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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 001-33642
MASIMOLOGOQ32019.JPG
________________________________________________
MASIMO CORPORATION
(Exact Name of Registrant as Specified in its Charter)
________________________________________________
Delaware
 
 
 
 
 
33-0368882
(State or Other Jurisdiction of
Incorporation or Organization)
 
 
 
 
 
(I.R.S. Employer
Identification Number)
52 Discovery
 
Irvine
,
California
 
 
 
 
 
92618
(Address of Principal Executive Offices)
 
 
 
 
 
(Zip Code)

 
 
 
 
 
(949)
 
297-7000
 
 
 
 
 
 
 
 
 
(Registrant’s Telephone Number, Including Area Code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
MASI
 
The 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 filer
 
 
 
 
 
 
 
 
Accelerated filer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-accelerated filer
 
 
 
 
 
 
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant 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:
 
 
Class
 
 
 
 
 
 
 
Number of Shares Outstanding as of
March 28, 2020
Common stock, $0.001 par value
 
 
 
 
 
 
 
54,115,411
 
 
 
 
 
 
 
 



MASIMO CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 28, 2020
TABLE OF CONTENTS
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 


2


PART I. FINANCIAL INFORMATION
Item 1.     Financial Statements
MASIMO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except par values)
 
March 28,
2020
 
December 28,
2019
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
605,916

 
$
567,687

Short-term investments
50,000

 
120,000

Trade accounts receivable, net of allowance for doubtful accounts of $1,377 and $1,803 at March 28, 2020 and December 28, 2019, respectively
152,846

 
132,433

Inventories
115,982

 
115,871

Other current assets
55,412

 
60,071

Total current assets
980,156

 
996,062

Lease receivable, noncurrent
51,680

 
49,936

Deferred costs and other contract assets
16,990

 
16,214

Property and equipment, net
253,156

 
219,552

Intangible assets, net
46,739

 
27,251

Goodwill
54,097

 
22,350

Deferred tax assets
36,152

 
35,972

Other non-current assets
35,575

 
28,791

Total assets
$
1,474,545

 
$
1,396,128

LIABILITIES AND STOCKHOLDERS EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
49,110

 
$
54,548

Accrued compensation
36,812

 
54,705

Deferred revenue and other contract liabilities, current
34,478

 
25,939

Other current liabilities
36,892

 
37,027

Total current liabilities
157,292

 
172,219

Other non-current liabilities
63,975

 
56,035

Total liabilities
221,267

 
228,254

Commitments and contingencies

 

Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value; 5,000 shares authorized; 0 shares issued and outstanding

 

Common stock, $0.001 par value; 100,000 shares authorized; 54,115 and 53,696 shares issued and outstanding at March 28, 2020 and December 28, 2019, respectively
54

 
54

Treasury stock, 15,533 and 15,530 shares at March 28, 2020 and December 28, 2019, respectively
(526,951
)
 
(526,580
)
Additional paid-in capital
623,967

 
600,624

Accumulated other comprehensive loss
(9,181
)
 
(6,718
)
Retained earnings
1,165,389

 
1,100,494

Total stockholders’ equity
1,253,278

 
1,167,874

Total liabilities and stockholders’ equity
$
1,474,545

 
$
1,396,128


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

3


MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
 
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Revenue:
 
 
 
Product
$
269,625

 
$
230,548

Royalty and other revenue

 
1,116

Total revenue
269,625

 
231,664

Cost of goods sold
83,996

 
80,022

Gross profit
185,629

 
151,642

Operating expenses:
 
 
 
Selling, general and administrative
89,877

 
74,204

Research and development
27,241

 
21,415

Litigation settlement awards
(499
)
 

Total operating expenses
116,619

 
95,619

Operating income
69,010

 
56,023

Non-operating income
3,346

 
3,886

Income before provision for income taxes
72,356

 
59,909

Provision for income taxes
7,900

 
10,587

Net income
$
64,456

 
$
49,322

 
 
 
 
Net income per share:
 
 
 
Basic
$
1.20

 
$
0.93

Diluted
$
1.12

 
$
0.87

 
 
 
 
Weighted-average shares used in per share calculations:
 
 
 
Basic
53,867

 
53,210

Diluted
57,585

 
56,799

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



4


MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Net income
$
64,456

 
$
49,322

Other comprehensive income, net of tax:
 
 
 
Unrealized losses from foreign currency translation adjustments
(2,463
)
 
(577
)
Comprehensive income
$
61,993

 
$
48,745

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




5


MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
 
Three Months Ended March 28, 2020
 
Common Stock
 
Treasury Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total Stockholders’
Equity
Shares
 
Amount
 
Shares
 
Amount
 
Balance at December 28, 2019
53,696

 
$
54

 
15,530

 
$
(526,580
)
 
$
600,624

 
$
(6,718
)
 
$
1,100,494

 
$
1,167,874

Stock options exercised
384

 

 

 

 
13,495

 

 

 
13,495

Restricted/Performance stock units vested
46

 

 

 

 

 

 

 

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, 2020
54,115

 
$
54

 
15,533

 
$
(526,951
)
 
$
623,967

 
$
(9,181
)
 
$
1,165,389

 
$
1,253,278


MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
 
Three Months Ended March 30, 2019
 
Common Stock
 
Treasury Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total Stockholders’
Equity
Shares
 
Amount
 
Shares
 
Amount
 
Balance at December 29, 2018
53,085

 
$
53

 
15,255

 
$
(489,026
)
 
$
533,164

 
$
(6,199
)
 
$
931,073

 
$
969,065

Stock options exercised
224

 

 

 

 
6,867

 

 

 
6,867

Restricted/Performance stock units vested
29

 

 

 

 

 

 

 

Shares paid for tax withholding
(1
)
 

 

 

 
(123
)
 

 

 
(123
)
Stock-based compensation

 

 

 

 
7,317

 

 

 
7,317

Cumulative effect of adoption of ASU 2016-02

 

 

 

 

 

 
(26,795
)
 
(26,795
)
Net income

 

 

 

 

 

 
49,322

 
49,322

Foreign currency translation adjustment

 

 

 

 

 
(577
)
 

 
(577
)
Balance at March 30, 2019
53,337

 
$
53

 
15,255

 
$
(489,026
)
 
$
547,225

 
$
(6,776
)
 
$
953,600

 
$
1,005,076

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

6


MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Cash flows from operating activities:
 
 
 
Net income
$
64,456

 
$
49,322

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
6,379

 
5,419

Stock-based compensation
11,272

 
7,317

Loss on disposal of property, equipment and intangibles
49

 
65

Provision for doubtful accounts
94

 
234

Benefit for deferred income taxes

 
(31
)
Changes in operating assets and liabilities:
 
