10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2016

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number 001-33642

_________________________________________________

MASIMO CORPORATION

(Exact Name of Registrant as Specified in its Charter)

________________________________________________

Delaware	33-0368882
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
52 Discovery Irvine, California	92618
(Address of Principal Executive Offices)	(Zip Code)

(949) 297-7000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class	Number of Shares Outstanding as of July 2, 2016
Common stock, $0.001 par value	49,351,459

MASIMO CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JULY 2, 2016

TABLE OF CONTENTS

PART I. Financial Information
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of July 2, 2016 and January 2, 2016	3
	Condensed Consolidated Statements of Operations for the three and six months ended July 2, 2016 and July 4, 2015	4
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 2, 2016 and July 4, 2015	5
	Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2016 and July 4, 2015	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
PART II. Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 6.	Exhibits	71
Signatures		72

2

PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

MASIMO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except par values)

	July 2, 2016			January 2, 2016
ASSETS
Current assets
Cash and cash equivalents	$	116,055		$	132,317
Accounts receivable, net of allowance for doubtful accounts of $1,718 and $1,967 at July 2, 2016 and January 2, 2016, respectively.	84,805			80,960
Inventories	62,312			62,038
Prepaid income taxes	9,803			2,404
Other current assets	22,995			21,423
Total current assets	295,970			299,142
Deferred cost of goods sold	73,362			71,718
Property and equipment, net	133,037			132,466
Intangible assets, net	28,264			27,556
Goodwill	20,384			20,394
Deferred tax assets	39,410			44,320
Other non-current assets	12,256			6,139
Total assets	$	602,683		$	601,735
LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	30,710		$	25,865
Accrued compensation	33,956			38,415
Accrued liabilities	26,781			44,222
Income taxes payable	2,304			2,777
Deferred revenue	26,622			21,280
Current portion of capital lease obligations	75			74
Total current liabilities	120,448			132,633
Deferred revenue	219			298
Long term debt	175,001			185,071
Other non-current liabilities	11,866			8,021
Total liabilities	307,534			326,023
Commitments and contingencies
Equity
Masimo Corporation stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; 0 shares issued and outstanding at July 2, 2016 and January 2, 2016	—			—
Common stock, $0.001 par value; 100,000 shares authorized; 49,351 and 49,881 shares issued and outstanding at July 2, 2016 and January 2, 2016	49			50
Treasury stock 14,255 and 12,759 at July 2, 2016 and January 2, 2016	(404,276		)	(340,873		)
Additional paid-in capital	357,766			332,417
Accumulated other comprehensive loss	(4,549		)	(4,739		)
Retained earnings	346,159			288,560
Total Masimo Corporation stockholders’ equity	295,149			275,415
Noncontrolling interest	—			297
Total equity	295,149			275,712
Total liabilities and equity	$	602,683		$	601,735

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

3

MASIMO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)

	Three Months Ended					Six Months Ended
	July 2, 2016		July 4, 2015			July 2, 2016		July 4, 2015
Revenue:
Product	$	164,607	$	147,612		$	327,897	$	294,969
Royalty	8,029		8,114			15,906		15,294
Total revenue	172,636		155,726			343,803		310,263
Cost of goods sold	57,501		52,825			114,455		104,257
Gross profit	115,135		102,901			229,348		206,006
Operating expenses:
Selling, general and administrative	63,888		61,666			126,399		122,465
Research and development	14,818		13,394			29,183		28,323
Total operating expenses	78,706		75,060			155,582		150,788
Operating income	36,429		27,841			73,766		55,218
Non-operating income (expense)	471		(1,125		)	969		(972		)
Income before provision for income taxes	36,900		26,716			74,735		54,246
Provision for income taxes	6,877		8,020			17,135		15,728
Net income including noncontrolling interest	30,023		18,696			57,600		38,518
Net loss attributable to the noncontrolling interest	—		655			—		1,356
Net income attributable to Masimo Corporation stockholders	$	30,023	$	19,351		$	57,600	$	39,874
Net income per share attributable to Masimo Corporation stockholders:
Basic	$	0.61	$	0.38		$	1.17	$	0.77
Diluted	$	0.57	$	0.36		$	1.10	$	0.74
Weighted-average shares used in per share calculations:
Basic	49,256		51,300			49,340		51,993
Diluted	52,703		53,675			52,404		53,908

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

4

MASIMO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

	Three Months Ended					Six Months Ended
	July 2, 2016			July 4, 2015		July 2, 2016		July 4, 2015
Net income including noncontrolling interest	$	30,023		$	18,696	$	57,600	$	38,518
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments	(1,209		)	584		190		(2,358		)
Total comprehensive income	28,814			19,280		57,790		36,160
Comprehensive loss attributable to noncontrolling interest	—			655		—		1,356
Comprehensive income attributable to Masimo Corporation stockholders	$	28,814		$	19,935	$	57,790	$	37,516

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

5

MASIMO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Six Months Ended
	July 2, 2016			July 4, 2015
Cash flows from operating activities:
Net income including noncontrolling interest	$	57,600		$	38,518
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities:
Depreciation and amortization	8,132			7,697
Stock-based compensation	6,204			5,429
Loss on disposal of property, equipment and intangibles	401			252
Gain on deconsolidation of variable interest entity	(273		)	—
Provision for doubtful accounts	(51		)	162
Provision for deferred income taxes	5,001			—
Changes in operating assets and liabilities:
Increase in accounts receivable	(3,739		)	(3,121		)
Increase in inventories	(297		)	(2,060		)
(Increase) decrease in deferred cost of goods sold	(1,566		)	1,987
Increase in prepaid income taxes	(7,462		)	(5,852		)
Increase in other assets	(6,596		)	(4,892		)
Increase (decrease) in accounts payable	8,084			(7,378		)
Decrease in accounts payable to related party	(1,092		)	—
Decrease in accrued compensation	(3,937		)	(4,271		)
(Decrease) increase in accrued liabilities	(12,534		)	3,805
Decrease in income tax payable	(322		)	(2,147		)
Increase in deferred revenue	5,263			836
Increase (decrease) in other liabilities	3,875			(342		)
Net cash provided by operating activities	56,691			28,623
Cash flows from investing activities:
Purchases of property and equipment, net	(10,734		)	(24,672		)
Increase in intangible assets	(1,349		)	(2,589		)
Reduction in cash resulting from deconsolidation of variable interest entity	(763		)	—
Net cash used in investing activities	(12,846		)	(27,261		)
Cash flows from financing activities:
Borrowings under line of credit	45,000			65,000
Repayments on line of credit	(55,000		)	(12,500		)
Debt issuance costs	(621		)	—
Repayments of capital lease obligations	(69		)	(77		)
Proceeds from issuance of common stock	18,997			15,178
Payroll tax withholdings on behalf of employees for stock options	—			(472		)
Repurchases of common stock	(68,218		)	(81,700		)
Issuance of equity by noncontrolling interest, net of equity issued	—			3
Net cash used in financing activities	(59,911		)	(14,568		)
Effect of foreign currency exchange rates on cash	(196		)	(1,850		)
Net decrease in cash and cash equivalents	(16,262		)	(15,056		)
Cash and cash equivalents at beginning of period	132,317			134,453
Cash and cash equivalents at end of period	$	116,055		$	119,397

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

6

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Description of the Company

Masimo Corporation (the Company) is a global medical technology company that develops, manufactures and markets a variety of noninvasive patient monitoring technologies. The Company’s mission is to improve patient outcomes and reduce cost of care by taking noninvasive monitoring to new sites and applications. The Company’s patient monitoring solutions generally incorporate a monitor or circuit board, proprietary single-patient use, reusable or resposable sensors, software and/or cables. The Company primarily sells its products to hospitals, emergency medical service providers, home care providers, physician offices, veterinarians, long term care facilities and consumers through its direct sales force, distributors and original equipment manufacturer (OEM) partners.

The Company invented Masimo Signal Extraction Technology^®(SET^®), which provides the capabilities of Measure-through Motion and Low Perfusion^™ pulse oximetry to address the primary limitations of conventional pulse oximetry. Over the years, the Company’s product offerings have expanded significantly to also include noninvasive optical blood constituent monitoring, optical organ oximetry monitoring, electrical brain function monitoring, acoustic respiration monitoring and optical gas monitoring. The Company also developed the Root^® patient monitoring and connectivity platform and the Masimo Patient SafetyNet^™ remote patient surveillance monitoring system. These solutions and related products are based upon Masimo SET^®, rainbow^® and other proprietary algorithms. These software-based technologies are incorporated into a variety of product platforms depending on customers’ specifications. This technology is supported by a substantial intellectual property portfolio that the Company has built through internal development and, to a lesser extent, acquisitions and license agreements.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. The 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 condensed consolidated balance sheet as of January 2, 2016 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 2, 2016 (fiscal year 2015), filed with the SEC on February 24, 2016. The results for the six months ended July 2, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2016 (fiscal year 2016) or for any other interim period or for any future year.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and through January 2, 2016, Cercacor Laboratories, Inc. (Cercacor), the variable interest entity (VIE) of which the Company was the primary beneficiary. Effective January 3, 2016, the Company discontinued consolidating Cercacor within its consolidated financial statements based on its determination that the Company was no longer the primary beneficiary of Cercacor. All intercompany balances and transactions have been eliminated in consolidation. In accordance with GAAP, current authoritative guidance is applied when determining whether an entity is subject to consolidation.

Fiscal Periods

The Company follows a conventional 52/53 week fiscal year. Under a conventional 52/53 week fiscal year, a 52 week fiscal year includes four quarters of 13 fiscal weeks while a 53 week fiscal year includes three 13 fiscal week quarters and one 14 fiscal week quarter. The Company’s last 53 week fiscal year was fiscal year 2014. Fiscal year 2016 is a 52 week fiscal year. All references to years in these notes to condensed consolidated financial statements are fiscal years unless otherwise noted.

7

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Use of Estimates

The Company prepares its financial statements in conformity with GAAP, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the determination of accounts receivable allowances, inventory reserves, warranty reserves, rebate accruals, valuation of the Company’s stock options, goodwill valuation, deferred taxes and any associated valuation allowances, distributor channel inventory, royalty revenues, deferred revenue, uncertain income tax positions, litigation costs and related accruals. Actual results could differ from such estimates.

Reclassifications

Certain amounts in the condensed consolidated financial statements for prior periods have been reclassified to conform to the current period presentation.

Fair Value Measurements

Authoritative guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

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

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

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

Pursuant to current authoritative guidance, entities are allowed an irrevocable option to elect the fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to apply the fair value option under this guidance to specific assets or liabilities on a contract-by-contract basis. There were no transfers between Level 1, Level 2 and Level 3 inputs during the six months ended July 2, 2016. The Company carries cash and cash equivalents at cost, which approximates fair value. As of July 2, 2016 and January 2, 2016, the Company did not have any short-term investments.

The following tables represent the Company’s financial assets (in thousands), measured at fair value on a recurring basis:

July 2, 2016	Adjusted Basis Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value		Cash and Cash Equivalents
Cash	$	61,055	$	—	$	—	$	61,055	$	61,055
Level 1:
Bank Time Deposits	55,000		—		—		55,000		55,000
Money Market Funds	—		—		—		—		—
Subtotal	55,000		—		—		55,000		55,000
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
Total assets measured at fair value	$	116,055	$	—	$	—	$	116,055	$	116,055

8

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

January 2, 2016	Adjusted Basis Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value		Cash and Cash Equivalents
Cash	$	57,168	$	—	$	—	$	57,168	$	57,168
Level 1:
Bank Time Deposits	55,000		—		—		55,000		55,000
Money Market Funds	20,149		—		—		20,149		20,149
Subtotal	75,149		—		—		75,149		75,149
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
Total assets measured at fair value	$	132,317	$	—	$	—	$	132,317	$	132,317

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity from date of purchase of three months or less, or highly liquid investments that are readily convertible into known amounts of cash, to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of trade receivables recorded upon recognition of revenue for product revenues, 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 evaluation of the customer’s financial condition. Collateral is generally not required. The allowance for doubtful accounts is determined based on historical write-off experience, current customer information and other relevant factors, including specific identification of past due accounts, based on the age of the receivable in excess of the contemplated or contractual due date. Accounts are charged off against the allowance when the Company believes they are uncollectible.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using a standard cost method, which approximates FIFO (first in, first out) and includes material, labor and overhead costs. Inventory reserves 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.

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	39 years
Building improvements	7 to 15 years
Leasehold improvements	Lesser of useful life or term of lease
Machinery and equipment	5 to 7 years
Vehicles	5 years
Tooling	3 years
Computer equipment	2 to 6 years
Furniture and office equipment	2 to 6 years
Demonstration units	3 years

9

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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.

Intangible Assets

The Company’s policy is to renew its patents and trademarks. Total renewal costs for patents and trademarks were $0.3 million for each of the six months ended July 2, 2016 and July 4, 2015. As of July 2, 2016, the weighted-average number of years until the next renewal was one year for patents and five years for trademarks. Costs to renew patents and trademarks are capitalized and amortized over the remaining useful life of the intangible asset. The Company continually evaluates the amortization period and carrying basis of patents and trademarks to determine whether any events or circumstances warrant a revised estimated useful life or reduction in value. Capitalized application costs are charged to operations when it is determined that the patent or trademark will not be obtained or is abandoned.

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 for each of its reporting units, the Company has the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macroeconomic, industry-specific and Company-specific factors, including: (i) severe adverse industry or economic trends; (ii) significant Company-specific actions; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if the Company concludes otherwise, then the Company is required to perform the first step of the two-step impairment test by comparing the fair value of the reporting unit, determined using future projected discounted operating cash flows, with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, goodwill is considered impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill. The Company also has the option to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. The annual impairment test is performed during the fourth fiscal quarter.

The Company reviews long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow 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.

No impairment of goodwill, intangible assets or other long-lived assets was recorded during the three and six months ended July 2, 2016 and July 4, 2015.

Revenue Recognition and Deferred Revenue

The Company follows the current authoritative guidance for revenue recognition. Based on these requirements, the Company recognizes revenue from the sale of products or services when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. In the case of the license or sale of software that does not function together with hardware components to provide the essential functionality of the hardware, revenue is recognized pursuant to the software revenue recognition guidance.

10

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The Company derives the majority of its revenue from four primary sources: (i) direct sales under long-term sensor purchase agreements with end-user hospitals where the Company provides certain monitoring-related equipment, software, installation, training and/or warranty support 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 direct customers, many of which have long-term sensor purchase agreements with the Company; and (iv) sales of integrated circuit boards to OEM customers who incorporate the Company’s embedded software technology into their multi-parameter monitoring devices.

The Company enters into agreements to sell its noninvasive monitoring solutions and services, sometimes as part of multiple deliverable arrangements that include various combinations of products and services. While the majority of the Company’s sales transactions contain standard business terms and conditions, there are some transactions that contain non-standard business terms and conditions. As a result, contract interpretation and analysis is sometimes required to determine the appropriate accounting, including: (i) how the arrangement consideration should be allocated among the deliverables when multiple deliverables exist, (ii) when to recognize revenue on the deliverables, and (iii) whether undelivered elements are essential to the functionality of the delivered elements. Changes in judgments on these assumptions and estimates could materially impact the timing of revenue recognition.

In the case of multiple deliverable arrangements, the authoritative guidance provides a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence (VSOE) of fair value, (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE of fair value is defined as the price charged when the same element is sold separately. VSOE generally exists only when the deliverable is sold separately and is the price actually charged for that deliverable. TPE generally does not exist for the majority of the Company’s products. The objective of ESP is to determine the price at which the Company would transact a sale if the product was sold on a stand-alone basis. In the absence of VSOE and TPE, the Company determines ESP for its products 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 market conditions.

A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. Most of the Company’s products in a multiple deliverable arrangement qualify as separate units of accounting. In the case of the Company’s monitoring equipment containing embedded Masimo SET^® or rainbow^® SET software, the Company has determined that the hardware and software components function together to deliver the equipment’s essential functionality and, therefore, represent a single deliverable. However, software deliverables, such as rainbow^® parameter software, which do not function together with hardware components to provide the equipment’s essential functionality, are accounted for under software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverables and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the revenue recognition accounting guidance for arrangements with multiple deliverables.

Sales under long-term sensor purchase contracts are generally structured such that the Company agrees to provide at no up-front charge certain monitoring-related equipment, software, installation, training and/or warranty support in exchange for the hospital’s agreement to purchase sensors over the term of the agreement, which generally ranges from three to six years. The sensors are essential to the functionality of the monitoring equipment and, therefore, represent a substantive performance obligation. The Company generally does not recognize any revenue when the monitoring-related equipment and software are delivered to the hospitals, but rather recognizes revenue for these delivered elements on a pro-rata basis as the sensors are delivered under the long-term purchase commitment, when installation and training are complete. Accordingly, the cost of the monitoring-related equipment initially placed at the hospitals is deferred and amortized to cost of goods sold over the life of the underlying long-term sensor purchase contract. Some of the Company’s long-term sensor contracts also contain provisions for certain cash payments to be made directly to the end-user hospital customer at the inception of the arrangement. These cash payments are generally treated as prepaid discounts that are deferred and amortized on a straight-line basis as contra-revenue over the life of the underlying long-term sensor purchase contract. Many of the Company’s distributors purchase sensor products which they then resell to end-user hospitals that are typically fulfilling their purchase obligations to the Company under such end-user hospital’s long-term sensor purchase commitments. Upon shipment to the distributor, revenue is deferred until the distributor ships the product to the Company’s end-user customers based on an estimate of the inventory held by these distributors at the end of the accounting period.

11

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The Company also earns revenue from the sale of integrated circuit boards and other products, as well as from rainbow^® parameter software licenses, to OEMs under various agreements. Revenue from the sale of products to the OEMs is generally recognized at the time of shipment. Revenue related to software licenses to OEMs is generally recognized upon shipment of the OEM’s product to its customers, as represented to the Company by the OEM.

The Company also provides certain customers with the ability to purchase sensors under rebate programs. Under these programs, the customers may earn rebates based on their purchasing activity. The Company estimates and provides allowances for these programs at the time of sale as a reduction to revenue.

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 and accounts receivable. The Company estimates returns based on several factors, including contractual limitations and past returns history.

The Company’s royalty revenue arises from one agreement with Medtronic plc (Medtronic, formerly Covidien Ltd.), and is due and payable quarterly based on U.S. sales of Medtronic’s infringing products. An estimate of these royalty revenues is recorded quarterly in the period earned based on the prior quarter’s historical results, adjusted for any new information or trends known to management at the time of estimation. This estimated revenue is adjusted prospectively when the Company receives the royalty report from Medtronic, approximately 60 days after the end of the previous quarter.

Product Warranty

The Company generally provides a warranty against defects in material and workmanship for a period ranging from six to forty-eight months, depending on the product type. In the case of long-term sales agreements, the Company typically warrants the products for the term of the agreement, which generally ranges from three to six years. In traditional sales activities, including direct and OEM sales, the Company establishes an accrual for the estimated costs of warranty at the time of revenue recognition. Estimated warranty expenses are recorded as an accrued liability, with a corresponding provision to cost of sales. In long-term sales agreements, revenue related to extended warranty is recognized over the life of the contract, while the product warranty costs related to the long-term sales agreements are expensed as incurred.

Changes in the product warranty accrual were as follows (in thousands):

	Six Months Ended
	July 2, 2016			July 4, 2015
Warranty accrual, beginning of period	$	1,222		$	1,416
Accrual for warranties issued	521			585
Changes to pre-existing warranties (including changes in estimates)	(40		)	(134		)
Settlements made	(488		)	(490		)
Warranty accrual, end of period	$	1,215		$	1,377

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.

12

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Comprehensive Income

Authoritative accounting guidance establishes requirements for reporting and disclosure of comprehensive income and its components. Comprehensive income includes foreign currency translation adjustments and any related tax benefits that have been excluded from net income including noncontrolling interest, and reflected in Masimo Corporation stockholders’ equity.

The change in accumulated other comprehensive loss was as follows (in thousands):

	Six Months Ended   July 2, 2016
Accumulated other comprehensive loss, beginning of period	$	(4,739	)
Foreign currency translation adjustments	190
Accumulated other comprehensive loss, end of period	$	(4,549	)

Net Income Per Share

Basic net income per share attributable to Masimo Corporation for the three and six months ended July 2, 2016 and July 4, 2015 is computed by dividing net income attributable to Masimo Corporation stockholders by the weighted-average number of shares outstanding during each period. The diluted net income per share attributable to Masimo Corporation stockholders for the three and six months ended July 2, 2016 and July 4, 2015 is computed by dividing the net income attributable to Masimo Corporation stockholders by the weighted-average number of shares and potential shares outstanding during each 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 restricted share units (RSUs). For the three and six months ended July 2, 2016, 1.6 million and 1.4 million, respectively, weighted options to purchase shares of common stock were outstanding, but were 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 three and six months ended July 4, 2015, 0.6 million and 1.0 million, respectively, weighted options to purchase shares of common stock were outstanding, but were 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 three and six months ended July 2, 2016, certain RSUs were 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 July 2, 2016, 2.7 million weighted average shares related to such RSUs have been excluded from the calculation of potential shares. Based on authoritative accounting guidance, the Company adjusted its net income including noncontrolling interest by the amount of net (income) loss attributable to the noncontrolling interest for the three and six months ended July 4, 2015 to determine its net income attributable to its stockholders. Since the Company discontinued consolidating Cercacor effective January 3, 2016, a similar adjustment was not required for the three and six months ended July 2, 2016.

A reconciliation of basic and diluted net income per share attributable to Masimo Corporation stockholders is as follows (in thousands, except per share amounts):

13

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

	Three Months Ended				Six Months Ended
	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
Net income attributable to Masimo Corporation stockholders:
Net income including noncontrolling interest	$	30,023	$	18,696	$	57,600	$	38,518
Net loss attributable to the noncontrolling interest	—		655		—		1,356
Net income attributable to Masimo Corporation stockholders	$	30,023	$	19,351	$	57,600	$	39,874
Basic net income per share attributable to Masimo Corporation stockholders:
Net income attributable to Masimo Corporation stockholders	$	30,023	$	19,351	$	57,600	$	39,874
Weighted-average shares outstanding - basic	49,256		51,300		49,340		51,993
Basic net income per share attributable to Masimo Corporation stockholders	$	0.61	$	0.38	$	1.17	$	0.77
Diluted net income per share attributable to Masimo Corporation stockholders:
Weighted-average shares outstanding - basic	49,256		51,300		49,340		51,993
Diluted share equivalent: stock options and RSUs	3,447		2,375		3,064		1,915
Weighted-average shares outstanding - diluted	52,703		53,675		52,404		53,908
Diluted net income per share attributable to Masimo Corporation stockholders	$	0.57	$	0.36	$	1.10	$	0.74

Supplemental Cash Flow Information

Supplemental cash flow information includes the following (in thousands):

	Six Months Ended
	July 2, 2016		July 4, 2015
Cash paid during the year for:
Interest (net of amounts capitalized)	$	2,603	$	952
Income taxes	19,292		23,523
Noncash investing and financing activities:
Assets acquired under capital leases	$	—	$	36
Unpaid purchases of property, plant and equipment	1,168		6,251
Unsettled common stock proceeds from option exercises	187		25
Unsettled stock repurchases	—		—

Seasonality

The healthcare business in the United States and overseas is subject to quarterly fluctuations in hospital and other alternative care admissions. Historically, the Company has typically experienced higher product revenues during the traditional “flu season” that often increases hospital and acute care facility admissions in the Company’s first and fourth fiscal quarters. At the same time, the Company has frequently experienced a sequential decline in product revenues in its second and/or third fiscal quarters, primarily due to the summer vacation season during which the flu season has moderated and people tend to avoid and/or delay elective procedures. Because the Company’s non-sales variable operating expenses often do not fluctuate in the same manner as its quarterly product sales, its quarterly operating income may fluctuate disproportionately to its quarterly revenue.

