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OFFON

MASIMO CORPORATION

(MASI)
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MASIMO : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

04/27/2021 | 06:07am EDT
This Quarterly Report on Form 10-Q contains "forward-looking statements" as
defined in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, in connection
with the Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove
incorrect, could cause our results to differ materially and adversely from those
expressed or implied by such forward-looking statements. Such forward-looking
statements include any expectation of earnings, revenues or other financial
items; any statements of the plans, strategies and objectives of management for
future operations; factors that may affect our operating results or financial
condition; statements concerning new products, technologies or services;
statements related to future capital expenditures; statements related to future
economic conditions or performance; statements related to our stock repurchase
program; statements as to industry trends and other matters that do not relate
strictly to historical facts or statements of assumptions underlying any of the
foregoing. These statements are often identified by the use of words such as
"anticipate," "believe," "continue," "could," "estimate," "expect," "intend,"
"may" or "will," the negative versions of these terms and similar expressions or
variations. These statements are based on the beliefs and assumptions of our
management based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results and the timing of certain events to differ
materially and adversely from future results expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those
discussed in the section titled "Risk Factors" included elsewhere in this
Quarterly Report on Form 10-Q and in our other Securities and Exchange
Commission (SEC) filings, including our Annual Report on Form 10-K for the
fiscal year ended January 2, 2021, which we filed with the SEC on February 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 in California in May 1989 and
reincorporated in Delaware in May 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 ended January 2, 2021, filed with
the SEC on February 23, 2021.
In January 2021, we announced the global launch of iSirona™, a compact,
versatile connectivity hub designed to maximize interoperability across the
continuum of care. The iSirona™ hub offers an efficient way to physically
connect up to six medical devices at the bedside and automatically route the
data to the Masimo Hospital Automation™. iSirona™ helps ensure that whatever the
source, all patient data can be accurately and efficiently captured and
presented to clinicians in the most suitable ways.

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In February 2021, we announced the full market release of Masimo
SafetyNet-OPEN™, a web and mobile app solution that helps businesses, schools
and other organizations screen, trace and manage users as they face COVID-19 and
other infectious illnesses, such as seasonal flu. SafetyNet-OPEN™ helps
organizations bring their people back to the workplace responsibly and stay open
safely. Tailored for each organization's safety protocols and needs,
SafetyNet-OPEN™ is capable of covering all stages of back-to-work management,
including risk screening, exposure contact tracing and recovery management.
Also in February 2021, we announced the U.S. introduction of softFlow®, which
provides nasal high-flow warmed and humidified respiratory gases to
spontaneously breathing patients. The technology offers adult patients high-flow
respiratory support through a soft nasal cannula by generating a consistent high
flow of warm, humidified air or air/oxygen mixture.
In March, 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®) 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 checking 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.
COVID-19 Pandemic
The COVID-19 pandemic has created significant uncertainty in the U.S. and around
the globe, resulting in both challenges and opportunities for our business. We
are committed to being as transparent as possible with our investors, employees,
customers, suppliers and business partners as we collectively work to respond to
this crisis. In response to this situation, we 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. In response to the
increased product demand from our customers, we increased our manufacturing
capacity. 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. 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.
Cercacor
Cercacor Laboratories, Inc. (Cercacor) is an independent entity spun off from us
to our stockholders in 1998. Joe Kiani, our Chairman and Chief Executive Officer
(CEO), is also the Chairman and CEO of Cercacor. We are a party to a
cross-licensing agreement with Cercacor, which was amended and restated
effective January 1, 2007 (the Cross-Licensing Agreement), which governs each
party's rights to certain intellectual property held by the two companies. See
Note 3 to our accompanying condensed consolidated financial statements included
in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional
information related to Cercacor.
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Results of Operations
The following table sets forth, for the periods indicated, our results of
operations expressed as U.S. Dollar amounts and as a percentage of revenue
(dollars in thousands).
                                                               Three Months Ended
                                            April 3,       Percentage      March 28,      Percentage
                                              2021         of Revenue        2020         of Revenue

Product revenue                            $ 299,043          100.0  %    $ 269,625          100.0  %
Cost of goods sold                           102,168           34.2          83,996           31.2
Gross profit                                 196,875           65.8         185,629           68.8
Operating expenses:
Selling, general and administrative           96,700           32.3          89,877           33.3
Research and development                      34,511           11.5          27,241           10.1
Litigation awards                                  -              -            (499)          (0.2)
Total operating expenses                     131,211           43.8         116,619           43.2
Operating income                              65,664           22.0          69,010           25.6
Non-operating (loss) income                     (737)          (0.2)          3,346            1.2
Income before provision for income taxes      64,927           21.8          72,356           26.8
Provision for income taxes                    11,544            3.9           7,900            2.9
Net income                                 $  53,383           17.9  %    $  64,456           23.9  %



