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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORMFORM 10-Q

(Mark One)
ý(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017October 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 NumberNumber 001-33642
masi-20211002_g1.jpg

masimologoq32016-01a03.jpgMASIMO CORPORATION
(Exact Name of Registrant as Specified in its Charter)

MASIMO CORPORATION
(Exact Name of Registrant as Specified in its Charter)

Delaware33-0368882
(State or Other Jurisdiction of

Incorporation or Organization)
(I.R.S. Employer

Identification Number)
52 DiscoveryIrvine,California92618
52 Discovery
Irvine, California
92618
(Address of Principal Executive Offices)(Zip Code)
(949) 297-7000
(Registrant’s Telephone Number, Including Area Code)
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.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
(949)297-7000
(Registrant’s Telephone Number, Including Area Code)
Securities Registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueMASIThe Nasdaq Stock Market LLC
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.        Yes☒No☐
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☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filerý☒Accelerated filer¨☐
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
☐		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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act.)     Yes☐No☒Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
ClassNumber of Shares Outstanding as of September 30, 2017
October 2, 2021
Common stock, $0.001 par value51,671,14455,221,689


Table of Contents


MASIMO CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2017OCTOBER 2, 2021
TABLE OF CONTENTS
 
Item 1.
PART I. Financial Information
Item 1.
Condensed Consolidated Balance Sheets as of September 30, 2017October2, 2021 and December 31, 2016January 2, 2021
3
4
5
56
68
79
Item 2.
2835
Item 3.
3944
Item 4.
4045
Item 1.
4045
Item 1A.
4146
Item 2.6.
6674
Item 6.
Exhibits
67
6775



2
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PART I. FINANCIAL INFORMATION
Item 1.     Financial Statements
MASIMO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except par values)
September 30,
2017		 December 31,
2016		October 2,
2021		January 2,
2021
ASSETS   ASSETS
Current assets   Current assets
Cash and cash equivalents$289,944
 $305,970
Cash and cash equivalents$652,354 $641,447 
Accounts receivable, net of allowance for doubtful accounts of $1,413 and $1,698 at September 30, 2017 and December 31, 2016, respectively.110,614
 101,667
Trade accounts receivable, net of allowance for credit losses of $2,081 and $1,603 at October 2, 2021 and January 2, 2021, respectivelyTrade accounts receivable, net of allowance for credit losses of $2,081 and $1,603 at October 2, 2021 and January 2, 2021, respectively191,332 141,350 
Inventories99,078
 72,542
Inventories202,328 215,952 
Other current assets46,844
 27,048
Other current assets91,772 102,416 
Total current assets546,480
 507,227
Total current assets1,137,786 1,101,165 
Deferred cost of goods sold96,464
 79,948
Lease receivable, noncurrentLease receivable, noncurrent66,955 57,666 
Deferred costs and other contract assetsDeferred costs and other contract assets22,599 20,076 
Property and equipment, net164,579
 135,996
Property and equipment, net274,929 272,511 
Intangible assets, net27,489
 29,376
Intangible assets, net74,089 73,923 
Goodwill20,676
 19,780
Goodwill101,242 103,206 
Deferred tax assets39,029
 38,975
Deferred tax assets39,294 39,363 
Other non-current assets11,354
 9,223
Other non-current assets49,886 44,642 
Total assets$906,071
 $820,525
Total assets$1,766,780 $1,712,552 
LIABILITIES AND STOCKHOLDERS’ EQUITY
   
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities   Current liabilities
Accounts payable$40,251
 $34,334
Accounts payable$60,710 $64,061 
Accrued compensation34,660
 43,180
Accrued compensation69,785 71,601 
Accrued and other current liabilities40,189
 104,654
Deferred revenue57,369
 38,198
Deferred revenue and other contract liabilities, currentDeferred revenue and other contract liabilities, current46,641 44,935 
Other current liabilitiesOther current liabilities51,118 53,239 
Total current liabilities172,469
 220,366
Total current liabilities228,254 233,836 
Deferred revenue261
 25,336
Other non-current liabilities16,059
 14,587
Other non-current liabilities70,377 71,076 
Total liabilities188,789
 260,289
Total liabilities298,631 304,912 
Commitments and contingencies
 
Commitments and contingencies - (Note 21)Commitments and contingencies - (Note 21)00
Stockholders’ equity   Stockholders’ equity
Preferred stock, $0.001 par value; 5,000 shares authorized; 0 shares issued and outstanding at September 30, 2017 and December 31, 2016—
 —
Common stock, $0.001 par value; 100,000 shares authorized; 51,671 and 50,188 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively52
 50
Treasury stock, 14,788 and 14,255 shares at September 30, 2017 and December 31, 2016, respectively(449,537) (404,276)
Preferred stock, $0.001 par value; 5,000 shares authorized; 0 shares issued and outstandingPreferred stock, $0.001 par value; 5,000 shares authorized; 0 shares issued and outstanding— — 
Common stock, $0.001 par value; 100,000 shares authorized; 55,222 and 55,251 shares issued and outstanding at October 2, 2021 and January 2, 2021, respectivelyCommon stock, $0.001 par value; 100,000 shares authorized; 55,222 and 55,251 shares issued and outstanding at October 2, 2021 and January 2, 2021, respectively55 55 
Treasury stock, 16,540 and 15,993 shares at October 2, 2021 and January 2, 2021, respectivelyTreasury stock, 16,540 and 15,993 shares at October 2, 2021 and January 2, 2021, respectively(767,653)(638,736)
Additional paid-in capital449,050
 382,263
Additional paid-in capital736,575 703,693 
Accumulated other comprehensive loss(2,757) (7,027)
Accumulated other comprehensive (loss) incomeAccumulated other comprehensive (loss) income(3,432)1,413 
Retained earnings720,474
 589,226
Retained earnings1,502,604 1,341,215 
Total stockholders’ equity717,282
 560,236
Total stockholders’ equity1,468,149 1,407,640 
Total liabilities and stockholders’ equity$906,071
 $820,525
Total liabilities and stockholders’ equity$1,766,780 $1,712,552 


The accompanying notes are an integral part of these condensed consolidated financial statements.

3
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MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
 
Three Months EndedNine Months Ended
October 2,
2021		September 26,
2020		October 2,
2021		September 26,
2020
Product revenue$307,414 $278,112 $911,575 $848,690 
Cost of goods sold103,750 99,186 318,124 292,551 
Gross profit203,664 178,926 593,451 556,139 
Operating expenses:
Selling, general and administrative100,647 90,376 291,180 278,714 
Research and development35,406 28,852 103,860 86,971 
Litigation awards— — — (474)
Total operating expenses136,053 119,228 395,040 365,211 
Operating income67,611 59,698 198,411 190,928 
Non-operating (loss) income(78)1,357 (735)6,108 
Income before provision for income taxes67,533 61,055 197,676 197,036 
Provision for income taxes9,762 11,650 36,287 27,403 
Net income$57,771 $49,405 $161,389 $169,633 
Net income per share:
Basic$1.05 $0.90 $2.93 $3.11 
Diluted$1.00 $0.85 $2.80 $2.92 
Weighted-average shares used in per share calculations:
Basic55,143 54,997 55,125 54,543 
Diluted57,664 58,280 57,651 58,033 
 Three Months Ended Nine Months Ended
 September 30,
2017		 October 1,
2016		 September 30,
2017		 October 1,
2016
Revenue:       
Product$181,271
 $160,286
 $542,170
 $488,183
Royalty and other revenue12,421
 7,335
 30,757
 23,241
Total revenue193,692
 167,621
 572,927
 511,424
Cost of goods sold65,027
 57,499
 191,692
 171,954
Gross profit128,665
 110,122
 381,235
 339,470
Operating expenses:       
Selling, general and administrative65,390
 57,845
 197,339
 184,244
Research and development15,300
 15,673
 45,859
 44,856
Total operating expenses80,690
 73,518
 243,198
 229,100
Operating income47,975
 36,604
 138,037
 110,370
Non-operating income (expense)287
 (546) 1,319
 423
Income before provision for income taxes48,262
 36,058
 139,356
 110,793
Provision for income taxes9,027
 8,285
 8,108
 25,420
Net income$39,235
 $27,773
 $131,248
 $85,373
        
Net income per share:       
Basic$0.75
 $0.56
 $2.55
 $1.73
Diluted$0.70
 $0.52
 $2.35
 $1.62
        
Weighted-average shares used in per share calculations:       
Basic52,079
 49,477
 51,469
 49,386
Diluted56,163
 53,565
 55,967
 52,837

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

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MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
Three Months Ended Nine Months EndedThree Months EndedNine Months Ended
September 30,
2017		 October 1,
2016		 September 30,
2017		 October 1,
2016		October 2,
2021		September 26,
2020		October 2,
2021		September 26,
2020
Net income$39,235
 $27,773
 $131,248
 $85,373
Net income$57,771 $49,405 $161,389 $169,633 
Other comprehensive income, net of tax:       Other comprehensive income, net of tax:
Unrealized gains (losses) from foreign currency translation adjustments1,405
 (470) 4,270
 (280)
Comprehensive income$40,640
 $27,303
 $135,518
 $85,093
Unrealized (losses) gains from foreign currency translation adjustmentsUnrealized (losses) gains from foreign currency translation adjustments(3,165)2,653 (4,845)1,504 
Total comprehensive incomeTotal comprehensive income$54,606 $52,058 $156,544 $171,137 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

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MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Three and Nine Months Ended October 2, 2021
Common StockTreasury StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Retained
Earnings		Total
Stockholders’
Equity
SharesAmountSharesAmount
Balance at January 2, 202155,251 $55 15,993 $(638,736)$703,693 $1,413 $1,341,215 $1,407,640 
Stock options exercised61 — — — 2,886 — — 2,886 
Restricted/Performance stock units vested303 — — — — — — — 
Shares paid for tax withholding(68)— — — (16,691)— — (16,691)
Stock-based compensation— — — — 12,708 — — 12,708 
Repurchases of common stock(547)— 547 (128,917)— — — (128,917)
Net income— — — — — — 53,383 53,383 
Foreign currency translation adjustment— — — — — (2,884)— (2,884)
Balance at April 3, 202155,000 55 16,540 (767,653)702,596 (1,471)1,394,598 1,328,125 
Stock options exercised52 — — — 3,442 — — 3,442 
Restricted/Performance stock units vested4 — — — — — — — 
Shares paid for tax withholding1 — — — (33)— — (33)
Stock-based compensation— — — — 8,262 — — 8,262 
Net income— — — — — — 50,235 50,235 
Foreign currency translation adjustment— — — — — 1,204 — 1,204 
Balance at July 3, 202155,057 55 16,540 (767,653)714,267 (267)1,444,833 1,391,235 
Stock options exercised165 — — — 9,748 — — 9,748 
Stock-based compensation— — — — 12,560 — — 12,560 
Net income— — — — — — 57,771 57,771 
Foreign currency translation adjustment— — — — — (3,165)— (3,165)
Balance at October 2, 202155,222 $55 16,540 $(767,653)$736,575 $(3,432)$1,502,604 $1,468,149 
MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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 Nine Months Ended
 September 30,
2017		 October 1,
2016
Cash flows from operating activities:   
Net income$131,248
 $85,373
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization14,384
 12,355
Stock-based compensation11,192
 9,693
Loss on disposal of property, equipment and intangibles420
 478
Gain on deconsolidation of variable interest entity—
 (273)
Provision for deferred income taxes—
 5,002
Changes in operating assets and liabilities:   
Increase in accounts receivable(17,277) (13,398)
Increase in inventories(25,998) (5,092)
Increase in other current assets(11,099) (12,911)
Increase in deferred cost of goods sold(16,166) (11,278)
Increase in other non-current assets(964) (2,117)
Increase in accounts payable3,748
 9,386
Decrease in accrued compensation(9,094) (810)
Decrease in accrued liabilities(66,918) (384)
(Decrease) increase in deferred revenue(5,905) 10,934
Increase in other non-current liabilities1,456
 1,072
Net cash provided by operating activities9,027
 88,030
Cash flows from investing activities:   
Purchases of property and equipment, net(37,830) (13,697)
Increase in intangible assets(2,220) (3,969)
Acquisition of long-term investments(1,145) (200)
Reduction in cash resulting from deconsolidation of variable interest entity—
 (763)
Net cash used in investing activities(41,195) (18,629)
Cash flows from financing activities:   
Borrowings under line of credit—
 45,000
Repayments on line of credit—
 (77,500)
Debt issuance costs—
 (621)
Repayments of capital lease obligations(71) (72)
Proceeds from issuance of common stock55,709
 26,063
Repurchases of common stock(42,608) (68,218)
Net cash provided by (used in) financing activities13,030
 (75,348)
Effect of foreign currency exchange rates on cash3,112
 (382)
Net decrease in cash and cash equivalents(16,026) (6,329)
Cash and cash equivalents at beginning of period305,970
 132,317
Cash and cash equivalents at end of period$289,944
 $125,988
Three and Nine Months Ended September 26, 2020
Common StockTreasury StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Loss		Retained
Earnings		Total
Stockholders’
Equity
SharesAmountSharesAmount
Balance at December 28, 201953,696 $54 15,530 $(526,580)$600,624 $(6,718)$1,100,494 $1,167,874 
Stock options exercised384 — — — 13,495 — — 13,495 
Restricted/Performance stock units vested46 — — — — — — — 
Shares paid for tax withholding(8)— — — (1,424)— — (1,424)
Stock-based compensation— — — — 11,272 — — 11,272 
Repurchases of common stock(3)— 3 (371)— — — (371)
Cumulative effect of adoption of ASU 2016-13— — — — — — 439 439 
Net income— — — — — — 64,456 64,456 
Foreign currency translation adjustment— — — — — (2,463)— (2,463)
Balance at March 28, 202054,115 54 15,533 (526,951)623,967 (9,181)1,165,389 1,253,278 
Stock options exercised825 1 — — 21,212 — — 21,213 
Restricted/Performance stock units vested9 — — — — — — — 
Stock-based compensation— — — — 13,188 — — 13,188 
Repurchases of common stock(1)— 1 (220)— — — (220)
Net income— — — — — — 55,772 55,772 
Foreign currency translation adjustment— — — — — 1,314 — 1,314 
Balance at June 27, 202054,948 55 15,534 (527,171)658,367 (7,867)1,221,161 1,344,545 
Stock options exercised107 — — — 6,314 — — 6,314 
Restricted/Performance stock units vested1 — — — — — — — 
Shares paid for tax withholding(1)— — — (25)— — (25)
Stock-based compensation— — — — 11,912 — — 11,912 
Net income— — — — — — 49,405 49,405 
Foreign currency translation adjustment— — — — — 2,653 — 2,653 
Balance at September 26, 202055,055 $55 15,534 $(527,171)$676,568 $(5,214)$1,270,566 $1,414,804 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended
October 2,
2021		September 26,
2020
Cash flows from operating activities:
Net income$161,389 $169,633 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization26,449 21,200 
Stock-based compensation33,530 36,372 
Loss on disposal of equipment, intangibles and other assets371 202 
Provision for credit losses647 5 
Provision for deferred income taxes— 136 
Changes in operating assets and liabilities:
Increase in accounts receivable(50,967)(9,459)
Decrease (increase) in inventories12,329 (86,815)
Decrease (increase) in other current assets4,433 (23,461)
Increase in lease receivable, net(9,312)(6,279)
Increase in deferred costs and other contract assets(2,573)(1,964)
Increase in other non-current assets(144)(775)
(Decrease) increase in accounts payable(4,290)31,793 
(Decrease) increase in accrued compensation(1,298)3,654 
(Decrease) increase in accrued liabilities(3,969)4,691 
Decrease in income tax payable(1,456)(2,756)
Increase in deferred revenue and other contract-related liabilities1,378 9,973 
Increase in other non-current liabilities634 395 
Net cash provided by operating activities167,151 146,545 
Cash flows from investing activities:
Maturities of short-term investments— 70,000 
Purchases of property and equipment, net(20,680)(60,017)
Increase in intangible assets(8,185)(5,763)
Business combinations, net of cash acquired— (78,310)
Other strategic investing activities(2,600)(6,750)
Net cash used in investing activities(31,465)(80,840)
Cash flows from financing activities:
Proceeds from issuance of common stock18,975 40,994 
Payroll tax withholdings on behalf of employees for vested equity awards(16,724)(1,449)
Repurchases of common stock(128,917)(591)
Net cash (used in) provided by financing activities(126,666)38,954 
Effect of foreign currency exchange rates on cash(89)(294)
Net increase in cash, cash equivalents and restricted cash8,931 104,365 
Cash, cash equivalents and restricted cash at beginning of period645,004 568,075 
Cash, cash equivalents and restricted cash at end of period$653,935 $672,440 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Description of the Company
Masimo Corporation (the Company) is a global medical technology company that develops, manufactures and markets a variety of noninvasive patient monitoring technologies.technologies, hospital automation solutions, home monitoring devices and consumer products. The Company’s mission is to improve patient outcomes, and reduce the cost of care by takingand take noninvasive monitoring to new sites and applications®.applications. 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 termlong-term care facilities, and consumers through its direct sales force, distributors and original equipment manufacturer (OEM) partners.
The Company invented Masimo Signal Extraction Technology®(SET®), which provides the capabilities ofMasimo’s core measurement technologies are based on Measure-through Motion and Low Perfusion™ pulse oximetry, to address the primary limitations of conventionalknown as Masimo Signal Extraction Technology® (SET®) pulse oximetry. Over the years, the Company’s product offerings have expanded significantly to also includeoximetry, and advanced rainbow® Pulse CO-Oximetry parameters such as noninvasive optical blood constituent monitoring, optical organ oximetry monitoring, electricalhemoglobin (SpHb®), alongside many other modalities, including brain function monitoring, hemodynamic monitoring, regional oximetry, acoustic respiration rate monitoring, capnography, nasal high-flow respiratory support therapy, patient position and optical gas monitoring. The Company also developedactivity tracking and neuromodulation technology for the reduction of symptoms associated with opioid withdrawal. Masimo’s measurement technologies are available on many types of devices, from bedside hospital monitors like the Root® patient monitoring Patient Monitoring and connectivity platformConnectivity Hub, to various handheld and portable devices, and to the tetherless Masimo Patient SafetyNet1™ remote patient surveillance monitoring system. Thesesolution. The Masimo Hospital Automation™ Platform facilitates data integration, connectivity, and interoperability through solutions like Patient SafetyNet™(1), Replica®, and related products are based upon Masimo SET®, rainbow®UniView™ to facilitate more efficient clinical workflows and other proprietary algorithms. These software-basedto help clinicians provide the best possible care, both in-person and remotely. Leveraging the Company’s expertise in hospital-grade technologies, are incorporated into a variety of product platforms depending on customers’ specifications. In addition, these technologies are supported by a substantial intellectual property portfolio that the Company has built through internal development, acquisitionsalso expanded its suite of products intended for use outside the hospital to products for consumers, including Sleep™, a sleep quality solution and the Radius Tº™ wireless, wearable continuous thermometer.
______________
(1)    The use of the trademark Patient SafetyNet™ is under license agreements.from the University HealthSystem Consortium.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. The accompanying condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, including normal recurring accruals, necessary to present fairly the Company’s condensed consolidated financial statements. The accompanying condensed consolidated balance sheet as of December 31, 2016January 2, 2021 was derived from the Company’s audited consolidated financial statements at that date. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016January 2, 2021 (fiscal year 2016)2020), filed with the SEC on February 15, 2017.23, 2021. The results for the three and nine months ended September 30, 2017October 2, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending December 30, 2017January 1, 2022 (fiscal year 2017)2021) or for any other interim period or for any future year.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In accordance with GAAP, current authoritative guidance is applied when determining whether an entity is subject to consolidation.
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 fiscal weeks while a 53 week fiscal year includes three 13 week fiscal week quarters and one 14 week fiscal week quarter. The Company’s last 53 week fiscal year was fiscal year 2014.2020. Fiscal year 20172021 is a 52 week fiscal year.year ending January 1, 2022. All references to years in these notes to condensed consolidated financial statements are fiscal years unless otherwise noted.

Reclassifications




1     The use ofCertain amounts in the trademark Patient SafetyNet is under license fromaccompanying condensed consolidated financial statements have been reclassified to conform to the University HealthSystem Consortium.

current period presentation.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

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 accounts receivable allowances,standalone selling prices, variable consideration, total consideration allocated to each performance obligation within a contract, inventory reserves, warranty reserves, rebate accruals,valuation, valuation of the Company’s stock options, goodwillequity awards, valuation of identifiable assets and liabilities connected with business combinations, deferred taxes and any associated valuation allowances, distributor channel inventory, royalty revenues, deferred revenue, uncertain income tax positions, and litigation costs and related accruals. Actual results could differ from such estimates.
ReclassificationsBusiness Combinations
Certain amountsThe 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 accompanying condensed consolidated financial statements for prior periods have been reclassified to conform toacquired entity, if applicable, are recorded at their respective fair values at the current period presentation.date of acquisition. The excess of the purchase price over the fair values of identifiable assets, liabilities and noncontrolling interests in the acquired entity, if applicable, is recorded as goodwill. The Company finalizes the purchase price allocation within one year from the acquisition date.
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 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.
●
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 either the nine months ended October 2, 2021 or September 30, 2017.26, 2020. The Company carries cash and cash equivalents, at cost, which approximates fair value. As of September 30, 2017 and December 31, 2016, the Company did not have any short-term investments or
For certain other financial assets that were required to be measured underand liabilities, including restricted cash, accounts receivable, accounts payable and other current assets and liabilities, the carrying amounts approximate their fair value hierarchy.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.
Accounts Receivable and Allowance for Doubtful AccountsCredit Losses
Accounts receivable consist of trade receivables recorded upon recognitionat the time of revenue forinvoicing of product revenues,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 is determinedcredit losses that it does not expect to collect based on relevant information, including historical write-off experience, current customer informationconditions, and other relevant factors, including specific identification of past due accounts, based on the age of the receivable in excess of the contemplated or contractual due date.reasonable and supportable forecasts. Accounts are charged off against the allowance when the Company believes they are uncollectible.
Inventories
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
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 reservesvaluation 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.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

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.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over estimated useful lives as follows:
Useful Lives
Building and building improvementsUseful Lives
Aircraft and components107 to 20 years
Buildings39 years
Building improvementsComputer equipment and software72 to 1512 years
ComputerDemonstration units3 years
Furniture and office equipment2 to 6 years
Demonstration units3 years
Furniture and office equipment2 to 6 years
Leasehold improvementsLesser of useful life or term of lease
Machinery, equipment and equipmenttooling53 to 710 years
ToolingTransportation, vehicles and other34 to 20 years
Vehicles5 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.
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 condensed 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. Total renewal costs for patents and trademarks for the nine months ended September 30, 2017 and October 1, 2016 were $0.5 million and $0.4 million, respectively. As of September 30, 2017, the weighted-average number of years until the next renewal was one year for patents and six years for trademarks. Costs to renew patents and trademarks are capitalized and amortized over the remaining useful life of the intangible asset. The Company continuallyperiodically evaluates the amortization period and carrying basis of patents, trademarks and trademarksother intangible assets 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.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
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, for each of its reporting units, 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 performing the two-step impairment testa quantitative analysis is unnecessary. However, if the Company concludes otherwise, or if the Company elects to bypass the qualitative analysis, then the Company is required tomust perform the first step of the two-step impairment test by comparinga quantitative analysis that compares the fair value of the reporting unit determined using future projected discounted operating cash flows, 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 is considered impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparingrecognized for the implied fair value oflesser of: (a) the reporting unit goodwill withamount that the carrying amount of goodwill. The Company also hasa reporting unit exceeds its fair value; or (b) the option to bypass the qualitative assessment and proceed directly to performing the first stepamount of the two-step goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period.allocated to that reporting unit. The annual impairment test is performed during the fourth fiscal quarter.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

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 flowflows 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.
No impairment of goodwill, intangible assets or other long-lived assets was recorded during the three and nine months ended September 30, 2017 and October 1, 2016.
Revenue Recognition, and Deferred Revenue
The Company follows the current authoritative guidance for revenue recognition. Based on these requirements, the Company recognizes revenue from the sale of products or services when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. In the case of the license or sale of software that does not function together with hardware components to provide the essential functionality of the hardware, revenue is recognized pursuant to the software revenue recognition guidance.Other Contract Liabilities
The Company derives the majority of its product revenue from four4 primary sources: (i) direct sales under long-term sensor purchasedeferred 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,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 direct 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 enters into agreementsgenerally recognizes revenue following a single, principles-based five-step model to sell its noninvasive monitoring solutionsbe 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 sometimes as partare 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 multiple deliverable arrangements that include various combinations of products and services. the lease.
While the majority of the Company’s salesrevenue 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 sometimes 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 among the deliverablesto each performance obligation when multiple deliverablesperformance obligations exist, (ii)including the determination of standalone selling price, and (v) when to recognize revenue on the deliverables, and (iii) whether undelivered elements are essential to the functionality of the delivered elements.performance obligations. Changes in judgments on these assumptions and estimates could materially impact the timing of revenue recognition.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
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 deliverable arrangements,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 hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence (VSOE) of selling price, (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE ofstandalone selling price is defined as the price charged when the same element is sold separately. VSOE generally exists only when the deliverable is sold separately and is the price actually charged for that deliverable. TPE generally does not exist for the majority of the Company’s products. The objective of ESP is to determine the price at whichreadily observable, the Company would transact a sale ifestimates the product was sold on a stand-alone basis. In the absence of VSOE and TPE, the Company determines ESP for its productsstandalone 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.
A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. Most of the Company’s products in a multiple deliverable arrangement qualify as separate units of accounting. In the case of the Company’s monitoring equipment containing embedded Masimo SET® or rainbow SET™ software, the Company has determined that the hardware and software components function together to deliver the equipment’s essential functionality and, therefore, represent a single deliverable. However, software deliverables, such as rainbow® parameter software, which do not function together with hardware components to provide the equipment’s essential functionality, are accounted for under software revenue recognition guidance.
The revenue for these multiple-element arrangements is allocated to the software deliverables and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the revenue recognition accounting guidance for arrangements with multiple deliverables.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

