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 1, 2022 , which we filed with theSEC onFebruary 15, 2022 . 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 monitoring technologies and hospital automation™ solutions. Our mission is to improve patient outcomes and reduce the cost of patient care. Our patient monitoring solutions generally incorporate a monitor or circuit board, proprietary single-patient use or reusable sensors, software and/or cables. We provide our products to hospitals, emergency medical service (EMS ) providers, home care providers, long-term care facilities, physician offices, veterinarians and consumers through our direct sales force, distributors and original equipment manufacturers (OEM) partners. We were incorporated inCalifornia inMay 1989 and reincorporated inDelaware inMay 1996 . Our core business is Measure-through Motion and Low Perfusion™ pulse oximetry, known as Masimo Signal Extraction Technology® (SET®) pulse oximetry. Our product offerings have expanded significantly over the years to also include noninvasive monitoring of blood constituents with an optical signature, optical regional oximetry monitoring, electrical brain function monitoring, acoustic respiration monitoring, exhaled gas monitoring, nasal high flow ventilation, minimally invasive neuromodulation technology for the reduction of symptoms associated with opioid withdrawal, hospital automation™ and connectivity solutions and home wellness and monitoring. These technologies are incorporated into a variety of platforms designed to meet our customers' needs. In addition, we provide our technologies to OEMs in a form factor that is easy to integrate into their patient monitors, defibrillators, infant incubators and other devices. Our technology is supported by a substantial intellectual property portfolio that we have built through internal development and, to a lesser extent, acquisitions and license agreements. We have also exclusively licensed fromCercacor Laboratories, Inc. (Cercacor) the right to certain OEM rainbow® technologies and to incorporate certain rainbow® technology into our products intended to be used by professional caregivers, including, but not limited to, hospital caregivers and alternate care facility caregivers. 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 1, 2022 , filed with theSEC onFebruary 15, 2022 . InFebruary 2022 , we announced a major expansion of Masimo SafetyNet® that brings robust, secure video conferencing to the remote patient management and connectivity platform to offer a comprehensive telehealth and telemonitoring solution - and for patients, a better "hospital at home" experience. Also inFebruary 2022 , we announced the FDA 510(k) clearance of SedLine® brain function monitoring for pediatric patients (1-17 years of age) and the SedLine® Pediatric EEG Sensor. With this clearance, the potential benefits of SedLine® have been expanded to all patients one year old and above inthe United States . 34
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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, 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™, Masimo SafetyNet-OPEN™ and Masimo SafetyNet Alert™ to help combat the COVID-19 pandemic and continue to make charitable pledges to various global health 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 the extent to which the fluctuations in product demand we have experienced will continue or any resulting changes in our product mix, as well as the associated gross margin impact from those fluctuations in boards and instrument sales. In addition, the fluctuations in demand could result in potential reductions in future demand if our customers have over purchased our products and need to consume their excess inventory before purchasing additional products. Furthermore, we continue to be exposed to potential disruptions to our manufacturing operations and disruptions in the manufacturing supply chain of critical components and in our workforce as circumstances surrounding the global impact of the COVID-19 pandemic continue to change. In particular, semiconductor chips have been subject to an ongoing global supply shortage and our ability to source semiconductor chips or the components that use semiconductor chips was adversely affected in the first quarter of 2022 and may continue to be adversely affected in the future. These supply constraints adversely affected our sales during the first quarter of 2022 and may adversely affect our future sales. 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.