14

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The new standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on stock-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of stock-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company early adopted this standard during the three months ended April 2, 2016. The early adoption of this standard resulted in a $5.1 million reduction to the Company’s income tax provision for the six months ended July 2, 2016.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810):Amendments to the Consolidation Analysis (ASU 2015-02). The amended standard applies to entities in all industries and eliminates the deferral of certain consolidation standards for entities considered to be investment companies, as well as modifies the consolidation analysis performed on certain types of legal entities. ASU 2015-02 is effective for annual and interim fiscal reporting periods beginning after December 15, 2015, and may be applied retrospectively, with early application permitted. The Company adopted this standard during the first quarter of the fiscal year ending December 31, 2016, and its adoption did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The new standard requires entities to use a current expected credit loss (CECL) model which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect. The entity’s estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts. ASU 2016-13 is effective for annual and interim fiscal reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the expected impact of this standard but does not expect it to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842): (ASU 2016-02). The new standard requires lessees to recognize most leases on their balance sheets but continue to recognize lease expenses in their income statement in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Expense related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement. ASU 2016-02 is effective for annual and interim fiscal reporting periods beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the expected impact of this standard on its consolidated financial statements, but anticipates that the required recognition of a lease liability and related right-of-use asset will likely increase both the assets and liabilities recognized and reported on its balance sheet.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue (Topic 606): Revenue from Contracts with Customers (ASU 2014-09). The new standard provides a single, principles-based five-step model to be applied to all contracts with customers while enhancing disclosures about revenue, providing additional guidance for transactions that were not previously addressed comprehensively and improving guidance for multiple-element arrangements. ASU 2014-09 will replace most existing revenue recognition guidance under GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method upon adoption. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606):Deferral of the Effective Date (ASU 2015-14), which amended ASU 2014-09, providing for a one year deferral period for the implementation of ASU 2014-09. ASU 2014-09 will now be effective for annual and interim periods beginning on or after December 15, 2017. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations under FASB ASC Topic 606 (ASU 2016-08), which provides guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing (ASU 2016-10) which amended ASU 2014-09 by providing clarity in identifying performance obligations and licensing implementation guidance.

15

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients (ASU 2016-12), which further amended ASU 2016-09 by providing additional clarity in recognizing revenue from contracts that have been modified prior to the transition period to the new standard, as well as providing additional disclosure requirements for businesses and other organizations that make the transition to the new standard by adjusting amounts from prior reporting periods via retrospective application. The Company is continuing to evaluate the expected impact of this standard on its consolidated financial statements but anticipates, among other things, that the adoption of such standard will result in the acceleration of certain revenue from product sales to distributors that is currently deferred under the “sell-through” method, as well as the deferral of certain contract-related costs that are currently expensed when incurred.

3. Variable Interest Entity (VIE)

The Company follows authoritative guidance for the consolidation of a VIE, which requires an enterprise to determine whether its variable interest gives it a controlling financial interest in a VIE. Determination about whether an enterprise should consolidate a VIE is required to be evaluated continuously as changes to existing relationships or future transactions may result in consolidating or deconsolidating the VIE.

Cercacor

Cercacor is an independent entity spun off from the Company to its stockholders in 1998. Joe Kiani, the Company’s Chairman and Chief Executive Officer, is also the Chairman and Chief Executive Officer of Cercacor. The Company is a party to a Cross-Licensing Agreement with Cercacor, which was most recently amended and restated effective January 1, 2007 (the Cross-Licensing Agreement), that governs each party’s rights to certain intellectual property held by the two companies. In addition, the Company entered into a Services Agreement with Cercacor effective January 1, 2007, which governs the general and administrative services the Company provides to Cercacor.

As a result of recent changes in the capital structure of Cercacor, as well as certain of its contractual relationships with the Company, the Company completed a re-evaluation of the authoritative consolidation guidance during the first quarter of 2016 and determined that although Cercacor remains a VIE, the Company is no longer its primary beneficiary as it can no longer be deemed to have the power to direct the activities of Cercacor that most significantly impact Cercacor’s economic performance and can no longer be deemed to have an obligation to absorb Cercacor’s losses pursuant to the Company’s on-going contractual relationships with Cercacor. Based on such determination, the Company discontinued consolidating Cercacor within its consolidated financial statements effective as of January 3, 2016. However, Cercacor continues to be a related party following its deconsolidation. The Company recognized a gain of $0.3 million upon such deconsolidation, which has been reported within non-operating income in the condensed consolidated statement of operations. See Note 4 to these condensed consolidated financial statements for a description of the Company’s continuing business relationships with Cercacor.

Cercacor continues to be included within the Company’s condensed consolidated financial statements for all periods prior to January 3, 2016. Accordingly, for periods prior to January 3, 2016, all intercompany royalties, option and license fees and other charges between the Company and Cercacor, as well as all intercompany payables and receivables, have been eliminated in consolidation. However, for periods prior to January 3, 2016, all direct operating expenses that were incurred by the Company and charged to Cercacor, or that were incurred by Cercacor and charged to the Company, have not been eliminated and are included within operating expenses in the Company’s condensed consolidated statements of operations. The consolidating statement of operations for the three and six months ended July 4, 2015, which reflect the Company, Cercacor and related eliminations (in thousands), is included below:

16

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

	Three Months Ended																Six Months Ended
	July 4, 2015																July 4, 2015
Consolidating Statement of Operations:	Masimo Corp			Percentage of Revenue		Cercacor			Cercacor Elim			Total			Percentage of Revenue		Masimo Corp			Percentage of Revenue		Cercacor			Cercacor Elim			Total			Percentage of Revenue
Revenue:
Product	$	147,612		94.8	%	$	—		$	—		$	147,612		94.8	%	$	294,969		95.1	%	$	—		$	—		$	294,969		95.1	%
Royalty	8,114			5.2		1,470			(1,470		)	8,114			5.2		15,294			4.9		2,845			(2,845		)	15,294			4.9
Total revenue	155,726			1.0		1,470			(1,470		)	155,726			1.0		310,263			100.0		2,845			(2,845		)	310,263			100.0
Cost of goods sold	54,170			34.8		—			(1,345		)	52,825			33.9		106,852			34.4		—			(2,595		)	104,257			33.6
Gross profit	101,556			65.2		1,470			(125		)	102,901			66.1		203,411			65.6		2,845			(250		)	206,006			66.4
Operating expenses:
Selling, general and administrative	61,077			39.2		714			(125		)	61,666			39.6		121,353			39.1		1,362			(250		)	122,465			39.5
Research and development	11,983			7.7		1,411			—			13,394			8.6		25,484			8.2		2,839			—			28,323			9.1
Total operating expenses	73,060			43.6		2,125			(125		)	75,060			48.2		146,837			47.3		4,201			(250		)	150,788			48.6
Operating income (loss)	28,496			(76.6	)	(655		)	—			27,841			17.9		56,574			18.2		(1,356		)	—			55,218			17.8
Non-operating expense	(1,125		)	(0.1	)	—			—			(1,125		)	(0.7	)	(972		)	(0.3	)	—			—			(972		)	(0.3	)
Income (loss) before provision for income taxes	27,371			(76.5	)	(655		)	—			26,716			17.2		55,602			17.9		(1,356		)	—			54,246			17.5
Provision for income taxes	8,020			3.6		—			—			8,020			5.2		15,728			5.1		—			—			15,728			5.1
Net income (loss) including noncontrolling interest	19,351			(80.1	)	(655		)	—			18,696			12.0		39,874			12.9		(1,356		)	—			38,518			12.4
Net loss attributable to the noncontrolling interest	—			—		—			655			655			0.4		—			—		—			1,356			1,356			0.4
Net income (loss) attributable to Masimo Corporation stockholders	$	19,351		(80.1	)%	$	(655	)	$	655		$	19,351		12.4	%	$	39,874		12.9	%	$	(1,356	)	$	1,356		$	39,874		12.9	%

17

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

4. Related Party Transactions

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

• Cross-Licensing Agreement - The Company is party to a cross-licensing agreement with Cercacor (the Cross-Licensing Agreement), which governs each party’s rights to certain intellectual property held by the two companies. The Company is subject to certain annual minimum aggregate royalty obligations for use of the rainbow^® licensed technology. The current annual minimum royalty obligation is $5.0 million. Actual aggregate royalty liabilities to Cercacor under the license were $1.6 million and $3.2 million for the three and six months ended July 2, 2016, respectively. Actual aggregate royalty liabilities to Cercacor under the license were $1.3 million and $2.6 million for the three and six months ended July 4, 2015, respectively, which were eliminated in consolidation. The Company had no sales to Cercacor for the three months ended July 2, 2016, and less than $0.1 million for the six months ended July 2, 2016 under the Cross-Licensing Agreement. There were no similar sales during the three and six months ended July 4, 2015.

• Administrative Services Agreement - The Company is a party to an administrative services agreement with Cercacor (G&A Services Agreement), which governs certain general and administrative services that the Company provides to Cercacor. Amounts charged by the Company pursuant to the G&A Services Agreement were less than $0.1 million for each of the three and six months ended July 2, 2016 and July 4, 2015.

• Consulting Services Agreement - The Company is also a party to a consulting services agreement (Consulting Agreement) with Cercacor that governs certain engineering consulting and clinical studies support services that Cercacor may provide to the Company from time-to-time. Expenses incurred by the Company related to this Consulting Agreement were less than $0.1 million for the three and six months ended July 2, 2016 and approximately $0.1 million and $0.2 million for the three and six months ended July 4, 2015, respectively.

• Sublease Agreement - In March 2016, the Company entered into a sublease agreement with Cercacor for approximately 16,830 square feet of excess office and laboratory space located at 40 Parker, Irvine, California (Cercacor Sublease). The Cercacor Sublease began on May 1, 2016 and expires on November 30, 2019. The Company recognized less than $0.1 million in sublease income for both the three and six months ended July 2, 2016.

Net amounts due to Cercacor at July 2, 2016 and January 2, 2016 were less than approximately $0.1 million and $1.1 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. The Company’s Chief Financial Officer (CFO) is also a Director of the Masimo Foundation.

The Company’s CEO is the Chairman of both the Patient Safety Movement Foundation (PSMF), a non-profit organization that was founded in 2013 to work with hospitals, medical technology companies and patient advocates to unite the healthcare ecosystem and eliminate the more than 200,000 U.S. preventable hospital deaths that occur every year by 2020, and the Patient Safety Movement Coalition (PSMC), a not-for-profit social welfare organization that was founded in 2013 to promote patient safety legislation. The Company’s CFO serves as the Treasurer and Secretary of PSMF, as well as the Secretary of PSMC.

The Company’s CEO also serves on the board of directors of Atheer Labs, which is working with the Company on the development of next generation Root^® applications, and the board of directors of Children’s Hospital of Orange County and CHOC Children’s at Mission Hospital, two non-profit hospitals devoted exclusively to caring for children, both of which are also customers of the Company.

18

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

5. Inventories

Inventories consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Raw materials	$	29,836	$	25,781
Work-in-process	5,489		4,337
Finished goods	26,987		31,920
Total inventories	$	62,312	$	62,038

6. Other Current Assets

Other current assets consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Prepaid expenses	$	13,170	$	9,930
Royalties receivable	7,500		7,200
Employee loans and advances	308		320
Due from related party	9		—
Other current assets	2,008		3,973
Total other current assets	$	22,995	$	21,423

7. Property and Equipment

Property and equipment, net, consists of the following (in thousands):

	July 2, 2016			January 2, 2016
Building and building improvements	$	85,546		$	78,877
Machinery and equipment	43,106			42,460
Land	23,738			23,738
Computer equipment	15,202			15,023
Tooling	13,113			13,079
Furniture and office equipment	9,336			8,885
Leasehold improvements	7,777			7,734
Demonstration units	978			973
Vehicles	45			45
Construction-in-progress	2,186			7,124
Total property and equipment	201,027			197,938
Accumulated depreciation and amortization	(67,990		)	(65,472		)
Property and equipment, net	$	133,037		$	132,466

During the six months ended July 2, 2016, the Company completed construction on its initial renovations to its new corporate headquarters and research and development facility in Irvine, California, resulting in the reclassification of approximately $6.2 million from construction-in-progress to building and improvements. Approximately $1.2 million of construction costs related to this facility are included in accounts payable as of July 2, 2016.

The gross value of furniture and office equipment under capital lease obligations was $0.4 million as of both July 2, 2016 and January 2, 2016, with accumulated depreciation of $0.3 million as of both July 2, 2016 and January 2, 2016.

For the six months ended July 2, 2016 and July 4, 2015, depreciation expense of property and equipment was $6.3 million and $5.6 million, respectively.

19

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

8. Intangible Assets

Intangible assets, net, consist of the following (in thousands):

	July 2, 2016			January 2, 2016
Patents	$	18,931		$	21,619
Customer relationships	7,669			7,669
Licenses(1)	7,500			—
Acquired technology	5,580			5,580
Trademarks	3,681			3,944
Capitalized software development costs	2,539			2,539
Other	2,529			2,541
Total intangible assets	48,429			43,892
Accumulated amortization	(20,165		)	(16,336		)
Intangible assets, net	$	28,264		$	27,556

⁽¹⁾ As a result of the deconsolidation of the Company’s prior VIE, Cercacor, $7.5 million of licenses that were previously eliminated in consolidation are now included as part of the Company’s intangible assets at July 2, 2016.

Total amortization expense for the six months ended July 2, 2016 and July 4, 2015 was $1.8 million and $2.4 million, respectively. All of these intangible assets have a 10 year weighted average amortization period.

Estimated amortization expense for future fiscal years is as follows (in thousands):

Fiscal year	Amount
2016 (balance of year)	$	4,099
2017	3,791
2018	3,554
2019	3,156
2020	2,849
Thereafter	10,815
Total	$	28,264

9. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Accrued customer rebates, fees and reimbursements	$	14,484	$	11,857
Accrued taxes	3,618		5,263
Accrued legal fees	2,620		5,785
Accrued warranty	1,215		1,222
Accrued donations	107		5,612
Accrued stock repurchases	—		4,815
Accrued arbitration award	—		5,391
Accrued other	4,737		4,277
Total accrued liabilities	$	26,781	$	44,222

20

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

10. Long Term Debt

Long term debt consists of the following (in thousands):

	July 2, 2016		January 2, 2016
Revolving line of credit	$	175,000	$	185,000
Long term portion of capital lease obligations acquisition	1		71
Total long term debt	$	175,001	$	185,071

In January 2016, the Company entered into an Amended and Restated Credit Agreement (Restated Credit Facility) with JPMorgan Chase Bank, N.A., as Administrative Agent and a Lender, Bank of America, N.A., as Syndication Agent and a Lender, Citibank, N.A., as Documentation Agent and a Lender, and various other Lenders (collectively, the Lenders). The Restated Credit Facility amends and restates the Company’s prior credit agreement dated April 23, 2014, as amended (the Amended Credit Agreement), and provides for up to $450.0 million in borrowings in multiple currencies, with an option, subject to certain conditions, for the Company to increase the aggregate borrowing capacity to up to $550.0 million in the future. The Restated Credit Facility also provides for a sublimit of up to $50.0 million for the issuance of letters of credit and a sublimit of $125.0 million in specified foreign currencies. All unpaid principal under the Restated Credit Facility will become due and payable on January 8, 2021.

Borrowings under the Restated Credit Facility will be deemed, at the Company’s election, either: (i) an Alternate Base Rate (ABR) Loan, which bears interest at the ABR plus a spread (ABR Spread) based upon a Company leverage ratio, or (ii) a Eurodollar Loan, which bears interest at the Adjusted LIBO Rate (as defined below) plus a spread (Eurodollar Spread) based upon a Company leverage ratio. The ABR Spread is 0.125% to 1.00% and the Eurodollar Spread is 1.125% to 2.0%. Subject to certain conditions, the Company may also request swingline loans from time to time (Swingline Loans) that bear interest similar to an ABR Loan.

The ABR is determined by taking the greatest of (i) the prime rate, (ii) the federal funds effective rate plus 0.50%, and (iii) the one-month Adjusted LIBO Rate plus 1.0%. The Adjusted LIBO Rate is equal to LIBOR for the applicable interest period multiplied by the statutory reserve rate for such period.

The Company is obligated under the Restated Credit Facility to pay a fee ranging from 0.175% to 0.300% per annum, based upon a Company leverage ratio, with respect to any unused portion of the line of credit. This fee and interest on any ABR Loan are due and payable quarterly in arrears. Interest on any Eurodollar Loan is due and payable at the end of the applicable interest period (or at each three month interval in the case of loans with interest periods greater than three months). Interest on any Swingline Loan is due and payable on the date that the Swingline Loan is required to be repaid. The Company may prepay the loans and terminate the commitments in whole at any time, without premium or penalty, subject to reimbursement of certain costs in the case of Eurodollar Loans.

Pursuant to the terms of the Restated Credit Facility, the Company is subject to certain covenants, including financial covenants related to a leverage ratio and an interest charge coverage ratio, and other customary negative covenants. The Company’s obligations under the Restated Credit Facility are secured by substantially all of the Company’s personal property, including certain equity interests in U.S. domestic and first-tier foreign subsidiaries.

As of July 2, 2016, the Restated Credit Facility had outstanding Eurodollar Loan draws totaling $175.0 million at an effective interest rate of 1.75% and outstanding standby letters of credit totaling $0.3 million. The Company was in compliance with all covenants under the Restated Credit Facility as of July 2, 2016.

The Company incurred interest expense related to the Restated Credit Facility of $1.2 million for the six months ended July 2, 2016. The Company incurred interest expense related to the Amended Credit Agreement of $2.1 million for the six months ended July 4, 2015.

21

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

11. Other Non-Current Liabilities

Other non-current liabilities consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Unrecognized tax benefit	$	8,008	$	7,747
Deposits, long-term	3,215		—
Deferred rent, long-term	419		76
Deferred tax liability, long-term	194		194
Other	30		4
Total other liabilities, long-term	$	11,866	$	8,021

Unrecognized tax benefit relates 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 16 to these condensed consolidated financial statements for further details.

12. Equity

Series A Junior Participating Preferred Stock and Stockholder Rights Plan

In November 2007, 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 November 26, 2007 (the Record Date) pursuant to a Rights Agreement, dated as of November 9, 2007, with Computershare Trust Company, N.A., as Rights Agent (the Rights Agreement). In addition, one Right was issued with each share of common stock that became outstanding after the Record Date. Each Right entitled 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 $136.00 per Right, subject to adjustment.

On February 12, 2016, the Company entered into an amendment to the Rights Agreement (the Rights Amendment). The Rights Amendment accelerated the expiration of the Rights from the close of business on February 8, 2017 to the close of business on February 16, 2016, and had the effect of terminating the Rights Agreement on that date. Upon the termination of the Rights Agreement, all of the Rights distributed to holders of the Company’s common stock pursuant to the Rights Agreement expired.

Stock Repurchase Programs

In September 2015, the Board authorized a stock repurchase program, whereby the Company may purchase up to 5.0 million shares of its common stock over a period of up to three years (2015 Repurchase Program). The 2015 Repurchase Program may be carried out at the discretion of a committee comprised of the Company’s Chief Executive Officer and Chief Financial Officer through open market purchases, one or more Rule 10b5-1 trading plans, block trades and in privately negotiated transactions. The total remaining shares authorized for repurchase under the 2015 Repurchase Program approximated 2.9 million shares as of July 2, 2016. The Company expects to fund the 2015 Repurchase Program through its available cash, future cash from operations, funds available under the Restated Credit Facility or other potential sources of capital.

The following table provides a summary of the Company’s stock repurchase activities during the three and six months ended July 2, 2016 and July 4, 2015 (in thousands, except per share amounts):

	Three Months Ended				Six Months Ended
	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
Shares repurchased	400		2,126		1,496		2,376
Average cost per share	$	51.30	$	34.56	$	42.39	$	34.39
Value of shares repurchased	$	20,519	$	73,467	$	63,403	$	81,628

22

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

13. Stock-Based Compensation

Stock-Based Award Activity

The number and weighted-average exercise price of options issued and outstanding under all of the Company’s stock option plans are as follows (in thousands, except for exercise prices):

	Six Months Ended   July 2, 2016
	Shares		Average Exercise Price
Options outstanding, beginning of period	9,202		$	25.46
Granted	1,189		38.33
Canceled	(120	)	28.61
Exercised	(965	)	19.83
Options outstanding, end of period	9,306		$	27.64
Options exercisable, end of period	5,358		$	25.87

The number of RSUs issued and outstanding under all of the Company’s stock option plans are as follows (in thousands, except for grant date fair value amounts):

	Six Months Ended   July 2, 2016
	Units	Weighted Average Grant  Date Fair Value
RSUs outstanding, beginning of period	2,703	$	41.45
Granted	6	43.09
Canceled	—	—
Expired	—	—
Vested	—	—
RSUs outstanding, end of period	2,709	$	41.45

23

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Approximately 2.7 million of the total RSUs outstanding were awarded to the Company’s Chairman and Chief Executive Officer in connection with the previous amendment and restatement of his employment agreement (see “Employment and Severance Agreements” in Note 14 to these condensed consolidated financial statements for further details).

At July 2, 2016, an aggregate of 16.4 million shares of common stock were reserved for future issuance under the Company’s 2007 Stock Incentive Plan (the 2007 Plan) and prior equity incentive plans, of which 4.4 million shares were available for future grant under the 2007 Plan.

Valuation of Stock-Based Award Activity

The fair value of each RSU award 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		Six Months Ended
	July 2, 2016	July 4, 2015	July 2, 2016	July 4, 2015
Risk-free interest rate	1.1% to 1.5%	1.4% to 1.9%	1.1% to 1.9%	1.3% to 1.9%
Expected term (in years)	5.7	5.5	5.7	5.5
Estimated volatility	31.7% to 32.8%	32.0% to 34.0%	31.7% to 35.7%	32.0% to 37.4%
Expected dividends	0%	0%	0%	0%
Weighted-average fair value of options granted	$14.70	$12.45	$13.24	$11.64

The total stock-based compensation expense for the six months ended July 2, 2016 and July 4, 2015 was $6.2 million and $5.4 million, respectively.

The aggregate intrinsic value of options is calculated as the positive difference, if any, between the market value of the Company’s common stock on the date of exercise or the respective period end, as appropriate, and the exercise price of the options. The aggregate intrinsic value of options outstanding, with an exercise price less than the closing price of the Company’s common stock, as of July 2, 2016 was $142.5 million. The aggregate intrinsic value of options exercisable, with an exercise price less than the closing price of the Company’s common stock, as of July 2, 2016 was $231.0 million. The aggregate intrinsic value of options exercised during the three and six months ended July 2, 2016 was $20.8 million and $25.3 million, respectively.

The unrecognized stock-based compensation expense related to unvested options granted after January 1, 2006 was $30.2 million as of July 2, 2016. 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 July 2, 2016 was 3.5 years. The weighted-average remaining contractual term of options exercisable, with an exercise price less than the closing price of the Company’s common stock, as of July 2, 2016 was 4.1 years.

14. Commitments and Contingencies

Leases

The Company leases certain facilities in North America, Europe and Asia under operating lease agreements expiring at various dates through May 2026. Certain facility leases contain predetermined price escalations and in some cases renewal options. The Company recognizes the lease costs using a straight-line method based on total lease payments. The Company has received leasehold improvement incentives in connection with certain leased facilities in the U.S. These leasehold improvement incentives have been recorded as deferred rent and are being amortized as a reduction to rent expense on a straight-line basis over the life of the lease. As of each of July 2, 2016 and January 2, 2016, rent expense accrued in excess of the amount paid aggregated $0.5 million and $0.2 million, respectively, which is classified within liabilities in the accompanying condensed consolidated balance sheets. In addition, the Company leases automobiles in the U.S. and Europe that are classified as operating leases and expire at various dates through June 2020. The majority of these leases are non-cancellable. The Company also has outstanding capital leases for office equipment and computer equipment, all of which are non-cancellable.

24

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Future minimum lease payments, including interest, under operating and capital leases for each of the following fiscal years ending on or about December 31 are (in thousands):

	As of July 2, 2016
	Operating Leases		Capital Leases		Total
2016 (balance of year)	$	2,721	$	5	$	2,726
2017	5,282		75		5,357
2018	4,885		—		4,885
2019	4,011		—		4,011
2020	2,119		—		2,119
Thereafter	5,811		—		5,811
Total	$	24,829	$	80	$	24,909

In January 2016, the Company entered into the Third Amendment to Lease with The Irvine Company LLC (Third Amendment) relating to the rental of space in a building located in Irvine, California pursuant to a Single-Tenant Lease originally dated June 22, 2012. Pursuant to the terms of the Third Amendment, the Company’s current lease of certain premises was set to terminate in exchange for the Company’s leasing of approximately 70,700 square feet of space in another building in Irvine, California, located near the Company’s new corporate headquarters (New Premises). The Third Amendment also extended the term of the original lease to the end of the month in which the ten-year anniversary of the date of commencement (Commencement Date) of the lease for the New Premises occurs. The Commencement Date will occur following the completion of certain improvements to the New Premises, which the Company currently expects to be no later than November 2016.

In July 2016, the Company entered into a Single-Tenant Lease with The Irvine Company LLC (New Lease), relating to the rental of space in a building located in Irvine, California that was to have been terminated by the Third Amendment. The date of commencement of the New Lease will be December 2016, and the New Lease will continue in effect for a period of ten years, until November 2026.