Sales under long-term sensor purchase contractsdeferred equipment agreements are generally structured such that the Company agrees to provide at no up-front charge certain monitoring-related equipment, software, installation, training and/or warranty support at no up-front charge in exchange for the hospital’s agreementcustomer’s commitment to purchase sensors over the term of the agreement, which generally ranges from three years to six years. These contracts generally do not provide forThe 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 payments thatunderlying lease components are not dependent uponrelated 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 future delivery of sensors, whichexpectations 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 essentialsatisfied. Revenue allocable to lease components under sales-type lease arrangements is generally recognized when control over the equipment is transferred to the functionalitycustomer. Revenue allocable to lease components under operating lease arrangements is generally recognized over the term of the monitoring equipment and, therefore, represent a substantive performance obligation. As a result, theoperating lease. The Company generally does not recognizeexpect to derive any revenue when the monitoring and related equipment and software are delivered to the hospitals, but rather recognizes revenue for these delivered elements on a pro-rata basis as the sensors are delivered under the long-term purchase commitment, when installation and training are complete. Accordingly, the cost of the monitoring and related equipment initially placed at the hospitals is deferred and amortized to cost of goods sold over the life of the underlying long-term sensor purchase contract. In cases where such contracts do provide for guaranteed payments that are unrelated to the future delivery of sensors, the Company recognizes the net presentsignificant value in excess of such payments as revenueasset’s unamortized book value from the monitoring and related equipment and expenses the cost of such equipment to cost of goods sold, as the equipment is delivered and when installation and training are complete. Some of the Company’s long-term sensor contracts also contain provisions for certain payments to be made directly to the end-user hospital customer at the inception of the arrangement. These payments are generally treated as prepaid discounts which are deferred and amortized on a straight-line basis as contra-revenue over the life of the underlying long-term sensor purchase contract.
Many of the Company’s distributors purchase sensor products that they then resell to end-user hospitals that are typically fulfilling their purchase obligations to the Company under such end-user hospital’s long-term sensor purchase commitments. Upon shipment to the distributor, revenue is deferred until the distributor ships the product to the Company’s end-user customers based on an estimate of the inventory held by these distributors atits operating lease arrangements after the end of the accounting period.agreement.
The Company also earns revenue from the sale of integrated circuit boards and other products, as well as from rainbow® parameter software licenses, to OEMs under various agreements. 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 OEMs is generally recognized atCompany when control of such products transfer to the timecustomer based upon the terms of shipment. the contract or underlying purchase order.
Revenue related to OEM rainbow® parameter software licenses to OEMs is generally recognized by the Company upon the OEM’s shipment of the OEM’sits product to its customers,customer, as representedreported to the Company by the OEM.
The Company also provides certain customers with various sales incentives that may take the abilityform of discounts or rebates. The Company records estimates related to purchase sensors under rebate programs. Under these programs the customers may earn rebates based on their purchasing activity. The Company estimates and provides allowances for these programsas a reduction to revenue at the time of sale as a reduction to revenue.
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 and accounts receivable.revenue. The Company estimates returnsthe revenue constraints related to these forms of variable consideration based on severalvarious factors, including expected purchasing volumes, prior sales and returns history, and specific contractual limitationsterms and past returns history.limitations.
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 condensed 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 majorityCompany’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 royalty and other revenue arises from an agreement with Medtronic plc (Medtronic, formerly Covidien Ltd.) that providesdeferred equipment agreements also contain provisions for quarterly royalty paymentscertain 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.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
The Company based upon U.S. sales ofgenerally invoices its customers under deferred equipment agreements as sensors are provided to the customer. However, the Company may recognize revenue for certain Medtronic products. An estimate of these royalty revenues is recorded quarterly in the period earned based on the prior quarter’s historical results, adjusted for any new information or trends known to managementnon-lease performance obligations under deferred equipment agreements with fixed annual commitments at the time of estimation. This estimated revenue is adjusted prospectively whensuch performance obligations are satisfied and prior to the customer being invoiced. When this occurs, the Company receivesrecords an unbilled contract receivable related to such revenue until the Medtronic royalty report, approximately sixty days aftercustomer has been invoiced pursuant to the endterms of the previous quarter. From time-to-time,underlying deferred equipment agreement.
The incremental costs of obtaining a contract with a customer are capitalized and deferred if the Company also recognizes revenue uponexpects such costs to be recoverable over the achievementlife of pre-agreed milestones relatedthe contract and the contract term is greater than one year. Such deferred costs generally relate to non-recurring engineering (NRE) services provided for certain OEM customers. Costs incurredincentive sales commissions earned by the Company relatedCompany’s internal sales team in connection with the execution of deferred equipment agreements and are amortized to these NRE services are generally deferred until such time thatexpense over the milestones are achieved andexpected term of the associated revenue is recognized.underlying contract.
Product Warranty
The Company generally provides a warranty against defects in material and workmanship for a period ranging fromfrom six 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 sales.goods sold. Customers may also purchase extended warranty coverage or service level upgrades separately or as part of a long-term sensor purchasedeferred equipment agreement. Revenue related to extended warranty coverage and service level upgrades is generally recognized over the extended life of the contract, andwhich reasonably approximates the period over which such services will be provided. The related extended warranty and service level upgrade costs are expensed as incurred.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

Changes in the product warranty accrual were as follows (in thousands):
Nine Months EndedNine Months Ended
September 30,
2017		 October 1,
2016		October 2,
2021		September 26,
2020
Warranty accrual, beginning of period$910
 $1,222
Warranty accrual, beginning of period$2,740 $3,395 
Accrual for warranties issued712
 722
Accrual for warranties issued3,442 428 
Changes to pre-existing warranties (including changes in estimates)(116) 99
Changes in pre-existing warranties (including changes in estimates)Changes in pre-existing warranties (including changes in estimates)(2,347)(97)
Settlements made(486) (751)Settlements made(891)(883)
Warranty accrual, end of period$1,020
 $1,292
Warranty accrual, end of period$2,944 $2,843 
Litigation Costs and Contingencies
The Company records a charge equal to at least the minimum estimated liability for a loss contingency or litigation settlement when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements, and (ii) the range of loss can be reasonably estimated. The determination of whether a loss contingency or litigation settlement is probable or reasonably possible involves a significant amount of management judgment, as does the estimation of the range of loss given the nature of contingencies. Liabilities related to litigation settlements with multiple elements are recorded based on the fair value of each element. Legal and other litigation related expenses are recognized as the services are provided. The Company records insurance and other indemnity recoveries for litigation expenses when both of the following conditions are met: (a) the recovery is probable, and (b) collectability is reasonably assured. Insurance recoveries are only recorded to the extent the litigation costs to which they relate have been incurred and recognized in the financial statements.
Comprehensive Income
Authoritative accounting guidance establishes requirements for reporting and disclosure of comprehensive income and its components. Comprehensive income includes foreign currency translation adjustments and any related tax benefits that have been excluded from net income and reflected in stockholders’ equity.
The change in accumulated other comprehensive loss was as follows (in thousands):
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MASIMO CORPORATION
 Nine Months Ended 
 September 30, 2017
Accumulated other comprehensive loss, beginning of period$(7,027)
Unrealized gains from foreign currency translation4,270
Accumulated other comprehensive loss, end of period$(2,757)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Net Income Per Share
A computation of basic and diluted net income per share is as follows (in thousands, except per share data):
Three Months EndedNine Months Ended
October 2,
2021		September 26,
2020		October 2,
2021		September 26,
2020
Net income$57,771 $49,405 $161,389 $169,633 
Basic net income per share:
Weighted-average shares outstanding - basic55,143 54,997 55,125 54,543 
Net income per basic share$1.05 $0.90 $2.93 $3.11 
Diluted net income per share:
Weighted-average shares outstanding - basic55,143 54,997 55,125 54,543 
Diluted share equivalent: stock options, RSUs and PSUs2,521 3,283 2,526 3,490 
Weighted-average shares outstanding - diluted57,664 58,280 57,651 58,033 
Net income per diluted share$1.00 $0.85 $2.80 $2.92 
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 isis 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 share units (PSUs). For each of the three and nine months ended October 2, 2021 and September 30, 2017,26, 2020, weighted options to purchase 0.6 million and 0.20.1 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 the three and nine months ended October 1, 2016,2, 2021 and September 26, 2020, weighted options to purchase less than 0.10.2 million and 1.40.3 million shares of common stock, respectively, were outstanding but were not included in the computation of diluted net incomeincome per share because the effect of including such shares would have been antidilutive in the applicable period. For the three and nine months ended September 30, 2017 and October 1, 2016, certainCertain RSUs wereare 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 each of October 2, 2021 and September 30, 2017 and October 1, 2016,26, 2020, 2.7 million weighted averageweighted-average shares related to such RSUs have been excluded from the calculation of potential shares.

shares for each of the three and nine month periods then ended.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

A reconciliation of basic and diluted net income per share is as follows (in thousands, except per share amounts):
 Three Months Ended Nine Months Ended
 September 30,
2017		 October 1,
2016		 September 30,
2017		 October 1,
2016
Net income$39,235
 $27,773
 $131,248
 $85,373
Basic net income per share:       
Weighted-average shares outstanding - basic52,079
 49,477
 51,469
 49,386
Net income per basic share$0.75
 $0.56
 $2.55
 $1.73
Diluted net income per share:       
Weighted-average shares outstanding - basic52,079
 49,477
 51,469
 49,386
Diluted share equivalent: stock options and RSUs4,084
 4,088
 4,498
 3,451
Weighted-average shares outstanding - diluted56,163
 53,565
 55,967
 52,837
Net income per diluted share$0.70
 $0.52
 $2.35
 $1.62
Supplemental Cash Flow Information
Supplemental cash flow information includes the following (in thousands):
Nine Months Ended
October 2,
2021		September 26,
2020
Cash paid during the year for:
Interest expense$202 $194 
Income taxes36,898 35,961 
Operating lease liabilities5,567 4,699 
Non-cash operating activities:
ROU assets obtained in exchange for lease liabilities$4,917 $9,900 
Non-cash investing activities:
Unpaid purchases of property and equipment$3,182 $3,988 
       Settlement of promissory note receivable in connection with business combination— 5,100 
Unpaid strategic investments3,400 — 
Deposit release to acquire noncontrolling interest(1)
3,374 — 
Non-cash financing activities:
       Unsettled common stock proceeds from option exercises$112 $27 
       Fair value of common stock received for payment of stock option exercise price— 220 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$652,354 $669,056 
Restricted cash1,581 3,384 
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows$653,935 $672,440 
 Nine Months Ended
 September 30,
2017		 October 1,
2016
Cash paid during the year for:   
Interest (net of amounts capitalized)$432
 $2,603
Income taxes86,759
 25,753
Noncash investing and financing activities:   
Unpaid purchases of property, plant and equipment$3,349
 $1,232
       Unsettled common stock proceeds from option exercises113
 476
       Unsettled stock repurchases2,653
 —
______________
Seasonality(1)     See Note 5.
Segment Information
The healthcareCompany uses the “management approach” in determining reportable business insegments. The management approach designates the United Statesinternal organization used by management for making operating decisions and overseas is subject to quarterly fluctuations in hospital and other alternative care admissions. Historically,assessing performance as the Company has typically experienced higher product revenues during the traditional “flu season” that often increases hospital and acute care facility admissions insource for determining the Company’s firstreportable segments. Based on this assessment, management has determined it operates in one reportable business segment, which is comprised of patient monitoring and fourth fiscal quarters. At the same time, the Company has frequently experienced a sequential decline in product revenues in its second and/or third fiscal quarters, primarily due to the summer vacation season during which the flu season has moderated and people tend to avoid and/or delay elective procedures. Because the Company’s non-sales variable operating expenses often do not fluctuate in the same manner as its quarterly product sales, its quarterly operating income may fluctuate disproportionately to its quarterly revenue.related products.





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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Recently IssuedAdopted Accounting Pronouncements
In September 2017,December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-13, Revenue Recognition2019-12, Income Taxes (Topic 605), Revenue740): Simplifying the Accounting for Income Taxes (ASU 2019-12). The standard simplifies the accounting for income taxes by removing exceptions to the incremental approach for intraperiod tax allocation when there is a loss from Contracts with Customers (Topic 606), Leases (Topic 840),continuing operations and Leases (Topic 842). The newincome 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 among other things, provides additional implementation guidance with respect to Accounting Standards Codification (ASC) Topic 606requires that an entity recognize a franchise tax that is partially based on income as an income-based tax and ASC Topic 842. ASU 2017-13 is effectiveaccount for annual and interim fiscal reporting periods beginning after December 15, 2017. The Company is currently evaluatingany incremental amount incurred as a non-income-based tax, evaluate when a step up in the impacttax basis of goodwill should be considered part of the newbusiness 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 specifies 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. The Company’s adoption of this standard, but doeseffective as of January 3, 2021, did not expect it to have a material impact on its implementation strategies or its consolidated financial statements upon adoption.statements.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

In May 2017,October 2020, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic718)2020-10, Codification Improvements. The standard provides updates for technical corrections, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements across various areas of accounting within GAAP. ASU No. 2020-10 is effective after December 15, 2020 on a retrospective basis. Early adoption is permitted. The Company’s adoption of this standard, effective as of January 3, 2021, did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): ScopeFacilitation of Modification Accounting (ASU 2017-09)the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04).The new standard is intendedprovides temporary optional expedients and exceptions to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in ASC Topic 718GAAP on contract modifications and hedge accounting to a changeease the financial reporting burdens related to the terms 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 conditions of a share-based payment award. The amendments in this new standard provide guidance about which changes toreclassify 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 terms or conditions of a share-based payment award require an entityCompany may elect to apply “modification accounting”this standard prospectively through December 31, 2022. The relief is temporary and generally cannot be applied to such changes. ASU 2017-09 will become effective for all entities for annual and interim periods beginningcontract modifications that occur after December 15, 2017, and early adoption is permitted.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 January 2017,2021, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (ASU 2017-04)2021-01, Reference Rate Reform (Topic 848): Scope (ASU 2021-01). The new standard is intended to eliminateclarified the requirement to calculatescope and application of the implied fair value of goodwill to measure a goodwill impairment charge. Instead, a goodwill impairment charge will be based on the excess of a reporting unit’s carrying amount over its fair value.original guidance. ASU 2017-04No. 2021-01 is effective for annualas of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim fiscal reporting periods beginning after December 15, 2019 and early adoptionperiod that includes or is permitted.subsequent to March 12, 2020. 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 January 2017,May 2021, the FASB issued ASU No. 2017-01, Business Combinations (ASU 2017-01)2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (ASU 2021-04). The new standard is intended to clarify the definitionaddresses modification or an exchange of a business and requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the set of transferred assets and activitiesfreestanding equity-classified written call option that is not considered to bewithin the scope of another topic. ASU No. 2021-04 is effective after December 15, 2021 on a business under ASU 2017-01. ASU 2017-01 also requires a business to include at least one substantive process and narrows the definition of business outputs. The new standard will be effective on January 1, 2018, and earlyprospective basis, including interim periods within those fiscal years. Early adoption is permitted, with prospective application to any business development transaction.including adoption in an interim period and should be applied as of the beginning of the fiscal year that includes the 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.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). The new standard is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 is effective for annual and interim fiscal reporting periods beginning after December 15, 2017, and early adoption is permitted. 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 October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory (ASU 2016-16). The new standard eliminates the exception that allowed the income tax consequences of an intra-entity transfer of assets other than inventory to be deferred until the transferred asset was sold to a third party or otherwise recovered through use, and now requires recognition of such income tax consequences at the time the non-inventory asset is transferred. ASU 2016-16 is effective for annual and interim fiscal reporting periods beginning after December 15, 2017, and early adoption is permitted. 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 August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). The new standard amended the existing accounting standards for the Statement of Cash Flows and provides guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual and interim fiscal reporting periods beginning after December 15, 2019, and early adoption is permitted. 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 June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The new standard 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 would recognize 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 would consider relevant information about past events, current conditions, and reasonable and supportable forecasts. ASU 2016-13 is effective for annual and interim fiscal reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. 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.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

In February 2016,July 2021, the FASB issued ASU No. 2016-02,2021-05, Leases (Topic 842)(ASU 2016-02), Lessors - Certain Leases with Variable Lease Payments (ASU 2021-05). TheThis new standard requires lesseesamends the original ASU No. 2016-02 lease standard by requiring lessors to recognize mostclassify leases on their balance sheets but continue to recognize lease expenses in their income statement in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to makeas operating leases if they have variable lease payments that do not depend on an index or rate and a right-of-use asset for the right to use the underlying asset for thewould have selling losses at lease term. Expense related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement.commencement if they were classified as sales-type. ASU 2016-022021-05 is effective for annual and interim fiscal reporting periods beginning after December 15, 2018,2021, and early applicationfor interim periods within those years, and may be adopted either prospectively or on a retrospective basis for leases that commenced or were modified after the date of initial adoption of ASC 842. Early adoption is permitted.permitted. The Company is currently evaluating the expected impact of this standard on its consolidated financial statements upon adoption, but anticipates that, among other things, the required recognition of a lease liability and related right-of-use asset will significantly increase both the assets and liabilities recognized and reported on its balance sheet. In addition, the Company anticipates that the classification of certain leases for which the Company is the lessor maywill change from sales-type leases to operating leases under thethis new guidance,standard, resulting in the immediateinitial deferral and subsequent expensing of equipment costs over time under certain costsleases that are currently deferred and expensedrecognized immediately upon lease commencement. Similarly, any revenue that is currently recognized for these leases on the date of lease commencement will now be recognized over the lifeterm of the lease.operating lease upon adoption of this new standard. The Company currently expects to complete its assessment of the full financial impact of thethis new lease accounting guidance during the next fifteen months.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, (ASU 2016-01). The new standard requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value in net income and (ii) changes in fair value due to instrument-specific credit risk be recognized separately in other comprehensive income when the fair value option has been elected for financial liabilities. ASU 2016-01 is effective for annual and interim fiscal reporting periods beginning after December 15, 2017. 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 May 2014, the FASB issued ASU No. 2014-09, Revenue (Topic 606): Revenue from Contracts with Customers (ASU 2014-09). The new standard provides a single, principles-based five-step model to be applied to all contracts with customers while enhancing disclosures about revenue, providing additional guidance for transactions that were not previously addressed comprehensively and improving guidance for multiple-element arrangements. ASU 2014-09 will replace most existing revenue recognition guidance under GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method upon adoption. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which amended ASU 2014-09, providing for a one year deferral period for the implementation of ASU 2014-09. ASU 2014-09 will now be effective for annual and interim periods beginning on or after December 15, 2017. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations under FASB ASC Topic 606, which provides guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, which amended ASU 2014-09 by providing clarity in identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients, which further amended ASU 2014-09 by providing additional clarity in recognizing revenue from contracts that have been modified prior to the transition period to the new standard, as well as providing additional disclosure requirements for businesses and other organizations that make the transition to the new standard by adjusting amounts from prior reporting periods via retrospective application. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (ASU 2016-20). ASU 2016-20affects narrow aspects of ASC Topic 606, including contract modifications, contract costs, and the balance sheet classification of items as contract assets versus receivables. The Company is continuing to evaluate the expected impact of the new revenue guidance contained in ASC Topic 606 on its consolidated financial statements and anticipates, among other things, that the adoption of such standard will result in the acceleration of certain revenue from product sales to distributors that is currently deferred under the “sell-through” method, as well as the capitalization and deferral of certain contract-related costs that are currently expensed when incurred. The Company is also further evaluating the impact of the new revenue guidance on associated processes, systems and internal controls over financial reporting. The Company currently expects to complete its assessment of the impact of the new revenue recognition guidance, including the method of adoption, during the next three months and to adopt the guidance when it becomes effective for the Company on December 31, 2017 (fiscal year 2018).six months.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

3. Variable Interest Entity (VIE)Related Party Transactions
The Company follows authoritative guidance for the consolidation of a VIE, which requires an enterprise to determine whether its variable interest gives it a controlling financial interest in a VIE. Determination about whether an enterprise should consolidate a VIE is required to be evaluated continuously as changes to existing relationships or future transactions may result in consolidating or deconsolidating the VIE.
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.Cercacor Laboratories, Inc. (Cercacor). The Company is a party to a the following agreements with Cercacor:
•Cross-Licensing Agreement with- The Company and Cercacor which was most recently amended and restated effective January 1, 2007 (the Cross-Licensingare parties to a cross-licensing agreement (Cross-Licensing Agreement), thatwhich governs each party’s rights to certain intellectual property held by the two companies. The Company is also a partysubject to various other agreements with Cercacor.
As a result of changes in the capital structure of Cercacor, as well as certain of its contractual relationships with the Company, the Company completed a re-evaluationannual minimum aggregate royalty obligations for use of the authoritative consolidation guidance duringrainbow® licensed technology. The current annual minimum royalty obligation is $5.0 million. Aggregate liabilities payable to Cercacor arising under the first quarter of 2016Cross-Licensing Agreement were $2.9 million and determined that although$3.5 million for the three months ended October 2, 2021 and September 26, 2020, respectively. Aggregate liabilities payable to Cercacor remained a VIE,arising under the Company was no longer its primary beneficiary as it could no longer be deemed to haveCross-Licensing Agreement were $9.6 million and $9.7 million for the power to direct the activities of Cercacor that most significantly impact Cercacor’s economic performancenine months ended October 2, 2021 and had no obligation to absorb Cercacor’s losses pursuant to the Company’s on-going contractual relationships with Cercacor. Based on such determination, the Company discontinued consolidating Cercacor within its consolidated financial statements effective as of January 3, 2016. However, Cercacor continues to be a related party following its deconsolidation. The Company recognized a gain of $0.3 million upon such deconsolidation, which has been reported within non-operating income in the accompanying condensed consolidated statement of operations. See Note 4 to these condensed consolidated financial statements for a description of the Company’s continuing business relationships with Cercacor.September 26, 2020, respectively.
4. Related Party Transactions
The Company’s Chairman and CEO is also the Chairman and CEO of Cercacor. The Company is a party to the following agreements with Cercacor:
•
Cross-Licensing Agreement - The Company and Cercacor are parties to the 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. Actual aggregate royalty liabilities to Cercacor under the license were $2.1 million and $1.6 million for the three months ended September 30, 2017 and October 1, 2016, respectively. Actual aggregate royalty liabilities to Cercacor under the license were $5.6 million and $4.7 million for the nine months ended September 30, 2017 and October 1, 2016, 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 less than $0.1 million and $0.1 million for each of the three and nine months ended October 2, 2021 and September 30, 201726, 2020. Amounts charged by the Company pursuant to the G&A Services Agreement were $0.2 million for each of the nine months ended October 2, 2021 and October 1, 2016, respectively.
September 26, 2020.
•Lease and Sublease AgreementAgreements - Effective December 2019, the Company entered into a lease agreement with Cercacor for approximately 34,000 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 expiresexpired on November 30,December 15, 2019. The Company recognized less than $0.1 million andapproximately $0.3 million in subleaseof lease income for each of the three and nine months ended October 2, 2021 and September 30, 2017, respectively.26, 2020. The Company recognized $0.1approximately $0.9 million and $0.2$0.8 million in subleaseof lease income for the three and nine months ended October 1, 2016,2, 2021 and September 26, 2020, respectively.
Net amounts due to Cercacor at each of September 30, 2017October 2, 2021 and December 31, 2016January 2, 2021 were $1.0approximately $3.3 million and $0.4$3.6 million, 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. TheIn addition, the Company’s formerExecutive Vice President (EVP), Chief Financial Officer (CFO) is also a Directorserves 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. During the three months ended October 2, 2021 and September 26, 2020, the Company made no cash contributions to the Masimo Foundation. During the nine months ended October 2, 2021, the Company made no contributions to the Masimo Foundation. During the nine months ended September 26, 2020, the Company made cash contributions of approximately $1.5 million to the Masimo Foundation.

During the three and nine months ended October 2, 2021 and September 26, 2020, the Company made various in-kind contributions to the Masimo Foundation, mainly in the form of donated administrative services.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

The Company’s CEO is the Chairmanalso a co-founder and a member of both the Patient Safety Movement Foundation (PSMF), a non-profit organization that was founded in 2013 to work with hospitals, medical technology companies and patient advocates to unite the healthcare ecosystem and eliminate the more than 200,000 U.S. preventable hospital deaths that occur every year by 2020, and the Patient Safety Movement Coalition (PSMC), a not-for-profit social welfare organization that was founded in 2013 to promote patient safety legislation. The Company’s former CFO serves as the Treasurer and Secretary of PSMF, as well as the Secretary of PSMC.
The Company’s CEO also serves on the board of directors of Atheer Labs, which is workingLike 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 three and nine months ended October 2, 2021, the Company onincurred no marketing expenses to LMMV under the marketing service agreement. During the three and nine months ended September 26, 2020, the Company incurred $0.2 million and $3.5 million, respectively, in marketing expenses to LMMV under the marketing service agreement. At October 2, 2021 and January 2, 2021, there was no amount due to LMMV for services rendered.
The Company entered into a software license and professional services agreement with Like Minded Labs (LML), a subsidiary of LMMV, during the second quarter of 2021. Pursuant to the software license agreement, LML granted the Company a perpetual, non-exclusive and fully paid-up right and license to integrate LML’s software into the Company’s products in exchange for a $3.0 million one-time license fee. Pursuant to the professional services agreement, LML will provide professional services to the Company, including the development of next generation Root® applications,custom software intended to support the integration of the licensed software into the Company’s products, as well as future support services upon the Company’s acceptance of deliverables.
In July 2021, the Company entered into a patent purchase and option agreement with Vantrix Corporation (Vantrix), an acquiree of LML, for certain patents for $0.5 million, and the boardright to purchase two pools of directorsadditional patents from Vantrix for an exercise fee of Children’s Hospital of Orange Countyup to $1.1 million. The agreements with LML and CHOC Children’s at Mission Hospital, two non-profit hospitals devoted exclusivelyVantrix include sublicensing provisions whereby the software and patents are licensed back to caringLML or Vantrix, respectively, for children, both of which are also customersfurther advancement of the Company.technologies.
In August 2017, theThe Company entered intomaintains 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 sharingtime-sharing basis. The Company charges the Company’s CEO for personal use based on agreed upon reimbursement rates. For each of the three and nine months ended October 2, 2021 and September 30, 2017,26, 2020, the Company charged the Company’s CEO less than $0.1 million related to such reimbursements.disbursements.
5.4. Inventories
Inventories consist of the following (in thousands):
October 2,
2021		January 2,
2021
Raw materials$121,593 $133,098 
Work-in-process14,383 15,985 
Finished goods66,352 66,869 
     Total inventories$202,328 $215,952 
19
 September 30,
2017		 December 31,
2016
Raw materials$42,023
 $32,647
Work-in-process8,217
 7,701
Finished goods48,838
 32,194
     Total inventories$99,078
 $72,542
6. Other Current Assets
Other current assets consist of the following (in thousands):
 September 30,
2017		 December 31,
2016
Prepaid expenses$15,113
 $13,051
Prepaid income taxes9,622
 981
Due from foreign agent8,571
 —
Royalties receivable7,800
 7,500
Employee loans and advances338
 305
Due from related party23
 77
Other current assets5,377
 5,134
     Total other current assets$46,844
 $27,048
The Company is currently evaluating the collectability of certain amounts that have been paid by a foreign government customer to the Company’s appointed foreign agent in connection with a foreign government tender, but which have not been timely remitted by such agent to the Company in accordance with the agency agreement. The Company is actively working with such agent to arrange for payment, possibly under an extended payment plan, as well as exploring other potential remedies for recovery of this receivable. As of September 30, 2017, the net amount due the Company from such agent was approximately $8.6 million. The Company is currently unable to determine whether any loss will ultimately occur in connection with the resolution of this matter and has not accrued any loss in the accompanying condensed consolidated financial statements based on its current expectations regarding the collectability of the receivable.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

7. Property and Equipment
Property and equipment, net, consists of the following (in thousands):
 September 30,
2017		 December 31,
2016
Building and building improvements$86,023
 $85,966
Machinery and equipment45,718
 41,683
Aircraft and vehicles25,329
 45
Land23,762
 23,762
Leasehold improvements15,015
 8,289
Computer equipment14,440
 13,549
Tooling13,667
 12,895
Furniture and office equipment10,821
 9,669
Demonstration units489
 448
Construction-in-progress8,434
 7,923
     Total property and equipment243,698
 204,229
Accumulated depreciation and amortization(79,119) (68,233)
     Property and equipment, net$164,579
 $135,996
In August 2017, the Company completed its purchase of a corporate aircraft for $25.3 million. For the nine months ended September 30, 2017 and October 1, 2016, depreciation expense of property and equipment was $10.8 million and $9.5 million, respectively.
8. Intangible5. Other Current Assets
IntangibleOther current assets net, consist of the following (in thousands):
October 2,
2021		January 2,
2021
Prepaid expenses$30,351 $30,235 
Lease receivable, current26,685 23,206 
Prepaid income taxes15,501 14,782 
Indirect taxes receivable10,715 14,545 
Prepaid rebates and royalties, current3,066 3,081 
Restricted cash(1)
1,496 3,397 
Customer notes receivable1,359 2,283 
Deposit to acquire noncontrolling interest(2)
— 3,374 
Other current assets2,599 7,513 
     Total other current assets$91,772 $102,416 
______________
(1)     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.
(2)     During the year ended January 2, 2021, 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. During the first quarter of 2021, the Company acquired the remaining noncontrolling interest. The impact of the noncontrolling interest is immaterial in all periods presented.
6. Lease Receivable
 September 30,
2017		 December 31,
2016
Patents$20,715
 $19,950
Customer relationships7,669
 7,669
Licenses7,500
 7,500
Acquired technology5,580
 5,580
Trademarks3,990
 3,777
Capitalized software development costs2,606
 2,539
Other3,681
 3,674
     Total intangible assets51,741
 50,689
Accumulated amortization(24,252) (21,313)
     Intangible assets, net$27,489
 $29,376
Total amortization expenseThe Company 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 three months ended October 2, 2021 and September 26, 2020 was approximately $12.0 million and $13.0 million, respectively, and is included within product revenue in the accompanying condensed consolidated statements of operations. Lease revenue related to both operating-type and sales-type leases for the nine months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 was $3.7approximately $40.0 million and $2.8$31.0 million, respectively. Allrespectively, and is included within product revenue in the accompanying condensed consolidated statements of these intangible assets have a 10 year weighted average amortization period.operations. Costs related to embedded leases within the Company’s deferred equipment agreements are included in cost of goods sold in the accompanying condensed consolidated statements of operations.