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 April 2, Percentage April 3, Percentage 2022 of Revenue 2021 of Revenue Revenue$ 304,241 100.0 %$ 299,043 100.0 % Cost of goods sold 99,477 32.7 102,168 34.2 Gross profit 204,764 67.3 196,875 65.8 Operating expenses: Selling, general and administrative 108,900 35.8 96,700 32.3 Research and development 36,119 11.9 34,511 11.5 Total operating expenses 145,019 47.7 131,211 43.8 Operating income 59,745 19.6 65,664 22.0 Non-operating loss (608) (0.2) (737) (0.2) Income before provision for income taxes 59,137 19.4 64,927 21.8 Provision for income taxes 12,542 4.1 11,544 3.9 Net income$ 46,595 15.3 %$ 53,383 17.9 % 35
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Comparison of the Three Months ended
Revenue. Revenue increased$5.2 million , or 1.7%, to$304.2 million for the three months endedApril 2, 2022 from$299.0 million for the three months endedApril 3, 2021 . The following table details our revenues by the geographic area to which we shipped for each of the three months endedApril 2, 2022 andApril 3, 2021 (dollars in thousands): Three Months Ended April 2, April 3, Increase/ Percentage 2022 2021 (Decrease) Change United States (U.S.)$ 197,777 65.0 %$ 204,197 68.3 %$ (6,420) (3.1) % Europe, Middle East and Africa 60,953 20.0 59,624 19.9 1,329 2.2 Asia and Australia 34,570 11.4 26,900 9.0 7,670 28.5North and South America (excluding the U.S.) 10,941 3.6 8,322 2.8 2,619 31.5 Revenue$ 304,241 100.0 %$ 299,043 100.0 %$ 5,198 1.7 % This increase was primarily due to higher revenue from consumables as well as the impact of approximately$4.3 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 endedApril 2, 2022 , we shipped approximately 75,700 noninvasive technology boards and instruments, an increase of approximately 9,700 units or 14.7%, from 66,000 units shipped during the first quarter of 2021. Revenue generated through our direct and distribution sales channels increased$6.5 million , or 2.5%, to$268.6 million for the three months endedApril 2, 2022 , compared to$262.0 million for the three months endedApril 3, 2021 . Revenues from our OEM channel decreased$1.3 million , or 3.5%, to$35.7 million for the three months endedApril 2, 2022 as compared to$37.0 million for the three months endedApril 3, 2021 .
Gross Profit. Gross profit consists of revenue less cost of goods sold. Our
gross profit for the three months ended
Gross Profit
Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage
April 2, 2022 Net Revenues April 3, 2021 Net Revenues (Decrease) Change
$204,764 67.3% $196,875 65.8% $7,889 4.0%
Cost of goods sold includes labor, material, overhead and other similar costs
related to the production, supply, distribution and support of our products and
technology. Cost of goods sold decreased $2.7 million for the three months ended
April 2, 2022 , compared to the three months ended April 3, 2021 , primarily due
to product mix associated with demand for our products.
Gross profit increased to 67.3% for the three months ended
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 endedApril 2, 2022 andApril 3, 2021 were as follows (dollars in thousands): Selling, General and Administrative Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage April 2, 2022 Net Revenues April 3, 2021 Net Revenues (Decrease) Change$108,900 35.8%$96,700 32.3%$12,200 12.6% Selling, general and administrative expenses increased$12.2 million , or 12.6%, for the three months endedApril 2, 2022 , compared to the three months endedApril 3, 2021 . This increase was primarily attributable to higher legal and professional fees of$7.8 million , higher travel costs of approximately$1.7 million , higher advertising and marketing-related costs of approximately$1.1 million and higher occupancy and other office-related costs of approximately$1.1 million , which were partially offset by lower compensation and other employee-related costs of approximately$1.9 million . 36
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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 endedApril 2, 2022 andApril 3, 2021 were as follows (dollars in thousands): Research and Development Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage April 2, 2022 Net Revenues April 3, 2021 Net Revenues (Decrease) Change$36,119 11.9%$34,511 11.5%$1,608 4.7% Research and development expenses increased$1.6 million , or 4.7%, for the three months endedApril 2, 2022 , compared to the three months endedApril 3, 2021 , primarily due to higher engineering project costs of approximately$1.1 million and higher compensation and employee-related costs of approximately$0.7 million . Non-operating Loss. Non-operating loss consists primarily of interest income, interest expense and foreign exchange gains and losses. Non-operating loss for the three months endedApril 2, 2022 andApril 3, 2021 was as follows (dollars in thousands): Non-operating Loss Three Months Ended Percentage of Three Months Ended Percentage of (Increase/) Percentage April 2, 2022 Net Revenues April 3, 2021 Net Revenues Decrease Change$(608) (0.2)%$(737) (0.2)%$129 (17.5)% Non-operating loss was$0.6 million for the three months endedApril 2, 2022 , as compared to$0.7 million of non-operating loss for the three months endedApril 3, 2021 . This decrease of approximately$0.1 million was primarily due to an increase in interest income on our invested cash in the current period. Provision for Income Taxes. Our provision for income taxes for the three months endedApril 2, 2022 andApril 3, 2021 was as follows (dollars in thousands): Provision for Income Taxes Three Months Ended Percentage of Three Months Ended Percentage of Increase/ Percentage April 2, 2022 Net Revenues April 3, 2021 Net Revenues (Decrease) Change$12,542 4.1%$11,544 3.9%$998 8.6% For the three months endedApril 2, 2022 , we recorded a provision for income taxes of approximately$12.5 million , or an effective tax provision rate of 21.2%, as compared to a provision for income taxes of approximately$11.5 million , or an effective tax provision rate of 17.8%, for the three months endedApril 3, 2021 . The increase in our effective tax rate for the three months endedApril 2, 2022 resulted primarily from a decrease in the amount of excess tax benefits realized from stock-based compensation of approximately$2.6 million compared to the three months endedApril 3, 2021 .
