MASIMO CORPORATION This Quarterly Report on Form 10-Q contains "forward-looking statements" as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, in connection with the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results or financial condition; statements concerning new products, technologies or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements related to our stock repurchase program; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may" or "will," the negative versions of these terms and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially and adversely from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q and in our otherSecurities and Exchange Commission (SEC) filings, including our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 , which we filed with theSEC onFebruary 23, 2021 . Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements. Executive Overview We are a global medical technology company that develops, manufactures and markets a variety of noninvasive patient monitoring technologies, hospital automation solutions, home monitoring devices and consumer products. Our mission is to improve patient outcomes, reduce the cost of care and take noninvasive monitoring to new sites and applications. Our patient monitoring solutions generally incorporate a monitor or circuit board, proprietary single-patient use or reusable sensors, software and/or cables. We primarily sell our products to hospitals, emergency medical service (EMS) providers, home care providers, physician offices, veterinarians, long-term care facilities and consumers through our direct sales force, distributors and original equipment manufacturer (OEM) partners. We were incorporated inCalifornia inMay 1989 and reincorporated inDelaware inMay 1996 . Our core measurement technologies are Measure-through Motion and Low Perfusion™ pulse oximetry, known as Masimo Signal Extraction Technology® (SET®) pulse oximetry, and advanced rainbow® Pulse CO-Oximetry parameters such as noninvasive hemoglobin (SpHb®), alongside many other modalities, including brain function monitoring, hemodynamic monitoring, regional oximetry, acoustic respiration rate monitoring, capnography, nasal high-flow respiratory support therapy, patient position and activity tracking and neuromodulation technology for the reduction of symptoms associated with opioid withdrawal. Masimo's measurement technologies are available on many types of devices, from bedside hospital monitors like the Root® Patient Monitoring and Connectivity Hub, to various handheld and portable devices, and to the tetherless Masimo SafetyNet™ remote patient surveillance solution. The Masimo Hospital Automation™ Platform facilitates data integration, connectivity, and interoperability through solutions like Patient SafetyNet™, Replica® and UniView™ to facilitate more efficient clinical workflows and to help clinicians provide the best possible care, both in-person and remotely. Leveraging our expertise in hospital-grade technologies, we are also expanding our suite of products intended for use outside the hospital and products for consumers, including Sleep™, a sleep quality solution and the Radius Tº™ wireless, wearable continuous thermometer. For an overview of our product offerings and technologies, please refer to "Business" in Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 , filed with theSEC onFebruary 23, 2021 . InJanuary 2021 , we announced the global launch of iSirona™, a compact, versatile connectivity hub designed to maximize interoperability across the continuum of care. The iSirona™ hub offers an efficient way to physically connect up to six medical devices at the bedside and automatically route the data to the Masimo Hospital Automation™ Platform. The iSirona™ hub helps ensure that whatever the source, all patient data can be accurately and efficiently captured and presented to clinicians in the most suitable ways. 35 -------------------------------------------------------------------------------- Table of Contents InFebruary 2021 , we announced the full market release of Masimo SafetyNet-OPEN™, a web and mobile app solution that helps businesses, schools and other organizations screen, trace and manage users entering their facilities with respect to COVID-19 and other infectious illnesses, such as seasonal flu. SafetyNet-OPEN™ helps organizations bring their people back to the workplace responsibly and stay open safely. Tailored for each organization's safety protocols and needs, SafetyNet-OPEN™ is capable of covering all stages of back-to-work management, including risk screening, exposure contact tracing and recovery management. Also inFebruary 2021 , we announced theU.S. introduction of softFlow®, which provides nasal high-flow warmed and humidified respiratory gases to spontaneously breathing patients. The technology offers adult patients high-flow respiratory support through a soft nasal cannula by generating a consistent high flow of warm, humidified air or air/oxygen mixture. InMarch 2021 , we announced the CE Marking of the Rad-G™ with temperature, a rugged handheld device that provides clinically proven SET® pulse oximetry, respiration rate from the pleth (RRp®) parameter and