Rental expense related to operating leases was $1.2 million and $2.3 million for the three and six months ended July 2, 2016, respectively, and $1.4 million and $2.9 million for the three and six months ended July 4, 2015, respectively. Included in the future capital lease payments as of July 2, 2016 is interest aggregating less than $0.1 million.

Employee Retirement Savings Plan

The Company maintains a 401(k) plan, the Masimo Retirement Savings Plan (the Plan), covering the Company’s full-time U.S. employees who meet certain eligibility requirements. In general, the Company matches an employee’s contribution up to 3% of the employee’s compensation, subject to a maximum amount. The Company may also contribute to the Plan on a discretionary basis. The Company contributed $0.5 million and $1.1 million to the Plan for the three and six months ended July 2, 2016, respectively, and $0.5 million and $1.0 million to the Plan for the three and six months ended July 4, 2015 respectively.

Employment and Severance Agreements

On November 4, 2015, the Company entered into an Amended and Restated Employment Agreement with Joe Kiani, the Company’s Chairman and Chief Executive Officer (the Restated Employment Agreement). The Restated Employment Agreement, among other things, eliminates the tax gross-up payments, “single trigger” change in control payments and certain survival provisions, as well as phases out the fixed annual stock option grants guaranteed to Mr. Kiani under his previous employment agreement. Pursuant to the terms of the Restated Employment Agreement, upon a “Qualifying Termination” (as defined in the Restated Employment Agreement, including a change in control), 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. In addition, upon a Qualifying Termination prior to 2018, Mr. Kiani will receive 2.7 million shares of common stock (subject to adjustment for recapitalizations, stock splits, stock dividends and the like) upon the vesting of certain RSUs granted to Mr. Kiani in connection with the Restated Employment Agreement, and an additional cash payment of $35.0 million related to a Non-Competition and Confidentiality Agreement between Mr. Kiani and the Company (collectively, the Special Payment).

25

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

For any Qualifying Termination occurring on or after January 1, 2018, the number of shares to be issued to Mr. Kiani pursuant to the RSUs and the cash payment will each be reduced by 10% of the original amount each year so that after December 31, 2026, no Special Payment will be due to Mr. Kiani upon a Qualifying Termination. As of July 2, 2016, the expense related to the Special Payment that would be recognized in the Company’s condensed consolidated financial statements upon the occurrence of a Qualifying Termination under the Restated Employment Agreement approximated $176.7 million.

As of July 2, 2016, the Company had severance plan participation agreements with seven other executive officers. The participation agreements (the Agreements) are governed by the terms and conditions of the Company’s 2007 Severance Protection Plan (the Severance Plan), which became effective on July 19, 2007 and which was amended effective December 31, 2008. Under each of the Agreements, the applicable executive officer may be entitled to receive certain salary, equity, medical and life insurance benefits if he is terminated by the Company without cause or if he terminates his employment for good reason under certain circumstances. The executive officers are also required to give the Company six months advance notice of their resignation under certain circumstances.

Purchase Commitments

Pursuant to contractual obligations with vendors, the Company had $56.6 million of purchase commitments as of July 2, 2016, which are expected to be purchased within one year. These purchase commitments have been made for certain inventory items in order to secure sufficient levels of those items and to achieve better pricing.

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 July 2, 2016, the Company had approximately $0.5 million in 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 July 2, 2016, 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 its excess cash deposits in time deposits and money market accounts with major financial institutions. As of July 2, 2016, the Company had $61.1 million of bank balances, of which $2.7 million was covered by either the U.S. Federal Deposit Insurance Corporation limit or foreign countries’ deposit insurance organizations. As of July 2, 2016, the Company had $55.0 million of bank time deposits that are not guaranteed by the U.S. Federal government.

While the Company and its contract manufacturers rely on sole source suppliers for certain components, steps have been taken to minimize the impact of a shortage or stoppage of shipments, such as maintaining a safety stock of inventory and designing products that could be modified to use different components. However, there can be no assurance that a shortage or stoppage of shipments of the materials or components that the Company purchases will not result in a delay in production or adversely affect the Company’s business.

The Company’s ability to sell its products to U.S. hospitals depends in part on its relationships with GPOs. Many existing and potential customers for the Company’s products become members of GPOs. GPOs negotiate pricing arrangements and contracts, sometimes exclusively, with medical supply manufacturers and distributors, and these negotiated prices are made available to a GPO’s affiliated hospitals and other members. During the three and six months ended July 2, 2016, revenue from the sale of the Company’s products to U.S. hospitals that are member of GPOs amounted to $93.3 million and $185.3 million, respectively, and for the three and six months ended July 4, 2015, revenue from the sale of the Company’s products to U.S. hospitals that are members of GPOs amounted to $84.5 million and $170.8 million, respectively.

For the three months ended July 2, 2016, the Company had sales through two just-in-time distributors that represented 14.8% and 12.7% of total revenue, respectively. For the three months ended July 4, 2015, the Company had sales through the same two just-in-time distributors that represented 15.4% and 11.9% of total revenue, respectively.

26

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

For the six months ended July 2, 2016, the Company had sales through the same two just-in-time distributors that represented 15.4% and 11.9% of total revenue, respectively. For the six months ended July 4, 2015, the Company had sales through the same two just-in-time distributors that represented 14.7% and 12.3% of total revenue, respectively.

As of July 2, 2016, two of the same just-in-time distributors represented 7.6% and 9.0% of the Company’s accounts receivable balance, respectively. As of January 2, 2016, one of these just-in-time distributors represented 5.3% of the Company’s accounts receivable balance, and one customer represented 5.5% of the Company’s accounts receivable balance.

For the six months ended July 2, 2016 and July 4, 2015, the Company recorded $15.9 million and $15.3 million, respectively, in royalty revenues from Medtronic pursuant to the original settlement agreement and amendments. In exchange for these royalty payments, the Company has provided Medtronic the ability to ship its patent infringing product with a covenant not to sue Medtronic as long as Medtronic abides by the terms of the agreement. The current royalty rate is 7.75% and the amended agreement can be terminated by Medtronic upon 60 days written notice.

Litigation

On February 3, 2009, the Company filed a patent infringement suit in the U.S. District Court for the District of Delaware against Philips Electronics North America Corporation and Philips Medizin Systeme Böblingen GmbH (collectively, Philips) related to Philips’ FAST pulse oximetry technology and certain of Philips’ patient monitors. On June 15, 2009, Philips answered the Company’s complaint and Philips Electronics North America Corporation filed antitrust and patent infringement counterclaims against the Company, as well as counterclaims seeking declaratory judgments of invalidity of the patents asserted by the Company against Philips. On July 9, 2009, the Company filed its answer denying Philips’ counterclaims and asserting various defenses. The Company also asserted counterclaims against Philips for fraud and intentional interference with prospective economic advantage and for declaratory judgments of noninfringement and invalidity with respect to the patents asserted by Philips against the Company. Philips later added a claim for infringement of one additional patent. Subsequently, the Court bifurcated Philips’ antitrust claims and its patent misuse defense, as well as stayed the discovery phase on those claims pending trial in the patent case. In addition, the Company asserted additional patents in 2012, and the Court ordered that these patents and some of the originally asserted patents be tried in a second phase.

On May 23, 2014, Philips filed a motion for leave to amend its answer and counterclaims to allege inequitable conduct. The Court granted Philips’ motion for leave to amend. A jury trial commenced on September 15, 2014 with respect to two of the Company’s patents and one of Philips’ patents. On October 1, 2014, the jury determined that both of the Company’s patents were valid and that the damages amount for Philips’ infringement was $466.8 million. The jury also determined that the Company did not infringe the Philips patent. Philips has indicated that it intends to appeal the damages award once a final judgment has been rendered in the case. On September 18, 2015, the Court set a schedule for the trials related to Masimo’s second phase patents against Philips and Philips’ antitrust counterclaims and patent misuse defense, with both trials scheduled to take place in the first quarter of 2017. On November 16, 2015, the Company asserted three antitrust claims against Philips. On December 9, 2015, the Court dismissed with prejudice Philips’ sole remaining patent infringement claim against the Company. On January 4, 2016, the Court granted Philips’ motion to strike the Company’s antitrust counterclaims, ruling that the Company must bring these claims in a separate litigation. On March 4, 2016, the Company filed an additional case against Philips alleging antitrust violations and patent infringement in the District of Delaware. On May 31, 2016, Philips filed a motion to dismiss the Company’s antitrust claims, which is pending before the Court. On June 27, 2016, Philips filed a motion for summary judgment, and a motion to exclude certain testimony by the Company’s experts with respect to the Company’s second phase patent infringement claims, both of which are pending before the Court. The Company believes that it has good and substantial defenses to the remaining antitrust claims asserted by Philips. The Company is unable to determine whether any loss will occur or to estimate the range of such potential loss; therefore, no amount of loss has been accrued by the Company as of the date of filing of this Quarterly Report on Form 10-Q. Furthermore, there is no guarantee that the Company will prevail in this suit or receive any damages or other relief if it does prevail.

In April 2011, the Company was informed by the United States Attorney’s Office for the Central District of California, Civil Division, that a qui tam complaint had been filed against the Company in the U.S. District Court for the Central District of California by three of the Company’s former physician office sales representatives. The qui tam complaint alleged, among other things, that the Company’s noninvasive hemoglobin products failed to meet their accuracy specifications, and that the Company misled the U.S. Food and Drug Administration and customers regarding the accuracy of the products. In November 2011, the United States declined to intervene in the case, and in October 2013, the District Court granted summary judgment in favor of the Company. The former sales representatives appealed the District Court’s decision and an argument on the appeal was held in the Ninth Circuit Court of Appeals on February 1, 2016.On February 19, 2016, the Ninth Circuit Court of Appeals affirmed the summary judgment of the District Court.

27

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

In September 2011, two of the same former sales representatives filed employment-related claims against the Company in arbitration also stemming from their allegations regarding the Company’s noninvasive hemoglobin products. On January 16, 2014, the Company was notified that the arbitrator awarded the plaintiffs approximately $5.4 million in damages (the Arbitration Award). The Company challenged the Arbitration Award in the U.S. District Court for the Central District of California, and on April 3, 2014, the District Court vacated the award. The former sales representatives appealed the District Court’s decision, and the appeal argument was held in the Ninth Circuit Court of Appeals on February 1, 2016. On February 19, 2016, the Ninth Circuit Court of Appeals reversed the decision of the District Court vacating the award, and remanded the case to the District Court with instructions to confirm the Arbitration Award. On March 23, 2016, the District Court entered final judgment confirming the Arbitration Award, and on April 8, 2016 the Company remitted $6.2 million to the plaintiffs in full payment of the Arbitration Award and related interest. On May 18, 2016, the Company filed a petition for a writ of certiorari with the United States Supreme Court seeking reversal of the decision of the Ninth Circuit Court of Appeals. The former sales representatives’ response to the petition is due August 11, 2016.

On July 20, 2016, the Company was notified that its insurance carrier was seeking reimbursement of certain defense costs previously advanced by the carrier in light of the decision by the Ninth Circuit Court of Appeals reinstating the Arbitration Award. The Company believes it has good and substantial grounds to dispute the coverage determination of the insurance carrier, but there is no guarantee that the Company will prevail. The Company has not recorded a charge related to this insurance coverage dispute and is unable to determine whether any loss will ultimately occur. However, the Company estimates that the potential incremental loss related to this insurance coverage dispute would approximate $2.6 million plus potential interest at the rate of 10% per annum from the date such payments were advanced by the insurance carrier.

On January 2, 2014, a putative class action complaint was filed against the Company in the U.S. District Court for the Central District of California by Physicians Healthsource, Inc. The complaint alleges that the Company sent unsolicited facsimile advertisements in violation of the Junk Fax Protection Act of 2005 and related regulations. The complaint seeks $500 for each alleged violation, treble damages if the District Court finds the alleged violations to be knowing, plus interest, costs and injunctive relief.

On April 14, 2014, the Company filed a motion to stay the case pending a decision on a related petition filed by the Company with the Federal Communications Commission (FCC). On May 22, 2014, the District Court granted the motion and stayed the case pending a ruling by the FCC on the petition. On October 30, 2014, the FCC granted some of the relief and denied some of the relief requested in the Company’s petition. Both parties appealed the FCC’s decision on the petition. On November 25, 2014, the District Court granted the parties’ joint request that the stay remain in place pending a decision on the appeal. The Company believes it has good and substantial defenses to the claims, but there is no guarantee that the Company will prevail. The Company is unable to determine whether any loss will ultimately occur or to estimate the range of such loss; therefore, no amount of loss has been accrued by the Company as of the date of filing of this Quarterly Report on Form 10-Q.

On January 31, 2014, an amended putative class action complaint was filed against the Company in the U.S. District Court for the Northern District of Alabama by and on behalf of two participants in the Surfactant, Positive Pressure, and Oxygenation Randomized Trial at the University of Alabama. On April 21, 2014, a further amended complaint was filed adding a third participant. The complaint alleges product liability and negligence claims in connection with pulse oximeters the Company modified and provided at the request of study investigators for use in the trial. On August 13, 2015, the U.S. District Court for the Northern District of Alabama granted summary judgment in favor of the Company on all claims. The plaintiffs have appealed the U.S. District Court for the Northern District of Alabama’s decision. 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 as of the date of filing of this Quarterly Report on Form 10-Q.

On October 21, 2015, Medtronic plc (Medtronic) filed three separate inter partes review petitions (IPR Petitions) with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office (PTO), challenging several of the claims of the Company’s U.S. Patent Nos. 7,496,393 (the ‘393 Patent), titled “Signal processing apparatus”, which expires in September 2016, and 8,560,034 (the ‘034 Patent), also titled “Signal processing apparatus”, which expires in October 2018. On April 27, 2016, the PTAB denied Medtronic’s IPR Petitions with respect to the ‘034 Patent. On April 28, 2016, the PTAB granted Medtronic’s IPR Petition for review of certain claims of the ‘393 Patent, and denied Medtronic’s IPR Petition for review of other claims of the ‘393 Patent. The Company is defending the claims of the ‘393 Patent for which review was granted. Although the Company believes it has good and substantial positions for the patentability review and trial of the ‘393 Patent, there is no guarantee that the Company will prevail.

28

MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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.

15. Segment Information and Enterprise Reporting

The Company’s chief decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region, for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single reporting segment, specifically noninvasive patient monitoring solutions and related products. The Company does not assess the performance of its geographic regions on other measures of income or expense, such as depreciation and amortization, operating income or net income including noncontrolling interest. In addition, the Company’s assets are primarily located in the U.S. The Company does not produce reports for, or measure the performance of, its geographic regions on any asset-based metrics. Therefore, geographic information is presented only for revenues and long-lived assets.

The following schedule presents an analysis of the Company’s product revenues based upon the geographic area to which the product was shipped (in thousands, except percentages):

	Three Months Ended								Six Months Ended
	July 2, 2016				July 4, 2015				July 2, 2016				July 4, 2015
Geographic area by destination:
United States	$	117,045	71.1	%	$	106,236	72.0	%	$	230,549	70.3	%	$	213,512	72.4	%
Europe, Middle East and Africa	25,988		15.8		24,335		16.5		57,958		17.7		48,396		16.4
Asia and Australia	16,602		10.1		12,751		8.6		30,184		9.2		24,569		8.3
North and South America (excluding United States)	4,972		3.0		4,290		2.9		9,206		2.8		8,492		2.9
Total product revenue	$	164,607	100.0	%	$	147,612	100.0	%	$	327,897	100.0	%	$	294,969	100.0	%

The Company’s consolidated long-lived assets and net assets by geographic area are (in thousands, except percentages):

	July 2, 2016				January 2, 2016
Long-lived assets by geographic area:
United States	$	211,136	96.5	%	$	203,553	96.8	%
International	7,666		3.5		6,770		3.2
Total	$	218,802	100.0	%	$	210,323	100.0	%

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MASIMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

16. Income Taxes

The Company has provided for income taxes in fiscal 2016 interim periods based on the estimated effective income tax rate for the complete fiscal year. The income tax provision is computed on the estimated pretax income of the consolidated entities located within each taxing jurisdiction based on legislation enacted as of the balance sheet date. 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 July 2, 2016, the liability for income taxes associated with uncertain tax positions was approximately $8.9 million. If fully recognized, approximately $7.6 million (net of federal benefit on state taxes) would impact the Company’s effective tax rate. The remaining balance relates to timing differences. 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 2011. The Company’s 2012 income tax return is currently under examination by the U.S. Internal Revenue Service. All material state, local and foreign income tax matters have been concluded through fiscal year 2008. The Company does not believe that the results of any tax authority examination would have a significant impact on its financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, in connection with the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results or financial condition; statements concerning new products, technologies or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements related to our stock repurchase program; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may” or “will,” the negative versions of these terms and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially and adversely from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission (SEC) filings, including our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, which we filed with the SEC on February 24, 2016. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

A non-GAAP financial measure for “Adjusted Product Gross Profit” is contained herein as a supplement to the corresponding financial measure prepared in accordance with U.S. generally accepted accounting principles (GAAP). Management has provided this information to assist investors in gaining a better understanding of the effects of the deconsolidation of Masimo’s variable interest entity, Cercacor, and the impact on period-to-period operating results. Investors should consider this non-GAAP financial measure in addition to, and not as a substitute for, or as superior to, the measure of financial performance prepared in accordance with GAAP.

Executive Overview

We are a global medical technology company that develops, manufactures and markets a variety of noninvasive monitoring technologies. We provide our products directly and through distributors and original equipment manufacturer (OEM) partners to hospitals, emergency medical service providers, physician offices, veterinarians, long-term care facilities and consumers. Our mission is to improve patient outcomes and reduce the cost of care by taking noninvasive monitoring to new sites and applications^™. We were incorporated in California in May 1989 and reincorporated in Delaware in May 1996.

Our core business is Measure-through Motion and Low Perfusion^™ pulse oximetry monitoring, known as Masimo Signal Extraction Technology^® (SET^®) pulse oximetry. Our product offerings have expanded significantly over the years to also include monitoring blood constituents with an optical signature, optical organ oximetry monitoring, electrical brain function monitoring, acoustic respiration monitoring, exhaled gas monitoring, patient monitoring with connectivity platforms, bedside and portable patient monitors and wearable wireless patent monitors. We have also developed a remote patient surveillance monitoring system, which currently allows up to 200 patients to be monitored simultaneously and remotely through a PC-based viewing station or by care providers through their pagers, voice-over-IP phones or smartphones.

Masimo SET^® was designed to overcome the primary limitations of conventional pulse oximetry by maintaining accuracy in the presence of motion artifact, low perfusion and weak signal-to-noise situations. Pulse oximetry is the noninvasive measurement of the oxygen saturation level of arterial blood, which delivers oxygen to the body’s tissues, and pulse rate. Pulse oximetry is one of the most common measurements taken inside and outside of hospitals around the world. We believe that Masimo SET^® is trusted by clinicians to safely monitor approximately 100 million patients each year. Masimo SET^® pulse oximetry has been shown by more than 100 independent studies and thousands of clinical evaluations during patient motion and low-perfusion conditions to provide more accurate measurements than other non-Masimo pulse oximeters, as well as to significantly reduce false alarms (specificity) and accurately detect true alarms (sensitivity) that can indicate a deteriorating patient condition. The use of Masimo SET^® pulse oximetry has also been shown to improve patient outcomes by helping clinicians reduce retinopathy of prematurity in neonates, screen newborns for critical congenital heart disease, reduce ventilator weaning time and arterial blood gas measurements in the intensive care unit (ICU), and save lives and costs while reducing rapid response activations and ICU transfers on the general floor.

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Our rainbow SET^™ platform leverages Masimo SET^® technology and incorporates licensed rainbow^® technology to enable real-time monitoring of additional noninvasive measurements. Our rainbow SET^™ platform includes our rainbow^® Pulse CO-Oximetry products, which we believe are the first devices cleared by the U.S. Food and Drug Administration (FDA) to noninvasively and continuously monitor multiple blood-based measurements using multiple wavelengths of light, which previously was only possible through intermittent invasive procedures. In addition to monitoring oxygen saturation (SpO₂), pulse rate (PR), perfusion index (PI), Pleth Variability Index (PVI^®) and Respiration Rate (RRa^™), rainbow SET^™ Pulse CO-Oximetry has the ability to provide noninvasive monitoring of total hemoglobin (SpHb^®), carboxyhemoglobin (SpCO^®) and methemoglobin (SpMet^®), as well as the calculation of Oxygen Content (SpOC^™). The rainbow SET^™ platform also allows for monitoring of arterial oxygen saturation, even under the presence of carboxyhemoglobin and methemoglobin, known as fractional arterial oxygen saturation (SpfO₂^™), Respiration Rate from the Pleth (RRp^™) and Oxygen Reserve Index^™ (ORI^™). Although SpfO₂^™, RRp^™ and ORI^™have received the CE Mark, they are not currently available for sale in the U.S.

In June 2016, we announced the full market release outside of the U.S. of our next generation SpHb^® spot check technology for use with our Pronto^® Pulse CO-Oximeter^®, substantially improving the clinical accuracy of SpHb^®, reducing the time required to display SpHb^® results and making SpHb^® less susceptible to motion artifact, although it is still not measure through motion. Pronto^® features rainbow SET^™ technology for noninvasive spot checking of SpHb^®, SpO₂, PR and PI. In addition, we released the rainbow^® DCI^®-mini reusable sensor to accompany the Pronto^®. The DCI^®-mini is a universal sensor usable on patients who weigh more than 3 kg. Pronto^® with next generation SpHb^® spot-check and the DCI^®-mini reusable sensor are not currently available for sale in the United States.

In June 2016, we also announced FDA 510(k) clearance for Radius-7^®, the only wearable, tetherless, noninvasive rainbow^® monitor. With this clearance, Radius-7^®, which connects to our Root^® patient monitoring and connectivity platform, now enables noninvasive measurement and monitoring of SpHb^® for the first time in a wearable device within the U.S.

Following the introduction of our rainbow SET^™ platform, we have continued to expand our technology offerings by introducing additional noninvasive measurements and technologies to create new market opportunities in both the hospital and non-hospital care settings. These offerings include:

• SedLine^® - Brain function monitoring is most commonly used during surgery to help clinicians monitor sedation under anesthesia. SedLine^® brain function monitoring technology measures the brain’s electrical activity by detecting electroencephalogram (EEG) signals. Brain function monitors display the patient’s EEG waveforms, but these are difficult for clinicians to interpret, so the EEG signals are processed and displayed as a single number called Patient State Index (PSI), which gives a continuous indication of the patient’s depth of sedation. Our SedLine^® brain function monitoring technology can now be delivered through the Masimo Open Connect^™ (MOC-9^™) connectivity port within our Root^® patient monitoring and connectivity platform, which integrates our rainbow^® and SET^® measurements with multiple additional parameters, such as SedLine^®. In addition, our SedLine^® brain function monitoring technology also displays raw EEG waveforms, the PSI trend and the Density Spectral Array view to allow clinicians to compare EEG power in both sides of the brain over time to facilitate the detection of asymmetrical activity.

In May 2016, we announced the CE Mark and scheduled full market release of our next generation SedLine^® Brain Function Monitoring technology. Our next generation SedLine^® enhances how the PSI responds in challenging situations, addressing many of the concerns raised with quantitative EEG while bolstering brain function monitoring support of anesthetic management.

• Capnography and Gas Monitoring - Our portfolio of capnography and gas monitoring products include external “plug-in-and-measure” capnography and gas analyzers, integrated modules and handheld capnograph and capnometer devices. These products have the ability to measure multiple expired gases, such as carbon dioxide (CO₂), nitrous oxide (N₂O), oxygen (O₂) and other anesthetic agents. In the case of capnography, respiration rate is also calculated from the CO₂ waveform. These measurements are possible through either mainstream monitoring, which samples gases from a ventilated patient’s breathing circuit, or sidestream monitoring, which samples gases from a breathing circuit in mechanically ventilated patients or through a cannula or mask in spontaneously breathing patients.

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• O₃^™ - Regional oximetry monitoring, also known as tissue oximetry and cerebral oximetry monitoring, uses near-infrared spectroscopy to provide for continuous measurement of tissue oxygen saturation (rSO₂) to help detect regional hypoxemia that pulse oximetry alone can miss. In addition, our Root^® patient monitor and O₃^™ sensors can automate the differential analysis of regional to central oxygen saturation. O₃^™ monitoring involves applying O₃^™ regional oximetry sensors to the forehead and connecting our O₃^™ Masimo Open Connect^™ (MOC-9^™) module to any Root^® monitor through one of its three MOC-9^™ ports. O₃^™ regional oximetry is currently intended for use in subjects larger than 40 kg (approximately 88 lbs). O₃^™ regional oximetry has received the CE Mark and, in June 2016, received FDA 510(k) clearance.