Liquidity and Capital Resources
Sources of Cash. 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 ofApril 2, 2022 , we had approximately$970.4 million in working capital, of which approximately$720.1 million was in cash and cash equivalents. In addition to net working capital, we had approximately$148.1 million of available borrowing capacity (net of outstanding letters of credit) under our credit facility. UntilApril 11, 2022 , we maintained a Credit Facility withJPMorgan Chase Bank, N.A . (as Administrative Agent and a Lender, andBank of the West , as a Lender, collectively, the Initial Lenders). The Credit Facility provided for up to$150.0 million of unsecured borrowings, with an option, subject to certain conditions, for us to increase the aggregate borrowing capacity to up to$550.0 million in the future with the Initial Lenders and additional Lenders, as required. The Credit Facility also provided 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. Proceeds from the Credit Facility were used for general corporate, capital investment and expenditures and working capital needs.
On
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Also, onApril 11, 2022 , we entered into a Credit Agreement (New Credit Facility) with financial institutions party thereto as initial lenders (collectively, the Initial Lenders),Citibank, N.A ., as Administrative Agent,Citibank, N.A .,JPMorgan Chase Bank, N.A .,Bank of the West and BofA Securities, Inc. , as joint lead arrangers and joint bookrunners, andJPMorgan Chase Bank, N.A .,Bank of the West and BofA Securities, Inc. , as co-syndication agents. The New Credit Facility provides for an unsecured term loan of$300.0 million (Term Loan) and$500.0 million of ongoing unsecured revolving commitments (Revolver), with an option, subject to certain conditions, for us to increase the aggregate borrowing capacity by an additional$400.0 million (plus additional unlimited amounts if certain incurrence tests are met) in the future with the Initial Lenders and additional lenders, as required. The New Credit Facility also provides for a sublimit of up to$50.0 million for the issuance of letters of credit. All unpaid principal under the New Credit Facility will become due and payable onApril 11, 2027 . Proceeds from the Term Loan and a portion of the Revolver were used to consummate the Sound United Acquisition (as discussed below), and the remainder of the proceeds from the Revolver are expected to be used for general corporate, capital investment and working capital needs.