Lease receivable consists of the following (in thousands):

October 2,
2021		January 2,
2021
Lease receivable$93,879 $81,074 
Allowance for credit loss(239)(202)
     Lease receivable, net93,640 80,872 
Less: current portion of lease receivable(26,685)(23,206)
     Lease receivable, noncurrent$66,955 $57,666 
18
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

As of October 2, 2021, estimated future maturities of customer sales-type lease receivables for each of the following fiscal years are as follows (in thousands):
Fiscal yearAmount
2021 (balance of year)$6,888 
202225,995 
202321,371 
202417,349 
202511,535 
Thereafter10,502 
    Total$93,640 
Estimated future operating lease payments expected to be received from customers under deferred equipment agreements are not material as of October 2, 2021.
7. Deferred Costs and Other Contract Assets
Deferred costs and other contract assets consist of the following (in thousands):
October 2,
2021		January 2,
2021
Deferred commissions$9,976 $7,477 
Prepaid contract allowances6,820 7,336 
Unbilled contract receivables4,317 3,925 
Equipment leased to customers, net1,486 1,338 
     Deferred costs and other contract assets$22,599 $20,076 
8. Property and Equipment, net
Property and equipment, net, consists of the following (in thousands):
October 2,
2021		January 2,
2021
Building and building improvements$141,990 $122,310 
Machinery, equipment and tooling101,833 90,843 
Land56,938 57,151 
Transportation, vehicles and other33,114 33,175 
Computer equipment and software32,131 24,693 
Leasehold improvements20,885 19,295 
Furniture and office equipment14,186 13,567 
Demonstration units1,049 1,024 
Construction-in-progress (CIP)23,955 44,589 
     Total property and equipment426,081 406,647 
Accumulated depreciation(151,152)(134,136)
     Property and equipment, net$274,929 $272,511 
For the three months ended October 2, 2021 and September 26, 2020, depreciation expense of property and equipment was $6.5 million and $5.8 million, respectively. For the nine months ended October 2, 2021 and September 26, 2020, depreciation expense of property and equipment was $18.8 million and $16.0 million, respectively.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
The balance in CIP at October 2, 2021 related primarily to the capitalized implementation costs related to a new enterprise resource planning software system and costs related to equipment and other facility improvements, the underlying assets for which have not been completed or placed into service. The decrease in CIP balance from January 2, 2021 primarily relates to the Company’s European headquarters building in Switzerland being placed into service along with a phase of the new enterprise resource planning software system for certain subsidiaries being placed into service.
The balance in CIP at January 2, 2021 related primarily to acquisition and improvement costs for a portion of the Company’s European headquarters 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 had not been placed into service.
9. Intangible Assets, net
Intangible assets, net, consist of the following (in thousands):
October 2,
2021		January 2,
2021
Patents$30,528 $26,875 
Acquired technologies28,567 29,039 
Customer relationships24,636 24,666 
Trademarks12,080 11,708 
Licenses8,108 5,108 
Licenses-related party7,500 7,500 
Other6,257 5,693 
     Total intangible assets117,676 110,589 
Accumulated amortization(43,587)(36,666)
     Intangible assets, net$74,089 $73,923 
Intangible assets have a weighted-average amortization period of twelve years. Total amortization expense for the three months ended October 2, 2021 and September 26, 2020 was $2.7 million and $1.6 million, respectively. Total amortization expense for the nine months ended October 2, 2021 and September 26, 2020 was $7.6 million and $5.2 million, respectively.
Total renewal costs for patents and trademarks for the three months ended October 2, 2021 and September 26, 2020 were $0.9 million and $0.6 million, respectively. Total renewal costs for patents and trademarks for the nine months ended October 2, 2021 and September 26, 2020 were $1.3 million and $1.2 million, respectively. As of October 2, 2021, the weighted-average number of years until the next renewal was two years for patents and four years for trademarks.
Estimated amortization expense for futureeach of the next fiscal years is as follows (in thousands):
Fiscal yearAmount
2021 (balance of year)$9,211 
20228,377 
20237,964 
20247,352 
20256,274 
Thereafter34,911 
     Total$74,089 
22
Fiscal yearAmount
2017 (balance of year)$5,343
20184,769
20193,710
20203,362
20212,330
Thereafter7,975
     Total$27,489
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MASIMO CORPORATION
9. AccruedNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
10. Goodwill
Changes in goodwill were as follows (in thousands):
Nine Months Ended
October 2,
2021
Goodwill, beginning of period$103,206 
Foreign currency translation adjustment(1,964)
Goodwill, end of period$101,242 
11. Lessee ROU Assets and Lease Liabilities
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 January 2032. In addition, the Company leases equipment in the U.S. and Europe, and these leases are classified as operating leases and expire at various dates through August 2026. 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 October 2, 2021, the weighted-average discount rate used by the Company for all operating leases was approximately 2.6%.
The balance sheet classifications for amounts related to the Company’s operating leases for which it is the lessee are as follows (in thousands):
Balance sheet classificationOctober 2,
2021		January 2,
2021
Lessee ROU assetsOther non-current assets$31,561 $32,324 
Lessee current lease liabilitiesOther current liabilities6,147 5,975 
Lessee non-current lease liabilitiesOther non-current liabilities27,471 28,373 
     Total operating lease liabilities$33,618 $34,348 
As of October 2, 2021 and January 2, 2021, accumulated amortization for lessee ROU assets was $13.0 million and $9.2 million, respectively. The weighted-average remaining lease term for the Company’s operating leases was 6.7 years as of October 2, 2021.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
As of October 2, 2021, estimated future operating lease payments for each of the following fiscal years were as follows (in thousands):
Fiscal yearAmount
2021 (balance of year)$1,509 
20227,093 
20236,649 
20245,123 
20253,998 
Thereafter(1)
12,317 
   Total36,689 
   Imputed interest(3,071)
   Present value$33,618 
______________
(1)     Includes optional renewal period for certain leases.
During the three months ended October 2, 2021 and September 26, 2020, operating lease costs were approximately $2.1 million and $1.8 million, respectively. During the nine months ended October 2, 2021 and September 26, 2020, operating lease costs were approximately $6.2 million and $5.2 million, respectively.
12. Other Non-Current Assets
Other non-current assets consist of the following (in thousands):
October 2,
2021		January 2,
2021
Lessee ROU assets, net$31,561 $32,324 
Strategic investments13,928 8,002 
Prepaid deposits and other4,397 4,316 
Total other non-current assets$49,886 $44,642 
13. Deferred Revenue and Other Contract Liabilities, Current
Deferred revenue and other contract liabilities consist of the following (in thousands):
October 2,
2021		January 2,
2021
Deferred revenue$34,392 $33,221 
Accrued rebates and allowances11,322 12,127 
Accrued customer reimbursements4,744 3,829 
     Total deferred revenue and other contract liabilities50,458 49,177 
Less: Non-current portion of deferred revenue(3,817)(4,242)
     Deferred revenue and other contract liabilities - current$46,641 $44,935 
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.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Changes in deferred revenue were as follows (in thousands):
Nine Months Ended
October 2,
2021
Deferred revenue, beginning of the period$33,221 
  Revenue deferred during the period23,425 
  Recognition of revenue deferred in prior periods(22,254)
     Deferred revenue, end of the period$34,392 
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.
As of October 2, 2021, the Company had approximately $987.3 million of Unrecognized Contract Revenue related to executed contracts with an original duration of one year or more. The Company expects to recognize approximately $272.7 million of this amount as revenue within the next twelve months and the remaining balance thereafter.
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.
14. Other Current Liabilities
Accrued and otherOther current liabilities consist of the following (in thousands):
October 2,
2021		January 2,
2021
Accrued indirect taxes payable$12,081 $14,365 
Accrued expenses12,046 6,794 
Lessee lease liabilities, current6,147 5,975 
Income tax payable4,443 5,910 
Accrued legal fees3,947 4,058 
Related party payables3,446 3,655 
Accrued warranty2,944 2,740 
Accrued property taxes1,686 1,682 
Accrued donations1,307 495 
Other current liabilities3,071 4,096 
Noncontrolling interest(1)
— 3,469 
     Total other current liabilities$51,118 $53,239 
______________
(1)During the year ended January 2, 2021, 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 noncontrolling interest shares were mandatorily redeemable. During the first quarter of 2021, the Company acquired the remaining noncontrolling interest. The impact of the noncontrolling interest is immaterial in all periods presented.
25
 September 30,
2017		 December 31,
2016
Contract related payables$14,365
 $10,673
Income taxes payable5,179
 76,316
Accrued taxes4,990
 5,135
Accrued customer rebates, fees and reimbursements4,101
 3,893
Accrued stock repurchases2,653
 —
Accrued legal fees1,263
 1,362
Accrued warranty1,220
 910
Related party payable1,028
 525
Accrued donations634
 503
Other4,756
 5,337
     Total accrued and other current liabilities$40,189
 $104,654
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MASIMO CORPORATION
10. RestatedNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
15. Credit Facility
In January 2016, theThe Company entered into an Amended and Restated Credit Agreement (Restated Credit Facility)currently maintains a credit facility with JPMorgan Chase Bank, N.A., as Administrative Agent and a Lender, Bank of America, N.A., as Syndication Agent and a Lender, Citibank, N.A., as Documentation Agent and a Lender, and various other Lenders (collectively, the Lenders). The Restated Credit Facility currentlylenders that provides for up to $250.0$150.0 million inof unsecured borrowings, in multiple currencies, with an option, subject to certain conditions, for the Company to increase the aggregate borrowing capacity to up to $350.0$550.0 million in the future.future with such 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 Restated Credit Facilitycredit facility will become due and payable on January 8, 2021.
Borrowings underDecember 17, 2023. Proceeds from the Restated Credit Facility will be deemed, at the Company’s election, either: (i) an Alternate Base Rate (ABR) Loan, which bears interest at the ABR plus a spread (ABR Spread) based upon a Company leverage ratio, or (ii) a Eurodollar Loan, which bears interest at the Adjusted LIBO Rate (as defined below) plus a spread (Eurodollar Spread) based upon a Company leverage ratio. The ABR Spread is 0.125% to 1.00% and the Eurodollar Spread is 1.125% to 2.0%. Subject to certain conditions, the Company may also request swingline loans from time to time (Swingline Loans) that bear interest similar to an ABR Loan.
The ABR is determined by taking the greatest of (i) the prime rate, (ii) the federal funds effective rate plus 0.50%, and (iii) the one-month Adjusted LIBO Rate plus 1.0%. The Adjusted LIBO Rate is equal to LIBOR for the applicable interest period multiplied by the statutory reserve rate for such period.
The Company is obligated under the Restated Credit Facility to pay a fee ranging from 0.175% to 0.300% per annum, based upon a Company leverage ratio, with respect to any unused portion of the line of credit. This fee and interest on any ABR Loancredit facility are due and payable quarterly in arrears. Interest on any Eurodollar Loan is due and payable at the end of the applicable interest period (or at each three month interval in the case of loans with interest periods greater than three months).

19
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

Interest on any Swingline Loan is due and payable on the date that the Swingline Loan is requiredexpected to be repaid. The Company may prepay the loansused for general corporate, capital investment and terminate the commitments in whole at any time, without premium or penalty, subject to reimbursement of certain costs in the case of Eurodollar Loans.
Pursuant to the terms of the Restated Credit Facility, the Company is subject to certain covenants, including financial covenants related to a leverage ratio and an interest charge coverage ratio, and other customary negative covenants. The Company’s obligations under the Restated Credit Facility are secured by substantially all of the Company’s personal property, including certain equity interests in U.S. domestic and first-tier foreign subsidiaries.
working capital needs. As of September 30, 2017,October 2, 2021 and January 2, 2021, the Restated Credit Facilitycredit facility had no outstanding draws and $2.4 million and $1.7 million of outstanding standby letters of credit, totaling $0.3 million. The Company incurred interest expense related to the Restated Credit Facility of $0.5 million and $3.0 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. The Company was in compliance with all covenants under the Restated Credit Facilitycredit facility as of October 2, 2021 and January 2, 2021.
For each of the three months ended October 2, 2021 and September 30, 2017.26, 2020, the Company incurred total interest expense of $0.1 million under the credit facility. For each of the nine months ended October 2, 2021 and September 26, 2020, the Company incurred total interest expense of $0.2 million under the credit facility.
11.16. Other Non-Current Liabilities
Other non-current liabilities consist of the following (in thousands):
 September 30,
2017		 December 31,
2016
Unrecognized tax benefit$14,078
 $13,442
Deferred rent, long-term1,350
 558
Deferred tax liability, long-term339
 340
Other292
 247
     Total other non-current liabilities$16,059
 $14,587
October 2,
2021		January 2,
2021
Lessee non-current lease liabilities$27,471 $28,373 
Income tax payable, non-current16,980 19,245 
Unrecognized tax benefits15,352 11,777 
Deferred tax liabilities6,063 6,247 
Other4,511 5,434 
     Total other non-current liabilities$70,377 $71,076 
Unrecognized tax benefit relatesbenefits 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 1620 to these condensed consolidated financial statements for further details.
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12.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
17. Stock Repurchase Program
In September 2015,October 2021, the Company’s Board of Directors (Board) authorizedapproved a stock repurchase program, wherebyauthorizing the Company mayto purchase up to 5.03.0 million shares of its common stock over a period of up to three years (2015(2021 Repurchase Program). The 2015Company expects to fund the 2021 Repurchase Program maythrough its available cash, cash expected to be generated from future operations, the credit facility and other potential sources of capital. The 2021 Repurchase Program can be carried out at the discretion of a committee comprised of the Company’s Chief Executive OfficerCEO and Chief Financial OfficerCFO through open market purchases, one or more Rule 10b5-1 trading plans, block trades and privately negotiated transactions. The total remaining
In July 2018, the Company’s Board approved a stock repurchase program, authorizing the Company to purchase up to 5.0 million additional shares authorized for repurchase underof its common stock over a period of up to three years (2018 Repurchase Program). During the 2015third quarter of 2021, the 2018 Repurchase Program approximated 2.4 million shares as of September 30, 2017. The Company expects to fund the 2015 Repurchase Program through its available cash, future cash from operations, funds available under the Restated Credit Facility or other potential sources of capital.expired.
The following table provides a summary of the Company’s stock repurchase activities during the three and nine months ended September 30, 2017 and October 1, 2016 (in thousands, except per share amounts):
Three Months EndedNine Months Ended
October 2,
2021		September 26,
2020		October 2,
2021		September 26,
2020
Shares repurchased(1)
— — 547 4 
Average cost per share$— $— $235.88 $164.44 
Value of shares repurchased$— $— $128,917 $591 
______________
(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.
  Three Months Ended Nine Months Ended
  September 30,
2017		 October 1,
2016		 September 30,
2017		 October 1,
2016
Shares repurchased 533
 —
 533
 1,496
Average cost per share $84.86
 $—
 $84.86
 $42.39
Value of shares repurchased $45,261
 $—
 $45,261
 $63,403

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

13.18. Stock-Based Compensation
The totalTotal stock-based compensation expense for the three months ended October 2, 2021 and September 26, 2020 was $12.6 million and $11.9 million, respectively. Total stock-based compensation expense for the nine months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 was $11.2$33.5 million and $9.7$36.4 million, respectively. As of September 30, 2017,October 2, 2021, an aggregate of 14.110.7 million shares of common stock were reserved for future issuance under the Company’s equity plans, of which 4.04.4 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
2017 Equity Incentive Plan
On June 1, 2017, the Company’s stockholders ratified and approved the 2017 Equity Plan. The 2017 Equity Plan permits the grant of stock options, restricted stock, restricted stock units (RSUs),RSUs, stock appreciation rights, performance share units (PSUs),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 its 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 5.07.5 million shares.
The 2017 Equity Plan provides that at least 95% of the equity awards issued under the 2017 Equity Plan must generally 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 NASDAQNasdaq Global Select Market on the grant date.
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.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
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):
Nine Months Ended 
 September 30, 2017		Nine Months Ended
October 2, 2021
Shares 
Average
Exercise Price
SharesWeighted-Average
Exercise Price
Options outstanding, beginning of period8,521
 $28.56
Options outstanding, beginning of period3,448 $77.44 
Granted847
 86.80
Granted85 250.15 
Canceled(220) 36.49
Canceled(150)146.62 
Exercised(2,009) 27.66
Exercised(278)57.88 
Options outstanding, end of period7,139
 $35.48
Options outstanding, end of period3,105 $80.55 
Options exercisable, end of period3,991
 $26.26
Options exercisable, end of period2,255 $55.57 
Total stock option expense for the three months ended October 2, 2021 and September 26, 2020 was $3.2 million and $3.8 million, respectively. Total stock option expense for the nine months ended October 2, 2021 and September 30, 201726, 2020 was $2.9$9.9 million and $8.2$11.9 million, respectively. As of September 30, 2017,October 2, 2021, the Company had $35.7$30.7 million of unrecognized compensation cost related to non-vested stock options that are expected to vest over a weighted averageweighted-average period of approximately 3.72.6 years. The weighted-average remaining contractual term of options outstanding with an exercise price less than the closing price of the Company’s common stock as of September 30, 2017October 2, 2021 was 6.05.3 years. The weighted-average remaining contractual term of options exercisable, with an exercise price less than the closing price of the Company’s common stock as of September 30, 2017October 2, 2021, was 4.34.4 years.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

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):
Nine Months Ended 
 September 30, 2017		Nine Months Ended
October 2, 2021
Units 
Weighted Average Grant
 Date Fair Value
UnitsWeighted-Average Grant
 Date Fair Value
RSUs outstanding, beginning of period2,706
 $41.45
RSUs outstanding, beginning of period2,862 $99.66 
Granted33
 86.42
Granted89 248.57 
Canceled(25) 85.79
Canceled(17)199.02 
Expired—
 —
Expired— — 
Vested(6) 43.09
Vested(34)163.57 
RSUs outstanding, end of period2,708
 $41.59
RSUs outstanding, end of period2,900 $102.88 
Total RSU expense for the three months ended October 2, 2021 and September 26, 2020 was $2.4 million and $1.5 million, respectively. Total RSU expense for the nine months ended October 2, 2021 and September 30, 201726, 2020 was $0.2$6.7 million and $0.3$4.0 million, respectively. As of September 30, 2017,October 2, 2021, the Company had $0.5$34.7 million of unrecognized compensation cost related to non-vested RSU awards expected to be recognized and vest over a weighted-average period of approximately 0.73.6 years.
In July 2017, in connection with the First Amendment to November 4, 2015 Amended and Restated Employment Agreement (First Amendment), the Company and Mr. Kiani agreed to, among other things modify certain vesting provisions related to the previous award
28
Table of 2.7 million RSUs to the Company’s Chairman and Chief Executive Officer (see “Employment and Severance Agreements” in Note 14 to these condensed consolidated financial statements for further details).Contents
MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
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):
Nine Months Ended 
 September 30, 2017		Nine Months Ended
October 2, 2021
Units 
Weighted Average Grant
 Date Fair Value
UnitsWeighted-Average Grant
 Date Fair Value
PSUs outstanding, beginning of period—
 $—
PSUs outstanding, beginning of period444 $120.28 
Granted248
 90.71
Granted(1)
Granted(1)
148 162.99 
Canceled(15) 90.87
Canceled(17)166.84 
Expired—
 —
Expired— — 
Vested—
 —
Vested(273)86.95 
PSUs outstanding, end of period233
 $90.70
PSUs outstanding, end of period302 $168.68 
During______________
(1)     On February 22, 2021, the nine months ended September 30, 2017,Audit Committee approved the weighted payout percentage for the 2018 PSU awards (three-year performance period), which were based upon the actual fiscal 2020 performance against pre-established performance objectives. Included in the granted amount are those additional PSUs earned based on actual performance achieved. These PSUs were originally awarded at target.
During the first quarter of 2021, the Company awarded 233,00068,600 PSUs that will vest in part over timethree years from the award date, based on the achievement of certain 20172024 performance criteria approved by the Board. If earned, 20% of the PSUs granted will vest upon achievement of the performance criteria and the remaining award will vest in equal installments at the beginning of each of the following four years 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 100%200% of the target amount; therefore, the maximum number of shares that can be issued under these awards is 233,000. Totaltwice the original award of 68,600 PSUs, or 137,200 shares. Based on management’s estimate of the number of units expected to vest, total PSU expense for the three months ended October 2, 2021 and September 26, 2020 was $7.0 million and $6.6 million, respectively. Based on management’s estimate of the number of units expected to vest, total PSU expense for the nine months ended October 2, 2021 and September 30, 201726, 2020 was $2.0$16.9 million and $2.6$20.5 million, respectively. As of September 30, 2017,October 2, 2021, the Company had $11.4$41.1 million of unrecognized compensation cost related to non-vested PSU awards expected to be recognized and vest over a weighted-average period of approximately 2.51.1 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:

Three Months EndedNine Months Ended
October 2,
2021(1)
September 26,
2020		October 2,
2021		September 26,
2020
Risk-free interest rate—%0.2% to 0.3%0.3% to 0.9%0.2% to 1.7%
Expected term (in years)0.05.15.65.1
Estimated volatility—%32.7% to 33.6%30.9% to 34.7%26.9% to 35.5%
Expected dividends0%0%0%0%
Weighted-average fair value of options granted$—$66.24$75.72$50.39
__________________
(1)    No stock options were granted during the three months ended October 2, 2021.
22
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

 Three Months Ended Nine Months Ended
 September 30,
2017		 October 1,
2016		 September 30,
2017		 October 1,
2016
Risk-free interest rate1.7% to 2.0% 1.0% to 1.3% 1.7% to 2.2% 1.0% to 1.9%
Expected term (in years)5.5 5.7 5.5 5.7
Estimated volatility30.3% to 32.1% 30.3% to 31.9% 29.7% to 32.1% 30.3% to 35.7%
Expected dividends0% 0% 0% 0%
Weighted-average fair value of options granted$27.70 $17.99 $27.74 $13.42
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 September 30, 2017October 2, 2021 was $365.9$589.6 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 September 30, 2017October 2, 2021 was $240.7$484.5 million. The aggregate intrinsic value of options exercised during the three months ended October 2, 2021 was $35.4 million. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2017October 2, 2021 was $17.4$56.9 million.
The fair value of each RSU and PSU award is determined based on the closing price of the Company’s common stock on the grant date, or the modification date, if any.
19. Non-operating (loss) income
14. Commitments and Contingencies
Leases
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 November 2026. Certain facility leases contain predetermined price escalations and in some cases renewal options. The Company recognizes the lease costs using a straight-line method based on total lease payments. The Company has received leasehold improvement incentives in connection with certain leased facilities in the U.S. These leasehold improvement incentives have been recorded as deferred rent and are being amortized as a reduction to rent expense on a straight-line basis over the life of the lease. As of each of September 30, 2017 and December 31, 2016, accrued rent expense in excess of the amount paid aggregated $1.5 million and $0.7 million, respectively, which is classified within other current and non-current liabilities in the accompanying condensed consolidated balance sheets. In addition, the Company leases automobiles in the U.S. and Europe that are classified as operating leases and expire at various dates through November 2020. The majority of these leases are non-cancellable. The Company also has outstanding capital leases for office equipment and computer equipment, all of which are non-cancellable.
Future minimum lease payments, including interest, under operating and capital leases for eachNon-operating (loss) income consists of the following fiscal years ending on or about December 31 are (in thousands):
Three Months EndedNine Months Ended
October 2,
2021		September 26,
2020		October 2,
2021		September 26,
2020
Interest income$242 $797 $677 $5,120 
Interest expense(87)(84)(259)(250)
Realized and unrealized foreign currency (losses) gains(233)647 (1,153)1,246 
Other— (3)— (8)
Total$(78)$1,357 $(735)$6,108 
 As of September 30, 2017
 
