterinarians and consumers through our direct sales force, distributors
and original equipment manufacturers (OEM) partners. We were incorporated in California in May 1989 and reincorporated in
Delaware in May 1996.
Our core business is Measure-through Motion and Low Perfusion™ pulse oximetry, known as Masimo Signal Extraction
Technology® (SET®) pulse oximetry. Our product offerings have expanded significantly over the years to also include
noninvasive monitoring of blood constituents with an optical signature, optical regional oximetry monitoring, electrical brain
function monitoring, acoustic respiration monitoring and exhaled gas monitoring. In addition, we have developed the Root®
patient monitoring and connectivity platform, the Radical-7® and Rad-97® bedside and portable patient monitors and the
Radius-7® wearable wireless patient monitor. We have also developed hospital automation and connectivity solutions, such as
the Masimo Patient SafetyNet™ supplemental remote patient surveillance and monitoring system, which currently allows up to
200 patients to be monitored and viewed simultaneously and remotely through a PC-based monitor or by care providers through
their pagers, voice-over-IP phones or smartphones; Iris® and Iris® Gateway, which allow the transfer of data from Masimo and
third-party devices to hospital electronic medical records; and UniView™, which provides an integrated display of real-time data
from Masimo and third-party devices. Please see Part I, Item 1 of this Annual Report on Form 10-K for additional information
related to our business, products and technologies.
COVID-19 Pandemic
The COVID-19 pandemic has created significant uncertainty in the U.S. and around the globe, resulting in both challenges and
opportunities for our business. We are committed to being as transparent as possible with our investors, employees, customers,
suppliers and business partners as we collectively work to respond to this crisis. In response to this situation, we have
implemented a number of precautionary measures at our facilities, including requiring certain personnel to work remotely from
home and enacting social distancing, requiring face masks and mandatory screening for symptoms associated with COVID-19
for critical personnel that are required to report to our facilities to work.
67
We have recently introduced new products, such as Masimo SafetyNet™ and Masimo SafetyNet-Open™, to help combat the
COVID-19 pandemic, and have made charitable pledges to various global health organizations to support global COVID-19
relief efforts. In response to the increased product demand that we are seeing from our customers as they respond to and prepare
for COVID-19 patient volumes, we have continued to increase our manufacturing capacity. We currently believe that our
existing liquidity position will be sufficient to fund these initiatives and our response efforts.
Given the uncertainties related to the COVID-19 pandemic, we cannot predict how long the increased product demand we have
experienced or any resulting changes in our product mix, as well as the associated gross margin impact from increased boards/
instruments sales, will continue. In addition, this increase in current demand could result in potential reductions in future
demand if our customers have over purchased our products and need to consume their excess inventory before purchasing
additional products. Furthermore, we continue to be exposed to potential disruptions to our manufacturing operations,
disruptions in the supply of critical manufacturing components and in our workforce as circumstances surrounding the global
impact of the COVID-19 pandemic continue to change. Please see “Risks Related to Our Revenues” and “Risks Related to our
Business and Operations” in Part I, Item 1A of this Annual Report on Form 10-K for additional information on potential
negative impacts to us resulting from the COVID-19 pandemic.
Adoption of Lease Accounting Standard
Effective December 30, 2018, we adopted ASC Topic 842, Leases (ASC 842). Our adoption of ASC 842 generally resulted in
(a) the recognition of lessee right-of-use (ROU) assets for the right to use assets subject to operating leases; (b) the recognition
of lessee lease liabilities for our obligation to make payments under operating leases; and (c) the acceleration of when we
recognize certain revenue and costs as a lessor of equipment provided to end-user hospitals at no up-front charge under deferred
equipment agreements with fixed multi-year sensor purchase commitments. See “Critical Accounting Policies and Estimates”
below and Note 2 to our accompanying consolidated financial statements included in Part I, Item 1 of this Annual Report on
Form 10-K for additional information related to our adoption of this accounting standard.
Stock Repurchase Program
In July 2018, our Board approved a stock repurchase program authorizing us to purchase up to 5.0 million shares of our
common stock over a period of up to three years (2018 Repurchase Program). The 2018 Repurchase Program may be carried
out at the discretion of a committee comprised of our CEO and CFO through open market purchases, one or more Rule 10b5-1
trading plans, block trades and in privately negotiated transactions. For additional information regarding our current and prior
stock repurchase programs, see Part II, Item 5 and Note 17 to our accompanying consolidated financial statements included in
Part IV, Item 15(a) of this Annual Report on Form 10-K.
Cercacor
Cercacor Laboratories, Inc. (Cercacor) is an independent entity spun off from us to our stockholders in 1998. Joe Kiani, our
Chairman and Chief Executive Officer (CEO), is also the Chairman and CEO of Cercacor. We are a party to a cross-licensing
agreement with Cercacor, which was amended and restated effective January 1, 2007 (the Cross-Licensing Agreement), which
governs each party’s rights to certain intellectual property held by the two companies. See Note 3 to our accompanying
consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for additional
information related to Cercacor.
68
Results of Operations
The following table sets forth, for the periods indicated, our results of operations expressed as U.S. Dollar amounts and as a
percentage of revenue (dollars in thousands).
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Amount
% of
Revenue
Amount
% of
Revenue
Amount
% of
Revenue
(dollars in thousands)
Revenue:
Product.............................................................. $ 1,143,744
Royalty and other revenue................................
—
100.0 % $ 936,408
99.8 % $ 829,874
96.7 %
—
1,429
0.2
28,415
3.3
Total revenue............................................................
1,143,744
100.0
937,837
100.0
858,289
100.0
Cost of goods sold....................................................
Gross profit..............................................................
400,679
743,065
Operating expenses:
Selling, general and administrative...................
369,057
Research and development...............................
Litigation awards, settlements/or defense costs
118,659
(474)
Total operating expenses..........................................
Operating income.....................................................
Non-operating income..............................................
Income before provision for income taxes...............
Provision for income taxes.......................................
Net income including noncontrolling interest..........
Net loss attributable to noncontrolling interest.......
Net income attributable to Masimo Corporation
stockholders............................................................. $ 240,262
487,242
255,823
7,913
263,736
23,454
240,282
20
35.0
65.0
32.3
10.4
—
42.6
22.4
0.7
23.1
2.1
21.0
—
308,665
629,172
32.9
67.1
283,397
574,892
314,661
33.6
285,417
93,295
—
407,956
221,216
12,950
234,166
37,950
196,216
—
9.9
—
43.5
23.6
1.4
25.0
4.0
20.9
—
81,006
425
366,848
208,044
5,732
213,776
20,233
193,543
—
33.0
67.0
33.3
9.4
—
42.7
24.2
0.7
24.9
2.4
22.5
—
21.0 % $ 196,216
20.9 % $ 193,543
22.5 %
Comparison of the Year ended January 2, 2021 to the Year ended December 28, 2019
Revenue. Total revenue increased $205.9 million, or 22.0%, to $1,143.7 million for the year ended January 2, 2021, from
$937.8 million for the year ended December 28, 2019. The following table details our total product revenues by the geographic
area to which the products were shipped for fiscal years 2020 and 2019 (dollars in thousands):
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Increase/
(Decrease)
Percentage
Change
United States (U.S.)........................................... $ 763,069
Europe, Middle East and Africa........................
238,681
Asia and Australia..............................................
North and South America (excluding U.S.).......
103,756
38,238
Total product revenue..................................... $ 1,143,744
—
Total revenue.................................................. $ 1,143,744
Royalty and other revenue.................................
66.7 % $ 636,371
183,363
20.9
9.1
3.3
87,961
28,713
68.0 % $ 126,698
55,318
19.6
9.4
3.0
15,795
9,525
100.0 % $ 936,408
1,429
$ 937,837
100.0 % $ 207,336
(1,429)
$ 205,907
19.9 %
30.2
18.0
33.2
22.1 %
(100.0) %
Product revenues increased $207.3 million, or 22.1%, to $1,143.7 million for the year ended January 2, 2021 from $936.4
million for the year ended December 28, 2019. This increase was primarily due to higher revenue from monitors, consumables,
boards and services, a portion of which we believe is related to a continued overall demand for our products due to the global
COVID-19 pandemic, as well as the impact of approximately $0.5 million of favorable foreign exchange rate movements from
the prior year that increased the U.S. Dollar translation of foreign sales that were denominated in various foreign currencies.
During the year ended January 2, 2021, we shipped approximately 472,300 noninvasive technology boards and monitors, an
increase of approximately 226,100 units, or 91.8%, from approximately 246,200 units shipped during the year ended December
28, 2019.
69
Product revenue generated through our direct and distribution sales channels increased $142.0 million, or 17.4%, to $958.8
million for the year ended January 2, 2021, compared to $816.8 million for the year ended December 28, 2019. Revenues from
our OEM channel increased $65.4 million, or 54.7%, to $185.0 million for the year ended January 2, 2021 as compared to
$119.6 million for the year ended December 28, 2019.
Royalty and other revenue historically consisted primarily of royalties received from Medtronic plc (Medtronic) and revenue
from non-recurring engineering services for a certain OEM customer. For the year ended January 2, 2021, there was no royalty
and other revenue compared to $1.4 million of royalty and other revenue reported for the year ended December 28, 2019,
primarily due to a reduction in royalties from Medtronic as a result of the expiration of its obligation to pay us sales-based
royalties after October 6, 2018. We received our final royalty payment from Medtronic during the three months ended March
30, 2019. We currently do not expect any significant royalty or other revenue in the future.
Gross Profit. Gross profit consists of total revenue less cost of goods sold. Our gross profit for fiscal years 2020 and 2019 was
as follows (dollars in thousands):
Gross Profit
Year Ended
January 2,
2021
Percentage of
Revenues
Year Ended
December 28,
2019
Percentage of
Revenues
Increase/
(Decrease)
Percentage
Change
Product gross profit................................. $ 743,065
65.0 % $ 627,911
67.1 % $ 115,154
18.3 %
Royalty and other revenue gross profit...
—
—
1,261
88.2
(1,261)
(100.0)
Total gross profit................................. $ 743,065
65.0 % $ 629,172
67.1 % $ 113,893
18.1 %
Cost of goods sold includes labor, material, overhead and other similar costs related to the production, supply, distribution and
support of our products and the rendering of non-recurring engineering (NRE) services. Cost of goods sold increased $92.0
million to $400.7 million for the year ended January 2, 2021, from $308.7 million for the year ended December 28, 2019,
primarily due to higher material, manufacturing and distribution costs associated with the increase in product sales volumes,
product mix, and increased manufacturing complexity associated with the impact of COVID-19.
Product gross margins decreased to 65.0% for the year ended January 2, 2021 from 67.1% for the year ended December 28,
2019, primarily due to unfavorable product mix associated with the increase in board and monitor sales, increased
manufacturing complexity associated with the impact of COVID-19, and higher distribution costs. Royalty and other revenue
gross profit decreased by $1.3 million for the year ended January 2, 2021 compared to the year ended December 28, 2019 due
to lower royalties from Medtronic as a result of the expiration of its obligation to pay us royalties after October 6, 2018.
Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries, stock-based
compensation and related expenses for sales, marketing and administrative personnel, sales commissions, advertising and
promotion costs, professional fees related to legal, accounting and other outside services, public company costs and other
corporate expenses. Selling, general and administrative expenses for fiscal years 2020 and 2019 were as follows (dollars in
thousands):
Year Ended
January 2,
2021
$369,057
Percentage of
Revenues
32.3%
Year Ended
December 28,
2019
$314,661
Percentage of
Revenues
33.6%
Increase/
(Decrease)
$54,396
Percentage
Change
17.3%
Selling, General and Administrative
Selling, general and administrative expenses increased $54.4 million, or 17.3%, to $369.1 million for the year ended January 2,
2021 from $314.7 million for the year ended December 28, 2019. This increase was primarily attributable to higher
compensation and other employee-related costs of approximately $28.3 million, higher advertising and marketing related
expenses of approximately $16.7 million, higher legal and professional fees of approximately $12.5 million and higher
contributions of approximately $3.7 million, which were partially offset by a reduction in travel costs of approximately $10.3
million.
Research and Development. Research and development expenses consist primarily of salaries, stock-based compensation and
related expenses for engineers and other personnel engaged in the design and development of our products. These expenses also
include third-party fees paid to consultants, prototype and engineering supply expenses and the costs of clinical trials. Research
and development expenses for fiscal years 2020 and 2019 were as follows (dollars in thousands):
70
Year Ended
January 2,
2021
$118,659
Percentage of
Revenues
10.4%
Year Ended
December 28,
2019
$93,295
Percentage of
Revenues
9.9%
Increase/
(Decrease)
$25,364
Percentage
Change
27.2%
Research and Development
Research and development expenses increased $25.4 million, or 27.2%, to $118.7 million for the year ended January 2, 2021
from $93.3 million for the year ended December 28, 2019, primarily due to higher compensation-related costs of approximately
$19.8 million, higher professional fees of approximately $1.5 million, higher office equipment-related expenses of
approximately $1.3 million and higher occupancy and facilities-related expense of approximately $1.0 million.
Non-operating Income. Non-operating income consists primarily of interest income, interest expense and foreign exchange
losses. Non-operating income for fiscal years 2020 and 2019 was as follows (dollars in thousands):
Year Ended
January 2,
2021
$7,913
Percentage of
Revenues
0.7%
Year Ended
December 28,
2019
$12,950
Percentage of
Revenues
1.4%
Increase/
(Decrease)
$(5,037)
Percentage
Change
(38.9)%
Non-operating Income
Non-operating income was $7.9 million for the year ended January 2, 2021, as compared to $13.0 million of non-operating
income for the year ended December 28, 2019. This net decrease of approximately $5.0 million was primarily due to
approximately $8.4 million in lower interest income, which was offset by approximately $3.3 million of net realized and
unrealized gains on foreign currency denominated transactions during the year ended January 2, 2021.
Provision for Income Taxes. Our provision for income taxes for fiscal years 2020 and 2019 was as follows (dollars in
thousands):
Year Ended
January 2,
2021
$23,454
Percentage of
Revenues
2.1%
Year Ended
December 28,
2019
$37,950
Percentage of
Revenues
4.0%
Increase/
(Decrease)
$(14,496)
Percentage
Change
(38.2)%
Provision for Income Taxes
Our provision for income taxes was $23.5 million for the year ended January 2, 2021 compared to $38.0 million for the year
ended December 28, 2019. Our effective tax rate was 8.9% for the year ended January 2, 2021 compared to 16.2% for the year
ended December 28, 2019. This decrease in our effective tax rate for the year ended January 2, 2021 resulted primarily from an
increase in the amount of excess tax benefits realized from stock-based compensation pursuant to ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU
2016-09) of approximately $14.5 million compared to the year ended December 28, 2019, an increase in R&D tax credits, and a
decrease in nondeductible compensation related expenses.
We have made no provision for U.S. income taxes or foreign withholding taxes on approximately $142.8 million in
accumulated earnings from our foreign subsidiaries as we expect that such amounts will continue to be indefinitely reinvested
in operations outside the U.S. Our effective tax rate was lower than the U.S. federal statutory rate primarily due to a portion of
our earnings being generated from countries other than the U.S., where such earnings are generally subject to lower tax rates
than the U.S., excess tax benefits from U.S. stock-based compensation and research and development tax credits. While we
expect our worldwide consolidated effective tax rate will continue to be lower than the U.S. federal statutory rate, our actual
future effective income tax rate will depend on various factors, including the geographic composition of our pre-tax income, the
amount of excess tax benefits realized from U.S. stock-based compensation, the amount of our research and development tax
credits, the deductibility of executive compensation, changes in tax laws, changes in deferred tax asset valuation allowances and
the recognition and derecognition of tax benefits associated with uncertain tax positions.
Comparison of the Year ended December 28, 2019 to the Year ended December 29, 2018
For a discussion regarding our financial condition and results of operations for the year ended December 28, 2019 as compared
to the year ended December 29, 2018, please refer to the discussion under the heading “Comparison of the Year ended
December 28, 2019 to the Year ended December 29, 2018” in Item 7 of our Annual Report on Form 10-K for the fiscal year
ended December 28, 2019, filed with the Securities and Exchange Commission on February 19, 2020.
71
Liquidity
Our principal sources of liquidity consist of our existing cash and cash equivalent balances, future funds expected to be
generated from operations and available borrowing capacity under our credit facility. As of January 2, 2021, we had
approximately $867.3 million in working capital, of which approximately $641.4 million was cash and cash equivalents. In
addition to net working capital, we had approximately $148.3 million of available borrowing capacity (net of outstanding letters
of credit) under our Credit Agreement (Credit Facility) as compared to approximately $823.8 million in working capital,
approximately $567.7 million in cash and cash equivalents and $120.0 million in short-term investments at December 28, 2019.
In managing our day-to-day liquidity and capital structure, we generally do not rely on foreign earnings as a source of funds. As
of January 2, 2021, we had cash totaling $71.7 million held outside of the U.S., of which approximately $32.8 million was
accessible without additional tax cost and approximately $38.9 million was accessible at an incremental estimated tax cost of up
to $0.4 million. We currently have sufficient funds on-hand and cash held outside the U.S. that is available without additional
tax cost to fund our global operations. In the event funds that are treated as permanently reinvested are repatriated, we may be
required to accrue and pay additional U.S. taxes to repatriate these funds.
Cash Flows
The following table summarizes our cash flows (in thousands):
Year Ended
January 2,
2021
December 28,
2019
Net cash provided by (used in):
Operating activities................................................................................................................ $
210,963 $
221,640
Investing activities..................................................................................................................
Financing activities................................................................................................................
Effect of foreign currency exchange rates on cash................................................................
(82,787)
(54,307)
3,060
Increase in cash, cash equivalents, and restricted cash.......................................................... $
76,929 $
(197,681)
(9,339)
814
15,434
Operating Activities. Cash provided by operating activities for the year ended January 2, 2021 was $211.0 million and was
primarily driven by net income including noncontrolling interests of $240.3 million. This was increased by non-cash activities
including stock-based compensation of $42.2 million, depreciation and amortization of $29.3 million and a deferred income tax
benefit of $5.0 million. Additional increases in operating cash resulted from increases in accrued compensation, deferred
revenue and other contract-related liabilities, accrued liabilities and accounts payable of $15.5 million, $10.9 million, $9.4
million and $7.6 million, respectively, primarily due to the timing of payments. Partially offsetting this was $94.4 million of
purchases of inventory to both increase finished goods days on hand as well as secure raw material supply to ensure we are able
to support higher customer demand during the COVID-19 pandemic, and to support product launches. Additional reductions to
net income including noncontrolling interests were changes in operating assets, including an increase in other current assets of
$30.0 million, primarily due to the timing of various tax payments and refunds, and an increase in lease receivables of $7.7
million.
Cash provided by operating activities for the year ended December 28, 2019 was $221.6 million and was driven primarily by
net income of $196.2 million. Non-cash activity included stock-based compensation of $39.2 million, depreciation and
amortization of $23.5 million and a deferred income tax benefit of $6.0 million. Additional sources of cash related to changes in
operating assets and liabilities included increases in accounts payable, deferred revenue and other contract-related liabilities,
and accrued compensation of $9.9 million, $7.7 million and $5.3 million, respectively, primarily due to the timing of payments.
These sources of cash were partially offset by other changes in operating assets and liabilities related to increases in accounts
receivable and lease receivable of $23.6 million and $12.0 million, respectively, primarily due to the timing of cash receipts, an
increase in inventory of $21.3 million, primarily due to the growth in our business and the timing of shipments, and an increase
in other current assets of $8.5 million, primarily due to the timing of various tax payments and refunds.
Investing Activities. Cash used in investing activities for the fiscal year ended January 2, 2021 was $82.8 million, consisting
primarily of $120.0 million for maturities of short-term investments, $112.71 million of business combinations, $72.5 million
for purchases of property and equipment of which $16.4 million related to the purchase of a building, $6.8 million related to the
acquisition of a strategic investment and $7.4 million for intangible assets related to capitalized patent and trademark costs.
72
Cash used in investing activities for the fiscal year ended December 28, 2019 was $197.7 million, consisting primarily of
$280.0 million for purchases of short-term investments, $68.4 million for purchases of property and equipment of which
$35.6 million related to the purchase of two buildings, $5.2 million related to the acquisition of a strategic investment and $4.1
million for intangible assets related to capitalized patent and trademark costs, which were offset by $160.0 million of maturities
of short-term investments.
Financing Activities. Cash used in financing activities for the fiscal year ended January 2, 2021 was $54.3 million, resulting
primarily from cash paid for common stock repurchase transactions that settled during the year of $110.5 million, which were
partially offset by proceeds from the issuance of common stock (upon exercise of options) of $58.4 million.
Cash used in financing activities for the fiscal year ended December 28, 2019 was $9.3 million, resulting primarily from cash
paid for common stock repurchase transactions that settled during the year of $37.6 million, which were partially offset by
proceeds from the issuance of common stock (upon exercise of options) of $28.3 million.
Capital Resources and Prospective Capital Requirements
We currently maintain a Credit Agreement (Credit Facility) with JPMorgan Chase Bank, N.A., as Administrative Agent and a
Lender, and Bank of the West, as a Lender (collectively, the Initial Lenders). The Credit Facility provides for up to $150.0
million of unsecured borrowings, with an option, subject to certain conditions, for us to increase the aggregate borrowing
capacity to up to $550.0 million in the future with the Initial Lenders and additional Lenders, as required. The Credit Facility
also provides for a sublimit of up to $25.0 million for the issuance of letters of credit and a sublimit of $75.0 million for
borrowings in specified foreign currencies. All unpaid principal under the Credit Facility will become due and payable on
December 17, 2023. Proceeds from the Credit Facility are expected to be used for general corporate, capital investment and
working capital needs. For additional information regarding the Credit Facility, see Note 15 to our accompanying consolidated
financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
In July 2018, our Board approved the 2018 Repurchase Program, authorizing us to purchase up to 5.0 million additional shares
of its common stock over a period of up to three years. The 2018 Repurchase Program became effective in September 2018
upon the expiration of our previous repurchase program. For additional information regarding our stock repurchase programs,
see Note 17 to our accompanying consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on
Form 10-K.