For additional information regarding the Credit Facility and the New Credit Facility, see Note 15 to our accompanying condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
In managing our day-to-day liquidity and capital structure, we generally do not rely on foreign earnings as a source of funds. As ofApril 2, 2022 , we had cash totaling$86.4 million held outside of theU.S. , of which approximately$33.4 million was accessible without additional tax cost and approximately$42.0 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. Uses of Cash. Our cash requirements depend on numerous factors, including but not limited to market acceptance of our technologies, our continued ability to commercialize new products and to create or improve our technologies and applications, expansion of our global footprint through acquisitions and/or strategic investments in technologies or technology companies, investments in property and equipment, the impact of disruptions to the manufacturing industry supply chain for key components resulting from the COVID-19 pandemic, inflation, repurchases of our stock under our authorized stock repurchase program, costs related to our domestic and international regulatory requirements and other long-term commitment and contingencies. For further details regarding our commitment and contingencies, see Note 21 to our accompanying condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Despite these investment requirements and potential expenditures, we anticipate that our existing cash and cash equivalents, amounts available under the New Credit Facility and cash provided by operations will be sufficient to meet our working capital requirements, capital expenditures and other operational funding needs for the next 12 months and beyond. OnApril 11, 2022 , we completed our previously announced acquisition of Sound United, a consumer technology company that owns a portfolio of premium brands, including Bowers & Wilkins®, Denon®, Polk Audio® and Marantz®, pursuant to an Agreement and Plan of Merger, dated as ofFebruary 15, 2022 (Merger Agreement), by and among the Company,Viper Holdings Corporation (the parent company of Sound United) (Viper),Sonic Boom Acquisition Corp. , a wholly-owned subsidiary of ours (Merger Sub), and, solely in its capacity as the Seller Representative,Viper Holdings, LLC (Sound United Series). Pursuant to the terms of the Merger Agreement, Merger Sub was merged with and into Viper, with Viper surviving as our wholly-owned subsidiary (Sound United Acquisition). The purchase price for the Sound United Acquisition was$1.025 billion , plus certain adjustments related to Sound United's working capital, and was paid by us with cash on hand and by drawing on the New Credit Facility. For further details regarding our acquisition of Sound United, see Note 15 to our accompanying condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 38
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Cash Flows
The following table summarizes our cash flows (in thousands):
Three Months Ended
April 2, April 3,
2022 2021
Net cash provided by (used in):
Operating activities $ 23,158 $ 59,260
Investing activities (23,789) (10,475)
Financing activities (22,223) (139,852)
Effect of foreign currency exchange rates on cash (2,505) 279
Increase in cash, cash equivalents and restricted cash
Operating Activities. Cash provided by operating activities was approximately$23.2 million for the three months endedApril 2, 2022 , generated primarily from net income from operations of$46.6 million . Non-cash activity included stock-based compensation of$10.9 million and depreciation and amortization of$9.1 million . An additional source of cash included a increase in accounts payable of approximately$9.2 million , offset by offset by other changes in operating assets and liabilities, including a decrease in accrued compensation, accrued liabilities and deferred revenue and other contract-related liabilities of approximately$20.7 million ,$3.5 million , and$1.8 million , respectively, primarily due to the timing of payments; an increase in deferred cost and and other contract assets and inventories of approximately$14.9 million and$12.4 million , respectively. For the three months endedApril 3, 2021 , cash provided by operating activities was approximately$59.3 million , generated primarily from net income from operations of$53.4 million . Non-cash activity included stock-based compensation of$12.7 million and depreciation and amortization of$8.5 million . Additional sources of cash included a decrease in other current assets of approximately$16.3 million , primarily related to prepaid income taxes, and a decrease in accounts receivable of approximately$6.8 million , primarily due to the timing of cash receipts. These sources of cash were partially offset by other changes in operating assets and liabilities, including a decrease in accrued compensation, accrued liabilities and deferred revenue and other contract-related liabilities of approximately$23.3 million ,$5.8 million and$5.3 million , respectively, primarily due to the timing of payments. Investing Activities. Cash used in investing activities for the three months endedApril 2, 2022 was approximately$23.8 million , consisting primarily of approximately$20.5 million for purchases of property and equipment, approximately$2.5 million of capitalized intangible asset costs related primarily to patent and trademark costs and license fees and approximately $- million for purchases of short-term investments. For the three months endedApril 3, 2021 , cash used in investing activities was approximately$10.5 million , consisting primarily of approximately$8.9 million for purchases of property and equipment and$1.6 million of capitalized intangible asset costs related primarily to patent and trademark costs. Financing Activities. Cash used in financing activities for the three months endedApril 2, 2022 was approximately$22.2 million , consisting primarily of withholding of shares for employee payroll taxes for vested equity awards of approximately$25.4 million , which were partially offset by the proceeds from the issuance of common stock related to employee equity awards of approximately$3.2 million . For the three months endedApril 3, 2021 , cash used in financing activities was approximately$139.9 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 proceeds from the issuance of common stock related to employee equity awards of approximately$5.8 million . 39
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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, 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. There have been no material changes to any of our critical accounting policies during the three months endedApril 2, 2022 . 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 1, 2022 , which was filed with theSEC onFebruary 15, 2022 .
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.
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