 
 
Increase in accounts receivable
(17,105
)
 
(8,531
)
Decrease in inventories
427

 
1,357

Decrease in other current assets
5,469

 
3,043

Increase in lease receivable, net
(1,747
)
 
(3,104
)
(Increase) decrease in deferred costs and other contract assets
(796
)
 
7,120

Increase in other non-current assets
(51
)
 
(115
)
Decrease in accounts payable
(7,968
)
 
(6,097
)
Decrease in accrued compensation
(17,687
)
 
(19,364
)
Increase (decrease) in accrued liabilities
1,704

 
(2,736
)
(Decrease) increase in income tax payable
(2,041
)
 
5,566

(Decrease) increase in deferred revenue and other contract-related liabilities
(676
)
 
2,377

Increase in other non-current liabilities
576

 
626

Net cash provided by operating activities
42,355

 
42,468

Cash flows from investing activities:
 
 
 
Maturities (purchases) of short-term investments, net
70,000

 
(180,000
)
Purchases of property and equipment, net
(37,004
)
 
(6,963
)
Increase in intangible assets
(1,135
)
 
(1,040
)
Business combination, net of cash acquired
(47,250
)
 

Net cash used in investing activities
(15,389
)
 
(188,003
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
13,044

 
6,288

Payroll tax withholdings on behalf of employees for vested equity awards
(1,424
)
 
(123
)
Repurchases of common stock
(371
)
 

Net cash provided by financing activities
11,249

 
6,165

Effect of foreign currency exchange rates on cash
2

 
(261
)
Net increase (decrease) in cash, cash equivalents and restricted cash
38,217

 
(139,631
)
Cash, cash equivalents and restricted cash at beginning of period
568,075

 
552,641

Cash, cash equivalents and restricted cash at end of period
$
606,292

 
$
413,010

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

7


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 wide array of patient monitoring technologies, as well as automation and connectivity solutions. The Company’s mission is to improve patient outcomes and reduce the cost of patient care. The Company’s patient monitoring solutions generally incorporate a monitor or circuit board, proprietary single-patient use or reusable sensors, software and/or cables. The Company primarily sells its products to hospitals, emergency medical service providers, home care providers, physician offices, veterinarians, long term care facilities and consumers through its direct sales force, distributors and original equipment manufacturer (OEM) partners.
The Company invented Masimo Signal Extraction Technology® (SET®), which provides the capabilities of Measure-through Motion and Low Perfusion  pulse oximetry to address the primary limitations of conventional pulse oximetry. Over the years, the Company’s product offerings have expanded significantly to also include rainbow® Pulse CO-Oximetry, with its ability to monitor carboxyhemoglobin (SpCO®), methemoglobin (SpMet®), total hemoglobin concentration (SpHb®), fractional arterial oxygen saturation (SpfO2), Oxygen Content (SpOC), Pleth Variability Index (PVi®), rainbow® Pleth Variability Index (RPVi), respiration rate from the pleth (RRp®) and Oxygen Reserve Index (ORi); as well as acoustic respiration monitoring (RRa®), SedLine® brain function monitoring, NomoLine® capnography and gas monitoring and O3® regional oximetry. These technologies are based upon Masimo SET®, rainbow® and other proprietary algorithms and are incorporated into a variety of product platforms depending on customers’ specifications. The Company’s current technology offerings also include remote patient monitoring, connectivity, and hospital automation solutions, including Masimo Patient SafetyNet™(1), Masimo Patient SafetyNet Surveillance1, Masimo SafetyNet, Replica, Iris®, MyView®, UniView and Trace. The Company’s technologies are supported by a substantial intellectual property portfolio that the Company has built through internal development and, to a lesser extent, acquisitions and license agreements.
2. Summary of Significant Accounting Policies
Basis of Presentation
The 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 28, 2019 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 28, 2019 (fiscal year 2019), filed with the SEC on February 19, 2020. The results for the three months ended March 28, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending January 2, 2021 (fiscal year 2020) or for any other interim period or for any future year.
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 fiscal week quarters and one 14 fiscal week quarter. The Company’s last 53 week fiscal year was fiscal year 2014. Fiscal year 2020 is a 53 week fiscal year. All references to years in these notes to condensed consolidated financial statements are fiscal years unless otherwise noted.
Reclassifications
Certain amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the current period presentation.

______________
(1)     The use of the trademark Patient SafetyNet is under license from the University HealthSystem Consortium.


8

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 standalone selling prices, variable consideration and how total consideration should be allocated to each performance obligation within a contract, inventory valuation, valuation of the Company’s equity awards, valuation of identifiable assets and liabilities connected with business combinations, deferred taxes and any associated valuation allowances, deferred revenue, uncertain income tax positions, and litigation costs and related accruals. Actual results could differ from such estimates.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The excess of the purchase price over fair values of identifiable assets and liabilities is recorded as goodwill.
Fair Value Measurements
Authoritative guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active; or other inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Pursuant to current authoritative guidance, entities are allowed an irrevocable option to elect the fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to apply the fair value option under this guidance to specific assets or liabilities on a contract-by-contract basis. There were no transfers between Level 1, Level 2 and Level 3 inputs during either the three months ended March 28, 2020 or March 30, 2019. The Company carries cash and cash equivalents, as well as certificates of deposit with maturities of one year or less, at cost, which approximates fair value.
The following table represents the Company’s financial assets (in thousands), measured at fair value on a recurring basis as of March 28, 2020:
 
 
 
 
 
 
 
 
 
Reported as
 
Adjusted Basis
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
(Losses)
 
Estimated
Fair Value
 
Cash and Cash
Equivalents
 
Short-Term
Investments
Cash and cash equivalents
$
605,916

 
$

 
$

 
$
605,916

 
$
605,916

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
50,000

 

 

 
50,000

 

 
50,000

               Subtotal
50,000

 

 

 
50,000

 

 
50,000

Level 2:
 
 
 
 
 
 
 
 
 
 
 
          None

 

 

 

 

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
          None

 

 

 

 

 

Total assets measured at fair value
$
655,916

 
$

 
$

 
$
655,916

 
$
605,916

 
$
50,000



9

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

The following table represents the Company’s financial assets (in thousands), measured at fair value on a recurring basis as of December 28, 2019:
 
 
 
 
 
 
 
 
 
Reported as
 
Adjusted Basis
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
(Losses)
 
Estimated
Fair Value
 
Cash and Cash
 Equivalents
 
Short-Term
Investments
Cash and cash equivalents
$
567,687

 
$

 
$

 
$
567,687

 
$
567,687

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
120,000

 