Comparison of the Three Months ended April 3, 2021 to the Three Months ended
March 28, 2020
Revenue. Product revenue increased $29.4 million, or 10.9%, to $299.0 million
for the three months ended April 3, 2021 from $269.6 million for the three
months ended March 28, 2020. The following table details our product revenues by
the geographic area to which the products were shipped for each of the three
months ended April 3, 2021 and March 28, 2020 (dollars in thousands):
                                                                                 Three Months Ended
                                             April 3,                            March 28,                    Increase/             Percentage
                                               2021                                 2020                      (Decrease)              Change
United States (U.S.)              $ 204,197              68.3  %       $ 189,519              70.3  %       $    14,678                     7.7  %
Europe, Middle East and Africa       59,624              19.9             54,357              20.2                5,267                     9.7
Asia and Australia                   26,900               9.0             19,312               7.2                7,588                    39.3
North and South America
(excluding the U.S.)                  8,322               2.8              6,437               2.3                1,885                    29.3
   Product revenue                $ 299,043             100.0  %       $ 269,625             100.0  %       $    29,418                    10.9  %


This increase was primarily due to higher revenue from technology boards and
instruments, as well as the impact of approximately $3.9 million of favorable
foreign exchange rate movements from the prior year that increased the U.S.
Dollar translation of foreign sales that were denominated in various foreign
currencies. During the three months ended April 3, 2021, we shipped
approximately 66,000 noninvasive technology boards and instruments.
Product revenue generated through our direct and distribution sales channels
increased $25.8 million, or 10.9%, to $262.0 million for the three months ended
April 3, 2021, compared to $236.3 million for the three months ended March 28,
2020. Revenues from our OEM channel increased $3.7 million, or 10.9%, to $37.0
million for the three months ended April 3, 2021 as compared to $33.3 million
for the three months ended March 28, 2020.
Gross Profit. Gross profit consists of product revenue less cost of goods sold.
Our gross profit for the three months ended April 3, 2021 and March 28, 2020 was
as follows (dollars in thousands):
   Three Months Ended          Percentage of         Three Months Ended          Percentage of            Increase/            Percentage
      April 3, 2021             Net Revenues           March 28, 2020            Net Revenues            (Decrease)              Change

        $196,875                   65.8%                  $185,629                   68.8%                 $11,246                6.1%


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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 $18.2 million for the three months ended April 3,
2021, compared to the three months ended March 28, 2020, primarily due to
unfavorable product mix, and higher material, manufacturing and distribution
costs associated with the increase in product sales volumes.
Gross profit decreased to 65.8% for the three months ended April 3, 2021,
compared to 68.8% for the three months ended March 28, 2020, primarily due to
unfavorable product mix associated with stronger sensor volumes in the prior
period and higher inventory related costs.
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 ended April 3,
2021 and March 28, 2020 were as follows (dollars in thousands):
                                                     Selling, General and Administrative
   Three Months Ended          Percentage of         Three Months Ended          Percentage of           Increase/            Percentage
      April 3, 2021             Net Revenues           March 28, 2020            Net Revenues            (Decrease)             Change
         $96,700                   32.3%                   $89,877                   33.3%                 $6,823                7.6%


Selling, general and administrative expenses increased $6.8 million, or 7.6%,
for the three months ended April 3, 2021, compared to the three months ended
March 28, 2020. This increase was primarily attributable to higher compensation
and other employee-related costs of approximately $7.6 million and higher legal
and professional fees of approximately $3.0 million, which were partially offset
by lower travel costs of approximately $2.5 million and lower charitable
contributions of approximately $1.5 million.
Research and Development. Research and development expenses consist primarily of
salaries, stock-based compensation and related expenses for engineers and other
personnel engaged in the design and development of our products. These expenses
also include third-party fees paid to consultants, prototype and engineering
supply expenses and the costs of clinical trials. Research and development
expenses for the three months ended April 3, 2021 and March 28, 2020 were as
follows (dollars in thousands):
                                                           Research and Development
   Three Months Ended          Percentage of         Three Months Ended          Percentage of            Increase/            Percentage
      April 3, 2021             Net Revenues           March 28, 2020            Net Revenues            (Decrease)              Change
         $34,511                   11.5%                   $27,241                   10.1%                 $7,270                 26.7%


