Published: 2022-11-09 00:00:00 ET

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1. Description of the Company

Masimo Corporation is a global medical technology company dedicated to improving lives, taking noninvasive monitoring to new sites and applications while improving patient outcomes and reducing the cost of care. The Company invented Masimo Signal Extraction Technology® (SET®), which provides the capabilities of Measure-through Motion and Low Perfusion™ pulse oximetry to address the primary limitations of conventional pulse oximetry. Historically, the Company has been focused on the core healthcare businesses derived from its SET® technology. During the early stages of the COVID-19 pandemic, the Company strategically expanded into the fast evolving remote patient monitoring and home wellness markets as well as the therapeutics markets.

On April 11, 2022, the Company acquired Viper Holdings Corporation, the parent company of DEI Sales, Inc., d/b/a Sound United (Sound United), via the Company’s wholly-owned subsidiary, Sonic Boom Acquisition Corp (Sonic). For more information on Masimo’s acquisition of Sound United, see Note 18, “Business Combinations”. In addition, the Company updated its financial reporting segments to align with the way it manages the business units post-acquisition. See Note 25, “Segment and Enterprise Reporting”, for additional details.

The terms “the Company” and “Masimo” refer to Masimo Corporation and, where applicable, its consolidated subsidiaries.

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

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. The accompanying condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, including normal recurring accruals, necessary to present fairly the Company’s condensed consolidated financial statements. The accompanying condensed consolidated balance sheet as of January 1, 2022 was derived from the Company’s audited consolidated financial statements at that date. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (fiscal year 2021), filed with the SEC on February 15, 2022. The results for the three and nine months ended October 1, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022 (fiscal year 2022) or for any other interim period or for any future year.

Fiscal Periods

The Company follows a conventional 52/53 week fiscal year. Under a conventional 52/53 week fiscal year, a 52 week fiscal year includes four quarters of 13 weeks while a 53 week fiscal year includes three 13 week fiscal quarters and one 14 week fiscal quarter. The Company’s last 53 week fiscal year was fiscal year 2020. Fiscal year 2022 is a 52 week fiscal year ending December 31, 2022. All references to years in these notes to condensed consolidated financial statements are fiscal years unless otherwise noted.

Use of Estimates

The Company prepares its financial statements in conformity with GAAP, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s use of estimates includes the determination of standalone selling prices, variable consideration, total consideration allocated to each performance obligation within a contract, inventory valuation, valuation of the Company’s equity awards, valuation of identifiable assets and liabilities connected with business combinations, derivative instruments, deferred taxes and any associated valuation allowances, deferred revenue, accounting for pensions, uncertain income tax positions, litigation costs and related accruals. Actual results could differ from such estimates.

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Business Combinations

The Company accounts for business combinations using the acquisition method of accounting in accordance with Accounting Standard Codification (ASC) Topic 805, Business Combinations, which requires that once control is obtained, the assets acquired, liabilities assumed and noncontrolling interests in the acquired entity, if applicable, are recorded at their respective fair values at the date of acquisition, with the exception of acquired contract assets and contract liabilities (i.e., deferred revenue) from contracts with customers. These are recognized and measured in accordance with ASC Topic 606, Revenue from Contracts with Customers. The excess of the purchase price over fair values of identifiable assets, liabilities and noncontrolling interests in the acquired entity, if applicable, is recorded as goodwill.

Fair Value Measurements

The Company accounts for certain financial instruments at their fair values as either assets or liabilities on the balance sheet. The Company determines the fair value of its financial instruments using the framework prescribed by ASC Topic 820, Fair Value Measurements and Disclosures, and considers the estimated amount the Company would receive or pay to transfer these instruments at the reporting date with respect to current currency exchange rates, interest rates, the creditworthiness of the counterparty for unrealized gain positions and the Company’s creditworthiness for unrealized loss positions. In certain instances, the Company may utilize financial models to measure the fair value of its financial instruments. In doing so, the Company uses inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability and inputs derived principally from, or corroborated by, observable market data by correlation or other means.

Recurring Fair Value Measurement

On a recurring basis, the Company measures certain financial assets and financial liabilities at fair value based upon quoted market prices. Where quoted market prices or other observable inputs are not available, the Company applies valuation techniques to estimate fair value. Authoritative guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

●    Level 1—Quoted prices in active markets for identical assets or liabilities.

●    Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active; or other inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●    Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following tables represent the Company’s financial assets, measured at fair value on a recurring basis at October 1, 2022:

			Total carrying value						Fair Value Measurement Hierarchy
(in millions)									Level 1						Level 2						Level 3
Assets
Cash and cash equivalents			$	162.5					$	162.5					$	—					$	—
Money market funds			57.0						57.0						—						—
Derivative instruments - cash flow hedges			19.4						—						19.4						—
Total assets			$	238.9					$	219.5					$	19.4					$	—
Liabilities
None			$	—					$	—					$	—					$	—
Total liabilities			$	—					$	—					$	—					$	—

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The following tables represent the Company’s financial assets, measured at fair value on a recurring basis at January 1, 2022:

			Total carrying value						Fair Value Measurement Hierarchy
(in millions)									Level 1						Level 2						Level 3
Assets
Cash and cash equivalents			$	745.3					$	745.3					$	—					$	—
Money market funds			—						—						—						—
Total assets			$	745.3					$	745.3					$	—					$	—
Liabilities
None			$	—					$	—					$	—					$	—
Total liabilities			$	—					$	—					$	—					$	—

The Company invests in checking, savings and money market fund accounts, which are classified within Level 1 of the fair value hierarchy as they are valued using quoted market prices. These investments are classified as cash and cash equivalents within the Company’s accompanying condensed consolidated balance sheets, in accordance with GAAP and its accounting policies.

Non-Recurring Fair Value Measurements

For certain other financial assets and liabilities, including restricted cash, accounts receivable, accounts payable and other current assets and liabilities, the carrying amounts approximate their fair value primarily due to the relatively short maturity of these balances. The Company also measures certain non-financial assets at fair value on a non-recurring basis, primarily goodwill, intangible assets and operating lease right-of-use assets, in connection with periodic evaluations for potential impairment.

Furthermore, the Company did not elect to apply the fair value option to specific assets or liabilities on a contract-by-contract basis. The Company did not have any transfers between Level 2 and Level 3 during the nine months ended October 1, 2022.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less, or highly liquid investments that are readily convertible into known amounts of cash, to be cash equivalents. The Company carries cash and cash equivalents at cost, which approximates fair value, and are Level 1 under the fair value hierarchy.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable consist of trade receivables recorded at the time of invoicing of product sales, reduced by reserves for estimated bad debts and returns. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Credit is extended based on an evaluation of the customer’s financial condition. Collateral is generally not required. The Company records an allowance for credit losses that it does not expect to collect based on relevant information, including historical experience, current conditions, and reasonable and supportable forecasts. Accounts are charged off against the allowance when the Company believes they are uncollectible. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified receivables for U.S. customers and receivables from international customers each as a portfolio, and measures expected credit losses on such receivables using an aging methodology.

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Inventory

Inventories are stated at the lower of cost or net realizable value. Cost is determined using a standard cost method, which approximates the first in, first out method, and includes material, labor and overhead costs. Inventory valuation adjustments are recorded for inventory items that have become excess or obsolete or are no longer used in current production and for inventory items that have a market price less than carrying value in inventory. The Company generally determines inventory valuation adjustments based on an evaluation of the expected future use of its inventory on an item by item basis and applies historical obsolescence rates to estimate the loss on inventory expected to have a recovery value below cost. The Company also records other specific inventory valuation adjustments when it becomes aware of unique events or circumstances that result in an expected recovery value below cost. For inventory items that have been written down, the reduced value becomes the new cost basis.

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over estimated useful lives as follows:

			Useful Lives
Buildings and building improvements			7 to 39 years
Computer equipment and software			1 to 12 years
Demonstration units			2 to 3 years
Furniture and office equipment			2 to 15 years
Leasehold improvements			Lesser of useful life or term of lease
Machinery, equipment and tooling			3 to 20 years
Operating lease assets			Lesser of useful life or term of lease
Transportation, vehicles and other			1 to 20 years

Land is not depreciated and construction-in-progress is not depreciated until placed in service. Normal repair and maintenance costs are expensed as incurred, whereas significant improvements that materially increase values or extend useful lives are capitalized and depreciated over the remaining estimated useful lives of the related assets. Upon sale or retirement of depreciable assets, the related cost and accumulated depreciation or amortization are removed from the accounts and any gain or loss on the sale or retirement is recognized in income.

Lessee Right-of-Use (ROU) Assets and Lease Liabilities

The Company determines if an arrangement contains a lease at inception. ROU assets represent the Company’s right to use an asset underlying an operating lease for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from an operating lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company generally estimates the applicable discount rate used to determine the net present value of lease payments based on available information at the lease commencement date. Many of the Company’s lessee agreements include options to extend the lease, which the Company does not include in its lease terms unless they are reasonably certain to be exercised. The Company utilizes a portfolio approach to account for the ROU assets and liabilities associated with certain equipment leases.

The Company has also made an accounting policy election not to separate lease and non-lease components for its real estate leases and to exclude short-term leases with a term of twelve months or less from its ROU assets and lease liabilities. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.

Intangible Assets

Intangible assets consist primarily of patents, trademarks, software development costs, customer relationships, licenses and acquired technology. Costs related to patents and trademarks, which include legal and application fees, are capitalized and amortized over the estimated useful lives using the straight-line method. Patent and trademark amortization commences once final approval of the patent or trademark has been obtained. Patent costs are amortized over the lesser of 10 years or the patent’s remaining legal life, which assumes renewals, and trademark costs are amortized over a range of 10 years to 17 years, and their associated amortization cost is included in selling, general and administrative expense in the accompanying condensed consolidated statements of operations.

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The Company’s policy is to renew its patents and trademarks. Costs to renew patents and trademarks are capitalized and amortized over the remaining useful life of the intangible asset. The Company periodically evaluates the amortization period and carrying basis of patents and trademarks to determine whether any events or circumstances warrant a revised estimated useful life or reduction in value. Capitalized application costs are charged to operations when it is determined that the patent or trademark will not be obtained or is abandoned.

Intangibles purchased as part of an asset acquisition or business combination historically have included patents, trademarks, customer relationships, developed technologies and contractual licenses. In certain circumstances the Company also has acquired non-compete agreements tied to certain employment relationships. The useful life for all of these is largely determined by valuation estimates of remaining economic life. In connection with the Sound United acquisition, the Company acquired certain trademarks/tradenames, which are intangible assets with indefinite useful lives. These brands are expected to maintain brand value for an indefinite period of time.

Impairment of Goodwill, Intangible Assets and Other Long-Lived Assets

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. Goodwill is not amortized, but instead is tested annually for impairment, or more frequently when events or changes in circumstances indicate that goodwill might be impaired. In assessing goodwill impairment, the Company has the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macroeconomic, industry-specific and Company-specific factors, including: (i) severe adverse industry or economic trends; (ii) significant Company-specific actions; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, or if the Company elects to bypass the qualitative analysis, then the Company performs a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of such reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to such reporting unit. The annual impairment test is performed during the fourth fiscal quarter.

Similar to Goodwill, indefinite-lived intangible assets are not amortized but instead are subject to annual impairment testing, unless circumstances dictate more frequent testing, if impairment indicators exist. Impairment for indefinite-lived assets exists if the carrying value of the indefinite-lived intangible asset exceeds its fair value. Determining whether impairment indicators exist and estimating the fair value of the Company’s indefinite-lived intangible assets if necessary for impairment testing requires significant judgment. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors.

The Company reviews finite lived intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Employee Defined Benefit Plans

The Company maintains noncontributory defined benefit pension plans that cover employees in various countries throughout Europe and Asia. The Company recognizes the funded status, or difference between the fair value of plan assets and the projected benefit obligations of the pension plan on the condensed consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income (loss). If the projected benefit obligation exceeds the fair value of plan assets, the difference or unfunded status represents the pension liability. The Company records a net periodic pension cost in the condensed consolidated statement of operations. The liabilities and annual income or expense is determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of asset return. The fair values of plan assets are determined based on prevailing market prices. See Note 21, “Employee Benefits”, for further details.

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Income Taxes

The Company accounts for income taxes using the asset and liability method, under which the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for net operating loss and tax credit carryforwards. Tax positions that meet a more-likely-than-not recognition threshold are recognized in the first reporting period that it becomes more-likely-than-not such tax position will be sustained upon examination. A tax position that meets this more-likely-than-not recognition threshold is recorded at the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Previously recognized income tax positions that fail to meet the recognition threshold in a subsequent period are derecognized in that period. Differences between actual results and the Company’s assumptions, or changes in the Company’s assumptions in future periods, are recorded in the period they become known. The Company records potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.