other important parameters alongside clinical-grade, non-contact infrared thermometry. With its long-lasting rechargeable battery, robust rubber casing, light weight and integrated noninvasive, real-time forehead temperature measurement, Rad-G™ with temperature makes it easier for clinicians to quickly assess patients and make informed care decisions anywhere pulse oximetry or vital signs monitoring is needed in a compact, portable form factor. Coupled with the universal Mini-Clip™ pulse oximeter sensor to provide the ultimate in handheld versatility, Rad-G™ with temperature can be used in a variety of settings, including but not limited to, entry screening, physicians' offices, outpatient services, long-term care facilities, wellness clinics, first-response scenarios and limited-resource environments both indoors and in the field. Rad-G™ can provide both spot-check measurement and continuous monitoring. InApril 2021 , we announced that Radius PCG™, a portable real-time capnograph with wireless Bluetooth® connectivity, received FDA 510(k) clearance. Radius PCG™ connects with the Root® Patient Monitoring and Connectivity Platform to provide seamless, tetherless mainstream capnography for patients of all ages. Radius PCG™ offers Masimo SET® Measure-through Motion and Low Perfusion pulse oximetry, continuous temperature measurements with no routine calibration, along with accurate end-tidal carbon dioxide (EtCO2) and respiration rate measurements. InJune 2021 , we announced that Radius T°™, a wearable, wireless thermometer that measures body temperature continuously and noninvasively, received FDA 510(k) clearance for both prescription and over-the-counter use on patients and consumers five years and older. Featuring continuously trending temperature measurements and Bluetooth® connectivity, Radius T°™ automates remote, continuous body temperature status for clinicians through its paired connection to a Masimo patient monitoring or telehealth solution, and for consumers through the Masimo Radius T°™ smartphone application. InJuly 2021 , we announced the release of the MX-7™ board, our latest and most advanced rainbow SET® board. Designed for integration into the more than 200 multi-parameter monitors available from our more than 90 OEM partners, MX-7™ has the ability to support all 13 of Masimo's SET® pulse oximetry and rainbow® Pulse CO-Oximetry measurements in an advanced module re-engineered to reduce power needs. InAugust 2021 , we announced the launch of Masimo SafetyNet Alert™, an arterial blood oxygen saturation monitoring and alert system designed for use at home. Masimo SafetyNet Alert™ features a Masimo SET® fingertip pulse oximetry sensor that communicates wirelessly to an accompanying Home Medical Hub and smartphone app. The system provides escalating visual and audible alerts that are designed to alert the patient, or anyone nearby, to help prompt action if oxygen levels continue to decline and designated emergency contacts are also notified via text message. Masimo SafetyNet Alert™ has received the CE Mark inEurope . InSeptember 2021 , we announced the launch of the single-patient-use rainbow® SuperSensor™, compatible for use with both Masimo monitors and third-party monitors with Masimo rainbow® technology inside. The rainbow® SuperSensor™ uses 12 LEDs to simultaneously offer 12 noninvasive, continuous Masimo SET® and rainbow® parameters, providing a comprehensive and convenient fingertip solution for assessing patient status. The rainbow® SuperSensor™ has received the CE Mark inEurope . 36 -------------------------------------------------------------------------------- Table of Contents COVID-19 Pandemic The COVID-19 pandemic has created significant uncertainty in theU.S. and around the globe, resulting in both challenges and opportunities for our business. We are committed to being as transparent as possible with our investors, employees, customers, suppliers and business partners as we collectively work to respond to this crisis. In response to this situation, we implemented a number of precautionary measures at our facilities, including: requiring certain personnel to work remotely from home and enacting social distancing, requiring face masks and mandatory screening for symptoms associated with COVID-19 for critical personnel that are required to report to our facilities to work. We also introduced new products, such as Masimo SafetyNet™ and Masimo SafetyNet-OPEN™ to help combat the COVID-19 pandemic and made pledges to various charitable organizations to support global COVID-19 relief efforts. We currently believe that our existing liquidity position will be sufficient to fund these ongoing initiatives and our response efforts. Given the continuing uncertainties related to the COVID-19 pandemic, we cannot predict how it will continue to affect our product demand or our product mix. In addition, the increase in demand we have experienced due to the COVID-19 pandemic could result in potential reductions in future demand if our customers have over purchased our products and need to consume their excess inventory before purchasing additional products. Furthermore, we continue to be exposed to potential disruptions to our manufacturing