Research and development expenses increased $7.3 million, or 26.7%, for the
three months ended April 3, 2021, compared to the three months ended March 28,
2020, primarily due to higher compensation and employee-related costs of
approximately $5.1 million from headcount additions, higher engineering project
costs of approximately $0.7 million and higher equipment and supplies related
costs of $0.7 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 ended April 3, 2021 and
March 28, 2020 was as follows (dollars in thousands):
                                                           Non-operating (Loss) Income
   Three Months Ended          Percentage of         Three Months Ended          Percentage of             Increase/              Percentage
      April 3, 2021             Net Revenues           March 28, 2020            Net Revenues              (Decrease)               Change
         $(737)                   (0.2)%                   $3,346                    1.2%                   $(4,083)               (122.0)%


Non-operating loss was $0.7 million for the three months ended April 3, 2021, as
compared to $3.3 million of non-operating income for the three months ended
March 28, 2020. This decrease of approximately $4.1 million was primarily due to
a decrease in interest income of approximately $2.6 million and a decrease of
net realized and unrealized gains on foreign currency denominated transactions
of approximately $1.5 million.
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Provision for Income Taxes. Our provision for income taxes for the three months
ended April 3, 2021 and March 28, 2020 was as follows (dollars in thousands):
                                                          Provision for Income Taxes
   Three Months Ended          Percentage of         Three Months Ended          Percentage of            Increase/            Percentage
      April 3, 2021             Net Revenues           March 28, 2020            Net Revenues            (Decrease)              Change
         $11,544                   3.9%                    $7,900                    2.9%                  $3,644                 46.1%


For the three months ended April 3, 2021, we recorded a provision for income
taxes of approximately $11.5 million, or an effective tax provision rate of
17.8%, as compared to a provision for income taxes of approximately $7.9
million, or an effective tax provision rate of 10.9%, for the three months ended
March 28, 2020. The increase in our effective tax rate for the three months
ended April 3, 2021 resulted primarily from a decrease in the amount of excess
tax benefits realized from stock-based compensation of approximately $5.3
million compared to the three months ended March 28, 2020.
Comparison of the Three Months ended March 28, 2020 to the Three Months ended
March 30, 2019
For a discussion regarding our financial condition and results of operations for
the three months ended March 28, 2020 as compared to the three months ended
March 30, 2019, please refer to the discussion under the heading "Comparison of
the Three Months ended March 28, 2020 to the Three Months ended March 30, 2019"
in Item 2 of our Quarterly Report on Form 10-Q for the three months ended
March 28, 2020, filed with the Securities and Exchange Commission on April 28,
2020.
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 of April 3, 2021, we
had approximately $786.2 million in working capital, of which approximately
$552.0 million was in cash and cash equivalents. In addition to net working
capital, we had approximately $148.2 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 of April 3, 2021, we had cash
totaling $67.2 million held outside of the U.S., of which approximately $28.2
million was accessible without additional tax cost and approximately $39.0
million was accessible at an incremental estimated tax cost of up to $0.5
million. We currently have sufficient funds on-hand and cash held outside the
U.S. that is available without additional tax cost to fund our global
operations. In the event funds that are treated as permanently reinvested are
repatriated, we may be required to accrue and pay additional U.S. taxes to
repatriate these funds.
Cash Flows
The following table summarizes our cash flows (in thousands):
                                                                            

Three Months Ended

                                                                            April 3,            March 28,
                                                                              2021                 2020
Net cash provided by (used in):
Operating activities                                                     $    59,260          $    42,355
Investing activities                                                         (10,475)             (15,389)
Financing activities                                                        (139,852)              11,249
Effect of foreign currency exchange rates on cash                                279                    2

Increase (decrease) in cash, cash equivalents and restricted cash $

(90,788) $ 38,217



Operating Activities. Cash provided by operating activities was approximately
$59.3 million for the three months ended April 3, 2021, 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.