We expect to fund our future operating, investing and financing activities through our available cash, future cash from
operations, our Credit Facility and other potential sources of capital. In addition to funding our working capital requirements,
we anticipate additional capital expenditures primarily related to investments in infrastructure growth. Possible additional uses
of cash may include the acquisitions and/or strategic investments in technologies or technology companies, investments in
property and equipment as well as repurchases of stock under our authorized stock repurchase program. However, any
repurchases of common stock will be subject to numerous factors, including the availability of our stock, general market
conditions, the trading price of our stock, available capital, alternative uses for capital and our financial performance. In
addition, the amount and timing of our actual investing activities will vary significantly depending on numerous factors,
including the timing and amount of capital expenditures, costs of product development efforts, our timetable for infrastructure
expansion, stock repurchase activity and costs related to our domestic and international regulatory requirements. Despite these
investment requirements and potential expenditures, we anticipate that our existing cash and cash equivalents and amounts
available under our new Credit Facility will be sufficient to meet our working capital requirements, capital expenditures and
other operational funding needs for at least the next 12 months.
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such
as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. In addition, we do not engage
in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in these relationships.
Contractual Obligations and Commercial Commitments
The following table summarizes our outstanding contractual obligations and commercial commitments as of January 2, 2021
and the effect those obligations are expected to have on our cash liquidity and cash flow in future periods (in thousands). The
estimated payments reflected in this table are based on management’s estimates and assumptions about these obligations. As a
result, the actual cash outflows in future periods will vary, possibly materially, from those reflected in this table.
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Less than
1 Year
Between
1-3 Years
Between
3-5 Years
More than
5 Years
Payments Due By Period
Operating leases(1).......................... $
Purchase commitments(2)................
Total contractual obligations......... $
6,610 $
123,000
129,610 $
11,810 $
—
11,810 $
8,116 $
—
8,116 $
11,055 (3) $
—
11,055
$
Total
37,591
123,000
160,591
______________
(1)
(2)
(3)
Undiscounted lease payments for operating leases.
Certain inventory items under non-cancellable purchase orders.
Includes optional renewal periods for certain leases.
Other obligations. As of January 2, 2021, our estimated liabilities related to uncertain tax positions, including interest, were
$11.8 million. Due to the high degree of uncertainty regarding the timing of potential cash flows associated with these
liabilities, we are unable to make a reasonably reliable estimate of the amounts and periods in which these liabilities might be
made.
In addition, we had the following annual minimum royalty commitments to Cercacor, as of January 2, 2021 (in thousands):
Payments Due By Period
Less than
1 Year
Between
1-3 Years
Between
3-5 Years
More than
5 Years
Minimum royalty commitment to Cercacor(1)............. $
5,000 $
10,000 $
10,000
(1)
______________
(1)
Subsequent to 2025, the royalty arrangement requires a $5.0 million minimum annual royalty payment unless the agreement is amended,
restated or terminated.
See Note 3 to our accompanying consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on
Form 10-K for additional information related to Cercacor.
Critical Accounting Estimates
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to make estimates and judgements that affect the
reported amounts of net revenues, expenses, assets and liabilities. These estimates and judgements are based on historical
experience and on various other factors that are believed to be reasonable under the circumstances, and form the basis for
making management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the
effects of matters that are inherently uncertain. Although we regularly evaluate these estimates and assumptions, changes in
judgments and uncertainties relating to these estimates could potentially result in materially different results under different
assumptions and conditions. If these estimates differ significantly from actual results, the impact to the consolidated financial
statements may be material.
We believe that the critical accounting policies that are the most significant for purposes of fully understanding and evaluating
our reported financial results include the following:
Revenue Recognition, Deferred Revenue and Other Contract Liabilities
We derive the majority of our product revenue from four primary sources: (i) direct sales under deferred equipment agreements
with end-user hospitals where we provide up-front monitoring equipment at no up-front charge in exchange for a multi-year
sensor purchase commitment; (ii) other direct sales of noninvasive monitoring solutions to end-user hospitals, emergency
medical response organizations and other direct customers; (iii) sales of noninvasive monitoring solutions to distributors who
then typically resell to end-user hospitals, emergency medical response organizations and other customers; and (iv) sales of
integrated circuit boards to OEM customers who incorporate our embedded software technology into their multiparameter
monitoring devices. Subject to customer credit considerations, the majority of such sales are made on open account using
industry standard payment terms based on the geography within which the specific customer is located.
We generally recognize revenue following a single, principles-based five-step model to be applied to all contracts with
customers and generally provide for the recognition of revenue in an amount that reflects the consideration to which we expect
to be entitled, net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected from customers
that are remitted to government authorities, when control over the promised goods or services are transferred to the customer.
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Revenue related to equipment supplied under sales-type lease arrangements is recognized once control over the equipment is
transferred to the customer, while revenue related to equipment supplied under operating-type lease arrangements is generally
recognized on a straight-line basis over the term of the lease.
While the majority of our sales transactions contain standard business terms and conditions, there are some transactions that
contain non-standard business terms and conditions. As a result, contract interpretation and analysis is required to determine the
appropriate accounting, including: (i) the amount of the total consideration, including variable consideration, (ii) whether the
arrangement contains an embedded lease, and if so, whether such embedded lease is a sales-type lease or an operating lease,
(iii) the identification of the distinct performance obligations contained within the arrangement, (iv) how the arrangement
consideration should be allocated to each performance obligation when multiple performance obligations exist, including the
determination of standalone selling price, and (v) when to recognize revenue on the performance obligations. Changes in
judgments on these assumptions and estimates could materially impact the timing of revenue recognition.
We enter into agreements to sell our monitoring solutions and services, sometimes as part of arrangements with multiple
performance obligations that include various combinations of distinct product sales, equipment leases and services. In the case
of contracts with multiple performance obligations, the authoritative guidance provides that the total consideration be allocated
to each performance obligation on the basis of relative standalone selling prices. When a standalone selling price is not readily
observable, we estimate the standalone selling price by considering multiple factors including, but not limited to, features and
functionality of the product, geographies, type of customer, contractual prices pursuant to Group Purchasing Organization
(GPO) contracts, our pricing and discount practices, and other market conditions.
Sales under deferred equipment agreements are generally structured such that we agree to provide certain monitoring-related
equipment, software, installation, training and/or warranty support at no up-front charge in exchange for the customer’s
commitment to purchase sensors over the term of the agreement, which generally ranges from three to six years. We allocate
contract consideration under deferred equipment agreements containing fixed annual sensor purchase commitments to the
underlying lease and non-lease components at contract inception. In determining whether any underlying lease components are
related to a sales-type lease or an operating lease, we evaluate the customer’s rights and ability to control the use of the
underlying equipment throughout the contract term, including any equipment substitution rights retained by us, as well as our
expectations surrounding potential contract/lease extensions or renewals and the customer’s likelihood to exercise any purchase
options. Revenue allocable to non-lease components is generally recognized as such non-lease components are satisfied.
Revenue allocable to lease components under sales-type lease arrangements is generally recognized when control over the
equipment is transferred to the customer. Revenue allocable to lease components under operating lease arrangements is
generally recognized over the term of the operating lease. We generally do not expect to derive any significant value in excess
of such asset’s unamortized book value from equipment underlying our operating leases arrangements.
Revenue from direct sales of our products to end-user hospitals, emergency medical response organizations, other direct
customers, distributors and OEM customers is generally recognized by us when control of such products transfer to the
customer based upon the terms of the contract or underlying purchase order. Revenue related to OEM rainbow® parameter
software licenses is recognized by us upon the OEM’s shipment of its product to its customer, as reported to us by the OEM.
We provide certain customers with various sales incentives that may take the form of discounts or rebates. We estimate and
provide allowances for these programs as a reduction to revenue at the time of sale. In general, customers do not have a right of
return for credit or refund. However, we allow returns under certain circumstances. At the end of each period, we estimate and
accrue for these returns as a reduction to revenue. We estimate the revenue constraints related to these forms of variable
consideration based on various factors, including expected purchasing volumes, prior sales and returns history, and specific
contractual terms and limitations.
Inventory
Inventories are stated at the lower of cost or net realizable value. Cost is determined using a standard cost method, which
approximates FIFO (first-in, first-out). Inventory valuation reserves are recorded for materials that have become obsolete or are
no longer used in current production and for inventory that has a net realizable value less than the carrying value in inventory.
We generally purchase raw materials in quantities that we anticipate will be fully used within one year. However, changes in
operating strategy and customer demand, and frequent unpredictable fluctuations in market values for such materials, can limit
our ability to effectively utilize all of the raw materials purchased and sold through resulting finished goods to customers for a
profit. We regularly monitor potential inventory excess, obsolescence and lower market values compared to standard costs and,
when necessary, reduce the carrying amount of our inventory to its market value.
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We determine any required inventory valuation adjustments based on an evaluation of the expected future use of our inventory
on an item by item basis. We apply historical obsolescence rates to estimate the loss on inventory expected to have a recovery
value below cost. Our historical obsolescence rates are developed from our company specific experience for major categories of
inventory, which are then applied to excess inventory on an item by item basis. We also record other specific inventory
valuation adjustments when we become aware of other unique events that result in a known recovery value below cost. For
inventory items that have been written down, the reduced value becomes the new cost basis. If our estimates for potential
inventory losses prove to be too low, our future earnings will be affected when any related additional inventory losses are
recorded.
Lessee ROU Assets and Lease Liabilities
We determine if an arrangement contains a lease at inception. ROU assets represent our right to use an asset underlying an
operating lease for the lease term and lease liabilities represent our obligation to make lease payments arising from an operating
lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments
over the lease term. We generally estimate the applicable discount rate used to determine the net present value of lease
payments based on available information at the lease commencement date. Many of our lessee agreements include options to
extend the lease, which we do not include in our lease terms unless they are reasonably certain to be exercised. We utilize a
portfolio approach to account for the ROU assets and liabilities associated with certain equipment leases. We have also made a
policy election not to separate lease and non-lease components for our real estate leases and to exclude short-term leases with a
term of twelve months or less from our ROU assets and lease liabilities. Rental expense for lease payments related to operating
leases is recognized on a straight-line basis over the lease term.
Stock-Based Compensation
Our stock-based compensation awards are currently comprised of stock options, restricted stock units (RSUs) and performance
share units (PSUs), all of which are equity-classified awards. For equity-classified awards granted on or after January 1, 2006,
we estimate the fair value of the award on the date of grant and expense stock-based compensation over the requisite service
period. In the case of PSUs, the amount of expense recognized is also dependent upon the expected achievement level for the
specified performance criteria. The fair value of RSU and PSU awards is the closing price of our common stock on the grant
date. To calculate the fair value of stock option awards, we use the Black-Scholes option pricing model, which, in addition to
the closing price of our stock on the grant date and the option strike price, requires the input of subjective assumptions. These
assumptions include the estimated length of time employees will retain their stock options before exercising them (the expected
term), the estimated volatility of our stock price over the expected term and the dividend yield on our common stock.
We estimate expected term based on both our specific historical option exercise experience, as well as expected term
information available from a peer group of companies with similar vesting schedules. The estimated volatility is based on both
the historical and implied volatilities of our share price.
Changes in the types and quantity of equity awards, as well as the fair market value of our stock may impact the cost of future
stock option grants. In general, to the extent that the fair market value of our stock increases, the overall cost of granting these
options will also increase. For further details regarding our stock-based compensation see Note 18 to our accompanying
consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
Accounting for Income Taxes
We account for income taxes using the asset and liability method, under which we recognize deferred tax assets and liabilities
for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for net operating loss and tax credit carryforwards. A tax
position that meets a more-likely-than-not recognition threshold is recognized in the first reporting period that it becomes more-
likely-than-not such tax position will be sustained upon examination. A tax position that meets this more-likely-than-not
recognition threshold is recorded at the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement. Previously recognized income tax positions that fail to meet the recognition threshold in a subsequent
period are derecognized in that period. Differences between actual results and our assumptions, or changes in our assumptions
in future periods, are recorded in the period they become known. We record potential accrued interest and penalties related to
unrecognized tax benefits in income tax expense.
As a multinational corporation, we are subject to complex tax laws and regulations in various jurisdictions. The application of
tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject
to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings.
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We have concluded all U.S. federal income tax matters for years through 2016 and all material state, local and foreign income
tax matters for years through 2013. Given the foregoing, our actual liability for U.S. or foreign taxes may be materially different
from our estimates, which could result in the need to record additional liabilities or potentially to reverse previously recorded
tax liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is recorded against any
deferred tax assets when, in the judgment of management, it is more likely than not that all or part of a deferred tax asset will
not be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including recent
financial performance, scheduled reversals of temporary differences, projected future taxable income, availability of taxable
income in carryback periods and tax planning strategies.
Litigation Costs and Contingencies
We record a charge equal to at least the minimum estimated liability for a loss contingency or litigation settlement when both of
the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is
probable that a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably
estimated. The determination of whether a loss contingency or litigation settlement is probable or reasonably possible involves
a significant amount of management judgment, as does the estimation of the range of loss given the nature of contingencies.
Liabilities related to litigation settlements with multiple elements are recorded based on the fair value of each element. Legal
and other litigation related expenses are recognized as the services are provided. We record insurance and other indemnity
recoveries for litigation expenses when both of the following conditions are met: (i) the recovery is probable and
(ii) collectability is reasonably assured. The insurance recoveries recorded are only to the extent the litigation costs have been
incurred and recognized in the financial statements; however, it is reasonably possible that the actual recovery may be
significantly different from our estimates. There are many uncertainties associated with any litigation, and we cannot provide
assurance that any actions or other third-party claims against us will be resolved without costly litigation or substantial
settlement charges. If any of those events were to occur, our business, financial condition and results of operations could be
materially and adversely affected.
Business Combinations
We account for business combinations using the acquisition method of accounting, which requires that once control is obtained,
all the assets acquired, liabilities assumed and noncontrolling interest in the acquired entity, if applicable, are recorded at their
respective fair values at the date of acquisition. The determination of fair values of identifiable assets and liabilities requires
estimates and the use of valuation techniques when market value is not readily available.
For intangible assets acquired in a business combination, we typically use the income method. Significant estimates in valuing
certain intangible assets include, but are not limited to, the amount and timing of future cash flows, growth rates, discount rates
and useful lives. The excess of the purchase price over fair values of identifiable assets, liabilities, and noncontrolling interest in
the acquired entity, if applicable, is recorded as goodwill.
Recent Accounting Pronouncements
For details regarding any recently adopted and recently issued accounting standards, see Note 2 to our accompanying
consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks that may arise from adverse changes in market rates and prices, such as interest rates,
foreign exchange fluctuations and inflation. We do not enter into derivatives or other financial instruments for trading or
speculative purposes.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates to the increase or decrease in the amount of interest income we
can earn on our cash and cash equivalents and on the increase or decrease in the amount of interest expense we must pay with
respect to our various outstanding debt instruments. We do not believe our cash equivalents are subject to significant interest
rate risk due to their short terms to maturity. As of January 2, 2021, the carrying value of our cash equivalents approximated
fair value. We currently do not have any significant risks associated with interest rates fluctuations related to interest expense.
Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes.
77
Therefore, declines in interest rates over time will reduce our interest income while increases in interest rates will increase our
interest income. A hypothetical 100 basis point change in interest rates along the entire interest rate yield curve would increase
or decrease our interest rate yields on our investments and interest income approximately $0.1 million for each $10.0 million in
interest-bearing investments.
Foreign Currency Exchange Rate Risk
A majority of our assets and liabilities are maintained in the United States in U.S. Dollars and a majority of our sales and
expenditures are transacted in U.S. Dollars. However, we also transact with foreign customers in currencies other than the U.S.
Dollar. These foreign currency revenues, when converted into U.S. Dollars, can vary depending on average exchange rates
during a respective period. In addition, certain of our foreign subsidiaries transact in their respective country’s local currency,
which is also their functional currency. As a result, expenses of these foreign subsidiaries when converted into U.S. Dollars can
also vary depending on average monthly exchange rates during a respective period.
We are exposed to foreign currency gains or losses on outstanding foreign currency denominated receivables and payables, as
well as our foreign currency denominated cash balances and certain intercompany transactions. In addition, other transactions
between us or our subsidiaries and a third-party, denominated in a currency different from the functional currency, are foreign
currency transactions. Realized and unrealized foreign currency gains or losses on these transactions are also included in our
statements of operations as incurred.
The balance sheets of each of our foreign subsidiaries whose functional currency is not the U.S. Dollar are translated into U.S.
Dollars at the rate of exchange at the balance sheet date and the statements of comprehensive income and cash flows are
translated into U.S. Dollars using an approximation of the average monthly exchange rates applicable during the period. Any
foreign exchange gain or loss as a result of translating the balance sheets of our foreign subsidiaries whose functional currency
is not the U.S. Dollar is included in equity as a component of accumulated other comprehensive income.
Our primary foreign currency exchange rate exposures are with the Canadian Dollar, Euro, Japanese Yen, Swedish Krona, the
British Pound, Mexico Peso, Turkish Lira and Australian Dollar. Foreign currency exchange rates may experience significant
volatility from one period to the next. Specifically, during the fiscal year ended January 2, 2021, we estimate that fluctuations in
the exchange rates between the U.S. Dollar and other foreign currencies, including the Turkish Lira, Canadian Dollar and the
Australian Dollar, favorably impacted our revenues by $0.5 million.
We currently do not enter into forward exchange contracts to hedge exposures denominated in foreign currencies and do not use
derivative financial instruments for trading or speculative purposes. The effect of additional changes in foreign currency
exchange rates could have a material effect on our future operating results or cash flows, depending on which foreign currency
exchange rates change and depending on the directional change (either a strengthening or weakening against the U.S. Dollar).
We estimate that the potential impact of a hypothetical 10% adverse change in all applicable foreign currency exchange rates
from the rates in effect as of January 2, 2021 would have resulted in an estimated reduction of $23.4 million in reported pre-tax
income for the year ended January 2, 2021. As our foreign operations continue to grow, our exposure to foreign currency
exchange rate risk may become more significant.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations during the
periods presented. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset
such higher costs through price increases. Our inability or failure to do so could have a material adverse effect on our business,
financial condition and results of operations.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data required by this item are set forth at the pages indicated in Part
IV, Item 15(a)(1) and 15(a)(2), respectively, of this Annual Report on Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule
13a-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. We
recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report
on Form 10-K.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Rule 13a-15(f) promulgated by the SEC under the Exchange Act. All internal control systems, no matter how well
designed, have inherent limitations and may not prevent or detect all misstatements. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on
criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial
reporting was effective as of January 2, 2021.
Grant Thornton LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control
over financial reporting as of January 2, 2021. Their attestation report, which expresses an unqualified opinion on the
effectiveness of our internal control over financial reporting as of January 2, 2021, is included in Part IV, Item 15(a)(1) of this
Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During the quarter ended January 2, 2021 there were no changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from the information contained in our Definitive Proxy
Statement to be filed with the SEC in connection with the Annual Meeting of Stockholders to be held in 2021 (2021 Proxy
Statement).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the information contained in the 2021 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the information contained in the 2021 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the information contained in the 2021 Proxy Statement.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference from the information contained in the 2021 Proxy Statement.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
PART IV
The Consolidated Financial Statements of Masimo Corporation and Reports of Grant Thornton LLP, Independent Registered
Public Accounting Firm, are included in a separate section of this Annual Report on Form 10-K beginning on page F-1.
(a)(2) Financial Statement Schedules
The financial statement schedule is included in a separate section of this Annual Report on Form 10-K beginning on page F-1.