 

 
120,000

 

 
120,000

               Subtotal
120,000

 

 

 
120,000

 

 
120,000

Level 2:
 
 
 
 
 
 
 
 
 
 
 
          None

 

 

 

 


 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
          None

 

 

 

 

 

Total assets measured at fair value
$
687,687

 
$

 
$

 
$
687,687

 
$
567,687

 
$
120,000


Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity from date of purchase of three months or less, or highly liquid investments that are readily convertible into known amounts of cash, to be cash equivalents.
Short-Term Investments
The Company classifies its investments in certificates of deposits maturing in greater than three months but less than one year on the date of the original investment as short-term investments. The carrying value of such investments approximates fair value and is accessible without any significant restrictions, taxes, or penalties. As of March 28, 2020, the Company had total investments in certificates of deposit of $50.0 million with remaining maturities of less than seven months.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of trade receivables recorded at the time of invoicing of product sales, reduced by reserves for estimated bad debts and returns. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Credit is extended based on an evaluation of the customer’s financial condition. Collateral is generally not required. The Company records an allowance for doubtful accounts that it does not expect to collect based on relevant information, including historical experience, current conditions, and reasonable and supportable forecasts. Accounts are charged off against the allowance when the Company believes they are uncollectible.
Inventory
Inventories are stated at the lower of cost or net realizable value. Cost is determined using a standard cost method, which approximates the first in, first out method, and includes material, labor and overhead costs. Inventory valuation adjustments are recorded for inventory items that have become excess or obsolete or are no longer used in current production and for inventory items that have a market price less than carrying value in inventory. The Company generally determines inventory valuation adjustments based on an evaluation of the expected future use of its inventory on an item by item basis and applies historical obsolescence rates to estimate the loss on inventory expected to have a recovery value below cost. The Company also records other specific inventory valuation adjustments when it becomes aware of unique events or circumstances that result in an expected recovery value below cost. For inventory items that have been written down, the reduced value becomes the new cost basis.

10

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

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
Aircraft and components
4 to 20 years
Buildings
39 years
Building improvements
7 to 15 years
Computer equipment and software
2 to 12 years
Demonstration units
3 years
Furniture and office equipment
2 to 6 years
Leasehold improvements
Lesser of useful life or term of lease
Machinery and equipment
5 to 10 years
Tooling
3 years
Vehicles
5 years

Land is not depreciated and construction-in-progress is not depreciated until placed in service. Normal repair and maintenance costs are expensed as incurred, whereas significant improvements that materially increase values or extend useful lives are capitalized and depreciated over the remaining estimated useful lives of the related assets. Upon sale or retirement of depreciable assets, the related cost and accumulated depreciation or amortization are removed from the accounts and any gain or loss on the sale or retirement is recognized in income.
Lessee Right-of-Use (ROU) Assets and Lease Liabilities
The Company determines if an arrangement contains a lease at inception. ROU assets represent the Company’s right to use an asset underlying an operating lease for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from an operating lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company generally estimates the applicable discount rate used to determine the net present value of lease payments based on available information at the lease commencement date. Many of the Company’s lessee agreements include options to extend the lease, which the Company does not include in its lease terms unless they are reasonably certain to be exercised. The Company utilizes a portfolio approach to account for the ROU assets and liabilities associated with certain equipment leases. The Company has also made an accounting policy election not to separate lease and non-lease components for its real estate leases and to exclude short-term leases with a term of twelve months from its ROU assets and lease liabilities. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Intangible Assets
Intangible assets consist primarily of patents, trademarks, software development costs, customer relationships and acquired technology. Costs related to patents and trademarks, which include legal and application fees, are capitalized and amortized over the estimated useful lives using the straight-line method. Patent and trademark amortization commences once final approval of the patent or trademark has been obtained. Patent costs are amortized over the lesser of 10 years or the patent’s remaining legal life, which assumes renewals, and trademark costs are amortized over 17 years, and their associated amortization cost is included in selling, general and administrative expense in the accompanying condensed consolidated statements of operations. For intangibles purchased in an asset acquisition or business combination, which mainly include patents, trademarks, customer relationships and acquired technology, the useful life is determined in the same manner as noted above.
The Company’s policy is to renew its patents and trademarks. Costs to renew patents and trademarks are capitalized and amortized over the remaining useful life of the intangible asset. The Company continually evaluates the amortization period and carrying basis of patents and trademarks to determine whether any events or circumstances warrant a revised estimated useful life or reduction in value. Capitalized application costs are charged to operations when it is determined that the patent or trademark will not be obtained or is abandoned.

11

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, the Company has the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macroeconomic, industry-specific and Company-specific factors, including: (i) severe adverse industry or economic trends; (ii) significant Company-specific actions; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of a reporting unit is less than its carrying amount, then a quantitative analysis is unnecessary. However, if the Company concludes otherwise, or if the Company elects to bypass the qualitative analysis, then the Company must perform a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit. The annual impairment test is performed during the fourth fiscal quarter.
The Company reviews long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Revenue Recognition, Deferred Revenue and Other Contract Liabilities
The Company derives the majority of its product revenue from four primary sources: (i) direct sales under deferred equipment agreements with end-user hospitals where the Company provides up-front monitoring equipment at no up-front charge in exchange for a multi-year sensor purchase commitment; (ii) other direct sales of noninvasive monitoring solutions to end-user hospitals, emergency medical response organizations and other direct customers; (iii) sales of noninvasive monitoring solutions to distributors who then typically resell to end-user hospitals, emergency medical response organizations and other customers; and (iv) sales of integrated circuit boards to OEM customers who incorporate the Company’s embedded software technology into their multiparameter monitoring devices. Subject to customer credit considerations, the majority of such sales are made on open account using industry standard payment terms based on the geography within which the specific customer is located.
The Company generally recognizes revenue following a single, principles-based five-step model to be applied to all contracts with customers and generally provides for the recognition of revenue in an amount that reflects the consideration to which the Company expects to be entitled, net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected from customers that are remitted to government authorities, when control over the promised goods or services are transferred to the customer. Revenue related to equipment supplied under sales-type lease arrangements is recognized once control over the equipment is transferred to the customer, while revenue related to equipment supplied under operating-type lease arrangements is generally recognized on a straight-line basis over the term of the lease.
While the majority of the Company’s revenue contracts and transactions contain standard business terms and conditions, there are some transactions that contain non-standard business terms and conditions. As a result, contract interpretation, judgment and analysis is required to determine the appropriate accounting, including: (i) the amount of the total consideration, including variable consideration, (ii) whether the arrangement contains an embedded lease, and if so, whether such embedded lease is a sales-type lease or an operating lease, (iii) the identification of the distinct performance obligations contained within the arrangement, (iv) how the arrangement consideration should be allocated to each performance obligation when multiple performance obligations exist, including the determination of standalone selling price, and (v) when to recognize revenue on the performance obligations. Changes in judgments on these assumptions and estimates could materially impact the timing of revenue recognition.