Operating
Leases
 
Capital
Leases(1)
 Total
2017 (balance of year)$1,641
 $—
 $1,641
20186,347
 —
 6,347
20195,363
 —
 5,363
20203,165
 —
 3,165
20212,615
 —
 2,615
Thereafter7,284
 —
 7,284
Total$26,415
 $—
 $26,415
______________________
(1)
As of September 30, 2017, the Company had an outstanding capital lease of less than $0.1 million, which is not reflected in the above table due to rounding.
Rental expense related to operating leases was $1.7 million and $5.0 million for the three and nine months ended September 30, 2017, respectively, and $1.6 million and $4.5 million for the three and nine months ended October 1, 2016, respectively. Included in the future capital lease payments as of September 30, 2017 is interest aggregating less than $0.1 million.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

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 $0.6 million and $1.8 million to the MRSP for the three and nine months ended September 30, 2017, respectively, and $0.5 million and $1.6 million to the MRSP for the three and nine months ended October 1, 2016, respectively.
In addition, the Company also sponsors various defined contribution plans in certain locations outside of the United States (Subsidiary Plans). For the three and nine months ended September 30, 2017, the Company contributed $0.1 million and $0.2 million, respectively. For the three and nine months ended October 1, 2016, the Company contributed $0.1 million and $0.2 million to the Subsidiary Plans, respectively.
Employment and Severance Agreements
In July 2017, the Company entered into the First Amendment with Joe Kiani, the Company’s Chairman and Chief Executive Officer, which amended that certain Amended and Restated Employment Agreement entered into between the Company and Mr. Kiani on November 4, 2015 (together with the First Amendment, the Amended Employment Agreement). The First Amendment, among other things, eliminates Mr. Kiani’s eligibility for an automatic annual bonus equal to 100% of his base salary, imposes an annual cap on any annual bonus awarded by the Compensation Committee at 200% of his base salary, eliminates his guaranteed grant of 300,000 stock options in fiscal year 2017, modifies certain definitions and conditions related to Mr. Kiani’s ability to terminate his employment with the Company for “Good Reason”, and eliminates the annual 10% reduction of both: (1) the 2.7 million shares subject to the RSU award previously granted to Mr. Kiani (Award Shares) that will vest in certain circumstances, and (2) the $35.0 million cash payment (Cash Payment) that Mr. Kiani will be entitled to receive in certain circumstances.
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 and the full amount of the Cash Payment. 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 one year and two year 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 September 30, 2017, the expense related to the Award Shares 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 $233.7 million.
As of September 30, 2017, the Company had severance plan participation agreements with six executive officers. The participation agreements (the Agreements) are governed by the terms and conditions of the Company’s 2007 Severance Protection Plan (the Severance 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. The executive officers are also required to give the Company six months advance notice of their resignation under certain circumstances.
Purchase Commitments
Pursuant to contractual obligations with vendors, the Company had $81.6 million of purchase commitments as of September 30, 2017, which 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 and to achieve better pricing.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

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 September 30, 2017, the Company had approximately $0.3 million in 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 September 30, 2017, 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 its excess cash in time deposits with major financial institutions. As of September 30, 2017, the Company had $277.6 million of bank balances, of which $3.9 million was covered by either the U.S. Federal Deposit Insurance Corporation limit or foreign countries’ deposit insurance organizations.
While the Company and its contract manufacturers rely on sole source suppliers for certain components, steps have been taken to minimize the impact of a shortage or stoppage of shipments, such as maintaining a safety stock of inventory and designing products that could be modified to use different components. However, there can be no assurance that a shortage or stoppage of shipments of the materials or components that the Company purchases will not result in a delay in production or adversely affect the Company’s business.
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 three and nine months ended September 30, 2017, revenue from the sale of the Company’s products to U.S. hospitals that are members of GPOs amounted to $102.7 million and $308.0 million, respectively, and for the three and nine months ended October 1, 2016, revenue from the sale of the Company’s products to U.S. hospitals that are members of GPOs amounted to $94.5 million and $279.8 million, respectively.
For the three months ended September 30, 2017, the Company had sales through two just-in-time distributors that represented 12.3% and 10.9% of total revenue, respectively. For the three months ended October 1, 2016, the Company had sales through the same two just-in-time distributors that represented 14.0% and 13.2% of total revenue, respectively. For the nine months ended September 30, 2017, the Company had sales through two just-in-time distributors that represented 13.2% and 11.4% of total revenue, respectively. For the nine months ended October 1, 2016, the Company had sales through the same two just-in-time distributors that represented 15.0% and 12.4% of total revenue, respectively.
As of September 30, 2017, two just-in-time distributors represented 7.3% and 5.1% of the Company’s accounts receivable balance, respectively. As of December 31, 2016, two different just-in-time distributors represented 7.5% and 5.6% of the Company’s accounts receivable balance, respectively.
For the nine months ended September 30, 2017 and October 1, 2016, the Company recorded $25.7 million and $23.2 million, respectively, in royalty revenues from Medtronic. In exchange for these royalty payments, the Company has provided Medtronic the ability to ship its patent infringing product with a covenant not to sue Medtronic as long as Medtronic abides by the terms of the settlement agreement between the companies.
Litigation
On July 26, 2017, a patent infringement complaint was filed against the Company in the U.S. District Court for the District of Delaware by Silkeen, LLC (Silkeen). The complaint alleges that the Company’s pulse oximetry products infringe certain claims of U.S. Patent No. 7,944,469 titled “System and Method for Using Self-Learning Rules to Enable Adaptive Security Monitoring.” The Company’s policy is and has been not to settle patent infringement claims where it does not believe there is infringement of a valid patent, even if the cost of litigation would exceed the cost of settlement. On October 18, 2017, Silkeen dismissed the case against the Company with prejudice.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

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 by Physicians Healthsource, Inc. (PHI). 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 April 14, 2014, the Company filed a motion to stay the case pending a decision on a related petition filed by the Company with the Federal Communications Commission (FCC). On May 22, 2014, the District Court granted the motion and stayed the case pending a ruling by the FCC on the petition. On October 30, 2014, the FCC granted some of the relief and denied some of the relief requested in the Company’s petition. Both parties appealed the FCC’s decision on the petition. On November 25, 2014, the District Court granted the parties’ joint request that the stay remain in place pending a decision on the appeal. On March 31, 2017, the D.C. Circuit Court of Appeals vacated and remanded the FCC’s decision, holding that the applicable FCC rule was unlawful to the extent it requires opt-out notices on solicited faxes. On April 28, 2017, PHI filed a petition seeking rehearing by the D.C. Circuit Court of Appeals. The D.C. Circuit Court of Appeals denied the requested rehearing on June 6, 2017. The plaintiffs filed a petition for a writ of certiorari with the United States Supreme Court on September 5, 2017 seeking review of the D.C. Circuit Court of Appeals’ opinion. The Supreme Court has not yet ruled on the petition, and the stay of the District Court litigation has not yet been lifted. The Company believes it has good and substantial defenses to the claims in the District Court litigation, 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 condensed consolidated financial statements.
On January 31, 2014, an amended putative class action complaint was filed against the Company in the U.S. District Court for the Northern District of Alabama by and on behalf of two participants in the Surfactant, Positive Pressure, and Oxygenation Randomized Trial at the University of Alabama. On April 21, 2014, a further amended complaint was filed adding a third participant. The complaint alleges product liability and negligence claims in connection with pulse oximeters the Company modified and provided at the request of study investigators for use in the trial. On August 13, 2015, the U.S. District Court for the Northern District of Alabama granted summary judgment in favor of the Company on all claims. The plaintiffs have appealed the U.S. District Court for the Northern District of Alabama’s decision. The appellate hearing before the Eleventh Circuit Court of Appeals was held on December 13, 2016, and the parties are awaiting a decision. On July 7, 2017, the Eleventh Circuit Court of Appeals (Eleventh Circuit) issued a Certification to the Supreme Court of Alabama seeking guidance on a legal question. In that Certification, the Eleventh Circuit stated that the plaintiffs failed to establish that participation in the clinical study caused any injuries, and that the negligence, negligence per se, breach of fiduciary duty and products liability claims, which includes the claims currently alleged against the Company, were properly dismissed. On September 7, 2017, the Supreme Court of Alabama issued an order declining to answer the legal question posted by the Eleventh Court. 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.
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 condensed consolidated financial position, results of operations or cash flows.
15. Segment Information and Enterprise Reporting
The Company’s chief decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region, for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single reporting segment, specifically noninvasive patient monitoring solutions and related products. The Company does not assess the performance of its geographic regions on other measures of income or expense, such as depreciation and amortization, operating income or net income including noncontrolling interest. 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.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)

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):
  Three Months Ended Nine Months Ended
  September 30, 2017 October 1, 2016 September 30, 2017 October 1, 2016
Geographic area by destination:              
United States $119,266
 65.8% $114,563
 71.5% $370,403
 68.3% $345,113
 70.7%
Europe, Middle East and Africa 38,127
 21.0
 23,929
 14.9
 102,322
 18.9
 81,887
 16.8
Asia and Australia 18,078
 10.0
 16,630
 10.4
 51,801
 9.6
 46,815
 9.6
North and South America (excluding United States) 5,800
 3.2
 5,164
 3.2
 17,644
 3.2
 14,368
 2.9
     Total product revenue $181,271
 100.0% $160,286
 100.0% $542,170
 100.0% $488,183
 100.0%
The Company’s consolidated long-lived assets (total non-current assets excluding deferred taxes, goodwill and intangible assets) by geographic area are (in thousands, except percentages):
  September 30, 2017 December 31, 2016
Long-lived assets by geographic area:        
United States $262,249
 96.3% $216,784
 96.3%
International 10,148
 3.7
 8,383
 3.7
     Total $272,397
 100.0% $225,167
 100.0%
16.20. Income Taxes
The Company has provided for income taxes in fiscal 2017year 2021 interim periods based on the estimated effective income tax rate for the complete fiscal year, andas adjusted for discrete tax events, including excess tax benefits or deficiencies related to stock-based compensation, in the period such events occur. The incomeestimated annual effective tax provisionrate is computed based on the estimatedexpected annual pretax income of the consolidated entities located within each taxing jurisdiction based on legislation enacted as of the balance sheet date. For the ninethree months ended October 2, 2021 and September 30, 2017 and October 1, 2016,26, 2020, the Company recorded discrete tax benefits of approximately $35.1$6.4 million and $7.7$3.1 million, respectively, related to excess tax benefits realized from stock-based compensation. For the nine months ended October 2, 2021 and September 26, 2020, the Company recorded discrete tax benefits of approximately $12.0 million and $20.2 million, respectively, related to excess tax benefits realized from stock-based compensation.
Deferred tax assets and liabilities are determined based on the future tax consequences associated with temporary differences between income and expenses reported for accounting and tax purposes. A valuation allowance for deferred tax assets is recorded to the extent that the Company cannot determine that the ultimate realization of the net deferred tax assets is more likely than not. Realization of deferred tax assets is principally dependent upon the achievement of future taxable income, the estimation of which requires significant judgment by the Company’s management. The judgment of the Company’s management regarding future profitability may change due to many factors, including future market conditions and the Company’s ability to successfully execute its business plans or tax planning strategies. These changes, if any, may require material adjustments to these deferred tax asset balances.
As of September 30, 2017,October 2, 2021, the liability for income taxes associated with uncertain tax positions was approximately $15.2$21.6 million. If fully recognized, approximately $13.5$19.6 million (net of federal benefit on state taxes) would impact the Company’s effective tax rate. The remaining balance relates to timing differences. It is reasonably possible that the amount of unrecognized tax benefits in various jurisdictions may change in the next twelve 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 twelve months cannot currently be made.
The Company conducts business in multiple jurisdictions and, as a result, one or more of the Company’s subsidiaries files income tax returns in U.S. federal, various state, local and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters through fiscal year 2012.2016. All material state, local and foreign income tax matters have been concluded through fiscal year 2009.2012. The Company does not believe that the results of any tax authority examination would have a significant impact on its consolidated financial statements.

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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
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 $0.9 million and $0.8 million to the MRSP for the three months ended October 2, 2021 and September 26, 2020, respectively, all in the form of matching contributions. The Company contributed $2.8 million and $2.4 million to the MRSP for the nine months ended October 2, 2021 and September 26, 2020, 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). 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 October 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 October 2, 2021, the Company had severance plan participation agreements with 5 executive officers. The participation agreements (the Agreements) are governed by the terms and conditions of the Company’s 2007 Severance Protection Plan (the Severance 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. The executive officers are also required to give the Company six months’ advance notice of their resignation under certain circumstances.
Purchase Commitments
Pursuant to contractual obligations with vendors, the Company had $155.9 million of purchase commitments as of October 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 October 2, 2021, the Company had approximately $3.4 million in outstanding unsecured bank guarantees.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
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 October 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 with major financial institutions. As of October 2, 2021, the Company had $652.4 million of bank balances, of which $5.0 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 three months ended October 2, 2021 and September 26, 2020, revenue from the sale of the Company’s products to customers that are members of GPOs approximated 55.0% and 48.1% of product revenue, respectively. During the nine months ended October 2, 2021 and September 26, 2020, revenue from the sale of the Company’s products to customers that are members of GPOs approximated 51.8% and 49.6% of product revenue, respectively.
For the three months ended October 2, 2021, the Company had sales through 2 just-in-time distributors that represented 15.0% and 10.4% of product revenue, respectively. For the three months ended September 26, 2020, the Company had sales through the same 2 just-in-time distributors that represented 11.0% and 9.3% of product revenue, respectively.
For the nine months ended October 2, 2021, the Company had sales through 2 just-in-time distributors that represented 14.6% and 10.4% of product revenue, respectively. For the nine months ended September 26, 2020, the Company had sales through the same 2 just-in-time distributors that represented 11.2% and 10.0% of product revenue, respectively.
As of October 2, 2021 and January 2, 2021, 1 customer represented 9.4% and 9.1%, respectively, of the Company’s accounts receivable balance. The receivable balance related to such customer is fully secured by a letter of credit.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
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 condensed consolidated financial statements.
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 instituted Inter Partes review of the asserted patents. On October 13, 2020, the District Court stayed the patent infringement claims pending completion of the Inter Partes review proceedings. On February 5, 2021, the Company filed a fourth amended complaint. On February 26, 2021, Apple filed a partial motion to dismiss the trade secrets claim in the fourth amended complaint. On April 21, 2021, the District Court issued an order granting in part and denying in part the motion to dismiss. On May 5, 2021, Apple filed its answer to the fourth amended complaint. The Company is seeking damages, injunctive relief, and declaratory judgment regarding ownership of the Apple patents.
On June 30, 2021, the Company filed a complaint with the U.S. International Trade Commission (ITC) against Apple for infringement of a number of other patents. The Company filed an amended complaint on July 12, 2021. On August 13, 2021, the ITC issued a Notice of Institution of Investigation on the asserted patents. An evidentiary hearing is scheduled for June 6-10, 2022, and the target date for completion of the ITC investigation is January 16, 2023. The Company is seeking an exclusion order and a permanent cease and desist order. 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.
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MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
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 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):
Three Months EndedNine Months Ended
October 2,
2021		September 26,
2020		October 2,
2021		September 26,
2020
Geographic area by destination:
United States (U.S.)$207,060 67.4 %$186,919 67.2 %$613,197 67.3 %$571,158 67.3 %
Europe, Middle East and Africa56,223 18.3 54,257 19.5 177,053 19.4 176,781 20.8 
Asia and Australia34,878 11.3 27,583 9.9 94,134 10.3 73,155 8.6 
North and South America (excluding the U.S.)9,252 3.0 9,353 3.4 27,190 3.0 27,596 3.3 
     Product revenue$307,413 100.0 %$278,112 100.0 %$911,574 100.0 %$848,690 100.0 %
The Company’s consolidated long-lived assets (tangible non-current assets) by geographic area are (in thousands, except percentages):
October 2,
2021		January 2,
2021
Long-lived assets by geographic area:
United States$239,435 86.6 %$238,094 86.9 %
International36,980 13.4 35,755 13.1 
     Total long-lived assets$276,415 100.0 %$273,849 100.0 %
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, in connection with the Private Securities Litigation Reform Act of 1995 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. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results or financial condition; statements concerning new products, technologies or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements related to our stock repurchase program; statements as to 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” or “will,” the negative versions of these terms and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause 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 in the section titled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission (SEC) filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,January 2, 2021, which we filed with the SEC on February 15, 2017.23, 2021. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Executive Overview
We are a global medical technology company that develops, manufactures and markets a variety of noninvasive patient monitoring technologies.technologies, hospital automation solutions, home monitoring devices and consumer products. Our mission is to improve patient outcomes, reduce the cost of care and take noninvasive monitoring to new sites and applications. Our patient monitoring solutions generally incorporate a monitor or circuit board, proprietary single-patient use or reusable sensors, software and/or cables. We provideprimarily sell our products directly and through distributors and original equipment manufacturer (OEM) partners to hospitals, emergency medical service (EMS) providers, home care providers, physician offices, veterinarians, long-term care facilities and consumers. Our mission is to improve patient outcomesconsumers through our direct sales force, distributors and reduce the cost of care.original equipment manufacturer (OEM) partners. We were incorporated in California in May 1989 and reincorporated in Delaware in May 1996.
Our core business ismeasurement technologies are Measure-through Motion and Low Perfusion™ pulse oximetry, monitoring, known as Masimo Signal Extraction Technology® (SET®) pulse oximetry. Our product offerings have expanded significantly over the years to also include monitoring blood constituents with an optical signature, optical organ oximetry, monitoring, electricaland advanced rainbow® Pulse CO-Oximetry parameters such as noninvasive hemoglobin (SpHb®), alongside many other modalities, including brain function monitoring, hemodynamic monitoring, regional oximetry, acoustic respiration rate monitoring, exhaled gas monitoring,capnography, nasal high-flow respiratory support therapy, patient monitoringposition and activity tracking and neuromodulation technology for the reduction of symptoms associated with connectivity platforms,opioid withdrawal. Masimo’s measurement technologies are available on many types of devices, from bedside hospital monitors like the Root® Patient Monitoring and Connectivity Hub, to various handheld and portable patient monitorsdevices, and wearable wireless patient monitors. We have also developed ato the tetherless Masimo SafetyNet™ remote patient surveillance monitoring system,solution. The Masimo Hospital Automation™ Platform facilitates data integration, connectivity, and interoperability through solutions like Patient SafetyNet which currently allows™, Replica® and UniView™ to facilitate more efficient clinical workflows and to help clinicians provide the best possible care, both in-person and remotely. Leveraging our expertise in hospital-grade technologies, we are also expanding our suite of products intended for use outside the hospital and products for consumers, including Sleep™, a sleep quality solution and the Radius Tº™ wireless, wearable continuous thermometer. For an overview of our product offerings and technologies, please refer to “Business” in Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, filed with the SEC on February 23, 2021.
In January 2021, we announced the global launch of iSirona™, a compact, versatile connectivity hub designed to maximize interoperability across the continuum of care. The iSirona™ hub offers an efficient way to physically connect up to 200six medical devices at the bedside and automatically route the data to the Masimo Hospital Automation™ Platform. The iSirona™ hub helps ensure that whatever the source, all patient data can be accurately and efficiently captured and presented to clinicians in the most suitable ways.

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In February 2021, we announced the full market release of Masimo SafetyNet-OPEN™, a web and mobile app solution that helps businesses, schools and other organizations screen, trace and manage users entering their facilities with respect to COVID-19 and other infectious illnesses, such as seasonal flu. SafetyNet-OPEN™ helps organizations bring their people back to the workplace responsibly and stay open safely. Tailored for each organization’s safety protocols and needs, SafetyNet-OPEN™ is capable of covering all stages of back-to-work management, including risk screening, exposure contact tracing and recovery management.
Also in February 2021, we announced the U.S. introduction of softFlow®, which provides nasal high-flow warmed and humidified respiratory gases to spontaneously breathing patients. The technology offers adult patients per server to be monitored simultaneously and remotelyhigh-flow respiratory support through a PC-based viewing stationsoft nasal cannula by generating a consistent high flow of warm, humidified air or by care providers through their pagers, voice-over-IP phones or smartphones.air/oxygen mixture.
MasimoIn March 2021, we announced the CE Marking of the Rad-G™ with temperature, a rugged handheld device that provides clinically proven SET® was designed to overcome the primary limitations of conventional pulse oximetry, by maintaining accuracyrespiration rate from the pleth (RRp®) parameter and other important parameters alongside clinical-grade, non-contact infrared thermometry. With its long-lasting rechargeable battery, robust rubber casing, light weight and integrated noninvasive, real-time forehead temperature measurement, Rad-G™ with temperature makes it easier for clinicians to quickly assess patients and make informed care decisions anywhere pulse oximetry or vital signs monitoring is needed in a compact, portable form factor. Coupled with the universal Mini-Clip™ pulse oximeter sensor to provide the ultimate in handheld versatility, Rad-G™ with temperature can be used in a variety of settings, including but not limited to, entry screening, physicians’ offices, outpatient services, long-term care facilities, wellness clinics, first-response scenarios and limited-resource environments both indoors and in the presencefield. Rad-G™ can provide both spot-check measurement and continuous monitoring.
In April 2021, we announced that Radius PCG™, a portable real-time capnograph with wireless Bluetooth® connectivity, received FDA 510(k) clearance. Radius PCG™ connects with the Root® Patient Monitoring and Connectivity Platform to provide seamless, tetherless mainstream capnography for patients of motion artifact, low perfusionall ages. Radius PCG™ offers Masimo SET® Measure-through Motion and weak signal-to-noise situations. PulseLow Perfusion pulse oximetry, iscontinuous temperature measurements with no routine calibration, along with accurate end-tidal carbon dioxide (EtCO2) and respiration rate measurements.
In June 2021, we announced that Radius T°™, a wearable, wireless thermometer that measures body temperature continuously and noninvasively, received FDA 510(k) clearance for both prescription and over-the-counter use on patients and consumers five years and older. Featuring continuously trending temperature measurements and Bluetooth® connectivity, Radius T°™ automates remote, continuous body temperature status for clinicians through its paired connection to a Masimo patient monitoring or telehealth solution, and for consumers through the noninvasive measurementMasimo Radius T°™ smartphone application.
In July 2021, we announced the release of the oxygen saturation level of arterial blood, which delivers oxygen toMX-7™ board, our latest and most advanced rainbow SET® board. Designed for integration into the body’s tissues, and pulse rate. Pulse oximetry is one of the most common measurements taken inside and outside of hospitals around the world. We believe that Masimo SET® is trusted by clinicians to safely monitor approximately 100 million patients each year. Masimo SET® pulse oximetry has been shown by more than 100 independent studies and thousands of clinical evaluations during patient motion and low-perfusion conditions to provide200 multi-parameter monitors available from our more accurate measurements than other non-Masimo pulse oximeters, as well as to significantly reduce false alarms (specificity) and accurately detect true alarms (sensitivity) that can indicate a deteriorating patient condition. The use of Masimo SET® pulse oximetry has also been shown to improve patient outcomes by helping clinicians reduce retinopathy of prematurity in neonates, screen newborns for critical congenital heart disease, reduce ventilator weaning time and arterial blood gas measurements in the intensive care unit (ICU), manage fluid therapy, reduce length of stay and complications, and save lives and costs while reducing rapid response activations and ICU transfers within medical-surgical units.
Our rainbow SET90 OEM partners, MX-7™ platform leverages Masimo SET® technology and incorporates licensed rainbow® technology to provide additional continuous noninvasive measurements. Our rainbow SET™ platform includes our rainbow® Pulse CO-Oximetry products, which we believe are the first devices cleared by the U.S. Food and Drug Administration (FDA) to noninvasively and continuously monitor multiple blood-based measurements using multiple wavelengths of light, which previously was only possible through intermittent invasive procedures. In addition to monitoring oxygen saturation (SpO2), pulse rate (PR), perfusion index (Pi), Pleth Variability Index (PVi®) and Respiration Rate (RRa®), rainbow SET™ Pulse CO-Oximetry has the ability to provide noninvasive monitoringsupport all 13 of total hemoglobin (SpHbMasimo’s SET®), carboxyhemoglobin (SpCO®) pulse oximetry and methemoglobinrainbow® Pulse CO-Oximetry measurements in an advanced module re-engineered to reduce power needs.

(SpMet®), as well as the calculation of Oxygen Content (SpOC™). The rainbow SET™ platform also allows for monitoring of arterial oxygen saturation, even under the presence of carboxyhemoglobin and methemoglobin, known as fractional arterial oxygen saturation (SpfO2™), Respiration Rate from the Pleth (RRp®), Oxygen Reserve Index™ (ORi™) and Rainbow Pleth Variability Index (RPVi™). Although SpfO2™, RRp®, RPVi™ and ORi™ have received the CE Mark, they are not currently available for sale in the U.S.
In March 2017,August 2021, we announced the CE Marklaunch of our noninvasive blood pressure (NIBP) measurements for the Rad-97Masimo SafetyNet Alert™ Pulse Co-Oximeter® and connectivity hub. In September 2017, we announced FDA 510(k) clearance and full market release of the Rad-97™ Pulse CO-Oximeter®, including configurations with integrated NomoLine™ capnography and NIBP measurement from SunTech Medical. Rad-97™ with NIBP enables clinicians to measurean arterial blood pressure for adult, pediatricoxygen saturation monitoring 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). An integrated port allows clinicians to connect a blood pressure cuff inflation hose directly to Rad-97™, and is compatible with both disposable and reusable cuffs, for a variety of patient types,alert system designed for reliability and patient comfort. In May 2017, we announced the introduction of Rad-Guse at home. Masimo SafetyNet Alert™, features a combined pulse oximeter designed primarily for use in pneumonia screening and spot-checking of oxygen saturation (SpO2) in low-resource settings. The Rad-G™is a low-cost, rugged, handheldMasimo SET® fingertip pulse oximetry device with a rechargeable batterysensor that communicates wirelessly to an accompanying Home Medical Hub and LCD display. It uses Measure-through Motionsmartphone app.The system provides escalating visual and Low Perfusion™ SET® pulse oximetry technologyaudible alerts that are designed to measure SpO2, RRp®, PRalert the patient, or anyone nearby, to help prompt action if oxygen levels continue to decline and Pi. The Rad-Gdesignated emergency contacts are also notified via text message. Masimo SafetyNet Alert™ is not currently available for sale in the U.S.
In June 2017, we announced the limited market release of the Spot-Check Rad-67™ Handheld Pulse CO-Oximeter®. Rad-67™ offers Measure-through Motion and Low Perfusion™ SET® pulse oximetry and upgradeable rainbow® noninvasive monitoring technology in a compact, portable spot-check device. With the universal reusable rainbow® DCI®-mini sensor, Rad-67™ features Next Generation SpHb® technology. The Rad-67™has received the CE Mark but is not currently availablein Europe.
In September 2021, we announced the launch of the single-patient-use rainbow® SuperSensor™, compatible for sale in the U.S.
Following the introduction of ouruse with both Masimo monitors and third-party monitors with Masimo rainbow® technology inside. The rainbow® SuperSensor™ uses 12 LEDs to simultaneously offer 12 noninvasive, continuous Masimo SET™ platform, we have continued to expand our technology offerings by introducing additional noninvasive measurements® and technologies to create new market opportunities in both the hospitalrainbow® parameters, providing a comprehensive and non-hospital care settings. These offerings include:
•
SedLine® - Brain function monitoring is most commonly used during surgery to help clinicians monitor sedation under anesthesia. SedLine® brain function monitoring technology measures the brain’s electrical activity by detecting electroencephalogram (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 are difficult for clinicians to interpret, so the EEG signals are processed and displayed as a single number called Patient State Index (PSi), which is related to the effects of anesthetic agents. Our SedLine® brain function monitoring technology can now be delivered through the Masimo Open Connect® (MOC®) connectivity port, MOC-9®, within our Root® patient monitoring and connectivity platform, which integrates our rainbow® and SET® measurements with multiple additional parameters, such as SedLine®. In addition, our SedLine® brain function monitoring technology also displays raw EEG waveforms, the PSI trend and the Density Spectral Array view to allow 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. In 2016, we introduced Next Generation SedLine®, which improved PSi in the presence of EMG (electrical activity due to muscle movement) artifact and in patients with low power EEG signals (such as geriatric patients). Next Generation SedLine®convenient fingertip solution for assessing patient status. The rainbow® SuperSensor™ has received CE Mark but is not currently available for sale in the U.S.
•
NomoLine™ Capnography and Gas Monitoring - We offer a portfolio of sidestream and mainstream capnography products, as well as gas monitoring products, which include external “plug-in-and-measure” capnography and gas analyzers, integrated modules and handheld capnograph and capnometer devices. The gas monitoring products have the ability to measure multiple expired gases, such as carbon dioxide (CO2), nitrous oxide (N2O), oxygen (O2) and other anesthetic agents. In the case of capnography, respiration rate is also calculated from the CO2 waveform. 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.
•
O3® - Organ oximetry, also known as regional oximetry, tissue oximetry and cerebral oximetry monitoring, uses near-infrared spectroscopy (NIRS) to provide continuous measurement of tissue oxygen saturation (rSO2) to help detect regional hypoxemia that pulse oximetry alone can miss under certain conditions. In addition, our Root® monitor and O3®sensors can automate the differential analysis of regional to central oxygen saturation derived from our SET® pulse oximeters. O3® monitoring involves applying O3® regional oximetry sensors to the forehead and connecting our O3® MOC-9® module to any 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 subjects larger than 40 kg (approximately 88 lbs).