80
(a)(3) Exhibits
Exhibit
Number
Description of Document
3.1(1) Amended and Restated Certificate of Incorporation (Exhibit 3.2)
3.2(2) Second Amended and Restated Bylaws adopted on October 24, 2019 (Exhibit 3.1)
4.1(1) Form of Common Stock Certificate (Exhibit 4.1)
4.2(4)# Masimo Retirement Savings Plan (Exhibit 4.7)
4.3* Description of Securities of Masimo Corporation
10.1(1)# Form of Indemnity Agreement between the Registrant and its officers and directors (Exhibit 10.1)
10.2(5)# Amended and Restated Employment Agreement, dated November 4, 2015, between Joe Kiani and the
Registrant (Exhibit 10.1)
10.3(13) First Amendment to November 4, 2015 Amended and Restated Employment Agreement, dated July 27, 2017,
by and between Masimo Corporation and Joe Kiani (Exhibit 10.1)
10.4(1)# Offer Letter, dated February 15, 1996, between Yongsam Lee and the Registrant (Exhibit 10.7)
10.5(1)# Offer Letter, dated March 30, 2007, between Anand Sampath and the Registrant (Exhibit 10.8)
10.6(6)# Offer Letter, dated July 23, 2008, between Jon Coleman and the Registrant (Exhibit 10.9)
10.7(19)# Offer Letter, dated March 31, 2011 between Tom McClenahan and the Registrant (Exhibit 10.7)
10.8(14)# Offer Letter, dated September 22, 2017, between the Company and Micah Young (Exhibit 10.1)
10.9(5)# Restricted Share Unit Award Agreement, dated November 4, 2015, by and between Joe Kiani and the
Registrant (Exhibit 10.2)
10.10(5)# Equity-Holder Non-Competition and Confidentiality Agreement, dated November 4, 2015, by and between
Joe Kiani and the Registrant (Exhibit 10.3)
10.11(7)# Amended and Restated 2007 Severance Protection Plan and Summary Plan Description, effective
December 31, 2008 (Exhibit 10.11)
10.12(9)# 2007 Severance Protection Plan Participation Agreement, dated January 11, 2008, by and between the
Registrant and Yongsam Lee (Exhibit 10.3)
10.13(19)# Amended and Restated 2007 Severance Protection Plan Agreement, dated November 12, 2013, by and
between the Registrant and Jon Coleman (Exhibit 10.13)
10.14(19)# Amended and Restated 2007 Severance Protection Plan Agreement, dated December 9, 2013, by and between
the Registrant and Anand Sampath
10.15(3)# Amended and Restated 2007 Severance Protection Plan Agreement, dated November 3, 2014, by and between
the Registrant and Tom McClenahan (Exhibit 10.21)
10.16(17)# Amended and Restated 2007 Severance Protection Plan, Limited Participation Agreement, dated December
12, 2017, by and between the Registrant and Micah Young (Exhibit 10.16)
10.17(1)# 2007 Stock Incentive Plan of the Registrant, and forms of agreements related thereto (Exhibit 10.33)
10.18(15)# Masimo Corporation 2017 Equity Incentive Plan (Exhibit 10)
10.19(16)# Masimo Corporation Executive Bonus Incentive Plan (Appendix D)
10.20(6)+ Manufacturing and Purchase Agreement, dated October 2, 2008, by and between Analog Devices, Inc. and the
Registrant (Exhibit 10.21)
10.21(1)+ Purchase Agreement, dated July 26, 2001, between Jabil Circuit, Inc. and the Registrant (Exhibit 10.15)
10.22(1)+ Shelter Labor Services Agreement, dated December 27, 2000, between Industrial Vallera de Mexicali, S.A. de
C.V. and the Registrant (Exhibit 10.11)
10.23†* Lease Agreement effective as of September 1, 2007, by and among Industrias Asociadas Maquiladoras, S.A.
de C.V., Industrial Vallera de Mexicali, S.A. de C.V. and the Registrant, as guarantor
81
Exhibit
Number
Description of Document
10.24†* First Amendment, Lease Agreement effective as of December 17, 2013, by and among Industrias Asociadas
Maquiladoras, S.A. de C.V., Industrial Vallera de Mexicali, S.A. de C.V. and the Registrant, as guarantor
10.25(1) Settlement Agreement and Release of Claims, dated January 17, 2006, between Cercacor Laboratories, Inc.,
Nellcor Puritan Bennett, Inc., Mallinckrodt, Inc., Tyco Healthcare Group LP, Tyco International Ltd., Tyco
International (US) Inc. and the Registrant (Exhibit 10.30)
10.26(8) Second Amendment to the January 17, 2006 Settlement Agreement and Release of Claims, as amended
pursuant to the January 24, 2006 Amendment to Settlement Agreement and Release of Claims, dated
January 28, 2011, by and among Masimo Corporation, Masimo Laboratories, Inc., Nellcor Puritan Bennett
LLC, Mallinckrodt Inc., Tyco Healthcare Group LP and Covidien Inc. (Exhibit 10.1)
10.27(1) Amended and Restated Cross-Licensing Agreement, effective January 1, 2007, between Cercacor
Laboratories, Inc. and the Registrant (Exhibit 10.34)
10.28(1) Services Agreement, effective January 1, 2007, between Cercacor Laboratories, Inc. and the Registrant
(Exhibit 10.35)
10.29†* Settlement and Covenant Not to Sue Agreement, entered into as of the Effective Date of November 16, 2015,
between Masimo Corporation, Masimo Technologies SARL, and Masimo International SARL and Mindray
Medical International, Limited, Shenzhen Mindray Biomedical Electronics Co., Ltd and Mindray DS USA,
Inc.
10.30(10) Lease Agreement, dated July 15, 2012, related to the premises at 9600 Jeronimo, between the Registrant and
The Irvine Company, LLC (Exhibit 10.45)
10.31(10) First Amendment to June 22, 2012 Lease Agreement, relating to the premises at 9600 Jeronimo, between the
Registrant and Irvine Company, LLC (Exhibit 10.46)
10.32(3) Second Amendment to June 22, 2012 Lease Agreement, relating to the premises at 9600 Jeronimo, between
the Registrant and Irvine Company, LLC (Exhibit 10.34)
10.33(10) Third Amendment to June 22, 2012 Lease Agreement, relating to the premises at 9600 Jeronimo, between the
Registrant and Irvine Company, LLC (Exhibit 10.48)
10.34(11) Single-Tenant Lease, relating to the premises at 9600 Jeronimo, dated as of July 13, 2016, by and between
Masimo Corporation and The Irvine Company LLC (Exhibit 10.1)
10.35(12) Third Amendment to Settlement Agreement and Release of Claims, dated as of September 1, 2016, by and
among Masimo Corporation and Cercacor Laboratories, Inc., and Medtronic Plc., Covidien LP, Nellcor
Puritan Bennett LLC and Covidien Holdings Inc. (Exhibit 10.1)
10.36(12)+ Settlement Agreement, dated November 5, 2016, by and between Masimo Corporation, Masimo International
Technologies SARL and Masimo International SARL and Koninklijke Philips N.V. (Exhibit 10.1)
10.37(19) Credit Agreement dated as of December 17, 2018, among Masimo Corporation, the Lenders party thereto and
JPMorgan Chase Bank, N.A. as Administrative Agent (Exhibit 10.42)
10.38(18)# Offer Letter, dated April 17, 2002, between the Company and Bilal Muhsin (Exhibit 10.1)
10.39(18)# Offer Letter, dated December 15, 2017, between the Company and Tao Levy (Exhibit 10.2)
10.40(18)# 2007 Severance Protection Plan Participation Agreement, dated March 26, 2018, by and between the
Company and Bilal Muhsin (Exhibit 10.3)
10.41(18)# 2007 Severance Protection Plan Participation Agreement, dated March 16, 2018, by and between the
Company and Tao Levy (Exhibit 10.4)
21.1* List of Registrant’s Subsidiaries
23.1* Consent of Independent Registered Public Accounting Firm
31.1* Certification of Joe Kiani, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2* Certification of Micah Young, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
82
Exhibit
Number
Description of Document
32.1* Certification of Joe Kiani, Chief Executive Officer, and Micah Young, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
___________
Attached as Exhibit 101 to this report are the following formatted in iXBRL (Inline eXtensible Business Reporting
Language): (i) Consolidated Balance Sheets as of January 2, 2021 and December 28, 2019, (ii) Consolidated Statements of
Operations for the years ended January 2, 2021, December 28, 2019 and December 29, 2018, (iii) Consolidated Statements
of Comprehensive Income for the years ended January 2, 2021, December 28, 2019 and December 29, 2018,
(iv) Consolidated Statements of Equity for the years ended January 2, 2021, December 28, 2019 and December 29, 2018,
(v) Consolidated Statements of Cash Flows for the years ended January 2, 2021, December 28, 2019 and December 29,
2018, and (vi) Notes to Consolidated Financial Statements.
___________
(1)
Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (No. 333-142171),
originally filed on April 17, 2007. The number given in parentheses indicates the corresponding exhibit number in
such Form S-1, as amended.
(2) Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, filed on October 30, 2019.
(3)
(4)
(5)
The number given in parentheses indicates the corresponding exhibit number in such Form 8-K.
Incorporated by reference to the exhibit to the Registrant’s Annual Report on Form 10-K, filed on February 17, 2015.
The number given in parentheses indicates the corresponding exhibit number in such Form 10-K.
Incorporated by reference to the exhibit to the Registrant’s Registration Statement on Form S-8, filed on February 11,
2008. The number given in parentheses indicates the corresponding exhibit number in such Form S-8.
Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, filed on November 5, 2015
at 4:45 p.m. Eastern Time. The number given in parentheses indicates the corresponding exhibit number in such Form
8-K.
(6) Incorporated by reference to the exhibit to the Registrant’s Annual Report on Form 10-K, filed on March 4, 2009.
(7)
(8)
(9)
The number given in parentheses indicates the corresponding exhibit number in such Form 10-K.
Incorporated by reference to the exhibit to the Registrant’s Annual Report on Form 10-K, filed on February 15, 2013.
The number given in parentheses indicates the corresponding exhibit number in such Form 10-K.
Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, filed on January 31, 2011.
The number given in parentheses indicates the corresponding exhibit number in such Form 8-K.
Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, filed on January 17, 2008.
The number given in parentheses indicates the corresponding exhibit number in such Form 8-K.
(10) Incorporated by reference to the exhibit to the Registrant’s Annual Report on Form 10-K, filed on February 24, 2016.
The number given in parentheses indicates the corresponding exhibit number in such Form 8-K.
(11) Incorporated by reference to the exhibit to the Registrant’s Quarterly Report on Form 10-Q, filed on August 3, 2016.
The number given in parentheses indicates the corresponding exhibit number in such Form 8-K.
(12) Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, filed on September 2, 2016.
The number given in parentheses indicates the corresponding exhibit number in such Form 8-K.
(13) Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K filed on August 2, 2017. The
number given in parentheses indicates the corresponding exhibit number in such Form 8-K.
(14) Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K filed on September 25, 2017.
The number given in parentheses indicates the corresponding exhibit number in such Form 8-K.
(15) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on July 28, 2020. The number
given in parentheses indicates the corresponding exhibit number in such Form 10-Q.
(16) Incorporated by reference to Appendix D to the Registrant’s Definitive Proxy Statement on Schedule 14A (File No.
001-33642) filed on April 16, 2020.
83
(17) Incorporated by reference to the exhibit to the Registrant’s Annual Report on Form 10-K filed February 28, 2018.
The number given in parentheses indicates the corresponding exhibit number in such Form 10-K.
(18) Incorporated by reference to the exhibit to the Registrant’s Quarterly Report on Form 10-Q filed May 7, 2018. The
number given in parentheses indicates the corresponding exhibit number in such Form 10-Q.
(19) Incorporated by reference to the exhibit to the Registrant’s Annual Report on Form 10-K filed February 26, 2019.
The number given in parentheses indicates the corresponding exhibit number in such Form 10-K.
*
#
+
†
Filed herewith.
Indicates management contract or compensatory plan.
The SEC has granted confidential treatment with respect to certain portions of this exhibit. Omitted portions have
been filed separately with the SEC.
Certain identified information has been omitted pursuant to Item 601(b)(10) of Regulation S-K because such
information is both (i) not material and (ii) would likely cause competitive harm to the Registrant if publicly
disclosed. The Registrant hereby undertakes to furnish supplemental copies of the unredacted exhibit upon request by
the SEC.
(b) Exhibits
See Item 15(a)(3) above.
(c) Financial Statement Schedules
See Item 15(a)(2) above.
ITEM 16. FORM 10-K SUMMARY
None.
84
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 23, 2021
By:
/s/ JOE KIANI
Joe Kiani
Chairman of the Board & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
/s/ JOE KIANI
Joe Kiani
/s/ MICAH YOUNG
Micah Young
/s/ J. TODD KONING
J. Todd Koning
TITLE(S)
DATE
Chairman of the Board & Chief Executive Officer
(Principal Executive Officer)
February 23, 2021
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
February 23, 2021
Senior Vice President, Chief Accounting Officer
(Principal Accounting Officer)
February 23, 2021
/s/ H MICHAEL COHEN
Director
H Michael Cohen
/s/ THOMAS HARKIN
Director
Thomas Harkin
/s/ ADAM MIKKELSON
Adam Mikkelson
Director
/s/ CRAIG REYNOLDS
Director
Craig Reynolds
/s/ JULIE A. SHIMER, PH.D.
Julie A. Shimer, Ph.D.
Director
February 23, 2021
February 23, 2021
February 23, 2021
February 23, 2021
February 23, 2021
85
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Consolidated
Financial Statements
[THIS PAGE INTENTIONALLY LEFT BLANK.]
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
MASIMO CORPORATION
Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm................................................................................................
Consolidated Balance Sheets as of January 2, 2021 and December 28, 2019.......................................................................
F-2
F-5
Consolidated Statements of Operations for the years ended January 2, 2021, December 28, 2019 and December 29,
2018.......................................................................................................................................................................................
Consolidated Statements of Comprehensive Income for the years ended January 2, 2021, December 28, 2019 and
December 29, 2018................................................................................................................................................................
Consolidated Statements of Equity for the years ended January 2, 2021, December 28, 2019 and December 29,
2018.......................................................................................................................................................................................
..
Consolidated Statements of Cash Flows for the years ended January 2, 2021, December 28, 2019 and December 29,
2018.......................................................................................................................................................................................
F-9
.
Notes to Consolidated Financial Statements.......................................................................................................................... F-10
F-6
F-8
F-7
Schedule
Schedule II - Valuation and Qualifying Accounts................................................................................................................. F-45
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Masimo Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Masimo Corporation (a Delaware corporation) and
subsidiaries (the “Company”) as of January 2, 2021 and December 28, 2019, the related consolidated statements of operations,
comprehensive income, equity, and cash flows for each of the three years in the period ended January 2, 2021, and the related
notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 2,
2021 and December 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended
January 2, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of January 2, 2021, based on criteria established in the
2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), and our report dated February 23, 2021 expressed an unqualified opinion.
Change in accounting principle
As described in Note 2 to the financial statements, the Company has changed its method of accounting for leases in fiscal year
2019 due to the adoption of the new leasing standard. The Company adopted the new leasing standard using the modified
retrospective approach.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Accounting for Deferred Equipment Agreements
As described in Note 2 to the financial statements, the Company derives a portion of its product revenue from direct sales under
deferred equipment agreements with end-user hospitals. Contract consideration under such agreements containing fixed annual
sensor purchase commitments is allocated to the identified performance obligations, including lease components, on the basis of
relative standalone selling prices.
F-2
We identified the accounting for deferred equipment agreements as a critical audit matter. The principal consideration for our
determination that the accounting for deferred equipment agreements is a critical audit matter is that the identification and
evaluation of performance obligations requires management judgment and interpretation of contract terms. Therefore,
subjective and complex auditor judgment is necessary to evaluate the reasonableness of management’s judgments and
assumptions in this area.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. Our audit procedures related to deferred equipment agreements included the
following, among others.
•
•
Inspecting a sample of deferred equipment agreements with fixed sensor commitments and evaluating the
reasonableness of performance obligations, including lease components, identified by management in accordance with
the relevant authoritative guidance.
Testing the design and operating effectiveness of internal controls related to the accounting for deferred equipment
agreements, including controls over the identification of performance obligations.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2006.
Newport Beach, California
February 23, 2021
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Masimo Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Masimo Corporation (a Delaware corporation) and subsidiaries
(the “Company”) as of January 2, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of January 2, 2021, based on criteria
established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended January 2, 2021, and our report
dated February 23, 2021 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Newport Beach, California
February 23, 2021
F-4
MASIMO CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
January 2,
2021
December 28,
2019
ASSETS
Current assets
Cash and cash equivalents............................................................................................... $
641,447 $
Short-term investments...................................................................................................
Trade accounts receivable, net of allowance for doubtful accounts of $1,603 and
$1,803 at January 2, 2021 and December 28, 2019, respectively...................................
Inventories.......................................................................................................................
Other current assets.........................................................................................................
Total current assets.........................................................................................
Lease receivable, noncurrent..................................................................................................
Deferred costs and other contract assets.................................................................................
Property and equipment, net...................................................................................................
Intangible assets, net...............................................................................................................
Goodwill.................................................................................................................................
Deferred tax assets..................................................................................................................
Other non-current assets.........................................................................................................
Total assets..................................................................................................... $
—
141,350
215,952
102,416
1,101,165
57,666
20,076
272,511
73,923
103,206
39,363
44,642
1,712,552 $
LIABILITIES AND EQUITY
Current liabilities
Accounts payable............................................................................................................ $
Accrued compensation....................................................................................................
Deferred revenue and other contract-related liabilities, current......................................
Other current liabilities....................................................................................................
Total current liabilities...................................................................................
Other non-current liabilities...................................................................................................
Total liabilities................................................................................................
64,061 $
71,601
44,935
53,239
233,836
71,076
304,912
Commitments and contingencies (Note 21)
Masimo Corporation Stockholders’ equity
567,687
120,000
132,433
115,871
60,071
996,062
49,936
16,214
219,552
27,251
22,350
35,972
28,791
1,396,128
54,548
54,705
25,939
37,027
172,219
56,035
228,254
Preferred stock, $0.001 par value; 5,000 shares authorized; 0 shares issued and
outstanding......................................................................................................................
Common stock, $0.001 par value; 100,000 shares authorized; 55,251 and 53,696
shares issued and outstanding at January 2, 2021 and December 28, 2019,
respectively......................................................................................................................
Treasury stock, 15,993 and 15,530 shares at January 2, 2021 and December 28, 2019,
respectively......................................................................................................................
Additional paid-in capital................................................................................................
Accumulated other comprehensive income (loss)...........................................................
Retained earnings............................................................................................................
Total Masimo Corporation stockholders’ equity...........................................
Noncontrolling interest....................................................................................................
Total equity....................................................................................................
Total liabilities and equity.............................................................................. $
—
55
—
54
(638,736)
703,693
1,413
1,341,235
1,407,660
(20)
1,407,640
1,712,552 $
(526,580)
600,624
(6,718)
1,100,494
1,167,874
—
1,167,874
1,396,128
The accompanying notes are an integral part of these consolidated financial statements.
F-5
MASIMO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Revenue:
Product.............................................................................................. $
Royalty and other revenue.................................................................
Total revenue............................................................................................
Cost of goods sold....................................................................................
Gross profit...............................................................................................
Operating expenses:
Selling, general and administrative...................................................
Research and development................................................................
Litigation awards, settlements/or defense costs................................
Total operating expenses..........................................................................
Operating income.....................................................................................
Non-operating income..............................................................................
Income before provision for income taxes...............................................
Provision for income taxes.......................................................................
Net income including noncontrolling interest..........................................
Net loss attributable to noncontrolling interest.........................................
Net income attributable to Masimo Corporation stockholders................. $
1,143,744 $
—
1,143,744
400,679
743,065
369,057
118,659
(474)
487,242
255,823
7,913
263,736
23,454
240,282
20
240,302 $
936,408 $
1,429
937,837
308,665
629,172
314,661
93,295
—
407,956
221,216
12,950
234,166
37,950
196,216
—
196,216 $
829,874
28,415
858,289
283,397
574,892
285,417
81,006
425
366,848
208,044
5,732
213,776
20,233
193,543
—
193,543
Net income per share attributable to Masimo Corporation stockholders:
Basic.................................................................................................. $
Diluted............................................................................................... $
4.39 $
4.14 $
3.67 $
3.44 $
3.70
3.45
Weighted-average shares used in per share calculations:
Basic..................................................................................................
Diluted...............................................................................................
54,700
58,037
53,434
57,100
52,296
56,039
The accompanying notes are an integral part of these consolidated financial statements.
F-6
MASIMO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Net income including noncontrolling interest.......................................... $
240,282 $
196,216 $
193,543
Other comprehensive gain (loss), net of tax:
Foreign currency translation gains (losses).......................................
Total comprehensive income....................................................................
Comprehensive loss attributable to noncontrolling interest..............
Comprehensive income attributable to Masimo Corporation
stockholders.............................................................................................. $
8,131
248,413
20
(519)
195,697
—
(3,258)
190,285
—
248,433 $
195,697 $
190,285
The accompanying notes are an integral part of these consolidated financial statements.
F-7
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F-8
MASIMO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
240,282 $
196,216 $
193,543
Cash flows from operating activities:
Net income including noncontrolling interest................................................................ $
Adjustments to reconcile net income including noncontrolling interest to net cash
provided by operating activities:
Depreciation and amortization................................................................................
Stock-based compensation......................................................................................
Loss on disposal of equipment, intangibles and other assets..................................
Benefit (provision) for doubtful accounts...............................................................
(Benefit) for amount due from former foreign agent..............................................
(Benefit) from deferred income taxes.....................................................................
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable..........................................
(Increase) in inventories................................................................................
(Increase) decrease in other current assets....................................................
(Increase) in lease receivable, net.................................................................
(Increase) decrease in deferred costs and other contract assets....................
(Increase) decrease in other non-current assets.............................................
Increase in accounts payable.........................................................................
Increase in accrued compensation.................................................................
Increase in deferred revenue and other contract-related liabilities...............
(Decrease) increase in income taxes payable................................................
Increase in accrued liabilities........................................................................
(Decrease) increase in other non-current liabilities......................................
Net cash provided by operating activities.........................................................................
Cash flows from investing activities:
Maturities of short-term investments.............................................................................
Purchases of short-term investments..............................................................................
Purchases of property and equipment, net.....................................................................
Increase in intangible assets...........................................................................................
29,300
42,225
554
82
—
(4,964)
(2,229)
(94,434)
(29,984)
(7,749)
(2,806)
(1,320)
7,637
15,544
10,871
(1,301)
9,391
(136)
210,963
120,000
—
(72,549)
(7,408)
Business combinations, net of cash acquired.................................................................
(112,706)
Deposit to acquire noncontrolling interest.....................................................................
Other strategic investing activities.................................................................................
Net cash (used in) investing activities................................................................................
Cash flows from financing activities:
Proceeds from issuance of common stock.....................................................................
Repurchases of common stock.......................................................................................
Payroll tax withholdings on behalf of employees for stock options..............................
Debt issuance costs........................................................................................................