• rainbow Acoustic Monitoring^® (RAM^™) - Our sound-based monitoring technology enables noninvasive monitoring of respiration rate (RRa^®). Compared to traditional capnography, which monitors exhaled carbon dioxide (CO₂), most often through a nasal cannula, multiple clinical studies have shown that the noninvasive measurement of RRa^® provides as good or better accuracy to monitor respiration rate and detect respiratory pause episodes, defined as a cessation of breathing for 30 seconds or more. When used with other clinical variables, RRa^® may help clinicians assess respiratory depression and respiratory distress earlier and more often to help determine treatment options and potentially enable earlier interventions.

• Root^® - This powerful patient monitoring and connectivity platform integrates our breakthrough rainbow^® and SET^® measurements with multiple additional specialty measurements through its MOC-9^™ connectivity ports in an integrated, clinician-centric platform. The first three Masimo MOC-9^™ technologies for Root^® were SedLine^® brain function monitoring, Phasein^™ capnography and O₃^™regional oximetry. In March 2016, we announced Iris Gateway^™, a server-based software solution for integrating medical device data. The Iris^™ ports on our Root^® patient monitor allow other medical devices (such as infusion pumps, ventilators, patient monitors and “smart” beds) to connect to Iris Gateway^™ via Root^®. Iris^™Gateway can provide a timely and cost-effective solution for the integration of medical device data by connecting to existing medical devices and performing the required translations to move the data from the devices into EMRs. Iris Gateway^™ can be deployed on a remote server farm or as a server appliance in the hospital. Root^® is also available with noninvasive blood pressure from SunTech Medical^®, which enables clinicians to measure arterial blood pressure for adult, pediatric and neonatal patients with three distinct measurement modes: spot-check, automatic interval and stat interval. The temperature module from Welch Allyn^® can measure the temperature of adult, pediatric and neonatal patients.

• Patient SafetyNet^™ - Our patient surveillance, remote monitoring and clinician notification solution allows for monitoring of the oxygen saturation, pulse rate, perfusion index, hemoglobin, methemoglobin and respiration rate of up to 200 patients simultaneously. Patient SafetyNet^™ offers a rich user interface with trending, real-time waveform capability at the central station and remote notification via pager or smart phone. Patient SafetyNet^™ also features the Adaptive Connectivity Engine^™, which enables two-way, Health Level 7 (HL7) based connectivity to clinical/hospital information systems. The Adaptive Connectivity Engine^™ significantly reduces the time and complexity to integrate and validate custom HL7 implementations and demonstrates our commitment to innovation that automates patient care with open, scalable and standards-based connectivity architecture.

The Patient SafetyNet Series 5000^™, together with Iris^™ Connectivity and MyView^™through the Root^® patient monitoring and connectivity platform, offers a new level of interoperability designed to enhance clinician workflows and reduce the cost of care, from operating rooms to medical-surgical units. Patient SafetyNet Series^™ 5000^™ with Iris^™ enables Root^® to accept data from all devices connected to the patient, thereby acting as an in-room patient monitor and connectivity hub. Alarms and alerts for all devices are seamlessly forwarded to the patient’s clinician and all device data are effortlessly documented in the patient’s EMR. The patient-centric user interface of the Patient SafetyNet^™ Series 5000^™ displays near real-time data from all devices, providing a single unified dashboard of patient information. To simplify documentation of patient data, Root^® enables clinicians to easily verify and send patient vitals, as well as all connected medical device information data, to the EMR directly from Root^®. Data can also be sent to the EMR periodically. An interface between the Patient SafetyNet Series 5000^™ and the hospital admission, discharge and transfer (ADT) system allows clinicians to receive ADT information on Root^® for positive patient identification at the bedside. Clinicians can also manually enter additional data on the Root^® device, including temperature, blood pressure, level of consciousness, pain score and urine output.

In March 2016, we introduced SafetyNet Surveillance^™, a software option for our Patient SafetyNet^™solution that provides real-time video images of a patient’s room, including the patient with connected monitoring devices, adding existing communication technology to central monitoring. Two-way audio is available to allow the caregiver to listen to and communicate with the patient. The system utilizes the existing hospital information technology network and can provide viewing of images in the same care area.

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• MightySat^™ - Our fingertip pulse oximeterprovides oxygen saturation and pulse rate measurements and is designed for those who want accurate measurements even under challenging conditions such as movement and low perfusion. MightySat^™ provides SpO₂, PR, RRp^™, PVI^® and PI measurements in a compact, battery-powered design with a large color screen that can be rotated for real-time display of the pleth waveform as well as measurements. Its Bluetooth^® wireless functionality enables measurement display via the free, downloadable Masimo Personal Health app on iOS and Android mobile devices, as well as the ability to trend and communicate measurements and interface with the Apple Health app. MightySat^™ is also available with optional PVI^®, a measure of the dynamic changes in the perfusion index that occur during one or more complete respiratory cycles. MightySat^™ is available through online retailers such as Amazon.com. In the U.S., MightySat^™ is intended for general health and wellness use and is not intended for medical use. However, MightySat^™ Rx, the medical version of the product with optional Bluetooth^®, received 510(k) clearance in late 2015. MightySat^™ Rx with the RRp^™ measurement is not currently available for sale in the U.S.

• MyView^™ - This wireless, presence-detection system enables clinicians to automatically display customized clinical profiles on our devices, such as Root^®, Radical-7^® and the Patient SafetyNet^™ View Station. When a clinician approaches the device, a clinician-worn MyView^™ badge signals the device to display a preselected set of parameters and waveforms tailored to the individual clinician’s preferences. MyView^™ gives clinicians the ability to receive and review medical device information in a manner that is most conducive to optimizing their workflow, while the presence mapping data collected by all the Masimo devices can provide information on how clinicians spend time with their patients. This provides nursing leadership and management with the opportunity to examine analytical data on patient and clinician interactions to optimize workflows across the unit, hospital or hospital system.

Since inception, our mission has been to develop noninvasive monitoring solutions that improve patient outcomes and reduce the cost of patient care^®. We intend to continue to grow our business and improve our market position by pursuing the following strategies:

(1) continue to expand our market share in pulse oximetry;

(2) expand the pulse oximetry market to other patient care settings;

(3) expand the use of rainbow^® technology in hospital settings;

(4) expand the use of rainbow^® technology in non-hospital settings;

(5) expand the use of Root^® in hospital settings;

(6) utilize our customer base and OEM relationships to market our rainbow SET^™ products incorporating our licensed rainbow^® technology, as well as our other non-invasive specialty products including O₃^™, SedLine^® and capnography monitoring; and

(7) continue to innovate and maintain our technology leadership position.

Our solutions and related products are based upon our Masimo SET^®, rainbow^® and other proprietary algorithms. This software-based technology is incorporated into a variety of product platforms depending on our customers’ specifications. Our technology is supported by a substantial intellectual property portfolio that we have built through internal development and, to a lesser extent, acquisitions and license agreements. In addition, we have exclusively licensed certain rainbow^® technology from Cercacor Laboratories, Inc. (Cercacor) and have the right to incorporate such rainbow^® technology into products that are intended for use by professional caregivers, including, but not limited to, hospital caregivers and alternate care facility caregivers.

Cercacor Laboratories, Inc.

Cercacor is an independent entity spun off from us to our stockholders in 1998. Joe Kiani, our Chairman and Chief Executive Officer, is also the Chairman and Chief Executive Officer of Cercacor. We are a party to a cross-licensing agreement with Cercacor, which was amended and restated effective January 1, 2007 (the Cross-Licensing Agreement), which governs each party’s rights to certain intellectual property held by the two companies.

As a result of recent changes in the capital structure of Cercacor, as well as certain of its contractual relationships with us, we completed a re-evaluation of the authoritative consolidation guidance during the three months ended April 2, 2016 and determined that although Cercacor remains a VIE, we are no longer its primary beneficiary. Based on such determination, we discontinued consolidating Cercacor within our consolidated financial statements effective as of January 3, 2016. However, Cercacor continues to be consolidated within our condensed consolidated financial information for all periods prior to January 3, 2016. See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

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Stock Repurchase Program

In September 2015, our board of directors (Board) authorized a stock repurchase program, whereby we may purchase up to 5.0 million shares of our common stock over a period of up to three years. As of July 2, 2016, approximately 2.9 million shares remained authorized for repurchase under this program.

Our stock repurchase program may be carried out at the discretion of a committee comprised of our Chief Executive Officer and Chief Financial Officer through open market purchases, one or more Rule 10b5-1 trading plans, block trades and in privately negotiated transactions. For additional information regarding our current stock repurchase program, see Note 12 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Results of Operations

The following table sets forth, for the periods indicated, our unaudited results of operations expressed as dollar amounts and as a percentage of total revenues (in thousands, except percentages):

	Three Months Ended									Six Months Ended
	July 2, 2016		Percentage of Revenue		July 4, 2015			Percentage of Revenue		July 2, 2016		Percentage of Revenue		July 4, 2015			Percentage of Revenue
Revenue:
Product	$	164,607	95.3	%	$	147,612		94.8	%	$	327,897	95.4	%	$	294,969		95.1	%
Royalty	8,029		4.7		8,114			5.2		15,906		4.6		15,294			4.9
Total revenue	172,636		100.0		155,726			100.0		343,803		100.0		310,263			100.0
Cost of goods sold	57,501		33.3		52,825			33.9		114,455		33.3		104,257			33.6
Gross profit	115,135		66.7		102,901			66.1		229,348		66.7		206,006			66.4
Operating expenses:
Selling, general and administrative	63,888		37.0		61,666			39.6		126,399		36.8		122,465			39.5
Research and development	14,818		8.6		13,394			8.6		29,183		8.5		28,323			9.1
Total operating expenses	78,706		45.6		75,060			48.2		155,582		45.3		150,788			48.6
Operating income	36,429		21.1		27,841			17.9		73,766		21.5		55,218			17.8
Non-operating income (expense)	471		0.3		(1,125		)	(0.7	)	969		0.3		(972		)	(0.3	)
Income before provision for income taxes	36,900		21.4		26,716			17.2		74,735		21.7		54,246			17.5
Provision for income taxes	6,877		4.0		8,020			5.2		17,135		5.0		15,728			5.1
Net income including noncontrolling interest	30,023		17.4		18,696			12.0		57,600		16.8		38,518			12.4
Net loss attributable to the noncontrolling interest(1)	—		—		655			0.4		—		—		1,356			0.4
Net income attributable to Masimo Corporation stockholders	$	30,023	17.4	%	$	19,351		12.4	%	$	57,600	16.8	%	$	39,874		12.9	%

⁽¹⁾Effective January 3, 2016, we determined that we are no longer the primary beneficiary of Cercacor, and, therefore, we discontinued consolidating Cercacor in our consolidated financial information. Pursuant to authoritative accounting guidance, all periods prior to January 3, 2016 continue to include Cercacor in our consolidated financial information. See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

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Comparison of the Three Months ended July 2, 2016 to the Three Months ended July 4, 2015

Revenue. Total revenue increased$16.9 million, or 10.9%, to $172.6 million for the three months ended July 2, 2016 from $155.7 million for the three months ended July 4, 2015. The following chart details our total product revenues by the geographic area to which the products were shipped for each of the three month periods ended July 2, 2016 and July 4, 2015 (dollars in thousands):

	Three Months Ended
	July 2, 2016				July 4, 2015				Increase/ (Decrease)			Percentage Change
United States	$	117,045	71.1	%	$	106,236	72.0	%	$	10,809		10.2	%
Europe, Middle East and Africa	25,988		15.8		24,335		16.5		1,653			6.8
Asia and Australia	16,602		10.1		12,751		8.6		3,851			30.2
North and South America (excluding United States)	4,972		3.0		4,290		2.9		682			15.9
Total product revenue	$	164,607	100.0	%	$	147,612	100.0	%	$	16,995		11.5	%
Royalty	8,029				8,114				(85		)
Total Revenue	$	172,636			$	155,726			$	16,910		10.9	%

Product revenue increased$17.0 million or 11.5%, to $164.6 million for the three months ended July 2, 2016 from $147.6 million for the three months ended July 4, 2015. This increase was primarily due to higher sales of consumable products, as well as the impact of approximately $0.6 million related to favorable movements in foreign exchange rates from the prior year period that increased the U.S. Dollar translation of foreign sales that were denominated in various foreign currencies. We estimate that our installed base of circuit boards and pulse oximeters increased to approximately 1,459,000 units at July 2, 2016 as compared to 1,362,000 units at July 4, 2015.

Product revenue generated through our direct and distribution sales channels increased$15.9 million, or 12.7%, to $140.9 million for the three months ended July 2, 2016, compared to $125.1 million for the three months ended July 4, 2015. Revenues from our OEM channel increased$1.1 million, or 5.1%, to $23.7 million for the three months ended July 2, 2016 as compared to $22.5 million for the three months ended July 4, 2015. Total rainbow^® product revenue increased by $1.4 million, or 10.6%, to $14.9 million for the three months ended July 2, 2016, compared to $13.5 million for the three months ended July 4, 2015.

Royalty revenue consists of amounts received from Medtronic plc (Medtronic, formerly Covidien Ltd.) related to its U.S. sales pursuant to the terms of our amended settlement agreement. Based on the terms of such agreement, Medtronic has the right to stop paying us royalties, subject to certain notice requirements. In addition, on October 21, 2015, Medtronic filed three separate inter partes review petitions (IPR Petitions) with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office, challenging several of the claims of two U.S. patents titled “Signal processing apparatus” that are owned by us. On April 27, 2016, the PTAB denied the IPR Petitions with respect to one patent. On April 28, 2016, the PTAB granted the IPR Petition for review of certain claims of the other patent while denying the IPR Petition for review of other claims of such patent. We are defending the claims of the patent for which review was granted. See Note 14 to the condensed consolidated financial statements under the caption “Litigation” included in Part I, Item 1 and “Medtronic may seek to avoid paying any royalties to us, which would significantly reduce our royalty revenues and adversely affect our business, financial condition and results of operations” under Part II, Item 1A - Risk Factors, in this Quarterly Report on Form 10-Q for additional information.

Gross Profit. Gross profit consists of total revenue less cost of goods sold. Our gross profit for the three months ended July 2, 2016 and July 4, 2015 was as follows (dollars in thousands):

	Three Months Ended
	July 2, 2016		Gross Profit Percentage		July 4, 2015		Gross Profit Percentage		Increase/ (Decrease)			Percentage Change
Product Gross Profit	$	107,106	65.1	%	$	94,787	64.2	%	$	12,319		13.0	%
Royalty Gross Profit	8,029		100.0		8,114		100.0		(85		)	(1.0	)
Total Gross Profit	$	115,135	66.7	%	$	102,901	66.1	%	$	12,234		11.9	%

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Cost of goods sold includes labor, material, overhead and other similar costs related to the production, supply, distribution and support of our products. Cost of goods sold increased$4.7 million for the three months ended July 2, 2016, compared to the three months ended July 4, 2015, primarily due to the increase in our product revenues and the impact of approximately $1.7 million of Cercacor royalty expense that is no longer eliminated in consolidation. Notwithstanding the impact of the non-elimination of the Cercacor royalty expense, our product gross margins still increased to 65.1% for the three months ended July 2, 2016 as compared to 64.2% for the three months ended July 4, 2015 primarily due to a more favorable product mix, as well as benefits from our continued cost reduction efforts. We incurred $1.3 million in Cercacor royalty expense for the three months ended July 4, 2015 that was eliminated in our condensed consolidated financial statements for such period. Had such royalty expense not been eliminated in consolidation, the adjusted product gross profit margin would have been 63.3% for the three months ended July 4, 2015, compared to our reported product gross profit margin of 65.1% for the three months ended July 2, 2016. See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to the deconsolidation of Cercacor. A reconciliation of GAAP product gross profit to adjusted product gross profit is as follows:

	Three Months Ended
	July 2, 2016		Gross Profit Percentage		July 4, 2015		Gross Profit Percentage
Product Gross Profit (GAAP)	$	107,106	65.1	%	$	94,787	64.2	%
Less: Cercacor Royalty Eliminated in Consolidation	—		—		1,345		0.9
Adjusted Product Gross Profit (Non-GAAP)	$	107,106	65.1	%	$	93,442	63.3	%

Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries and related expenses for sales, marketing and administrative personnel, sales commissions, advertising and promotion costs, professional fees related to legal, accounting and other outside services, public company costs, medical device taxes and other corporate expenses. Selling, general and administrative expenses for the three months ended July 2, 2016 and July 4, 2015 were as follows (dollars in thousands):

Selling, General and Administrative
Three Months Ended   July 2, 2016	Percentage of Net Revenues	Three Months Ended   July 4, 2015	Percentage of Net Revenues	Increase/ (Decrease)	Percentage Change
$63,888	37.0%	$61,666	39.6%	$2,222	3.6%

Selling, general and administrative expenses increased$2.2 million, or 3.6%, for the three months ended July 2, 2016 compared to the three months ended July 4, 2015. This increase was primarily attributable to higher payroll related costs of approximately $4.6 million, which were partially offset by a decrease of approximately $1.8 million in medical device excise tax as a result of the two year moratorium signed into law on December 18, 2015 under the Consolidated Appropriations Act, and lower legal and professional fees of approximately $0.7 million. In addition, approximately $0.7 million of selling, general and administrative expenses related to Cercacor were included in our consolidated results of operations for the three months ended July 4, 2015, as compared to $0 for the three months ended July 2, 2016 due to the deconsolidation of Cercacor as of January 3, 2016. (See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to the deconsolidation of Cercacor.) Stock-based compensation expense of approximately $2.5 million and $2.0 million was included in selling, general and administrative expenses for the three months ended July 2, 2016 and July 4, 2015, respectively.

Research and Development. Research and development expenses consist primarily of salaries and related expenses for engineers and other personnel engaged in the design and development of our products. These expenses also include third-party fees paid to consultants, prototype and engineering supply expenses and the costs of clinical trials. Research and development expenses for the three months ended July 2, 2016 and July 4, 2015 were as follows (dollars in thousands):

Research and Development
Three Months Ended   July 2, 2016	Percentage of Net Revenues	Three Months Ended   July 4, 2015	Percentage of Net Revenues	Increase/ (Decrease)	Percentage Change
$14,818	8.6%	$13,394	8.6%	$1,424	10.6%

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Research and development expenses increased$1.4 million for the three months ended July 2, 2016 compared to the three months ended July 4, 2015, primarily due to higher payroll related costs of approximately $2.0 million and higher occupancy related costs of $0.4 million. Offsetting these higher expenses were approximately $1.4 million of research and development expenses related to Cercacor that were included in our consolidated results of operations for the three months ended July 4, 2015 as compared to $0 for the three months ended July 2, 2016 due to the deconsolidation of Cercacor as of January 3, 2016. (See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to the deconsolidation of Cercacor.) Included in research and development expenses was approximately $0.6 million and $0.4 million of stock-based compensation expense for the three month periods ended July 2, 2016 and July 4, 2015, respectively.

Non-operating income. Non-operating income consists primarily of interest income, interest expense and foreign exchange losses. Non-operating income for the three months ended July 2, 2016 and July 4, 2015 was as follows (dollars in thousands):

Non-operating Income (Expense)
Three Months Ended   July 2, 2016	Percentage of Net Revenues	Three Months Ended   July 4, 2015	Percentage of Net Revenues	Increase/ (Decrease)	Percentage Change
$471	0.3%	$(1,125)	(0.7)%	$1,596	(141.9)%

Non-operating income increased by $1.6 million for the three months ended July 2, 2016 compared to the three months ended July 4, 2015. Non-operating income for the three months ended July 2, 2016 consisted of approximately $1.1 million of interest expense offset by approximately $1.5 million of net realized and unrealized gains on foreign currency denominated transactions resulting primarily from the weakening of the U.S. Dollar against the Japanese Yen and the strengthening of the U.S. Dollar against the Swedish Krona, which were partially offset by losses due to the strengthening of the U.S. Dollar against the British Pound and Euro.

Non-operating expense of $1.1 million for the three months ended July 4, 2015 related primarily to $0.6 million of interest expense and $0.5 million of net realized and unrealized losses on foreign currency denominated transactions resulting primarily from the strengthening of the U.S. Dollar against the Japanese Yen and the weakening of the U.S Dollar against the Swedish Krona, which were partially offset by gains due to the strengthening of the U.S. Dollar against the Euro and British Pound. 

Provision for Income Taxes. Our provision for income taxes for the three months ended July 2, 2016 and July 4, 2015 was as follows (dollars in thousands):

Provision for Income Taxes
Three Months Ended   July 2, 2016	Percentage of Net Revenues	Three Months Ended   July 4, 2015	Percentage of Net Revenues	Increase/ (Decrease)	Percentage Change
$6,877	4.0%	$8,020	5.2%	$(1,143)	(14.3)%

Our provision for income taxes was $6.9 million, or an effective tax rate of 18.6%, for the three months ended July 2, 2016, compared to $8.0 million, or an effective tax rate of 30.0%, for the three months ended July 4, 2015. The lower effective tax rate for the three months ended July 2, 2016 is primarily due to a discrete tax benefit of $4.1 million during the three months ended July 2, 2016 related to excess tax benefits realized for stock-based compensation, pursuant to our early adoption of Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). No similar tax benefit was recognized in our provision for income taxes during the three months ended July 4, 2015. (See Note 2 to the condensed consolidated financial statements under the caption “Recently Adopted Accounting Pronouncements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our adoption of ASU 2016-09.)

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Comparison of the Six Months ended July 2, 2016 to the Six Months ended July 4, 2015

Revenue. Total revenue increased$33.5 million, or 10.8%, to $343.8 million for the six months ended July 2, 2016 from $310.3 million for the six months ended July 4, 2015. The following chart details our total product revenues by the geographic area to which the products were shipped for the six months ended July 2, 2016 and July 4, 2015 (dollars in thousands):

	Six Months Ended
	July 2, 2016				July 4, 2015				Increase/ (Decrease)		Percentage Change
United States	$	230,549	70.3	%	$	213,512	72.4	%	$	17,037	8.0	%
Europe, Middle East and Africa	57,958		17.7		48,396		16.4		9,562		19.8
Asia and Australia	30,184		9.2		24,569		8.3		5,615		22.9
North and South America (excluding United States)	9,206		2.8		8,492		2.9		714		8.4
Total product revenue	$	327,897	100.0	%	$	294,969	100.0	%	$	32,928	11.2	%
Royalty	15,906				15,294				612
Total Revenue	$	343,803			$	310,263			$	33,540	10.8	%

Product revenue increased$32.9 million, or 11.2%, to $327.9 million for the six months ended July 2, 2016 from $295.0 million for the six months ended July 4, 2015. This increase was primarily due to higher sales of consumable products. This increase in product revenue was partially offset by the impact of approximately $0.8 million related to unfavorable movements in foreign exchange rates from the prior year period that reduced the U.S. Dollar translation of foreign sales that were denominated in various foreign currencies, primarily in Europe. We estimate that our installed base of circuit boards and pulse oximeters increased to 1,459,000 units at July 2, 2016 as compared to 1,362,000 units at July 4, 2015.

Product revenue generated through our direct and distribution sales channels increased$31.7 million, or 12.7%, to $281.9 million for the six months ended July 2, 2016, compared to $250.1 million for the six months ended July 4, 2015. Revenues from our OEM channel increased$1.2 million, or 2.6%, to $46.0 million for the six months ended July 2, 2016, compared to $44.8 million for the six months ended July 4, 2015. Total rainbow^® product revenue increased by $6.2 million, or 24.2%, to $31.9 million for the six months ended July 2, 2016, compared to $25.6 million for the six months ended July 4, 2015.

Royalty revenue consists of amounts received from Medtronic related to its U.S. sales pursuant to the terms of our amended settlement agreement. On October 21, 2015, Medtronic filed three separate inter partes review petitions (IPR Petitions) with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office, challenging several of the claims of two U.S. patents titled “Signal processing apparatus” that are owned by us. On April 27, 2016, the PTAB denied the IPR Petitions with respect to one patent. On April 28, 2016, the PTAB granted the IPR Petition for review of certain claims of the other patent while denying the IPR Petition for review of other claims of such patent. We are defending the claims of the patent for which review was granted. See Note 14 to the condensed consolidated financial statements under the caption “Litigation” included in Part I, Item 1 and “Medtronic may seek to avoid paying any royalties to us, which would significantly reduce our royalty revenues and adversely affect our business, financial condition and results of operations” under Part II, Item 1A - Risk Factors, in this Quarterly Report on Form 10-Q for additional information.