operations and disruptions in the supply of critical manufacturing components and in our workforce as circumstances surrounding the global impact of the COVID-19 pandemic continue to change. In addition, given the recent presidential executive order mandating federal contractors and subcontractors to be fully vaccinated against COVID-19 byNovember 22, 2021 , we expect that our employees will be required to be vaccinated per the federal mandate, and current employees and candidates seeking employment with Masimo may be opposed to being vaccinated and may risk possible termination or may seek employment with an employer that is not required to follow the federal mandate. Please see "Risks Related to Our Revenues" and "Risks Related to our Business and Operations" in Part II, Item 1A of this Quarterly Report on Form 10-Q for additional information on potential negative impacts to us resulting from the COVID-19 pandemic. CercacorCercacor Laboratories, Inc. (Cercacor) is an independent entity spun off from us to our stockholders in 1998.Joe Kiani , our Chairman and Chief Executive Officer (CEO), is also the Chairman and CEO of Cercacor. We are a party to a cross-licensing agreement with Cercacor, which was amended and restated effectiveJanuary 1, 2007 (the Cross-Licensing Agreement), which governs each party's rights to certain intellectual property held by the two companies. See Note 3 to our accompanying condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to Cercacor. 37 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth, for the periods indicated, our results of operations expressed asU.S. Dollar amounts and as a percentage of revenue (dollars in thousands). Three Months Ended Nine Months EndedOctober 2 , PercentageSeptember 26 , PercentageOctober 2 , PercentageSeptember 26 , Percentage 2021 of Revenue 2020 of Revenue 2021 of Revenue 2020 of Revenue Product revenue$ 307,414 100.0 %$ 278,112 100.0 %$ 911,575 100.0 %$ 848,690 100.0 % Cost of goods sold 103,750 33.7 99,186 35.7 318,124 34.9 292,551 34.5 Gross profit 203,664 66.3 178,926 64.3 593,451 65.1 556,139 65.5 Operating expenses: Selling, general and administrative 100,647 32.7 90,376 32.5 291,180 31.9 278,714 32.8 Research and development 35,406 11.5 28,852 10.4 103,860 11.4 86,971 10.2 Litigation awards - - - - - - (474) (0.1) Total operating expenses 136,053 44.3 119,228 42.9 395,040 43.2 365,211 43.0 Operating income 67,611 22.0 59,698 21.5 198,411 21.8 190,928 22.5 Non-operating (loss) income (78) - 1,357 0.5 (735) (0.1) 6,108 0.7 Income before provision for income taxes 67,533 21.9 61,055 22.0 197,676 21.7 197,036 23.2 Provision for income taxes 9,762 3.2 11,650 4.2 36,287 4.0 27,403 3.2 Net income$ 57,771 18.7 %$ 49,405 17.8 %$ 161,389 17.6 %$ 169,633 20.0 % Comparison of the Three Months endedOctober 2, 2021 to the Three Months endedSeptember 26, 2020 Revenue. Product revenue increased$29.3 million , or 10.5%, to$307.4 million for the three months endedOctober 2, 2021 from$278.1 million for the three months endedSeptember 26, 2020 . The following table details our product revenues by the geographic area to which the products were shipped for each of the three months endedOctober 2, 2021 andSeptember 26, 2020 (dollars in thousands): Three Months Ended October 2, September 26, Increase/ Percentage 2021 2020 (Decrease) Change United States (U.S.)$ 207,060 67.4 %$ 186,919 67.2 %$ 20,141 10.8 % Europe, Middle East and Africa 56,223 18.3 54,257 19.5 1,966 3.6 Asia and Australia 34,878 11.3 27,583 9.9 7,295 26.4North and South America (excluding the U.S.) 9,252 3.0 9,353 3.4 (101) (1.1) Product revenue$ 307,413 100.0 %$ 278,112 100.0 %$ 29,301 10.5 % This increase was primarily due to higher revenue from consumables, parameters and services, as well as the impact of approximately$1.3 million of favorable foreign exchange rate movements from the prior year that increased theU.S. Dollar translation of foreign sales that were denominated in various foreign currencies. During the three months endedOctober 2, 2021 , we shipped approximately 74,600 noninvasive technology boards and instruments. Product revenue generated through our direct and distribution sales channels increased$56.5 million , or 25.7%, to$275.7 million for the three months endedOctober 2, 2021 , compared to$219.3 million for the three months endedSeptember 26, 2020 . Revenues from our OEM channel decreased$27.2 million , or 46.1%, to$31.7 million for the three months endedOctober 2, 2021 as compared to$58.8 million for the three months endedSeptember 26, 2020 . 38 -------------------------------------------------------------------------------- Table of Contents Gross Profit. Gross profit consists of product revenue less cost of goods sold. Our gross profit for the three months endedOctober 2, 2021 andSeptember 26, 2020 was as follows (dollars in thousands): Gross Profit Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage October 2, 2021 Net Revenues September 26, 2020 Net Revenues (Decrease) Change$203,664 66.3%$178,926 64.3%$24,738 13.8% Cost of goods sold includes labor, material, overhead and other similar costs related to the production, supply, distribution and support of our products. Cost of goods sold increased$4.6 million for the three months endedOctober 2, 2021 , compared to the three months endedSeptember 26, 2020 , primarily due to higher material, manufacturing and distribution costs associated with the increase in product sales. Gross profit increased to 66.3% for the three months endedOctober 2, 2021 , compared to 64.3% for the three months endedSeptember 26, 2020 , primarily due to an increase in product sales and favorable revenue mix. Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries, stock-based compensation and related expenses for sales, marketing and administrative personnel, sales commissions, advertising and promotion costs, professional fees related to legal, accounting and other outside services, public company costs and other corporate expenses. Selling, general and administrative expenses for the three months endedOctober 2, 2021 andSeptember 26, 2020 were as follows (dollars in thousands): Selling, General and Administrative Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage October 2, 2021 Net Revenues September 26, 2020 Net Revenues (Decrease) Change$100,647 32.7%$90,376 32.5%$10,271 11.4% Selling, general and administrative expenses increased$10.3 million , or 11.4%, for the three months endedOctober 2, 2021 , compared to the three months endedSeptember 26, 2020 . This increase was primarily attributable to higher compensation and other employee-related costs of approximately$11.0 million , higher legal and professional fees of$4.2 million , higher occupancy and other office-related costs of approximately$1.5 million and higher travel costs of approximately$1.4 million , which were partially offset by lower advertising and marketing-related costs of approximately$8.5 million . Research and Development. Research and development expenses consist primarily of salaries, stock-based compensation and related expenses for engineers and other personnel engaged in the design and development of our products. These expenses also include third-party fees paid to consultants, prototype and engineering supply expenses and the costs of clinical trials. Research and development expenses for the three months endedOctober 2, 2021 andSeptember 26, 2020 were as follows (dollars in thousands): Research and Development Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage October 2, 2021 Net Revenues September 26, 2020 Net Revenues (Decrease) Change$35,406 11.5%$28,852 10.4%$6,554 22.7% Research and development expenses increased$6.6 million , or 22.7%, for the three months endedOctober 2, 2021 , compared to the three months endedSeptember 26, 2020 , primarily due to higher compensation and employee-related costs of approximately$4.6 million and higher engineering project costs of approximately$2.0 million . Non-operating (Loss) Income. Non-operating (loss) income consists primarily of interest income, interest expense and foreign exchange gains and losses. Non-operating (loss) income for the three months endedOctober 2, 2021 andSeptember 26, 2020 was as follows (dollars in thousands): Non-operating (Loss) Income Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage October 2, 2021 Net Revenues September 26, 2020 Net Revenues (Decrease) Change$(78) -%$1,357 0.5%$(1,435) (105.7)% 39
-------------------------------------------------------------------------------- Table of Contents Non-operating (loss) income was less than$0.1 million for the three months endedOctober 2, 2021 , as compared to$1.4 million of non-operating income for the three months endedSeptember 26, 2020 . This decrease of approximately$1.4 million was primarily due to lower interest yields realized on our invested cash. Provision for Income Taxes. Our provision for income taxes for the three months endedOctober 2, 2021 andSeptember 26, 2020 was as follows (dollars in thousands): Provision for Income Taxes Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage October 2, 2021 Net Revenues September 26, 2020 Net Revenues (Decrease) Change$9,762 3.2%$11,650 4.2%$(1,888) (16.2)% For the three months endedOctober 2, 2021 , we recorded a provision for income taxes of approximately$9.8 million , or an effective tax provision rate of 14.5%, as compared to a provision for income taxes of approximately$11.7 million , or an effective tax provision rate of 19.1%, for the three months endedSeptember 26, 2020 . The decrease in our effective tax rate for the three months endedOctober 2, 2021 resulted primarily from an increase in the amount of excess tax benefits realized from stock-based compensation of approximately$3.3 million compared to the three months endedSeptember 26, 2020 . Comparison of the Nine Months endedOctober 2, 2021 to the Nine Months endedSeptember 26, 2020 Revenue. Product revenue increased$62.9 million , or 7.4%, to$911.6 million for the nine months endedOctober 2, 2021 from$848.7 million for the nine months endedSeptember 26, 2020 . The following table details our product revenues by the geographic area to which the products were shipped for each of the nine months endedOctober 2, 2021 andSeptember 26, 2020 (dollars in thousands): Nine Months Ended October 2, September 26, Increase/ Percentage 2021 2020 (Decrease) Change United States (U.S.)