12

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 performance obligations, the authoritative guidance provides that the total consideration be allocated to each performance obligation on the basis of relative standalone selling prices. When a standalone selling price is not readily observable, the Company estimates the standalone selling price by considering multiple factors including, but not limited to, features and functionality of the product, geographies, type of customer, contractual prices pursuant to Group Purchasing Organization (GPO) contracts, the Company’s pricing and discount practices, and other market conditions.
Sales under deferred equipment agreements are generally structured such that the Company agrees to provide certain monitoring-related equipment, software, installation, training and/or warranty support at no up-front charge in exchange for the customer’s commitment to purchase sensors over the term of the agreement, which generally ranges from three years to six years. The Company allocates contract consideration under deferred equipment agreements containing fixed annual sensor purchase commitments to the underlying lease and non-lease components at contract inception. In determining whether any underlying lease components are related to a sales-type lease or an operating lease, the Company evaluates the customer’s rights and ability to control the use of the underlying equipment throughout the contract term, including any equipment substitution rights retained by the Company, as well as the Company’s expectations surrounding potential contract/lease extensions or renewals and the customer’s likelihood to exercise any purchase options. Revenue allocable to non-lease performance obligations is generally recognized as such non-lease performance obligations are satisfied. Revenue allocable to lease components under sales-type lease arrangements is generally recognized when control over the equipment is transferred to the customer. Revenue allocable to lease components under operating lease arrangements is generally recognized over the term of the operating lease. The Company generally does not expect to derive any significant value in excess of such asset’s unamortized book value from equipment underlying its operating lease arrangements after the end of the agreement.
Revenue from the sales of products to end-user hospitals, emergency medical response organizations, other direct customers, distributors and OEM customers, is recognized by the Company when control of such products transfer to the customer based upon the terms of the contract or underlying purchase order.
Revenue related to OEM rainbow® parameter software licenses is recognized by the Company upon the OEM’s shipment of its product to its customer, as reported to the Company by the OEM.
The Company provides certain customers with various sales incentives that may take the form of discounts or rebates. The Company records estimates related to these programs as a reduction to revenue at the time of sale. In general, customers do not have a right of return for credit or refund. However, the Company allows returns under certain circumstances. At the end of each period, the Company estimates and accrues for these returns as a reduction to revenue. The Company estimates the revenue constraints related to these forms of variable consideration based on various factors, including expected purchasing volumes, prior sales and returns history, and specific contractual terms and limitations.
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 Company’s policy is to present revenue net of taxes collected from customers and remitted to governmental authorities.
Deferred Costs and Other Contract Assets
The costs of monitoring-related equipment provided to customers under operating lease arrangements within the Company’s deferred equipment agreements are generally deferred and amortized to cost of goods sold over the life of the underlying contracts. Some of the Company’s deferred equipment agreements also contain provisions for certain allowances to be made directly to the end-user hospital customer at the inception of the arrangement. These allowances are generally allocated to the lease and non-lease components and recognized as a reduction to revenue as the underlying performance obligations are satisfied.

13

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

The Company generally invoices its customers under deferred equipment agreements as sensors are provided to the customer. However, the Company may recognize revenue for certain non-lease performance obligations under deferred equipment agreements with fixed annual commitments at the time such performance obligations are satisfied and prior to the customer being invoiced. When this occurs, the Company records an unbilled contract receivable related to such revenue until the customer has been invoiced pursuant to the terms of the underlying deferred equipment agreement.
The incremental costs of obtaining a contract with a customer are capitalized and deferred if the Company expects such costs to be recoverable over the life of the contract and the contract term is greater than one year. Such deferred costs generally relate to certain incentive sales commissions earned by the Company’s internal sales team in connection with the execution of deferred equipment agreements and are amortized to expense over the expected term of the underlying contract.
Product Warranty
The Company generally provides a warranty against defects in material and workmanship for a period ranging from three months to forty-eight months, depending on the product type. In traditional sales activities, including direct and OEM sales, the Company establishes an accrued liability for the estimated warranty costs at the time of revenue recognition, with a corresponding provision to cost of goods sold. Customers may also purchase extended warranty coverage or service level upgrades separately or as part of a deferred equipment agreement. Revenue related to extended warranty coverage and service level upgrades is generally recognized over the life of the contract, which reasonably approximates the period over which such services will be provided. The related extended warranty and service level upgrade costs are expensed as incurred.
Changes in the product warranty accrual were as follows (in thousands):
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Warranty accrual, beginning of period
$
3,395

 
$
1,910

Accrual for warranties issued
117

 
720

Changes in pre-existing warranties (including changes in estimates)
(105
)
 
2,447

Settlements made
(241
)
 
(524
)
Warranty accrual, end of period
$
3,166

 
$
4,553


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
Comprehensive income includes foreign currency translation adjustments and any related tax benefits that have been excluded from net income and reflected in stockholders’ equity.

14

MASIMO CORPORATION
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 Ended
 
March 28,
2020
 
March 30,
2019
Net income
$
64,456

 
$
49,322

Basic net income per share:
 
 
 
Weighted-average shares outstanding - basic
53,867

 
53,210

Net income per basic share
$
1.20

 
$
0.93

Diluted net income per share:
 
 
 
Weighted-average shares outstanding - basic
53,867

 
53,210

Diluted share equivalent: stock options, RSUs and PSUs
3,718

 
3,589

Weighted-average shares outstanding - diluted
57,585

 
56,799

Net income per diluted share
$
1.12

 
$
0.87


Basic net income per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Net income per diluted share is computed by dividing the net income by the weighted-average number of shares and potential shares outstanding during the period, if the effect of potential shares is dilutive. Potential shares include incremental shares of stock issuable upon the exercise of stock options and the vesting of both restricted share units (RSUs) and performance share units (PSUs). For the three months ended March 28, 2020 and March 30, 2019, weighted options to purchase 0.4 million and 0.3 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. Certain RSUs are 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 March 28, 2020 and March 30, 2019, 2.7 million weighted average shares related to such RSUs have been excluded from the calculation of potential shares for each of the three month periods then ended.