As a multinational corporation, the Company is subject to complex tax laws and regulations in various jurisdictions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from the Company’s estimates, which could result in the need to record additional liabilities or potentially to reverse previously recorded tax liabilities.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is recorded against any deferred tax assets when, in the judgment of management, it is more likely than not that all or part of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including recent financial performance, scheduled reversals of temporary differences, projected future taxable income, availability of taxable income in carryback periods and tax planning strategies.

Income taxes are highly susceptible to changes from period to period, requiring management to make assumptions about the Company’s future income over the lives of its deferred tax assets (DTA) and the impact of changes in valuation allowances. Any difference in the assumptions, judgments and estimates mentioned above could result in changes to the Company’s results of operations.

Revenue Recognition, Deferred Revenue and Other Contract Liabilities

The Company generally recognizes revenue following a single, principles-based five-step model to be applied to all contracts with customers and generally provides for the recognition of revenue in an amount that reflects the consideration to which the Company expects to be entitled, net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected from customers that are remitted to government authorities, when control over the promised goods or services are transferred to the customer.

Healthcare segment

While the majority of the Company’s Healthcare segment revenue contracts and transactions contain standard business terms and conditions, there are some transactions that contain non-standard business terms and conditions. As a result, contract interpretation, judgment and analysis is required to determine the appropriate accounting, including: (i) the amount of the total consideration, as well as variable consideration, (ii) whether the arrangement contains an embedded lease, and if so, whether such embedded lease is a sales-type lease or an operating lease, (iii) the identification of the distinct performance obligations contained within the arrangement, (iv) how the arrangement consideration should be allocated to each performance obligation when multiple performance obligations exist, including the determination of standalone selling price, and (v) when to recognize revenue on the performance obligations. Changes in judgments on these assumptions and estimates could materially impact the timing of revenue recognition. Revenue from fixed lease payments related to equipment supplied under sales-type lease arrangements is recognized once control over the equipment is transferred to the customer, while revenue from fixed lease payments related to equipment supplied under operating-type lease arrangements is generally recognized on a straight-line basis over the term of the lease and variable lease payments are recognized as they occur.

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The Company derives the majority of its Healthcare segment revenue from four primary sources: (i) direct sales under deferred equipment agreements with end-user hospitals where the Company provides up-front monitoring equipment at no up-front charge in exchange for a multi-year sensor purchase commitment; (ii) other direct sales of noninvasive monitoring solutions to end-user hospitals, emergency medical response organizations and other direct customers; (iii) sales of noninvasive monitoring solutions to distributors who then typically resell to end-user hospitals, emergency medical response organizations and other customers; and (iv) sales of integrated circuit boards to original equipment manufacturer (OEM) customers who incorporate the Company’s embedded software technology into their multiparameter monitoring devices. Subject to customer credit considerations, the majority of such sales are made on open account using industry standard payment terms based on the geography within which the specific customer is located.

The Company enters into agreements to sell its monitoring solutions and services, sometimes as a part of arrangements with multiple performance obligations that include various combinations of product sales, equipment leases and services. In the case of contracts with multiple performance obligations, the authoritative guidance provides that the total consideration be allocated to each performance obligation on the basis of relative standalone selling prices. When a standalone selling price is not readily observable, the Company estimates the standalone selling price by considering multiple factors including, but not limited to, features and functionality of the product, geographies, type of customer, contractual prices pursuant to Group Purchasing Organization (GPO) contracts, the Company’s pricing and discount practices, and other market conditions.

Sales under deferred equipment agreements are generally structured such that the Company agrees to provide certain monitoring-related equipment, software, installation, training and/or warranty support at no up-front charge in exchange for the customer’s commitment to purchase sensors over the term of the agreement, which generally ranges from three years to six years. The Company allocates contract consideration under deferred equipment agreements containing fixed annual sensor purchase commitments to the underlying lease and non-lease components at contract inception. In determining whether any underlying lease components are related to a sales-type lease or an operating lease, the Company evaluates the customer’s rights and ability to control the use of the underlying equipment throughout the contract term, including any equipment substitution rights retained by the Company, as well as the Company’s expectations surrounding potential contract/lease extensions or renewals and the customer’s likelihood to exercise any purchase options. Beginning January 2, 2022, for contracts that contain variable lease payments, the Company also classifies as operating leases any components that would result in a day one selling loss should they be otherwise classified as a sales-type lease. Revenue allocable to non-lease performance obligations is generally recognized as such non-lease performance obligations are satisfied. Revenue allocable to lease components under sales-type lease arrangements is generally recognized when control over the equipment is transferred to the customer. Revenue allocable to lease components under operating lease arrangements is generally recognized over the term of the operating lease. The Company generally does not expect to derive any significant value in excess of such asset’s unamortized book value from equipment underlying its operating lease arrangements after the end of the agreement.

Revenue from the sale of products to end-user hospitals, emergency medical response organizations, other direct customers, distributors and OEM customers, is recognized by the Company when control of such products transfer to the customer based upon the terms of the contract or underlying purchase order.

Revenue related to OEM rainbow® parameter software licenses is recognized by the Company upon the OEM’s shipment of its product to its customer, as reported to the Company by the OEM.

The Company provides certain customers with various sales incentives that may take the form of discounts or rebates. The Company records estimates related to these programs as a reduction to revenue at the time of sale. In general, customers do not have a right of return for credit or refund. However, the Company allows returns under certain circumstances. At the end of each period, the Company estimates and accrues for these returns as a reduction to revenue. The Company estimates the revenue constraints related to these forms of variable consideration based on various factors, including expected purchasing volumes, prior sales and returns history, and specific contractual terms and limitations.

Non-healthcare segment

Non-healthcare segment revenue is related to hardware and embedded software that is integrated into final products that are manufactured and sold by the Company. Products and related software are accounted for as a single performance obligation and all intended functionality is available to the customer upon purchase. Non-healthcare segment revenue is recognized upon transfer of control of promised products or service to customers, which is either upon shipment or upon delivery to the customers, depending on delivery terms.

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The Company offers sales incentives and has customer programs consisting primarily of discounts and market development fund programs, and records them as a contra revenue. Estimates for sales incentives are developed using most likely amount and are included in the transaction price to the extent that a significant reversal of revenue would not result once the uncertainty is resolved. In developing its estimates, the Company also considers the susceptibility of the incentive to outside influences, the length of time until the uncertainty is resolved and the Company’s experience with similar contracts. Reductions in revenue related to discounts are allocated to products on a relative basis based on their respective standard selling price if there are undelivered products in a contract. Judgement is required to determine the timing and amount of recognition of marketing funds which the Company estimates based on past practice of providing similar funds.

Payment terms and conditions vary among the Company’s distribution channels although terms generally include a requirement of payment within 30 to 60 days of product shipment. Sales directly to customers from the Company’s website are paid at the time of product shipment. Prior to determining payment terms for each customers, an evaluation of such customer’s credit risk is performed. Contractual allowances are an offset to accounts receivable.

Shipping and Handling Costs and Fees

All shipping and handling costs are expensed as incurred and are recorded as a component of cost of goods sold in the accompanying condensed consolidated statements of operations. Charges for shipping and handling billed to customers are included as a component of revenue.

Taxes Collected From Customers and Remitted to Governmental Authorities

The Company’s policy is to present revenue net of taxes collected from customers and remitted to governmental authorities.

Deferred Costs and Other Contract Assets

The costs of monitoring-related equipment provided to customers under operating lease arrangements within the Company’s deferred equipment agreements are generally deferred and amortized to cost of goods sold over the life of the underlying contracts. Some of the Company’s deferred equipment agreements also contain provisions for certain allowances to be made directly to the end-user hospital customer at the inception of the arrangement. These allowances are generally allocated to the lease and non-lease components and recognized as a reduction to revenue as the underlying performance obligations are satisfied.

The Company generally invoices its customers under deferred equipment agreements as sensors are provided to the customer. However, the Company may recognize revenue for certain non-lease performance obligations under deferred equipment agreements with fixed annual commitments at the time such performance obligations are satisfied and prior to the customer being invoiced. When this occurs, the Company records an unbilled contract receivable related to such revenue until the customer has been invoiced pursuant to the terms of the underlying deferred equipment agreement.

The incremental costs of obtaining a contract with a customer are capitalized and deferred if the Company expects such costs to be recoverable over the life of the contract and the contract term is greater than one year. Such deferred costs generally relate to certain incentive sales commissions earned by the Company’s internal sales team in connection with the execution of deferred equipment agreements and are amortized to expense over the expected term of the underlying contract.

In connection with the Sound United acquisition, the Company recognized non-healthcare royalty revenue associated with certain prepaid license arrangements. The Company recognizes non-healthcare revenue from the prepaid license arrangements based upon sales-based royalties when a subsequent sale occurs.

Warranty

The Company generally provides a warranty against defects in material and workmanship for a period ranging from six months to forty-eight months, depending on the product type. In traditional sales activities, including direct and OEM sales, the Company establishes an accrued liability for the estimated warranty costs at the time of revenue recognition, with a corresponding provision to cost of goods sold. Customers may also purchase extended warranty coverage or service level upgrades separately or as part of a deferred equipment agreement. Revenue related to extended warranty coverage and service level upgrades is generally recognized over the life of the contract, which reasonably approximates the period over which such services will be provided. The related extended warranty and service level upgrade costs are expensed as incurred.

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Changes in the warranty accrual were as follows:

			Nine Months Ended
(in millions)			October 1, 2022						October 2, 2021
Warranty accrual, beginning of period			$	2.5					$	2.7
Increase related to acquisition, net of reserve			8.0						—
Accrual for warranties issued			1.9						3.4
Changes in pre-existing warranties (including changes in estimates)			1.5						(2.3)
Settlements made			(4.5)						(0.9)
Warranty accrual, end of period			$	9.4					$	2.9

Litigation Costs and Contingencies

The Company records a charge equal to at least the minimum estimated liability for a loss contingency or litigation settlement when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements, and (ii) the range of loss can be reasonably estimated. The determination of whether a loss contingency or litigation settlement is probable or reasonably possible involves a significant amount of management judgment, as does the estimation of the range of loss given the nature of contingencies. Liabilities related to litigation settlements with multiple elements are recorded based on the fair value of each element. Legal and other litigation related expenses are recognized as the services are provided. The Company records insurance and other indemnity recoveries for litigation expenses when both of the following conditions are met: (a) the recovery is probable, and (b) collectability is reasonably assured. Insurance recoveries are only recorded to the extent the litigation costs to which they relate have been incurred and recognized in the financial statements.

Foreign Currency Translation

The Company’s international headquarters is in Switzerland, and its functional currency is the U.S. Dollar. The Company has many other foreign subsidiaries, and the largest transactions in foreign currency translations occur in Japanese Yen, the British Pound, Chinese Yuan and the European Euro.

The Company records certain revenues and expenses in foreign currencies. These revenues and expenses are translated into U.S. Dollars based on the average exchange rate for the reporting period. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollars at the exchange rate in effect as of the balance sheet date. Translation gains and losses related to foreign currency assets and liabilities of a subsidiary that are denominated in the functional currency of such subsidiary are included as a component of accumulated other comprehensive income (loss) within the accompanying condensed consolidated balance sheets. Realized and unrealized foreign currency gains and losses related to foreign currency assets and liabilities of the Company or a subsidiary that are not denominated in the underlying functional currency are included as a component of non-operating income (loss) within the accompanying condensed consolidated statements of operations.

Derivatives Instruments & Hedging Activities

The Company addresses market risk from changes in foreign currency and interest rates risks through risk management programs which include the use of derivative and nonderivative instruments. The Company’s exposure to the counterparty’s credit risk is generally limited to the amounts of the net obligation to the counterparty. The Company established policies to enter into contracts only with major investment-grade financial institutions to mitigate such counterparty credit risk. The Company also established a policy to further monitor the counterparty risks throughout the life of the instruments. None of the derivative instruments currently held by the Company were entered into for speculative trading purposes.

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All derivative financial instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets and are classified as short-term or long-term based on the tenor of the instrument. The Company has elected not to separate a derivative instrument into current and long-term portions. A derivative instrument whose fair value is a net liability is classified as current in total. A derivative instrument whose fair value is a net asset and whose current portion is an asset is classified as noncurrent in total. For a derivative instrument that meets the criteria to qualify for hedge accounting, the Company marks the fair value of the derivative instrument to market periodically through other comprehensive income (loss). When the hedged items hit income (expense), associated deferred gains (losses) of the derivatives in accumulated other comprehensive income (loss) will be reclassified into earnings. For a derivative instrument that does not meet the criteria for hedge accounting, any fluctuation in the fair value is reflected in earnings in the period it occurs.