Net cash (used in) provided by financing activities..........................................................
Effect of foreign currency exchange rates on cash................................................................
Net increase in cash, cash equivalents and restricted cash....................................................
Cash, cash equivalents and restricted cash at beginning of period.......................................
Cash, cash equivalents and restricted cash at end of period.................................................. $
(3,374)
(6,750)
(82,787)
58,424
(110,540)
(2,191)
—
(54,307)
3,060
76,929
568,075
645,004 $
23,487
39,233
357
687
—
(5,965)
(23,580)
(21,257)
(8,536)
(11,958)
3,308
(226)
9,934
5,338
7,739
4,079
746
2,038
221,640
160,000
(280,000)
(68,375)
(4,117)
—
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(5,189)
(197,681)
28,339
(37,555)
(123)
—
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814
15,434
552,641
568,075 $
21,127
27,417
949
(439)
(2,016)
(8,274)
10,826
(1,885)
3,843
—
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407
5,211
10,195
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3,923
(7,577)
239,527
—
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(5,557)
(3,922)
—
453
(26,152)
44,748
(18,478)
(168)
(322)
25,780
(1,997)
237,158
315,483
552,641
The accompanying notes are an integral part of these consolidated financial statements.
F-9
MASIMO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company
Masimo Corporation (the Company) is a global medical technology company that develops, manufactures and markets a wide
array of patient monitoring technologies, as well as automation and connectivity solutions. The Company’s mission is to
improve patient outcomes and reduce the cost of patient care. The Company’s patient monitoring solutions generally
incorporate a monitor or circuit board, proprietary single-patient use or reusable sensors, software and/or cables. The Company
primarily sells its products to hospitals, emergency medical service providers, home care providers, physician offices,
veterinarians, long-term care facilities and consumers through its direct sales force, distributors and original equipment
manufacturer (OEM) partners.
™), Oxygen Content (SpOC™), Pleth Variability Index (PVi®), rainbow® Pleth Variability Index
The Company invented Masimo Signal Extraction Technology® (SET®), which provides the capabilities of Measure-through
Motion and Low Perfusion™ pulse oximetry to address the primary limitations of conventional pulse oximetry. Over the years,
the Company’s product offerings have expanded significantly to also include rainbow® Pulse CO-Oximetry, with its ability to
monitor carboxyhemoglobin (SpCO®), methemoglobin (SpMet®), total hemoglobin concentration (SpHb®), fractional arterial
oxygen saturation (SpfO2
(RPVi™), respiration rate from the pleth (RRp®) and Oxygen Reserve Index (ORi™); as well as acoustic respiration monitoring
(RRa®), SedLine® brain function monitoring, NomoLine® capnography and gas monitoring and O3® Regional Oximetry. These
technologies are based upon Masimo SET®, rainbow® and other proprietary algorithms and are incorporated into a variety of
product platforms depending on customers’ specifications. The Company’s current technology offerings also include remote
patient monitoring, connectivity, and hospital automation solutions, including Masimo Patient SafetyNet™(1), Masimo Patient
SafetyNet™ Surveillance(1), Masimo SafetyNet™, Masimo SafetyNet-Open™, Replica™, Iris®, MyView®, UniView™, Uniview :
60™, Trace™, Masimo Sleep™, Centroid™, and Bridge™. The Company’s technologies are supported by a substantial intellectual
property portfolio that the Company has built through internal development and, to a lesser extent, acquisitions and license
agreements.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP), and include the accounts of the Company and its wholly-owned or controlled
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
As further discussed below within this Note 2 to these consolidated financial statements, the Company adopted Financial
Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02)
effective December 30, 2018.
Fiscal Periods
The Company follows a conventional 52/53 week fiscal year. Under a conventional 52/53 week fiscal year, a 52 week fiscal
year includes four quarters of 13 weeks while a 53 week fiscal year includes three 13 week fiscal quarters and one 14 week
fiscal quarter. The Company’s last 53 week fiscal year was fiscal year 2014. Fiscal year 2020 is a 53 week fiscal year ending
January 2, 2021, with the fourth quarter having 14 weeks. All references to years in these notes to consolidated financial
statements are fiscal years unless otherwise noted.
Reclassifications
Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the current period
presentation, including previously reported selling, general and administrative expenses that have been reclassified as research
and development expenses within the consolidated financial statements for the year ended December 29, 2018. Included in the
consolidated financial statements were certain reclassifications of the short-term investments for the years ended January 2,
2021 and December 28, 2019.
___________________________
(1) The use of the trademark Patient SafetyNet™ is under license from the University HealthSystem Consortium.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
Use of Estimates
The Company prepares its financial statements in conformity with GAAP, which requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant
estimates include the determination of standalone selling prices, variable consideration, total consideration allocated to each
performance obligation within a contract, inventory valuation, valuation of the Company’s equity awards, valuation of
identifiable assets and liabilities connected with business combinations, deferred taxes and any associated valuation allowances,
deferred revenue, uncertain income tax positions, and litigation costs and related accruals. Actual results could differ from such
estimates.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, which requires that once control
is obtained, all the assets acquired, liabilities assumed and noncontrolling interests in the acquired entity, if applicable, are
recorded at their respective fair values at the date of acquisition. The excess of the purchase price over fair values of identifiable
assets, liabilities and noncontrolling interests in the acquired entity, if applicable, is recorded as goodwill.
Fair Value Measurements
Authoritative guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value:
•
•
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities, quoted prices in markets that are not active or other inputs that can be corroborated by observable market data
for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
Pursuant to current authoritative guidance, entities are allowed an irrevocable option to elect the fair value for the initial and
subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect
to apply the fair value option under this guidance to specific assets or liabilities on a contract-by contract basis. There were no
transfers between Level 1, Level 2 and Level 3 inputs during the years ended January 2, 2021 or December 28, 2019. The
Company carries cash and cash equivalents, as well as certificates of deposit with maturities of one year or less, at cost, which
approximates fair value.
The following table represents the Company’s financial assets (in thousands), measured at fair value on a recurring basis as of
January 2, 2021:
Adjusted Basis
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair Value
Cash and Cash
Equivalents
Short-Term
Investments
Reported as
Cash............................................. $
641,447 $
— $
— $
641,447 $
641,447 $
Level 1:
None..................................
Level 2:
None..................................
Level 3:
None..................................
Total assets measured at fair
value............................................ $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
641,447 $
— $
— $
641,447 $
641,447 $
—
—
—
—
—
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
The following table represents the Company’s financial assets (in thousands), measured at fair value on a recurring basis as of
December 28, 2019.
Adjusted Basis
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair Value
Cash and Cash
Equivalents
Short-Term
Investments
Reported as
Cash............................................. $
567,687 $
— $
— $
567,687 $
567,687 $
—
Level 1:
Certificates of deposit........
Subtotal.........................
120,000
120,000
Level 2:
None..................................
Level 3:
None..................................
Total assets measured at fair
value............................................ $
—
—
—
—
—
—
—
—
—
—
120,000
120,000
—
—
—
—
—
—
120,000
120,000
—
—
687,687 $
— $
— $
687,687 $
567,687 $
120,000
For certain other financial assets and liabilities, including restricted cash, accounts receivable, accounts payable and other
current assets and liabilities, the carrying amounts approximate their fair value primarily due to the relatively short maturity of
these balances. The Company also measures certain non-financial assets at fair value on a non-recurring basis, primarily
goodwill, intangible assets and operating lease right-of-use assets, in connection with periodic evaluations for potential
impairment.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity from date of purchase of three months or less, or
highly liquid investments that are readily convertible into known amounts of cash, to be cash equivalents.
Short-Term Investments
The Company classifies its investments in certificates of deposits maturing in greater than three months but less than one year
on the date of the original investment as short-term investments. The carrying value of such investments approximates fair
value and is accessible without any significant restrictions, taxes, or penalties. As of January 2, 2021, the Company had no
investments in certificates of deposit.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of trade receivables recorded at the time of invoicing of product sales, reduced by reserves for
estimated bad debts and returns. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Credit
is extended based on an evaluation of the customer’s financial condition. Collateral is generally not required. The Company
records an allowance for doubtful accounts that it does not expect to collect based on relevant information, including historical
experience, current conditions, and reasonable and supportable forecasts. Accounts are charged off against the allowance when
the Company believes they are uncollectible.
Inventory
Inventories are stated at the lower of cost or net realizable value. Cost is determined using a standard cost method, which
approximates the first in, first out method, and includes material, labor and overhead costs. Inventory valuation adjustments are
recorded for inventory items that have become excess or obsolete or are no longer used in current production and for inventory
items that have a market price less than carrying value in inventory. The Company generally determines inventory valuation
adjustments based on an evaluation of the expected future use of its inventory on an item by item basis and applies historical
obsolescence rates to estimate the loss on inventory expected to have a recovery value below cost. The Company also records
other specific inventory valuation adjustments when it becomes aware of unique events or circumstances that result in an
expected recovery value below cost. For inventory items that have been written down, the reduced value becomes the new cost
basis.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over estimated useful lives
as follows:
Aircraft and components.................................................................................................
Buildings.........................................................................................................................
Building improvements...................................................................................................
Computer equipment and software.................................................................................
Demonstration units........................................................................................................
Furniture and office equipment.......................................................................................
Useful Lives
4 to 20 years
39 years
7 to 15 years
2 to 12 years
3 years
2 to 6 years
Leasehold improvements................................................................................................
Lesser of useful life or term of lease
Machinery and equipment...............................................................................................
5 to 10 years
Tooling............................................................................................................................
Vehicles...........................................................................................................................
3 years
5 years
Land is not depreciated and construction-in-progress is not depreciated until placed in service. Normal repair and maintenance
costs are expensed as incurred, whereas significant improvements that materially increase values or extend useful lives are
capitalized and depreciated over the remaining estimated useful lives of the related assets. Upon sale or retirement of
depreciable assets, the related cost and accumulated depreciation or amortization are removed from the accounts and any gain
or loss on the sale or retirement is recognized in income.
Lessee Right-of-Use (ROU) Assets and Lease Liabilities
As further discussed below within this Note 2 to these consolidated financial statements, the Company adopted ASC 842
effective December 30, 2018. The Company determines if an arrangement contains a lease at inception. ROU assets represent
the Company’s right to use an asset underlying an operating lease for the lease term and lease liabilities represent the
Company’s obligation to make lease payments arising from an operating lease. ROU assets and lease liabilities are recognized
at the commencement date based on the present value of lease payments over the lease term. The Company generally estimates
the applicable discount rate used to determine the net present value of lease payments based on available information at the
lease commencement date. Many of the Company’s lessee agreements include options to extend the lease, which the Company
does not include in its lease terms unless they are reasonably certain to be exercised. The Company utilizes a portfolio approach
to account for the ROU assets and liabilities associated with certain equipment leases.
The Company has also made an accounting policy election not to separate lease and non-lease components for its real estate
leases and to exclude short-term leases with a term of twelve months or less from its ROU assets and lease liabilities. Rental
expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Intangible Assets
Intangible assets consist primarily of patents, trademarks, software development costs, customer relationships and acquired
technology. Costs related to patents and trademarks, which include legal and application fees, are capitalized and amortized
over the estimated useful lives using the straight-line method. Patent and trademark amortization commences once final
approval of the patent or trademark has been obtained. Patent costs are amortized over the lesser of 10 years or the patent’s
remaining legal life, which assumes renewals, and trademark costs are amortized over 17 years, and their associated
amortization cost is included in selling, general and administrative expense in the accompanying consolidated statements of
operations. For intangibles purchased in an asset acquisition or business combination, which mainly include patents,
trademarks, customer relationships and acquired technologies, the useful life is determined largely by valuation estimates of
remaining economic life.
The Company’s policy is to renew its patents and trademarks. Costs to renew patents and trademarks are capitalized and
amortized over the remaining useful life of the intangible asset. The Company periodically evaluates the amortization period
and carrying basis of patents and trademarks to determine whether any events or circumstances warrant a revised estimated
useful life or reduction in value. Capitalized application costs are charged to operations when it is determined that the patent or
trademark will not be obtained or is abandoned.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
Impairment of Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of
the acquired net tangible and intangible assets. Goodwill is not amortized, but instead is tested annually for impairment, or more
frequently when events or changes in circumstances indicate that goodwill might be impaired. In assessing goodwill
impairment, the Company has the option to first assess the qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macroeconomic,
industry-specific and Company-specific factors, including: (i) severe adverse industry or economic trends; (ii) significant
Company-specific actions; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a
sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or
circumstances, the Company determines it is unlikely that the fair value of a reporting unit is less than its carrying amount, then
a quantitative analysis is unnecessary. However, if the Company concludes otherwise, or if the Company elects to bypass the
qualitative analysis, then the Company must perform a quantitative analysis that compares the fair value of the reporting unit
with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not
considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying
amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit. The annual
impairment test is performed during the fourth fiscal quarter.
The Company reviews long-lived assets and identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flows expected to be
generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower
of carrying amount or fair value less costs to sell.
Income Taxes
The Company accounts for income taxes using the asset and liability method, under which the Company recognizes deferred
tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and for net operating loss and tax credit
carryforwards. Tax positions that meet a more-likely-than-not recognition threshold are recognized in the first reporting period
that it becomes more-likely-than-not such tax position will be sustained upon examination. A tax position that meets this more-
likely-than-not recognition threshold is recorded at the largest amount of tax benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement. Previously recognized income tax positions that fail to meet the recognition threshold
in a subsequent period are derecognized in that period. Differences between actual results and the Company’s assumptions, or
changes in the Company’s assumptions in future periods, are recorded in the period they become known. The Company records
potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.
As a multinational corporation, the Company is subject to complex tax laws and regulations in various jurisdictions. The
application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws
themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court
rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from the Company’s estimates,
which could result in the need to record additional liabilities or potentially to reverse previously recorded tax liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment
date. A valuation allowance is recorded against any deferred tax assets when, in the judgment of management, it is more likely
than not that all or part of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, the Company
considers all positive and negative evidence, including recent financial performance, scheduled reversals of temporary
differences, projected future taxable income, availability of taxable income in carryback periods and tax planning strategies.
Revenue Recognition, Deferred Revenue and Other Contract Liabilities
The Company derives the majority of its product revenue from four primary sources: (i) direct sales under deferred equipment
agreements with end-user hospitals where the Company provides up-front monitoring equipment at no up-front charge in
exchange for a multi-year sensor purchase commitment; (ii) other direct sales of noninvasive monitoring solutions to end-user
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
hospitals, emergency medical response organizations and other direct customers; (iii) sales of noninvasive monitoring solutions
to distributors who then typically resell to end-user hospitals, emergency medical response organizations and other customers;
and (iv) sales of integrated circuit boards to OEM customers who incorporate the Company’s embedded software technology
into their multiparameter monitoring devices. Subject to customer credit considerations, the majority of such sales are made on
open account using industry standard payment terms based on the geography within which the specific customer is located.
The Company generally recognizes revenue following a single, principles-based five-step model to be applied to all contracts
with customers and generally provides for the recognition of revenue in an amount that reflects the consideration to which the
Company expects to be entitled, net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected
from customers that are remitted to government authorities, when control over the promised goods or services are transferred to
the customer. Revenue related to equipment supplied under sales-type lease arrangements is recognized once control over the
equipment is transferred to the customer, while revenue related to equipment supplied under operating-type lease arrangements
is generally recognized on a straight-line basis over the term of the lease.
While the majority of the Company’s revenue contracts and transactions contain standard business terms and conditions, there
are some transactions that contain non-standard business terms and conditions. As a result, contract interpretation, judgment
and analysis is required to determine the appropriate accounting, including: (i) the amount of the total consideration, as well as
variable consideration, (ii) whether the arrangement contains an embedded lease, and if so, whether such embedded lease is a
sales-type lease or an operating lease, (iii) the identification of the distinct performance obligations contained within the
arrangement, (iv) how the arrangement consideration should be allocated to each performance obligation when multiple
performance obligations exist, including the determination of standalone selling price, and (v) when to recognize revenue on the
performance obligations. Changes in judgments on these assumptions and estimates could materially impact the timing of
revenue recognition.
The Company enters into agreements to sell its monitoring solutions and services, sometimes as a part of arrangements with
multiple performance obligations that include various combinations of product sales, equipment leases and services. In the case
of contracts with multiple performance obligations, the authoritative guidance provides that the total consideration be allocated
to each performance obligation on the basis of relative standalone selling prices. When a standalone selling price is not readily
observable, the Company estimates the standalone selling price by considering multiple factors including, but not limited to,
features and functionality of the product, geographies, type of customer, contractual prices pursuant to Group Purchasing
Organization (GPO) contracts, the Company’s pricing and discount practices, and other market conditions.
Sales under deferred equipment agreements are generally structured such that the Company agrees to provide certain
monitoring-related equipment, software, installation, training and/or warranty support at no up-front charge in exchange for the
customer’s commitment to purchase sensors over the term of the agreement, which generally ranges from three years to six
years. The Company allocates contract consideration under deferred equipment agreements containing fixed annual sensor
purchase commitments to the underlying lease and non-lease components at contract inception.
In determining whether any underlying lease components are related to a sales-type lease or an operating lease, the Company
evaluates the customer’s rights and ability to control the use of the underlying equipment throughout the contract term,
including any equipment substitution rights retained by the Company, as well as the Company’s expectations surrounding
potential contract/lease extensions or renewals and the customer’s likelihood to exercise any purchase options. Revenue
allocable to non-lease performance obligations is generally recognized as such non-lease performance obligations are satisfied.
Revenue allocable to lease components under sales-type lease arrangements is generally recognized when control over the
equipment is transferred to the customer. Revenue allocable to lease components under operating lease arrangements is
generally recognized over the term of the operating lease. The Company generally does not expect to derive any significant
value in excess of such asset’s unamortized book value from equipment underlying its operating lease arrangements after the
end of the agreement.
Revenue from the sale of products to end-user hospitals, emergency medical response organizations, other direct customers,
distributors and OEM customers, is recognized by the Company when control of such products transfer to the customer based
upon the terms of the contract or underlying purchase order. Revenue related to OEM rainbow® parameter software licenses is
recognized by the Company upon the OEM’s shipment of its product to its customer, as reported to the Company by the OEM.
The Company provides certain customers with various sales incentives that may take the form of discounts or rebates. The
Company records estimates related to these programs as a reduction to revenue at the time of sale. In general, customers do not
have a right of return for credit or refund. However, the Company allows returns under certain circumstances. At the end of
each period, the Company estimates and accrues for these returns as a reduction to revenue. The Company estimates the
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
revenue constraints related to these forms of variable consideration based on various factors, including expected purchasing
volumes, prior sales and returns history, and specific contractual terms and limitations.
The majority of the Company’s royalty and other revenue arose from one agreement that was due and payable quarterly in
arrears. An estimate of these royalty revenues was recorded in the period earned based on historical results, adjusted for any
new information or trends known to management at the time of estimation. This estimated revenue was adjusted prospectively
when the Company received the underlying royalty report, approximately sixty days after the end of the previous quarter. The
Company received its final royalty payment from this agreement during the three months ended March 30, 2019. For the years
ended January 2, 2021, December 28, 2019 and December 29, 2018, the Company recognized royalty revenue pursuant to this
agreement of approximately $0.0 million, $0.7 million and $26.4 million, respectively.
Shipping and Handling Costs and Fees
All shipping and handling costs are expensed as incurred and are recorded as a component of cost of goods sold in the
accompanying consolidated statements of operations. Charges for shipping and handling billed to customers are included as a
component of product revenue.
Taxes Collected From Customers and Remitted to Governmental Authorities
The Company’s policy is to present revenue net of taxes collected from customers and remitted to governmental authorities.
Deferred Costs and Other Contract Assets
The costs of monitoring-related equipment provided to customers under operating lease arrangements within the Company’s
deferred equipment agreements are generally deferred and amortized to cost of goods sold over the life of the underlying
contracts. Some of the Company’s deferred equipment agreements also contain provisions for certain allowances to be made
directly to the end-user hospital customer at the inception of the arrangement. These allowances are generally allocated to the
lease and non-lease components and recognized as a reduction to revenue as the underlying performance obligations are
satisfied.
The Company generally invoices its customers under deferred equipment agreements as sensors are provided to the customer.
However, the Company may recognize revenue for certain non-lease performance obligations under deferred equipment
agreements with fixed annual commitments at the time such performance obligations are satisfied and prior to the customer
being invoiced.
When this occurs, the Company records an unbilled contract receivable related to such revenue until the customer has been
invoiced pursuant to the terms of the underlying deferred equipment agreement.
The incremental costs of obtaining a contract with a customer are capitalized and deferred if the Company expects such costs to
be recoverable over the life of the contract and the contract term is greater than one year. Such deferred costs generally relate to
certain incentive sales commissions earned by the Company’s internal sales team in connection with the execution of deferred
equipment agreements and are amortized to expense over the expected term of the underlying contract.
Product Warranty
The Company generally provides a warranty against defects in material and workmanship for a period ranging from three
months to forty-eight months, depending on the product type. In traditional sales activities, including direct and OEM sales, the
Company establishes an accrued liability for the estimated warranty costs at the time of revenue recognition, with a
corresponding provision to cost of goods sold. Customers may also purchase extended warranty coverage or service level
upgrades separately or as part of a deferred equipment agreement. Revenue related to extended warranty coverage and service
level upgrades is generally recognized over the life of the contract, which reasonably approximates the period over which such
services will be provided. The related extended warranty and service level upgrade costs are expensed as incurred.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
Changes in the product warranty accrual were as follows (in thousands):
January 2,
2021
Year Ended
December 28,
2019
December 29,
2018
Warranty accrual, beginning of period..................................................... $
3,395 $
1,910 $
Accrual for warranties issued...................................................................