$ 613,197 67.3 %$ 571,158 67.3 %$ 42,039 7.4 % Europe, Middle East and Africa 177,053 19.4 176,781 20.8 272 0.2 Asia and Australia 94,134 10.3 73,155 8.6 20,979 28.7North and South America (excluding the U.S.) 27,190 3.0 27,596 3.3 (406) (1.5) Product revenue$ 911,574 100.0 %$ 848,690 100.0 %$ 62,884 7.4 % This increase was primarily due to higher revenue from consumables, services and parameters, as well as the impact of approximately$9.5 million of favorable foreign exchange rate movements from the prior year period that increased theU.S. Dollar translation of foreign sales that were denominated in various foreign currencies. During the nine months endedOctober 2, 2021 , we shipped approximately 213,100 noninvasive technology boards and instruments. Product revenue generated through our direct and distribution sales channels increased$112.4 million , or 16.1%, to$810.4 million for the nine months endedOctober 2, 2021 , compared to$698.0 million for the nine months endedSeptember 26, 2020 . Revenues from our OEM channel decreased$49.5 million , or 32.8%, to$101.2 million for the nine months endedOctober 2, 2021 as compared to$150.7 million for the nine months endedSeptember 26, 2020 . Gross Profit. Gross profit consists of total revenue less cost of goods sold. Our gross profit for the nine months endedOctober 2, 2021 andSeptember 26, 2020 was as follows (dollars in thousands): Gross Profit Nine Months Ended Percentage of Nine Months Ended Percentage of Increase/ Percentage October 2, 2021 Net Revenues September 26, 2020 Net Revenues (Decrease) Change$593,451 65.1%$556,139 65.5%$37,312 6.7% Cost of goods sold increased$25.6 million for the nine months endedOctober 2, 2021 compared to the nine months endedSeptember 26, 2020 , primarily due to higher material, manufacturing and distribution costs associated with the increase in product sales. Gross profit decreased to 65.1% for the nine months endedOctober 2, 2021 compared to 65.5% for the nine months endedSeptember 26, 2020 , primarily due to costs associated with an elevated level of customer installations and higher material, manufacturing and distribution costs, offset by favorable revenue mix. 40 -------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative. Selling, general and administrative expenses for the nine months endedOctober 2, 2021 andSeptember 26, 2020 were as follows (dollars in thousands): Selling, General and Administrative Nine Months Ended Percentage of Nine Months Ended Percentage of Increase/ Percentage October 2, 2021 Net Revenues September 26, 2020 Net Revenues (Decrease) Change$291,180 31.9%$278,714 32.8%$12,466 4.5% Selling, general and administrative expenses increased$12.5 million , or 4.5%, for the nine months endedOctober 2, 2021 compared to the nine months endedSeptember 26, 2020 . This increase was primarily due to higher compensation and other employee-related costs of approximately$14.8 million , higher legal and professional fees of approximately$12.8 million , higher occupancy and other office-related costs of approximately$4.4 million and higher travel-related costs of approximately$0.5 million , which were partially offset by lower advertising and marketing-related costs of approximately$18.4 million and lower charitable contributions of approximately$3.1 million . Research and Development. Research and development expenses for the nine months endedOctober 2, 2021 andSeptember 26, 2020 were as follows (dollars in thousands): Research and Development Nine Months Ended Percentage of Nine Months Ended Percentage of Increase/ Percentage October 2, 2021 Net Revenues September 26, 2020 Net Revenues (Decrease) Change$103,860 11.4%$86,971 10.2%$16,889 19.4% Research and development expenses increased$16.9 million , or 19.4%, for the nine months endedOctober 2, 2021 compared to the nine months endedSeptember 26, 2020 , primarily due to higher compensation-related costs of approximately$11.6 million and higher engineering project costs of approximately$5.7 million , which were partially offset by lower professional service fees of$1.0 million . Non-operating (Loss) Income. Non-operating (loss) income consists primarily of interest income, interest expense and foreign exchange gains and losses. Non-operating (loss) income for the nine months endedOctober 2, 2021 andSeptember 26, 2020 was as follows (dollars in thousands): Non-operating (Loss) Income Nine Months Ended Percentage of Nine Months Ended Percentage of Increase/ Percentage October 2, 2021 Net Revenues September 26, 2020 Net Revenues (Decrease) Change$(735) (0.1)%$6,108 0.7%$(6,843) (112.0)% Non-operating (loss) income decreased by$6.8 million for the nine months endedOctober 2, 2021 compared to the nine months endedSeptember 26, 2020 , primarily due to lower interest yields realized on our invested cash of approximately$4.5 million and a decrease in net realized and unrealized gains on foreign currency denominated transactions of approximately$2.4 million . Provision for Income Taxes. Our provision for income taxes for the nine months endedOctober 2, 2021 andSeptember 26, 2020 was as follows (dollars in thousands): Provision for Income Taxes Nine Months Ended Percentage of Nine Months Ended Percentage of Increase/ Percentage October 2, 2021 Net Revenues September 26, 2020 Net Revenues (Decrease) Change$36,287 4.0%$27,403 3.2%$8,884 32.4% For the nine months endedOctober 2, 2021 , we recorded a provision for income taxes of approximately$36.3 million , or an effective tax rate of 18.4%, as compared to a provision for income taxes of approximately$27.4 million , or an effective tax rate of 13.9%, for the nine months endedSeptember 26, 2020 . The increase in our tax rate for the nine months endedOctober 2, 2021 resulted primarily from a decrease in the amount of excess tax benefits realized from stock-based compensation of approximately$8.2 million as compared to the nine months endedSeptember 26, 2020 . 