Comprehensive Income

Comprehensive income includes foreign currency translation adjustments, changes to pension benefits, unrealized gains or (losses) on cash flow hedges and any related tax benefits (expenses) that have been excluded from net income and reflected in stockholders’ equity.

Net Income Per Share

Computation of basic and diluted net income per share is as follows:

			Three Months Ended												Nine Months Ended
(in millions, except per share amounts)			October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Net income			$	37.9					$	57.8					$	102.6					$	161.4
Basic net income per share:
Weighted-average shares outstanding - basic			52.5						55.1						54.0						55.1
Net income per basic share			$	0.72					$	1.05					$	1.90					$	2.93
Diluted net income per share:
Weighted-average shares outstanding - basic			52.5						55.1						54.0						55.1
Diluted share equivalents: stock options, RSUs and PSUs			1.6						2.6						1.6						2.6
Weighted-average shares outstanding - diluted			54.1						57.7						55.6						57.7
Net income per diluted share			$	0.70					$	1.00					$	1.85					$	2.80

Basic net income per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Net income per diluted share is computed by dividing the net income by the weighted-average number of shares and potential shares outstanding during the period, if the effect of potential shares is dilutive. Potential shares include incremental shares of stock issuable upon the exercise of stock options and the vesting of both restricted share units (RSUs) and performance stock units (PSUs). For the three months ended October 1, 2022 and October 2, 2021, weighted options to purchase 1.0 million and 0.1 million shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the effect of including such shares would have been antidilutive in the applicable period. For the nine months ended October 1, 2022 and October 2, 2021, weighted options to purchase 0.8 million and 0.2 million shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the effect of including such shares would have been antidilutive in the applicable period. Certain RSUs are considered contingently issuable shares as their vesting is contingent upon the occurrence of certain future events. Since such events had not occurred and were not considered probable of occurring as of each of October 1, 2022 and October 2, 2021, 2.7 million weighted-average shares related to such RSUs have been excluded from the calculation of potential shares for each of the three and nine month periods then ended.

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Supplemental Cash Flow Information

Supplemental cash flow information includes the following:

			Nine Months Ended
(in millions)			October 1, 2022						October 2, 2021
Cash paid during the year for:
Interest expense			$	11.9					$	0.2
Income taxes			71.1						36.9
Operating lease liabilities			12.0						5.6
Non-cash operating activities:
ROU assets obtained in exchange for lease liabilities			$	9.8					$	4.9
Non-cash investing activities:
Unpaid purchases of property and equipment			$	4.8					$	3.2
Unpaid strategic investments			1.5						3.4
Deposit release to acquire noncontrolling interest(1)			—						3.4
Non-cash financing activities:
Unsettled common stock proceeds from option exercises			$	—					$	0.1
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents			$	219.5					$	652.3
Restricted cash			2.6						1.6
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows			$	222.1					$	653.9

______________

(1)     During the year ended January 2, 2021, the Company obtained a controlling interest in a provider of advanced hemodynamic monitoring solutions. The Company made a deposit to acquire the noncontrolling interest of the acquiree. During the first quarter of 2021, the Company acquired the remaining noncontrolling interest. The impact of the noncontrolling interest is immaterial in all periods presented.

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Recently Adopted Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board (FASB) issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08). The standard requires companies to apply ASC Topic 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. This creates an exception to the general recognition and measurement principle in ASC Topic 805. ASU 2021-08 is effective for annual reporting periods beginning after December 15, 2022, and for interim periods within those years, and should be adopted prospectively. Early adoption is permitted. The Company’s early adoption of this standard, effective January 3, 2021, did not have a material impact on its consolidated financial statements. Subsequently, upon the closing of the Sound United acquisition, the Company recognized and measured acquired contract assets and contract liabilities (i.e., deferred revenue) in accordance with the ASC Topic 606.

In July 2021, the FASB issued Accounting Standards Update (ASU) No. 2021-05, Leases (Topic 842), Lessors - Certain Leases with Variable Lease Payments (ASU 2021-05). The new standard amends the original ASU No. 2016-02 lease standard by requiring lessors to classify leases as operating leases if they have variable lease payments that do not depend on an index or rate and would have selling losses at lease commencement if they were classified as sales-type. ASU 2021-05 is effective for annual reporting periods beginning after December 15, 2021, and for interim periods within those years, and may be adopted either prospectively or on a retrospective basis for leases that commenced or were modified after the date of initial adoption of ASC 842.

On January 2, 2022, the Company adopted ASU 2021-05 prospectively for leases that commenced or were modified on or after the date of adoption. As a result, certain leases which would have previously been classified as lease receivables (sales-type leases) were classified as operating leases, as they were determined to have variable lease payments that do not depend on an index or rate and would have selling losses at lease commencement. For leases that are classified as operating leases, the Company recorded these operating lease assets within property, plant, and equipment, net of accumulated depreciation. The equipment costs associated with such new operating leases were initially deferred and will subsequently be amortized over the lease term on a straight-line basis, rather than being immediately recognized upon lease commencement. Similarly, revenue associated with such new operating leases is now being recognized over the term of the lease, rather than being immediately recognized at the date of the lease commencement. See Notes 6, 8 and 11 of these condensed consolidated financial statements for further details.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04). The standard provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). Entities can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. ASU 2020-04 is effective beginning on March 12, 2020, and the Company may elect to apply this standard prospectively through December 31, 2022. The relief is temporary and generally cannot be applied to contract modifications that occur after December 31, 2022 or hedging relationships entered into or evaluated after that date. However, certain optional expedients can be applied to hedging relationships evaluated in periods after December 31, 2022.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (ASU 2021-01). The new standard clarified the scope and application of the original guidance. ASU 2021-01 is effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020.

On April 11, 2022, the Company adopted ASU 2020-04 and ASU 2021-01 prospectively, in conjunction with the termination of the Company’s Credit Facility and execution of a new Credit Facility, which included both term loans and a revolving line of credit. At the time of transition, the Company no longer held any debt based upon the then-current reference rate, thus, it did not elect any optional practical expedients for contract modifications. Ultimately, the Company transitioned away from an interest rate based on LIBOR to SOFR, and such adoption did not have a material impact on its condensed consolidated financial statements.

3. Related Party Transactions

The Company’s Chairman and Chief Executive Officer (CEO) is also the Chairman and CEO of Cercacor Laboratories, Inc. (Cercacor). The Company is a party to the following agreements with Cercacor:

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•Cross-Licensing Agreement - The Company and Cercacor are parties to a cross-licensing agreement (Cross-Licensing Agreement), which governs each party’s rights to certain intellectual property held by the two companies. The Company is subject to certain annual minimum aggregate royalty obligations for use of the rainbow® licensed technology. The current annual minimum royalty obligation is $5.0 million. Aggregate liabilities payable to Cercacor arising under the Cross-Licensing Agreement were $4.5 million and $2.9 million for the three months ended October 1, 2022 and October 2, 2021, respectively. Aggregate liabilities payable to Cercacor arising under the Cross-Licensing Agreement were $13.1 million and $9.6 million for the nine months ended October 1, 2022 and October 2, 2021, respectively.

•Administrative Services Agreement - The Company is a party to an administrative services agreement with Cercacor (G&A Services Agreement), which governs certain general and administrative services that the Company provides to Cercacor. Amounts charged by the Company pursuant to the G&A Services Agreement were $0.1 million and less than $0.1 million for the three months ended October 1, 2022 and October 2, 2021, respectively. Amounts charged by the Company pursuant to the G&A Services Agreement were $0.3 million and $0.2 million for the nine months ended October 1, 2022 and October 2, 2021, respectively.

•Lease Agreement - Effective December 2019, the Company entered into a lease agreement with Cercacor for approximately 34,000 square feet of office, research and development space at one of the Company’s owned facilities in Irvine (Cercacor Lease). The term of the Cercacor Lease expires on December 31, 2024. The Company recognized approximately $0.3 million of lease income for each of the three months ended October 1, 2022 and October 2, 2021. The Company recognized approximately $0.9 million of lease income for each of the nine months ended October 1, 2022 and October 2, 2021.

Net amounts due to Cercacor at October 1, 2022 and January 1, 2022 were approximately $4.7 million and $3.5 million, respectively.

The Company’s CEO is also the Chairman of the Masimo Foundation for Ethics, Innovation and Competition in Healthcare (Masimo Foundation), a non-profit organization that was founded in 2010 to provide a platform for encouraging ethics, innovation and competition in healthcare. In addition, the Company’s Executive Vice President (EVP), Chief Financial Officer (CFO) serves as the Treasurer of the Masimo Foundation and the Company’s EVP, General Counsel and Corporate Secretary serves as the Secretary for the Masimo Foundation. During the three months ended October 1, 2022 and October 2, 2021, the Company made no cash contributions to the Masimo Foundation. During the nine months ended October 1, 2022, the Company made cash contributions of approximately $1.0 million to the Masimo Foundation. During the nine months ended October 2, 2021, the Company made no cash contributions to the Masimo Foundation.

During the three and nine months ended October 1, 2022 and October 2, 2021, the Company made various in-kind contributions to the Masimo Foundation, mainly in the form of donated administrative services.

The Company’s CEO is also a co-founder and a member of the board of directors of Like Minded Media Ventures (LMMV), a team of storytellers that create content focused in the areas of true stories, social causes and science. LMMV creates stories with a multi-platform strategy, bridging the gap between film, television, digital and social media. The Company entered into a marketing service agreement with LMMV for audiovisual production services promoting brand awareness, including television commercials and digital advertising, during the second quarter of 2020. During the three months ended October 1, 2022 and October 2, 2021, the Company incurred no marketing expenses to LMMV under the marketing service agreement. During the nine months ended October 1, 2022 the Company incurred $0.6 million in marketing expenses to LMMV under the marketing service agreement. During the nine months ended October 2, 2021 the Company incurred no marketing expenses to LMMV under the marketing service agreement. At October 1, 2022, $0.1 million was due to LMMV for services rendered. At January 1, 2022, there was no amount due to LMMV for services rendered.

The Company entered into a software license and professional services agreement with Like Minded Labs (LML), a subsidiary of LMMV, during the second quarter of 2021. Pursuant to the software license agreement, LML granted the Company a perpetual, non-exclusive and fully paid-up right and license to integrate LML’s software into the Company’s products in exchange for a $3.0 million one-time license fee. Pursuant to the professional services agreement, LML will provide professional services to the Company, including the development of custom software intended to support the integration of the licensed software into the Company’s products, as well as future support services upon the Company’s acceptance of deliverables.

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4. Inventories

Inventories consist of the following:

(in millions)			October 1, 2022						January 1, 2022
Raw materials			$	205.5					$	128.3
Work-in-process			30.4						17.1
Finished goods			259.5						56.0
Total inventories(1)			$	495.4					$	201.4

______________

(1)    Included in the October 1, 2022 ending total inventories balance was approximately $53.3 million of step-up amortization related to the Sound United acquisition. See Note 18, “Business Combinations”, for further details.

5. Other Current Assets

Other current assets consist of the following:

(in millions)			October 1, 2022						January 1, 2022
Prepaid expenses			$	66.1					$	30.9
Lease receivable, current			30.1						28.7
Indirect taxes receivable			27.1						12.8
Prepaid income taxes			19.8						7.0
Prepaid rebates and royalties, current			3.7						2.8
Contract assets, current			2.7						2.1
Restricted cash(1)			2.5						3.0
Customer notes receivable			0.8						2.4
Other current assets			6.3						1.3
Total other current assets			$	159.1					$	91.0

______________

(1)     Restricted cash includes funds received from the Bill and Melinda Gates Foundation. As the Company incurs costs associated with research and development related to this project, on a quarterly basis, the Company reclasses amounts from the grant to offset costs incurred.

6. Lease Receivable

Effective January 2, 2022, the Company adopted ASU 2021-05 prospectively for leases that commenced or were modified on or after the date of adoption, resulting in the Company recording these operating lease assets within property, plant, and equipment, net of accumulated depreciation. The equipment costs associated with such new operating leases were initially deferred and will subsequently be amortized over the lease term on a straight-line basis.

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The Company recognizes revenue and costs, as well as a lease receivable, at the time the lease commences pursuant to deferred equipment agreements containing embedded sales-type leases. Lease revenue related to both operating-type and sales-type leases for the three months ended October 1, 2022 and October 2, 2021 was approximately $16.0 million and $12.0 million, respectively, and is included within product revenue in the accompanying condensed consolidated statements of operations. Lease revenue related to both operating-type and sales-type leases for each of the nine months ended October 1, 2022 and October 2, 2021 was approximately $40.0 million, and is included within revenue in the accompanying condensed consolidated statements of operations. Costs related to embedded leases within the Company’s deferred equipment agreements are included in cost of goods sold in the accompanying condensed consolidated statements of operations.