Gross Profit. Gross profit consists of total revenue less cost of goods sold. Our gross profit for the six months ended July 2, 2016 and July 4, 2015 was as follows (dollars in thousands):

	Six Months Ended
	July 2, 2016		Gross Profit Percentage		July 4, 2015		Gross Profit Percentage		Increase/ (Decrease)		Percentage Change
Product Gross Profit	$	213,442	65.1	%	$	190,712	64.7	%	$	22,730	11.9	%
Royalty Gross Profit	15,906		100.0		15,294		100.0		612		4.0
Total Gross Profit	$	229,348	66.7	%	$	206,006	66.1	%	$	23,342	11.3	%

Cost of goods sold increased$10.2 million for the six months ended July 2, 2016, compared to the six months ended July 4, 2015, primarily due to the increase in our product revenues and the impact of approximately $3.3 million of Cercacor royalty expense that is no longer eliminated in consolidation. Notwithstanding the impact of the non-elimination of the Cercacor royalty expense, our product gross margins still increased to 65.1% for the six months ended July 2, 2016 as compared to 64.7% for the six months ended July 4, 2015, primarily due to slightly favorable product mix and our continued cost reduction efforts.

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We incurred $2.6 million in Cercacor royalty expense for the six months ended July 4, 2015 that was eliminated in our condensed consolidated financial statements for such period. Had such royalty expense not been eliminated in consolidation, product gross profit margin would have been 63.8% for the six months ended July 4, 2015, compared to our reported product gross profit margin of 65.1% for the six months ended July 2, 2016. See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to the deconsolidation of Cercacor. A reconciliation of GAAP product gross profit to adjusted product gross profit is as follows:

	Six Months Ended
	July 2, 2016		Gross Profit Percentage		July 4, 2015		Gross Profit Percentage
Product Gross Profit (GAAP)	$	213,442	65.1	%	$	190,712	64.7	%
Eliminated Cercacor Royalty	—		—		2,595		0.9
Adjusted Product Gross Profit (Non-GAAP)	$	213,442	65.1	%	$	188,117	63.8	%

Selling, General and Administrative. Selling, general and administrative expenses for the six months ended July 2, 2016 and July 4, 2015 were as follows (dollars in thousands):

Selling, General and Administrative
Six Months Ended   July 2, 2016	Percentage of Net Revenues	Six Months Ended   July 4, 2015	Percentage of Net Revenues	Increase/ (Decrease)	Percentage Change
$126,399	36.8%	$122,465	39.5%	$3,934	3.2%

Selling, general and administrative expenses increased$3.9 million, or 3.2%, for the six months ended July 2, 2016 compared to the six months ended July 4, 2015. This increase was primarily attributable to higher payroll related costs of approximately $7.7 million, higher marketing related fees of approximately $2.0 million and higher travel related costs of approximately $1.1 million, which were partially offset by a decrease of approximately $3.6 million in medical device excise tax as a result of the two year moratorium signed into law on December 18, 2015 under the Consolidated Appropriations Act, and lower legal and professional fees of approximately $1.8 million. In addition, approximately $1.4 million of selling, general and administrative expenses related to Cercacor were included in our consolidated results of operations for the six months ended July 4, 2015, as compared to $0 for the six months ended July 2, 2016 due to the deconsolidation of Cercacor as of January 3, 2016. (See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to the deconsolidation of Cercacor.) Stock-based compensation expense of approximately $4.8 million and $4.1 million was included in selling, general and administrative expenses for the six months ended July 2, 2016 and July 4, 2015, respectively.

Research and Development. Research and development expenses for the six months ended July 2, 2016 and July 4, 2015 were as follows (dollars in thousands):

Research and Development
Six Months Ended   July 2, 2016	Percentage of Net Revenues	Six Months Ended   July 4, 2015	Percentage of Net Revenues	Increase/ (Decrease)	Percentage Change
$29,183	8.5%	$28,323	9.1%	$860	3.0%

Research and development expenses increased$0.9 million for the six months ended July 2, 2016 compared to the six months ended July 4, 2015, primarily due to higher payroll related costs of approximately $2.9 million and higher occupancy related costs of $0.9 million, which were partially offset by lower project related expenses of $0.7 million. In addition, approximately $2.8 million of research and development expenses related to Cercacor were included in our consolidated results of operations for the six months ended July 4, 2015, as compared to $0 for the six months ended July 2, 2016 due to the deconsolidation of Cercacor as of January 3, 2016. (See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to the deconsolidation of Cercacor.)

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Non-operating income. Non-operating income for the six months ended July 2, 2016 and July 4, 2015 was as follows (dollars in thousands):

Non-operating Income (Expense)
Six Months Ended   July 2, 2016	Percentage of Net Revenues	Six Months Ended   July 4, 2015	Percentage of Net Revenues	Increase/ (Decrease)	Percentage Change
$969	0.3%	$(972)	(0.3)%	$1,941	(199.7)%

Non-operating income increased by $1.9 million for the six months ended July 2, 2016 compared to the six months ended July 4, 2015. Non-operating income for the six months ended July 2, 2016 consisted of $1.8 million of interest expense offset by $2.3 million of net realized and unrealized gains on foreign currency denominated transactions resulting primarily from the weakening of the U.S. Dollar against the Japanese Yen, which was partially offset by losses due to the strengthening of the U.S. Dollar against the British Pound, and a $0.3 million gain resulting from our deconsolidation of Cercacor. See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on the deconsolidation of Cercacor.

Non-operating income for the six months ended July 4, 2015 related primarily to $1.0 million of interest expense. 

Provision for Income Taxes. Our provision for income taxes for the six months ended July 2, 2016 and July 4, 2015 was as follows (dollars in thousands):

Provision for Income Taxes
Six Months Ended   July 2, 2016	Percentage of Net Revenues	Six Months Ended   July 4, 2015	Percentage of Net Revenues	Increase/ (Decrease)	Percentage Change
$17,135	5.0%	$15,728	5.1%	$1,407	8.9%

Our provision for income taxes was $17.1 million, or an effective tax rate of 22.9%, for the six months ended July 2, 2016, compared to $15.7 million, or an effective tax rate of 29.0%, for the six months ended July 4, 2015. The lower effective tax rate for the six months ended July 2, 2016 is primarily due to a discrete tax benefit of $5.1 million during the six months ended July 2, 2016 related to excess tax benefits realized for stock-based compensation, pursuant to our early adoption of ASU 2016-09. No similar tax benefit was recognized in our provision for income taxes during the six months ended July 4, 2015. (See Note 2 to the condensed consolidated financial statements under the caption “Recently Adopted Accounting Pronouncements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our adoption of ASU 2016-09.)

Liquidity and Capital Resources

Our principal sources of liquidity consist of our existing cash and cash equivalent balances, funds expected to be generated from operations and funds available under our revolving credit agreement. At July 2, 2016, we had approximately $175.5 million in working capital and approximately $116.1 million in cash and cash equivalents as compared to approximately $166.5 million in working capital and approximately $132.3 million in cash and cash equivalents at January 2, 2016. We carry cash equivalents at cost that approximates fair value. We currently do not maintain an investment portfolio but have the ability to invest in various security holdings, types and maturities that meet credit quality standards in accordance with our investment guidelines.

As of July 2, 2016, we had cash totaling $88.8 million held outside of the U.S., of which approximately $11.3 million was accessible without additional tax cost and approximately $77.5 million was accessible at an incremental estimated tax cost of approximately $23.5 million. In managing our day-to-day liquidity and capital structure, we do not rely on foreign earnings as a source of funds. We currently have sufficient funds on-hand and available under our line of credit to fund our domestic operations and do not anticipate the need to repatriate funds associated with our permanently reinvested foreign earnings. In the event funds that are treated as permanently reinvested are repatriated, we may be required to accrue and pay additional U.S. taxes with respect to any such repatriation.

In January 2016, we entered into an Amended and Restated Credit Agreement (Restated Credit Facility) with JPMorgan Chase Bank, N.A., as Administrative Agent and a Lender, Bank of America, N.A., as Syndication Agent and a Lender, Citibank, N.A., as Documentation Agent and a Lender, and various other Lenders (collectively, the Lenders). The Restated Credit Facility amended and restated the Company’s prior credit agreement dated April 23, 2014, as amended (the Amended Credit Agreement) and provides for up to $450.0 million in borrowings in multiple currencies, with an option, subject to certain conditions, for us to increase the aggregate borrowing capacity to up to $550.0 million in the future.

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The Restated Credit Facility also provides for a sublimit of up to $50.0 million for the issuance of letters of credit and a sublimit of $125.0 million in specified foreign currencies. All unpaid principal under the Restated Credit Facility will become due and payable on January 8, 2021. See Note 10 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

During the six months ended July 2, 2016, we received $15.6 million from Medtronic for royalties related to its U.S. sales pursuant to the terms of our amended settlement agreement. Based on the terms of such agreement, Medtronic has the right to stop paying us royalties, subject to certain notice requirements. In addition, on October 21, 2015, Medtronic filed three separate inter partes review petitions (IPR Petitions) with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office, challenging several of the claims of two U.S. patents titled “Signal processing apparatus” that are owned by us. On April 27, 2016, the PTAB denied the IPR Petitions with respect to one patent. On April 28, 2016, the PTAB granted the IPR Petition for review of certain claims of the other patent while denying the IPR Petition for review of other claims of such patent. We are defending the claims of the patent for which review was granted.

See Note 14 to the condensed consolidated financial statements under the caption “Litigation” included in Part I, Item 1 and “Medtronic may seek to avoid paying any royalties to us, which would significantly reduce our royalty revenues and adversely affect our business, financial condition and results of operations” under Part II, Item 1A - Risk Factors, in this Quarterly Report on Form 10-Q for additional information.

Cash Flows

The following table summarizes our cash flows (in thousands):

	Six Months Ended
	July 2, 2016			July 4, 2015
Net cash provided by (used in):
Operating activities	$	56,691		$	28,623
Investing activities	(12,846		)	(27,261		)
Financing activities	(59,911		)	(14,568		)
Effect of foreign currency exchange rates on cash	(196		)	(1,850		)
(Decrease) increase in cash and cash equivalents	$	(16,262	)	$	(15,056	)

Operating Activities. Cash provided by operating activities was $56.7 million in the six months ended July 2, 2016, arising primarily from net income of $57.6 million. Non-cash activity included depreciation and amortization of $8.1 million, stock-based compensation of $6.2 million and deferred income taxes of $5.0 million. In addition, accounts payable, deferred revenue and other liabilities increased by $8.1 million, $5.3 million and $3.9 million, respectively, during the six months ended July 2, 2016. These sources of cash were primarily offset by other changes in operating assets and liabilities, including a decrease in accrued liabilities of $12.5 million and accrued compensation of $3.9 million, as well as an increase in prepaid income taxes of $7.5 million, all due to the timing of related payments; an increase in other assets of $6.6 million; and an increase in accounts receivable of $3.7 million due to the timing of collections.

Cash provided by operating activities was $28.6 million for the six months ended July 4, 2015, arising primarily from net income of $38.5 million. Non-cash activity included depreciation and amortization of $7.7 million and stock-based compensation of $5.4 million. In addition, accrued liabilities increased by $3.8 million, primarily due to the timing of related payments. These sources of cash were primarily offset by other changes in operating assets and liabilities, including a decrease in accounts payable of $7.4 million, an increase in prepaid income taxes of $5.9 million, a decrease in accrued compensation of $4.3 million and a decrease in income taxes payable of $2.1 million, all due to the timing of payments; and an increase in other assets of $4.9 million due primarily to an increase in prepaid discounts; an increase in accounts receivable of $3.1 million due to the timing of collections.

Investing Activities. Cash used in investing activities for the six months ended July 2, 2016 was $12.8 million, consisting primarily of $10.7 million for purchases of property and equipment, $1.3 million of intangible assets related to capitalized patent and trademark costs and $0.8 million related to the deconsolidation of Cercacor. See Note 3 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to the deconsolidation of Cercacor.

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Cash used in investing activities for the six months ended July 4, 2015 was $27.3 million, consisting of $24.7 million for purchases of property and equipment, including $6.3 million related to the purchase of our New Hampshire manufacturing and warehouse facility (New Hampshire Property), and $2.6 million for purchases of intangible assets, of which approximately $1.3 million related to capitalized patent and trademark costs and approximately $0.9 million related to intangible assets acquired in connection with the purchase of our New Hampshire Property.

Financing Activities. Cash used in financing activities for the six months ended July 2, 2016 was $59.9 million, primarily driven by common stock repurchase transactions during the six month period totaling $68.2 million and net repayments under our Restated Credit Facility of $10.0 million, offset by proceeds from the issuance of common stock (upon exercise of options) totaling $19.0 million.

Cash used in financing activities for the six months ended July 4, 2015 was $14.6 million, primarily driven by common stock repurchase transactions that settled during the period totaling $81.7 million, offset by net borrowings under our Amended Credit Agreement of $52.5 million and proceeds from the issuance of common stock (upon exercise of options) totaling $15.2 million.

Capital Resources and Prospective Capital Requirements

As of July 2, 2016, we had $175.3 million in outstanding loan draws and letters of credit under our Restated Credit Facility, leaving available borrowing capacity of $274.7 million. We also had outstanding capital lease obligations of $0.1 million related primarily to office and computer equipment. We had no other debt obligations and were in compliance with all bank covenants.

In September 2015, the Board authorized a stock repurchase program for the repurchase of up to 5.0 million shares of our common stock over a period of up to three years. The stock repurchase program may be carried out at the discretion of a committee comprised of our Chief Executive Officer and Chief Financial Officer through open market purchases, one or more Rule 10b5-1 trading plans, block trades and in privately negotiated transactions.  As of July 2, 2016, approximately 2.9 million shares remained authorized for repurchase under this stock repurchase program. For additional information regarding our stock repurchase program, see Note 12 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We expect to fund our future operating, investing and financing activities through our available cash, future cash from operations, funds available under our Restated Credit Facility and other potential sources of capital. In addition to funding our normal working capital requirements, we anticipate additional capital purchases related to renovating our new corporate headquarters. We also anticipate that we will continue to repurchase stock under our authorized stock repurchase program subject to the availability of our stock, general market conditions, the trading price of our stock, available capital, alternative uses for capital and our financial performance. Possible additional uses of cash may include the acquisition of technologies or technology companies. The amount and timing of our actual investing activities will vary significantly depending on numerous factors, including the timing and amount of costs related to the renovation of our new corporate headquarters facility and other capital expenditures, costs of product development efforts, stock repurchase activity and costs related to our domestic and international regulatory requirements. Despite these investment requirements, we anticipate that our existing cash and cash equivalents, as well as amounts available under the Restated Credit Facility, will be sufficient to meet our working capital requirements, capital expenditures and other operational funding needs for at least the next 12 months.

Off-Balance Sheet Arrangements

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we engaged in these relationships. As of July 2, 2016, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

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Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of net revenues, expenses, assets and liabilities. We regularly evaluate our estimates and assumptions related to our critical accounting policies, including revenue recognition and deferred revenue, inventory and related reserves for excess or obsolete inventory, allowance for doubtful accounts, stock-based compensation, goodwill, deferred taxes and related valuation allowances, uncertain tax positions, tax contingencies, litigation costs and loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. Changes in judgments and uncertainties relating to these estimates could potentially result in materially different results under different assumptions and conditions. If these estimates differ significantly from actual results, the impact on our condensed consolidated financial statements and future results of operations may be material. For a description of our critical accounting policies, please refer to “Critical Accounting Estimates” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, filed with the SEC on February 24, 2016. There have been no material changes to any of our critical accounting policies during the six months ended July 2, 2016.

RecentAccounting Pronouncements

See Note 2 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recently issued or adopted accounting standards.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. We are exposed to various market risks that may arise from adverse changes in market rates and prices, such as interest rates, foreign exchange fluctuations and inflation. We do not enter into derivatives, including forward contracts, or other financial instruments for trading or speculative purposes.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of interest expense we must pay with respect to our various outstanding debt instruments. Our risk associated with fluctuations in interest expense is limited to interest associated with our outstanding capital lease arrangements, which have fixed interest rates, and any borrowings under our Restated Credit Facility and any amendments thereto. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We reduce default risk by investing in investment grade securities. A hypothetical 100 basis point change in interest rates along the entire interest rate yield curve would not significantly affect the fair value of our interest-sensitive financial instruments at July 2, 2016. Declines in interest rates over time will, however, reduce our interest income and expense while increases in interest rates will increase our interest income and expense.

Foreign Currency Exchange Rate Risk

A majority of our assets and liabilities are maintained in the United States in U.S. Dollars and a majority of our sales and expenditures are transacted in U.S. Dollars. However, we also transact with foreign customers in currencies other than the U.S. Dollar. These foreign currency revenues, when converted into U.S. Dollars, can vary depending on average exchange rates during a respective period. In addition, certain of our foreign subsidiaries transact in their respective country’s local currency, which is also their functional currency. As a result, expenses of these foreign subsidiaries, when converted into U.S. Dollars, can vary depending on the average exchange rates during a respective period.

We are exposed to foreign currency gains or losses on outstanding foreign currency denominated receivables and payables, as well as intercompany transactions. Realized and unrealized foreign currency gains or losses on these transactions are included in our statements of comprehensive income as incurred. Furthermore, other transactions between us or our subsidiaries and a third-party, denominated in a currency different from the functional currency, are foreign currency transactions. Realized and unrealized foreign currency gains or losses on these transactions are included in our statements of comprehensive income as incurred, and are converted to U.S. Dollars at the average exchange rates for a respective period.

The balance sheets of each of our foreign subsidiaries whose functional currency is not the U.S. Dollar are translated into U.S. Dollars at the rate of exchange at the balance sheet date and the statements of comprehensive income and cash flows are translated into U.S. Dollars using the average monthly exchange rate during the period. Any foreign exchange gain or loss as a result of translating the balance sheets of our foreign subsidiaries whose functional currency is not the U.S. Dollar is included in equity as a component of accumulated other comprehensive income.

Our primary foreign currency exchange rate exposures are with the Euro, Japanese Yen, Swedish Krona, Canadian Dollar, British Pound, Mexican Peso and Australian Dollar, against the U.S. Dollar. Foreign currency exchange rates have experienced significant movements recently, particularly when compared to the same prior year period, and such volatility may continue in the future. Specifically, during the six months ended July 2, 2016, we estimate that changes in the exchange rates of the U.S. Dollar relative primarily to the Euro, Japanese Yen, Swedish Krona, Canadian Dollar, British Pound and Australian Dollar, negatively impacted our revenues by $0.8 million when compared to foreign exchange rates from the prior year period. We currently do not enter into forward exchange contracts to hedge exposures denominated in foreign currencies and do not use derivative financial instruments for trading or speculative purposes. The effect of a 10% change in foreign currency exchange rates could have a material effect on our future operating results or cash flows, depending on which foreign currency exchange rates change and depending on the directional change (either a strengthening or weakening against the U.S. Dollar). As our foreign operations continue to grow, our exposure to foreign currency exchange rate risk may become more significant.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations during the periods presented. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could have a material adverse effect on our business, financial condition and results of operations.

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Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) regulations, rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) or Rule 15d-15(b) promulgated by the SEC under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

There has been no change in our internal control over financial reporting during the quarter ended July 2, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Note 14 to the condensed consolidated financial statements under the caption “Litigation” included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

Before you decide to invest or maintain an interest in our common stock, you should consider carefully the risks described below, which have been updated since the filing of our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, filed with the Securities and Exchange Commission (SEC) on February 24, 2016, together with the other information contained in this Quarterly Report on Form 10-Q, and any recent Current Reports on Form 8-K. We believe the risks described below are the risks that are material to us as of the date of this Quarterly Report on Form 10-Q. Other risks and uncertainties, including those not presently known to us or that we do not currently consider material, may also impair our business operations. If any of the following risks comes to fruition, our business, financial condition, results of operations and growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you could lose all or part of your investment or interest.

Risk factors marked with an asterisk (*) below include a substantive change from or an update to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, filed with the SEC on February 24, 2016.

Risks Related to Our Revenues

*We currently derive the majority of our revenue from our Masimo SET^® platform, Masimo rainbow SET^™ platform and related products. If this technology and the related products do not continue to achieve market acceptance, our business, financial condition and results of operations would be adversely affected.

We are highly dependent upon the continued success and market acceptance of our proprietary Masimo SET^® technology that serves as the basis of our primary product offerings. Continued market acceptance of products incorporating Masimo SET^® will depend upon us continuing to provide evidence to the medical community that our products are cost-effective and offer significantly improved performance compared to conventional pulse oximeters. Health care providers that currently have significant investments in competitive pulse oximetry products may be reluctant to purchase our products. If hospitals and other health care providers do not believe our Masimo SET^® platform is cost-effective, safe or more accurate or reliable than competitive pulse oximetry products, they may not buy our products in sufficient quantities to enable us to generate revenue growth from the sale of these products. In addition, allegations regarding the safety and effectiveness of our products, whether or not substantiated, may impair or impede the acceptance of our products. If we are unable to achieve additional market acceptance of our core technology or products incorporating Masimo SET^®, we will not generate significant revenue growth from the sale of our products, which would adversely affect our business, financial condition and results of operations.

*Some of our products, including those based on licensed rainbow^® technology, are in development or have been recently introduced into the market and may not achieve market acceptance, which could limit our growth and adversely affect our business, financial condition and results of operations.

Products that we have introduced into the market in recent years, including, but not limited to, those based on rainbow^® technology, a technology that we license, may not be accepted in the market. In general, our recent noninvasive measurement technologies are considered disruptive. These recent technologies have performance levels that we believe are acceptable for many clinical environments but may be insufficient in others. In addition, these technologies may perform better in some patients and settings than others. Over time, we hope to continue to improve the performance of these technologies and educate the clinical community on how to properly evaluate them. If we are successful in these endeavors, we expect these technologies will become more useful in more environments and will become more widely adopted. While this is the adoption pattern experienced historically with other new noninvasive measurements, such as regional oximetry, we are unable to guarantee that such adoption pattern will apply to our recent and future technologies.

Even if our customers recognize the benefits of our products, we cannot assure you that our customers will purchase them in quantities sufficient for us to be profitable or successful. We are continuing to invest in significant sales and marketing resources to achieve market acceptance of these products with no assurance of success.

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The degree of market acceptance of these products will depend on a number of factors, including:

• perceived clinical benefits from our products;

• perceived cost effectiveness of our products;

• perceived safety and effectiveness of our products;

• reimbursement available through Centers for Medicare and Medicaid Services (CMS) programs for using some of our products; and

• introduction and acceptance of competing products or technologies.

If our products do not gain market acceptance or if our customers prefer our competitors’ products, our potential revenue growth would be limited, which would adversely affect our business, financial condition and results of operations.

Our ability to commercialize new products, new or improved technologies and additional applications for Masimo SET^® and our licensed rainbow^® technology is limited to certain markets by our Cross-Licensing Agreement with Cercacor Laboratories, Inc. (Cercacor), which may impair our growth and adversely affect our business, financial condition and results of operations.

In May 1998, we spun off a newly-formed entity, Cercacor, and provided it rights to use Masimo SET^® to commercialize non-vital signs monitoring applications, while we retained the rights to Masimo SET^® to commercialize vital signs monitoring applications. On May 2, 1998, we entered into a cross-licensing agreement with Cercacor, which has been amended several times, most recently in an Amended and Restated Cross-Licensing Agreement, effective January 1, 2007 (the Cross-Licensing Agreement). Under the Cross-Licensing Agreement, we granted Cercacor:

• an exclusive, perpetual and worldwide license, with sublicense rights, to use all Masimo SET^® owned by us, including all improvements on this technology, for the monitoring of non-vital signs parameters and to develop and sell devices incorporating Masimo SET^® for monitoring non-vital signs parameters in any product market in which a product is intended to be used by a patient or pharmacist rather than by a professional medical caregiver, which we refer to as the Cercacor Market; and

• a non-exclusive, perpetual and worldwide license, with sublicense rights, to use all Masimo SET^® for measurement of vital signs in the Cercacor Market.

Non-vital signs measurements consist of body fluid constituents other than vital signs measurements, including, but not limited to, carbon monoxide, methemoglobin, blood glucose, hemoglobin and bilirubin. Under the Cross-Licensing Agreement, we are only permitted to sell devices utilizing Masimo SET^® for the monitoring of non-vital signs parameters in markets where the product is intended to be used by a professional medical caregiver, including, but not limited to, hospital caregivers and alternate care facility caregivers, rather than by a patient or pharmacist, which we refer to as the Masimo Market. Accordingly, our ability to commercialize new products, new or improved technologies and additional applications for Masimo SET^® is limited. In particular, our inability to expand beyond the Masimo Market may limit our ability to maintain or increase our revenue and impair our growth.