41 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our principal sources of liquidity consist of our existing cash and cash equivalent balances, future funds expected to be generated from operations and available borrowing capacity under our credit facility. As ofOctober 2, 2021 , we had approximately$909.5 million in working capital, of which approximately$652.4 million was in cash and cash equivalents. In addition to net working capital, we had approximately$147.6 million of available borrowing capacity (net of outstanding letters of credit) under our credit facility. In managing our day-to-day liquidity and capital structure, we generally do not rely on foreign earnings as a source of funds. As ofOctober 2, 2021 , we had cash totaling$91.8 million held outside of theU.S. , of which approximately$50.3 million was accessible without additional tax cost and approximately$41.5 million was accessible at an incremental estimated tax cost of up to$0.4 million . We currently have sufficient funds on-hand and cash held outside theU.S. that is available without additional tax cost to fund our global operations. In the event funds that are treated as permanently reinvested are repatriated, we may be required to accrue and pay additionalU.S. taxes to repatriate these funds. Cash Flows The following table summarizes our cash flows (in thousands): Nine Months Ended October 2, September 26, 2021 2020 Net cash provided by (used in): Operating activities$ 167,151 $ 146,545 Investing activities (31,465) (80,840) Financing activities (126,666) 38,954 Effect of foreign currency exchange rates on cash (89)
(294)
Increase in cash, cash equivalents and restricted cash
Operating Activities. Cash provided by operating activities was approximately$167.2 million for the nine months endedOctober 2, 2021 , generated primarily from net income from operations of$161.4 million . Non-cash activity included stock-based compensation of$33.5 million and depreciation and amortization of$26.4 million . An additional source of cash included a decrease in other inventories and other current assets and an increase in deferred revenue and other contract-related liabilities and other non-current liabilities of$12.3 million ,$4.4 million ,$1.4 million and$0.6 million , respectively. These sources of cash were partially offset by other changes in operating assets and liabilities, including a decrease in accounts payable, accrued liabilities, income taxes payable and accrued compensation of approximately$4.3 million ,$4.0 million ,$1.5 million and$1.3 million , respectively, primarily due to the timing of payments; an increase in accounts receivable of approximately$51.0 million , primarily due to the timing of cash receipts; an increase in lease receivable of approximately$9.3 million and an increase in deferred costs and other contract assets of approximately$2.6 million . For the nine months endedSeptember 26, 2020 , cash provided by operating activities was approximately$146.5 million , generated primarily from net income from operations of$169.6 million . Non-cash activity included stock-based compensation of$36.4 million and depreciation and amortization of$21.2 million . Additional sources of cash included an increase in accounts payable, deferred revenue and other contract-related liabilities, accrued liabilities and accrued compensation of$31.8 million ,$10.0 million ,$4.7 million and$3.7 million , respectively. These sources of cash were partially offset by other changes in operating assets and liabilities, including a decrease in income tax payable of approximately$2.8 million , an increase in inventory of approximately$86.8 million , an increase in other current assets of approximately$23.5 million , an increase in accounts receivable of approximately$9.5 million , primarily due to the timing of cash receipts and an increase in lease receivable of approximately$6.3 million . Investing Activities. Cash used in investing activities for the nine months endedOctober 2, 2021 was approximately$31.5 million , consisting primarily of approximately$20.7 million for purchases of property and equipment, approximately$8.2 million of capitalized intangible asset costs related primarily to patent and trademark costs and license fees and approximately$2.6 million for strategic investments. 