Changes in pre-existing warranties (including changes in estimates)(1)....
Settlements made......................................................................................
Warranty accrual, end of period............................................................... $
832
196
(1,683)
2,740 $
1,715
1,130
(1,360)
3,395 $
1,149
1,549
551
(1,339)
1,910
______________
(1)
In connection with its adoption of ASC 842 on December 30, 2018, the Company recorded an adjustment to pre-existing warranties of $2.5 million
related to equipment previously capitalized under its deferred equipment agreements where the embedded leases were treated as operating leases under
prior guidance. See “Recently Adopted Accounting Pronouncements” in Note 2 to these consolidated financial statements for additional information
related to the Company’s adoption of ASC 842.
Advertising Costs
Advertising costs are expensed as incurred. These costs are included in selling, general and administrative expense in the
accompanying consolidated statements of operations. Advertising costs for the years ended January 2, 2021, December 28,
2019 and December 29, 2018 were $30.8 million, $14.0 million and $17.9 million, respectively.
Research and Development
Costs related to research and development activities are expensed as incurred. These costs include personnel costs, materials,
depreciation and amortization on associated tangible and intangible assets and an allocation of facility costs, all of which are
directly related to research and development activities.
Litigation Costs and Contingencies
The Company records a charge equal to at least the minimum estimated liability for a loss contingency or litigation settlement
when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates
that it is probable that a liability had been incurred at the date of the financial statements, and (ii) the range of loss can be
reasonably estimated. The determination of whether a loss contingency or litigation settlement is probable or reasonably
possible involves a significant amount of management judgment, as does the estimation of the range of loss given the nature of
contingencies.
Liabilities related to litigation settlements with multiple elements are recorded based on the fair value of each element. Legal
and other litigation related expenses are recognized as the services are provided. The Company records insurance and other
indemnity recoveries for litigation expenses when both of the following conditions are met: (a) the recovery is probable, and
(b) collectability is reasonably assured. Insurance recoveries are only recorded to the extent the litigation costs to which they
relate have been incurred and recognized in the financial statements.
Foreign Currency Translation
The Company’s international headquarters is in Switzerland, and its functional currency is the U.S. Dollar. The Company has
many other foreign subsidiaries, and the largest transactions in foreign currency translations occur in Japanese Yen and the
European Euro.
The Company records certain revenues and expenses in foreign currencies. These revenues and expenses are translated into
U.S. Dollars based on the average exchange rate for the reporting period. Assets and liabilities denominated in foreign
currencies are translated into U.S. Dollars at the exchange rate in effect as of the balance sheet date. Translation gains and
losses related to foreign currency assets and liabilities of a subsidiary that are denominated in the functional currency of such
subsidiary are included as a component of accumulated other comprehensive income (loss) within the accompanying
consolidated balance sheets. Realized and unrealized foreign currency gains and losses related to foreign currency assets and
liabilities of the Company or a subsidiary that are not denominated in the underlying functional currency are included as a
component of non-operating (income) expense within the accompanying consolidated statements of operations.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
Comprehensive Income
Comprehensive income includes foreign currency translation adjustments and any related tax benefits that have been excluded
from net income including noncontrolling interest and reflected in equity.
Net Income Per Share
A computation of basic and diluted net income per share is as follows (in thousands, except per share data):
January 2,
2021
Year Ended
December 28,
2019
December 29,
2018
Net income attributable to Masimo Corporation stockholders:
$
Net loss attributable to noncontrolling interest.................................
240,282 $
20
196,216 $
—
Net income attributable to Masimo Corporation stockholders......... $
240,302 $
196,216 $
193,543
—
193,543
Basic net income per share attributable to Masimo Corporation
stockholders:
Net income attributable to Masimo Corporation stockholders......... $
Weighted-average shares outstanding - basic...................................
Net income per basic share attributable to Masimo Corporation
stockholders...................................................................................... $
Diluted net income per share attributable to Masimo Corporation
stockholders:
Weighted-average shares outstanding - basic...................................
Diluted share equivalents: stock options, RSUs and PSUs..............
Weighted-average shares outstanding - diluted................................
Net income per diluted share attributable to Masimo Corporation
stockholders...................................................................................... $
240,302 $
54,700
196,216 $
53,434
193,543
52,296
4.39 $
3.67 $
3.70
54,700
3,337
58,037
53,434
3,666
57,100
52,296
3,743
56,039
4.14 $
3.44 $
3.45
Basic net income per share is computed by dividing net income by the weighted-average number of shares outstanding during
the period. Net income per diluted share is computed by dividing the net income by the weighted-average number of shares and
potential shares outstanding during the period, if the effect of potential shares is dilutive. Potential shares include incremental
shares of stock issuable upon the exercise of stock options and the vesting of both restricted share units (RSUs) and
performance stock units (PSUs).
For the years ended January 2, 2021, December 28, 2019 and December 29, 2018, weighted options to purchase 0.4 million, 0.4
million and 1.1 million shares of common stock, respectively, were outstanding, but not included in the computation of diluted
net income per share because the effect of including such shares would have been antidilutive in the applicable period. For each
of the years ended January 2, 2021, December 28, 2019 and December 29, 2018, certain RSUs were considered contingently
issuable shares as their vesting is contingent upon the occurrence of certain future events. Since such events had not occurred
and were not considered probable of occurring as of January 2, 2021, December 28, 2019 and December 29, 2018, 2.7 million
of weighted average shares related to such RSUs have been excluded from the calculation of potential shares. For additional
information with respect to these RSUs, please see “Employment and Severance Agreements” in Note 21 to these consolidated
financial statements.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
Supplemental Cash Flow Information
Supplemental cash flow information includes the following (in thousands):
January 2,
2021
Year Ended
December 28,
2019
December 29,
2018
Cash paid during the year for:
Interest expense................................................................................. $
270 $
211 $
Income taxes......................................................................................
Operating lease liabilities..................................................................
39,491
6,276
42,270
6,676
193
36,589
—
Non-cash operating activities:
ROU assets obtained in exchange for lease liabilities(1).................... $
15,387 $
26,484 $
—
Non-cash investing activities:
Unpaid purchases of property and equipment................................... $
Settlement of promissory note receivable in connection with
business combination........................................................................
2,053 $
6,686 $
2,391
5,100
—
Non-cash financing activities:
Unsettled common stock proceeds from option exercises................. $
Fair value of common stock received for payment of stock option
exercise price.....................................................................................
3,011 $
14 $
1,616
—
—
4
—
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents................................................................. $
641,447 $
567,687 $
552,490
Restricted cash...................................................................................
Total cash, cash equivalents and restricted cash shown in the
statement of cash flows..................................................................... $
3,557
388
151
645,004 $
568,075 $
552,641
______________
(1)
In connection with its adoption of ASC 842 on December 30, 2018, the Company recorded a lessee operating lease ROU asset of $22.5 million. See
“Recently Adopted Accounting Pronouncements” in Note 2 to these consolidated financial statements for additional information related to the Company’s
adoption of ASC 842.
Segment Information
The Company uses the “management approach” in determining reportable business segments. The management approach
designates the internal organization used by management for making operating decisions and assessing performance as the
source for determining the Company’s reportable segments. Based on this assessment, management has determined it operates
in one reportable business segment, which is comprised of patient monitoring and related products.
Recently Adopted Accounting Pronouncements
In June 2016, the (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). Subsequent to the issuance of ASU
2016-13, the FASB clarified the guidance through several ASUs. The collective new guidance (ASC 326) generally requires
entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than
incurred losses. Under this model, an entity recognizes an impairment allowance equal to its current estimate of all contractual
cash flows that the entity does not expect to collect. The entity’s estimate considers relevant information about past events,
current conditions, and reasonable and supportable forecasts. The Company’s adoption of this standard, effective December 29,
2019, did not have a material impact on its consolidated financial statements.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
In July 2019, the FASB issued ASU No. 2019-07, Codification Updates to SEC Sections - Amendments to SEC Paragraphs
Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442,
Investment Company Reporting Modernization, and Miscellaneous Updates (ASU 2019-07). The new standard aligns the
guidance in various sections of the codification with the requirements of certain already effective SEC final rules. ASU 2019-07
is effective immediately and was adopted upon issuance. The Company’s adoption of this standard did not have a material
impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract (ASU 2018-15). The new standard aligns the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for
annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is
permitted, including adoption in an interim period. The Company early adopted this standard during the three months ended
September 28, 2019, and such adoption did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes
to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). The new standard adds and modifies certain
disclosure requirements for fair value measurements including when entities will no longer be required to disclose the amount
of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will need to disclose the range and
weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is
effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early
adoption is permitted, including adoption in an interim period. The Company early adopted this standard during the three
months ended September 28, 2019, and such adoption did not have a material impact on its consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements (ASU 2018-09). This new standard amends,
clarifies, corrects errors in and makes minor improvements to the ASC. The transition and effective date guidance is based on
the facts and circumstances of each amendment. Some of the amendments of ASU 2018-09 do not require transition guidance
and are effective upon issuance. The Company completed its adoption of all applicable items contained in ASU 2018-09 as of
September 28, 2019, and such adoption did not have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). The new standard
allows a reclassification for certain stranded tax effects from accumulated other comprehensive income to retained earnings,
and requires certain disclosures about stranded tax effects. ASU 2018-02 is effective for annual and interim periods beginning
after December 15, 2018. The Company adopted this standard during the three months ended March 30, 2019, and such
adoption did not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). Subsequent to the issuance of ASU
2016-02, the FASB clarified the guidance through several ASUs. The collective guidance was codified by the FASB in ASC
842, which, among other things (i) requires the Company to recognize an ROU asset and a lease liability for all operating leases
for which the Company is the lessee; (ii) changes the classification of certain embedded leases within the Company’s deferred
equipment agreements with its customers from operating to sales-type leases, resulting in the acceleration of revenue under
certain contracts, as well as the immediate expensing of certain costs that were previously deferred and expensed over the term
of the lease; and (iii) requires disclosures by the Company as a lessor and lessee about the amount, timing and uncertainty of
cash flows arising from its leases.
On December 30, 2018, the Company adopted ASC 842 using the modified retrospective method for all lease arrangements at
the beginning of the period of adoption. Results for reporting periods beginning December 30, 2018 are presented under ASC
842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic
accounting under ASC 840, Leases. Adoption of this new accounting standard had a material impact on the Company’s
consolidated balance sheet upon adoption, but did not have a significant impact on the Company’s consolidated net earnings
and cash flows for the year ended December 28, 2019. For leases that commenced before the effective date of ASC 842, the
Company did not elect any of the permitted practical expedients. However, the Company utilized a portfolio approach for
purposes of determining the discount rate associated with certain equipment leases and made certain accounting policy elections
not to separate lease and non-lease components for its real estate leases and to exclude short-term leases with a term of twelve
months or less from its application of ASC 842.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
In connection with its adoption of ASC 842, the Company recorded lessee operating lease ROU assets and lessee operating
lease liabilities of $22.5 million as of December 30, 2018, primarily related to real estate and equipment leases, based on the
present value of the future lease payments on such date. As a lessor, the Company also recorded customer lease receivables of
$62.0 million, a reduction to equipment leased to customers (formerly titled deferred cost of goods sold) of $103.5 million, an
increase to deferred tax assets of $8.6 million, a decrease to deferred revenue and contract-related liabilities of $9.1 million, an
increase in other current liabilities of $3.0 million and a cumulative net decrease to retained earnings of $26.8 million, all
related to the reclassification of certain embedded leases in existing deferred equipment agreements from operating to sales-
type leases as of December 30, 2018. See Notes 6, 7 and 11 to these consolidated financial statements for additional disclosures
required by ASC 842.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting (ASU 2020-04). The new guidance provides temporary optional expedients and
exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens
related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to
alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). Entities can make a one-time election to sell
and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. ASU 2020-04
is effective beginning on March 12, 2020, and the Company may elect to apply this guidance prospectively through December
31, 2022. The relief is temporary and generally cannot be applied to contract modifications that occur after December 31, 2022
or hedging relationships entered into or evaluated after that date. However, certain optional expedients can be applied to
hedging relationships evaluated in periods after December 31, 2022. The Company is currently evaluating the expected impact
of this standard, but does not expect it to have a material impact on its consolidated financial statements upon adoption.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
(ASU 2019-12). The new standard simplifies the accounting for income taxes by removing exceptions to the incremental
approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items,
to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an
equity method investment, to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity
method investment becomes a subsidiary, and to the general methodology for calculating income taxes in an interim period
when a year-to-date loss exceeds the anticipated loss for the year.
In addition, the standard requires that an entity recognize a franchise tax that is partially based on income as an income-based
tax and account for any incremental amount incurred as a non-income-based tax, evaluate when a step up in the tax basis of
goodwill should be considered part of the business combination in which the book goodwill was originally recognized and
when it should be considered a separate transaction, reflect the effect of an enacted change in tax laws or rates in the annual
effective tax rate computation in the interim period that includes the enactment date, and specifying that an entity is not required
to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate
financial statements, however, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not
subject to tax and disregarded by the taxing authority. ASU 2019-12 is effective for annual periods, and interim periods within
those annual periods, beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period.
The Company is currently evaluating the expected impact of this standard, but does not expect it to have a material impact on
its consolidated financial statements upon adoption.
3. Related Party Transactions
Cercacor Laboratories, Inc. (Cercacor) is an independent entity that was spun off from the Company to its stockholders in 1998.
Joe Kiani, the Company’s Chairman and Chief Executive Officer (CEO), is also the Chairman and CEO of Cercacor. Effective
as of January 3, 2016, in connection with changes in the capital structure of Cercacor, the Company determined that Cercacor
was no longer required to be consolidated. Although the Company believes that Cercacor continues to be considered a variable
interest entity, the Company has determined that it is no longer the primary beneficiary of Cercacor as it does not have the
power to direct the activities of Cercacor that most significantly impact Cercacor’s economic performance and has no obligation
to absorb Cercacor’s losses.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
The Company is a party to the following agreements with Cercacor:
•
•
•
•
Cross-Licensing Agreement - The Company and Cercacor are parties to a cross-licensing agreement (Cross-Licensing
Agreement), which governs each party’s rights to certain intellectual property held by the two companies. The Company is
subject to certain annual minimum aggregate royalty obligations for use of the rainbow® licensed technology. The current
annual minimum royalty obligation is $5.0 million. Aggregate liabilities payable to Cercacor arising under the Cross-
Licensing Agreement were $13.3 million, $12.1 million and $10.9 million for the years ended January 2, 2021, December
28, 2019 and December 29, 2018, respectively. The Company had sales to Cercacor in the amount of less than $0.1
million, $0.1 million, and less than $0.1 million for the years ended January 2, 2021, December 28, 2019 and December 29,
2018, respectively.
Administrative Services Agreement - The Company is a party to an administrative services agreement with Cercacor (G&A
Services Agreement), which governs certain general and administrative services that the Company provides to Cercacor.
Amounts charged by the Company pursuant to the G&A Services Agreement were $0.3 million, $0.2 million and $0.2
million for the years ended January 2, 2021, December 28, 2019 and December 29, 2018, respectively.
Patent Transfer and Licensing Agreement. The Company entered into a patent transfer and licensing agreement with
Cercacor (the Patent Agreement) effective July 2015, pursuant to which, among other things, it purchased certain patents
from Cercacor (the Purchased Patents) for an aggregate purchase price of $2.4 million. Pursuant to the Patent Agreement,
the Company granted Cercacor an irrevocable, non-exclusive, worldwide license with respect to the products and services
covered by the Purchased Patents.
Lease and Sublease Agreements - Effective December 14, 2019, the Company entered into a new lease agreement with
Cercacor for approximately 34,000 of square feet of office, research and development space at one of the Company’s
owned facilities in Irvine (Cercacor Lease). The term of the Cercacor Lease expires on December 31, 2024. In March 2016,
the Company entered into a sublease agreement with Cercacor for approximately 16,830 square feet of excess office and
laboratory space located at 40 Parker, Irvine, California (Cercacor Sublease). The Cercacor Sublease began on May 1, 2016
and expired on December 15, 2019. The Company recognized approximately $1.1 million, $0.4 million and $0.4 million of
combined lease and sublease income for the years ended January 2, 2021, December 28, 2019, and December 29, 2018,
respectively.
Net amounts due to Cercacor were approximately $3.6 million and $2.9 million as of January 2, 2021 and December 28, 2019,
respectively.
The Company’s CEO is also the Chairman of the Masimo Foundation for Ethics, Innovation and Competition in Healthcare
(Masimo Foundation), a non-profit organization that was founded in 2010 to provide a platform for encouraging ethics,
innovation and competition in healthcare. In addition, the Company’s Executive Vice President (EVP), Chief Financial Officer
(CFO) serves as the Treasurer of the Masimo Foundation and the Company’s EVP, General Counsel and Corporate Secretary
serves as the Secretary for the Masimo Foundation. For the fiscal years ended January 2, 2021, December 28, 2019 and
December 29, 2018, the Company made cash contributions of approximately $1.5 million, $1.0 million and $2.0 million,
respectively, to the Masimo Foundation. In addition, for each of the years ended January 2, 2021, December 28, 2019 and
December 29, 2018, the Company made various in-kind contributions to the Masimo Foundation, mainly in the form of donated
administrative services.
The Company’s CEO is also a co-founder and a member of the board of directors of Like Minded Media Ventures (LMMV), a
team of storytellers that create content focused in the areas of true stories, social causes and science. LMMV creates stories with
a multi-platform strategy, bridging the gap between film, television, digital and social media. The Company entered into a
marketing service agreement with LMMV for audiovisual production services promoting brand awareness, including television
commercials and digital advertising, during the second quarter of 2020. During the fiscal year ended January 2, 2021, the
Company incurred approximately $3.5 million in marketing expenses to LMMV under the marketing service agreement. At
January 2, 2021, there was no amount due to LMMV for services rendered.
The Company maintains an aircraft time share agreement, pursuant to which the Company has agreed from time to time to
make its aircraft available to the Company’s CEO for lease on a time-sharing basis. The Company charges the Company’s CEO
for personal use based on agreed upon reimbursement rates. During the fiscal years ended January 2, 2021, December 28, 2019
and December 29, 2018, the Company charged the Company’s CEO less than $0.1 million, $0.1 million and $0.2 million,
respectively, related to such reimbursements.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
4. Inventories
Inventories consist of the following (in thousands):
Raw materials......................................................................................................................... $
133,098 $
Work-in-process.....................................................................................................................
Finished goods........................................................................................................................
15,985
66,869
55,920
10,966
48,985
Total Inventories................................................................................................................. $
215,952 $
115,871
January 2,
2021
December 28,
2019
5. Other Current Assets
Other current assets consist of the following (in thousands):
January 2,
2021
December 28,
2019
Prepaid expenses.................................................................................................................... $
30,235 $
Lease receivable, current........................................................................................................
Prepaid income taxes..............................................................................................................
Indirect taxes receivable.........................................................................................................
Deposits to acquire noncontrolling interest(1)..........................................................................
Prepaid rebates and royalties..................................................................................................
Restricted cash(2).....................................................................................................................
Customer notes receivable......................................................................................................
Other current assets................................................................................................................
23,206
14,782
14,545
3,374
3,081
3,397
2,283
7,513
11,746
20,250
7,330
9,311
—
1,801
230
4,847
4,556
Total other current assets.................................................................................................... $
102,416 $
60,071
______________
(1)
During the fourth quarter of fiscal 2020, the Company obtained a controlling interest in a provider of advanced hemodynamic monitoring solutions. The
Company made a deposit to acquire the noncontrolling interest of the acquiree.
(2)
Restricted cash includes funds received from the Bill and Melinda Gates Foundation. As the Company incurs costs associated with research and
development related to this project, on a quarterly basis, the Company reclasses amounts from the grant to offset costs incurred.
6. Lease Receivable
Effective December 30, 2018, the Company adopted ASC 842, which resulted in changes to the classification of certain
embedded leases within its deferred equipment agreements from operating-type leases to sales-type leases. As a result, the
Company now recognizes revenue and costs, as well as a lease receivable, at the time the lease commences pursuant to deferred
equipment agreements containing embedded sales-type leases. Lease revenue related to both operating-type and sales-type
leases for the year ended January 2, 2021 and December 28, 2019 was approximately $42.6 million and $44.0 million,
respectively, and is included within product revenue in the accompanying consolidated statements of operations. Costs related
to embedded leases within the Company’s deferred equipment agreements are included in cost of goods sold. See “Recently
Adopted Accounting Pronouncements” in Note 2 to these consolidated financial statements for additional information related to
the Company’s adoption of ASC 842.
Lease receivable consists of the following (in thousands):
Lease receivable................................................................................................................... $
Allowance for credit loss.....................................................................................................
Lease receivable, net.......................................................................................................
Less: current portion of lease receivable.............................................................................
Lease receivable, noncurrent.......................................................................................... $
January 2,
2021
December 28,
2019
81,074 $
(202)
80,872
(23,206)
57,666 $
70,589
(403)
70,186
(20,250)
49,936
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
As of January 2, 2021, estimated future maturities of customer sales-type lease receivables for each of the following fiscal years
are as follows (in thousands):
Fiscal year
2021...................................................................................................................................................................... $
2022......................................................................................................................................................................
2023......................................................................................................................................................................
2024......................................................................................................................................................................
2025......................................................................................................................................................................
Thereafter.............................................................................................................................................................
Total................................................................................................................................................................. $
Amount
23,206
19,992
15,493
11,469
6,238
4,474
80,872
Estimated future operating lease payments expected to be received from customers under deferred equipment agreements are
not material as of January 2, 2021.