15

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

Supplemental Cash Flow Information
Supplemental cash flow information includes the following (in thousands):
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Cash paid during the year for:
 
 
 
Interest expense
$
66

 
$
13

Income taxes
3,886

 
2,157

Operating lease liabilities
1,463

 
1,748

 
 
 
 
Non-cash operating activities:
 
 
 
ROU assets obtained in exchange for lease liabilities
$
8,144

 
$
22,983

 
 
 
 
Non-cash investing activities:
 
 
 
Unpaid purchases of property, plant and equipment
$
4,240

 
$
1,127

 
 
 
 
Non-cash financing activities:
 
 
 
       Unsettled common stock proceeds from option exercises
$
466

 
$
583

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
605,916

 
$
412,861

Restricted cash
376

 
149

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows
$
606,292

 
$
413,010


Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). Subsequent to the issuance of ASU 2016-13, the FASB clarified the guidance through several ASUs. The collective new guidance (ASC 326) generally requires entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity recognizes an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect. The entity’s estimate considers relevant information about past events, current conditions, and reasonable and supportable forecasts. The Company adopted this standard during the three months ended March 28, 2020 and such adoption did not have a material impact on its condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04). The new guidance provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). Entities can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. ASU 2020-04 is applied prospectively and is effective for annual periods, and interim periods within those annual periods, beginning March 12, 2020. The relief is temporary and generally cannot be applied to contract modifications that occur after December 31, 2022 or hedging relationships entered into or evaluated after that date. However, certain optional expedients can be applied to hedging relationships evaluated in periods after December 31, 2022. The Company is currently evaluating the expected impact of this standard, but does not expect it to have a material impact on its consolidated financial statements upon adoption.

16

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

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). The new standard simplifies the accounting for income taxes by removing exceptions to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. In addition, the standard requires that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date, and 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. ASU 2019-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the expected impact of this standard, but does not expect it to have a material impact on its consolidated financial statements upon adoption.
3. Related Party Transactions
The Company’s Chairman and Chief Executive Officer (CEO) is also the Chairman and CEO of Cercacor Laboratories, Inc. (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. Aggregate liabilities to Cercacor arising under the Cross-Licensing Agreement were $3.1 million and $2.9 million for the three months ended March 28, 2020 and March 30, 2019, 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 for each of the three months ended March 28, 2020 and March 30, 2019.
Lease and Sublease Agreement - 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 expired on December 15, 2019. The Company recognized approximately $0.3 million and $0.1 million of lease and sublease income for the three months ended March 28, 2020 and March 30, 2019, respectively.
Net amounts due to Cercacor at March 28, 2020 and December 28, 2019 were $3.0 million and $2.9 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. In addition, the Company’s Executive Vice President (EVP), Chief Financial Officer (CFO) serves as the Treasurer of the Masimo Foundation and the Company’s EVP, General Counsel and Corporate Secretary serves as the Secretary for the Masimo Foundation. During the three months ended March 28, 2020 and March 30, 2019, the Company made cash contributions of approximately $1.5 million and $1.0 million, respectively, to the Masimo Foundation. During the three months ended March 28, 2020 and March 30, 2019, the Company made various in-kind contributions to the Masimo Foundation, mainly in the form of donated administrative services.
The Company’s CEO is also a director of the Patient Safety Movement Foundation (PSMF), a non-profit organization which 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. The Company’s EVP, CFO also serves as the Treasurer of PSMF. During the three months ended March 28, 2020 and March 30, 2019, the Company made various in-kind contributions to PSMF, mainly in the form of donated office rent and administrative services.

17

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

The Company maintains an aircraft time share agreement, pursuant to which the Company has agreed from time to time to make its aircraft available to the Company’s CEO for lease on a time-sharing basis. The Company charges the Company’s CEO for personal use based on agreed upon reimbursement rates. For each of the three months ended March 28, 2020 and March 30, 2019, the Company charged the Company’s CEO less than $0.1 million related to such reimbursements.
4. Inventories
Inventories consist of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
Raw materials
$
53,902

 
$
55,913

Work-in-process
13,254

 
10,966

Finished goods
48,826

 
48,992

     Total inventories
$
115,982

 
$
115,871


5. Other Current Assets
Other current assets consist of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
Lease receivable, current
$
20,454

 
$
20,250

Prepaid expenses
14,036

 
11,746

Indirect taxes receivable
9,330

 
9,311

Customer notes receivable
3,273

 
4,847

Prepaid rebates and royalties, current
2,575

 
1,801

Prepaid income taxes
1,711

 
7,330

Contract assets, current
1,709

 
1,486

Other current assets
2,324

 
3,300

     Total other current assets
$
55,412

 
$
60,071


6. Lease Receivable
The Company recognizes revenue and costs, as well as a lease receivable, at the time embedded sales-type leases within its deferred equipment agreements commence. Lease revenue related to both operating-type and sales-type leases for the three months ended March 28, 2020 and March 30, 2019 was approximately $10.0 million and $12.0 million, respectively, and is included within product revenue in the accompanying condensed consolidated statement of 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):
 
March 28,
2020
 
December 28,
2019
Lease receivable
$
72,315

 
$
70,589

Allowance for credit loss
(181
)
 
(403
)
     Lease receivable, net
72,134

 
70,186

Less: Current portion of lease receivable
(20,454
)
 
(20,250
)
     Lease receivable, noncurrent
$
51,680

 
$
49,936



18

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

As of March 28, 2020, estimated future maturities of customer sales-type lease receivables for each of the following fiscal years are as follows (in thousands):
Fiscal year
Amount
2020 (balance of year)
$
16,083

2021
17,911

2022
14,928

2023
10,792

2024
7,240

Thereafter
5,361

    Total
$
72,315


Estimated future operating lease payments expected to be received from customers under deferred equipment agreements are not material as of March 28, 2020.
7. Deferred Costs and Other Contract Assets
Deferred costs and other contract assets consist of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
Prepaid contract allowances
$
8,015

 
$
8,098

Deferred commissions
5,604

 
5,260

Unbilled contract receivables, non-current
3,048

 
2,482

Equipment leased to customers
323

 
374

     Deferred costs and other contract assets
$
16,990

 
$
16,214


8. Property and Equipment
Property and equipment, net, consists of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
Building and building improvements
$
101,883

 
$
101,731

Machinery and equipment
60,881

 
58,864

Land
50,411

 
40,216

Aircraft and vehicles
32,145

 
29,934

Computer equipment and software
22,475

 
19,650

Leasehold improvements
16,584

 
15,921

Tooling
15,972

 
15,346

Furniture and office equipment
11,253

 
11,049

Demonstration units
834

 
836

Construction-in-progress (CIP)
58,706

 
39,107

     Total property and equipment
371,144

 
332,654

Accumulated depreciation
(117,988
)
 
(113,102
)
     Property and equipment, net
$
253,156

 
$
219,552


For the three months ended March 28, 2020 and March 30, 2019, depreciation expense of property and equipment was $5.0 million and $4.3 million, respectively.