Pursuant to the Cross-Licensing Agreement, we have licensed from Cercacor the right to make and distribute products in the Masimo Market that utilize rainbow^® technology for certain noninvasive measurements. As a result, the opportunity to expand the market for our products incorporating rainbow^® technology is also limited, which could limit our ability to maintain or increase our revenue and impair our growth.

We face competition from other companies, many of which have substantially greater resources than we do. If we do not successfully develop and commercialize enhanced or new products that remain competitive with products or alternative technologies developed by others, we could lose revenue opportunities and customers, and our ability to grow our business would be impaired, adversely affecting our financial condition and results of operations.

The medical device industry is intensely competitive and is significantly affected by new product introductions and other market activities of industry participants. A number of our competitors have substantially greater capital resources, larger customer bases and larger sales forces, have established stronger reputations with specific customers, and have built relationships with Group Purchasing Organizations (GPOs) that are more effective than ours. Our Masimo SET^® platform faces additional competition from companies developing products for use with third-party monitoring systems, as well as from companies that currently market their own pulse oximetry monitors.

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Rapid product development and technological advances within the medical device industry place our products at risk of obsolescence. Our long-term success depends upon the development and successful commercialization of new products, new or improved technologies and additional applications for Masimo SET^® and licensed rainbow^® technology. The research and development process is time-consuming and costly and may not result in products or applications that we can successfully commercialize. In particular, we may not be able to successfully commercialize our products for applications other than arterial blood oxygen saturation and pulse rate monitoring, such as for respiration rate, hemoglobin, carboxyhemoglobin and methemoglobin monitoring.

If we do not successfully adapt our products and applications both within and outside these measurements, we could lose revenue opportunities and customers. Furthermore, one or more of our competitors may develop products that are substantially equivalent to our U.S. Food and Drug Administration (FDA) cleared products, or those of our original equipment manufacturer (OEM) partners, in which case a competitor of ours may use our products or those of our OEM partners as predicate devices to more quickly obtain FDA clearance of their competing products. Competition could result in pressure from our customers to reduce the price of our products and in fewer orders for our products, which could, in turn, cause a reduction in our revenues and product gross margins, thereby adversely impacting our business, financial condition and results of operations.

We depend on our domestic and international OEM partners for a portion of our revenue. If they do not devote sufficient resources to the promotion of products that use Masimo SET^® and licensed rainbow^® technology, our business would be harmed.

We are, and will continue to be, dependent upon our domestic and international OEM partners for a portion of our revenue through their marketing, selling and distribution of certain of their products that incorporate Masimo SET^® and licensed rainbow^® technology. Although we expect that our OEM partners will accept and actively market, sell and distribute products that incorporate licensed rainbow^® technology, they may not elect, and have no contractual obligation, to do so. Because products that incorporate our technologies may represent a relatively small percentage of business for some of our OEM partners, they may have less incentive to promote these products over other products that do not incorporate these technologies. In addition, some of our OEM partners offer products that compete with ours. Therefore, we cannot guarantee that our OEM partners, or any company that may acquire any of our OEM partners, will vigorously promote products incorporating Masimo SET^® and licensed rainbow^® technology. The failure of our OEM partners to successfully market, sell or distribute products incorporating these technologies, the termination of OEM agreements, the loss of OEM partners or the inability to enter into future OEM partnership agreements would have a material adverse effect on our business, financial condition and results of operations.

*Medtronic may seek to avoid paying any royalties to us, which would significantly reduce our royalty revenues and adversely affect our business, financial condition and results of operations.

Pursuant to our settlement agreement with Medtronic plc (Medtronic, formerly Covidien Ltd.), we earn royalties on Medtronic’s total U.S. based pulse oximetry sales. For the six months ended July 2, 2016 and July 4, 2015, our royalties from the Medtronic settlement agreement totaled approximately $15.9 million and $15.3 million, respectively. Because these royalty payments do not carry any significant cost, they result in significant improvements to our reported gross profit, operating income levels and earnings per share.

In January 2011, we entered into a second amendment to the settlement agreement, which became effective in March 2011. Pursuant to the second amendment, in exchange for a specified royalty payment, we agreed not to sue Medtronic for its current pulse oximetry products, but not for any other technologies that Medtronic may add. In October 2015, Medtronic filed three separate inter partes (IPR)review petitions (the IPR Petitions) with the Patent Trial and Appeal Board (the PTAB) of the U.S. Patent and Trademark Office (PTO), challenging several of the claims of our U.S. Patent Nos. 7,496,393 (the ‘393 Patent), titled “Signal processing apparatus”, which expires in September 2016, and 8,560,034 (the ‘034 Patent), also titled “Signal processing apparatus”, which expires in October 2018. In April 2016, the PTAB denied Medtronic’s IPR Petitions with respect to the ‘034 Patent, granted Medtronic’s IPR Petition for review of certain claims of the ‘393 Patent, and denied Medtronic’s IPR Petition for review of other claims of the ‘393 Patent. We are defending the claims of the ‘393 Patent for which review was granted. (See Note 14 to our accompanying consolidated financial statements under the caption “Litigation” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on the IPR Petitions.) Although we believe that we have good and substantial positions for the patentability review and trial of the ‘393 Patent, there is no guarantee that we will prevail. Furthermore, Medtronic has the right to stop paying royalties to us, subject to certain notice requirements, under our existing settlement agreement with them. If Medtronic ceases paying royalties to us under the settlement agreement, our revenue, gross margins, operating income and earnings per share would be materially and adversely affected.

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*If we fail to maintain or develop relationships with GPOs, sales of our products would decline.

Our ability to sell our products to U.S. hospitals depends, in part, on our relationships with GPOs. Many existing and potential customers for our products are members of GPOs. GPOs negotiate beneficial pricing arrangements and contracts, which are sometimes exclusive, with medical supply manufacturers and distributors.

These negotiated prices are made available to a GPO’s affiliated hospitals and other members. If we are not one of the providers selected by a GPO, the GPO’s affiliated hospitals and other members may be less likely or unlikely to purchase our products. If a GPO has negotiated a strict sole source, market share compliance or bundling contract for another manufacturer’s products, we may be prohibited from making sales to members of such GPO for the duration of such contractual arrangement. For the six months ended July 2, 2016 and July 4, 2015, shipments of our pulse oximetry products to customers that are members of GPOs represented approximately $185.3 million and $170.8 million, respectively, of our revenue from sales to U.S. hospitals. Our failure to renew our contracts with GPOs may cause us to lose market share and could have a material adverse effect on our business, financial condition and results of operations. In addition, if we are unable to develop new relationships with GPOs, our competitive position would likely suffer and our opportunities to grow our revenues and business would be harmed.

Certain GPOs are creating, coordinating and facilitating regional purchasing coalition (RPC) supply chain networks that include anti-competitive practices such as sole sourcing and bundling. These RPCs circumvent and potentially violate rules of conduct for GPOs and have the effect of reducing product purchasing decisions available to the hospitals that belong to these regional organizations. If the GPOs and RPCs are permitted to continue practices that limit, reduce or eliminate competition, we could lose customers who are no longer able to choose to purchase our products, resulting in lower sales that could adversely affect our business, financial condition and results of operations.

Inadequate levels of coverage or reimbursement from governmental or other third-party payers for our products, or for procedures using our products, may cause our revenue to decline.

Sales of our products depend in part on the reimbursement and coverage policies of governmental and private health care payers. The ability of our health care provider customers, including hospitals, to obtain adequate coverage and reimbursement for our products or the procedures in which our products are used may impact our customers’ purchasing decisions. Therefore, our customers’ inability to obtain adequate coverage and reimbursement for our products or reimbursement for the procedures in which our products are used would have a material adverse effect on our business.

Third-party payers have adopted, and are continuing to adopt, health care policies intended to curb rising health care costs. These policies include, among others:

• controls on reimbursement for health care services and price controls on medical products and services;

• limitations on coverage and reimbursement for new medical technologies and procedures; and

• the introduction of managed care and prospective payment systems in which health care providers contract to provide comprehensive health care for a fixed reimbursement amount per person or per procedure.

We cannot guarantee that governmental or third-party payers will reimburse, or continue to reimburse, a customer for the cost of our products or the procedures in which our products are used. In fact, some payers have indicated that they are not willing to reimburse for certain of our products or for certain of the procedures in which our products are used. For example, some insurance carriers have issued policies denying coverage for transcutaneous hemoglobin measurement on the grounds that the technology is investigational in the outpatient setting. Other payers are continuing to investigate our products to determine if they will provide reimbursement to our customers. While we are working with these payers to obtain reimbursement, we may not be successful. These trends could lead to pressure to reduce prices for our current and future products and could cause a decrease in the size of the market or a potential increase in competition that could have a material adverse effect on our business, financial condition and results of operations.

*Our customers may reduce, delay or cancel purchases due to a variety of factors, such as lower hospital census levels or third-party guidelines, or may require that we reduce the price of our products, which could adversely affect our business, financial condition and results of operations.

Our customers are facing growing levels of uncertainties, including variations in overall hospital census for paying patients and the impact of such census variations on hospital budgets. As a result, many hospitals are reevaluating their entire cost structure, including the amount of capital they allocate to medical device technologies and products. Such developments could have a significant negative impact on our OEM customers who, due to their traditionally larger capital equipment sales model, could see declines in purchases from their hospital customers. This, in turn, could reduce our board sales to our OEM customers.

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In addition, certain of our products, including our rainbow^® measurements such as carbon monoxide, methemoglobin and hemoglobin, that are sold with upfront license fees and more complex and expensive sensors, could also be impacted by hospital budget reductions.

States and other local regulatory authorities may issue guidelines regarding the appropriate scope and use of our products from time to time. For example, some of our noninvasive monitoring devices may be subject to authorization by individual states as part of the Emergency Medical Services scope of practice procedures. Although a lack of inclusion into scope of practice procedures does not prohibit usage, it may limit adoption.

Additionally, as a result of the continued consolidation in the health care industry, we may experience decreasing prices for our products due to the potential increased market pricing power of our health care provider customers. If these and other competitive forces drive down the price of our products, and we are not able to counter that pressure with cost reductions to our existing products or the introduction of new higher priced products, our product gross profit margins will decline. This, in turn, could have a material adverse effect on our business, financial condition and results of operations.

*The loss of any large customer or distributor, or any cancellation or delay of a significant purchase by a large customer, could reduce our net sales and harm our operating results.

We have a concentration of OEM, distribution and direct customers. We cannot provide any assurance that we will retain our current customers, groups of customers or distributors, or that we will be able to attract and retain additional customers in the future. If for any reason we were to lose our ability to sell to a specific group or class of customers, or through a distributor, we could experience a significant reduction in revenue, which would adversely impact our operating results. For the six months ended July 2, 2016 and July 4, 2015, we had sales through two just-in-time distributors, which in total represented approximately 27.5% and 27.0% of our total revenue, respectively. Some of our just-in-time distributors have been demanding higher fees, which we may be forced to pay in order to continue to offer products to our customers or which may force us to distribute our products directly to our customers. The loss of any large customer or distributor, or an increase in distributor fees, could have a material adverse effect on our business, financial condition and results of operations.

*Imitation Masimo sensors and third-party medical device reprocessors that reprocess our single-patient-use sensors may harm our reputation. Also, these imitation and third-party reprocessed sensors, as well as genuine Masimo reprocessed sensors, are sold at lower prices than new Masimo sensors and could cause our revenue to decline, which may adversely affect our business, financial condition and results of operations.

We are aware that other organizations are manufacturing and selling imitation Masimo sensors. In addition, we are aware that certain medical device reprocessors have been collecting our used single-patient-use sensors from hospitals and then reprocessing, repackaging and reselling those sensors to hospitals. These imitation and third-party reprocessed sensors are sold at lower prices than new Masimo sensors.Our experience with both these imitation sensors and third-party reprocessed sensors is that they provide inferior performance, increased sensor consumption, reduced comfort and a number of monitoring problems. Notwithstanding these limitations, some of our customers have indicated a willingness to consider purchasing some of their sensor requirements from these imitation manufacturers and third-party reprocessors in an effort to reduce their sensor costs. These imitation and reprocessed sensors have led and may continue to lead to confusion with our genuine Masimo products; have reduced and may continue to reduce our revenue; and, in some cases, have harmed and may continue to harm our reputation if customers conclude incorrectly that these imitation or reprocessed sensors are original Masimo sensors. In addition, we have expended a significant amount of time and expense investigating issues caused by imitation and reprocessed sensors, troubleshooting problems stemming from such sensors, educating customers about why imitation and reprocessed sensors do not perform to their expectations, enforcing our proprietary rights against the imitation manufacturers and reprocessors, and enforcing our contractual rights under our customer contracts.

In response to these imitation sensors and third-party reprocessors, we offer to our customers our own Masimo reprocessed sensors, which we re-manufacture and test to ensure that they meet the same performance specifications as our new Masimo sensors. In addition, we have incorporated X-Cal^™ technology into certain products to ensure our customers get the performance they expect by using genuine Masimo sensors and that such sensors do not continue to be used beyond their useful life. We believe this technology will help ensure that hospitals, clinicians and, ultimately, their patients receive true Masimo measurement quality and performance, and will curtail some of the harm to us that results when customers experience performance and other problems with imitation and reprocessed sensors. However, some customers may object to the X-Cal^™ technology, potentially resulting in the loss of customers and revenues. In addition, reprocessed sensors sold by us are generally offered at a lower price and, therefore, may reduce certain customer demand for our new sensors. As a result, increased sales of genuine Masimo reprocessed sensors may result in lower revenues, which could negatively impact our business, financial condition and results of operations.

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*From time to time, we may carry out strategic initiatives that may not be viewed favorably by our customers, or that could negatively impact our business, financial condition and results of operations.

We expect to continue to carry out strategic initiatives and investments that we believe are necessary to grow our revenues and expand our business, both in the U.S. and abroad. For example, since 2013, we have made investments in additional sales force resources whose primary focus is to work with hospitals to identify new opportunities for certain noninvasive measurement technologies. Although we believe strategic initiatives and investments, including our investment in our worldwide blood management sales force, are, and will continue to be, in the long-term best interests of Masimo and our stockholders, there are no assurances that such initiatives and investments will yield favorable results for us.

Accordingly, if these initiatives and investments are not viewed favorably by our customers, our business, financial condition and results of operations could be adversely affected.

Risks Related to Our Intellectual Property

*If the patents we own or license, or our other intellectual property rights, do not adequately protect our technologies, we may lose market share to our competitors and be unable to operate our business profitably.

Our success depends significantly on our ability to protect our rights to the technologies used in our products, including Masimo SET^® and licensed rainbow^® technology. We rely on patent protection, trade secrets and a combination of copyright and trademark laws, as well as nondisclosure, confidentiality and other contractual arrangements, to protect our technology and rights. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or maintain any competitive advantage. In addition, we cannot be assured that any of our pending patent applications will result in the issuance of a patent to us. The PTO may deny or require a significant narrowing of claims in our pending patent applications, and patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection or be issued in a form that is advantageous to us. We could also incur substantial costs in proceedings before the PTO.

As part of the Leahy-Smith America Invents Act (the Leahy-Smith Act), which was enacted in 2011, the PTO has introduced procedures that provide additional administrative pathways for third parties to challenge issued patents. IPR is one of these procedures. The number of IPR challenges filed is increasing, and in many cases, the PTO is canceling or significantly narrowing issued patent claims. Accordingly, even if a patent is granted by the PTO, there is a risk that it may not withstand an IPR challenge. IPR challenges could increase the uncertainties and costs associated with the maintenance, enforcement and defense of our issued and future patents and could have a material adverse effect on our business, financial condition and results of operations. In addition, recent case law has increased uncertainty regarding the availability of patent protection for certain technologies and the costs associated with obtaining patent protection for those technologies.

In October 2015, Medtronic filed three separate IPR Petitions with the PTAB challenging several of the claims of our ‘393 Patent, which expires in September 2016, and our ‘034 Patent, which expires in October 2018. In April 2016, the PTAB denied Medtronic’s IPR Petitions with respect to the ‘034 Patent, granted Medtronic’s IPR Petition for review of certain claims of the ‘393 Patent, and denied Medtronic’s IPR Petition for review of other claims of the ‘393 Patent. We are defending the claims of the ‘393 Patent for which review was granted. (See Note 14 to our accompanying consolidated financial statements under the caption “Litigation” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on the IPR Petitions.) Although we believe that we have good and substantial positions for the patentability review and trial of the ‘393 Patent, there is no guarantee that we will prevail.

Some of our patents related to our Masimo SET^® algorithm technology began to expire in March 2011. Additionally, upon the expiration of other issued or licensed patents, we may lose some of our rights to exclude competitors from making, using, selling or importing products using the technology based on the expired patents. While we seek to offset potential losses relating to important expiring patents by securing additional patents on commercially desirable improvements, there can be no assurance that we will be successful in securing such additional patents, or that such additional patents will adequately offset the effect of expiring patents. For example, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents once obtained. Depending on decisions by the U.S. Congress, the federal courts and the PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we might obtain in the future. Additionally, there is no assurance that competitors will not be able to design around our patents.

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We also rely on contractual rights with the third parties that license technology to us to protect our rights in such licensed technology. In addition, we rely on unpatented proprietary technology. We cannot assure you that we can meaningfully protect all of our rights in our unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our unpatented proprietary technology.

We seek to protect our know-how and other unpatented proprietary technology with confidentiality agreements and intellectual property assignment agreements with our employees, OEM partners, independent distributors and consultants. However, such agreements may not be enforceable or may not provide meaningful protection for our proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements or in the event that our competitors discover or independently develop similar or identical designs or other proprietary information. In addition, we rely on the use of registered and common law trademarks with respect to the brand names of some of our products. Common law trademarks provide less protection than registered trademarks. Loss of rights in our trademarks could adversely affect our business, financial condition and results of operations.

Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. If we fail to apply for intellectual property protection or if we cannot adequately protect our intellectual property rights in these foreign countries, our competitors may be able to compete more effectively against us, which could adversely affect our competitive position, as well as our business, financial condition and results of operations.

*If third parties claim that we infringe their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinue selling certain products.

Companies in the medical device industry have used intellectual property litigation to gain a competitive advantage in the marketplace. We face the risk of claims that we have infringed on third parties’ intellectual property rights. Searching for existing intellectual property rights may not reveal important intellectual property and our competitors may also have filed for patent protection, which is not publicly-available information, or claimed trademark rights that have not been revealed through our searches. In addition, some of our employees were previously employed at other medical device companies. We may be subject to claims that our employees have disclosed, or that we have used, trade secrets or other proprietary information of our employees’ former employers. Our efforts to identify and avoid infringing on third parties’ intellectual property rights may not always be successful. Any claims of patent or other intellectual property infringement against us, even those without merit, could:

• increase the cost of our products;

• be expensive and time consuming to defend;

• result in us being required to pay significant damages to third parties;

• force us to cease making or selling products that incorporate the challenged intellectual property;

• require us to redesign, reengineer or rebrand our products, product candidates and technologies;

• require us to enter into royalty or licensing agreements in order to obtain the right to use a third-party’s intellectual property on terms that may not be favorable or acceptable to us;

• require us to indemnify third parties pursuant to contracts in which we have agreed to provide indemnification for intellectual property infringement claims;

• divert the attention of our management and other key employees;

• result in our customers or potential customers deferring or limiting their purchase or use of the affected products impacted by the claims until the claims are resolved; and

• otherwise have a material adverse effect on our business, financial condition and results of operations.

In addition, new patents obtained by our competitors could threaten the continued commercialization of our products in the market even after they have already been introduced.

*We believe competitors may currently be violating and may in the future violate our intellectual property rights, and we may bring additional litigation to protect and enforce our intellectual property rights, which may result in substantial expense and may divert management’s attention from implementing our business strategy.

We believe that the success of our business depends, in significant part, on obtaining patent protection for our products and technologies, defending our patents and preserving our trade secrets. We were previously involved in significant litigation to protect our patent position and may be required to engage in further litigation. In 2006, we settled a costly, six-year lawsuit against Mallinckrodt, Inc., part of Tyco Healthcare, and one of its subsidiaries, Nellcor Puritan Bennett, Inc., in which we claimed infringement of some of our pulse oximetry signal processing patents.

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In November 2015, we settled multiple litigations with Mindray DS USA, Inc., Shenzhen Mindray Bio-Medical Electronics Co., Ltd. and Mindray Medical International Ltd.

In February 2009, we filed a patent infringement suit against Philips Electronics North America Corporation and Philips Medizin Systeme Böblingen GmbH (collectively, Philips) related to Philips’ FAST pulse oximetry technology and certain of Philips’ patient monitors. In March 2016, we filed a second patent infringement suit against Philips related to Philips’ FAST pulse oximetry technology and certain of Philips’ patient monitors. We also asserted various antitrust claims against Philips Electronics North America Corporation. These suits and Philips’ counterclaims are described in Note 14 to our accompanying consolidated financial statements under the caption “Litigation” included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Philips is an OEM partner of ours. There is no guarantee that we will prevail in this suit or receive any damages or other relief if we do prevail.

Our ongoing and future litigation could result in significant additional costs and further divert the attention of our management and key personnel from our business operations and the implementation of our business strategy and may not be adequate to protect our intellectual property rights.

Risks Related to Our Regulatory Environment

*Our failure to obtain and maintain FDA clearances or approvals on a timely basis, or at all, would prevent us from commercializing our current or upgraded products in the U.S., which could severely harm our business.

Each medical device that we wish to market in the U.S. generally must first undergo premarket review by the FDA and receive clearance or approval pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA) by receiving clearance of a 510(k) pre-market notification, receiving clearance through the de novo review process, or obtaining approval of a pre-market approval (PMA) application. Even if regulatory clearance or approval of a product is granted, the FDA may clear or approve our products only for limited indications for use, which would limit our ability to market the product to only such indications for use. We cannot guarantee that the FDA will grant 510(k) clearance on a timely basis, if at all, for new products or uses that we propose for Masimo SET^® or licensed rainbow^® technology. The traditional FDA 510(k) clearance process for our products has generally taken between three to six months. However, our more recent experience and interactions with the FDA, along with information we have received from other medical device manufacturers, suggests that, in some cases, the FDA is requiring applicants to provide additional or different information and data for 510(k) clearance than it had previously required; and that the FDA may not rely on approaches that it had previously accepted to support 510(k) clearance, thereby leading to more review cycles or to decisions by the FDA that our products are not substantially equivalent or require greater amounts of information to demonstrate substantial equivalence. As a result, we have experienced lengthier FDA 510(k) review periods over the past few years, which have delayed the 510(k) clearance process for our products.

In connection with an FDA 510(k) filing for certain improvements to our Pronto-7^® product, the FDA expressed concerns and requested additional information regarding the methods we used to validate the SpHb^® parameter. We responded to the FDA’s request for additional information in March 2014. The FDA responded that the remaining issues would not likely be resolved in the time remaining, so we voluntarily withdrew the application. We have since had further submissions and meetings with the FDA and believe we have a better understanding of the FDA’s expectations on validation methodologies for future 510(k) filings for SpHb spot-check devices such as Pronto^® and Pronto-7^®.

Even though 510(k) clearances have been obtained, if safety or effectiveness problems are identified with our pulse oximeters incorporating Masimo SET^® and licensed rainbow^® technology, patient monitor devices, sensors, cables and other products, we may need to initiate a recall of such devices. Furthermore, our new products or significantly modified marketed products could be denied 510(k) clearance and be required to undergo the more burdensome PMA or de novo review processes. The process of obtaining clearance of a de novo request or approval of a PMA is much more costly, lengthy and uncertain than the process for obtaining 510(k) clearance. Clearance of a de novo request generally takes six months to one year from the time of submission of the de novo request, although it can take longer. Approval of a PMA generally takes one to three years from the time of submission of the PMA, but may be longer.

We sell consumer versions of our iSpO₂^®and MightySat^™ pulse oximeters that are not intended for medical use. We are marketing these products in accordance with the FDA’s current policy for products that are intended for wellness or fitness uses. In addition, some of our products may also be exempted from the 510(k) process in accordance with specific FDA guidance and policies, such as the FDA guidance related to mobile medical applications. We cannot assure you that the FDA will not change its policy regarding the regulation of these products. If the FDA changes its policy or concludes that our marketing of these products is not in accordance with its current policy, we may be required to seek clearance or approval of these devices through the 510(k), de novo or PMA processes.

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The failure of our OEM partners to obtain required FDA clearances or approvals for products that incorporate our technologies could have a negative impact on our revenue.

Our OEM partners are required to obtain their own FDA clearances for products incorporating Masimo SET^® and licensed rainbow^® technology to market these products in the U.S. We cannot guarantee that the FDA clearances we have obtained will make it easier for our OEM partners to obtain clearances of products incorporating these technologies, or that the FDA will grant clearances on a timely basis, if at all, for any future product incorporating Masimo SET^® and licensed rainbow^®technology that our OEM partners propose to market.