7. Deferred Costs and Other Contract Assets
Deferred costs and other contract assets consist of the following (in thousands):
January 2,
2021
December 28,
2019
Deferred commissions............................................................................................................ $
7,477 $
Prepaid contract allowances...................................................................................................
Unbilled contract receivables.................................................................................................
Equipment leased to customers, net(1).....................................................................................
Deferred costs and other contract assets........................................................................... $
7,336
3,925
1,338
20,076 $
16,214
5,260
8,098
2,482
374
______________
(1) Formerly titled “Deferred cost of goods sold”. In connection with its adoption of ASC 842 on December 30, 2018, the Company recorded a reduction to
equipment leased to customers, net, of $103.5 million as a result of the reclassification of certain embedded leases within the Company’s deferred
equipment agreements with its customers from operating to sales-type leases. See “Recently Adopted Accounting Pronouncements” under Note 2 to these
consolidated financial statements for additional information related to the Company’s adoption of ASC 842.
For the years ended January 2, 2021, December 28, 2019, and December 29, 2018, $0.4 million, $1.0 million and $30.0 million,
respectively, of equipment leased to customers was amortized to cost of goods sold. As of January 2, 2021 and December 28,
2019, accumulated amortization of equipment leased to customers was $0.9 million and $0.7 million, respectively.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
8. Property and Equipment, net
Property and equipment, net, consists of the following (in thousands):
January 2,
2021
December 28,
2019
Building and building improvements..................................................................................... $
122,310 $
101,731
Machinery and equipment......................................................................................................
Land........................................................................................................................................
Aircraft and vehicles...............................................................................................................
Computer equipment and software.........................................................................................
Leasehold improvements........................................................................................................
Tooling...................................................................................................................................
Furniture and office equipment..............................................................................................
Demonstration units................................................................................................................
Construction-in-progress (CIP)..............................................................................................
72,610
57,151
33,175
24,693
19,295
18,233
13,567
1,024
44,589
Total property and equipment ............................................................................................
406,647
58,864
40,216
29,934
19,650
15,921
15,346
11,049
836
39,107
332,654
Accumulated depreciation......................................................................................................
(134,136)
(113,102)
Property and equipment, net............................................................................................... $
272,511 $
219,552
In March 2020, the Company purchased a facility in Switzerland for its international headquarters for a purchase price of
$16.4 million, as well as land in Mexicali, Mexico for a purchase price of $7.7 million to be used for the construction of a new
manufacturing and distribution facility.
The balance in CIP at January 2, 2021 relates primarily to acquisition and improvement costs for a portion of a recently
purchased building in Switzerland, capitalized implementation costs related to a new enterprise resource planning software
system and costs related to manufacturing equipment and other facility improvements, the underlying assets for which have not
been completed or placed into service. The balance in CIP at December 28, 2019 related primarily to acquisition and
improvement costs for a portion of a recently purchased building in California, capitalized and implementation costs related to
an enterprise resource planning software system and costs related to manufacturing equipment and other facility improvements,
the underlying assets for which have not been placed into service.
For the years ended January 2, 2021, December 28, 2019 and December 29, 2018, depreciation expense of property and
equipment was $21.8 million, $19.1 million and $16.3 million, respectively.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
9. Intangible Assets, net
Intangible assets, net, consist of the following (in thousands):
January 2,
2021
December 28,
2019
Gross carrying amount
Acquired technologies............................................................................................................ $
29,039 $
Patents.....................................................................................................................................
Customer relationships...........................................................................................................
Trademarks.............................................................................................................................
Licenses-related party.............................................................................................................
Capitalized software development costs.................................................................................
Other.......................................................................................................................................
26,875
24,666
11,708
7,500
3,710
7,091
5,580
23,242
7,669
4,614
7,500
3,328
5,466
Total gross carrying amount............................................................................................... $
110,589 $
57,399
Accumulated amortization
Patents..................................................................................................................................... $
Licenses-related party.............................................................................................................
(10,763) $
(6,841)
Customer relationships...........................................................................................................
Acquired technologies............................................................................................................
Trademarks.............................................................................................................................
Capitalized software development costs.................................................................................
Other.......................................................................................................................................
(6,486)
(5,259)
(3,999)
(2,319)
(999)
Total accumulated amortization..........................................................................................
(36,666)
Net carrying amount......................................................................................................... $
73,923 $
(9,251)
(5,984)
(5,688)
(4,182)
(2,195)
(2,137)
(711)
(30,148)
27,251
Intangible assets have a weighted-average amortization period of twelve years. For the years ended January 2, 2021, December
28, 2019 and December 29, 2018, amortization of intangible assets was $7.5 million, $4.4 million and $4.8 million,
respectively. As of January 2, 2021 and December 28, 2019, the total costs of patents not yet amortizing was $8.2 million and
$6.1 million, respectively. As of January 2, 2021 and December 28, 2019, the total costs of trademarks not yet amortizing was
$0.9 million and $0.7 million, respectively.
For the years ended January 2, 2021 and December 28, 2019, total renewal costs capitalized for patents and trademarks was
$1.3 million and $1.3 million, respectively. As of January 2, 2021, the weighted-average number of years until the next renewal
was one year for patents and six years for trademarks.
During the first quarter of fiscal 2020, the Company completed an immaterial business combination. Based on the Company’s
preliminary purchase price allocation, approximately $15.5 million, $2.6 million and $1.7 million of the purchase price was
assigned to customer relationships, acquired technologies and trademarks, respectively.
During the second quarter of fiscal 2020, the Company completed another immaterial business combination. Based on the
Company’s preliminary purchase price allocation, approximately $6.3 million, $2.4 million, $0.4 million and $0.3 million of
the purchase price was assigned to acquired technologies, trademarks, customer relationships and other intangibles,
respectively.
During the fourth quarter of fiscal 2020, the Company obtained a controlling interest in a provider of advanced hemodynamic
monitoring solutions. Based on the Company’s preliminary purchase price allocation, approximately $14.0 million,
$2.3 million, $1.0 million and $1.0 million of the purchase price was assigned to acquired technologies, trademarks, customer
relationships and other intangibles, respectively. Subsequently, during the first quarter of fiscal 2021, the Company acquired the
remaining minority interest. See Note 14 to these consolidated financial statements for further details.
The Company is still gathering additional information to finalize these preliminary estimates with respect to tax contingency
matters and expects to finalize the purchase price allocations as soon as practicable, but no later than one year from the
acquisition dates.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
Estimated amortization expense for each of the next fiscal years is as follows (in thousands):
Fiscal year
2021...................................................................................................................................................................... $
2022......................................................................................................................................................................
2023......................................................................................................................................................................
2024......................................................................................................................................................................
2025......................................................................................................................................................................
Thereafter.............................................................................................................................................................
Total.................................................................................................................................................................. $
Amount
8,761
8,385
7,334
6,985
5,974
36,484
73,923
10. Goodwill
Changes in goodwill were as follows (in thousands):
January 2,
2021
December 28,
2019
Goodwill, beginning of period............................................................................................... $
22,350 $
23,297
Increase from business combinations.....................................................................................
Foreign currency translation and other adjustments...............................................................
79,862
994
—
(947)
Goodwill, end of period.......................................................................................................... $
103,206 $
22,350
During the first quarter of fiscal 2020, the Company completed an immaterial business combination. Based on the Company’s
preliminary purchase price allocation for this transaction, approximately $31.4 million of the purchase price was assigned to
goodwill.
During the second quarter of fiscal 2020, the Company completed another immaterial business combination. Based on the
Company’s preliminary purchase price allocation for this transaction, approximately $26.7 million of the purchase price was
assigned to goodwill.
During the fourth quarter of fiscal 2020, the Company obtained a controlling interest in a provider of advanced hemodynamic
monitoring solutions. Based on the Company’s preliminary purchase price allocation, approximately $21.8 million of the
purchase price was assigned to goodwill. Subsequently, during the first quarter of fiscal 2021, the Company acquired the
remaining minority interest. See Note 14 to these consolidated financial statements for further details.
The Company is still gathering additional information to finalize these preliminary estimates with respect to tax contingency
matters and expects to finalize the purchase price allocations as soon as practicable, but no later than one year from the
acquisition dates.
11. Lessee ROU Assets and Lease Liabilities
Effective December 30, 2018, the Company adopted ASC 842. See “Recently Adopted Accounting Pronouncements” in Note 2
to these consolidated financial statements for additional information.
The Company leases certain facilities in North and South America, Europe, the Middle East and Asia-Pacific regions under
operating lease agreements expiring at various dates through February 2031. In addition, the Company leases equipment in the
U.S. and Europe that are classified as operating leases and expire at various dates through April 2024. The majority of these
leases are non-cancellable and generally do not contain any material restrictive covenants, material residual value guarantees or
other material guarantees. The Company recognizes lease costs under these agreements using a straight-line method based on
total lease payments. Certain facility leases contain predetermined price escalations and in some cases renewal options, the
longest of which is for five years.
The Company generally estimates the applicable discount rate used to determine the net present value of lease payments based
on available information at the lease commencement date. As of January 2, 2021, the weighted average discount rate used by
the Company for all operating leases was approximately 2.5%.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
The balance sheet classifications for amounts related to the Company’s operating leases for which it is the lessee are as follows
(in thousands):
Lessee ROU assets, net.................. Other non-current assets.............................................
$
32,324 $
19,137
Balance sheet classification
January 2,
2021
December 28,
2019
Lessee current lease liabilities........ Other current liabilities...............................................
Lessee non-current lease
liabilities......................................... Other non-current liabilities........................................
Total operating lease liabilities......................................................................................... $
5,975
4,653
28,373
34,348 $
15,834
20,487
For the years ended January 2, 2021 and December 28, 2019, accumulated amortization for lessee ROU assets was $9.2 million
and $4.7 million, respectively. The weighted average remaining lease term for the Company’s operating leases was 7.1 years as
of January 2, 2021.
As of January 2, 2021, estimated future operating lease payments for each of the following fiscal years were as follows (in
thousands):
Fiscal year
2021...................................................................................................................................................................... $
2022......................................................................................................................................................................
2023......................................................................................................................................................................
2024......................................................................................................................................................................
2025......................................................................................................................................................................
Thereafter(1)...........................................................................................................................................................
Total................................................................................................................................................................
Imputed interest..............................................................................................................................................
Present value(2)................................................................................................................................................. $
Amount
6,610
6,048
5,762
4,540
3,576
11,055
37,591
(3,243)
34,348
______________
(1)
(2) During fiscal 2020, the Company entered into lease agreements for two properties which have not commenced as of January 2, 2021. The future
Includes optional renewal period for certain leases.
obligations for such leases are $3.1 million in the aggregate and are not included in the estimated future operating lease payments.
Lease costs consist of the following (in thousands):
Operating lease costs.............................................................................................................. $
Short-term lease costs.............................................................................................................
Sublease income.....................................................................................................................
Total lease cost.................................................................................................................. $
6,945 $
1
—
6,946 $
6,790
12
(232)
6,570
For the year ended December 29, 2018, rental expense related to operating leases was $6.9 million.
January 2,
2021
December 28,
2019
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
12. Other Non-Current Assets
Other assets, long-term consist of the following (in thousands):
Lessee ROU assets, net........................................................................................................... $
32,324 $
19,137
Strategic investments..............................................................................................................
Prepaid deposits......................................................................................................................
Other non-current assets.........................................................................................................
8,002
3,816
500
6,475
3,022
157
Total non-current assets...................................................................................................... $
44,642 $
28,791
January 2,
2021
December 28,
2019
13. Deferred Revenue and Other Contract Liabilities
Deferred revenue and other contract liabilities consist of the following (in thousands):
January 2,
2021
December 28,
2019
Deferred revenue(1).................................................................................................................. $
33,221 $
Accrued rebates and allowances............................................................................................
Accrued customer reimbursements(2)......................................................................................
Total deferred revenue and other contract liabilities.........................................................
Less: Non-current portion of deferred revenue......................................................................
Deferred revenue and other contract liabilities - current................................................... $
12,127
3,829
49,177
(4,242)
44,935 $
13,998
8,436
5,739
28,173
(2,234)
25,939
______________
(1)
In connection with its adoption of ASC 842 on December 30, 2018, the Company recorded a reduction to deferred revenue of approximately $1.1 million
due to the acceleration of revenue as a result of the reclassification of certain embedded leases within the Company’s deferred equipment agreements with
its customers from operating to sales-type leases. See “Recently Adopted Accounting Pronouncements” in Note 2 to these consolidated financial
statements for additional information related to the Company’s adoption of ASC 842.
(2)
In connection with its adoption of ASC 842 on December 30, 2018, the Company recorded a reduction to accrued customer reimbursements of
approximately $12.3 million related to the derecognition of liabilities and leased equipment assets for certain OEM equipment reimbursements. See
“Recently Adopted Accounting Pronouncements” in Note 2 to these consolidated financial statements for additional information related to the Company’s
adoption of ASC 842.
Deferred revenue relates to contracted amounts that have been invoiced to customers for which remaining performance
obligations must be completed before the Company can recognize the revenue. These amounts primarily relate to undelivered
equipment, sensors and services under deferred equipment agreements, extended warranty agreements and maintenance
agreements.
Changes in deferred revenue for the year ended January 2, 2021 were as follows:
Deferred revenue, beginning of the period........................................................................................................... $
Increase from business combinations.................................................................................................................
Revenue deferred during the period...................................................................................................................
Recognition of revenue deferred in prior periods...............................................................................................
Deferred revenue, end of the period................................................................................................................ $
Amount
13,998
9,778
27,385
(17,940)
33,221
During the first quarter of fiscal 2020, the Company completed an immaterial business combination. Based on the Company’s
preliminary purchase price allocation for this transaction, approximately $7.4 million of the purchase price was assigned to
deferred revenue.
During the second quarter of fiscal 2020, the Company completed another immaterial business combination. Based on the
Company’s preliminary purchase price allocation for this transaction, approximately $1.3 million of the purchase price was
assigned to deferred revenue.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
During the fourth quarter of fiscal 2020, the Company obtained a controlling interest in a provider of advanced hemodynamic
monitoring solutions. Based on the Company’s preliminary purchase price allocation, approximately $1.1 million of the
purchase price was assigned to deferred revenue. Subsequently, during the first quarter of fiscal 2021, the Company acquired
the remaining minority interest. See Note 14 to these consolidated financial statements for further details.
The Company is still gathering additional information to finalize these preliminary estimates with respect to tax contingency
matters and expects to finalize the purchase price allocations as soon as practicable, but no later than one year from the
acquisition dates.
Expected revenue from remaining contractual performance obligations (Unrecognized Contract Revenue) includes deferred
revenue, as well as other amounts that will be invoiced and recognized as revenue in future periods when the Company
completes its performance obligations. While Unrecognized Contract Revenue is similar in concept to backlog, Unrecognized
Contract Revenue excludes revenue allocable to monitoring-related equipment that is effectively leased to customers under
deferred equipment agreements and other contractual obligations for which neither party has performed.
The following table summarizes the Company’s estimated Unrecognized Contract Revenue as of January 2, 2021 and the future
periods within which the Company expects to recognize such revenue.
Expected Future Revenue By Period
(in thousands)
Unrecognized contract
revenue......................................... $
231,982 $
370,779 $
176,835 $
44,862 $
824,458
Less than
1 Year
Between
1-3 Years
Between
3-5 Years
More than
5 Years
Total
The estimated timing of this revenue is based, in part, on management’s estimates and assumptions about when its performance
obligations will be completed. As a result, the actual timing of this revenue in future periods may vary, possibly materially,
from those reflected in this table.
14. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
January 2,
2021
December 28,
2019
Accrued indirect taxes payable.............................................................................................. $
14,365 $
Accrued expenses...................................................................................................................
Lessee lease liabilities, current...............................................................................................
Income tax payable.................................................................................................................
Accrued legal fees..................................................................................................................
Related party payables...........................................................................................................
Minority interest(1)...................................................................................................................
Accrued warranty...................................................................................................................
Accrued property taxes...........................................................................................................
Other current liabilities...........................................................................................................
Total other current liabilities.............................................................................................. $
6,794
5,975
5,910
4,058
3,655
3,469
2,740
1,682
4,591
53,239 $
7,545
6,115
4,653
7,142
1,839
3,024
—
3,395
1,629
1,685
37,027
______________
(1) During the fourth quarter of fiscal 2020, the Company obtained a controlling interest in a provider of advanced hemodynamic monitoring solutions. The
noncontrolling interest of the acquiree was recorded within other current liabilities as of January 2, 2021, as the minority interest shares are mandatorily
redeemable. During the first quarter of fiscal 2021, the Company acquired the remaining minority interest.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
15. Credit Facilities
The Company currently maintains a credit agreement (Credit Facility) with JPMorgan Chase Bank, N.A., as Administrative
Agent and a Lender, and Bank of the West, a Lender (collectively, the Lenders). The Credit Facility provides for up to $150.0
million of unsecured borrowings, with an option, subject to certain conditions, for the Company to increase the aggregate
borrowing capacity up to $550.0 million in the future with the Lenders and additional lenders, as required. The Credit Facility
also provides for a sublimit of up to $25.0 million for the issuance of letters of credit and a sublimit of $75.0 million for
borrowings in specified foreign currencies. All unpaid principal under the Credit Facility will become due and payable on
December 17, 2023. Proceeds from the Credit Facility are expected to be used for general corporate, capital investment and
working capital needs.
Borrowings under the Credit Facility will be deemed, at the Company’s election, either: (a) an Alternate Base Rate (ABR)
Loan, which bears interest at the ABR, plus a spread of 0.125% to 1.000% based upon a Company leverage ratio, or (b) a
Eurocurrency Loan, which bears interest at the Adjusted LIBO Rate (as defined below), plus a spread of 1.125% to 2.000%
based upon a Company net leverage ratio. Subject to certain conditions, the Company may also request swingline loans from
time to time that bear interest similar to an ABR Loan. Pursuant to the terms of the Credit Facility, the ABR is equal to the
greatest of (i) the prime rate, (ii) the Federal Reserve Bank of New York effective rate plus 0.50%, and (iii) the one-month
Adjusted LIBO Rate plus 1.0%. The Adjusted LIBO Rate is equal to the Eurocurrency Rate (as defined within the 2018 Credit
Facility) for the applicable interest period multiplied by the statutory reserve rate for such period, rounded upward, if necessary,
to the next 1/16 of 1%. The Company is also obligated under the Credit Facility to pay an unused fee ranging from 0.150% to
0.275% per annum, based upon a Company leverage ratio, with respect to any unutilized portion of the Credit Facility.
Pursuant to the terms of the Credit Facility, the Company is subject to certain covenants, including financial covenants related
to a net leverage ratio and an interest charge coverage ratio, and other customary negative covenants. The Credit Facility also
includes customary events of default which, upon the occurrence of any such event of default, provide the Lenders with the
right to take either or both of the following actions: (a) immediately terminate the commitments, and (b) declare the loans then
outstanding immediately due and payable in full. As of January 2, 2021 and December 28, 2019, the Credit Facility had no
outstanding draws and as of January 2, 2021, the Credit Facility had $1.7 million of outstanding letters of credit. The Company
was in compliance with all covenants under the Credit Facility as of January 2, 2021.
The Company incurred total combined interest expense of $0.3 million, $0.3 million and $0.6 million for the years ended
January 2, 2021, December 28, 2019 and December 29, 2018, respectively, under its current and previous credit facilities.
16. Other Non-Current Liabilities
Other non-current liabilities consist of the following (in thousands):
January 2,
2021
December 28,
2019
Lessee non-current lease liabilities......................................................................................... $
28,373 $
Income tax payable, non-current............................................................................................
Unrecognized tax benefits......................................................................................................
Deferred tax liabilities............................................................................................................
Other non-current liabilities...................................................................................................
Total other non-current liabilities....................................................................................... $
19,245
11,777
6,247
5,434
71,076 $
15,834
21,509
13,184
3,052
2,456
56,035
Unrecognized tax benefits relate to the Company’s long-term portion of tax liability associated with uncertain tax positions.
Authoritative guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax return. See Note 20 to these consolidated financial
statements for further details.
17. Stock Repurchase Program
In September 2015, the Company’s Board of Directors (Board) authorized a stock repurchase program, whereby the Company
could purchase up to 5.0 million shares of its common stock over a period of up to three years (2015 Repurchase Program). A
total of 3.1 million shares were purchased by the Company pursuant to the 2015 Repurchase Program prior to its expiration in
September 2018.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
In July 2018, the Board approved a new stock repurchase program, authorizing the Company to purchase up to 5.0 million
additional shares of its common stock over a period of up to three years (2018 Repurchase Program). The 2018 Repurchase
Program became effective in September 2018 upon the expiration of the 2015 Repurchase Program. The Company expects to
fund the 2018 Repurchase Program through its available cash, cash expected to be generated from future operations, the Credit
Facility and other potential sources of capital. The 2018 Repurchase Program can be carried out at the discretion of a committee
comprised of the Company’s CEO and CFO through open market purchases, one or more Rule 10b5-1 trading plans, block
trades and privately negotiated transactions. As of January 2, 2021, 4.3 million shares remained available for repurchase
pursuant the 2018 Repurchase Program.
The following table provides a summary of the Company’s stock repurchase activities during the years ended January 2, 2021,
December 28, 2019 and December 29, 2018 (in thousands, except per share amounts):
January 2,
2021
Years Ended
December 28,
2019
December 29,
2018
Shares repurchased............................................................................