19

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

During the three months ended March 28, 2020, the Company purchased a facility in Switzerland for its European headquarter operations for a purchase price of $16.4 million, as well as land in Mexicali, Mexico for a purchase price of $7.7 million to be used for the construction of a new manufacturing and distribution facility.
The balance in CIP at March 28, 2020 relates primarily to acquisition and improvement costs for a recently purchased building in Switzerland and a portion of a building in California, 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 balance in CIP at December 28, 2019 related primarily to acquisition and improvement costs for a portion of a recently purchased building in California, capitalized implementation costs related to an enterprise resource planning software system and costs related to equipment and other facility improvements, the underlying assets for which have not been placed into service.
9. Intangible Assets
Intangible assets, net, consist of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
Patents
$
26,332

 
$
23,242

Customer relationships
23,219

 
7,669

Licenses-related party
7,500

 
7,500

Trademarks
6,591

 
4,614

Acquired technology
5,580

 
5,580

Capitalized software development costs
3,328

 
3,328

Other
5,466

 
5,466

     Total intangible assets
78,016

 
57,399

Accumulated amortization
(31,277
)
 
(30,148
)
     Intangible assets, net
$
46,739

 
$
27,251


Intangible assets have a twelve year weighted-average amortization period. Total amortization expense for the three months ended March 28, 2020 and March 30, 2019 was $1.4 million and $1.1 million, respectively.
Total renewal costs for patents and trademarks for the three months ended March 28, 2020 and March 30, 2019 were $0.2 million and $0.3 million, respectively. As of March 28, 2020, the weighted-average number of years until the next renewal was one year for patents and five years for trademarks.
During the three months ended March 28, 2020, the Company completed a business combination. Based on the Company’s preliminary purchase price allocation, approximately $15.5 million, $2.6 million and $1.7 million of the purchase price has been assigned to customer relationships, acquired technology and trademarks, respectively. The Company is still gathering additional information to finalize these preliminary estimates and expects to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
Estimated amortization expense for each of the next fiscal years is as follows (in thousands):
Fiscal year
Amount
2020 (balance of year)
$
5,716

2021
5,940

2022
4,866

2023
4,043

2024
3,653

Thereafter
22,521

     Total
$
46,739



20

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

10. Goodwill
Changes in goodwill were as follows (in thousands):
 
Three Months Ended 
 March 28, 2020
Goodwill, beginning of period
$
22,350

Increase from business combination(1) 
32,165

Foreign currency translation adjustment
(418
)
Goodwill, end of period
$
54,097


______________
(1)
During the three months ended March 28, 2020, the Company completed a business combination. Based on the Company’s preliminary purchase price allocation, approximately $32.2 million of the purchase price has been assigned to goodwill. The Company is still gathering additional information to finalize this preliminary estimate and expects to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
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 2030. In addition, the Company leases equipment in the U.S. and Europe that are classified as operating leases and expire at various dates through September 2023. 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 March 28, 2020, the weighted average discount rate used by the Company for all operating leases was approximately 2.8%.
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 classification
 
March 28,
2020
 
December 28,
2019
Lessee ROU assets
Other non-current assets
 
$
25,937

 
$
19,137

 
 
 
 
 
 
Lessee current lease liabilities
Other current liabilities
 
4,547

 
4,653

Lessee non-current lease liabilities
Other non-current liabilities
 
22,776

 
15,834

     Total operating lease liabilities
 
 
$
27,323

 
$
20,487


The weighted average remaining lease term for the Company’s operating leases was 8.4 years as of March 28, 2020.

21

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

As of March 28, 2020, estimated future operating lease payments for each of the following fiscal years were as follows (in thousands):
Fiscal year
Amount
2020 (balance of year)
$
4,320

2021
4,454

2022
3,405

2023
3,105

2024
2,678

Thereafter(1)
12,852

   Total
30,814

   Imputed interest
(3,491
)
   Present value
$
27,323


______________
(1)     Includes optional renewal period for certain leases.
Lease costs consist of the following (in thousands):
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Operating lease costs
$
1,658

 
$
1,765

Short-term lease costs

 
9

Sublease income

 
(52
)
     Total lease costs
$
1,658

 
$
1,722


12. Other Non-Current Assets
Other assets, long-term consist of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
Lessee ROU assets
$
25,937

 
$
19,137

Strategic investments
6,302

 
6,475

Prepaid deposits
3,186

 
3,022

Other
150

 
157

Total other non-current assets
$
35,575

 
$
28,791


13. Deferred Revenue and Other Contract Liabilities
Deferred revenue and other contract liabilities consist of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
Deferred revenue
$
24,360

 
$
13,998

Accrued rebates and allowances
7,771

 
8,436

Accrued customer reimbursements
4,830

 
5,739

     Total deferred revenue and other contract liabilities
36,961

 
28,173

Less: Non-current portion of deferred revenue
(2,483
)
 
(2,234
)
     Deferred revenue and other contract liabilities - current
$
34,478

 
$
25,939



22

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

Deferred revenue relates to contracted amounts that have been invoiced to customers for which remaining performance obligations must be completed before the Company can recognize the revenue. These amounts primarily relate to undelivered equipment, sensors and services under deferred equipment agreements, extended warranty agreements and maintenance agreements.
Changes in deferred revenue were as follows (in thousands):
 
Three Months Ended 
 March 28, 2020
Deferred revenue, beginning of the period
$
13,998

  Increase from business combination(1)
9,464

  Revenue deferred during the period
4,085

  Recognition of revenue deferred in prior periods
(3,187
)
     Deferred revenue, end of the period
$
24,360


______________
(1)
During the three months ended March 28, 2020, the Company completed a business combination. Based on the Company’s preliminary purchase price allocation, approximately $9.5 million of the purchase price has been assigned to deferred revenue. The Company is still gathering additional information to finalize this preliminary estimate and expects to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
Expected revenue from remaining contractual performance obligations (Unrecognized Contract Revenue) includes deferred revenue, as well as other amounts that will be invoiced and recognized as revenue in future periods, when the Company completes its performance obligations. While Unrecognized Contract Revenue is similar in concept to backlog, Unrecognized Contract Revenue excludes revenue allocable to monitoring-related equipment that is effectively leased to customers under deferred equipment agreements and other contractual obligations for which neither party has performed.
The following table summarizes the Company’s estimated Unrecognized Contract Revenue as of March 28, 2020 and the future periods within which the Company expects to recognize such revenue.
 