*If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.

Our products, along with the manufacturing processes, labeling and promotional activities for our products, are subject to continual review and periodic inspections by the FDA and other regulatory bodies. Among other requirements, we and our suppliers are required to comply with the FDA’s Quality System Regulation (QSR), which covers the methods and documentation of the design, control testing, production, component suppliers control, quality assurance, complaint handling, labeling control, packaging, storage and shipping of our products. The FDA enforces the QSR through announced and unannounced inspections. We are also subject to similar state requirements and licenses.

In 2013, the FDA inspected our facility in Irvine, California and issued an FDA Form 483 listing observations the investigator believed may constitute violations of statutes or regulations administered by the FDA, including observations relating to complaint handling, medical device reporting and corrective and preventative action (CAPA) procedures. In 2014, the FDA also inspected our facility in Mexicali, Mexico and issued a Form 483 listing observations relating to our CAPA procedures, documentation practices associated with our device history records and procedures for employee training. We submitted responses to both Form 483s. In August 2014, we received from the FDA a final inspection report closing out the Mexicali inspection and a warning letter (the Warning Letter) related to the Irvine inspection. We submitted a response (the Response Letter) to the Warning Letter and attended a regulatory meeting with the FDA in September 2014. At the meeting, in addition to discussing our Response Letter, the FDA raised issues beyond the scope of the Warning Letter in the areas of Good Manufacturing Practices, quality, bioresearch monitoring and labeling/promotion. We have been in communication with the FDA since the meeting and are working to resolve the issues raised by the FDA. Although the FDA has yet to close out the Warning Letter, the FDA resumed issuing certificates to foreign governments (CFGs) for products manufactured in our Irvine, California facility in January 2016, which allows us to continue to register and import products into certain countries that require CFGs. We do not know what further actions, if any, the FDA will take in connection with these issues. If we are unable to resolve the issues raised by the FDA, our business, financial condition and results of operations could be adversely affected.

Failure by us or one of our suppliers to comply with statutes and regulations administered by the FDA and other regulatory bodies or failure to adequately respond to any FDA Form 483 observations, any Food and Drug Branch notices of violation or any similar reports could result in, among other things, any of the following items:

• warning letters or untitled letters issued by the FDA;

• fines, civil penalties, in rem forfeiture proceedings, injunctions, consent decrees and criminal prosecution;

• import alerts;

• unanticipated expenditures to address or defend such actions;

• delays in clearing or approving, or refusal to clear or approve, our products;

• withdrawal or suspension of clearance or approval of our products or those of our third-party suppliers by the FDA or other regulatory bodies;

• product recall or seizure;

• orders for physician notification or device repair, replacement or refund;

• interruption of production or inability to export to certain foreign countries; and

• operating restrictions.

If any of these items were to occur, it would harm our reputation and adversely affect our business, financial condition and results of operations.

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*Failure to obtain regulatory authorizations in foreign jurisdictions may prevent us from marketing our products abroad.

We currently market and intend to continue to market our products internationally. Outside of the U.S., we can market a product only if we receive a marketing authorization and, in some cases, pricing approval, from the appropriate regulatory authorities. The regulatory registration/licensing process varies among international jurisdictions, may require additional product testing, and may differ from that required for obtaining FDA clearance. FDA clearance does not ensure new product registration/licensing by foreign regulatory authorities and we may be unable to obtain foreign regulatory registration/licensing on a timely basis, if at all. In addition, clearance by one foreign regulatory authority does not ensure clearance by any other foreign regulatory authority or by the FDA. If we fail to receive necessary approvals to commercialize our products in foreign jurisdictions on a timely basis, or at all, our business, financial condition and results of operations could be adversely affected.

Modifications to our marketed devices may require new regulatory clearances or premarket approvals, or may require us to cease marketing or to recall the modified devices until clearances or approvals are obtained.

We have made modifications to our devices in the past and we may make additional modifications in the future. Any modifications to an FDA-cleared device that could significantly affect its safety or effectiveness or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly a de novo review or PMA. We may not be able to obtain such clearances or approvals in a timely fashion, or at all. Delays in obtaining future clearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would have an adverse effect on our business, financial condition and results of operations. The standards for determining which modifications require a new 510(k) clearance are ambiguous, and the FDA may disagree with our conclusions. For those modifications that we conclude do not require a new 510(k), if the FDA disagrees with our conclusion and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices, which could have an adverse effect on our business, financial condition and results of operations.

Federal regulatory reforms may make it difficult to maintain or attain approval to develop and commercialize our products and technologies.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of medical devices. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or whether FDA regulations, guidance or interpretations will be changed, and what the impact of such changes, if any, may be. However, any future regulatory changes could make it more difficult for us to maintain or attain approval to develop and commercialize our products and technologies.

*If our products cause or contribute to a death or serious injury, or malfunction in a way that would likely cause or contribute to a death or serious injury, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions, including recall of our products.

Under the FDA medical device reporting regulations, we are required to report to the FDA any incident in which a product of ours may have caused or contributed to a death or serious injury or in which a product of ours malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. In addition, all manufacturers placing medical devices in the European Union (EU) are legally required to report any serious or potentially serious incidents involving devices produced or sold by the manufacturer to the relevant authority in those jurisdictions where any such incident occurred.

The FDA and similar foreign governmental authorities have the authority to require the recall of our commercialized products in the event of material deficiencies or defects in, for example, design, labeling or manufacture. In the case of the FDA, the authority to require a recall generally must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found or they become aware of a safety issue involving a marketed product. A government-mandated or voluntary recall by us or by one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues.

We may initiate certain field actions, such as a correction or removal of our products in the future. A correction is a repair, modification, adjustment, relabeling, destruction or inspection of a device, without its physical removal from its point of use to some other location. A removal is the physical removal of a device from its point of use to some other location for repair, modification, adjustment, relabeling, destruction or inspection. If a correction or removal is initiated to reduce a health risk posed by our device, or to remedy a violation of the FDCA caused by the device that may present a risk to health, the correction or removal must be reported to the FDA. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations.

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From time to time, we have initiated various field actions related to our products as required by applicable law and regulations, including device corrections and removals, none of which were material to our operating results. Some of these field actions involved “reportable events” that were reported to the FDA and other foreign regulatory agencies within the appropriate regulatory timeframes. Because of our dependence upon patient and physician perceptions, any negative publicity associated with these or any future voluntary recalls could materially and adversely affect our business, financial condition, results of operations and growth prospects.

*Promotion of our products using claims that are off-label, unsubstantiated, false or misleading could subject us to substantial penalties.

Obtaining 510(k) clearance permits us to promote our products for the uses cleared by the FDA. Use of a device outside its cleared or approved indications is known as “off-label” use. Physicians may use our products off-label because the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. While we may request additional cleared indications for our current products, the FDA may deny those requests, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared product as a condition of clearance. If the FDA determines that we or our OEM partners have promoted our products for off-label use or have made false or misleading or inadequately substantiated promotional claims, it could request that we or our OEM partners modify those promotional materials or take regulatory or enforcement actions, including the issuance of an untitled letter, warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities may take action if they consider our promotional or training materials to constitute promotion of an uncleared or unapproved use. Although, depending on the facts and circumstances, such promotion might be protected speech under the First Amendment to the U.S. Constitution, we cannot be sure that government authorities or a court would accept such an argument. If not successfully defended, enforcement actions related to off-label promotion, could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In any such event, in addition to potential extensive fines and penalties, our reputation could be damaged and adoption of our products would be impaired. Although our policy is to refrain from statements that could be considered off-label promotion of our products, the FDA or another regulatory agency could conclude that we have engaged in off-label promotion.

In addition to promoting our products in a manner consistent with our clearances, we must have adequate substantiation for the claims we make for our products. If any of our claims are determined to be either false, misleading or deceptive, our products could be considered to be misbranded under the FDCA or to violate the Federal Trade Commission Act.

*We may be subject to or otherwise affected by federal and state health care laws, including fraud and abuse laws and health information privacy and security laws, and could face substantial penalties if we are unable to fully comply with these laws.

Although we do not provide health care services or receive payments directly from Medicare, Medicaid or other third-party payers for our products or the procedures in which our products are used, health care regulation by federal and state governments will impact our business. Health care fraud and abuse laws potentially applicable to our operations include, but are not limited to:

• the Federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any bribe, kickback or other remuneration intended to induce the purchase, order or recommendation of an item or service reimbursable under a federal health care program (such as the Medicare or Medicaid programs);

• the Federal False Claims Act and other federal laws which prohibit, among other things, knowingly and willfully presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payers that are false or fraudulent;

• the provisions of the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which established federal crimes for knowingly and willfully executing a scheme to defraud any health care benefit program or making false statements in connection with the delivery of or payment for health care benefits, items or services; and

• state laws analogous to each of the above federal laws, such as state anti-kickback and false claims laws that may apply to items or services reimbursed by governmental programs and non-governmental third-party payers, including commercial insurers, and state laws governing the privacy of certain patient identifiable health information (PHI).

Federal and state false claims laws prohibit anyone from presenting, or causing to be presented, claims for payment to third-party payers that are false or fraudulent. For example, the federal Civil False Claims Act imposes liability on any person or entity that, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program, including Medicaid and Medicare.

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Some suits filed under the Civil False Claims Act, known as “qui tam” actions, can be brought by a private individual, referred to as a “whistleblower” or “relator,” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Such complaints are filed under seal and remain sealed until the applicable court orders otherwise. In recent years, the number of suits brought by private individuals has increased dramatically. Manufacturers, like us, can be held liable under false claims laws, even if they do not submit claims to the government, if they are found to have caused medical care providers to have submitted claims to the government for payment for a service or the use of a device that is not properly covered for government reimbursement. A number of states also have false claims laws, and some of these laws may apply to claims for items or services reimbursed under Medicaid and/or commercial insurance. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs and imprisonment. In particular, when an entity is determined to have violated the federal Civil False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of $5,500 to $11,000 for each separate false claim.

In April 2011, we were informed by the U.S. Attorney’s Office for the Central District of California, Civil Division, that a qui tam complaint had been filed against us in the U.S. District Court for the Central District of California by three of our former physician office sales representatives. The qui tam complaint alleged, among other things, that our noninvasive hemoglobin products failed to meet their accuracy specifications and that we misled the FDA and customers regarding the accuracy of the products. In November 2011, the U.S. declined to intervene in the case, and in October 2013, the District Court granted summary judgment in our favor. The former sales representatives appealed the District Court’s decision and an argument on the appeal was held in the Ninth Circuit Court of Appeals in February 2016 resulting in the Ninth Circuit Court of Appeals’ affirmation of the District Court’s summary judgment.

In the third quarter of 2013, we were notified that the FDA and the U.S. Attorney’s Office for the Central District of California, Criminal Division (USAO) were investigating the allegations regarding our noninvasive hemoglobin products. In the second quarter of 2014, we received grand jury subpoenas requesting documents pertaining to, among other things, the testing, marketing and sales of our Pronto^® and Pronto-7^® products. In May 2015, we received a letter from the USAO stating that, as of the date of the letter, the USAO had decided not to initiate any criminal charges against us or any of our current or former employees in connection with its investigation. The USAO reserved the right to revisit its decision at any time.

We have certain arrangements with hospitals that may be affected by health care fraud and abuse laws. For instance, under our standard customer arrangements, we provide hospitals with free pulse oximetry monitoring devices in exchange for their agreement to purchase future pulse oximetry sensor requirements from us. In addition, we occasionally provide our customers with rebates in connection with their annual purchases. While we believe that these arrangements are structured such that we are currently in compliance with applicable federal and state health care laws, one or more of these arrangements may not meet the Federal Anti-Kickback Statute’s safe harbor requirements, which may result in increased scrutiny by government authorities that are responsible for enforcing these laws.

There can be no assurance that we will not be found to be in violation of any of such laws or other similar governmental regulations to which we are directly or indirectly subject and, as a result, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion of our products from reimbursement under Medicare, Medicaid and other federal health care programs, and the curtailment or restructuring of our operations. Any penalties could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against such action, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

Further, we are required to comply with federal and state laws governing the transmission, security and privacy of individually identifiable PHI that we may obtain or have access to in connection with the manufacture and sale of our products. We may be required to make costly system modifications to comply with the HIPAA privacy and security requirements.In addition, if we do not properly comply with existing or new laws and regulations related to the protection of health information, we could be subject to criminal or civil sanctions, the potential enforcement of which is greater as a result of the Health Information Technology of Economic and Clinical Health Act.

Numerous other federal and state laws protect the confidentiality of PHI, including state medical information privacy laws, state social security number protection laws and state and federal consumer protection laws. In some cases, more protective state privacy and security laws are not preempted by HIPAA and may be subject to interpretation by various governmental authorities and courts, resulting in potentially complex compliance issues for us and our customers.

In addition, state and federal human subject protection laws apply to our receipt of individually identifiable PHI in connection with clinical research. These laws could create liability for us if one of our research collaborators uses or discloses research subject information without authorization and in violation of applicable laws.

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We may incur significant costs and potential liabilities in defending our new products and technologies in various legal and other proceedings.

Our noninvasive measurement technologies are new and not yet widely understood or accepted. These new technologies may become the subject of various legal and other proceedings. We may incur significant costs in explaining and defending our new products and technologies in these proceedings, often to non-technical audiences. The outcomes of these proceedings are unpredictable and may result in significant liabilities, regardless of the merits of the claims made in the proceedings.

*Legislative and regulatory changes in the health care industry could have a negative impact on our financial performance. Furthermore, our business, financial condition, results of operations and cash flows could be significantly and adversely affected by health care reform legislation in the U.S. or if reform programs are adopted in our key international markets.

Changes in the health care industry in the U.S. and elsewhere could adversely affect the demand for our products as well as the way in which we conduct our business. In 2010, President Obama signed health care reform legislation into law that required most individuals to have health insurance, established new regulations on health plans, created insurance pooling mechanisms and reduced Medicare spending on services provided by hospitals and other providers. Beginning in January 2013, this legislation also imposed significant new taxes on medical device makers in the form of a 2.3% excise tax on U.S. medical device sales, as well as related compliance and reporting obligations. Although President Obama signed into law a bill that included a two-year suspension of the medical device tax beginning in January 2016, such tax may be reimposed on medical device makers beginning in January 2018 if such suspension is not extended or the medical device tax is not permanently repealed.

Moreover, the Physician Payment Sunshine Act (the Sunshine Act), which was enacted by Congress as part of the Patient Protection and Affordable Care Act in March 2010, requires medical device companies to track and publicly report, with limited exceptions, all payments and transfers of value to physicians and teaching hospitals in the U.S. Implementing regulations for these tracking and reporting obligations were finalized in 2013, and companies are now required to track payments made since August 2013. If we fail to comply with the data collection and reporting obligations imposed by the Sunshine Act, we may be subject to substantial civil monetary penalties.

In general, an expansion in the government’s role in the U.S. health care industry may lower reimbursements for our products, reduce demand for innovative products, reduce medical procedure volumes and adversely affect our business and results of operations, possibly in a material manner. In addition, as a result of the continued focus on health care reform, there is a risk that Congress may implement changes in laws and regulations governing health care service providers, including measures to control costs or reductions in reimbursement levels, which could result in pricing pressures, have an adverse effect on the demand for our products and/or negatively impact the prices that the market is willing to accept for our current and future products. We cannot predict the effect any future legislation or regulation will have on us or what health care initiatives, if any, will be implemented at the state level. Furthermore, many private payers look to Medicare’s coverage and reimbursement policies in setting their coverage policies and reimbursement amounts such that federal reforms could influence the private sector as well. Finally, many states also may attempt to reform their Medicaid programs such that either coverage for certain items or services may be narrowed or reimbursement for them could be reduced. These health care reforms may adversely affect our business.

Consistent with or in addition to Congressional or state reforms, CMS, the federal agency that administers the Medicare and Medicaid programs, could change its current policies that affect coverage and reimbursement for our products. For example, in 2007, CMS determined that certain uses of pulse oximetry monitoring are eligible for separate Medicare payment in the hospital outpatient setting when no separately payable hospital outpatient services are reported on the same date of service. However, CMS re-examines the reimbursement rates for hospital inpatient and outpatient and physician office settings each year and could either increase or decrease the reimbursement rate for procedures utilizing our products. We are unable to predict when legislation or regulation that affects our business may be proposed or enacted in the future or what effect any such legislation or regulation would have on our business. Any such legislation, regulation or policies that affect the coverage and reimbursement of our current or future products, or the procedures utilizing our current or future products, could cause our sales to decrease and our revenue to decline.

Our success in international markets also may depend upon the eligibility of reimbursement for our products through government-sponsored health care payment systems and other third-party payers. Outside of the U.S., reimbursement systems vary by country. These systems are often subject to the same pressures to curb rising health care costs and control health care expenditures as those in the U.S. In addition, as economies of emerging markets develop, these countries may implement changes in their health care delivery and payment systems. If adequate levels of reimbursement from third-party payers outside of the U.S. are not obtained, sales of our products outside of the U.S. may be adversely affected.

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In addition, the requirements or restrictions imposed on us or our products may change, either as a result of administratively adopted policies or regulations or as a result of the enactment of new laws. Our medical devices and business activities are subject to rigorous regulation by the FDA and other federal, state and international governmental authorities. These authorities and members of Congress have been increasing their scrutiny over the medical device industry. In recent years, the U.S. Congress, Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and the Department of Defense have issued subpoenas and other requests for information to medical device manufacturers, primarily related to financial arrangements with health care providers, regulatory compliance and marketing and product promotional practices. Furthermore, certain state governments have enacted legislation to increase transparency of interactions with health care providers, pursuant to which we are required by law to disclose payments and other transfers for value to health care providers licensed by certain states. We anticipate that the government will continue to scrutinize our industry closely, and any new regulations or statutory provisions could result in delays or increased costs during the periods of product development, clinical trials and regulatory review and approval, as well as increased costs to assure compliance.

Risks Related to Our Business and Operations

*We may experience conflicts of interest with Cercacor with respect to business opportunities and other matters.

Prior to our initial public offering in August 2007, our stockholders owned 99% of the outstanding shares of capital stock of Cercacor and we believe that, as of July 2, 2016, a number of our stockholders, including certain of our directors and executive officers, continue to own shares of Cercacor stock. Joe Kiani, our Chairman and Chief Executive Officer, is also the Chairman and Chief Executive Officer of Cercacor.

Due to the interrelated nature of Cercacor with us, conflicts of interest will arise with respect to transactions involving business dealings between us and Cercacor, potential acquisitions of businesses or products, the development and ownership of technologies and products, the sale of products, markets and other matters in which our best interests and the best interests of our stockholders may conflict with the best interests of the stockholders of Cercacor. In addition, we and Cercacor may disagree regarding the interpretation of certain terms in the Cross-Licensing Agreement. We cannot guarantee that any conflict of interest will be resolved in our favor, or that, with respect to our transactions with Cercacor, we will negotiate terms that are as favorable to us as if such transactions were with another third-party.

We will be required to assign to Cercacor and pay Cercacor for the right to use certain products and technologies we develop that relate to the monitoring of non-vital sign parameters, including improvements to Masimo SET^®.

Under the Cross-Licensing Agreement, if we develop certain products or technologies that relate to the noninvasive monitoring of non-vital sign parameters, including improvements to Masimo SET^® for the noninvasive monitoring of non-vital sign parameters, we would be required to assign these developments to Cercacor and then license the technology back from Cercacor in consideration for upfront payments and royalty obligations to Cercacor. Therefore, these products and technologies would be deemed to have been developed or improved exclusively by Cercacor. In addition, we will not be reimbursed by Cercacor for our expenses relating to the development or improvement of any such products or technologies, which expenses may be significant. As a result of these terms, we may not generate any revenue from the further development of certain products and technologies for the monitoring of non-vital sign parameters, including improvements to Masimo SET^®, which could adversely affect our business, financial condition and results of operations.

In the event that the Cross-Licensing Agreement is terminated for any reason, or Cercacor grants a license to rainbow^® technology to a third-party, our business would be materially and adversely affected.

Cercacor owns all of the proprietary rights to certain rainbow^® technology developed with our proprietary Masimo SET^® for products intended to be used in the Cercacor Market, and all rights to any non-vital signs measurement for which we do not exercise an option pursuant to the Cross-Licensing Agreement. In addition, Cercacor has the right to terminate the Cross-Licensing Agreement or grant licenses covering rainbow^® technology to third parties if we breach certain terms of the agreement, including any failure to meet our minimum royalty payment obligations or failure to use commercially reasonable efforts to develop or market products incorporating licensed rainbow^® technology. If we lose our exclusive license to rainbow^® technology, we would lose the ability to prevent others from making, using, selling or importing products using rainbow^® technology in our market. As a result, we would likely be subject to increased competition within our market, and Cercacor or competitors who obtain a license to rainbow^® technology from Cercacor would be able to offer related products.

We may not be able to commercialize our products incorporating licensed rainbow^® technology cost-effectively or successfully.

As a result of the royalties that we must pay to Cercacor, it is generally more expensive for us to make products that incorporate licensed rainbow^® technology than products that do not include licensed rainbow^® technology.

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We cannot assure you that we will be able to sell products incorporating licensed rainbow^® technology at a price the market is willing to accept. If we cannot commercialize our products incorporating licensed rainbow^® technology successfully, we may not be able to generate sufficient product revenue from these products to be profitable, which could adversely affect our business, financial condition and results of operations.

Rights provided to Cercacor in the Cross-Licensing Agreement may impede a change in control of our company.

Under the Cross-Licensing Agreement, a change in control includes the resignation or termination of Joe Kiani from his position as Chief Executive Officer of either Masimo or Cercacor. A change in control also includes other customary events, such as the sale or merger of Masimo or Cercacor to a non-affiliated third-party or the acquisition of 50% or more of the voting power of Masimo or Cercacor by a non-affiliated third-party. In the event we undergo a change in control, we are required to immediately pay a $2.5 million fee to exercise an option to license technology developed by Cercacor for use in blood glucose monitoring. Additionally, our per product royalties payable to Cercacor will become subject to specified minimums, and the minimum aggregate annual royalties for licensed rainbow^® measurements payable to Cercacor related to carbon monoxide, methemoglobin, fractional arterial oxygen saturation, hemoglobin and blood glucose will increase to $15.0 million, plus up to $2.0 million for other rainbow^® measurements. Also, if the surviving or acquiring entity ceases to use “Masimo” as a company name and trademark following a change in control, all rights to the “Masimo” trademark will automatically be assigned to Cercacor. This could delay or discourage transactions involving an actual or potential change in control of us, including transactions in which our stockholders might otherwise receive a premium for their shares over our then-current trading price. In addition, our requirement to assign all future improvements for non-vital signs to Cercacor could impede a change in control of our company.

We may experience significant fluctuations in our quarterly results in the future, we may not maintain our current levels of profitability, and changes to existing accounting pronouncements or taxation rules may affect how we conduct our business and our results of operations.

Our operating results have fluctuated in the past and are likely to fluctuate in the future. We may experience fluctuations in our quarterly results of operations as a result of:

• delays or interruptions in manufacturing and shipping of our products;

• varying demand for and market acceptance of our technologies and products;

• delayed acceptance of our new products, negatively impacting the carrying value of our inventory;

• design, technology or other market changes that could negatively impact the carrying value of our inventory;

• the effect of competing technological and market developments resulting in lower selling prices or significant promotional costs;

• changes in the timing of product orders and the volume of sales to our OEM partners;

• actions taken by GPOs;

• delays in hospital conversions to our products and declines in hospital patient census;

• our legal expenses, particularly those related to litigation matters;

• changes in our product or customer mix;

• movements in foreign currency exchange rates;

• market seasonality of our sales due to quarterly fluctuations in hospital and other alternative care admissions;

• our ability to renew existing long-term sensor contract commitments;

• changes in the total dollar amount of annual contract renewal activities;

• changes in the mix and, therefore, the related costs of products that we supply at no upfront costs to our customers as part of their long-term sensor commitments;

• changes in hospital and other alternative care admission levels;

• our inability to efficiently scale operations and establish processes to accommodate business growth;

• unanticipated delays or problems in the introduction of new products, including delays in obtaining clearance or approval from the FDA;

• high levels of returns and repairs; and

• changes in reimbursement rates for SpHb^®, SpCO^® and SpMet^® parameters.

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In addition, a change in accounting pronouncements or taxation rules or practices, or the interpretation of them by the SEC or other regulatory bodies, could have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practice have occurred and may occur in the future. Changes to existing rules, the adoption of new rules, changes in tax laws, or the expiration of existing favorable tax holidays may adversely affect our reported financial results or the way we conduct our business.