Lease receivable from sales-type leases consists of the following:

(in millions)			October 1, 2022						January 1, 2022
Lease receivable			$	110.0					$	102.6
Allowance for credit loss			(0.3)						(0.3)
Lease receivable, net			109.7						102.3
Less: current portion of lease receivable			(30.1)						(28.7)
Lease receivable, noncurrent			$	79.6					$	73.6

As of October 1, 2022, estimated future maturities of customer sales-type lease receivables and operating lease payments for each of the following fiscal years are as follows:

			Future Lease Receivables/Payments (in millions)
Fiscal year			Sales-Type Leases						Operating Leases
2022 (balance of year)			$	7.8					$	0.7
2023			29.1						2.6
2024			25.4						2.5
2025			19.9						2.5
2026			13.4						2.3
Thereafter			14.1						4.8
Total			$	109.7					$	15.4
Less: imputed interest(1)			—
Present value of total lease payments			$	109.7

______________

(1)     The calculation of the rates implicit in the leases resulted in negative discount rates. Therefore, the Company as a lessor used a 0% discount rate to measure the net investment in the lease.

7. Deferred Costs and Other Contract Assets

Deferred costs and other contract assets consist of the following:

(in millions)			October 1, 2022						January 1, 2022
Deferred commissions			$	16.0					$	11.9
Prepaid contract allowances			12.5						8.6
Unbilled contract receivables			7.3						5.0
Deferred equipment agreements, net			1.2						2.6
Deferred costs and other contract assets			$	37.0					$	28.1

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8. Property and Equipment, net

Property and equipment, net, consists of the following:

(in millions)			October 1, 2022						January 1, 2022
Building and building improvements			$	150.0					$	142.1
Machinery, equipment and tooling			140.0						103.5
Land			64.0						57.0
Computer equipment and software			41.6						32.5
Transportation, vehicles and other			32.7						33.1
Leasehold improvements			30.9						21.9
Operating lease assets(1)			22.8						—
Furniture and office equipment			17.8						14.2
Demonstration units			10.4						0.9
Construction-in-progress (CIP)			45.9						25.1
Total property and equipment			556.1						430.3
Accumulated depreciation			(183.9)						(157.5)
Property and equipment, net			$	372.2					$	272.8

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(1)    Effective January 2, 2022, the Company adopted ASU 2021-05, resulting in the Company recording these operating lease assets within property, plant, and equipment.

A significant portion of the increase in property and equipment was attributable to the Sound United acquisition. See Note 18, “Business Combinations”, for further details.

For the three months ended October 1, 2022 and October 2, 2021, depreciation expense of property and equipment was $12.6 million and $6.5 million, respectively. For the nine months ended October 1, 2022 and October 2, 2021, depreciation expense of property and equipment was $31.1 million and $18.8 million, respectively.

For the three months ended October 1, 2022 and October 2, 2021, depreciation expense of operating lease assets was $0.9 million and $0.0 million, respectively. For the nine months ended October 1, 2022 and October 2, 2021, depreciation expense of operating lease assets was $1.0 million and $0.0 million, respectively.

The balance in CIP at October 1, 2022 and January 1, 2022 related primarily to the capitalized implementation costs related to a new enterprise resource planning software system and costs related to equipment and other facility improvements at the Company’s corporate headquarters, as well as at a new research and development facility, the underlying assets for which have not been completed or placed into service.

On February 14, 2022, the Company’s wholly owned subsidiary, Masimo Canada ULC, entered into a Purchase and Sale Agreement (Purchase Agreement) with Keltic (Prior) Development Limited Partnership (Vendor) for the purchase of a property in Vancouver, British Columbia, Canada for a purchase price of CAD 123.0 million, plus GST (Purchase Price), subject to certain adjustments. The Company has paid CAD 21.0 million as a deposit towards the purchase. The balance of the Purchase Price will be due and payable upon the closing of the transaction, which is currently expected to occur during the second half of 2024.

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9. Intangible Assets, net

Intangible assets, net, consist of the following:

			October 1, 2022																		January 1, 2022
(in millions)			Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount						Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount
Intangible assets subject to amortization:
Customer relationships			$	220.6					$	(16.1)					$	204.5					$	24.6					$	(9.3)					$	15.3
Acquired technologies			183.5						(19.6)						163.9						28.4						(8.7)						19.7
Patents			33.9						(13.3)						20.6						31.5						(12.2)						19.3
Licenses			37.8						(3.6)						34.2						8.1						(2.0)						6.1
Trademarks			18.7						(5.2)						13.5						12.2						(4.1)						8.1
Licenses-related party			7.5						(6.3)						1.2						7.5						(6.0)						1.5
Non-compete agreements(1)			6.3						(0.7)						5.6						0.3						—						0.3
Capitalized software development costs			5.3						(2.8)						2.5						4.3						(2.6)						1.7
Other			1.6						(1.0)						0.6						1.6						(1.1)						0.5
Total intangible assets subject to amortization, net			$	515.2					$	(68.6)					$	446.6					$	118.5					$	(46.0)					$	72.5
Intangible assets not subject to amortization:
Trademarks															262.0																		—
Intangible assets, net															$	708.6																	$	72.5

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(1)    In connection with the Sound United acquisition, the Company also acquired non-compete agreements with a gross carrying amount equal to $6.0 million.

A significant portion of the increase in intangible assets was attributable to the Sound United acquisition. Please refer to Note 18, “Business Combinations”, for further details.

Finite lived intangible assets have a weighted-average amortization period ranging from twelve years to fourteen years. Total amortization expense for the three months ended October 1, 2022 and October 2, 2021 was $10.3 million and $2.7 million, respectively. Total amortization expense for the nine months ended October 1, 2022 and October 2, 2021 was $25.5 million and $7.6 million, respectively.

Total renewal costs for patents and trademarks for the three months ended October 1, 2022 and October 2, 2021 were $0.3 million and $0.9 million, respectively. Total renewal costs for patents and trademarks for the nine months ended October 1, 2022 and October 2, 2021 were $1.0 million and $1.3 million, respectively. As of October 1, 2022, the weighted-average number of years until the next renewal was two years for patents and six years for trademarks.

Estimated amortization expense for each of the next fiscal years is as follows:

Fiscal year			Amount (in millions)
2022 (balance of year)			$	14.1
2023			28.7
2024			28.4
2025			27.4
2026			25.6
Thereafter			322.4
Total			$	446.6

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10. Goodwill

Changes in goodwill were as follows:

			Nine Months Ended October 1, 2022
(in millions)			Healthcare						Non-healthcare						Total
Goodwill, beginning of period			$	100.3					$	—					$	100.3
Increase from business combinations			—						351.5						351.5
Foreign currency translation adjustment			(5.5)						—						(5.5)
Goodwill, end of period			$	94.8					$	351.5					$	446.3

A significant portion of the increase in goodwill at October 1, 2022 was attributable to the Sound United acquisition. See Note 18, “Business Combinations”, for further details.

11. Lessee ROU Assets and Lease Liabilities

The Company leases certain facilities in North and South America, Europe, the Middle East and Asia-Pacific regions under operating lease agreements expiring at various dates through January 2032. In addition, the Company leases equipment in the U.S. and Europe pursuant to leases that are classified as operating leases and expire at various dates through August 2026. The majority of these leases are non-cancellable and generally do not contain any material restrictive covenants, material residual value guarantees or other material guarantees. The Company recognizes lease costs under these agreements using a straight-line method based on total lease payments. Certain facility leases contain predetermined price escalations and in some cases renewal options, the longest of which is for five years.

The Company generally estimates the applicable discount rate used to determine the net present value of lease payments based on available information at the lease commencement date. As of October 1, 2022, the weighted-average discount rate used by the Company for all operating leases was approximately 3.8%.

The balance sheet classifications for amounts related to the Company’s operating leases for which it is the lessee are as follows:

(in millions)						Balance sheet classification						October 1, 2022						January 1, 2022
Lessee ROU assets						Other non-current assets						$	69.8					$	30.5
Lessee current lease liabilities						Other current liabilities						18.5						6.4
Lessee non-current lease liabilities						Other non-current liabilities						54.5						26.3
Total operating lease liabilities												$	73.0					$	32.7

As of October 1, 2022 and January 1, 2022, accumulated amortization for lessee ROU assets was $31.9 million and $15.2 million, respectively. The weighted-average remaining lease term for the Company’s operating leases was 5.9 years as of October 1, 2022.

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As of October 1, 2022, estimated future operating lease payments for each of the following fiscal years were as follows:

Fiscal year						Amount (in millions)
2022 (balance of year)						$	5.0
2023						19.4
2024						16.0
2025						12.1
2026						8.5
Thereafter(1)						21.0
Total						82.0
Imputed interest						(9.0)
Present value						$	73.0

______________

(1)     Includes optional renewal period for certain leases.

During the three months ended October 1, 2022 and October 2, 2021, operating lease costs were approximately $4.8 million and $2.1 million, respectively. During the nine months ended October 1, 2022 and October 2, 2021, operating lease costs were approximately $12.6 million and $6.2 million, respectively.

12. Other Non-Current Assets

Other non-current assets consist of the following:

(in millions)			October 1, 2022						January 1, 2022
Lessee ROU assets, net			$	69.8					$	30.5
Derivative assets - non-current			19.4						—
Strategic investments			13.8						13.8
Prepaid deposits and other			7.2						3.9
Other non-current assets			0.4						0.4
Total non-current assets			$	110.6					$	48.6

13. Deferred Revenue and Other Contract Liabilities, Current

Deferred revenue and other contract liabilities, current, consist of the following:

(in millions)			October 1, 2022						January 1, 2022
Deferred revenue			$	56.7					$	35.1
Accrued rebates and allowances			36.4						13.6
Accrued customer reimbursements			7.2						7.4
Total deferred revenue and other contract liabilities			100.3						56.1
Less: Non-current portion of deferred revenue			(22.7)						(5.2)
Deferred revenue and other contract liabilities - current			$	77.6					$	50.9

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Deferred revenue relates to contracted amounts that have been invoiced to customers for which remaining performance obligations must be completed before the Company can recognize revenue. Generally, both healthcare and non-healthcare segments record deferred revenue when revenue is to be recognized subsequent to invoicing.

Healthcare Deferred Revenue

Healthcare deferred revenue primarily relates to undelivered equipment, sensors and services under deferred equipment agreements, extended warranty agreements, and maintenance agreements. Expected revenue from remaining contractual performance obligations (Unrecognized Contract Revenue) includes deferred revenue, as well as other amounts that will be invoiced and recognized as revenue in future periods when the Company completes its performance obligations. Unrecognized Contract Revenue excludes revenue allocable to monitoring-related equipment that is effectively leased to customers under deferred equipment agreements and other contractual obligations for which neither party has performed. The estimated timing of this revenue is based, in part, on management’s estimates and assumptions about when its performance obligations will be completed. As a result, the actual timing of this revenue in future periods may vary, possibly materially. As of October 1, 2022, the Company had approximately $1,238.1 million of Unrecognized Contract Revenue related to executed contracts with an original duration of one year or more. The Company expects to recognize approximately $347.8 million of this amount as revenue within the next twelve months and the remaining balance thereafter.

Non-Healthcare Deferred Revenue

In October 2020, Bowers and Wilkins (B&W), a subsidiary of Sound United, entered into an amendment to a licensing agreement, whereby B&W received a $20.0 million royalty prepayment in relation to sound system units manufactured by B&W for various high-end car manufacturers with a total commitment of $35.0 million to be received by September 30, 2028. As of October 1, 2022, deferred revenue was $22.0 million.

Changes in deferred revenue were as follows:

(in millions)			Nine Months Ended October 1, 2022
Deferred revenue, beginning of the period			$	35.1
Increase from business combinations			18.6
Revenue deferred during the period			29.2
Recognition of revenue deferred in prior periods			(26.2)
Deferred revenue, end of the period			$	56.7

14. Other Current Liabilities

Other current liabilities consist of the following:

(in millions)			October 1, 2022						January 1, 2022
Accrued expenses			$	40.5					$	12.1
Accrued indirect taxes payable			26.5						16.3
Income tax payable			18.7						12.0
Lessee lease liabilities, current			18.5						6.4
Current portion of long-term debt			13.8						—
Accrued warranty			9.4						2.5
Accrued property taxes			6.0						2.0
Accrued legal fees			5.8						7.1
Related party payables			4.7						3.6
Accrued donations			1.6						3.7
Other current liabilities			6.0						4.7
Total other current liabilities			$	151.5					$	70.4

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15. Debt

(in millions)			October 1, 2022						January 1, 2022
Term loan - current portion			$	7.5					$	—
Japanese loans - current portion			6.3						—
Short-term debt			13.8						—
Term loan - long-term			280.3						—
Revolver - long-term			660.6						—
Japanese loans - long-term			10.5						—
Long-term debt			951.4						—
Total debt			$	965.2					$	—

Prior Credit Facility

Until April 11, 2022, the Company maintained a credit agreement (Prior Credit Facility) with JPMorgan Chase Bank, N.A., as the Administrative Agent and a Lender, and Bank of the West, a Lender (collectively, the Lenders). The Prior Credit Facility provided for up to $150.0 million of unsecured borrowings, with an option, subject to certain conditions, for the Company to increase the aggregate borrowing capacity up to $550.0 million in the future with the Lenders and additional lenders, as required. The Prior 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.