Expected Future Revenue By Period
(in thousands)
 
Less than
1 Year
 
 Between
1-3 Years
 
 Between
 3-5 Years
 
More than
5 Years
 
Total
Unrecognized contract revenue
$
212,273

 
$
344,630

 
$
173,384

 
$
46,381

 
$
776,668


The estimated timing of this revenue is based, in part, on management’s estimates and assumptions about when its performance obligations will be completed. As a result, the actual timing of this revenue in future periods may vary, possibly materially, from those reflected in this table.
14. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
Accrued indirect taxes payable
$
6,231

 
$
7,545

Accrued expenses
5,456

 
6,115

Income tax payable
5,088

 
7,142

Lessee lease liabilities, current
4,547

 
4,653

Accrued donations
3,366

 
966

Accrued legal fees
3,204

 
1,839

Accrued warranty
3,166

 
3,395

Related party payables
3,164

 
3,024

Other
2,670

 
2,348

     Total accrued and other current liabilities
$
36,892

 
$
37,027



23

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

15. Credit Facility
The Company currently maintains a credit facility with various lenders that provides for up to $150.0 million of unsecured borrowings, with an option, subject to certain conditions, for the Company to increase the aggregate borrowing capacity up to $550.0 million in the future with 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 credit facility will become due and payable on December 17, 2023. Proceeds from the credit facility are expected to be used for general corporate, capital investment and working capital needs. As of March 28, 2020 and December 28, 2019, the credit facility had no outstanding draws and $1.7 million of outstanding letters of credit. The Company was in compliance with all covenants under the credit facility as of March 28, 2020 and December 28, 2019.
For each of the three months ended March 28, 2020 and March 30, 2019, the Company incurred total interest expense of $0.1 million under the credit facility.
16. Other Non-Current Liabilities
Other non-current liabilities consist of the following (in thousands):
 
March 28,
2020
 
December 28,
2019
Lessee lease liabilities, non-current
$
22,776

 
$
15,834

Income tax payable, non-current
21,509

 
21,509

Unrecognized tax benefits
13,870

 
13,184

Deferred tax liabilities
3,115

 
3,052

Other
2,705

 
2,456

     Total other non-current liabilities
$
63,975

 
$
56,035


Unrecognized tax benefits relate to the Company’s long-term portion of tax liability associated with uncertain tax positions. Authoritative guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. See Note 20 to these condensed consolidated financial statements for further details.
17. Stock Repurchase Program
In July 2018, the Company’s Board of Directors (Board) approved a stock repurchase program, authorizing the Company to purchase up to 5.0 million additional shares of its common stock over a period of up to three years (2018 Repurchase Program). The Company expects to fund the 2018 Repurchase Program through its available cash, cash expected to be generated from future operations, the credit facility and other potential sources of capital. The 2018 Repurchase Program can be carried out at the discretion of a committee comprised of the Company’s CEO and CFO through open market purchases, one or more Rule 10b5-1 trading plans, block trades and privately negotiated transactions. As of March 28, 2020, 4.7 million shares remained available for repurchase pursuant the 2018 Repurchase Program.
The following table provides a summary of the Company’s stock repurchase activities (in thousands, except per share amounts):
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Shares repurchased(1)
3

 

Average cost per share
$
144.65

 
$

Value of shares repurchased
$
371

 
$


______________
(1)
Excludes shares withheld from the shares of its common stock actually issued in connection the vesting of PSU awards to satisfy certain U.S. federal and state tax withholding obligations.

24

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

18. Stock-Based Compensation
Total stock-based compensation expense for the three months ended March 28, 2020 and March 30, 2019 was $11.3 million and $7.3 million, respectively. As of March 28, 2020, an aggregate of 10.2 million shares of common stock were reserved for future issuance under the Company’s equity plans, of which 1.9 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, RSUs, stock appreciation rights, PSUs, performance shares, performance bonus awards and other stock or cash awards to employees, directors and consultants of the Company and employees and consultants of any parent or subsidiary of the Company. The aggregate number of shares that may be awarded under the 2017 Equity Plan is 5.0 million shares.
The 2017 Equity Plan provides that at least 95% of the equity awards issued under the 2017 Equity Plan must vest over a period of not less than one year following the date of grant. The exercise price per share of each option granted under the 2017 Equity Plan may not be less than the fair market value of a share of the Company’s common stock on the date of grant, which is generally equal to the closing price of the Company’s common stock on the Nasdaq Global Select Market on the grant date.
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.
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 exercise prices):
 
Three Months Ended 
 March 28, 2020
 
Shares
 
Average
Exercise Price
Options outstanding, beginning of period
5,212

 
$
54.23

Granted
255

 
175.10

Canceled
(33
)
 
112.65

Exercised
(384
)
 
35.10

Options outstanding, end of period
5,050

 
$
61.42

Options exercisable, end of period
3,245

 
$
36.12


Total stock option expense for the three months ended March 28, 2020 and March 30, 2019 was $4.0 million and $3.5 million, respectively. As of March 28, 2020, the Company had $51.2 million of unrecognized compensation cost related to non-vested stock options that are expected to vest over a weighted average period of approximately 3.1 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 March 28, 2020 was 5.8 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 March 28, 2020, was 4.5 years.

25

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):
 
Three Months Ended 
 March 28, 2020
 
Units
 
Weighted Average Grant
 Date Fair Value
RSUs outstanding, beginning of period
2,797

 
$
96.85

Granted
72

 
178.71

Canceled

 

Expired

 

Vested
(17
)
 
132.83

RSUs outstanding, end of period
2,852

 
$
98.72


Total RSU expense for the three months ended March 28, 2020 and March 30, 2019 was $1.0 million and $0.2 million, respectively. As of March 28, 2020, the Company had $22.4 million of unrecognized compensation cost related to non-vested RSU awards expected to be recognized and vest over a weighted-average period of approximately 4.2 years.
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):
 
Three Months Ended 
 March 28, 2020
 
Units
 
Weighted Average Grant
 Date Fair Value
PSUs outstanding, beginning of period
412

 
$
102.22

Granted
97

 
179.42

Canceled

 

Expired

 

Vested
(29
)
 
90.69

PSUs outstanding, end of period
480

 
$
118.52


During the three months ended March 28, 2020, the Company awarded 97,000 PSUs that will vest three years from the award date, based on the achievement of certain 2022 performance criteria approved by the Board. If earned, the PSUs granted will vest upon achievement of the performance criteria after the year in which the performance achievement level has been determined. The number of shares that may be earned can range from 0% to 200% of the target amount; therefore, the maximum number of shares that can be issued under these awards is twice the original award of 97,000 PSUs or 194,000 shares. Based on management’s estimate of the number of units expected to vest, total PSU expense for the three months ended March 28, 2020 and March 30, 2019 was $6.3 million and $3.6 million, respectively. As of March 28, 2020, the Company had $62.4 million of unrecognized compensation cost related to non-vested PSU awards expected to be recognized and vest over a weighted-average period of approximately 1.6 years.