In 2016, O3® regional oximetry with the O3® pediatric sensor received the CE Mark in Europe.
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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 useour 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 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. We also introduced new products, such as Masimo SafetyNet™and Masimo SafetyNet-OPEN™ to help combat the COVID-19 pandemic and made pledges to various charitable organizations to support global COVID-19 relief efforts. We currently believe that our existing liquidity position will be sufficient to fund these ongoing initiatives and our response efforts.
Given the continuing uncertainties related to the COVID-19 pandemic, we cannot predict how it will continue to affect our product demand or our product mix. In addition, the increase in pediatric patients weighing less than 40kg (approximately 88lbs). In May 2017, O3® regional oximetry withdemand we have experienced due to the O3® pediatric sensor received FDA 510(k) clearance for useCOVID-19 pandemic could result in pediatric patients weighing less than 40kg (approximately 88lbs).
•
rainbow Acoustic Monitoring® (RAM™) - Our acoustic-based monitoring technology enables noninvasive monitoring of respiration rate (RRa®). Compared to traditional capnography, which monitors exhaled CO2, most often through a nasal cannula, multiple clinical studies have shown that the noninvasive measurement of RRa® provides as good or better accuracy to monitor respiration rate and detect respiratory pause episodes, defined as a cessation of breathing for 30 seconds or more. Yet, due to its ease of use and wear, RAM™ is better tolerated by patients than capnography. 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.
•
Root® - Our Root® patient monitoring and connectivity platform integrates our breakthrough rainbow® and SET® measurements with multiple additional specialty measurements through its MOC-9® connectivity ports in an integrated, clinician-centric platform. The first three Masimo MOC-9® technologies for Root® were SedLine® brain function monitoring, NomoLine™ capnography and gas monitoring, and O3®organ oximetry. In June 2017, we announced our first MOC® partnership, which enables 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 or our Open Connect Control (MOC-C™) App for Root® using our MOC® software development kit (SDK). While we support the development efforts of our MOC® partners as needed, and help increase awareness of the availability of MOC-9® modules and MOC-C™ Apps, our MOC® partners use their existing distribution channels to sell their MOC-9® module or MOC-C™ App to customers.
In February 2017,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 introduced a limited market releasecontinue to be exposed to potential disruptions to our manufacturing operations and disruptions in the supply of critical manufacturing components and in our workforce as circumstances surrounding the global impact of the Early Warning Score (EWS) for Root®. EWS aggregates information from multiple vital signs and clinical observationsCOVID-19 pandemic continue to generate a score that represents the potential degree of patient deterioration. There are several EWS protocols, such as 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.
•
Patient SafetyNet - Our patient surveillance, remote monitoring and clinician notification solution allows for 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 a rich user interface with trending, real-time waveform capability at the central station and remote notification via pager or smart phone. Patient SafetyNet also features the Adaptive Connectivity Engine™(ACE), which enables two-way, Health Level 7 (HL7) based connectivity to clinical/hospital information systems. The ACE significantly reduces the time and complexity to integrate and validate custom HL7 implementations and demonstrates our commitment to innovation that automates patient care with open, scalable and standards-based connectivity architecture.
The Patient SafetyNet Series 5000, together with Iris® Connectivity, Kite® 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, from operating rooms to medical-surgical units. Patient SafetyNet Series 5000 with Iris® enables Root® to intake data from all devices connected to the patient, thereby acting as an in-room patient monitor and connectivity hub. Alarms and alerts for all devices are seamlessly forwarded to the patient’s clinician and all device data are effortlessly documented in 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.
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MyView™ - MyView™ is a wireless, presence-detection system enables clinicians to automatically display customized clinical profiles on our 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 information on how clinicians spend time with their patients. This provides nursing leadership and management with the opportunity to examine analytical data on patient and clinician interactions to optimize workflows across the unit, hospital or hospital system.

•
Patient SafetyNet Surveillance - Patient SafetyNet Surveillanceis a software option for our Patient SafetyNetsolution that provides real-time video images of a patient’s room, including the patient with 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 and can provide viewing of images in the same care area.
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MightySat™and MightySat Rx™ - Our fingertip pulse oximeters leverage Masimo SET® and are designed for those who want accurate measurements, even under challenging conditions such as movement and low perfusion. MightySat™ is intended for personal use and provides SpO2, PR, RRp®, PVi® and Pi measurements in a compact, battery-powered design with an organic light-emitting diode color screen that can be rotated for real-time display of the pleth waveform as well as measurements. Its Bluetooth® wireless functionality enables measurement display via the free, downloadable Masimo Personal Health app on iOS and Android mobile devices, as well as the ability to trend and communicate measurements and interface with the Apple Health app. MightySat™ is available through online retailers such as Amazon.com and in select Apple stores. In the U.S., MightySat™ is intended for general health and wellness use and is not intended for medical use. However, MightySat Rx™, the medical version of the product with optional Bluetooth® is intended for professional use. MightySat Rx™ received 510(k) clearance in late 2015. In February 2017, MightySat™ Rx with the RRp® measurement received CE Mark, but is not currently available for sale in the U.S.
Our solutions and related products are based upon our Masimo SET®, rainbow® and other proprietary algorithms. This software-based technology is incorporated into a variety of product platforms depending on our customers’ specifications. 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.change. In addition, given the recent presidential executive order mandating federal contractors and subcontractors to be fully vaccinated against COVID-19 by November 22, 2021, we have exclusively licensed certain rainbow® technologyexpect that our employees will be required to be vaccinated per the federal mandate, and current employees and candidates seeking employment with Masimo may be opposed to being vaccinated and may risk possible termination or may seek employment with an employer that is not required to follow the federal mandate. Please see “Risks Related to Our Revenues” and “Risks Related to our Business and Operations” in Part II, Item 1A of thisQuarterly Report on Form 10-Q for additional information on potential negative impacts to us resulting from Cercacor Laboratories, Inc. (Cercacor) and have the right to incorporate such rainbow® technology into products that are intended for use by professional caregivers, including, but not limited to, hospital caregivers and alternate care facility caregivers.COVID-19 pandemic.
Cercacor Laboratories, Inc.
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 Chief Executive OfficerCEO 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 NotesNote 3 and 4 to theour accompanying condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to Cercacor.
Stock Repurchase Program
37
In September 2015, our board
Table of directors (Board) authorized a stock repurchase program, whereby we may purchase up to 5.0 million shares of our common stock over a period of up to three years. As of September 30, 2017, approximately 2.4 million shares remained authorized for repurchase under this program.Contents
Our stock repurchase program may be carried out at the discretion of a committee comprised of our Chief Executive Officer and Chief Financial Officer 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 stock repurchase program, see Note 12 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Results of Operations
The following table sets forth, for the periods indicated, our unaudited results of operations expressed as dollarU.S. Dollar amounts and as a percentage of total revenues (in thousands, except percentages):revenue (dollars in thousands).
Three Months EndedNine Months Ended
October 2,
2021		Percentage
of Revenue		September 26,
2020		Percentage
of Revenue		October 2,
2021		Percentage
of Revenue		September 26,
2020		Percentage
of Revenue
Product revenue$307,414 100.0 %$278,112 100.0 %$911,575 100.0 %$848,690 100.0 %
Cost of goods sold103,750 33.7 99,186 35.7 318,124 34.9 292,551 34.5 
Gross profit203,664 66.3 178,926 64.3 593,451 65.1 556,139 65.5 
Operating expenses:
Selling, general and administrative100,647 32.7 90,376 32.5 291,180 31.9 278,714 32.8 
Research and development35,406 11.5 28,852 10.4 103,860 11.4 86,971 10.2 
Litigation awards— — — — — — (474)(0.1)
Total operating expenses136,053 44.3 119,228 42.9 395,040 43.2 365,211 43.0 
Operating income67,611 22.0 59,698 21.5 198,411 21.8 190,928 22.5 
Non-operating (loss) income(78)— 1,357 0.5 (735)(0.1)6,108 0.7 
Income before provision for income taxes67,533 21.9 61,055 22.0 197,676 21.7 197,036 23.2 
Provision for income taxes9,762 3.2 11,650 4.2 36,287 4.0 27,403 3.2 
Net income$57,771 18.7 %$49,405 17.8 %$161,389 17.6 %$169,633 20.0 %

 Three Months Ended Nine Months Ended
 September 30,
2017		 Percentage
of Revenue		 October 1,
2016		 Percentage
of Revenue		 September 30,
2017		 
Percentage
of Revenue
 October 1,
2016		 Percentage
of Revenue
Revenue:               
Product$181,271
 93.6% $160,286
 95.6 % $542,170
 94.6% $488,183
 95.5%
Royalty and other revenue12,421
 6.4
 7,335
 4.4
 30,757
 5.4
 23,241
 4.5
Total revenue193,692
 100.0
 167,621
 100.0
 572,927
 100.0
 511,424
 100.0
Cost of goods sold65,027
 33.6
 57,499
 34.3
 191,692
 33.5
 171,954
 33.6
Gross profit128,665
 66.4
 110,122
 65.7
 381,235
 66.5
 339,470
 66.4
Operating expenses:          
    
Selling, general and administrative65,390
 33.8
 57,845
 34.5
 197,339
 34.4
 184,244
 36.0
Research and development15,300
 7.9
 15,673
 9.4
 45,859
 8.0
 44,856
 8.8
Total operating expenses80,690
 41.7
 73,518
 43.9
 243,198
 42.4
 229,100
 44.8
Operating income47,975
 24.8
 36,604
 21.8
 138,037
 24.1
 110,370
 21.6
Non-operating income (expense)287
 0.1
 (546) (0.3) 1,319
 0.2
 423
 0.1
Income before provision for income taxes48,262
 24.9
 36,058
 21.5
 139,356
 24.3
 110,793
 21.7
Provision for income taxes9,027
 4.7
 8,285
 4.9
 8,108
 1.4
 25,420
 5.0
Net income$39,235
 20.3% $27,773
 16.6 % $131,248
 22.9% $85,373
 16.7%
Comparison of the Three Months ended September 30, 2017October 2, 2021 to the Three Months ended October 1, 2016September 26, 2020
Revenue. TotalProduct revenue increased $26.1$29.3 million, or 15.6%10.5%, to $193.7$307.4 million for the three months ended October 2, 2021 from $278.1 million for the three months ended September 30, 2017 from $167.6 million for the three months ended October 1, 2016.26, 2020. The following table details our total product revenues by the geographic area to which the products were shipped for each of the three months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 (dollars in thousands):
Three Months Ended
October 2,
2021		September 26,
2020		Increase/
(Decrease)		Percentage
Change
United States (U.S.)$207,060 67.4 %$186,919 67.2 %$20,141 10.8 %
Europe, Middle East and Africa56,223 18.3 54,257 19.5 1,966 3.6 
Asia and Australia34,878 11.3 27,583 9.9 7,295 26.4 
North and South America (excluding the U.S.)9,252 3.0 9,353 3.4 (101)(1.1)
     Product revenue$307,413 100.0 %$278,112 100.0 %$29,301 10.5 %
 Three Months Ended
 September 30, 2017 October 1, 2016 
Increase/
(Decrease)
 
Percentage
Change
United States$119,266
 65.8% $114,563
 71.5% $4,703
 4.1%
Europe, Middle East and Africa38,127
 21.0
 23,929
 14.9
 14,198
 59.3
Asia and Australia18,078
 10.0
 16,630
 10.4
 1,448
 8.7
North and South America (excluding United States)5,800
 3.2
 5,164
 3.2
 636
 12.3
     Total product revenue$181,271
 100.0% $160,286
 100.0% $20,985
 13.1%
Royalty and other revenue12,421
   7,335
   5,086
 69.3
     Total revenue$193,692
   $167,621
   $26,071
 15.6%
Product revenue increased $21.0 million, or 13.1%, to $181.3 million for the three months ended September 30, 2017 from $160.3 million for the three months ended October 1, 2016. This increase was primarily due to higher revenue from consumables, parameters and services, as well as the impact of approximately $1.3 million of favorable foreign exchange rate movements from the prior year that increased the U.S. Dollar translation of foreign sales of consumables. We estimate that our installed base of circuitwere denominated in various foreign currencies. During the three months ended October 2, 2021, we shipped approximately 74,600 noninvasive technology boards and pulse oximeters increased to approximately 1,566,000 units at September 30, 2017 as compared to 1,482,000 units at October 1, 2016.instruments.

Product revenue generated through our direct and distribution sales channels increased $21.7$56.5 million, or 15.8%25.7%, to $159.1$275.7 million for the three months ended October 2, 2021, compared to $219.3 million for the three months ended September 30, 2017, compared26, 2020. Revenues from our OEM channel decreased $27.2 million, or 46.1%, to $137.4$31.7 million for the three months ended October 1, 2016. Revenues from our OEM channel decreased $0.7 million, or 3.0%,2, 2021 as compared to $22.2$58.8 million for the three months ended September 30, 2017 as compared to $22.9 million for the three months ended October 1, 2016. Total rainbow® product revenue increased by $3.6 million, or 19.9%, to $21.5 million for the three months ended September 30, 2017, compared to $18.0 million for the three months ended October 1, 2016, primarily due to an increase in rainbow® orders from a large international customer.26, 2020.
Royalty and other revenue consists primarily
38
Table of royalties received from Medtronic plc (Medtronic, formerly Covidien Ltd.) related to its U.S. sales pursuant to the terms of our settlement agreement, and revenue from non-recurring engineering (NRE) services for certain OEM customers. The $5.1 million increase in royalty and other revenue for the three months ended September 30, 2017 compared to the three months ended October 1, 2016 primarily related to revenue from NRE services.Contents
Gross Profit. Gross profit consists of totalproduct revenue less cost of goods sold. Our gross profit for the three months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 was as follows (dollars in thousands):
Gross Profit
Three Months Ended
October 2, 2021		Percentage of
 Net Revenues		Three Months Ended
September 26, 2020		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$203,66466.3%$178,92664.3%$24,73813.8%
 Three Months Ended
 September 30,
2017		 Gross Profit
Percentage		 October 1,
2016		 Gross Profit
Percentage		 Increase/
(Decrease)		 Percentage
Change
Product gross profit$116,890
 64.5% $102,787
 64.1% $14,103
 13.7%
Royalty and other revenue gross profit11,775
 94.8
 7,335
 100.0
 4,440
 60.5
     Total gross profit$128,665
 66.4% $110,122
 65.7% $18,543
 16.8%
Cost of goods sold includes labor, material, overhead and other similar costs related to the production, supply, distribution and support of our products.products. Cost of goods sold increased $7.5$4.6 million for the three months ended September 30, 2017October 2, 2021, compared to the three months ended October 1, 2016,September 26, 2020, primarily due to increased product revenuehigher material, manufacturing and higher productiondistribution costs associated with the expansion of our manufacturing capacity. Product gross marginsincrease in product sales.
Gross profit increased slightly to 64.5%66.3% for the three months ended October 2, 2021, compared to 64.3% for the three months ended September 30, 2017 compared to 64.1% for the three months ended October 1, 201626, 2020, primarily due to an increase in product sales and favorable productrevenue mix. Royalty and other revenue gross profit increased by $4.4 million for the three months ended September 30, 2017 compared to the three months ended October 1, 2016, primarily due to NRE services.
Selling, General and Administrative. Selling, general and administrativeadministrative 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 the three months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 were as follows (dollars in thousands):
Selling, General and Administrative
Three Months Ended 
 September 30, 2017		Percentage of
Net Revenues		Three Months Ended 
 October 1, 2016		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$65,39033.8%$57,84534.5%$7,54513.0%
Selling, General and Administrative
Three Months Ended
October 2, 2021		Percentage of
 Net Revenues		Three Months Ended
September 26, 2020		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$100,64732.7%$90,37632.5%$10,27111.4%
Selling, general and administrative expenses increased $7.5$10.3 million, or 13.0%11.4%, for the three months ended September 30, 2017October 2, 2021, compared to the three months ended October 1, 2016.September 26, 2020. This increase was primarily attributable to higher payrollcompensation and other employee-related expenses of approximately $4.7 million, higher selling and marketing related costs of approximately $1.9$11.0 million, higher legal and professional fees of $4.2 million, higher occupancy and other office-related costs of approximately $1.5 million and higher occupancytravel costs of approximately $1.0$1.4 million, Stock-based compensation expensewhich were partially offset by lower advertising and marketing-related costs of approximately $4.0 million and $2.5 million was included in selling, general and administrative expenses for the three months ended September 30, 2017 and October 1, 2016, respectively.$8.5 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 the three months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 were as follows (dollars in thousands):

Research and Development
Three Months Ended 
 September 30, 2017		Percentage of
Net Revenues		Three Months Ended 
 October 1, 2016		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$15,3007.9%$15,6739.4%$(373)(2.4)%
Research and Development
Three Months Ended
October 2, 2021		Percentage of
 Net Revenues		Three Months Ended
September 26, 2020		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$35,40611.5%$28,85210.4%$6,55422.7%
Research and development expenses decreased $0.4increased $6.6 million, or 2.4%22.7%, for the three months ended September 30, 2017October 2, 2021, compared to the three months ended October 1, 2016,September 26, 2020, primarily due to capitalizedhigher compensation and employee-related costs related to customer NRE services of approximately $1.0$4.6 million and lowerhigher engineering project expensescosts of approximately $0.3 million, which were offset by higher payroll expenses of approximately $1.0$2.0 million. Included in research and development expenses was approximately $0.9 million and $0.8 million of stock-based compensation expense for the three months ended September 30, 2017 and October 1, 2016, respectively.
Non-operating Income (Expense).(Loss) Income. Non-operating (loss) income consists primarily of interest income, interest expense and foreign exchange gains and losses. Non-operating (loss) income for the three months ended October 2, 2021 and September 26, 2020 was as follows (dollars in thousands):
Non-operating (Loss) Income
Three Months Ended
October 2, 2021		Percentage of
 Net Revenues		Three Months Ended
September 26, 2020		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$(78)—%$1,3570.5%$(1,435)(105.7)%
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Table of Contents
Non-operating (loss) income was less than $0.1 million for the three months ended October 2, 2021, as compared to $1.4 million of non-operating income for the three months ended September 30, 2017 and October 1, 2016 was as follows (dollars in thousands):
Non-operating Income (Expense)
Three Months Ended 
 September 30, 2017		Percentage of
Net Revenues		Three Months Ended 
 October 1, 2016		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$2870.1%$(546)(0.3)%$833(152.6)%
Non-operating income increased by $0.8 million for the three months ended September 30, 2017 compared to the three months ended October 1, 2016. Non-operating income for the three months ended September 30, 2017 consisted26, 2020. This decrease of approximately $0.7$1.4 million in netwas primarily due to lower interest income, which was offset by approximately $0.4 million of netyields realized and unrealized losses on foreign currency denominated transactions. Non-operating income (expense) for the three months ended October 1, 2016 consisted of approximately $0.9 million of interest expense, which was offset by approximately $0.3 million of net realized and unrealized gains on foreign currency denominated transactions.our invested cash.
Provision for Income Taxes. Our provision for income taxes for the three months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 was as follows (dollars in thousands):
Provision for Income Taxes
Three Months Ended
October 2, 2021		Percentage of
 Net Revenues		Three Months Ended
September 26, 2020		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$9,7623.2%$11,6504.2%$(1,888)(16.2)%
Provision for Income Taxes
Three Months Ended 
 September 30, 2017		Percentage of
Net Revenues		Three Months Ended 
 October 1, 2016		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$9,0274.7%$8,2854.9%$7429.0%
For thethe three months ended September 30, 2017,October 2, 2021, we recorded a provision for income taxes of approximately $9.0$9.8 million, or an effective tax provision rate of 18.7%14.5%, as compared to a provision for income taxes of approximately $8.3$11.7 million, or an effective tax provision rate of 23.0%19.1%, for the three months ended October 1, 2016.September 26, 2020. The decrease in theour effective tax rate for the three months ended September 30, 2017October 2, 2021 resulted primarily from a discrete tax benefitan increase in the amount of approximately $4.9 million related to excess tax benefits realized from stock-based compensation pursuantof approximately $3.3 million compared to Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which substantially exceeded the discrete tax benefit of approximately$2.6 million recorded for such excess tax benefits during the three months ended October 1, 2016.September 26, 2020.
Comparison of the Nine Months ended September 30, 2017October 2, 2021 to the Nine Months ended October 1, 2016September 26, 2020
Revenue. Total Product revenue increased $61.5 $62.9 million, or 12.0%7.4%, to $572.9$911.6 million for the nine months ended October 2, 2021 from $848.7 million for the nine months ended September 30, 2017 from $511.4 million for the nine months ended October 1, 2016.26, 2020. The following table details our total product revenues by the geographic area to which the products were shipped for each of the nine months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 (dollars in thousands):

Nine Months Ended
October 2,
2021		September 26,
2020		Increase/
(Decrease)		Percentage
Change
United States (U.S.)$613,197 67.3 %$571,158 67.3 %$42,039 7.4 %
Europe, Middle East and Africa177,053 19.4 176,781 20.8 272 0.2 
Asia and Australia94,134 10.3 73,155 8.6 20,979 28.7 
North and South America (excluding the U.S.)27,190 3.0 27,596 3.3 (406)(1.5)
     Product revenue$911,574 100.0 %$848,690 100.0 %$62,884 7.4 %
 Nine Months Ended
 September 30, 2017 October 1, 2016 
Increase/
(Decrease)
 