On April 11, 2022, the Company paid off all obligations owing under the Prior Credit Facility, and terminated it. As a result of the repayment, the Company expensed $0.1 million of previously capitalized debt issuance costs.

Credit Facility

On April 11, 2022, concurrently with the closing of the Sound United acquisition, as disclosed in Note 18, “Business Combinations”, the Company entered into a new credit agreement (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, and JPMorgan Chase Bank, N.A., Bank of the West and BofA Securities, Inc., as co-syndication agents.

The 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 the Company 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. Debt issuance costs of $8.4 million were recorded as a reduction to the carrying amount of the Credit Facility, and are being amortized to interest expense using the effective interest method.

The Credit Facility also provides for a sublimit of up to $50.0 million for the issuance of letters of credit.

Borrowings under the Credit Facility will be deemed, at the Company’s election, either: (a) an Alternate Base Rate (ABR) Loan, which bears interest at the ABR, plus a spread of 0.000% to 0.750% based upon a Company leverage ratio, or (b) a Term SOFR Loan, which bears interest at the Adjusted Term SOFR Rate (as defined below), plus a spread of 1.000% to 1.750% based upon a Company net leverage ratio. Pursuant to the terms of the Credit Facility, the ABR is equal to the greatest of (i) the prime rate, (ii) the Federal Reserve Bank of New York effective rate plus 0.50%, and (iii) the one-month Adjusted Term SOFR plus 1.0%. The Adjusted Term SOFR Rate is equal to the Term SOFR Rate (as defined in the Credit Facility) for the applicable interest period plus a spread adjustment of 0.10%, 0.15% and 0.25% for the interest periods ending one, three and six months, respectively.

The Company is also obligated under the Credit Facility to pay an unused fee ranging from 0.150% to 0.275% per annum, based upon a Company leverage ratio, with respect to any non-utilized portion of the Credit Facility.

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The Company is subject to certain covenants, including financial covenants related to a net leverage ratio and an interest charge coverage ratio, and other customary negative covenants. The Credit Facility also includes customary events of default which, upon the occurrence of any such event of default, provide the Initial Lenders (and any additional lenders) with the right to take either or both of the following actions: (a) immediately terminate the commitments, and (b) declare the loans then outstanding immediately due and payable in full. All unpaid principal under the Credit Facility will become due and payable on April 12, 2027.

On May 16, 2022, the Company entered into the First Amendment to the Credit Agreement (First Amendment) with the Initial Lenders and Citibank, N.A., as the administrative agent, which amended the Credit Facility. The First Amendment provides for an additional $205 million of unsecured revolving commitments, increasing the aggregate amount of the Revolver from $500 million to $705 million.

Borrowing rates, financial covenants, affirmative and negative covenants and other restricted terms remain unchanged from the Credit Facility. All unpaid principal under the First Amendment will become due and payable on April 12, 2027. The Company was in compliance with the financial covenants as of October 1, 2022.

For each of the three and nine months ended October 1, 2022, the Company incurred total interest expense of $9.7 million and $14.3 million under the Credit Facility, respectively.

For each of the three and nine months ended October 2, 2021, the Company incurred total interest expense of $0.1 million and $0.3 million under the Credit Facility, respectively.

Furthermore, in connection with the Sound United acquisition, the Company assumed three outstanding loans as follows:

Japanese Revolving Loan

In March 2020, Sound United entered into a secured revolving loan (Japanese Revolving Loan) with Mizuho bank, which allows Sound United to borrow up to ¥800 million (approximately $5.5 million). The Japanese Revolving Loan is an evergreen agreement that terminates upon request by either the financial institution or the borrower and is collateralized with land and buildings in Shirakawa-Shi owned by the borrower. Interest accrues at a rate equal to the Mizuho Tokyo Interbank Offered Rate (TIBOR) plus a fixed spread of 0.50% per annum. In connection with the execution of the Japanese Revolving Loan, the Company incurred debt issuance costs of ¥7.2 million (approximately $0.1 million). As of October 1, 2022, the Company had ¥800 million (approximately $5.5 million) of outstanding borrowing under the Japanese Revolving Loan, which is presented under short-term loans on the accompanying condensed consolidated balance sheets.

The Japanese Revolving Loan agreement contains customary affirmative and negative covenants, such as financial reporting requirements and customary covenants that restrict the borrower’s ability to, among other things, provide collateral for obligations borne by the borrower, and determine the eligibility to declare, and amount of potential dividends to be paid during a given fiscal year. The Company was in compliance with the financial covenants as of October 1, 2022.

Japanese Government Loans

In May and June 2020, Sound United received ¥1.48 billion (approximately $10.2 million in non-collateralized Japanese Government Loan facilities (Japanese Government Loans) as part of its local Japanese stimulus program. Interest accrues at a weighted average rate of 1.33% and is repayable in installments with various maturities through June 2035. The non-current portion of the Japanese Government Loans is presented under long-term debt and the current portion is presented under short-term loans on the accompanying condensed consolidated balance sheets. The Company incurred no debt issuance costs in connection with the Japanese Government Loans.

Japanese Equipment Loans

In April and May 2021, Sound United entered into collateralized Japanese Equipment Loans of ¥150 million (approximately $1.0 million), payable in installments through March 2031 with an interest of 0.58%, and ¥80 million (approximately $0.5 million) payable in installments through April 2028 with interest of 1.2%. The non-current portion of the Japanese Equipment Loans is presented under long-term debt and the current portion is presented under short-term loans on the accompanying condensed consolidated balance sheets. The Company incurred no debt issuance costs in connection with these Japanese Equipment Loans.

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As of October 1, 2022, the aggregate maturities of principal on all debt for each of the next five years and thereafter is as follows:

Fiscal year						Amount (in millions)
2022 (balance of the year)						$	7.5
2023						8.6
2024						14.8
2025						16.6
2026						16.6
Thereafter						901.1
Total						$	965.2

16. Other Non-Current Liabilities

Other non-current liabilities consist of the following:

(in millions)			October 1, 2022						January 1, 2022
Lessee non-current lease liabilities			$	54.5					$	26.3
Deferred revenue, non-current			22.7						5.2
Unrecognized tax benefits			17.5						14.9
Income tax payable, non-current			12.7						17.0
Retirement allowance			10.9						—
Indirect tax payable, non-current			7.5						—
Other			0.1						0.6
Total other non-current liabilities			$	125.9					$	64.0

Unrecognized tax benefits relate to the Company’s long-term portion of tax liability associated with uncertain tax positions. Authoritative guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. See Note 23, “Income Taxes”, to these condensed consolidated financial statements for further details.

17. Derivative Instruments and Hedging Activities

Derivative Instruments - Cash Flow Hedges

The Company’s cash flow hedges are designed to mitigate the risk of exposure to variability in expected future cash flows of recognized assets, liabilities, or any unrecognized forecasted transactions. In July 2022, the Company entered into various interest rate swaps that are designated as cash flow hedges on a substantial portion of the outstanding debt the Company issued to fund the Sound United acquisition. The interest rate swaps reduce the variability of cash flow payments for the Company by converting the variable interest rate on the Company’s long-term debt to an average fixed interest rate of 2.75%. These contracts, carried at fair value, have maturities of approximately five years. All hedging relationships were highly effective at achieving offsetting changes in cash flows attributable to the risk being hedged. The Company used a regression analysis at hedge inception to assess the effectiveness of cash flow hedge and periodically hereafter.

The Company records gains and losses from the changes in the fair value of these instruments as a component of other comprehensive income (loss). Deferred gains or losses from these designated cash flow hedges are reclassified into earnings in the period that the hedged items affects earnings. The Company does not offset fair value amounts recognized for derivative instruments in its condensed consolidated balance sheets for presentation purposes. The following table summarizes the fair value of the hedging instruments, presented on a gross basis, as of October 1, 2022 and January 1, 2022.

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												Condensed Consolidated Balance Sheets
(in millions)						Balance sheet classification						October 1, 2022						January 1, 2022
Interest rate contracts						Other non-current assets						$	19.4					$	—
Total												$	19.4					$	—

The following table summarizes the gains (losses) reclassified from accumulated other comprehensive income to the condensed consolidated financial statements for the three and nine months ended October 1, 2022.

												Condensed Consolidated Statement of Operations
(in millions)						Location of gain (loss)						Three Months Ended October 1, 2022						Nine Months Ended October 1, 2022
Cash flow hedges - interest rate contracts						Non-operating loss (income)						$	0.8					$	0.8
Total												$	0.8					$	0.8

The following tables summarize the changes in accumulated other comprehensive income related to the hedging instruments:

(in millions)						Amounts
Beginning balance as of July 3, 2022						$	—
Amount recognized in other comprehensive income						18.6
Amount reclassified into earnings						0.8
Ending Balance as of October 1, 2022						$	19.4

The net of tax gain was $14.7 million as of October 1, 2022.

Derivative Instruments - Foreign Currency Forwards

The Company used foreign currency derivative instruments in the form of forward contracts to hedge certain monetary assets and liabilities, primarily receivables and payables denominated in foreign currencies. The Company’s objective is to partially offset gains or losses resulting from these exposures with opposing gains or losses on the forward contracts, thereby reducing volatility of earnings created by these foreign currency exposures. In conjunction with the Sound United acquisition, the Company acquired multiple foreign currency forward contracts. The fair values of the forward contracts are estimated at each period end based on quoted market prices and are recorded as either net asset or liability on the accompanying condensed consolidated balance sheets. These contracts are considered economic hedges but were not designated as hedges. These contracts are recorded net at fair value on the condensed consolidated balance sheets, classified as Level 2 in the fair value hierarchy. As of October 1, 2022, all derivative contracts have matured and were terminated. The gains and losses were recognized in the condensed consolidated statement of operations and were immaterial for the three and nine months ended October 1, 2022.

18. Business Combinations

Sound United Acquisition

On April 11, 2022, the Company completed the previously announced acquisition of Sound United, pursuant to a Merger Agreement dated as of February 15, 2022 (Merger Agreement), by and among the Company, Sonic Boom Acquisition Corp., a wholly-owned subsidiary of the Company (Merger Sub), Viper Holdings Corporation (Sound United), and, solely in its capacity as the Seller Representative, Viper Holdings, LLC, Merger Sub merged with and into Sound United, with Sound United continuing as a wholly-owned subsidiary of the Company (Merger).

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Sound United is a leading innovator of premium, high-performance audio products for consumers around the world, which operates iconic consumer brands: Bowers & Wilkins®, Denon®, Marantz®, HEOS®, Classé®, Polk Audio®, Boston Acoustics® and Definitive Technology®. The brands are linked by a commitment to the highest production standards and a focus on unparalleled audio quality and audio performance. Sound United delivers significant competitive benefits through its platform advantages including global distribution across online, retail and custom installation channels; a cloud-connected home ecosystem; and a state-of-the-art research and development function focused on creating the highest-quality consumer products with world-class industrial design.

The Company acquired 100% of the equity interests of Sound United for $1.065 billion in cash, subject to adjustments based on Sound United’s net working capital, transaction expenses, cash and debt as of the closing of the Merger (Closing), payable by the Company in cash. The transaction was primarily funded with the proceeds from the Credit Facility. See Note 15, “Debt”, for additional information about the Credit Facility. There was no contingent consideration resulting from the transaction.

The results of operations of Sound United subsequent to the acquisition date and the acquired assets and assumed liabilities, including the preliminary allocation of goodwill and intangible assets, are included in the non-healthcare segment, including revenue of $430.3 million and a net loss of $26.7 million for the period of April 11, 2022 to October 1, 2022.

Acquisition costs

The Company recognized transaction costs related to the Sound United acquisition of $16.6 million for the nine months ended October 1, 2022. These costs include investment banker fees, legal, due diligence, and other external costs that the Company recorded within selling, general and administrative expense.