456 (1)
Average cost per share...................................................................... $
Value of shares repurchased.............................................................. $
242.40
110,540
$
$
275 (1)
136.61
37,554
$
$
198
84.12
16,490
______________
(1) Excludes shares withheld from the shares of its common stock actually issued in connection with the vesting of PSU or RSU awards to satisfy certain U.S.
federal and state tax withholding obligations.
18. Stock-Based Compensation
Total stock-based compensation expense for the years ended January 2, 2021, December 28, 2019 and December 29, 2018 was
$42.2 million, $39.2 million and $27.4 million, respectively. As of January 2, 2021, an aggregate of 11.1 million shares of
common stock were reserved for future issuance under the Company’s equity plans, of which 4.4 million shares were available
for future grant under the Masimo Corporation 2017 Equity Incentive Plan (2017 Equity Plan). Additional information related
to the Company’s current equity incentive plans, stock-based award activity and valuation of stock-based awards is included
below.
Equity Incentive Plans
2007 Stock Incentive Plan
Effective June 1, 2017, upon the approval and ratification of the 2017 Equity Plan, the Company’s 2007 Stock Incentive Plan
(2007 Equity Plan) terminated, provided that awards outstanding under the 2007 Equity Plan will continue to be governed by
the terms of that plan. In addition, upon the effectiveness of the 2017 Equity Plan, an aggregate of 5.0 million shares of the
Company’s common stock registered under prior registration statements for issuance pursuant to the 2007 Equity Plan were
deregistered and concurrently registered under the 2017 Equity Plan.
2017 Equity Incentive Plan
The 2017 Equity Plan permits the grant of stock options, restricted stock, RSUs, stock appreciation rights, PSUs, performance
shares, performance bonus awards and other stock or cash awards to employees, directors and consultants of the Company and
employees and consultants of any parent or subsidiary of the Company. Upon effectiveness, an aggregate of 5.0 million shares
were available for issuance under the 2017 Equity Plan. In May 2020, the Company’s stockholders approved an increase of
2.5 million shares to the 2017 Equity Plan. The aggregate number of shares that may be awarded under the 2017 Equity Plan is
7.5 million shares.
The 2017 Equity Plan provides that at least 95% of the equity awards issued under the 2017 Equity Plan must vest over a period
of not less than one year following the date of grant. The exercise price per share of each option granted under the 2017 Equity
Plan may not be less than the fair market value of a share of the Company’s common stock on the date of grant, which is
generally equal to the closing price of the Company’s common stock on the Nasdaq Global Select Market on the grant date.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
Stock-Based Award Activity
Stock Options
The number and weighted-average exercise price of options issued and outstanding under all of the Company’s equity plans are
as follows (in thousands, except for weighted-average exercise prices):
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Shares
Average
Exercise
Price
Shares
Average
Exercise
Price
Shares
Average
Exercise
Price
Options outstanding, beginning of period.........
5,212 $
54.23
5,676 $
43.61
6,953 $
Granted..............................................................
Canceled/Forfeited............................................
400
(219)
Exercised...........................................................
(1,945)
Options outstanding, end of period...................
Options exercisable, end of period....................
3,448 $
2,026 $
187.83
126.98
32.41
77.44
47.31
545
(158)
(851)
5,212 $
3,311 $
140.56
83.14
33.32
54.23
33.80
564
(233)
(1,608)
5,676 $
3,273 $
36.26
98.47
67.45
27.62
43.61
29.63
Total stock option expense for the years ended January 2, 2021, December 28, 2019 and December 29, 2018 was $16.1 million,
$14.8 million, and $13.8 million, respectively. As of January 2, 2021, the Company had $40.8 million of unrecognized
compensation cost related to non-vested stock options that are expected to vest over a weighted average period of
approximately 5.9 years.
The number and weighted-average exercise price of outstanding and exercisable stock options segregated by exercise price
ranges (in thousands, except range of exercise prices and remaining contractual life) were as follows:
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Options Outstanding
Options
Exercisable
Options Outstanding
Number of
Options
Average
Remaining
Contractual
Life
Number of
Options
Number of
Options
Average
Remaining
Contractual
Life
Options
Exercisable
Number of
Options
1,696
42
910
476
255
37
32
3,448
4.14
5.80
6.83
8.41
9.17
9.50
9.53
5.90
1,518
26
408
74
—
—
—
2,026
3,464
68
1,148
532
—
—
—
5,212
4.14
5.56
6.98
8.46
0.00
0.00
0.00
5.60
2,958
30
320
3
—
—
—
3,311
Range of Exercise Prices
$15.00 to $50.00.......................
$50.01 to $80.00.......................
$80.01 to $120.00.....................
$120.01 to $160.00...................
$160.01 to $200.00...................
$200.01 to $230.00...................
$230.01 to $275.00...................
Total....................................
As of January 2, 2021 and December 28, 2019, the weighted-average remaining contractual term of options outstanding was 5.9
years and 5.6 years, respectively. As of January 2, 2021 and December 28, 2019, the weighted average remaining contractual
term of options exercisable with an exercise price less than the closing price of the Company’s common stock was 4.7 years and
4.3 years, respectively.
RSUs
The number of RSUs issued and outstanding under all of the Company’s equity plans are as follows (in thousands, except for
weighted average grant date fair value amounts):
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
RSUs outstanding, beginning of period............
2,797 $
96.85
2,707 $
95.54
2,708 $
Granted..............................................................
Canceled/Forfeited............................................
98
193.77
(6)
165.03
Vested...............................................................
(27)
134.78
100
(3)
(7)
RSUs outstanding, end of period......................
2,862 $
99.66
2,797 $
133.57
133.50
99.05
96.85
7
—
(8)
2,707 $
95.51
99.05
—
88.40
95.54
Total RSU expense for the years ended January 2, 2021, December 28, 2019 and December 29, 2018 was $5.7 million, $2.8
million and $0.7 million, respectively. As of January 2, 2021, the Company had $22.6 million of unrecognized compensation
cost related to non-vested RSU awards expected to be recognized and vest over a weighted-average period of approximately 3.8
years, excluding any contingent compensation expense related to certain RSUs that were granted to the Company’s Chairman
and CEO in connection with the amendment and restatement of his employment agreement. See “Employment and Severance
Agreements” in Note 21 to these consolidated financial statements for further details on the CEO’s employment agreement.
PSUs
The number of PSUs outstanding under all of the Company’s equity plans are as follows (in thousands, except for weighted
average grant date fair value amounts):
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
PSUs outstanding, beginning of period............
412 $ 102.22
313 $
88.34
Granted..............................................................
Canceled/Forfeited............................................
97
179.42
(7)
122.13
128
—
133.50
—
Vested...............................................................
(58)
90.69
(29)
90.69
PSUs outstanding, end of period.......................
444 $ 120.28
412 $ 102.22
233 $
197
(86)
(31)
313 $
90.70
86.95
90.71
90.70
88.34
During the year ended December 29, 2018, the Company awarded 197,000 PSUs that will vest three years from the award date
based on the achievement of certain 2020 performance criteria approved by the Compensation Committee. If earned, the PSUs
granted will vest at the time the achievement level of the performance criteria is determined by the Compensation Committee.
The number of shares that may be earned can range from 0% to 200% of the target amount; therefore, the maximum number of
shares that can be issued under these awards is twice the original award of 197,000 PSUs or 394,000 shares. On February 22,
2021, the Compensation Committee determined that the performance criteria was achieved within the range.
During the year ended December 28, 2019, the Company awarded 128,000 PSUs that will vest three years from the award date,
based on the achievement of certain 2021 performance criteria approved by the Board. If earned, the PSUs granted will vest
upon achievement of the performance criteria after the year in which the performance achievement level has been determined.
The number of shares that may be earned can range from 0% to 200% of the target amount; therefore, the maximum number of
shares that can be issued under these awards is twice the original award of 128,000 PSUs or 256,000 shares.
During the year ended January 2, 2021, the Company awarded 97,000 PSUs that will vest three years from the award date,
based on the achievement of certain 2023 performance criteria approved by the Board. If earned, the PSUs granted will vest
upon achievement of the performance criteria after the year in which the performance achievement level has been determined.
The number of shares that may be earned can range from 0% to 200% of the target amount; therefore, the maximum number of
shares that can be issued under these awards is twice the original award of 97,000 PSUs or 194,000 shares.
Based on management’s estimate of the number of units expected to vest, total PSU expense for the years ended January 2,
2021, December 28, 2019 and December 29, 2018 was $20.4 million, $21.6 million and $12.9 million, respectively. As of
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
January 2, 2021, the Company had $31.6 million of unrecognized compensation cost related to non-vested PSU awards
expected to be recognized and vest over a weighted-average period of approximately 0.9 years.
Valuation of Stock-Based Award Activity
The fair value of each RSU and PSU is determined based on the closing price of the Company’s common stock on the grant
date.
The Black-Scholes option pricing model is used to estimate the fair value of options granted under the Company’s stock-based
compensation plans. The range of assumptions used and the resulting weighted-average fair value of options granted at the date
of grant were as follows:
Risk-free interest rate............................................
Expected term.......................................................
Estimated volatility...............................................
Expected dividends...............................................
Year Ended
January 2,
2021
0.2% to 1.7%
5.1 years to 5.1 years
26.9% to 35.5%
0%
Year Ended
December 28,
2019
1.4% to 2.6%
5.1 years to 5.2 years
28.2% to 30.0%
0%
Year Ended
December 29,
2018
2.3% to 3.1%
5.2 years to 5.6 years
26.8% to 32.0%
0%
Weighted-average fair value of options granted...
$51.10 per share
$42.29 per share
$31.85 per share
Risk-free interest rate. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues
with a remaining term approximately equal to the expected term of the Company’s stock options.
Expected term. The expected term represents the average period that the Company’s stock options are expected to be
outstanding. The expected term is based on both the Company’s specific historical option exercise experience, as well as
expected term information available from a peer group of companies with a similar vesting schedule.
Estimated volatility. The estimated volatility is the amount by which the Company’s share price is expected to fluctuate during
a period. The Company’s estimated volatilities for fiscal years 2020, 2019 and 2018 are based on historical and implied
volatilities of the Company’s share price over the expected term of the option.
Expected dividends. The Board may from time to time declare, and the Company may pay, dividends on its outstanding shares
in the manner and upon the terms and conditions provided by law. Any determination to declare and pay dividends will be
made by the Board and will depend upon the Company’s results of operations, earnings, capital requirements, financial
condition, business prospects, contractual restrictions and other factors deemed relevant by the Board. In the event a dividend is
declared, there is no assurance with respect to the amount, timing or frequency of any such dividends. The dividend declared in
2012 was deemed to be a special dividend and there is no assurance that special dividends will be declared again during the
expected term. Based on this uncertainty and unknown frequency, for the years ended January 2, 2021, December 28, 2019 and
December 29, 2018, no dividend rate was used in the assumptions to calculate the stock-based compensation expense.
The Company has elected to recognize stock-based compensation expense on a straight-line basis over the requisite service
period for the entire award. The total fair value of all options that vested during fiscal years 2020, 2019 and 2018 was $15.1
million, $14.2 million and $13.7 million, respectively.
The aggregate intrinsic value of options is calculated as the positive difference, if any, between the market value of the
Company’s common stock on the date of exercise or the respective period end, as appropriate, and the exercise price of the
options. The aggregate intrinsic value of options outstanding, with an exercise price less than the closing price of the
Company’s common stock, as of January 2, 2021 was $658.5 million. The aggregate intrinsic value of options exercisable, with
an exercise price less than the closing price of the Company’s common stock, as of January 2, 2021 was $447.8 million. The
aggregate intrinsic value of options exercised during the years ended January 2, 2021, December 28, 2019 and December 29,
2018 was $355.3 million, $93.9 million and $127.1 million, respectively.
The total income tax benefit recognized in the consolidated statements of operations for stock-based compensation expense was
$30.4 million, $15.7 million and $22.0 million for the years ended January 2, 2021, December 28, 2019 and December 29,
2018, respectively.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
The following table presents the total stock-based compensation expense that is included in each functional line item of the
consolidated statements of operations (in thousands):
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Cost of goods sold.................................................................................... $
714 $
445 $
Selling, general and administrative..........................................................
Research and development.......................................................................
31,462
10,049
30,450
8,340
Total...................................................................................................... $
42,225 $
39,235 $
334
21,391
5,692
27,417
The increase in total stock-based compensation expense during the year ended January 2, 2021 was due to both the composition
of the equity awards granted and a significant increase in the fair market value of the Company’s stock from the prior year,
which increased the value of the equity awards granted during such year.
19. Non-operating Income
Non-operating income consists of the following (in thousands):
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Interest income......................................................................................... $
5,534 $
13,917 $
Realized and unrealized foreign currency gain (loss)..............................
Interest expense........................................................................................
Other.........................................................................................................
2,631
(338)
86
(627)
(328)
(12)
Total non-operating income.................................................................. $
7,913 $
12,950 $
8,178
(2,027)
(706)
287
5,732
20. Income Taxes
The components of income before provision for income taxes are as follows (in thousands):
United States............................................................................................. $
214,816 $
181,664 $
Foreign......................................................................................................
48,920
52,502
Total...................................................................................................... $
263,736 $
234,166 $
173,848
39,928
213,776
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
The following table presents the current and deferred provision (benefit) for income taxes (in thousands):
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Current:
Federal...................................................................................................... $
13,901 $
30,218 $
State..........................................................................................................
Foreign......................................................................................................
6,444
8,073
5,273
8,424
Subtotal.................................................................................................. $
28,418 $
43,915 $
Deferred:
Federal...................................................................................................... $
1,354 $
(3,732) $
State..........................................................................................................
Foreign......................................................................................................
Subtotal..................................................................................................
(6,191)
(127)
(4,964)
(1,985)
(248)
(5,965)
Total................................................................................................... $
23,454 $
37,950 $
20,418
3,075
5,014
28,507
(6,678)
(1,258)
(338)
(8,274)
20,233
Included in the fiscal year 2020 and 2019 tax provisions are increases of $0.2 million and $1.8 million, respectively, for tax and
accrued interest related to uncertain tax positions for each fiscal year. Fiscal year 2018 included a tax benefit of $1.6 million for
tax and accrued interest related to uncertain tax positions.
The reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate is as follows:
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Statutory regular federal income tax rate.................................................
21.0 %
21.0 %
21.0 %
State provision, net of federal benefit.......................................................
Nondeductible executive compensation...................................................
Research and development tax credits......................................................
Foreign income taxed at different rates....................................................
U.S. tax on foreign income, net................................................................
Impact of 2017 Tax Act............................................................................
Withholding taxes on undistributed foreign earnings, net........................
Excess stock-based compensation............................................................
Derecognition of uncertain tax position...................................................
Other.........................................................................................................
0.1
1.8
(2.2)
(1.0)
1.0
—
—
(10.4)
(2.2)
0.8
1.1
2.1
(1.1)
(1.7)
0.1
—
—
(6.0)
—
0.7
0.7
1.9
(1.4)
(2.0)
0.7
0.1
(0.6)
(9.4)
(1.5)
—
Total......................................................................................................
8.9 %
16.2 %
9.5 %
During the year ended December 29, 2018, the Company completed its analysis of the income tax effects of the Tax Cuts and
Jobs Act of 2017 (2017 Tax Act) and, pursuant to Staff Accounting Bulletin No. 118, recorded an adjustment of approximately
$0.9 million to reduce its previously estimated accrual based on additional information and guidance that became available with
respect to the application of certain provisions of the 2017 Tax Act. The U.S. Treasury Department, the Internal Revenue
Service, and other standard-setting bodies will continue to interpret or issue guidance on how provisions of the 2017 Tax Act
will be applied or otherwise administered. As future guidance is issued, the Company may make adjustments to amounts that it
has previously recorded that may materially impact its provision for income taxes in the period in which such adjustments are
made.
As of January 2, 2021, the Company has accumulated undistributed earnings generated by its foreign subsidiaries of
approximately $229.3 million. Because such earnings have previously been subject to U.S. tax, any additional taxes due with
respect to such earnings or the excess of the amount for financial reporting over the tax basis of its foreign investments would
generally be limited to foreign withholding and state taxes.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
The Company considers $86.5 million of these accumulated undistributed earnings as no longer permanently reinvested and has
accrued foreign withholding and state taxes, net of estimated foreign tax credits, of $1.6 million. The Company intends,
however, to indefinitely reinvest the remaining $142.8 million of earnings. If the Company decides to distribute such
permanently reinvested earnings, the Company would accrue estimated additional income tax expense of up to approximately
$6.8 million.
The components of the deferred tax assets are as follows (in thousands):
January 2,
2021
December 28,
2019
Deferred tax assets:
Deferred revenue.................................................................................................................... $
Net operating losses................................................................................................................
Accrued liabilities...................................................................................................................
Tax credits..............................................................................................................................
Stock-based compensation.....................................................................................................
Operating lease assets.............................................................................................................
Other.......................................................................................................................................
Total....................................................................................................................................
Valuation allowance...............................................................................................................
19,769 $
19,140
16,534
9,398
8,385
5,782
—
79,008
(15,660)
13,948
724
13,273
6,438
7,926
4,174
867
47,350
—
Total deferred tax assets...................................................................................................... $
63,348 $
47,350
Deferred tax liabilities:
Property and equipment.......................................................................................................... $
(12,818) $
(6,604)
Acquired intangibles...............................................................................................................
Operating lease liabilities.......................................................................................................
Withholding taxes on undistributed foreign earnings.............................................................
State taxes and other...............................................................................................................
Other.......................................................................................................................................
(5,465)
(5,429)
(3,108)
(2,302)
(1,110)
Total deferred tax liabilities................................................................................................
(30,232)
Net deferred tax assets................................................................................................... $
33,116 $
—
(3,845)
(2,829)
(1,152)
—
(14,430)
32,920
As of January 2, 2021, the Company has $1.9 million and $2.9 million of net operating losses from federal and various state
jurisdictions, which will begin to expire in 2036 and 2039, respectively. Additionally, the Company has $76.8 million of net
operating losses from foreign jurisdictions which will carryover indefinitely. The Company also has state research and
development tax credits of $14.9 million that will carry forward indefinitely and $0.3 million of Canadian investment tax
credits on research and development expenditures that will begin to expire in 2033. In assessing the realizability of deferred tax
assets, the Company considers whether it is more likely than not that all or some portion of the deferred tax assets will not be
realized. In making this determination, the Company considered all available positive and negative evidence, including
scheduled reversals of liabilities, projected future taxable income, tax planning strategies and recent financial performance.
During the year ended January 2, 2021, the Company established a valuation allowance to reduce the deferred tax assets
relating to certain acquired operating losses in certain foreign jurisdictions that the Company believes are not likely to be
realized.
As a result of certain business and employment actions undertaken by the Company, income earned in a certain European
country is subject to a reduced tax rate through 2022, which, upon meeting certain requirements, can be extended through 2026.
For the year ended January 2, 2021 and December 29, 2018, the estimated income tax benefit related to such business
arrangement was $0.9 million and $1.7 million, respectively, and favorably impacted net income per diluted share by $0.02 for
each year.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):
Unrecognized tax benefits (gross), beginning of period......................................................... $
Increase from tax positions in prior period.............................................................................
Increase from tax positions in current period.........................................................................
Lapse of statute of limitations................................................................................................
Unrecognized tax benefits (gross), end of period................................................................... $
Year Ended
January 2,
2021
Year Ended
December 28,
2019
17,009 $
15,412
471
6,565
(6,040)
18,005 $
81
2,636
(1,120)
17,009
The amount of unrecognized benefits which, if ultimately recognized, could favorably affect the tax rate in a future period was
$16.3 million and $15.7 million as of January 2, 2021 and December 28, 2019, respectively. It is reasonably possible that the
amount of unrecognized tax benefits in various jurisdictions may change in the next 12 months due to the expiration of statutes
of limitation and audit settlements. However, due to the uncertainty surrounding the timing of these events, an estimate of the
change within the next 12 months cannot be made at this time.
For the years ended January 2, 2021 and December 29, 2018, the Company recorded a benefit of $0.5 million and $0.8 million,
respectively, for interest and penalties related to unrecognized tax benefits as part of income tax expense. For the year ended
December 28, 2019, the Company recorded an expense of $0.5 million for interest and penalties related to unrecognized tax
benefits as part of income tax expense.
Total accrued interest and penalties related to unrecognized tax benefits as of January 2, 2021 and December 28, 2019 were
$0.7 million and $1.3 million, respectively.
The Company conducts business in multiple jurisdictions, and as a result, one or more of the Company’s subsidiaries files
income tax returns in the U.S. federal, various state, local and foreign jurisdictions. The Company has concluded all U.S.
federal income tax matters for years through 2016. All material state, local and foreign income tax matters have been concluded
for years through 2013.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted and signed into law in
response to the market volatility and instability resulting from the COVID-19 pandemic. It includes a significant number of tax
provisions and lifts certain deduction limitations originally imposed by the 2017 Tax Act. The changes are primarily related to:
(1) the business interest expense disallowance rules for 2019 and 2020; (2) net operating loss rules; (3) charitable contribution
limitations; (4) employee retention credit; and (5) the realization of corporate alternative minimum tax credits.
The Company has reviewed the tax provision in the CARES Act and did not identify any material impact to the Company’s
consolidated financial statements.
21. Commitments and Contingencies
Employee Retirement Savings Plan
The Company sponsors a qualified defined contribution plan or 401(k) plan, the Masimo Retirement Savings Plan (MRSP),
covering the Company’s full-time U.S. employees who meet certain eligibility requirements. In general, the Company matches
an employee’s contribution up to 3% of the employee’s compensation, subject to a maximum amount. The Company may also
contribute to the MRSP on a discretionary basis. The Company contributed $3.2 million, $2.5 million and $2.3 million to the
MSRP for the years ended January 2, 2021, December 28, 2019 and December 29, 2018, respectively, all in the form of
matching contributions. In addition, the Company sponsors various defined contribution plans in certain locations outside of the
United States, the contributions to which were not material for any period.