Percentage
Change
United States$370,403
 68.3% $345,113
 70.7% $25,290
 7.3%
Europe, Middle East and Africa102,322
 18.9
 81,887
 16.8
 20,435
 25.0
Asia and Australia51,801
 9.6
 46,815
 9.6
 4,986
 10.7
North and South America (excluding United States)17,644
 3.2
 14,368
 2.9
 3,276
 22.8
     Total product revenue$542,170
 100.0% $488,183
 100.0% $53,987
 11.1%
Royalty and other revenue30,757
   23,241
   7,516
 69.3
     Total revenue$572,927
   $511,424
   $61,503
 12.0%
Product revenue increased $54.0 million or 11.1%, to $542.2 million for the nine months ended September 30, 2017 from $488.2 million for the nine months ended October 1, 2016. This increase was primarily due to higher sales ofrevenue from consumables, monitorsservices and semiconductors, which was partially offset byparameters, as well as the impact of approximately $1.7approximately $9.5 million in unfavorableof favorable foreign exchange rate movements from the prior year period that reducedincreased the U.S. Dollar translation of foreign sales that were denominated in various foreign currencies, primarilycurrencies. During the British Pound and Japanese Yen. We estimate that our installed base of circuitnine months ended October 2, 2021, we shipped approximately 213,100 noninvasive technology boards and pulse oximeters increased to approximately 1,566,000 units at September 30, 2017 as compared to 1,482,000 units at October 1, 2016.instruments.
Product revenue generated throughthrough our direct and distribution sales channels increased $55.1$112.4 million, or 13.1%16.1%, to $474.4$810.4 million for the nine months ended October 2, 2021, compared to $698.0 million for the nine months ended September 30, 2017, compared26, 2020. Revenues from our OEM channel decreased $49.5 million, or 32.8%, to $419.3$101.2 million for the nine months ended October 1, 2016. Revenues from our OEM channel decreased $1.1 million, or 1.7%,2, 2021 as compared to $67.8$150.7 million for the nine months ended September 30, 2017 as compared to $68.9 million for the nine months ended October 1, 2016. Total rainbow® product revenue increased by $2.8 million, or 5.5%, to $52.6 million for the nine months ended September 30, 2017, compared to $49.8 million for the nine months ended October 1, 2016.26, 2020.
Royalty and other revenue increased by $7.5 million for the nine months ended September 30, 2017 compared to the nine months ended October 1, 2016, primarily due to higher revenue from NRE services.
Gross Profit. Gross profit consists of total revenue less cost of goods sold. Our gross profit for the nine months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 was as follows (dollars in thousands):
Gross Profit
Nine Months Ended
October 2, 2021		Percentage of
 Net Revenues		Nine Months Ended
September 26, 2020		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$593,45165.1%$556,13965.5%$37,3126.7%
 Nine Months Ended
 September 30, 2017 Gross Profit
Percentage		 October 1, 2016 Gross Profit
Percentage		 Increase/
(Decrease)		 Percentage
Change
Product gross profit$351,190
 64.8% $316,229
 64.8% $34,961
 11.1%
Royalty and other revenue gross profit30,045
 97.7
 23,241
 100.0
 6,804
 29.3
     Total gross profit$381,235
 66.5% $339,470
 66.4% $41,765
 12.3%
CostCost of goods sold increased $19.7 $25.6 million for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020, primarily due to higher material, manufacturing and distribution costs associated with the increase in product sales.
Gross profit decreased to 65.1% for the nine months ended October 2, 2021 compared to 65.5% for the nine months ended September 30, 2017 compared to the nine months ended October 1, 2016, 26, 2020, primarily due to higher product revenue and higher production costs associated with the expansionan elevated level of ourcustomer installations and higher material, manufacturing capacity. Product gross margins remained unchanged at 64.8% for the nine months ended September 30, 2017 and October 1, 2016. Royalty and otherdistribution costs, offset by favorable revenue gross profit increased by $6.8 million for the nine months ended September 30, 2017 compared to the nine months ended October 1, 2016, primarily due to NRE services.mix.
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Table of Contents
Selling, General and Administrative. Selling, general and administrative expenses for the nine months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 were as follows (dollars in thousands):
Selling, General and Administrative
Nine Months Ended
October 2, 2021		Percentage of
 Net Revenues		Nine Months Ended
September 26, 2020		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$291,18031.9%$278,71432.8%$12,4664.5%
Selling, General and Administrative
Nine Months Ended 
 September 30, 2017		Percentage of
Net Revenues		Nine Months Ended 
 October 1, 2016		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$197,33934.4%$184,24436.0%$13,0957.1%
Selling, general and administrative expenses increased $13.1 $12.5 million, or 7.1%4.5%, for the nine months ended October 2, 2021 compared to the nine months ended September 30, 2017 compared to the nine months ended October 1, 2016.26, 2020. This increase was primarily attributabledue to higher payrollcompensation and other employee-related expenses of approximately $10.3 million, higher marketing-related costs of approximately $4.6$14.8 million, higher legal and professional fees of approximately $12.8 million, higher occupancy and other office-related costs of approximately $4.4 million and higher

occupancy travel-related costs of approximately $2.4$0.5 million, which were partially offset by approximately $4.0 million of lower legal fees. Stock-based compensation expenseadvertising and marketing-related costs of approximately $8.7$18.4 million and $7.3 million was included in selling, general and administrative expenses for the nine months ended September 30, 2017 and October 1, 2016, respectively.lower charitable contributions of approximately $3.1 million.
Research and Development. Research and development expenses for the nine months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 were as follows (dollars in thousands):
Research and Development
Nine Months Ended 
 September 30, 2017		Percentage of
Net Revenues		Nine Months Ended 
 October 1, 2016		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$45,8598.0%$44,8568.8%$1,0032.2%
Research and Development
Nine Months Ended
October 2, 2021		Percentage of
 Net Revenues		Nine Months Ended
September 26, 2020		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$103,86011.4%$86,97110.2%$16,88919.4%
Research and development expenses increased $1.0$16.9 million, or 2.2%19.4%, for the nine months ended September 30, 2017October 2, 2021 compared to the nine months ended October 1, 2016,September 26, 2020, primarily due to higher payroll-relatedcompensation-related costs of approximately $3.0$11.6 million and higher engineering project related costs of $0.3 million, higher outside services costs of approximately $0.2 million and higher occupancy costs of $0.2$5.7 million, which were partially offset by capitalized costs related to customer NRE serviceslower professional service fees of approximately $2.9$1.0 million. Included in research and development expenses was approximately $2.3 million and $2.1 million of stock-based compensation expense for the nine months ended September 30, 2017 and October 1, 2016, respectively.
Non-operating (Loss) Income. Non-operating (loss) income consists primarily of interest income, interest expense and foreign exchange gains and losses. Non-operating income for the nine months ended September 30, 2017 and October 1, 2016 was as follows (dollars in thousands):
Non-operating Income
Nine Months Ended 
 September 30, 2017		Percentage of
Net Revenues		Nine Months Ended 
 October 1, 2016		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$1,3190.2%$4230.1%$896211.8%
Non-operating income increased by $0.9 million for the nine months ended September 30, 2017 compared to the nine months ended October 1, 2016. Non-operating income for the nine months ended September 30, 2017 consisted of approximately $1.6 million in net interest income, which was partially offset by approximately $0.2 million of net realized and unrealized gains on foreign currency denominated transactions. Non-operating(loss) income for the nine months ended October 1, 2016 consisted2, 2021 and September 26, 2020 was as follows (dollars in thousands):
Non-operating (Loss) Income
Nine Months Ended
October 2, 2021		Percentage of
 Net Revenues		Nine Months Ended
September 26, 2020		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$(735)(0.1)%$6,1080.7%$(6,843)(112.0)%
Non-operating (loss) income decreased by $6.8 million for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020, primarily due to lower interest yields realized on our invested cash of approximately $2.6$4.5 million ofand a decrease in net realized and unrealized gains on foreign currency denominated transactions and an approximate $0.3 million gain resulting from our deconsolidation of Cercacor, which was partially offset by $2.7 million of interest expense.approximately $2.4 million.
Provision for Income Taxes. Our provision for income taxes for the nine months ended October 2, 2021 and September 30, 2017 and October 1, 201626, 2020 was as follows (dollars in thousands):
Provision for Income Taxes
Nine Months Ended
October 2, 2021		Percentage of
 Net Revenues		Nine Months Ended
September 26, 2020		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$36,2874.0%$27,4033.2%$8,88432.4%
Provision for Income Taxes
Nine Months Ended 
 September 30, 2017		Percentage of
Net Revenues		Nine Months Ended 
 October 1, 2016		Percentage of
Net Revenues		Increase/
(Decrease)		Percentage
Change
$8,1081.4%$25,4205.0%$(17,312)(68.1)%
For the nine months ended September 30, 2017,October 2, 2021, we recorded a provision for income taxes of approximately $8.1$36.3 million, or an effective tax benefit rate of 5.8%18.4%, as comparedcompared to a provision for income taxes of approximately $25.4$27.4 million, or an effective tax rate of 22.9%13.9%, for the nine months ended October 1, 2016.September 26, 2020. The decreaseincrease in theour tax rate for the nine months ended September 30, 2017October 2, 2021 resulted primarily from a discrete tax benefitdecrease in the amount of approximately $35.1 million related to excess tax benefits realized from stock-based compensation pursuantof approximately $8.2 million as compared to ASU 2016-09, which substantially exceeded the discrete tax provision of approximately $7.7 million recorded for such excess tax benefits during the nine months ended October 1, 2016. Partially offsetting this discrete tax benefit was an increase in our effective tax rate resulting from differences in our expected fiscal 2017 geographic compositionSeptember 26, 2020.


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Table of our pre-tax income compared to our expected fiscal 2016 geographic composition as of October 1, 2016.Contents

Liquidity and Capital Resources
Our principal sources of liquidity consist of our existing cash and cash equivalent balances, future funds expected to be generated from operations and funds available borrowing capacity under our revolving credit agreement. At September 30, 2017,facility. As of October 2, 2021, we had approximately $374.0approximately $909.5 million in working capital, andof which approximately $289.9$652.4 million was in cash and cash equivalents as comparedequivalents. In addition to approximately $286.9 million innet working capital, and approximately $306.0 million in cash and cash equivalents at December 31, 2016. We carry cash equivalents at cost that approximates fair value. We currently do not maintain an investment portfolio but have the ability to invest in various security holdings, types and maturities that meet credit quality standards in accordance with our investment guidelines.
As of September 30, 2017, we had cash totaling $170.8approximately $147.6 million held outsideof available borrowing capacity (net of the U.S.,outstanding letters of which approximately $18.3 million was accessible without additional tax cost and approximately $152.5 million was accessible at an incremental estimated tax cost of approximately $47.4 million. credit) under our credit facility.
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 October 2, 2021, we had cash totaling $91.8 million held outside of the U.S., of which approximately $50.3 million was accessible without additional tax cost and approximately $41.5 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 under our line of creditwithout additional tax cost to fund our domestic operations and do not anticipate the need to repatriate funds associated with our permanently reinvested foreign earnings.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 with respect to any such repatriation.repatriate these funds.
We are currently evaluating the collectability of certain amounts that have been paid to our appointed foreign agent in connection with a foreign government tender that have not been timely remitted by such agent to us. As of September 30, 2017, the net amount due to us from such agent was approximately $8.6 million. See Note 6 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Our Amended and Restated Credit Agreement (Restated Credit Facility) with JPMorgan Chase Bank, N.A., as Administrative Agent and a Lender, Bank of America, N.A., as Syndication Agent and a Lender, Citibank, N.A., as Documentation Agent and a Lender, and various other Lenders (collectively, the Lenders) provides for up to $250.0 million in borrowings in multiple currencies, with an option, subject to certain conditions, for us to increase the aggregate borrowing capacity to up to $550.0 million in the future. The Restated Credit Facility also provides for a sublimit of up to $50.0 million for the issuance of letters of credit and a sublimit of $125.0 million in specified foreign currencies. All unpaid principal under the Restated Credit Facility will become due and payable on January 8, 2021. See Note 10 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Cash Flows
The following table summarizes our cash flows (in thousands):
Nine Months Ended
October 2,
2021		September 26,
2020
Net cash provided by (used in):
Operating activities$167,151 $146,545 
Investing activities(31,465)(80,840)
Financing activities(126,666)38,954 
Effect of foreign currency exchange rates on cash(89)(294)
Increase in cash, cash equivalents and restricted cash$8,931 $104,365 
  Nine Months Ended
  September 30,
2017		 October 1,
2016
Net cash (used in) provided by:   
Operating activities$9,027
 $88,030
Investing activities(41,195) (18,629)
Financing activities13,030
 (75,348)
Effect of foreign currency exchange rates on cash3,112
 (382)
Increase (decrease) in cash and cash equivalents$(16,026) $(6,329)
Operating Activities.Cash provided by operating activities was approximately $9.0$167.2 million for the nine months ended September 30, 2017. NetOctober 2, 2021, generated primarily from net income from operations was $131.2of $161.4 million. Non-cash activity included stock-based compensation of $33.5 million which was offset by non-cash activity includingand depreciation and amortization of $14.4$26.4 million. An additional source of cash included a decrease in other inventories and other current assets and an increase in deferred revenue and other contract-related liabilities and other non-current liabilities of $12.3 million, $4.4 million, $1.4 million and stock-based compensation of $11.2 million.$0.6 million, respectively. These sources of cash were partially offset by other changes in operating assets and liabilities, including a decrease in accounts payable, accrued liabilities, income taxes payable and accrued compensation of $66.9approximately $4.3 million, primarily related to tax payments for the year ended December 31, 2016; a decrease in deferred revenue of $5.9$4.0 million, $1.5 million and $1.3 million, respectively, primarily due to decreased channel inventory; increases in inventories and deferred costthe timing of goods sold of $26.0 million and $16.2 million, respectively;payments; an increase in accounts receivable of $17.3approximately $51.0 million, primarily due to the timing of cash receipts; an increase in other current assetslease receivable of $11.1approximately $9.3 million primarily related to estimated tax payments for the current fiscal year; a decrease in accrued compensation of $9.1 million, primarily due to the timing of payments and an increase in accounts payabledeferred costs and other contract assets of $3.7 million, primarily due toapproximately $2.6 million.
For the timing of payments.

Cashnine months ended September 26, 2020, cash provided by operating activities was approximately $88.0$146.5 million, for the nine months ended October 1, 2016, arisinggenerated primarily from net income from operations of $85.4$169.6 million. Non-cash activity included stock-based compensation of $36.4 million and depreciation and amortization of $12.4 million, stock-based$21.2 million. Additional sources of cash included an increase in accounts payable, deferred revenue and other contract-related liabilities, accrued liabilities and accrued compensation of $9.7$31.8 million, $10.0 million, $4.7 million and deferred income taxes of $5.0 million. In addition, deferred revenue decreased by $10.9$3.7 million, and accounts payable increased by $9.4 million during the nine months ended October 1, 2016.respectively. These sources of cash were primarilypartially offset by other changes in operating assets and liabilities, including a decrease in income tax payable of approximately $2.8 million, an increase in inventory of approximately $86.8 million, an increase in other current assets of approximately $23.5 million, an increase in accounts receivable of $13.4approximately $9.5 million, primarily due to the timing of collections, an increase in deferred cost of goods sold of $11.3 million, an increase in inventory of $5.1 million and increases in prepaid income taxes, other current assets and prepaid expenses of $5.6 million, $4.4 million and $2.9 million, respectively, all due to the timing of related payments.
Investing Activities. Cash used in investing activities for the nine months ended September 30, 2017 was $41.2 million, consisting of $37.8 million for purchases of property and equipment, of which approximately $25.3 million related to the purchase of a corporate aircraft; capitalized intangible asset costs of $2.2 million related primarily to patent and trademark costscash receipts and an increase in long-term investmentslease receivable of $1.1approximately $6.3 million.
Investing Activities. Cash used in investing activities for the nine months ended October 1, 20162, 2021 was $18.6approximately $31.5 million, consisting primarily of $13.7approximately $20.7 million for purchases of property and equipment, approximately $8.2 million of capitalized intangible asset costs of $4.0 million related primarily to patent and trademark costs and $0.8license fees and approximately $2.6 million related to the deconsolidationfor strategic investments.


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Table of Cercacor. See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to the deconsolidation of Cercacor.Contents
Financing Activities. Cash provided by financing activities forFor the nine months ended September 30, 201726, 2020, cash used in investing activities was $13.0approximately $80.8 million, consisting primarily driven by proceeds from the exercise of employee options totaling $55.7approximately $78.3 million for business combinations, $60.0 million for purchases of property and equipment, $6.8 million for strategic investments and $5.8 million of capitalized intangible asset costs related primarily to patent and trademark costs, which were partially offset by common stock repurchase transactionscash provided by maturities of $42.6short-term investments of approximately $70.0 million.
Financing Activities. Cash used in financing activities for the nine months ended October 1, 20162, 2021 was $75.3approximately $126.7 million, consisting primarily driven byof repurchases of our common stock repurchase transactions during the nine month period totaling $68.2of approximately $128.9 million and net repayments under our Restated Credit Facilitywithholding of $32.5shares for employee payroll taxes for vested equity awards of approximately $16.7 million, which were partially offset by the proceeds from the issuance of common stock (upon exerciserelated to employee equity awards of options) totaling $26.1approximately $19.0 million.
For the nine months ended September 26, 2020, cash provided by financing activities was approximately $39.0 million, consisting primarily of proceeds from the issuance of common stock related to employee equity awards of approximately $41.0 million, which was partially offset by the withholding of shares for employee payroll taxes for vested equity awards of approximately $1.4 million and repurchases of our common stock of approximately $0.6 million.
Capital Resources and Prospective Capital Requirements
As of September 30, 2017, we did not have any outstanding loan draws and had $0.3 million in outstanding letters of credit under our Restated Credit Facility, leaving available borrowing capacity of $249.7 million. We also had outstanding capital lease obligations of less than $0.1 million related primarily to office and computer equipment. We had no other debt obligations and were in compliance with all bank covenants.
In September 2015, the Board authorized a stock repurchase program for the repurchase of up to 5.0 million shares of our common stock over a period of up to three years. The stock repurchase program may be carried out at the discretion of a committee comprised of our Chief Executive Officer and Chief Financial Officer through open market purchases, one or more Rule 10b5-1 trading plans, block trades and in privately negotiated transactions.  As of September 30, 2017, approximately 2.4 million shares remained authorized for repurchase under this stock repurchase program. For additional information regarding our stock repurchase program, see Note 12 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We expect to fund our future operating, investing and financing activities through our available cash, future cash from operations, funds available under our Restated Credit Facilitycredit facility and other potential sources of capital. In addition to funding our normal working capital requirements, we anticipate additional capital purchasesexpenditures primarily related to renovating our new corporate headquarters. We also anticipate that we will continue to repurchaseinvestments in infrastructure growth. Possible additional uses of cash may include acquisitions of and/or strategic investments in technologies or technology companies, investments in property and repurchases of common stock under our authorized stock repurchase programprogram. However, any repurchases of common stock will be subject to numerous factors, including the availability of our common stock, general market conditions, the trading price of our common stock, availableavailability of capital, alternative uses for capital and our financial performance. Possible additional uses of cash may includeIn addition, the acquisition of technologies or technology companies.
The amount and timing of our actual operating, investing and financing activities will vary significantly depending on numerous factors, including changes in working capital, the leveltiming and amount of our capital expenditures, costs of product development efforts, our timetable for infrastructure expansion, any stock repurchase activity and costs related to our domestic and international regulatory requirements. However,Despite these investment requirements and potential expenditures, we anticipate that our existing cash and cash equivalents as well asand amounts available under the Restated Credit Facility,our 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. For additional information related to our credit facility, please see Note 15 to our accompanying condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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. As of September 30, 2017,October 2, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of net revenues, expenses, assets and liabilities. We regularly evaluate our estimates and assumptions related to our critical accounting policies, including revenue recognition, inventory valuation, lessee right-of-use (ROU) assets and deferred revenue, inventory and related reserves for excess or obsolete inventory, allowance for doubtful accounts,lease liabilities, stock-based compensation, goodwill, deferredcompensation, business combinations, deferred taxes and related valuation allowances, uncertain tax positions, tax contingencies, litigation costs and loss contingencies. We base our
These estimates and assumptionsjudgments are based on current facts, historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of whichand 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 carrying valueseffects of assets and liabilities and the recording of revenue, costs and expensesmatters that are not readily apparent from other sources. Changesinherently 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 on ourto the condensed consolidated financial statements and future results of operations may be material.
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There have been no material changes to any of our critical accounting policies during the nine months ended October 2, 2021. For a description of ourthese critical accounting policies, please refer to “Critical Accounting Estimates” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,January 2, 2021, which was filed with the SEC on February 15, 2017. There have been no material changes to23, 2021.
RecentAccounting Pronouncements
For details regarding any of our criticalrecently adopted and recently issued accounting policies during the nine months ended September 30, 2017.
RecentAccounting Pronouncements
Seestandards, see Note 2 to theour accompanying condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recently issued or adopted accounting standards.10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. 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 including forward contracts, 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 investment portfoliocash 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. Our riskAs of October 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 in interest expense is currently limitedrelated to interest associated with our outstanding capital lease arrangements, which have fixed interest rates, and any borrowings under our Restated Credit Facility and any amendments thereto.expense. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We ensure the safety and preservation ofTherefore, declines in interest rates over time will reduce our invested principal funds by limiting default risk, market risk and reinvestment risk. We reduce default risk by investinginterest income while increases in investment grade securities.interest rates will increase our interest income. A hypothetical 100 basis point change in interest rates along the entire interest rate yield curve would not significantly affect the fair value of our interest-sensitive financial instruments at September 30, 2017. Declines in interest rates over time will, however, reduceincrease or decrease our interest incomerate yields on our investments and expense while increases in interest rates will increase our interest income and expense.by 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 the 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. Realized and unrealized foreign currency gains or losses on these transactions are included in our statements of comprehensive income as incurred. Furthermore,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 comprehensive incomeoperations as incurred, and are converted to U.S. Dollars at the average exchange rates for a respective period.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 raterates 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 primarily with the Canadian Dollar, Euro, Japanese Yen, Swedish Krona, Canadian Dollar,the British Pound, Mexican Peso, Turkish Lira and Australian Dollar, against the U.S. Dollar. Foreign currency exchange rates have experiencedmay experience significant movements in recent years, and such volatility may continue infrom one period to the future. Duringnext. Specifically, during the three and nine months ended September 30, 2017,October 2, 2021, we estimate that changesfluctuations in the exchange rates ofbetween the U.S. Dollar relative primarily toand other foreign currencies, including the Euro, andthe Australian Dollar, the Canadian Dollar, the British Pound unfavorablyand the South Korean Won, favorably impacted our revenues by $0.2 million and $1.7 million, respectively, when compared to foreign exchange rates from the prior year period. $9.5 million.
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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 September 30, 2017October 2, 2021 would have resulted in an estimated reduction of $10.6$13.0 million in reported pre-tax income for the nine months ended September 30, 2017.October 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 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) regulations, rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive OfficerCEO and Chief Financial Officer (CFO), as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating theour disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) or Rule 15d-15(b) promulgated by the SEC under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive OfficerCEO and Chief Financial Officer,CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive OfficerCEO and Chief Financial OfficerCFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
There has been During the three months ended October 2, 2021, there were no changechanges in our internal control over financial reporting during(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the quarter ended September 30, 2017Exchange Act) that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 1421 to theour accompanying condensed consolidated financial statements under the caption “Litigation” included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

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Item 1A. Risk Factors
Before you decide to invest or maintain an interest in our common stock, you should consider carefully the risks described below, which have been updated since the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SecuritiesThe following risk factors and Exchange Commission (SEC) on February 15, 2017, together with the other information containedincluded in this Quarterly Report on Form 10-Q should be carefully considered. The risks and any recent Current Reports on Form 8-K. We believe the risksuncertainties described below are not the risks that are material to us as of the date of this Quarterly Report on Form 10-Q. Otheronly ones we face. Additional risks and uncertainties including those not presently known to us or that we do not currently consider material,presently deem less significant may also impair our business operations. If any of the following risks comescome 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 or interest.
investment. Risk factors marked with an asterisk (*) below include a substantive change from or an update to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,January 2, 2021, filed with the SEC on February 15, 2017.23, 2021.
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 Quarterly Report on Form 10-Q.
•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.
•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.
•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 reprocessed single-patient-use Masimo 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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•The laws of foreign countries may not adequately protect our intellectual property rights.
•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.
•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.
•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 or in certain circumstances be required to take 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 is increasingly demanding and continues to evolve.
•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.
•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.
•Our business, financial condition and results of operations may be adversely affected by the COVID-19 pandemic.
•If our employees become ill or otherwise incapacitated, our operations may be adversely impacted.
•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®.
•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.
•Rights provided to Cercacor in the Cross-Licensing Agreement may 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.
•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.
•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® technology and Masimo rainbow SET® technologies that servesserve as the basis of our primary product offerings. Continued market acceptance of products incorporating Masimo SET®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. Health careHealthcare providers that currently have significant investments in competitive pulse oximetry products may be reluctant to purchase our products. If hospitals and other health carehealthcare providers do not believe our Masimo SET® platform is 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. If we are unable to achieve additional market acceptance of our core technology or products incorporating Masimo SET®, we will not generate significant revenue growth from the sale of our products, which would adversely affect our business, financial condition and results of operations.
*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.
Products that we have introduced into the market in recent years may not be accepted in the market. In general,Many of our recent noninvasive measurement technologies are considered disruptive. These recent 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. While this is the adoption pattern experienced historically with other new noninvasive measurements, such as regional oximetry,Our product portfolio continues to expand, and we are unableinvesting significant resources to guarantee that such adoption pattern will apply to our recententer into, and future technologies.
Even if our customers recognize the benefits of our products, we cannot assure you that our customers will purchase them in quantities sufficientsome cases create, new markets for us to be profitable or successful.these products. We are continuing to invest in significant sales and marketing resources to achieve market acceptance of these products, with no assurance of success.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:including but not limited to:
•perceived clinical benefits from our products;
•perceived cost effectiveness of our products;
•perceived safety and effectiveness of our products;
•reimbursement available through Centers for Medicaregovernment and Medicaid Services (CMS)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.
*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 areSince 1998, we have been a party to a cross-licensing agreement with Cercacor, which has been(as amended, several times, most recently in an Amended and Restated Cross-Licensing Agreement, effective January 1, 2007 (the Cross-Licensing Agreement). Under the Cross-Licensing Agreement,Agreement), under which we granted Cercacor:
•
an exclusive, perpetual and worldwide license, with sublicense rights, to use all Masimo SET® technology owned by us, including all improvements on 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.
•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.”

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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“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“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“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 (GPOs)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 mayare 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.offer, effectively pricing their competing products at a loss.
Rapid product development andContinuing technological advances and new product introductions within the medical device industry place our products at risk of obsolescence. Our long-term success depends upon the development and successful commercialization of new products, new or improved technologies and additional applications for Masimo SET® and licensed rainbow® technology.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.
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 U.S. Food and Drug Administration (FDA)products that are cleared products,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 FDAregulatory clearance or approval of their competing products. Competition could result in pressure from our customers to reduce the price of our products and incould 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. 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. In addition, in September 2021, Apple, Inc. announced that its Apple Watch Series 7 includes a blood oxygen level monitoring feature and a sleep tracking function, both of which compete with our existing products. 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.

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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 Masimo SET® and licensed rainbow® technology,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 Masimo SET® and licensed rainbow® technology.our technologies. Although we expect that our OEM partners will accept and actively market, sell and distribute products that incorporate licensed rainbow® technology,our technologies, they may not elect, and have no contractual obligation, to 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 Masimo SET® and licensed rainbow® technology.our technologies. The failure of our OEM partners to successfully market, sell or distribute products incorporating theseour 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 U.S. hospitals depends, in part, on our relationships with GPOs. Many existing and potential customers for our products are members of GPOs. GPOs negotiate beneficial pricing arrangements and contracts which are sometimes exclusive, with medical supply manufacturers and distributors.distributors that may include provisions for sole sourcing and bundling, which generally reduce the choices available to member hospitals.
These negotiated prices are made available to a GPO’s affiliated hospitals and other members. If we are not one of the providers selected by a GPO, the GPO’s affiliated hospitals and other 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. For the nine months ended September 30, 2017 and October 1, 2016, shipmentsShipments of our pulse oximetry products to customers that are members of GPOs represented approximately $308.0 million and $279.8 million, respectively,represent approximately 50% of our revenue from sales to U.S. hospitals.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.
Certain GPOs are creating, coordinating and facilitating regional purchasing coalition (RPC) supply chain networks that include anti-competitive practices such as sole sourcing and bundling. These RPCs circumvent and potentially violate rules of conduct for GPOs and have the effect of reducing product purchasing decisions available to the hospitals that belong to these regional organizations. If the GPOs and RPCs are permitted to continue practices that limit, reduce or eliminate competition, we could lose customers who are no longer able to choose to purchase our products, resulting in lower sales that could adversely affect our business, financial condition and results of operations.
*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.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 health carehealthcare payers. The abilitylack of our health care provider customers, including hospitals, to obtain adequate coverage and reimbursement for our products or the procedures in which our products are used may impactdeter customers from purchasing our customers’ purchasing decisions. Therefore, our customers’ inability to obtain adequate coverage and reimbursement for our products or reimbursement for the procedures in which our products are used would have a material adverse effect on our business.