Purchase price allocations

The purchase price for the Sound United acquisition is preliminary, pending final customary purchase price adjustments. Based on additional supportable information and changes in assumptions during the period, the Company recorded certain measurement period adjustments during the three months ended October 1, 2022. The valuations of the assets acquired and liabilities assumed have not yet been finalized as of October 1, 2022. The purchase price allocation is preliminary and subject to change, including measurement period adjustments, the valuation of intangible assets, leases, deferred taxes, inventory, property, plant and equipment and goodwill. The purchase price allocation will be finalized as the information necessary to complete the required analysis is obtained, which the Company will complete within one year from the acquisition date. Goodwill was calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired in a business combination and represents the future economic benefits expected to arise from intangible assets acquired that do not qualify for separate recognition, including the assembled workforce. Goodwill is not expected to be deductible for tax purposes.

Measurement period adjustments for the period ended October 1, 2022, included changes to the purchase price allocation and total consideration, resulting in a net increase of $14.0 million to goodwill. The measurement period adjustments resulted primarily from valuation inputs pertaining to certain acquired assets based on facts and circumstances that existed as of the acquisition date and did not result from events subsequent to the acquisition date. The fair values assigned to assets acquired and liabilities assumed as of October 1, 2022 are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of the valuation analysis.

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The table below summarizes the preliminary allocation of fair value of assets acquired and liabilities assumed, inclusive of measurement period adjustments as of April 11, 2022:

(in millions)									Sound United
Cash consideration(1)									$	1,065.0
Purchase price									$	1,065.0
Assets acquired:
Cash and cash equivalents									$	82.6
Accounts receivables									111.3
Inventories									233.0
Prepaid expenses and other current assets									37.5
Property, plant and equipment									100.0
Intangible asset									649.0
Goodwill									351.5
Long-term other assets									7.2
Total assets acquired									$	1,572.1
Liabilities assumed:
Accounts payable									$	(118.8)
Accrued liabilities and other current liabilities									(165.0)
Deferred tax liabilities									(157.7)
Other long-term liabilities									(65.6)
Total liabilities assumed									$	(507.1)

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(1)    The purchase price for the Sound United acquisition is preliminary, pending final customary purchase price adjustments.

Identifiable Intangible Assets

The following table sets forth the components of identifiable intangible assets acquired and the weighted average amortization period as of the acquisition date:

						Weighted average amortization period (in years)						April 11,  2022 (in millions)
Trademarks/tradenames						10						$	268.0
Customer relationships						17						196.0
Developed technology						8						156.0
Contractual license agreements						15						29.0
Total						14 years						$	649.0

In determining the fair value of the identifiable intangible assets, the Company utilized various forms of the income approach, depending on the asset being valued. The estimation of fair value requires significant judgment related to cash flow forecasts, discount rates reflecting the risk inherent in each cash flow stream, competitive trends, market comparables and other factors. Other inputs included historical data, current and anticipated market conditions, and growth rates. Contractual license agreements have a weighed average amortization period of five years until the next renewal term.

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The intangible assets were valued using the following valuation approaches:

Customer relationships

The fair value of customer relationships was determined using the multi-period excess earnings method. The multi-period excess earnings method involves forecasting the net earnings expected to be generated by the asset, reducing them by appropriate returns on contributory assets, and then discounting the resulting net cash flows to a present value using an appropriate discount rate.

Trademarks/tradenames

The fair values of the trademark/tradenames were determined using the relief-from-royalty method under the income approach. This involves forecasting avoided royalties, reducing them by taxes, and discounting the resulting net cash flows to a present value using an appropriate discount rate. Judgment was applied for a number of assumptions in valuing the identified intangible assets including revenue and cash flow forecasts, survival rates, technology life, royalty rate, obsolescence and discount rate.

Developed technology

The fair values of the developed technology was determined using the relief-from-royalty method under the income approach. This involves forecasting avoided royalties, reducing them by taxes, and discounting the resulting net cash flows to a present value using an appropriate discount rate. Judgment was applied for a number of assumptions in valuing the identified intangible assets including revenue and cash flow forecasts, survival rates, technology life, royalty rate, obsolescence and discount rate.

Contractual licensing agreements

The fair value of the contractual license agreements was determined using a variation of the multi-period excess earnings method. This method involves forecasting the net earnings expected to be generated by the asset and then discounting the resulting net cash flows to a present value using an appropriate discount rate.

Unaudited pro forma financial information

The supplemental pro forma financial information has been prepared using the acquisition method of accounting and is based on the historical financial information of Masimo and Sound United, assuming the transaction occurred on January 1, 2021. The supplemental pro forma financial information does not necessarily represent what the combined companies’ revenue or results of operations would have been had the acquisition of Sound United been completed on January 1, 2021, nor is it intended to be a projection of future operating results of the combined company. It also does not reflect any operating efficiencies or potential cost savings that might be achieved from synergies of combining Masimo and Sound United.

The unaudited supplemental pro forma financial information has been calculated after applying Masimo’s accounting policies and adjusting the results of the combined company to reflect incremental amortization and depreciation expense resulting from the fair value adjustments for acquired intangible assets, inventory, property, plant and equipment as well as the net decrease to interest expense resulting from the elimination of the historical interest expense on Sound United’s debt that was paid off at closing partially offset by incremental interest expense resulting from the external debt borrowed by Masimo to fund the acquisition, and the corresponding income tax impact of these adjustments.

Also, during the nine months ended October 1, 2022, Masimo and Sound United incurred $18.1 million and $41.1 million of acquisition-related costs, respectively. Additionally, there were $49.3 million of Profit Interest Units paid out in conjunction with the transaction. These expenses are reflected in pro forma net income for the three months ended October 1, 2022, in the table below and the acquisition related expenses incurred by Masimo are included in selling, general and administrative, in the Company’s condensed consolidated statements of comprehensive income for the three and nine months ended October 2, 2021.

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There are no other material non-recurring pro forma adjustments directly attributable to the acquisition included in the reported pro forma revenue and pro forma net income.

						Three Months Ended												Nine Months Ended
(in millions)						October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Pro forma net revenue						$	549.3					$	534.6					$	1,676.4					$	1,556.3
Pro forma net income (loss)						$	38.0					$	85.6					$	127.0					$	54.1

19. Equity

Series A Junior Participating Preferred Stock and Stockholder Rights Plan

In September 2022, the Company authorized and declared a dividend of one preferred stock purchase right (Right) for each outstanding share of its common stock to stockholders of record at the close of business on September 20, 2022 (the Record Date) pursuant to a Rights Agreement, dated as of September 9, 2022, with Broadridge Corporate Issuer Solutions, Inc., as Rights Agent. In addition, one Right was issued with each share of common stock that became outstanding after the Record Date. Each Right entitles the registered holder to purchase from the Company one thousandth of one share of the Company’s Series A junior participating preferred stock, par value $0.001 per share, at a purchase price equal to $1,000.00 per Right, subject to adjustment. Generally, the Rights become exercisable in the event any person or group of affiliated or associated persons acquires beneficial ownership of 10% (20% in the case of a passive institutional investor), subject to certain exceptions. The Rights will expire on the earliest of (i) 5:00 p.m., New York City time, on September 8, 2023, (ii) the time at which the Rights are redeemed, and (iii) the time at which the Rights are exchanged in full.

Stock Repurchase Programs

In July 2018, the Company’s Board of Directors (Board) approved a stock repurchase program, authorizing the Company to purchase up to 5.0 million shares of its common stock over a period of up to three years (2018 Repurchase Program). A total of 1.3 million shares were purchased by the Company pursuant to the 2018 Repurchase Program prior to its expiration in September 2021.

In October 2021, the Board approved a stock repurchase program, authorizing the Company to purchase up to 3.0 million shares of its common stock over a period of up to three years (2021 Repurchase Program). The 2021 Repurchase Program became effective in October 2021 upon the expiration of the 2018 Repurchase Program. The 2021 Repurchase Program was completed in May 2022.

In June 2022, the Board approved a new stock repurchase program, authorizing the Company to purchase up to 5.0 million shares of its common stock on or before December 31, 2027 (2022 Repurchase Program). The 2022 Repurchase Program became effective in July 2022. The Company expects to fund the 2022 Repurchase Program through its available cash, cash expected to be generated from future operations, the Credit Facility and other potential sources of capital. The 2022 Repurchase Program can be carried out at the discretion of a committee comprised of the Company’s CEO and CFO through open market purchases, one or more Rule 10b5-1 trading plans, block trades and privately negotiated transactions. As of October 1, 2022, 5.0 million shares remained available for repurchase pursuant the 2022 Repurchase Program.

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The following table provides a summary of the Company’s stock repurchase activities:

			Three Months Ended												Nine Months Ended
(in millions, except per share amounts)			October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Shares repurchased(1)			—						—						3.0						0.5
Average cost per share			$	—					$	—					$	133.82					$	235.88
Value of shares repurchased			$	—					$	—					$	401.4					$	128.9

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

20. Stock-Based Compensation

Total stock-based compensation expense for the three months ended October 1, 2022 and October 2, 2021 was $13.5 million and $12.6 million, respectively. Total stock-based compensation expense for the nine months ended October 1, 2022 and October 2, 2021 was $41.7 million and $33.5 million, respectively. As of October 1, 2022, an aggregate of 10.1 million shares of common stock were reserved for future issuance under the Company’s equity plans, of which 3.6 million shares were available for future grant under the Masimo Corporation 2017 Equity Incentive Plan (2017 Equity Plan). Additional information related to the Company’s current equity incentive plans, stock-based award activity and valuation of stock-based awards is included below.

Equity Incentive Plans

2017 Equity Incentive Plan

On June 1, 2017, the Company’s stockholders ratified and approved the 2017 Equity Plan. The 2017 Equity Plan permits the grant of stock options, restricted stock, RSUs, stock appreciation rights, PSUs, performance shares, performance bonus awards and other stock or cash awards to employees, directors and consultants of the Company and employees and consultants of any parent or subsidiary of the Company. Upon effectiveness, an aggregate of 5.0 million shares were available for issuance under the 2017 Equity Plan. In May 2020, the Company’s stockholders approved an increase of 2.5 million shares to the 2017 Equity Plan. The aggregate number of shares that may be awarded under the 2017 Equity Plan is 7.5 million shares. The 2017 Equity Plan provides that at least 95% of the equity awards issued under the 2017 Equity Plan must vest over a period of not less than one year following the date of grant. The exercise price per share of each option granted under the 2017 Equity Plan may not be less than the fair market value of a share of the Company’s common stock on the date of grant, which is generally equal to the closing price of the Company’s common stock on the Nasdaq Global Select Market on the grant date.

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2007 Stock Incentive Plan

Effective June 1, 2017, upon the approval and ratification of the 2017 Equity Plan, the Company’s 2007 Stock Incentive Plan (2007 Equity Plan) terminated, provided that awards outstanding under the 2007 Equity Plan will continue to be governed by the terms of that plan. In addition, upon the effectiveness of the 2017 Equity Plan, an aggregate of 5.0 million shares of the Company’s common stock registered under prior registration statements for issuance pursuant to the 2007 Equity Plan were deregistered and concurrently registered under the 2017 Equity Plan.

Stock-Based Award Activity

Stock Options

The number and weighted-average exercise price of options issued and outstanding under all of the Company’s equity plans are as follows:

			Nine Months Ended October 1, 2022
(in millions, except for weighted-average exercise prices)			Shares						Weighted-Average Exercise Price
Options outstanding, beginning of period			3.0						$	81.38
Granted			0.1						150.91
Canceled			(0.1)						160.95
Exercised			(0.1)						57.17
Options outstanding, end of period			2.9						$	83.85
Options exercisable, end of period			2.4						$	65.32

Total stock option expense for the three months ended October 1, 2022 and October 2, 2021 was $2.7 million and $3.2 million, respectively. Total stock option expense for the nine months ended October 1, 2022 and October 2, 2021 was $9.1 million and $9.9 million, respectively. As of October 1, 2022, the Company had $21.6 million of unrecognized compensation cost related to non-vested stock options that are expected to vest over a weighted-average period of approximately 2.5 years. The weighted-average remaining contractual term of options outstanding with an exercise price less than the closing price of the Company’s common stock as of October 1, 2022 was 4.5 years.

RSUs

The number of RSUs issued and outstanding under all of the Company’s equity plans are as follows:

			Nine Months Ended October 1, 2022
(in millions, except for weighted-average grant date fair value amounts)			Units						Weighted-Average Grant  Date Fair Value
RSUs outstanding, beginning of period			2.9						$	104.13
Granted			0.3						149.50
Canceled			—						—
Expired			(0.1)						170.37
Vested			—						183.66
RSUs outstanding, end of period			3.1						$	105.78

Total RSU expense for the three months ended October 1, 2022 and October 2, 2021 was $3.6 million and $2.4 million, respectively. Total RSU expense for the nine months ended October 1, 2022 and October 2, 2021 was $10.7 million and $6.7 million, respectively. As of October 1, 2022, the Company had $57.6 million of unrecognized compensation cost related to non-vested RSU awards expected to be recognized and vest over a weighted-average period of approximately 3.8 years.