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For the three months ended March 28, 2020, cash provided by operating activities
was approximately $42.4 million, generated primarily from net income from
operations of $64.5 million. Non-cash activity included stock-based compensation
of $11.3 million and depreciation and amortization of $6.4 million. Additional
sources of cash included a decrease in other current assets of approximately
$5.5 million, primarily related to prepaid income taxes. These sources of cash
were partially offset by other changes in operating assets and liabilities,
including a decrease in accrued compensation, accounts payable and income taxes
payable of approximately $17.7 million, $8.0 million and $2.0 million,
respectively, primarily due to the timing of payments, and an increase in
accounts receivable of approximately $17.1 million, primarily due to the timing
of cash receipts.
Investing Activities. Cash used in investing activities for the three months
ended April 3, 2021 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.
For the three months ended March 28, 2020, cash used in investing activities was
approximately $15.4 million, consisting primarily of approximately $47.3 million
for a business combination, $37.0 million for purchases of property and
equipment and $1.1 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 three months
ended April 3, 2021 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 the proceeds from the issuance of
common stock related to employee equity awards of approximately $5.8 million.
For the three months ended March 28, 2020, cash provided by financing activities
was approximately $11.2 million, consisting primarily of proceeds from the
issuance of common stock related to employee equity awards of approximately
$13.0 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 $0.4 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 equipment as well as
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 stock, general market conditions, the trading
price of our stock, available capital, alternative uses for capital and our
financial performance. In addition, the amount and timing of our actual
investing activities will vary significantly depending on numerous factors,
including the timing and amount of capital expenditures, costs of product
development efforts, our timetable for infrastructure expansion, stock
repurchase activity and costs related to our domestic and international
regulatory requirements. Despite these investment requirements and potential
expenditures, we anticipate that our existing cash and cash equivalents and
amounts available under our Credit Facility will be sufficient to meet our
working capital requirements, capital expenditures and other operational funding
needs for at least the next 12 months.
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with
unconsolidated entities or financial partnerships, such as entities referred to
as structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
for other contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded contracts. As a
result, we are not materially exposed to any financing, liquidity, market or
credit risk that could arise if we had engaged in these relationships. As of
April 3, 2021, we did not have any off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based on our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these condensed consolidated
financial statements requires management to make estimates and judgments that
affect the reported amounts of net revenues, expenses, assets and liabilities.
We regularly evaluate our estimates and assumptions related to our critical
accounting policies, including revenue recognition, inventory valuation, lessee
right-of-use (ROU) assets and lease liabilities, stock-based compensation,
business combinations, deferred taxes and related valuation allowances,
uncertain tax positions, tax contingencies, litigation costs and loss
contingencies.
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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 ended April 3, 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 ended
January 2, 2021, which was filed with the SEC on February 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
of April 3, 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 in the United States in
U.S. Dollars and a majority of our sales and expenditures are transacted in U.S.
Dollars. However, we also transact with foreign customers in currencies other
than the U.S. Dollar. These foreign currency revenues, when converted into U.S.
Dollars, can vary depending on average exchange rates during a respective
period. In addition, certain of our foreign subsidiaries transact in their
respective country's local currency, which is also their functional currency. As
a result, expenses of these foreign subsidiaries, when converted into U.S.
Dollars can also vary depending on average monthly exchange rates during a
respective period.
We are exposed to foreign currency gains or losses on outstanding foreign
currency denominated receivables and payables, as well as our foreign currency
denominated cash balances and certain intercompany transactions. In addition,
other transactions between us or our subsidiaries and a third-party, denominated
in a currency different from the functional currency, are foreign currency
transactions. Realized and unrealized foreign currency gains or losses on these
transactions are also included in our statements of operations as incurred.
The balance sheets of each of our foreign subsidiaries whose functional currency
is not the U.S. Dollar are translated into U.S. Dollars at the rate of exchange
at the balance sheet date and the statements of comprehensive income and cash
flows are translated into U.S. Dollars using an approximation of the average
monthly exchange rates applicable during the period. Any foreign exchange gain
or loss as a result of translating the balance sheets of our foreign
subsidiaries whose functional currency is not the U.S. Dollar is included in
equity as a component of accumulated other comprehensive income.
Our 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 three months ended April 3, 2021, we estimate fluctuations in the
exchange rates between the U.S. Dollar and other foreign currencies, including
the Euro, the Australian Dollar, the Japanese Yen and the South Korean Won,
favorably impacted our revenues by $3.9 million.
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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 the U.S. Dollar). We estimate that the
potential impact of a hypothetical 10% adverse change in all applicable foreign
currency exchange rates from the rates in effect as of April 3, 2021 would have
resulted in an estimated reduction of $6.3 million in reported pre-tax income
for the three months ended April 3, 2021. As our foreign operations continue to
grow, our exposure to foreign currency exchange rate risk may become more
significant.
Inflation Risk
We do not believe that inflation has had a material effect on our business,
financial condition or results of operations during the periods presented. If
our costs were to become subject to significant inflationary pressures, we may
not be able to fully offset such higher costs through price increases. Our
inability or failure to do so could have a material adverse effect on our
business, financial condition and results of operations.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's (SEC) regulations, rules and forms and that such
information is accumulated and communicated to our management, including our 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 the SEC 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 quarter ended April 3, 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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