Employment and Severance Agreements
In July 2017, the Company entered into the First Amendment to the certain Amended and Restated Employment Agreement
entered into between the Company and Mr. Kiani on November 4, 2015 (as amended, the Amended Employment Agreement).
Pursuant to the terms of the Amended Employment Agreement, upon a “Qualifying Termination” (as defined in the Amended
Employment Agreement), Mr. Kiani will be entitled to receive a cash severance benefit equal to two times the sum of his then-
current base salary and the average annual bonus paid to Mr. Kiani during the immediately preceding three years, the full
amount of the “Award Shares” (as defined in the Amended Employment Agreement) and the full amount of the “Cash
Payment” (as defined in the Amended Employment Agreement).
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
In addition, in the event of a “Change in Control” (as defined in the Amended Employment Agreement) prior to a Qualifying
Termination, on each of the first and second anniversaries of the Change in Control, 50% of the Cash Payment and 50% of the
Award Shares will vest, subject in each case to Mr. Kiani’s continuous employment through each such anniversary date;
however, in the event of a Qualifying Termination or a termination of Mr. Kiani’s employment due to death or disability prior
to either of such anniversaries, any unvested amount of the Cash Payment and all of the unvested Award Shares shall vest and
be paid in full. Additionally, in the event of a Change in Control prior to a Qualifying Termination, Mr. Kiani’s stock options
and any other equity awards will vest in accordance with their terms, but in no event later than in two equal installments on
each of the one year and two year anniversaries of the Change in Control, subject in each case to Mr. Kiani’s continuous
employment through each such anniversary date.
As of January 2, 2021, the expense related to the Award Shares and Cash Payment that would be recognized in the Company’s
consolidated financial statements upon the occurrence of a Qualifying Termination under the Restated Employment Agreement
was approximately $292.9 million.
As of January 2, 2021, the Company had severance plan participation agreements with eight executive officers. The
participation agreements (the Agreements) are governed by the terms and conditions of the Company’s 2007 Severance
Protection Plan, which became effective on July 19, 2007 and which was amended effective December 31, 2008.
Under each of the Agreements, the applicable executive officer may be entitled to receive certain salary, equity, medical and
life insurance benefits if he is terminated by the Company without cause or if he terminates his employment for good reason
under certain circumstances. Each executive officer is also required to give the Company six months advance notice of his
resignation under certain circumstances.
Cercacor Cross-Licensing Agreement Provisions
The Company’s Cross-Licensing Agreement with Cercacor contains annual minimum aggregate royalty obligations for use of
the rainbow® licensed technology. The current annual minimum royalty obligation is $5.0 million. Upon a change in control (as
defined in the Cross-Licensing Agreement) of the Company or Cercacor: (i) all rights to the “Masimo” trademark will be
assigned to Cercacor if the surviving or acquiring entity ceases to use “Masimo” as a company name and trademark; (ii) the
option to license technology developed by Cercacor for use in blood glucose monitoring will be deemed automatically
exercised and a $2.5 million license fee for this technology will become immediately payable to Cercacor; and (iii) the
minimum aggregate annual royalties payable to Cercacor for carbon monoxide, methemoglobin, fractional arterial oxygen
saturation, hemoglobin and/or glucose measurements will increase to $15.0 million per year until the exclusivity period of the
agreement ends, plus up to $2.0 million for each additional vital sign measurement with no maximum ceiling for non-vital sign
measurements.
Purchase Commitments
Pursuant to contractual obligations with vendors, the Company had $123.0 million of purchase commitments as of January 2,
2021, that are expected to be purchased within one year. These purchase commitments have been made for certain inventory
items in order to secure sufficient levels of those items, other critical inventory and manufacturing supplies and to achieve
better pricing.
Other Contractual Commitments
In the normal course of business, the Company may provide bank guarantees to support government hospital tenders in certain
foreign jurisdictions. As of January 2, 2021, the Company had approximately $2.5 million in outstanding unsecured bank
guarantees.
In certain circumstances, the Company also provides limited indemnification within its various customer contracts whereby the
Company indemnifies the parties to whom it sells its products with respect to potential infringement of intellectual property,
and against bodily injury caused by a defective Company product. It is not possible to predict the maximum potential amount of
future payments under these or similar agreements, due to the conditional nature of the Company’s obligations and the unique
facts and circumstances involved. As of January 2, 2021, the Company had not incurred any significant costs related to
contractual indemnification of its customers.
Concentrations of Risk
The Company is exposed to credit loss for the amount of its cash deposits with financial institutions in excess of federally
insured limits. The Company invests a portion of its excess cash in time deposits with major financial institutions. As of
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
January 2, 2021, the Company had $641.4 million of bank balances of which $4.8 million was covered by either the U.S.
Federal Deposit Insurance Corporation limit or foreign countries’ deposit insurance organizations.
The Company’s ability to sell its products to U.S. hospitals depends in part on its relationships with GPOs. Many existing and
potential customers for the Company’s products become members of GPOs. GPOs negotiate pricing arrangements and
contracts, sometimes exclusively, with medical supply manufacturers and distributors, and these negotiated prices are made
available to a GPO’s affiliated hospitals and other members. During the years ended January 2, 2021, December 28, 2019 and
December 29, 2018, revenue from the sale of the Company’s products to customers that are members of GPOs approximated
49.3%, 55.3% and 56.7% of total product revenue, retrospectively.
For the years ended January 2, 2021, December 28, 2019 and December 29, 2018, the Company had sales through two just-in-
time distributors that represented 11.5% and 10.1%, 11.1% and 13.0%, and 10.4% and 12.9% of total product revenue,
respectively. As of January 2, 2021 and December 28, 2019, one just-in-time distributor represented 6.7% and 6.2% of the
Company’s accounts receivable balance, respectively.
As of January 2, 2021 and December 28, 2019, one customer represented 9.1% and 19.0%, respectively, of the Company’s
accounts receivable balance. The receivable balance related to such customer is fully secured by letters of credit.
The majority of the Company’s historical royalty revenue arose from one agreement with Medtronic plc (Medtronic). For the
year ended January 2, 2021, the Company recognized no royalty revenue pursuant to this agreement. For the years ended
December 28, 2019 and December 29, 2018, the Company recognized royalty revenue pursuant to this agreement of $0.7
million and $26.4 million, respectively. Pursuant to the agreement, Medtronic is not obligated to pay royalties to the Company
for its sales occurring after October 6, 2018.
Litigation
During the third quarter of fiscal year 2017, the Company became aware that certain amounts had been paid by a foreign
government customer to the Company’s former appointed foreign agent in connection with a foreign government tender, but
had not been remitted by such agent to the Company in accordance with the agency agreement. On December 28, 2017, the
Company initiated arbitration proceedings against this foreign agent after unsuccessful attempts to recover such remittances. As
a result, the Company recorded a net charge of approximately $10.5 million during the fourth quarter of fiscal year 2017 in
connection with this dispute, of which $2.0 million was recovered during the year ended December 28, 2019. An arbitration
hearing was held on February 11, 2019. On July 8, 2019, the arbitrator awarded the Company $10.5 million in damages, fees
and costs. On January 12, 2020, the Company received notice that bankruptcy restructuring proceedings had been initiated for
the foreign agent. The Company filed its claim with the bankruptcy trustee on January 16, 2020. In July 2020, the Company
was notified that a bankruptcy reorganization proposal had been submitted for voting by creditors in August 2020. The
reorganization proposal was rejected by a vote of the creditors on August 26, 2020. On October 22, 2020, the Company filed a
petition seeking to enforce the arbitration award. Although the Company intends to vigorously pursue the collection of the
arbitration award, there is no guarantee that the Company will be successful in these efforts.
On January 2, 2014, a putative class action complaint was filed against the Company in the U.S. District Court for the Central
District of California (District Court) by Physicians Healthsource, Inc. The complaint alleges that the Company sent unsolicited
facsimile advertisements in violation of the Junk Fax Protection Act of 2005 and related regulations. The complaint seeks $500
for each alleged violation, treble damages if the District Court finds the alleged violations to be knowing, plus interest, costs
and injunctive relief. On March 26, 2019, an amended complaint was filed adding Radha Geismann, M.D. PC as an additional
named plaintiff. On June 17, 2019, the plaintiffs filed their motion for class certification. On September 10, 2019, the parties
filed motions for summary judgment. On September 30, 2019, the Company filed its opposition to the motion for class
certification, and the plaintiffs filed their reply on October 7, 2019.
On November 21, 2019, the District Court issued an order denying the plaintiffs’ motion for class certification, and granting in
part and denying in part the Company’s motion for summary judgment, and deferring ruling on the plaintiffs’ motion for
summary judgment. On December 5, 2019, the plaintiffs filed a petition for permission to appeal the order denying class
certification, which was denied on January 24, 2020. Trial of the individual plaintiffs’ claims was scheduled for June 2, 2020,
but on April 1, 2020, the District Court vacated the trial date and directed the parties to conduct an in-person mediation. The
mediation has not occurred and no new trial date has been set. On July 13, 2020, the District Court issued an order granting in
part and denying in part the plaintiffs’ motion for summary judgment. The Company believes it has good and substantial
defenses to the claims, but there is no guarantee that the Company will prevail. The Company is unable to determine whether
any loss will ultimately occur or to estimate the range of such loss; therefore, no amount of loss has been accrued by the
Company in the accompanying consolidated financial statements.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
On January 9, 2020, the Company filed a complaint against Apple Inc. (Apple) in the District Court for infringement of a
number of patents, for trade secret misappropriation, and for ownership and correction of inventorship of a number of Apple
patents listing one of its former employees as an inventor. Apple filed petitions for Inter Partes Review of the asserted patents in
the U.S. Patent and Trademark Office (PTO). The PTO has not yet acted on the petitions. On October 14, 2020, the District
Court stayed the patent infringement claims pending completion of the Inter Partes review proceedings. On November 13,
2020, the Company filed a third amended complaint. On December 1, 2020, Apple filed a partial motion to dismiss the trade
secrets claim in the third amended complaint. On January 6, 2021, the District Court granted the motion in part and denied it in
part, with leave to amend within 30 days. On February 3, 2021, Apple filed its answer to the third amended complaint. The
Company is seeking damages, injunctive relief, and declaratory judgment regarding ownership of the Apple patents. Although
the Company intends to vigorously pursue all of its legal remedies, there is no guarantee that the Company will be successful in
these efforts.
From time to time, the Company may be involved in other litigation and investigations relating to claims and matters arising out
of its operations in the normal course of business. The Company believes that it currently is not a party to any other legal
proceedings which, individually or in the aggregate, would have a material adverse effect on its consolidated financial position,
results of operations or cash flows.
22. Segment Information and Enterprise Reporting
The Company operates in one segment based upon the Company’s organizational structure and the way in which the
Company’s chief operating decision maker, the CEO, reviews financial information, including gross profit, operating expenses,
operating income, and net income including noncontrolling interests presented on a consolidated basis, accompanied by
disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing
financial performance. In addition, the Company’s assets are primarily located in the U.S. The Company does not produce
reports for, or measure the performance of, its geographic regions on any asset-based metrics. Therefore, geographic
information is presented only for revenues and long-lived assets.
The following schedule presents an analysis of the Company’s product revenues based upon the geographic area to which the
product was shipped (in thousands, except percentages):
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Geographic area by destination:
United States (U.S.).............................. $ 763,069
66.7 % $ 636,371
68.0 % $ 566,816
68.3 %
Europe, Middle East and Africa............
Asia and Australia.................................
North and South America (excluding
U.S.)......................................................
238,681
103,756
38,238
20.9
9.1
3.3
183,363
87,961
28,713
19.6
9.4
3.0
160,910
75,534
26,614
Total product revenue...................... $ 1,143,744
100.0 % $ 936,408
100.0 % $ 829,874
19.4
9.1
3.2
100.0 %
.
The Company’s consolidated long-lived assets (tangible non-current assets) by geographic area are (in thousands, except
percentages):
Year Ended
January 2,
2021
Year Ended
December 28,
2019
Year Ended
December 29,
2018
Long-lived assets by geographic area:
United States.......................................... $ 238,094
35,755
International...........................................
$ 273,849
Total................................................
86.9 % $ 216,650
3,276
13.1
100.0 % $ 219,926
98.5 % $ 262,373
12,016
1.5
100.0 % $ 274,389
95.6 %
4.4
100.0 %
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MASIMO CORPORATION
23. Quarterly Financial Data
The following tables contain selected unaudited consolidated statements of operations data for each quarter of 2020 and 2019
(in thousands, except per share data):
Fiscal 2020
March 28,
2020
June 27,
2020
September 26,
2020
January 2,
2021
Quarters Ended
Total revenue.............................................................. $
269,625 $
300,953 $
278,112 $
Gross profit.................................................................
Operating income.......................................................
Net income..................................................................
185,629
69,010
64,456
191,584
62,220
55,772
178,926
59,698
49,405
295,054
186,926
64,895
70,669
Net income per share
Basic(1).................................................................. $
Diluted(1).............................................................. $
1.20 $
1.12 $
1.02 $
0.96 $
0.90 $
0.85 $
1.28
1.21
Fiscal 2019
March 30,
2019
June 29,
2019
September 28,
2019
December 28,
2019
Quarters Ended
Total revenue.............................................................. $
231,664 $
229,652 $
229,011 $
Gross profit.................................................................
Operating income.......................................................
Net income..................................................................
151,642
56,023
49,322
154,339
52,004
44,888
156,268
51,632
49,085
247,510
166,923
61,557
52,921
Net income per share
Basic(1).................................................................. $
Diluted(1).............................................................. $
0.93 $
0.87 $
0.84 $
0.79 $
0.92 $
0.86 $
0.99
0.92
______________
(1)
The sum of the basic and diluted earnings per share numbers for each quarter may not equal the basic and diluted earnings per share number for the entire
year due to quarterly rounding.
F-43
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Schedule II -
Valuation and Qualifying Accounts
F-45
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Schedule II
MASIMO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended January 2, 2021, December 28, 2019 and December 29, 2018
(in thousands)
Description
Year ended January 2, 2021
Balance at
Beginning of Period
Additions Charged
to
Expense and Other
Accounts
Amounts Charged
Against Reserve
Balance at
End of Period
Allowance for doubtful accounts....................... $
Allowance for sales returns and
allowances.........................................................
Year ended December 28, 2019
Allowance for doubtful accounts(2)....................
Allowance for sales returns and
allowances.........................................................
Year ended December 29, 2018
Allowance for doubtful accounts.......................
Allowance for sales returns and
allowances.........................................................
2,206 $
128 (1) $
(529) $
1,805
700
1,535
432
2,116
424
814 (1)
1,021
1,696
(486)
1,416
(292)
(350)
(1,428)
(95)
(1,408)
1,222
2,206
700
1,535
432
______________
(1)
Additions charged to expense and other accounts include amounts from immaterial business combinations.
(2)
In connection with its adoption of ASC 842 on December 30, 2018, the Company recorded allowance for credit loss for lease receivable, which is
included in the allowance for doubtful accounts for the year ended December 28, 2019. See “Recently Adopted Accounting Pronouncements” in Note 2 to
these consolidated financial statements for additional information related to the Company’s adoption of ASC 842.
F-47
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Exhibits
[THIS PAGE INTENTIONALLY LEFT BLANK.]
Exhibit 21.1
The following are wholly-owned subsidiaries of the registrant, Masimo Corporation, a Delaware corporation:
Subsidiaries of the Registrant - 2020
Name of Subsidiary
Masimo Americas, Inc.
Masimo de Mexico Holdings I LLC
Masimo de Mexico Holdings II LLC
Masimo Holdings LLC
SpO2.com, Inc.
SEDLine, Inc.
Masimo Australia Pty Ltd
Masimo Öesterreich GmbH
State or Jurisdiction of Incorporation or Organization
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Australia
Austria
Masimo Importacao e Distribuicao de Produtos Medicos Ltda
Brazil
Masimo Holdings LP
Masimo China Medical Technology Co., Ltd.
Masimo Europe Ltd.
Masimo Hong Kong Limited
Masimo Medical Technologies India Private Limited
Masimo Japan Kabushiki Kaisha
Masimo Mexico, S. de R.L. de C.V.
Masimo Canada ULC
Masimo Peru Srl
Masimo Asia Pacific PTE. Ltd.
Masimo International SARL
Masimo International Technologies SARL
Masimo Medikal Ürünler Ticaret Limited Şirketi
Masimo Semiconductor, Inc.
Masimo Sweden AB
52 Discovery, LLC
Masimo 25 Sagamore, LLC
Masimo Korea, LLC
Masimo Polska sp. Z.o.o.
Masimo 17, LLC
Masimo (Shanghai) Industrial Co., Ltd.
Patient Doctor Technologies, Inc.
Cayman
China
England and Wales
Hong Kong
India
Japan
Mexico
Nova Scotia
Peru
Singapore
Switzerland
Switzerland
Turkey
Delaware
Sweden
California
New Hampshire
South Korea
Poland
California
China
Delaware
Exhibit 21.1
The following are wholly-owned subsidiaries of the registrant, Masimo Corporation, a Delaware corporation:
Subsidiaries of the Registrant - 2020 - (Continued)
Name of Subsidiary
State or Jurisdiction of Incorporation or Organization
Alton Office Property, LLC
Alton Office Holdings, LLC
OC Property Ventures LLC
OC Property Shelter LLC
Delaware
Delaware
Delaware
Delaware
Masimo Saudi Arabia for Trading, LLC
Saudi Arabia
VCCB Holdings, Inc.
TNI medical AG
Masimo Technology Café LLC
Masimo LHC, Limited
LiDCO Group, Plc
LiDCO Limited
Cassette Analytical Systems Limited
LiDCO Netherlands B.V.
Delaware
Germany
California
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Netherlands
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
We have issued our reports dated February 23, 2021, with respect to the consolidated financial statements, financial statement
schedule, and internal control over financial reporting included in the Annual Report of Masimo Corporation on Form 10-K for
the year ended January 2, 2021. We consent to the incorporation by reference of said reports in the Registration Statements of
Masimo Corporation on Forms S-8 (File No. 333-148149, effective December 19, 2007; File No. 333-157673, effective March
4, 2009; File No. 333-168534, effective August 4, 2010; File No. 333-179557, effective February 17, 2012; File No.
333-186692, effective February 15, 2013; File No. 333-194089, effective February 24, 2014; File No. 333-219207, effective
July 10, 2017; File No. 333-234386, effective October 30, 2019, and File No. 333-240152, effective July 28, 2020) and Form
S-3 (File No. 333-229892, effective February 26, 2019).
/s/ GRANT THORNTON LLP
Newport Beach, California
February 23, 2021
Exhibit 23.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Joe Kiani, certify that:
1. I have reviewed this annual report on Form 10-K of Masimo Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 23, 2021
/s/ JOE KIANI
Joe Kiani
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.1
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Micah Young, certify that:
1. I have reviewed this annual report on Form 10-K of Masimo Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 23, 2021
/s/ MICAH YOUNG
Micah Young
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATIONS OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Joe Kiani, Chief Executive Officer of Masimo Corporation (the “Company”), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:
1. The Annual Report on Form 10-K of the Company for the period ended January 2, 2021 (the “Report”) fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 23, 2021
/s/ JOE KIANI
Joe Kiani
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
I, Micah Young, Executive Vice President and Chief Financial Officer of Masimo Corporation (the “Company”), certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:
1. The Annual Report on Form 10-K of the Company for the period ended January 2, 2021 (the “Report”) fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 23, 2021
/s/ MICAH YOUNG
Micah Young
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
A signed original of these certifications has been provided to Masimo Corporation and will be retained by Masimo Corporation
and furnished to the Securities and Exchange Commission or its staff upon request.
These certifications are being furnished solely to accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section
1350, and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not
to be incorporated by reference into any filing of Masimo Corporation, whether made before or after the date hereof, regardless
of any general incorporation language in such filing.
Corporate Information
Masimo Corporation
Headquarters
The principal executive office of Masimo Corporation (the Company) are located at 52 Discovery, Irvine, CA
92618.
Stock Listing
The Company’s common stock is listed on the Nasdaq Stock Market, under the symbol “MASI”. As of January 2,
2021, there were 18 registered holders of the Company’s common stock.
Investor Relations
Analysts, portfolio managers and other investors seeking additional information about Masimo stock should contact
our V.P. Investor Relations at (949) 297-7077 or investorrelations@masimo.com. Visit the Investor Relations area
of the Masimo website, https://investor.masimo.com/overview/default.aspx for stock information, financial news
releases, links to Masimo’s SEC filings, electronic versions of our annual reports and other items of interest to the
Company’s shareholders.
News Media
News media seeking information should visit our online newsroom at https://investor.masimo.com/news/
default.aspx for new releases, press kits, and other items related to the Company.
Annual Report on Form 10-K
The Company’s 2020 Annual Report on Form 10-K is available at https://investor.masimo.com/financials/annual-
reports/default.aspx. The Company also will provide a copy of the 2020 Annual Report on Form 10-K (without
exhibits) upon written request addressed to:
Masimo Corporation
Attn: Investor Relations
52 Discovery
Irvine, CA 92618
Shareholder Inquiries
For inquiries concerning tax statements, electronic delivery, transferring ownership, address changes or lost or stolen
stock certificates, contact Masimo Corporation Shareholder Services at Computershare Trust Company, N.A. at
(800) 642-9855. For general shareholder information, contact Masimo Corporation Corporate Secretary at (949)
297-7000.
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