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PSUs

The number of PSUs outstanding under all of the Company’s equity plans are as follows:

			Nine Months Ended October 1,  2022
(in millions, except for weighted-average grant date fair value amounts)			Units						Weighted-Average Grant  Date Fair Value
PSUs outstanding, beginning of period			0.3						$	168.68
Granted(1)			0.3						145.49
Canceled			—						—
Expired			(0.1)						139.73
Vested			(0.2)						127.46
PSUs outstanding, end of period			0.3						$	178.51

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(1)     On February 14, 2022, the Audit Committee approved the weighted payout percentage for the 2019 PSU awards (three-year performance period), which were based upon the actual fiscal 2021 performance against pre-established performance objectives. Included in the granted amount are those additional PSUs earned based on actual performance achieved. These PSUs were originally awarded at target.

During the nine months ended October 1, 2022, the Company awarded 142,900 PSUs that will vest three years from the award date, based on the achievement of certain 2025 performance criteria approved by the Board. If earned, the PSUs granted will vest upon achievement of the performance criteria after the year in which the performance achievement level has been determined. The number of shares that may be earned can range from 0% to 200% of the target amount; therefore, the maximum number of shares that can be issued under these awards is twice the original award of 142,900 PSUs, or 162,800 shares. Based on management’s estimate of the number of units expected to vest, total PSU expense for the three months ended October 1, 2022 and October 2, 2021 was $7.2 million and $7.0 million, respectively. Based on management’s estimate of the number of units expected to vest, total PSU expense for the nine months ended October 1, 2022 and October 2, 2021 was $21.9 million and $16.9 million, respectively. As of October 1, 2022, the Company had $60.5 million of unrecognized compensation cost related to non-vested PSU awards expected to be recognized and vest over a weighted-average period of approximately 1.6 years.

Valuation of Stock-Based Award Activity

The fair value of each RSU and PSU is determined based on the closing price of the Company’s common stock on the grant date.

The Black-Scholes option pricing model is used to estimate the fair value of options granted under the Company’s stock-based compensation plans. The range of assumptions used and the resulting weighted-average fair value of options granted at the date of grant were as follows:

			Three Months Ended												Nine Months Ended
			October 1,  2022(1)						October 2, 2021						October 1, 2022						October 2, 2021
Risk-free interest rate			—%						—%						1.0% to 1.9%						0.3% to 0.9%
Expected term (in years)			0.0						5.1						5.7						5.6
Estimated volatility			—%						—%						31.2% to 38.9%						30.9% to 34.7%
Expected dividends			0%						0%						0%						0%
Weighted-average fair value of options granted			$—						$66.53						$49.69						$75.72

__________________

(1)    No stock options were granted during the three months ended October 1, 2022.

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21. Employee Benefits

Defined Contribution Plans

The Company sponsors one qualified defined contribution plan or 401(k) plan, the Masimo Retirement Savings Plan (MRSP), covering the Company’s full-time U.S. employees who meet certain eligibility requirements.

The MRSP matches a Masimo employee’s contribution up to 3% of the Masimo employee’s compensation, subject to a maximum amount. The Company may also contribute to the MRSP on a discretionary basis. The Company contributed $1.8 million and $0.9 million to the MRSP for the three months ended October 1, 2022 and October 2, 2021, respectively, all in the form of matching contributions. The Company contributed $4.5 million and $2.8 million to the MRSP for the nine months ended October 1, 2022 and October 2, 2021, respectively, all in the form of matching contributions. In addition, the Company sponsors various defined contribution plans in certain locations outside of the United States, the contributions to which were not material for any period. On April 11, 2022, in connection with the Sound United acquisition, the MRSP was amended to allow for participation by eligible Sound United employees.

Defined Benefit Plans

The Company sponsors several immaterial noncontributory defined benefit plans in Europe and Asia Pacific. In connection with the Sound United acquisition, the Company assumed sponsorship of two additional defined benefit plans which cover employees in Japan and the Netherlands. The Company’s contributions are designed to fund normal costs on a current basis and to fund the estimated prior service cost of benefit improvements. The unit credit actuarial cost method is used to determine the annual cost. The Company pays the entire cost of the defined benefit plan and funds such costs as they accrue. Virtually all of the assets of the defined benefit plan are comprised of equities and participation in equity and fixed income funds.

The service cost component for the defined benefit plans are recorded in cost of sales and operating expenses in the condensed consolidated statement of operations. All other cost components are recorded in other income (expense), net in the condensed consolidated statement of operations. The Company’s net periodic defined benefit costs for each of the three and nine months ended October 1, 2022, and October 2, 2021 were not material. The Company is still determining its contributions to the defined benefit plans for the year. No contributions were made to the defined benefit plans during the three and nine months ended October 1, 2022 and October 2, 2021. The expected rate of return on the Defined Benefit Plans’ assets for determining net periodic benefit plan cost is 0%.

22. Non-operating (loss) income

Non-operating (loss) income consists of the following:

			Three Months Ended												Nine Months Ended
(in millions)			October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Interest income			$	0.5					$	0.2					$	1.0					$	0.7
Interest expense			(9.7)						—						(14.3)						(0.2)
Realized and unrealized foreign currency gains (losses)			6.4						(0.2)						14.3						(1.2)
Total non-operating (loss) income			$	(2.8)					$	—					$	1.0					$	(0.7)

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23. Income Taxes

The Company has provided for income taxes in fiscal year 2022 interim periods based on the estimated effective income tax rate for the complete fiscal year, as adjusted for discrete tax events, including excess tax benefits or deficiencies related to stock-based compensation, in the period such events occur. The estimated annual effective tax rate is computed based on the expected annual pretax income of the consolidated entities located within each taxing jurisdiction based on legislation enacted as of the balance sheet date. For the three months ended October 1, 2022 and October 2, 2021, the Company recorded discrete tax benefits of approximately $0.3 million and $6.4 million, respectively, related to excess tax benefits realized from stock-based compensation. For the nine months ended October 1, 2022 and October 2, 2021, the Company recorded discrete tax benefits of approximately $2.2 million and $12.0 million, respectively, related to excess tax benefits realized from stock-based compensation.

Deferred tax assets and liabilities are determined based on the future tax consequences associated with temporary differences between income and expenses reported for accounting and tax purposes. A valuation allowance for deferred tax assets is recorded to the extent that the Company cannot determine that the ultimate realization of the net deferred tax assets is more likely than not. Realization of deferred tax assets is principally dependent upon the achievement of future taxable income, the estimation of which requires significant judgment by the Company’s management. The judgment of the Company’s management regarding future profitability may change due to many factors, including future market conditions and the Company’s ability to successfully execute its business plans or tax planning strategies. These changes, if any, may require material adjustments to these deferred tax asset balances.

As of October 1, 2022, the liability for income taxes associated with uncertain tax positions was approximately $24.5 million. If fully recognized, approximately $22.4 million (net of federal benefit on state taxes) would impact the Company’s effective tax rate. It is reasonably possible that the amount of unrecognized tax benefits in various jurisdictions may change in the next twelve months due to the expiration of statutes of limitation and audit settlements. However, due to the uncertainty surrounding the timing of these events, an estimate of the change within the next twelve months cannot currently be made.

The Company conducts business in multiple jurisdictions and, as a result, one or more of the Company’s subsidiaries files income tax returns in U.S. federal, various state, local and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters through fiscal year 2017. All material state, local and foreign income tax matters have been concluded through fiscal year 2014. The Company does not believe that the results of any tax authority examination would have a significant impact on its consolidated financial statements.

24. Commitments and Contingencies

Employment and Severance Agreements

In July 2017, the Company entered into the First Amendment to that certain Amended and Restated Employment Agreement entered into between the Company and Mr. Kiani on November 4, 2015 (as amended, the Amended Employment Agreement). Pursuant to the terms of the Amended Employment Agreement, upon a “Qualifying Termination” (as defined in the Amended Employment Agreement), Mr. Kiani will be entitled to receive a cash severance benefit equal to two times the sum of his then-current base salary and the average annual bonus paid to Mr. Kiani during the immediately preceding three years, the full amount of the “Award Shares” (as defined in the Amended Employment Agreement) and the full amount of the “Cash Payment” (as defined in the Amended Employment Agreement). In addition, in the event of a “Change in Control” (as defined in the Amended Employment Agreement) prior to a Qualifying Termination, on each of the first and second anniversaries of the Change in Control, 50% of the Cash Payment and 50% of the Award Shares will vest, subject in each case to Mr. Kiani’s continuous employment through each such anniversary date; however, in the event of a Qualifying Termination or a termination of Mr. Kiani’s employment due to death or disability prior to either of such anniversaries, any unvested amount of the Cash Payment and all of the unvested Award Shares shall vest and be paid in full. Additionally, in the event of a Change in Control prior to a Qualifying Termination, Mr. Kiani’s stock options and any other equity awards will vest in accordance with their terms, but in no event later than in two equal installments on each of the one year and two year anniversaries of the Change in Control, subject in each case to Mr. Kiani’s continuous employment through each such anniversary date.

On January 14, 2022, the Company entered into the Second Amendment to the Amended Employment Agreement (Second Amendment) with Mr. Kiani. The Second Amendment provides that the RSUs granted to Mr. Kiani pursuant to the Amended Employment Agreement will vest in full upon the termination of Mr. Kiani’s employment with the Company pursuant to Mr. Kiani’s death or disability. As of October 1, 2022, the expense related to the Award Shares and Cash Payment that would be recognized in the Company’s consolidated financial statements upon the occurrence of a Qualifying Termination under the Amended Employment Agreement, as amended by the Second Amendment, was approximately $664.3 million.

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As of October 1, 2022, the Company had severance plan participation agreements with five executive officers. The participation agreements (the Agreements) are governed by the terms and conditions of the Company’s 2007 Severance Protection Plan (the Severance Plan), which became effective on July 19, 2007 and which was amended effective December 31, 2008.

Under each of the Agreements, the applicable executive officer may be entitled to receive certain salary, equity, medical and life insurance benefits if he is terminated by the Company without cause or if he terminates his employment for good reason under certain circumstances. Each executive officer is also required to give the Company six months’ advance notice of his resignation under certain circumstances.

On September 16, 2022, the Company appointed Blair Tripodi as its Chief Operating Officer (COO), Consumer Division. The offer letter entered into with Mr. Tripodi upon completion of the Sound United acquisition included certain compensation, retention and benefit provisions. In addition, Mr. Tripodi is also a limited participant in the Severance Plan, which provides that, if (a) Mr. Tripodi’s employment is terminated on the date of a Change in Control (as defined in the Severance Plan) specifically because his current job, or similar job, is not offered to him on the date of such Change in Control, or (b) Mr. Tripodi’s employment is terminated by the Company without cause or if he terminates his employment with the Company for Good Reason (as defined in the Severance Plan) upon or within 36 months of a Change in Control, fifty percent of Mr. Tripodi’s unvested and outstanding equity-based awards will immediately vest.

Cercacor Cross-Licensing Agreement Provisions

The Company’s Cross-Licensing Agreement with Cercacor contains annual minimum aggregate royalty obligations for use of the rainbow® licensed technology. The current annual minimum royalty obligation is $5.0 million. Upon a change in control (as defined in the Cross-Licensing Agreement) of the Company or Cercacor: (i) all rights to the “Masimo” trademark will be assigned to Cercacor if the surviving or acquiring entity ceases to use “Masimo” as a company name and trademark; (ii) the option to license technology developed by Cercacor for use in blood glucose monitoring will be deemed automatically exercised and a $2.5 million license fee for this technology will become immediately payable to Cercacor; and (iii) the minimum aggregate annual royalties payable to Cercacor for carbon monoxide, methemoglobin, fractional arterial oxygen saturation, hemoglobin and/or glucose measurements will increase to $15.0 million per year until the exclusivity period of the agreement ends, plus up to $2.0 million for each additional vital sign measurement with no maximum ceiling for non-vital sign measurements.

Purchase Commitments

Pursuant to contractual obligations with vendors, the Company had $386.8 million of purchase commitments as of October 1, 2022 that are expected to be purchased within one year. These purchase commitments have been made for certain inventory items in order to secure sufficient levels of those items, other critical inventory and manufacturing supplies, and to achieve better pricing.

Other Contractual Commitments

In the normal course of business, the Company may provide bank guarantees to support government hospital tenders in certain foreign jurisdictions. As of October 1, 2022, the Company had approximately $4.7 million in outstanding unsecured bank guarantees.