42 -------------------------------------------------------------------------------- Table of Contents For the nine months endedSeptember 26, 2020 , cash used in investing activities was approximately$80.8 million , consisting primarily of approximately$78.3 million for business combinations,$60.0 million for purchases of property and equipment,$6.8 million for strategic investments and$5.8 million of capitalized intangible asset costs related primarily to patent and trademark costs, which were partially offset by cash provided by maturities of short-term investments of approximately$70.0 million . Financing Activities. Cash used in financing activities for the nine months endedOctober 2, 2021 was approximately$126.7 million , consisting primarily of repurchases of our common stock of approximately$128.9 million and withholding of shares for employee payroll taxes for vested equity awards of approximately$16.7 million , which were partially offset by the proceeds from the issuance of common stock related to employee equity awards of approximately$19.0 million . For the nine months endedSeptember 26, 2020 , cash provided by financing activities was approximately$39.0 million , consisting primarily of proceeds from the issuance of common stock related to employee equity awards of approximately$41.0 million , which was partially offset by the withholding of shares for employee payroll taxes for vested equity awards of approximately$1.4 million and repurchases of our common stock of approximately$0.6 million . Capital Resources and Prospective Capital Requirements We expect to fund our future operating, investing and financing activities through our available cash, future cash from operations, our credit facility and other potential sources of capital. In addition to funding our working capital requirements, we anticipate additional capital expenditures primarily related to investments in infrastructure growth. Possible additional uses of cash may include acquisitions of and/or strategic investments in technologies or technology companies, investments in property and repurchases of common stock under our authorized stock repurchase program. However, any repurchases of common stock will be subject to numerous factors, including the availability of our common stock, general market conditions, the trading price of our common stock, availability of capital, alternative uses for capital and our financial performance. In addition, the amount and timing of our actual investing activities will vary significantly depending on numerous factors, including the timing and amount of capital expenditures, costs of product development efforts, our timetable for infrastructure expansion, any stock repurchase activity and costs related to our domestic and international regulatory requirements. Despite these investment requirements and potential expenditures, we anticipate that our existing cash and cash equivalents and amounts available under our credit facility will be sufficient to meet our working capital requirements, capital expenditures and other operational funding needs for at least the next 12 months. For additional information related to our credit facility, please see Note 15 to our accompanying condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. As ofOctober 2, 2021 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by theSEC . Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of net revenues, expenses, assets and liabilities. We regularly evaluate our estimates and assumptions related to our critical accounting policies, including revenue recognition, inventory valuation, lessee right-of-use (ROU) assets and lease liabilities, stock-based compensation, business combinations, deferred taxes and related valuation allowances, uncertain tax positions, tax contingencies, litigation costs and loss contingencies. These estimates and judgments are based on historical experience and on various other factors that we believe to be reasonable under the circumstances, and form the basis for making management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Although we regularly evaluate these estimates and assumptions, changes in judgments and uncertainties relating to these estimates could potentially result in materially different results under different assumptions and conditions. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material. 43 -------------------------------------------------------------------------------- Table of Contents There have been no material changes to any of our critical accounting policies during the nine months endedOctober 2, 2021 . For a description of these critical accounting policies, please refer to "Critical Accounting Estimates" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 , which was filed with theSEC onFebruary 23, 2021 . Recent Accounting Pronouncements For details regarding any recently adopted and recently issued accounting standards, see Note 2 to our accompanying condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to various market risks that may arise from adverse changes in market rates and prices, such as interest rates, foreign exchange fluctuations and inflation. We do not enter into derivatives or other financial instruments for trading or speculative purposes. Interest Rate Risk Our exposure to market risk for changes in interest rates relates to the increase or decrease in the amount of interest income we can earn on our cash and cash equivalents and on the increase or decrease in the amount of interest expense we must pay with respect to our various outstanding debt instruments. As ofOctober 2, 2021 , the carrying value of our cash equivalents approximated fair value. We currently do not have any significant risks associated with interest rates fluctuations related to interest expense. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. Therefore, declines in interest rates over time will reduce our interest income while increases in interest rates will increase our interest income. A hypothetical 100 basis point change in interest rates along the entire interest rate yield curve would increase or decrease our interest rate yields on our investments and interest income by approximately$0.1 million for each$10.0 million in interest-bearing investments. Foreign Currency Exchange Rate Risk A majority of our assets and liabilities are maintained inthe United States inU.S. Dollars and a majority of our sales and expenditures are transacted inU.S. Dollars. However, we also transact with foreign customers in currencies other than theU.S. Dollar. These foreign currency revenues, when converted intoU.S. Dollars, can vary depending on average exchange rates during a respective period. In addition, certain of our foreign subsidiaries transact in their respective country's local currency, which is also their functional currency. As a result, expenses of these foreign subsidiaries, when converted intoU.S. Dollars can also vary depending on average monthly exchange rates during a respective period. We are exposed to foreign currency gains or losses on outstanding foreign currency denominated receivables and payables, as well as our foreign currency denominated cash balances and certain intercompany transactions. In addition, other transactions between us or our subsidiaries and a third-party, denominated in a currency different from the functional currency, are foreign currency transactions. Realized and unrealized foreign currency gains or losses on these transactions are also included in our statements of operations as incurred. The balance sheets of each of our foreign subsidiaries whose functional currency is not theU.S. Dollar are translated intoU.S. Dollars at the rate of exchange at the balance sheet date and the statements of comprehensive income and cash flows are translated intoU.S. Dollars using an approximation of the average monthly exchange rates applicable during the period. Any foreign exchange gain or loss as a result of translating the balance sheets of our foreign subsidiaries whose functional currency is not theU.S. Dollar is included in equity as a component of accumulated other comprehensive income. Our foreign currency exchange rate exposures are primarily with the Canadian Dollar, Euro, Japanese Yen, Swedish Krona, the British Pound, Mexican Peso, Turkish Lira and Australian Dollar. Foreign currency exchange rates may experience significant volatility from one period to the next. Specifically, during the nine months endedOctober 2, 2021 , we estimate fluctuations in the exchange rates between theU.S. Dollar and other foreign currencies, including the Euro, the Australian Dollar, the Canadian Dollar, the British Pound and the South Korean Won, favorably impacted our revenues by$9.5 million . 44
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Table of Contents We currently do not enter into forward exchange contracts to hedge exposures denominated in foreign currencies and do not use derivative financial instruments for trading or speculative purposes. The effect of additional changes in foreign currency exchange rates could have a material effect on our future operating results or cash flows, depending on which foreign currency exchange rates change and depending on the directional change (either a strengthening or weakening against theU.S. Dollar). We estimate that the potential impact of a hypothetical 10% adverse change in all applicable foreign currency exchange rates from the rates in effect as ofOctober 2, 2021 would have resulted in an estimated reduction of$13.0 million in reported pre-tax income for the nine months endedOctober 2, 2021 . As our foreign operations continue to grow, our exposure to foreign currency exchange rate risk may become more significant. Inflation Risk We do not believe that inflation has had a material effect on our business, financial condition or results of operations during the periods presented. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could have a material adverse effect on our business, financial condition and results of operations. Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission's (SEC) regulations, rules and forms and that such information is accumulated and communicated to our management, including our CEO and Chief Financial Officer (CFO), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) or Rule 15d-15(b) promulgated by theSEC under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. During the three months endedOctober 2, 2021 , there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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