Third-party payers have adopted, and are continuing to adopt, health care policies intended to curb rising health care costs. These policies include, among others:
controls on reimbursement for health care services and price controls on medical products and services;
limitations on coverage and reimbursement for new medical technologies and procedures; and
the introduction of managed care and prospective payment systems in which health care providers contract to provide comprehensive health care for a fixed reimbursement amount per person or per procedure.products.
We cannot guarantee that governmental or third-party payers will reimburse or continue to reimburse,begin reimbursing a customer for the cost of our products or the procedures in which our products are used. In fact, some payers have indicated that they are not willing to reimburse for certain of our products or for certain of 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 to our customers. for the use of such products.
These trends could lead to pressure to reduce prices for our current and future products, and couldhinder our ability to obtain market adoption, cause a decrease in the size of the market or a potentialpotentially increase in competition, thatany of which could have a material adverse effect on our business, financial condition and results of operations.
We do not control payorpayer decision-making with respect to coverage and payment levels for our products. Additionally, we expect many payorspayers to continue to explore cost-containment strategies (e.g., comparative and cost-effectiveness analyses, so-called ”pay-for-performance”“pay-for-performance” programs implemented by various public government health carehealthcare programs and private third-party payors,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.
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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, or may require that we reduce the price of our products, 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. Such developmentsIn 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.
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.
StatesFrom time to time, states and other local regulatory authorities may issue guidelines regarding the appropriate scope and use of our products from time to time.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. Although aA lack of inclusion into scope of practice procedures does not prohibit usage, it may limit adoption.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 result of the continued consolidation in the health care industry, we may experience decreasing prices for our products due to the potential increased market pricing power of our health care provider customers. If these and other competitive forces drive down the pricestockpiling of our products and we are not able to counter that pressure with cost reductions toby, or excess inventory at, our existing productscustomers, future orders may be delayed or the introduction of new higher priced products, our product gross profit margins will decline. This, in turn, could have a material adverse effect on our business, financial condition and results of operations.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, distributiondistributor and direct customers. For example, sales to two just-in-time distributors each represented 10% or more of our product sales for the fiscal quarter ended October 2, 2021. We cannot provide any assuranceassurances 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. For the nine months ended September 30, 2017 and October 1, 2016, we had sales through two just-in-time distributors, which in total represented approximately 24.6% and 27.4% of our total revenue, respectively.

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 forcedobligated to pay in order to continue to offer products to our customers through these distributors or which may forceobligate us to distribute our products directly to our customers. The loss of any large customer or distributor, or an increase in distributor fees or the risks associated with selling directly to our customers could have a material adverse effect on our business, financial condition and results of operations.
Imitation
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Counterfeit Masimo sensors and third-party medical device reprocessors that reprocess ourreprocessed single-patient-use Masimo sensors may harm our reputation. Also, these imitationcounterfeit 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 are awarebelieve that other organizationsentities are manufacturing and selling imitationcounterfeit Masimo sensors. In addition, we are aware that 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 imitationcounterfeit and third-party reprocessed sensors are sold at lower prices than new Masimo sensors.Our experience with both these imitationcounterfeit 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 consider purchasingpurchase some of their sensor requirements from these imitationcounterfeit manufacturers and third-party reprocessors in an effort to reduce their sensor costs.
These imitationcounterfeit and reprocessed sensors have led and may continue to lead to confusion with our genuine Masimo products;products, have reduced and may continue to reduce our revenue;revenue, and, in some cases, have harmed and may continue to harm our reputation if customers conclude incorrectly that these imitationcounterfeit or reprocessed sensors are original Masimo sensors.
In addition, we have expended a significant amount of time and expense investigating issues caused by imitationcounterfeit and reprocessed sensors, troubleshooting problems stemming from such sensors, educating customers about why imitationcounterfeit and reprocessed sensors do not perform to their expectations, enforcing our proprietary rights against the imitationcounterfeit manufacturers and reprocessors, and enforcing our contractual rights under our customer contracts.rights.
In response to these imitationcounterfeit sensors and third-party reprocessors, we offer to our customers our own Masimo reprocessed sensors, which we re-manufacture and test to ensure that they meet the same performance specifications as our new Masimo sensors. In addition, 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. We believe this technology will help ensure that hospitals, clinicians and, ultimately, their patients receive true Masimo measurement quality and performance, and will curtail some of the harm to us that results when customers experience performance and other problems with imitation and reprocessed sensors. However, some customers may object to the X-Cal® technology, potentially resulting in the loss of customers and revenues. In addition,
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 generallyalso offered at a lower price and, therefore, may reduce certain customer demand for our new sensors. As a result, increased sales of genuineour own Masimo reprocessed sensors may result in lower revenues, which could negatively impact our business, financial condition and results of operations.
From time to time, we may carry out strategic initiatives that may not be viewed favorably by our customers, or that could negatively impact our business, financial condition and results of operations.
We expect to continue to carry out strategic initiatives and investments that we believe are necessary to grow our revenues and expand our business, both in the U.S. and abroad. For example, since 2013, we have made incremental investments in additional sales force resources whose primary focus is to work with hospitals to identify new opportunities for certain noninvasive measurement technologies. We also intend to continue 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 these initiatives and investments continue to be in the long-term best interests of Masimo and our stockholders, there are no assurances that such initiatives and investments will yield favorable results for us. Accordingly, if these initiatives and investments are not viewed favorably by our customers, our business, financial condition and results of operations could be adversely affected.

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, including Masimo SET® and licensed rainbow® technology. We rely onproducts. 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 technology and rights. However, these legal meansintellectual 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 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, we cannot be assured that any of our pending patent applications will result in the issuance of a patent to us. The PTO may deny or require a significant narrowing of claims in our pending patent applications, and patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection or may not be issued in a form that is advantageous to us. We could also incur substantial costs in proceedings before the PTO.
As part of the Leahy-Smith America Invents Act (the Leahy-Smith Act), which was enacted in 2011, the PTO has introduced procedures that provide additional administrative pathways for third parties tomay challenge our issued patents. IPR is one of these procedures. The number ofpatents through procedures such as Inter-Partes Review (IPR). In many IPR challenges, filed is increasing,the U.S. Patent and in many cases, the PTO is cancelingTrademark Office (PTO) cancels or significantly narrowingnarrows issued patent claims. Accordingly, even if a patent is granted by the PTO, there is a risk that it may not withstand an IPR challenge. 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. In addition, recent case law has increased uncertainty regarding the availability of patent protection for certain technologies and the costs associated with obtaining patent protection for those technologies. Some of our patents related to our Masimo SET® algorithm technology began to expire in March 2011. Additionally, upon the expiration of other issued or licensed patents, we may lose some of our rights to exclude competitors from making, using, selling or importing products using the technology based on the expired patents. While we seek to offset potential losses relating to important expiring patents by securing additional patents on commercially desirable improvements, there can be no assurance that we will be successful in securing such additional patents, or that such additional patents will adequately offset the effect of expiring patents. For example, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations.
In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents once obtained. Depending on decisions by the U.S. Congress, the federal courts and the PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we might obtain in the future. Additionally, there is no assurance that competitors will not be able to design around our patents.
We also rely on contractual rights with the third parties that license technology to us to protect our rights in such licensed technology. In addition, we rely on unpatented proprietary technology. We cannot assure you that we can meaningfully protect all of our rights in ourutilize unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our unpatented proprietary technology.
We seek to protect ourand know-how and other unpatented proprietary technology withoften rely on confidentiality agreements and intellectual property assignment agreements with our employees, OEM partners, independent distributors and consultants.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. In addition, we
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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.
Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. If we fail to apply for intellectual property protection 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.

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 ismay 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:
increase the cost of our products;
•be expensive and time consumingtime-consuming to defend;
defend and result in us being required to paypayment of significant damages to third parties;
•force us to ceasestop making or selling products that incorporate the challenged intellectual property;
•require us to redesign, reengineer or rebrand our products, product candidates and technologies;
•require us to enter into royalty or licensing agreements in order to obtainthat would increase the right to use a third-party’s intellectual property on terms that may not be favorable or acceptable to us;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; and
otherwiseany 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, andrights. As a result, we may bring additionalinitiate 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 significant 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 settlementssettlements. We believe some of the new market entrants in 2006, 2015the healthcare and 2016,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. 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.
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.


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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 upgradednew products in the U.S., which could severely harm our business.
EachUnless an exemption applies, each medical device that we wish to market in the U.S. generally must first undergo premarket review by the FDA and receive clearance or approval 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 FDAU.S. Food and Drug Administration (FDA) may clear or approve our products only for limited indications for use, which would limit our ability to market the product to only such indications for use. We cannot guarantee thatAdditionally, the FDA willmay 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 threefour to sixnine 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;required, and that the FDA may not rely on approaches that it had previously accepted to support 510(k) clearance.

These changes could lead to more review cycles or to decisions by the FDA that our products are not substantially equivalent or require greater amounts of information to demonstrate substantial equivalence. As a result, we have experienced lengthier FDA 510(k) review periods over the past few years, which haveclearance can be delayed the 510(k) clearance process for our products.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 humanstudy 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, depending onif the study involves a significant risk posed by a study,device, we may beare 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 resourcesresources. In addition, public health emergencies and ifother extraordinary circumstances may disrupt the conduct of our clinical trials. If the FDA determines that we have not complied with such requirements, itthe 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.products. 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 clearance of a de novo request classification or PMA approval of a PMA is much more costly, lengthy and uncertain than the process for obtaining 510(k) clearance. Clearance of a de
De novo request 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 to three yearsyear from the time of submission of the PMA, but may be longer.
We sell consumer versions of our iSpO2®and MightySat™® pulse oximeters that are not intended for medical use. We are marketing these products in accordance with the FDA’s current policy for products that are intended for wellness or fitness uses. Some of our products or product features may alsonot be exempted fromsubject 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 underpursuant to Section 520(o) of the FDCA, which was enacted as part of the 21st Century Cures Act (Cures Act) in December 2016 and excludes certain software functions from the statutory definition of a device. We cannot assure you thatIn 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 not change its policy regardingneed to seek clearance or approval of such products to continue marketing these products at the regulationend of these products.the COVID-19 pandemic. If the FDA changes its policypolicies or concludes that our marketing of these products is not in accordance with its current policypolicies 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.
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 SET® and licensed rainbow® technology to market these products in the U.S. We cannot guarantee that thetechnologies. The FDA clearances we have obtained willmay not make it easier for our OEM partners to obtain clearances of products incorporating these technologies, or that the FDA willmay not grant clearances on a timely basis, if at all, for any future productproducts incorporating Masimo SET® and licensed rainbow®technologytechnologies that our OEM partners propose to market.
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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 coversgoverns 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 2013, the FDA inspected our facility in Irvine, California and issued an FDA Form 483 listing observations the investigator believed may constitute violations of statutes or regulations administered by the FDA, including observations relating to complaint handling, medical device reporting and corrective and preventative action (CAPA) procedures. We submitted responses to the Form 483. In August 2014, we received a warning letter (the Warning Letter) related to the Irvine inspection. We submitted a response (the Response Letter) to the Warning Letter and attended a regulatory meeting with the FDA in September 2014. At the meeting, in addition to discussing our Response Letter, the FDA raised issues beyond the scope of the Warning Letter in the areas of Good Manufacturing Practices, quality, bioresearch monitoring and labeling/promotion.

In January 2016, the FDA issued certificates to foreign governments (CFGs) for products manufactured in our Irvine, California facility, which allows us to continue to register and import products into certain countries that require CFGs. In May 2017, the FDA inspected the Irvine facility and evaluated our corrective actions in response to the Warning Letter. At the close of that inspection, the FDA did not issue a Form 483 and later issued a letter indicating that, based on the FDA’s evaluation, it appeared that we had addressed the violations contained in the Warning Letter. The letter indicated that future FDA inspections and regulatory activities will further assess the adequacy and sustainability of the corrections.
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 items:following:
•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;
withdrawal•withdrawals or suspensionsuspensions of clearance or approval of our products or those of our third-party suppliers by the FDA or other regulatory bodies;
•product recallrecalls or seizure;seizures;
•orders for physician notification or device repair, replacement or refund;
interruption•interruptions of production or inability to export to certain foreign countries; and
•operating restrictions.
If any of these itemsevents 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 and may differ from thatthan required for obtainingto 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. These include the new European Union Medical Devices Regulation (EU) 2017/745 (MDR), which came into effect on May 26, 2021 and a new regulatory regime in the UK effective as of January 1, 2021 as a result of the UK’s exit from the EU and the expiry of the transitional periods, on December 31, 2020 (Brexit).

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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 modificationsmodification to an FDA-cleareda device that is cleared by the FDA that could significantly affect its safety or effectiveness or that wouldcould constitute a major change in its intended use would require a new 510(k) clearance or possiblyapproval and certain modifications to devices cleared or approved by foreign regulatory authorities may also require a de novo reviewnew clearance or PMA. 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. The standards for determining which modifications require a new 510(k) clearance are ambiguous, and the FDA may disagree with our conclusions.
For thosedevice modifications that we conclude do not require a new 510(k), if the FDA disagrees with our conclusion and requires new clearancesregulatory clearance or approvals for the modifications,approval, we may be required to recall and to stop marketing the modified devices whichif 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.
*Federal regulatoryRegulatory reforms may make it difficult to maintain or attain approvalimpact our ability to develop and commercialize our products and technologies.
From time to time, legislation is drafted and introduced in Congressby governments that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of medical devices. For example, in December 2016, Congress enacted the Cures Act, which contained several provisions related to the review and approval of new medical technologies. Along with other changes, the Cures Act established a statutory program for “breakthrough” devices, defined as a device intended to treat or diagnose a life-threatening or irreversibly debilitating disease or condition and (1) that represents a breakthrough technology, (2) that has no approved/cleared alternatives, (3) that offers significant advantages over approved/cleared alternatives or (4) the availability of the device is in the best interest of patients. The FDA will apply additional resources to help speed the approval or clearance of devices that are designated as breakthrough devices. The Cures Act also included provisions related to the “least burdensome” principle with respect to demonstrating substantial equivalence or reasonable assurance of safety and effectiveness and expanded the number of patients that could be treated by a device approved under a Humanitarian Device Exemption, among other provisions.
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 servicers,third-party services, and createscreated 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, the FDA regulations and guidance are often revised or reinterpreted by the FDAgovernment agency in ways that may significantly affect our business and ouror products. It is impossible to predict whether additional legislative changes will be enacted or whether FDA regulations, guidance or interpretations will be changed, and what the impact of such changes, if any, may be. However, any futureFuture regulatory changes could make it more difficult for us to maintainobtain or attainmaintain 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 MDR became applicable to our medical devices from May 26, 2021. The MDR requires 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 from 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, which can result inand may need to initiate voluntary corrective actions or agency enforcementin certain circumstances be required to take corrective actions, includingsuch as the recall of our products.
UnderRegulatory 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)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 governmentalregulatory 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. In the case of theThe FDA the authority to require a recall generally must be based on an FDA findingfind that there is a reasonable probability that the device would cause serious adverse health consequences or death.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 is found 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 product correction or removal of our products in the future. A correction is a repair, modification, adjustment, relabeling, destructionIn addition, third parties that commercialize products incorporating our technologies may initiate similar actions or inspection of a device, without its physical removal from its point of use to some other location. A removal is the physical removal of a device from its point of use to some other location for repair, modification, adjustment, relabeling, destruction or inspection. If aproduct corrections. Any correction or removal is 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, the correction or removal 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 or corrections of our products or third party products that incorporate our technologies, or enforcement actions would divert managerial and financial resources and could have an adverse effect on our financial condition and results of operations.

From time to time, we have initiated various field actions related to our products as required by applicable law and regulations, including device corrections and removals, none of which were material to our operating results. Some of these field actions involved “reportable events” that were reported to the FDA and other foreign regulatory agencies within the appropriate regulatory timeframes. Because of In addition, given our dependence upon patient and physician perceptions, any negative publicity associated with these or any future voluntary 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 or promotion of a device outside its cleared or approved indications is known as “off-label” use.use or promotion, respectively. 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.medicine, but we may not promote our products “off-label.” 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 we or our OEM partners have promoted our products were promoted for off-label use or have madethat false, or 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 it could 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, or other communications, to constitute promotion of an uncleared or unapproved use. Although, depending on the facts and circumstances, such promotion might be protected speech under the First Amendment to the U.S. Constitution, we cannot be sure that government authorities or a court would accept such an argument. 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, in addition to potential extensive fines and penalties, our reputation could be damaged, and adoption of our products would be impaired. Although our policy is to refrain from statements that could be considered off-label promotion of our products, the regulatory standards regarding off-label promotion are ambiguous,impaired and the FDA or another regulatory agencywe could conclude that we have engaged in off-label promotion.be subject to extensive fines and penalties.
In addition to promoting our products in a manner consistent with our clearances,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 to be misbranded under the FDCA or to violatein 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 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. and foreign laws, such as the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), govern the transmission, security and privacy of individually identifiable information and sensitive health and other personal 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 this 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 sales to third parties, affords new consumer rights, 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 specified personal information due to failure to implement reasonable security procedures. Other U.S. states have implemented or are in the process of implementing analogous legislation. The impact of the CCPA and these other state legislations 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.
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, intentional 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 health carehealthcare laws, including fraud and abuse laws and health information privacy and security laws, and could face substantial penalties if we are unable to fully comply with these laws.
Although we do not provide health care services or receive payments directly from Medicare, Medicaid or other third-party payers for our products or the procedures in which our products are used, health care regulation by federal and state governments will impact our business. Health careHealthcare fraud and abuse laws potentially applicable to our operations include, but are not limited to:
•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 health carehealthcare 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 provisionsPhysician 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 federal Health Insurance PortabilityU.S.; and Accountability Act of 1996 (HIPAA), which established federal crimes for knowingly and willfully executing a scheme to defraud any health care benefit program or making false statements in connection with the delivery of or payment for health care benefits, items or services; 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, and state laws governing the privacy of certain patient identifiable health information (PHI).insurers.
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 imposes liability on any person or entity that, 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 Civil False Claims Act, known as “qui tam” actions, can be brought by a private individual, referred to as 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. Such complaints are filed under seal and remain sealed until the applicable court orders otherwise. In recent years, the number of suits brought by private individuals has increased dramatically. Manufacturers, like us, can be held liable under false claims laws, even if they do not submit claims to the government, if theyIf we are found to have caused medical care providers to have submitted claims to the government for payment for a service or the use of a device that is not properly covered for government reimbursement.
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 laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs and imprisonment. In particular, when an entity is determined to have violated the federal Civil False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of $10,975 to $21,916 (adjusted for inflation) for each separate false claim.
We have certain arrangements with hospitals that may be affected by health care fraud and abuse laws. For instance, under our standard customer arrangements, we provide hospitals with free pulse oximetry monitoring devices in exchange for their agreement to purchase future pulse oximetry sensor requirements from us. In addition, we occasionally provide our customers with rebates in connection with their annual purchases. While we believe that these arrangements are structured such that we are currently in compliance with applicable federal and state health care laws, one or more of these arrangements may not meet the federal Anti-Kickback Statute’s safe harbor requirements, which may result in increased scrutiny by government authorities that are responsible for enforcing these laws.
There can be no assurance that we will not be found to be in violation of any of such laws or other similar governmental regulations, to which weincluding their foreign counterparts, that are directly or indirectly subject and, as a result,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 health carehealthcare programs, and the curtailment or restructuring of our operations. 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.
Further, we are required to comply with federal and state laws governing the transmission, security and privacy
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Numerous other federal and state laws protect the confidentiality of PHI, including state medical information privacy laws, state social security number protection laws and state and federal consumer protection laws. In some cases, more protective state privacy and security laws are not preempted by HIPAA and may be subject to interpretation by various governmental authorities and courts, resulting in potentially complex compliance issues for us and our customers.
In addition, state and federal human subject protection laws apply to our receipt of individually identifiable PHI in connection with clinical research. These laws could create liability for us if one of our research collaborators uses or discloses research subject information without authorization and in violation of applicable laws.
We may incur significant costs and potential liabilities in defending our new products and technologies in various legal and other proceedings.
Our noninvasive measurement technologies are new and not yet widely understood or accepted. These new technologies may become the subject of various legal and other proceedings. We may incur significant costs in explaining and defending our new products and technologies in these proceedings, often to non-technical audiences. The outcomes of these proceedings are unpredictable and may result in significant liabilities, regardless of the merits of the claims made in the proceedings.

*Legislative and regulatory changes in the health carehealthcare 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 health carehealthcare reform legislation in the U.S. or if reform programs are adopted in our key international markets.
Changes in the health carehealthcare industry in the U.S. and elsewhereabroad could adversely affect the demand for our products as well asand the way in which we conduct our business. InFor example, the Patient Protection and Affordable Care Act (the ACA), enacted in 2010, President Obama signed health care reform legislation into law that required most individuals to have health insurance, established new regulations on health plans, created insurance poolinginsurance-pooling mechanisms and reduced Medicare spending on services provided by hospitals and other providers. Beginning in January 2013, this legislation also imposed significant new taxes on medical device makers in the form of a 2.3% excise tax on U.S. medical device sales, as well as related compliance and reporting obligations. Although President Obama signed into law a bill that included a two-year suspensionThe long-term viability of the medical device tax beginning in January 2016, such tax will be reimposedACA, and its impact on medical device makers beginning in January 2018 if such suspension is not extended or the medical device tax is not permanently repealed.
Moreover, the Physician Payment Sunshine Act (the Sunshine Act), which was enacted by Congress as part of the Patient Protection and Affordable Care Act (the Affordable Care Act) in March 2010, 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. Implementing regulations for these tracking and reporting obligations were finalized in 2013, and companies are now required to track payments made since August 2013. If we fail to comply with the data collection and reporting obligations imposed by the Sunshine Act, we may be subject to substantial civil monetary penalties.
In general, an expansion in the government’s role in the U.S. health care industry may lower reimbursements for our products, reduce demand for innovative products, reduce medical procedure volumes and adversely affect our business and results of operations, possibly in a material manner. In addition, as a result of the continued focus on health care reform, there is a risk that Congress may implement changes in laws and regulations governing health care service providers, including measures to control costs or reductions in reimbursement levels, which could result in pricing pressures,remains uncertain. There have an adverse effect on the demand for our products and/or negatively impact the prices that the market is willing to accept for our current and future products. We cannot predict the effect any future legislation or regulation will have on us or what health care initiatives, if any, will be implemented at the state level. Furthermore, many private payers look to Medicare’s coverage and reimbursement policies in setting their coverage policies and reimbursement amounts such that federal reforms could influence the private sector as well. Finally, many states also may attempt to reform their Medicaid programs such that either coverage for certain items or services may be narrowed or reimbursement for them could be reduced. These health care reforms may adversely affect our business.
Consistent with or in addition to Congressional or state reforms, CMS, the federal agency that administers the Medicare and Medicaid programs, could change its current policies that affect coverage and reimbursement for our products. For example, in 2007, CMS determined that certain uses of pulse oximetry monitoring are eligible for separate Medicare payment in the hospital outpatient setting when no separately payable hospital outpatient services are reported on the same date of service. However, CMS re-examines the reimbursement rates for hospital inpatient and outpatient and physician office settings each year and could either increase or decrease the reimbursement rate for procedures utilizing our products. We are unable to predict when legislation or regulation that affects our business may be proposed or enacted in the future or what effect any such legislation or regulation would have on our business. Any such legislation, regulation or policies that affect the coverage and reimbursement of our current or future products, or the procedures utilizing our current or future products, could cause our sales to decrease and our revenue to decline.
Our success in international markets also may depend upon the eligibility of reimbursement for our products through government-sponsored health care payment systems and other third-party payers. Outside of the U.S., reimbursement systems vary by country. These systems are often subject to the same pressures to curb rising health care costs and control health care expenditures as those in the U.S. In addition, as economies of emerging markets develop, these countries may implement changes in their health care 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.
In addition, the requirements or restrictions imposed on us or our products may change, either as a result of administratively adopted policies or regulations or as a result of the enactment of new laws. Moreover, there have been recent U.S. Congressional actions to repeal and replace the Affordable Care Act and Medicare,ACA, and future actions are expected. Even ifFor example, the Affordable CareTax Cuts and Jobs Act is not amended or repealed, proposed changes impacting implementation or existing provisionsof 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 Affordable Care Act could materiallyquestion of severability and adversely affect our financial position or operations.

whether portions of the law remain valid. In June 2021, the U.S. Supreme Court held that the states and individuals that brought the lawsuit do not have standing to challenge the law, effectively ending the case without ruling on the constitutionality of the individual mandate. 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 replacementinvalidation of these programs, including any reduction in the future availability of healthcare insurance benefits, or reimbursement rates,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 U.S. Congress, 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 health carehealthcare 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 health carehealthcare providers, pursuant to which we are required by law to disclose payments and other transfers forof value to health carehealthcare 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.
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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.
Although the pace of the COVID-19 pandemic has recently slowed in the U.S. and certain other jurisdictions where we operate, our business operations could be further delayed or interrupted in countries that are still experiencing high levels of infections. Further, any resurgence in infections in the U.S. or other countries where government restrictions have been fully or partially lifted could result in a re-imposition of such restrictions, causing renewed disruptions to our business. In the event that government and health authorities announce new or extend existing restrictions or vaccine or testing mandates, we may be required to make further adjustments to our operations in order to comply with any such restrictions. For example, on September 9, 2021, the President of the United States issued Executive Order (EO) 14042, requiring that employees of federal contractors and subcontractors be fully vaccinated against COVID-19. Masimo is a federal contractor and therefore we are required to mandate COVID-19 vaccines for our employees. The President of the United States also directed the Federal Occupational Safety and Health Administration (Fed-OSHA) to issue Emergency Temporary Standards (ETS) that will direct large employers (those with 100+ employees) to mandate COVID-19 vaccinations for their employees. Fed-OSHA has not yet issued the ETS, so we are not yet able to determine what the ETS will require or how they might affect our business and operations. Though it is difficult to predict the impact of the EO mandate, we may experience workforce constraints due to shortages of vaccinated personnel, strains on the labor market, limitations on hiring new employees and, difficulty retaining and securing employees who are vaccinated, all of which could negatively affect our business and operations.
Furthermore, global supply chains and the timely availability of raw materials, component parts and products may be materially disrupted by the COVID-19 pandemic and measures taken to combat COVID-19, such as quarantines, government mandates surrounding vaccinations, factory slowdowns or shutdowns, border closings and travel restrictions. In addition, our suppliers have experienced, and may continue to experience, difficulties in delivering raw materials, components and products to us as transportation networks and distribution facilities have been disrupted, resulting in delays at ports of arrival. Furthermore, the availability of shipping containers has decreased and there have been global changes in the types of goods being shipped, all of which have resulted in increased shipping costs, which may affect the availability of raw materials, component parts and products to meet our sales demand. For example, we utilize semiconductor chips in certain products that we manufacture. Semiconductor chips have been recently subject to an ongoing global supply shortage and our ability to source semiconductor chips or the components that use semiconductor chips may be adversely affected in the future. Component delivery lead times have increased and are expected to continue to increase, which may cause delays in our production of products and increase the cost to obtain semiconductor chips and components that use semiconductor chips. If this semiconductor chip shortage or shortages of other component parts continues, we may experience delays, production interruptions, increased costs and an inability to fulfill engineering design changes or customer demand, each of which could adversely affect our business and financial performance.
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. We could also 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 have experienced unusual fluctuations in the demand for our products throughout the COVID-19 pandemic and we may continue to experience these fluctuations for the foreseeable future. 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.