In certain circumstances, the Company also provides limited indemnification within its various customer contracts whereby the Company indemnifies the parties to whom it sells its products with respect to potential infringement of intellectual property, and against bodily injury caused by a defective Company product. It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved. As of October 1, 2022, the Company had not incurred any significant costs related to contractual indemnification of its customers.

Concentrations of Risk

The Company is exposed to credit loss for the amount of its cash deposits with financial institutions in excess of federally insured limits. The Company invests a portion of its excess cash with major financial institutions. As of October 1, 2022, the Company had $219.5 million of bank balances, of which $8.2 million was covered by either the U.S. Federal Deposit Insurance Corporation limit or foreign countries’ deposit insurance organizations.

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The Company’s ability to sell its healthcare products to U.S. hospitals depends in part on its relationships with GPOs. Many existing and potential healthcare customers for the Company’s products become members of GPOs. GPOs negotiate pricing arrangements and contracts, sometimes exclusively, with medical supply manufacturers and distributors, and these negotiated prices are made available to a GPO’s affiliated hospitals and other members. During the three months ended October 1, 2022 and October 2, 2021, revenue from the sale of the Company’s healthcare products to customers that are members of GPOs approximated 54.0% and 55.0% of healthcare revenue, respectively. During the nine months ended October 1, 2022 and October 2, 2021, revenue from the sale of the Company’s healthcare products to customers that are members of GPOs approximated 52.9% and 51.8% of healthcare revenue, respectively.

For the three months ended October 1, 2022, the Company had sales through one just-in-time distributor that represented 8.9% of revenue. For the three months ended October 2, 2021, the Company had sales through two just-in-time distributors that represented 15.0% and 10.4% of revenue, respectively.

For the nine months ended October 1, 2022, the Company had sales through one just-in-time distributor that represented 10.5% revenue. For the nine months ended October 2, 2021, the Company had sales through two just-in-time distributors that represented 14.6% and 10.4% of revenue, respectively.

As of October 1, 2022 and January 1, 2022, one customer represented 12.2% and 15.7%, respectively, of the Company’s accounts receivable balance. The receivable balance related to such customer is fully secured by a letter of credit.

Litigation

On January 2, 2014, a putative class action complaint was filed against the Company in the U.S. District Court for the Central District of California (District Court) by Physicians Healthsource, Inc. The complaint alleged that the Company sent unsolicited facsimile advertisements in violation of the Junk Fax Protection Act of 2005 and related regulations. The complaint sought $500 for each alleged violation, treble damages if the District Court found the alleged violations to be knowing, plus interest, costs and injunctive relief. On March 26, 2019, an amended complaint was filed adding Radha Geismann, M.D. PC as an additional named plaintiff. On June 17, 2019, the plaintiffs filed their motion for class certification. On November 21, 2019, the District Court issued an order denying the plaintiffs’ motion for class certification and granting in part and denying in part the Company’s motion for summary judgment, and deferring ruling on the plaintiffs’ motion for summary judgment. On December 5, 2019, the plaintiffs filed a petition for permission to appeal the order denying class certification, which was denied on January 24, 2020. On July 13, 2020, the District Court issued an order granting in part and denying in part the plaintiffs’ motion for summary judgment. On July 27, 2022, the parties filed a joint stipulation to dismiss the case with prejudice.

On January 9, 2020, the Company filed a complaint against Apple Inc. (Apple) in the District Court for infringement of a number of patents, for trade secret misappropriation, and for ownership and correction of inventorship of a number of Apple patents listing one of its former employees as an inventor. The Company is seeking damages, injunctive relief, and declaratory judgment regarding ownership of the Apple patents. Apple filed petitions for Inter Partes review (IPR) of the asserted patents in the U.S. Patent and Trademark Office (PTO). The PTO instituted IPR of the asserted patents. On October 13, 2020, the District Court stayed the patent infringement claims pending completion of the IPR proceedings. On February 5, 2021, the Company filed a fourth amended complaint. On February 26, 2021, Apple filed a partial motion to dismiss the trade secrets claim in the fourth amended complaint. On April 21, 2021, the District Court issued an order granting in part and denying in part the motion to dismiss. On May 5, 2021, Apple filed its answer to the fourth amended complaint. On December 7, 2021, Apple filed a motion for partial summary judgment on the trade secrets claim, which was denied on February 17, 2022. Trial is currently set to begin on March 27, 2023. In the IPR proceedings, one or more of the challenged claims of three of the asserted patents were found valid. The challenged claims of nine of the asserted patents were found invalid. The Company and Apple filed notices of appeal with the U.S. Court of Appeals for the Federal Circuit seeking review of the IPR decisions on all asserted patents. The Company filed an opening brief in one consolidated appeal for five asserted patents on August 5, 2022, and Apple filed a reply brief on October 5, 2022. Apple filed opening briefs in two appeals for two asserted patents on October 19, 2022.

On June 30, 2021, the Company filed a complaint with the U.S. International Trade Commission (ITC) against Apple for infringement of a number of other patents. The Company filed an amended complaint on July 12, 2021. On August 13, 2021, the ITC issued a Notice of Institution of Investigation on the asserted patents. From June 6, 2022 to June 10, 2022, the ITC conducted an evidentiary hearing. The current target date for completion of the ITC investigation is April 19, 2023, with an initial determination due December 19, 2022. The Company is seeking an exclusion order and a permanent cease and desist order. Apple filed petitions for IPR of the asserted patents in the PTO and the Company has responded and will continue to respond to each of the petitions before the PTO determines whether to institute IPRs.

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On October 20, 2022, Apple filed two complaints against the Company in the District Court of Delaware alleging that the Masimo W1™ watch infringes a number of patents. Apple is seeking damages, injunctive relief and declaratory relief. On October 20, 2022, Apple also filed a motion seeking expedited discovery that allegedly relates to a potential motion for a preliminary injunction against the Masimo W1™ watch. The Company intends to vigorously pursue all of its legal remedies in its litigation against Apple and believes the Company has good and substantial defenses to Apple’s claims, but there is no guarantee that the Company will be successful in these efforts.

On October 21, 2022, a complaint was filed in the Delaware Court of Chancery against the Company and the members of the Company’s Board (Director Defendants) by Politan Capital Management LP and Politan Capital NY LLC (Activist Plaintiffs). The complaint seeks relief to (i) declare certain amendments to the Company’s bylaws that became effective on September 9, 2022 (Bylaw Amendments) unenforceable, (ii) find that the Director Defendants breached their fiduciary duties by approving and implementing the Bylaw Amendments and the shareholder rights plan adopted by the Company on September 9, 2022, and refusing to invalidate certain change of control provisions in the Company’s employment agreement with Joe Kiani, the Company’s Chief Executive Officer (CEO), (iii) invalidate certain change of control provisions in Mr. Kiani’s employment agreement, (iv) permanently enjoin the Company and its Board from taking any actions to prevent the Activist Plaintiffs from exercising their rights in accordance with the Company’s prior bylaws to nominate directors, and (v) award the Activist Plaintiffs their fees, costs and expenses in connection with the action covered by the complaint. In response to the complaint, on October 24, 2022, the Company and the Director Defendants filed a counterclaim, answer and defense in the Delaware Court of Chancery against the Activist Plaintiffs, seeking relief to (i) have the court declare that the Bylaw Amendments are valid and enforceable and that the Company is permitted to invalidate any director nominations by the Activist Plaintiffs that are not made in accordance with the amended bylaws and (ii) award the Company reasonable costs, including attorneys’ fees and expenses. The Company stated in the counterclaim that, among other things, the Bylaw Amendments were adopted by the Board after thoughtful deliberation and were designed to increase transparency to ensure that stockholders are sufficiently informed regarding who is being nominated to the Board and who is backing the nomination so that they may have a reasonable opportunity to thoughtfully consider the nominations. On October 28, 2022, the Activist Plaintiffs filed a counterclaim and answer generally denying substantially all of the allegations raised in the Company’s counterclaim and raising a number of affirmative defenses against the Company’s counterclaim. The Company intends to vigorously pursue all of its legal remedies in its litigation against the Activist Plaintiffs and believes that the Company and the Director Defendants have good and substantial defenses to the claims (including those raised in the counterclaim), but there is no guarantee that the Company and the Director Defendants will be successful in these efforts. The Company is unable to determine whether any loss will ultimately occur or to estimate the range of such loss; therefore, no amount of loss has been accrued by the Company in the accompanying condensed consolidated financial statements.

From time to time, the Company may be involved in other litigation and investigations relating to claims and matters arising out of its operations in the normal course of business. The Company believes that it currently is not a party to any other legal proceedings which, individually or in the aggregate, would have a material adverse effect on its consolidated financial position, results of operations or cash flows.

25. Segment and Enterprise Reporting

The Company’s reportable segments are determined based upon the Company’s new organizational structure and the way in which the Company’s Chief Operating Decision Maker (CODM), the CEO, makes operating decisions and assesses financial performance. The CODM considered several factors including, but not limited to, customer base, technology, and homogeneity of products. The two segments are:

•Healthcare - develops, manufactures, and markets a variety of noninvasive monitoring technologies and hospital automation solutions and therapeutics. This segment includes the Company’s core legacy hospital business and new Masimo-technology-enabled consumer products that are distributed through many channels including e-commerce sites, leading national retailers and specialty chains globally.

•Non-healthcare - designs, develops, manufactures, markets and sells a broad portfolio of premium, high-performance audio products and services. This is a new reportable segment comprised primarily of Sound United’s operations.

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Income from operations for each segment includes all geographic revenues, related cost of net revenues and operating expenses directly attributable to the segment. The Company uses operating income, as presented in the Company’s financial reports, as the primary measure of segment profitability. The Company does not allocate costs from corporate functions to segment operating income. Items below operating income are not considered when measuring the profitability of a segment. The Company uses the same accounting policies to generate segment results as the Company does for consolidated results. Non-reportable operating segment and unallocated corporate expenses are reported within “Corporate overhead, and Other”. Segment information presented herein reflects the impact of these changes for all periods presented. There was no inter-segment revenue for any of the periods presented.

Selected information by reportable segment is presented below for the three and nine months ended October 1, 2022 and October 2, 2021:

			Three Months Ended												Nine Months Ended
(in millions)			October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Revenues by segment:
Healthcare			$	327.2					$	307.4					$	988.5					$	911.6
Non-healthcare			222.1						—						430.3						—
Total revenue by segment			$	549.3					$	307.4					$	1,418.8					$	911.6
Gross profit:
Healthcare			$	211.4					$	204.4					653.5						$	599.6
Non-healthcare			77.7						—						150.3						—
Corporate overhead			—						—						—						—
Other(1)			(6.6)						(0.8)						(58.4)						(6.1)
Gross profit			$	282.5					$	203.6					$	745.4					$	593.5
Gross profit margin:
Healthcare			64.6		%				66.5		%				66.1		%				65.8		%
Non-healthcare			35.0						—						34.9						—
Corporate overhead			—						—						—						—
Other(1)			(1.2)						(0.1)						(10.6)						(1.1)
Gross profit margin:			51.4		%				66.2		%				52.5		%				65.1		%
Operating income (loss):
Healthcare			$	80.9					$	—					$	—					$	—
Non-healthcare			14.7						—						—						—
Corporate overhead			(14.2)						—						—						—
Other(1)			(26.6)						—						—						—
Operating income			$	54.8					$	67.6					$	136.7					$	198.4
Interest income			$	0.5					$	0.2					$	1.0					$	0.7
Interest expense			(9.7)						—						(14.3)						(0.2)
Other expense (income), net			6.4						(0.2)						14.3						(1.2)
Income before income taxes			$	52.0					$	67.6					$	137.7					$	197.7

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(1)     Management excludes certain corporate expenses from segment operating income. In addition, certain amounts that management considers to be non-recurring or non-operational are excluded from segment operating income because management evaluates the operating results of the segments excluding such items. Corporate overhead represents certain costs that are not allocated to the segments for purposes of the CODM assessing performance and allocating resources--for example, the costs of being a publicly traded company.

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The Company’s depreciation and amortization by segment:

			Three Months Ended												Nine Months Ended
(in millions)			October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Depreciation and amortization by segment:
Healthcare			$	9.0					$	9.2					$	27.1					$	26.4
Non-healthcare			13.9						—						29.5						—
Total depreciation and amortization			$	22.9					$	9.2					$	56.6					$	26.4

The Company’s total assets by segment:

			As of						As of
(in millions)			October 1, 2022						January 1, 2022
Total assets by segment:
Healthcare			$	1,514.2											$	1,866.4
Non-healthcare			1,522.9												—
Corporate overhead			19.3												20.6
Other			—												—
Total assets			$	3,056.4											$	1,887.0

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