26

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

Valuation of Stock-Based Award Activity
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 Ended
 
March 28,
2020
 
March 30,
2019
Risk-free interest rate
0.4% to 1.7%
 
2.2% to 2.6%
Expected term (in years)
5.1
 
5.6
Estimated volatility
26.9% to 27.2%
 
29.3% to 30.0%
Expected dividends
0%
 
0%
Weighted-average fair value of options granted
$45.01
 
$41.01

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 March 28, 2020 was $594.0 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 March 28, 2020 was $463.7 million. The aggregate intrinsic value of options exercised during the three months ended March 28, 2020 was $54.6 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 income
Non-operating income consists of the following (in thousands):
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Interest income
$
2,844

 
$
3,433

Realized and unrealized foreign currency gains
588

 
534

Interest expense
(84
)
 
(80
)
Other
(2
)
 
(1
)
Total
$
3,346

 
$
3,886


20. Income Taxes
The Company has provided for income taxes in fiscal year 2020 interim periods based on the estimated effective income tax rate for the complete fiscal year, as adjusted for discrete tax events, including excess tax benefits or deficiencies related to stock-based compensation, in the period such events occur. The estimated annual effective tax rate is computed based on the expected annual pretax income of the consolidated entities located within each taxing jurisdiction based on legislation enacted as of the balance sheet date. For the three months ended March 28, 2020 and March 30, 2019, the Company recorded discrete tax benefits of approximately $9.6 million and $3.4 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.

27

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

As of March 28, 2020, the liability for income taxes associated with uncertain tax positions was approximately $17.7 million. If fully recognized, approximately $16.3 million (net of federal benefit on state taxes) would impact the Company’s effective tax rate. 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 2014. All material state, local and foreign income tax matters have been concluded through fiscal year 2012. The Company does not believe that the results of any tax authority examination would have a significant impact on its consolidated financial statements.
21. Commitments and Contingencies
Employee Retirement Savings Plan
The Company sponsors a qualified defined contribution plan or 401(k) plan, the Masimo Retirement Savings Plan (MRSP), covering the Company’s full-time U.S. employees who meet certain eligibility requirements. In general, the Company matches an employee’s contribution up to 3% of the employee’s compensation, subject to a maximum amount. The Company may also contribute to the MRSP on a discretionary basis. The Company contributed $0.8 million and $0.5 million to the MRSP for the three months ended March 28, 2020 and March 30, 2019, respectively. 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 March 28, 2020, 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 March 28, 2020, the Company had severance plan participation agreements with eight executive officers. The participation agreements (the Agreements) are governed by the terms and conditions of the Company’s 2007 Severance Protection Plan (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 $132.1 million of purchase commitments as of March 28, 2020, 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.

28

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 March 28, 2020, the Company had approximately $2.4 million in outstanding unsecured bank guarantees.
In certain circumstances, the Company also provides limited indemnification within its various customer contracts whereby the Company indemnifies the parties to whom it sells its products with respect to potential infringement of intellectual property, and against bodily injury caused by a defective Company product. It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved. As of March 28, 2020, the Company had not incurred any significant costs related to contractual indemnification of its customers.
In March 2020, the Company exercised its option and entered into a definitive agreement to acquire TNI medical AG for approximately EUR 29.8 million in cash. The transaction closed subsequent to March 28, 2020.
Concentrations of Risk
The Company is exposed to credit loss for the amount of its cash deposits with financial institutions in excess of federally insured limits. The Company invests a portion of its excess cash in time deposits with major financial institutions. As of March 28, 2020, the Company had $656.3 million of bank balances, including short terms investments and restricted cash, of which $3.9 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 March 28, 2020 and March 30, 2019, revenue from sales to customers that are members of GPOs approximated 55.2% and 56.2% of total product revenue, respectively.
For the three months ended March 28, 2020, the Company had sales through two just-in-time distributors that represented 14.6% and 12.3% of total product revenue, respectively. For the three months ended March 30, 2019, the Company had sales through the same two just-in-time distributors that represented 10.3% and 13.6% of total product revenue, respectively.
As of March 28, 2020 and December 28, 2019, one customer represented 18.0% and 19.0%, respectively, of the Company’s accounts receivable balance. The receivable balances related to such customer are fully secured by letters of credit.
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. Although the Company intends to vigorously pursue the collection of the arbitration award through the bankruptcy proceedings, 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 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.

29

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

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 motions 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 the date was vacated. No new trial date has been set. 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 U.S. District Court for the Central District of California 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. The Company is seeking damages, injunctive relief, and declaratory judgment regarding ownership of the Apple patents. Although the Company intends to vigorously pursue all of its legal remedies, there is no guarantee that the Company will be successful in these efforts.
From time to time, the Company may be involved in other litigation and investigations relating to claims and matters arising out of its operations in the normal course of business. The Company believes that it currently is not a party to any other legal proceedings which, individually or in the aggregate, would have a material adverse effect on its consolidated financial position, results of operations or cash flows.
22. Segment Information and Enterprise Reporting
The Company’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. Accordingly, the Company considers itself to be in a single reporting segment, specifically noninvasive patient monitoring solutions and related products. 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 Ended
 
March 28,
2020
 
March 30,
2019
Geographic area by destination:
 
 
 
 
 
 
United States (U.S.)
$
189,519

 
70.3
%
 
$
156,668

 
68.0
%
Europe, Middle East and Africa
54,357

 
20.2

 
48,472

 
21.0

Asia and Australia
19,312

 
7.2

 
18,118

 
7.9

North and South America (excluding the U.S.)
6,437

 
2.3

 
7,290

 
3.1

     Total product revenue
$
269,625

 
100.0
%
 
$
230,548

 
100.0
%

The Company’s consolidated long-lived assets (tangible non-current assets) by geographic area are (in thousands, except percentages):
 
March 28,
2020
 
December 28,
2019
Long-lived assets by geographic area:
 
 
 
 
 
 
 
United States
$
226,197

 
89.2
%
 
$
216,650

 
98.5
%
International
27,282

 
10.8

 
3,276

 
1.5

     Total long-lived assets
$