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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 negatively affect our liquidity in the future. The extent to which COVID-19 impacts our business and financial results continues to depend on numerous evolving factors that we may not be able to accurately predict.
*If our employees become ill or otherwise incapacitated, our operations may be adversely impacted.
At the outset of the COVID-19 pandemic, we implemented telework policies wherever possible for appropriate categories of employees in response to various stay at home/shelter in place orders (Stay at Home Orders) implemented by state and local governments. In response to the lifting or partial lifting of the Stay at Home Orders, we have reopened our facilities to both “nonessential” and “essential” employees. 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 employees become ill, incapacitated or are otherwise unable to continue working during the current or any future pandemic or 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 as of September 30, 2017, 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 Chief Executive OfficerCEO of Cercacor.
Due to the interrelated nature of Cercacor with us, conflicts of interest willmay arise with respect toto: 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.
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.
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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 materially and 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,“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 Chief Executive OfficerCEO 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.
*We may experience significant fluctuations in our quarterly and annual results in the future, we may not maintain our current levels of profitability, and changes to existing accounting pronouncements or taxation rules may affect how we conduct our business and our results of operations.
Our operating results have fluctuated in the past and are likely to fluctuate in the future. We may experience fluctuations in our quarterly results of operations as a result of:
delays or interruptions in manufacturing and shipping of our products;
varying demand for and market acceptance of our technologies and products;
delayed acceptance of our new products, negatively impacting the carrying value of our inventory;
design, technology or other market changes that could negatively impact the carrying value of our inventory;
the effect of competing technological and market developments resulting in lower selling prices or significant promotional costs;
changes in the timing of product orders and the volume of sales to our OEM partners;
actions taken by GPOs;
delays in hospital conversions to our products and declines in hospital patient census;
our legal expenses, particularly those related to litigation matters;
changes in our product or customer mix;
movements in foreign currency exchange rates;
market seasonality of our sales due to quarterly fluctuations in hospital and other alternative care admissions;
our ability to renew existing long-term sensor contract commitments;
changes in the total dollar amount of annual contract renewal activities;
changes in the mix and, therefore, the related costs of products that we supply at no upfront costs to our customers as part of their long-term sensor commitments;
changes in hospital and other alternative care admission levels;
our inability to efficiently scale operations and establish processes to accommodate business growth;

unanticipated delays or problems in the introduction of new products, including delays in obtaining clearance or approval from the FDA;
high levels of returns and repairs; and
•
changes in reimbursement rates for SpHb®, SpCO® and SpMet® parameters.
In addition, a change in accounting pronouncements or taxation rules or practices, or the interpretation of them by the SEC or other regulatory bodies, could have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practice have occurred and may occur in the future. Moreover, there have been recent public announcements by members of the U.S. Congress, President Trump and his administration regarding their plans to make substantial changes in the taxation of U.S. companies and their foreign operations, including the possible implementation of a border tax, tariff or increase in custom duties on products manufactured outside of and imported into the U.S., as well as the renegotiation of U.S. trade agreements. Certain of our manufacturing facilities are located in Mexico and Sweden, and the imposition of a border tax, tariff or higher customs duties on our products imported into the U.S., or any potential corresponding actions by other countries in which we do business, could negatively impact our financial performance. Furthermore, changes to existing rules, the adoption of new rules, changes in tax laws, changes in trade policies or the expiration of existing favorable tax holidays may adversely affect our reported financial results or the way we conduct our business.
If our operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. 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. Due to these and other factors, you should not rely on our results for any one quarter as an indication of our future performance.
*Our results of operations could be harmed if we fail to effectively manage our growth or, alternatively, our spending during economic downturns.
Our ability to offer our products and implement our business plan in evolving markets successfully requires an effective planning and management process. We must effectively manage our spending and operations to ensure our competitive position during economic downturns, and must preserve our future opportunities when the economy improves. A failure to manage our spending and operations effectively could disrupt our business and harm our operating results. A growth in sales, combined with the challenges of managing geographically dispersed operations, can place a significant strain on our management systems and resources, and growth in future operations could continue to place such a strain. The failure to manage our growth effectively could disrupt our business and harm our operating results.
*Our results of operations could vary as a result of the methods, estimates and judgments that we use in applying our accounting policies.
The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations. See “Critical Accounting Estimates” contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which we filed with the SEC on February 15, 2017.
*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 Chief Executive Officer, and other key officers. We are also heavily dependent on our engineers and field sales team, including sales representatives and clinical specialists. Additionally, from time to time, some of our key personnel may hold stock options with an exercise price that is greater than our recent closing prices, which may minimize the retention value of these options. The loss of the services of members of our key personnel 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.

*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. The H-1B visa classification enables U.S. employers to hire certain qualified foreign workers in positions that require an education at least equal to a four-year bachelor degree in the United States in specialty occupations such as engineering. Statutory law limits the number of new H1-B temporary work permit petitions that may be approved in a fiscal year, and if we are unable to obtain H1-B visas for our employees 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.
The subject of H1-B visas has recently become a topic of political discussion, and there are indications that the H1-B visa program may be significantly overhauled. If a new or revised visa program is implemented, there could be elements of any new or revised visa program that may impact our ability to recruit, hire and retain qualified skilled personnel, which could adversely impact our business, operating results and financial condition.
*The risks inherent in operating internationally and the risks of selling and shipping our products and purchasing our components and products internationally may adversely impact our business, financial condition and results of operations.
We derive a portion of our net sales from international operations. For the nine months ended September 30, 2017 and October 1, 2016, approximately 31.7% and 29.3%, respectively, of our product revenue was derived from our international operations. In addition, we purchase a portion of our raw materials and components on the international market. The sale and shipment of our products across international borders, as well as the purchase ofkey materials and components from international sources, subject us to extensive U.S. and foreign governmental trade regulations. Compliance with such regulations is costly andsole or limited source suppliers, 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. 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.
We are currently evaluating the collectability of certain amounts that have been paid by a foreign government customer to our appointed foreign agent in connection with a foreign government tender, but which have not been timely remitted to us by such agent in accordance with the agency agreement. We are actively working with such agent to arrange for payment, possibly under an extended payment plan, as well as exploring other potential remedies for recovery of this receivable. As of September 30, 2017, the net amount due to us from such agent was approximately $8.6 million. Any failure to collect any amounts from this foreign agent or any other foreign agent could adversely impact our business, operating results and financial condition.
In June 2016, the United Kingdom (UK) held a referendum pursuant to which voters elected to leave the EU, commonly referred to as Brexit. As a result of UK voters’ election to leave the EU, the British government is expected to begin negotiating the terms of the UK’s future relationship with the EU. Although the long-term effects of Brexit will depend on any agreements the UK makes to retain access to the EU markets, 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 sales 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:
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;
the inability to collect amounts paid by foreign government customers to our appointed foreign agents;
scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us;
pricing pressure that we may experience internationally;
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 such as the Zika virus;
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. 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 health care 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. Our policies mandate compliance with these anti-bribery laws.
Personal privacy and data security have become significant issues in the United States, Europe and in 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. Future laws, regulations, standards and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations could result in increased regulation, cost of compliance and limitations on data collection, use, disclosure and transfer. For example, in October 2015, the Court of Justice of the EU ruled that the US-EU Safe Harbor framework that had been in place since 2000, which allowed companies to meet certain European legal requirements for the transfer of personal data from the European Economic Area to the United States, was invalid. In July 2016, a new data transfer framework referred to as the EU-U.S. Privacy Shield was adopted, which may provide a new mechanism for companies to transfer EU personal data to the U.S. While we have adopted the EU-U.S. Privacy Shield framework for the transfer of personal data from the EU to the U.S., our means for transferring personal data from the EU may not be adopted by all of our customers and suppliers and may be subjectable to legal challenge or risk of enforcement actions by data protection authorities. In addition, in April 2016, the EU approved a new data protection regulation, known as the General Data Protection Regulation (GDPR), which will become effective in May 2018. The GDPR will include new operational requirements for companies that receive or process personal data of EU residents, as well as significant penalties for non-compliance. Complying with the GDPR may cause us to incur substantial operational costs or require us to change our business practices. Despite our training and compliance programs, 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 cash and non-cash penalties, disrupt our operations, involve significant management distraction and result in a material adverse effect on our business, financial condition and results of operations.
Our operations may be adversely impacted by our exposure to risks related to foreign currency exchange rates.
We marketdeliver 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. For example, the announcement of Brexit caused significant volatility in global economic markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. Dollar relative to certain other foreign currencies in which we conduct business. 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 average exchange rates during a respective period. Similarly, certain of our foreign sales support 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. When converted to U.S. Dollars, these receivables and payables 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 the average monthly exchange rate 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. Should we decide in the future to hedge such exchange rate risk by entering into forward contracts, these contracts may not mitigate the potential adverse impact on our financial results due to the variability of timing and amount of payments under these contracts. In addition, our failure to sufficiently hedge, forecast or otherwise manage such foreign currency risks properly could have a material adverse effect on our business, financial condition and results of operations.
*We currently manufacture our products at several locations and any disruption to or expansion of our manufacturing operations could adversely affect our business, financial condition and results of operations.
We rely on our manufacturing facilities in Mexicali and San Luis Rio Colorado, Mexico; Irvine, California; Hudson, New Hampshire; and Danderyd, Sweden. These facilities and the manufacturing equipment we use to produce our products would be difficult to replace and could require substantial time to repair. Our facilities may be affected by natural or man-made disasters. Earthquakes are of particular significance since some of our facilities are located in an earthquake-prone area. 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. In the event that one of our facilities is 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 we are 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 we may experience a disruption in the supply of our products until the new facilities are available and operating.
We also purchase materials and components from international sources. Any disruption in the supply of such materials, including transportation or port delays, could adversely impact our manufacturing operations. Disruptions may also occur as a result of local, regional and worldwide health risks. Such disruptions may include the inability to manufacture and distribute our products due to the direct effects of illness on individuals or due to constraints on supply and distribution that may result from either voluntary or government imposed restrictions.
Any disruption or delay at our manufacturing facilities, any expansion of our operations to additional locations, or any changes in market conditions could create operational hurdles and have an adverse impact on our ability to produce sufficient inventory of our products or may require us to incur additional expenses in order to produce sufficient inventory, depending on changes in product demand. Furthermore, if we are unable to meet the demand of our customers, our customers may cancel orders or purchase products from our competitors, which could adversely affect our business, financial condition and results of operations. 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.
Our suppliers may not supply us with a sufficient amount of materials and components or materials and components of adequate quality.customers.
We depend on certain sole or limited source suppliers for certain key materials and components, ofincluding digital signal processor chips and analog-to-digital converter chips, for our noninvasive patient monitoring solutions,solutions. These suppliers are located around the world, and if we are unable to obtain thesethe 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, we will not be able to deliver our noninvasive patient monitoring solutions to customers. Also, we cannot guarantee that any of the materials or provide us with products and components that we purchase, if available at all, will be of adequatedo not meet our quality standards and at acceptable price levels. Fromrequired quantities. In addition, from time to time there arehave been industry-wide shortages of several electroniccertain 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.

We may experience delays in production of our products if we fail to identify alternate vendors for materials and components, if any parts supply is interrupted or reduced or if there is a significant increase in production costs, each ofcustomers, which could adversely affectimpact our business, financial condition and results of operations. In addition, we rely on third party manufacturers to supply some of our products and components, including digital signal processor chips and analog to digital converter chips.gross margins.
Manufacturing problems may occur with these and other outside sources, as a supplier may fail to develop and supply products and components to us on a timely basis, or may supply us with products and components that do not meet our quality, quantity and cost requirements. 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.
If we fail to comply with the reporting obligations
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Table of the Securities Exchange Act of 1934, as amended, and Section 404 of the Sarbanes-Oxley Act of 2002, 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 materially and adversely affected.Contents
As a public company, we are required to comply with the periodic reporting obligations of the Securities Exchange Act of 1934, as amended,Future strategic initiatives, including preparing annual reports, quarterly reports and current reports. Our failure to prepare and disclose this information in a timely manner and meet our reporting obligations in their entirety 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.
In addition, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes-Oxley Act), we are required to evaluate and provide a management report on our systems of internal control over financial reporting, and our independent registered public accounting firm is required to attest to our internal control over financial reporting. During the course of the evaluation of our internal control over financial reporting, we may identify areas requiring improvement and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and costs to us and require us to divert substantial resources, including management time, from other activities. In addition, if we fail to maintain the adequacy of our internal controls over financial reporting, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. Any failure to maintain compliance with the requirements of Section 404 of the Sarbanes-Oxley Act or 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 Sarbanes-Oxley Act, 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 and will create additional compliance requirements for companies such as ours. 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.
For example, the Dodd-Frank Act includes provisions regarding “conflict minerals” (generally tin, tantalum, tungsten and gold) that are mined in the Democratic Republic of Congo and adjoining countries (the DRC region), and in June 2016, the EU adopted its own regulation on conflict minerals that covers the sourcing of conflict minerals from anywhere in the world. The provisions of the Dodd-Frank Act require us to undertake comprehensive due diligence to determine whether conflict minerals used in our products, including any portion of our products manufactured by third parties, financed or benefited armed groups in the DRC region. The rules also require us to file conflict mineral reports with the SEC annually. We have incurred, and expect to continue to incur, additional costs to comply with these rules, including costs related to determining the source of origin of conflict minerals used in our products. Given the complexity of our supply chain, we may face difficulties if our suppliers are unwilling or unable to verify the origin of all conflict minerals used in our products.

Furthermore, our ongoing compliance with these rules could affect the pricing, sourcing and availability of minerals used in the manufacture of our products. We may also encounter challenges with our customers and stockholders if we are unable to certify that our products are free of conflict minerals. 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 such evolving standards. These investments have resulted in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities and may continue to do so in the future.
In addition, stockholder litigation surrounding executive compensation and disclosure of executive compensation has increased with the passage of the Dodd-Frank Act. Furthermore, in recent years, our stockholders have not approved our advisory vote on named executive officer compensation that is required to be voted on by our stockholders annually pursuant to the Dodd-Frank Act. 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.
The manufacture and sale of products using Masimo SET® and licensed rainbow® technology expose us to product liability claims and product recalls, including, but not limited to, those that may arise from unauthorized off-label use, which is use of a device in a manner outside the indications for use cleared by the FDA, malfunctions, design flaws or manufacturing defects related to our products or the use of our products with incompatible components or systems. For example, in April 2014, an amended putative class action complaint was filed against us alleging product liability and negligence claims in connection with pulse oximeters that we modified and provided at the request of the study investigators for use in a randomized trial at the University of Alabama. In August 2015, the Court granted summary judgment in favor of Masimo, rejecting the plaintiffs’ claims. The plaintiffs have appealed the Court’s decision. The appellate hearing before the Eleventh Circuit Court of Appeals was held on December 13, 2016. On July 7, 2017, the Eleventh Circuit Court of Appeals (Eleventh Circuit) issued a Certification to the Supreme Court of Alabama seeking guidance on a legal question. In that Certification, the Eleventh Circuit stated that the plaintiffs failed to establish that participation in the clinical study caused any injuries, and that the negligence, negligence per se, breach of fiduciary duty, and products liability claims, which includes the claims currently alleged against us, were properly dismissed. While we believe we have good and substantial defenses to the claims, there is no guarantee that we will ultimately prevail. In addition, we cannot be certain that our product liability insurance will be sufficient to cover any or all damages or claims asserted in this case or any other 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.
*Future 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 if we discover previously undisclosed liabilities.achieve the desired results of our investment.
We have acquired sixseveral businesses since our inception and we may acquire additional businesses in the future, which may be larger in magnitude than our previous acquisitions. Successful acquisitions depend upon our ability to identify, negotiate, complete and integrate suitable acquisitions and to obtain any necessary financing.future. Future acquisitions may require debt or equity financing, either of which could be dilutive to our existing stockholders andor reduce our earnings per share, or debt financing, whichshare. Even if we complete acquisitions, we may experience:there are many factors that could affect whether such acquisition will be beneficial to our business, including, without limitation:
•payment of above-market prices for acquisitions and incurring higher than anticipated acquisition costs;
a need to issue shares•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 as future acquisitions mayif an acquisition is not result in accretive contributions to theour 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 relatedcompliance-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 or liabilities 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 acquisition terms, evaluate prospective acquisitionsopportunities and bring acquired technologies and/or products to market at acceptable margins and operating expense levels. For example, we acquired TNI medical AG® (TNI®) and added softFlow® technology to our product portfolio. In addition, we acquired 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 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.
We may also discover deficiencies in internal controls, data adequacy and integrity, product quality, regulatory compliance, and product liabilities or other undisclosed liabilities that we did not uncover prior to our acquisition of such businesses,or investment, which could result in us becoming subject to penalties, other liabilities or other liabilities. Ifasset 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 perceive the same benefitssuccessful, our business, financial condition and results of the acquisition as we do. 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 liabilitiesasset impairments in connection with such businessesacquisitions or investments could have a material adverse effect on 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.
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Our manufacturing processes involve the 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 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. 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, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, 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 be forced to incur significant costs to comply with environmental regulations.
From time to time, new regulations are enacted and it is difficult to anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with environmental regulations as they are enacted. Future environmental laws may significantly affect our operations by, for example, requiring our manufacturing processes to be altered or requiring us to use different types of materials in manufacturing our products. Any 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 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. These materials and various wastes resulting from their use are stored at our facility pending ultimate use and disposal.

The risk of accidental injury to our employees or contamination from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any resulting damages and any such liability could exceed our reserves. Although we maintain general liability insurance, 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.
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, threats and more sophisticated and targeted cybersecurity attacks pose a risk to the security of Masimo’s and our customers’, partners’, suppliers’ and third-party service providers’ products, systems and networks, and the confidentiality, availability and integrity of any underlying information and data. 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 network 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, malicious software, 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.
Our operating results may be adversely affected by unfavorable economic and market conditions.
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, such as Brexit. 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.
In addition, we cannot predict how future economic conditions will affect our critical customers, suppliers and distributors and any negative impact on our critical customers, suppliers or distributors may also have an adverse impact on our results of operations or financial condition.
*Our Amended and Restated Credit Agreementagreement contains certain covenants and restrictions that may limit our flexibility in operating our business.
Our Amended and Restated Credit Agreement,credit agreement dated January 8, 2016 (Restated CreditDecember 17, 2018 (Credit Facility), with JPMorgan Chase Bank, N.A., as Administrative Agent and a Lender,lender, and Bank of America, N.A., as Syndication Agentthe West, a lender (each and a Lender, Citibank, N.A., as Documentation Agent and a Lender, and various other Lenders (collectively, the Lenders)both, Lender(s)), contains various affirmative covenants and restrictions that limit our ability to engage in specified types of transactions, including:
•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;
•making specified investments (including loans and advances);
•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 Restated 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 the Restatedour Credit Facility. Upon the occurrence of an event of default, the Lenders could elect to declare all amounts outstanding under the Restated 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. AsSee Note 15 to our accompanying condensed consolidated financial statements included in Part I, Item 1 of September 30, 2017, we had no amounts outstanding under the Restatedthis Quarterly Report on Form 10-Q for additional information on our Credit Facility and were in compliance with all applicable covenants.Facility.

Risks Related to Our Stock
*Our stock price may be volatile, and your investment in our stock could suffer a decline in value.
There has been significant volatility in the market price and trading volumeConcentration of equity securities, which is often unrelated to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our stock. From January 3, 2017 to September 30, 2017, our closing stock price ranged from $67.40 to $104.46 per share. You may not be able to resell your shares at or above the price you paid for them due to fluctuations in the market priceownership of our stock caused by changes in our operating performance or prospects and other factors.
In addition to the other risk factors previously discussed above, 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;
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;
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.
*Concentration of ownership among our existing directors, executive officers and principal stockholders may prevent new investors from influencing significant corporate decisions.
As of September 30, 2017,October 2, 2021, our current directors and executive officers and their affiliates, in the aggregate, beneficially owned approximately 12.0%9.1% 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.policies in their roles as stockholders. 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.
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 of Directors (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.

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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.
General Risk Factors
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.
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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, 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 Policies and Estimates” contained in Part I, Item 2 of this Quarterly Report on Form 10-Q.
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. Future changes made by new accounting standards may apply prospectively or retrospectively, depending on the method of adoption, and may 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 Quarterly Report on Form 10-Q.
In addition, future changes to the U.S. tax code and its regulations could have a material impact on our effective tax rate and its implementation could require us to make substantial changes to our business practices, allocate 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.
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*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.
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 duties, tariffs, and conflict minerals. Compliance with such regulations is costly and we could be exposed to potentially significant penalties, fines and interest 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. 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 limitations 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:
•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 who 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;
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•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 initiated substantial changes in U.S. trade policy and U.S. trade agreements, including the 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 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 foreign 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. 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 Quarterly Report on Form 10-Q.
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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 or contractors at our manufacturing facilities, we may not be able to meet our customers’ demands.
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 Exchange Act, 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 Exchange Act, 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.
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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. 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 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.
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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 or products 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.
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 our 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, ransomware, 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 2023. 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 our equity securities. For example, our closing stock price ranged from $208.49 to $285.24 per share from January 3, 2021 to October 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 Quarterly Report on Form 10-Q, 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:
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•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;
•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 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 September 30, 2017,October 2, 2021, approximately 14.110.7 million shares of our common stock were reserved for future issuance under our equity incentive plans, of which approximately 7.13.1 million shares were subject to options outstanding at such date at a weighted-average exercise price of $35.48$80.55 per share, approximately 2.72.9 million shares were subject to outstanding RSUs, approximately 0.20.3 million shares were subject to outstanding PSUs and approximately 4.04.4 million shares were available for future grantawards under our 2017 Equity Incentive Plan. Over the past 1236 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.
Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent a change in control
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Table of our company, prevent attempts to replace or remove current management and reduce the market price of our stock.Contents
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable. For example, our amended and restated 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 amended and restated certificate of incorporation provides for a staggered board of directors, 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.

*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 bypermitted under applicable 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 addition, under certain circumstances, our Restated Credit Facility may limit or restrict our ability to pay cash dividends. In the event our Board declares any dividends, there is no assurance with respect to the amount, timing or frequency of any such dividends.
In September 2015, our Board authorized a stock repurchase program, whereby we may purchase up to 5.0 million shares of our common stock over a period of up to three years. As of September 30, 2017, approximately 2.4 million shares remained available for repurchase under this program. Any repurchase of our common stock under the stock repurchase plan authorized by our Board in October 2021 (2021 Repurchase Program) will be at the discretion of a committee comprised of our Chief Executive OfficerCEO 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. In addition, under certain circumstances,For additional information related to our Restated Credit Facility may limit or restrict2021 Repurchase Program, please see Note 17 to our ability to repurchase our stock. accompanying condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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 ourthe 2021 Repurchase Program, or adopt a new stock repurchase program, at any time at its discretion without stockholder approval.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Stock Repurchase Program
Stock repurchases during each fiscal month of the quarter ended September 30, 2017 were as follows:
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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)
July 2, 2017 to July 29, 2017 —
 $—
 —
 2,901,215
July 30, 2017 to August 26, 2017 —
 —
 —
 2,901,215
August 27, 2017 to September 30, 2017 533,335
 84.86
 533,335
 2,367,880
     Total 533,335
 $84.86
 533,335
 2,367,880
(1)
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In September 2015, our board of directors authorized a stock repurchase program, whereby we may purchase up to 5.0 million shares of our common stock over a period of up to three years. The stock repurchase program, which was announced by the Company in a press release dated November 5, 2015, may be carried out at the discretion of a committee comprised of our Chief Executive Officer and Chief Financial Officer through open market purchases, Rule 10b5-1 trading plans, block trades and in privately negotiated transactions.

Item 6. Exhibits
EXHIBIT INDEX


EXHIBIT INDEX


EXHIBIT INDEX
Exhibit
Number
 Description of Document
Exhibit
Number
Description of Document
3.1 (1) 
Amended and Restated Certificate of Incorporation (Exhibit 3.1)
3.1(1)
3.2 (2) 
Amended and Restated Bylaws adopted on October 20, 2011 (Exhibit 3.2)
3.2(2)
4.1 (1) 
Form of Common Stock Certificate (Exhibit 4.1)
4.1(1)
4.2 (1) 
Fifth Amended and Restated Registration Rights Agreement made and entered into as of September 14, 1999, between Masimo Corporation and certain of its stockholders (Exhibit 4.2)
4.2(1)
4.3# (3) 
Masimo Retirement Savings Plan (Exhibit 4.7)
4.3#(3)
10.1# (4) 
First Amendment to November 4, 2015 Amended and Restated Employment Agreement, dated July 27, 2017, by and between Masimo Corporation and Joe Kiani.
10.2# (5) 
Offer Letter, dated September 22, 2017, between the Company and Micah Young
12.1* 
Statement Regarding the Computation of Ratio of Earnings to Fixed Charges
31.1* 
Certification of Joe Kiani, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
31.1*
31.2* 
Certification of Micah Young, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
31.2*
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, as amended
32.1*
101.INS* XBRL Instance Document101.INS*XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH* XBRL Taxonomy Extension Schema Document101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document
104104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
Attached as Exhibit 101 to this report are the following formatted in XBRL (ExtensibleiXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2017October 2, 2021 and December 31, 2016,January 2, 2021, (ii) Condensed Consolidated Statements of Income for the three and nine months ended October 2, 2021 and September 30, 2017 and October 1, 2016,26, 2020, respectively, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 2, 2021 and September 30, 2017 and October 1, 2016,26, 2020, respectively, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended October 2, 2021 and September 30, 2017 and October 1, 2016,26, 2020, respectively, and (v) Notes to Condensed Consolidated Financial Statements.
 _____________________________
(1)Incorporated by reference to the exhibits to the Company’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 Company’s Current Report on Form 8-K filed on October 26, 2011. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K.
(3)Incorporated by reference to the exhibit to the Company’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.
(4)Incorporated by reference to the exhibit to the Company’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.
(5)Incorporated by reference to the exhibit to the Company’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.
#Indicates management or compensatory plan.
*Filed herewith.
(1)    Incorporated by reference to the exhibits to the Company’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 Company’s Current Report on Form 8-K filed on October 30, 2019. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K.
(3)    Incorporated by reference to the exhibit to the Company’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.
#     Indicates management or compensatory plan.
*     Filed herewith.
74
Table of Contents
SIGNATURES

Pursuant to the requirements 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.
MASIMO CORPORATION
Date: October 31, 201726, 2021By:
/s/ JOE KIANI
Joe Kiani
Chief Executive Officer and Chairman
Date: October 31, 201726, 2021By:
/s/ MICAHYOUNG
Micah Young
Executive Vice President and Chief Financial Officer

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