If our operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. Our expense levels are based, in part, on our expectations regarding future revenue levels and are relatively fixed in the short term. As a result, if our revenue for a particular period was below our expectations, we would not be able to proportionately reduce our operating expenses for that period. Any revenue shortfall would have a disproportionately negative effect on our operating results for the period. Due to these and other factors, you should not rely on our results for any one quarter as an indication of our future performance.

Our results of operations could vary as a result of the methods, estimates and judgments that we use in applying our accounting policies.

The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations. See “Critical Accounting Estimates” contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, which we filed with the SEC on February 24, 2016.

*If we lose the services of our key personnel, or if we are unable to attract and retain other key personnel, we may not be able to manage our operations or meet our growth objectives.

We are highly dependent on our senior management, especially Joe Kiani, our Chief Executive Officer, and other key officers. We are also heavily dependent on our engineers and field sales team, including sales representatives and clinical specialists. Our success will depend on our ability to retain our current management, engineers and field sales team and, in order to manage current operations and growth effectively, to attract and retain qualified personnel in the future, including scientists, clinicians, engineers and other highly skilled personnel. As competition for senior management, engineers and field sales personnel is intense, we may not be able to retain our personnel. In addition, some of our key personnel may hold stock options with an exercise price that is greater than our recent closing prices, which may minimize the retention value of these options. The loss of the services of members of our key personnel, or the inability to attract and retain qualified personnel in the future, could prevent the implementation and completion of our objectives, including the development and introduction of our products. In general, our key personnel may terminate their employment at any time and for any reason without notice.

Existing or future acquisitions of businesses could negatively affect our business, financial condition and results of operations if we fail to integrate the acquired businesses successfully into our existing operations or if we discover previously undisclosed liabilities.

We have acquired six businesses since our inception and we may acquire additional businesses in the future. Successful acquisitions depend upon our ability to identify, negotiate, complete and integrate suitable acquisitions and to obtain any necessary financing. Even if we complete acquisitions, we may experience:

• difficulties in integrating any acquired companies, personnel, products and other assets into our existing business;

• delays in realizing the benefits of the acquired company, products or other assets;

• diversion of our management’s time and attention from other business concerns;

• limited or no direct prior experience in new markets or countries we may enter;

• higher costs of integration than we anticipated;

• difficulties in retaining key employees of the acquired business who are necessary to manage these acquisitions; and

• changes in the overall financial model as certain acquired companies may have a different revenue, gross profit margin or operating expense profile.

In addition, an acquisition could materially impair our operating results by causing us to incur debt or requiring us to amortize acquisition expenses and acquired assets. We may also discover deficiencies in internal controls, data adequacy and integrity, product quality, regulatory compliance and product liabilities that we did not uncover prior to our acquisition of such businesses, which could result in us becoming subject to penalties or other liabilities.

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Any difficulties in the integration of acquired businesses or unexpected penalties or liabilities in connection with such businesses could have a material adverse effect on our business, financial condition and results of operations.

*The risks inherent in operating internationally and the risks of selling and shipping our products and purchasing our components and products internationally may adversely impact our business, financial condition and results of operations.

We derive a portion of our net sales from international operations. For the six months ended July 2, 2016 and July 4, 2015, approximately 28.4% and 27.6%, respectively, of our product revenue was derived from our international operations. In addition, we purchase a portion of our raw materials and components on the international market. The sale and shipment of our products across international borders, as well as the purchase of materials and components from international sources, subject us to extensive U.S. and foreign governmental trade regulations. Compliance with such regulations is costly and we could be exposed to potentially significant penalties if we are found not to be in compliance with such regulations. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, restrictions on certain business activities, and exclusion or debarment from government contracting. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our shipping, manufacturing and sales activities. Any material decrease in our international sales would adversely affect our business, financial condition and results of operations.

On June 23, 2016, the United Kingdom (UK) held a referendum pursuant to which voters elected to leave the EU, commonly referred to as Brexit. As a result of UK voters’ election to leave the EU, the British government is expected to begin negotiating the terms of the UK’s future relationship with the EU. Although the long-term effects of Brexit will depend on any agreements the UK makes to retain access to the EU markets, Brexit has created additional uncertainties that may ultimately result in new regulatory costs and challenges for medical device companies and increased restrictions on imports and exports throughout Europe, which could adversely affect our ability to conduct and expand our operations in Europe and which may have an adverse effect on our business, financial condition and results of operations. In addition, Brexit may also increase the possibility that other countries may decide to leave the EU in the future.

In addition, our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions. These risks include, but are not limited to:

• the imposition of additional U.S. and foreign governmental controls or regulations;

• the imposition of costly and lengthy new export licensing requirements;

• a shortage of high-quality sales people and distributors;

• the loss of any key personnel that possess proprietary knowledge, or who are otherwise important to our success in certain international markets;

• changes in duties and tariffs, license obligations and other non-tariff barriers to trade;

• the imposition of new trade restrictions;

• the imposition of restrictions on the activities of foreign agents, representatives and distributors;

• scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us;

• pricing pressure that we may experience internationally;

• changes in foreign currency exchange rates;

• laws and business practices favoring local companies;

• political instability and actual or anticipated military or political conflicts;

• financial and civil unrest worldwide;

• longer payment cycles; and

• difficulties in enforcing or defending intellectual property rights.

The U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from promising or making improper payments to non-U.S. officials for the purpose of obtaining an advantage to secure or retain business. Because of the predominance of government-sponsored health care systems around the world, many of our customer relationships outside of the U.S. are with governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws.

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Despite our training and compliance programs, our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could subject us to cash and non-cash penalties, disrupt our operations, involve significant management distraction and result in a material adverse effect on our business, financial condition and results of operations.

*Our operations may be adversely impacted by our exposure to risks related to foreign currency exchange rates.

We market our products in certain foreign markets through our subsidiaries and other international distributors. As a result, events that result in global economic uncertainty could also adversely affect our results of operations. For example, the announcement of Brexit caused significant volatility in global economic markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. Dollar relative to certain other foreign currencies in which we conduct business, which may expose us to gains and losses on foreign currency transactions and a potential devaluation of the local currencies of our customers relative to the U.S. Dollar. While a majority of our sales are transacted in U.S. Dollars, some of our sales agreements with foreign customers provide for payment in currencies other than the U.S. Dollar. These foreign currency revenues, when converted into U.S. Dollars, can vary depending on average exchange rates during a respective period. Specifically, during the six months ended July 2, 2016, our foreign currency revenue was negatively impacted by $0.8 million, as compared to foreign exchange rates from the six months ended July 4, 2015, which resulted from unfavorable movements in foreign exchange rates that reduced the U.S. Dollar translation of foreign sales that were denominated in various foreign currencies, primarily in Europe. Similarly, certain of our foreign sales support subsidiaries transact business in their respective country’s local currency, which is also their functional currency. As a result, expenses of these foreign subsidiaries when converted into U.S. Dollars can vary depending on average monthly exchange rates during a respective period. We are also exposed to foreign currency gains or losses on outstanding foreign currency denominated receivables and payables. When converted to U.S. Dollars, these receivables and payables can vary depending on the monthly exchange rates at the end of the period. In addition, certain intercompany transactions may give rise to realized and unrealized foreign currency gains or losses based on the currency underlying such intercompany transactions. Accordingly, our operating results are subject to fluctuations in foreign currency exchange rates.

The balance sheets of our foreign subsidiaries whose functional currency is not the U.S. Dollar are translated into U.S. Dollars at the rate of exchange at the balance sheet date and the statements of operations and cash flows are translated into U.S. Dollars using the average monthly exchange rate during the period. Any foreign currency exchange gain or loss as a result of translating the balance sheets of our foreign subsidiaries whose functional currency is not the U.S. Dollar is included in equity as a component of accumulated other comprehensive income (loss).

We currently do not hedge our foreign currency exchange rate risk. Should we decide in the future to hedge such exchange rate risk by entering into forward contracts, these contracts may not mitigate the potential adverse impact on our financial results due to the variability of timing and amount of payments under these contracts. In addition, our failure to sufficiently hedge, forecast or otherwise manage such foreign currency risks properly could have a material adverse effect on our business, financial condition and results of operations.

We currently manufacture our products at several locations and any disruption to or expansion of our manufacturing operations could adversely affect our business, financial condition and results of operations.

We rely on our manufacturing facilities in Mexicali, Mexico; Irvine, California; Hudson, New Hampshire; and Danderyd, Sweden. These facilities and the manufacturing equipment we use to produce our products would be difficult to replace and could require substantial time to repair. Our facilities may be affected by natural or man-made disasters. Earthquakes are of particular significance since some of our facilities are located in an earthquake-prone area. We are also vulnerable to damage from other types of disasters, including power loss, attacks from extremist or terrorist organizations, epidemics, communication failures, fire, floods and similar events. In the event that one of our facilities is affected by a natural or man-made disaster, we would be forced to rely on third-party manufacturers if we could not shift production to our other manufacturing facilities. Furthermore, our insurance for damage to our property and the disruption of our business from casualties may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. If we are forced to seek alternative facilities, or if we voluntarily expand one or more of our manufacturing operations to new locations, we may incur additional transition costs and we may experience a disruption in the supply of our products until the new facilities are available and operating.

We also purchase materials and components from international sources. Any disruption in the supply of such materials, including transportation or port delays, could adversely impact our manufacturing operations. Disruptions may also occur as a result of local, regional and worldwide health risks. Such disruptions may include the inability to manufacture and distribute our products due to the direct effects of illness on individuals or due to constraints on supply and distribution that may result from either voluntary or government imposed restrictions.

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Any disruption or delay at our manufacturing facilities, any expansion of our operations to additional locations, or any changes in market conditions could create operational hurdles and have an adverse impact on our ability to produce sufficient inventory of our products or may require us to incur additional expenses in order to produce sufficient inventory, depending on changes in product demand. Furthermore, if we are unable to meet the demand of our customers, our customers may cancel orders or purchase products from our competitors, which could adversely affect our business, financial condition and results of operations. Conversely, if product demand decreases, we may be unable to timely adjust our manufacturing cost structure, resulting in excess capacity, which would lower gross product margins. Similarly, if we are unable to forecast demand accurately, we could be required to record charges related to excess or obsolete inventory, which would also lower our gross margin.

*Our suppliers may not supply us with a sufficient amount of materials and components or materials and components of adequate quality.

We depend on certain sole or limited source suppliers for key materials and components of our noninvasive patient monitoring solutions, and if we are unable to obtain these components on a timely basis, we will not be able to deliver our noninvasive patient monitoring solutions to customers. Also, we cannot guarantee that any of the materials or components that we purchase, if available at all, will be of adequate quality. From time to time, there are industry-wide shortages of several electronic components that we use in our noninvasive blood constituent patient monitoring solutions. We may experience delays in production of our products if we fail to identify alternate vendors for materials and components, if any parts supply is interrupted or reduced or if there is a significant increase in production costs, each of which could adversely affect our business, financial condition and results of operations.

If we fail to comply with the reporting obligations of the Securities Exchange Act of 1934, as amended, and Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or if we fail to maintain adequate internal control over financial reporting, our business, results of operations and financial condition and investors’ confidence in us could be materially and adversely affected.

As a public company, we are required to comply with the periodic reporting obligations of the Securities Exchange Act of 1934, as amended, including preparing annual reports, quarterly reports and current reports. Our failure to prepare and disclose this information in a timely manner and meet our reporting obligations in their entirety could subject us to penalties under federal securities laws and regulations of The NASDAQ Stock Market LLC, expose us to lawsuits and restrict our ability to access financing on favorable terms, or at all.

In addition, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes-Oxley Act), we are required to evaluate and provide a management report on our systems of internal control over financial reporting, and our independent registered public accounting firm is required to attest to our internal control over financial reporting. During the course of the evaluation of our internal control over financial reporting, we may identify areas requiring improvement and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and costs to us and require us to divert substantial resources, including management time, from other activities. In addition, if we fail to maintain the adequacy of our internal controls over financial reporting, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. Any failure to maintain compliance with the requirements of Section 404 of the Sarbanes-Oxley Act could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business, negatively impact the trading price of our stock, and adversely affect investors’ confidence in our company and our ability to access capital markets for financing.

*Changing laws and increasingly complex corporate governance and public disclosure requirements could have an adverse effect on our business and operating results.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the California Transparency in Supply Chains Act, the UK Modern Slavery Act and new regulations issued by the SEC and The NASDAQ Stock Market LLC, have and will create additional compliance requirements for companies such as ours. To maintain high standards of corporate governance and public disclosure, we have invested in, and intend to continue to invest in, reasonably necessary resources to comply with evolving standards.

For example, the Dodd-Frank Act includes provisions regarding “conflict minerals” (generally tin, tantalum, tungsten and gold) that are mined in the Democratic Republic of Congo and adjoining countries (the DRC region), and in June 2016, the EU adopted its own regulation on conflict minerals that covers the sourcing of conflict minerals from anywhere in the world. The provisions of the Dodd-Frank Act require us to undertake comprehensive due diligence to determine whether conflict minerals

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used in our products, including any portion of our products manufactured by third parties, financed or benefited armed groups in the DRC region. The rules also require us to file conflict mineral reports with the SEC annually. We have incurred, and expect to continue to incur, additional costs to comply with these rules, including costs related to determining the source of origin of conflict minerals used in our products. Given the complexity of our supply chain, we may face difficulties if our suppliers are unwilling or unable to verify the origin of all conflict minerals used in our products. Furthermore, our ongoing compliance with these rules could affect the pricing, sourcing and availability of minerals used in the manufacture of our products. We may also encounter challenges with our customers and stockholders if we are unable to certify that our products are free of conflict minerals. To maintain high standards of corporate governance and public disclosure, we have invested in, and intend to continue to invest in, reasonably necessary resources to comply with such evolving standards. These investments have resulted in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities and may continue to do so in the future.

In addition, stockholder litigation surrounding executive compensation and disclosure of executive compensation has increased with the passage of the Dodd-Frank Act. Furthermore, in recent years, our stockholders have not approved our advisory vote on named executive officer compensation that is required to be voted on by our stockholders annually pursuant to the Dodd-Frank Act. If we are involved in a lawsuit related to compensation matters or any other matters not covered by our directors’ and officers’ liability insurance, we may incur significant expenses in defending against such lawsuits, or be subject to significant fines or required to take significant remedial actions, each of which could adversely affect our business, financial condition and results of operations.

*If product liability claims are brought against us, we could face substantial liability and costs.

The manufacture and sale of products using Masimo SET^® and licensed rainbow^® technology expose us to product liability claims and product recalls, including, but not limited to, those that may arise from unauthorized off-label use, which is use of a device in a manner outside the indications for use cleared by the FDA, malfunctions, design flaws or manufacturing defects related to our products or the use of our products with incompatible components or systems. For example, in April 2014, an amended putative class action complaint was filed against us alleging product liability and negligence claims in connection with pulse oximeters that we modified and provided at the request of the study investigators for use in a randomized trial at the University of Alabama. In August 2015, the Court granted summary judgment in favor of Masimo, rejecting the plaintiffs’ claims. The plaintiffs have appealed the Court’s decision. While we believe we have good and substantial defenses to the claims, there is no guarantee that we will ultimately prevail. In addition, we cannot be certain that our product liability insurance will be sufficient to cover any or all damages or claims asserted in this case or any other product liability claims that may be brought against us in the future. Furthermore, we may not be able to obtain or maintain insurance in the future at satisfactory rates or in adequate amounts to protect us against any product liability claims. Any losses that we may suffer from product liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our technology and products, together with the corresponding diversion of the attention of our key employees, may subject us to significant damages and could adversely affect our business, financial condition and results of operations.

*We may incur environmental and personal injury liabilities related to certain hazardous materials used in our operations.

Our manufacturing processes involve the use, generation and disposal of certain hazardous materials and wastes, including silicone adhesives, solder and solder paste, sealants, epoxies and various solvents such as methyl ethyl ketone, acetone and isopropyl alcohol. As a result, we are subject to stringent federal, state and local laws relating to the protection of the environment, including those governing the use, handling and disposal of hazardous materials and wastes. For example, products that we sell in Europe are subject to regulation in the EU markets under the Restriction of the Use of Hazardous Substances Directive (RoHS). RoHS prohibits companies from selling products that contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In addition, the EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very high concern in products. Compliance with such regulations may be costly and, therefore, we may be forced to incur significant costs to comply with environmental regulations.

From time to time, new regulations are enacted and it is difficult to anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with environmental regulations as they are enacted. Future environmental laws may significantly affect our operations by, for example, requiring our manufacturing processes to be altered or requiring us to use different types of materials in manufacturing our products. Any changes to our operations may increase our manufacturing costs, detrimentally impact the performance of our products, add greater testing lead-times for product introductions or have other similar effects. In our research and manufacturing activities, we use, and our employees may be exposed to, materials that are hazardous to human health, safety or the environment. These materials and various wastes resulting from their use are stored at our facility pending ultimate use and disposal.

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The risk of accidental injury to our employees or contamination from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any resulting damages and any such liability could exceed our reserves. Although we maintain general liability insurance, we do not specifically insure against environmental liabilities. If an enforcement action were to occur, our reputation and our business and financial condition may be harmed, even if we were to prevail or settle the action on terms favorable to us.

We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.

Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted cybersecurity attacks pose a risk to the security of Masimo’s and our customers’, partners’, suppliers’ and third-party service providers’ products, systems and networks, and the confidentiality, availability and integrity of any underlying information and data. Our ability to effectively manage and maintain our internal business information, and to ship products to customers and invoice them on a timely basis, depends significantly on our enterprise resource planning system and other information systems. Portions of our information technology systems may experience interruptions, delays or cessations of service or produce errors in connection with ongoing systems implementation work. In addition, interfaces between our products and our customers’ computer network could provide additional opportunities for cybersecurity attacks on us and our customers. The techniques used to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, misappropriation of confidential or otherwise protected information and corruption of data. As a result, there can be no assurance that our protective measures will prevent or detect security breaches that could have a significant impact on our business, reputation, financial condition and results of operations. The failure of these systems to operate or integrate effectively with other internal, customer, supplier or third-party service provider systems and to protect the underlying information technology system and data integrity, including from cyber-attacks, intrusions or other breaches or unauthorized access of these systems, or any failure by us to remediate any such attacks or breaches, may also result in damage to our reputation or competitiveness, delays in product fulfillment and reduced efficiency of our operations, and could require significant capital investments to remediate any such failure, problem or breach, all of which could adversely affect our business, financial condition and results of operations.

*Our operating results may be adversely affected by unfavorable economic and market conditions.

Many of the countries in which we operate, including the U.S. and several of the members of the EU, have experienced and continue to experience uncertain economic conditions resulting from global as well as local factors, such as Brexit. Our business or financial results may be adversely impacted by these uncertain economic conditions, including: adverse changes in interest rates, foreign currency exchange rates, tax laws or tax rates; inflation; contraction in the availability of credit in the marketplace due to legislation or other economic conditions, which may potentially impair our ability to access the capital markets on terms acceptable to us or at all; and the effects of government initiatives to manage economic conditions. In addition, we cannot predict how future economic conditions will affect our critical customers, suppliers and distributors and any negative impact on our critical customers, suppliers or distributors may also have an adverse impact on our results of operations or financial condition.

*Our Amended and Restated Credit Agreement contains certain covenants and restrictions that may limit our flexibility in operating our business.

Our Amended and Restated Credit Agreement dated January 8, 2016 (Restated Credit Facility), with JPMorgan Chase Bank, N.A., as Administrative Agent and a Lender, Bank of America, N.A., as Syndication Agent and a Lender, Citibank, N.A., as Documentation Agent and a Lender, and various other Lenders (collectively, the Lenders), contains various affirmative covenants and restrictions that limit our ability to engage in specified types of transactions, including:

• incurring specified types of additional indebtedness (including guarantees or other contingent obligations);

• paying dividends on, repurchasing or making distributions in respect of our common stock or making other restricted payments, subject to specified exceptions;

• making specified investments (including loans and advances);

• selling or transferring certain assets;

• creating certain liens;

• consolidating, merging, selling or otherwise disposing of all or substantially all of our assets; and

• entering into certain transactions with any of our affiliates.

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In addition, under our Restated Credit Facility, we are required to satisfy and maintain specified financial ratios and other affirmative covenants. Our ability to meet those financial ratios and affirmative covenants could be affected by events beyond our control and, therefore, we cannot be assured that we will be able to continue to satisfy these requirements. A breach of any of these ratios or covenants could result in a default under the Restated Credit Facility. Upon the occurrence of an event of default, the Lenders could elect to declare all amounts outstanding under the Restated Credit Facility immediately due and payable, terminate all commitments to extend further credit and pursue legal remedies for recovery, all of which could adversely affect our business and financial condition. As of July 2, 2016, we had $175.0 million outstanding under the Restated Credit Facility and were in compliance with all applicable covenants.

Risks Related to Our Stock

*Our stock price may be volatile, and your investment in our stock could suffer a decline in value.

There has been significant volatility in the market price and trading volume of equity securities, which is often unrelated to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our stock. From January 4, 2016 to July 2, 2016, our closing stock price ranged from $35.12 to $52.52 per share. You may not be able to resell your shares at or above the price you paid for them due to fluctuations in the market price of our stock caused by changes in our operating performance or prospects and other factors.

In addition to the other risk factors previously discussed above, there are many other factors that we may not be able to control that could have a significant effect on our stock price. These include, but are not limited to:

• actual or anticipated fluctuations in our operating results or future prospects;

• our announcements or our competitors’ announcements of new products;

• the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

• strategic actions by us or our competitors, such as acquisitions or restructuring;

• new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

• changes in accounting standards, policies, guidance, interpretations or principles;

• changes in our growth rates or our competitors’ growth rates;

• developments regarding our patents or proprietary rights or those of our competitors;

• ongoing legal proceedings;

• our inability to raise additional capital as needed;

• concerns or allegations as to the safety or efficacy of our products;

• changes in financial markets or general economic conditions, including the effects of recession or slow economic growth in the U.S. and abroad;

• sales of stock by us or members of our management team, our board of directors (Board) or certain institutional stockholders; and

• changes in stock market analyst recommendations or earnings estimates regarding our stock, other comparable companies or our industry generally.

*Concentration of ownership among our existing directors, executive officers and principal stockholders may prevent new investors from influencing significant corporate decisions.

As of July 2, 2016, our current directors and executive officers and their affiliates, in the aggregate, beneficially owned approximately 14.7% of our outstanding stock. Subject to any fiduciary duties owed to our other stockholders under Delaware law, these stockholders may be able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have some control over our management and policies. Some of these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your best interests. The concentration of ownership could delay or prevent a change in control of us, or otherwise discourage a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our stock. In addition, these stockholders could use their voting influence to maintain our existing management and directors in office or support or reject other management and Board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.

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*You could experience substantial dilution of your investment as a result of subsequent exercises of our outstanding options, vesting of outstanding restricted stock units (RSUs) or the grant of future equity awards by us.

As of July 2, 2016, approximately 16.4 million shares of our common stock were reserved for future issuance under our two equity incentive plans, approximately 9.3 million of which were subject to options outstanding as of that date at a weighted-average exercise price of $27.64 per share and approximately 2.7 million of which were subject to outstanding RSUs. To the extent outstanding options are exercised or outstanding RSUs vest, our existing stockholders may incur dilution. We rely on equity awards to motivate current employees and to attract new employees. The grant of future equity awards by us to our employees and other service providers may further dilute our stockholders.

Future resales of our stock, including those by our insiders and a few investment funds, may cause our stock price to decline.

A significant portion of our outstanding shares are held by our directors, our executive officers and a few investment funds. Resales by these stockholders of a substantial number of such shares, announcements of any proposed resale of substantial amounts of our stock or the perception that substantial resales may be made, could significantly reduce the market price of our stock. Some of our directors and executive officers have entered into Rule 10b5-1 trading plans pursuant to which they have arranged to sell shares of our stock from time to time in the future. Generally, these sales require public filings. Actual or potential sales by these insiders, including those under a pre-arranged Rule 10b5-1 trading plan, could be interpreted by the market as an indication that the insider has lost confidence in our stock and reduce the market price of our stock.

We have registered and expect to continue to register shares reserved under our equity plans pursuant to Registration Statements on Form S-8. All shares issued pursuant to a Registration Statement on Form S-8 can be freely sold in the public market upon issuance, subject to restrictions on our affiliates under Rule 144. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our stock.

Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent a change in control of our company, prevent attempts to replace or remove current management and reduce the market price of our stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable. For example, our amended and restated certificate of incorporation authorizes our Board to issue up to 5.0 million shares of “blank check” preferred stock. As a result, without further stockholder approval, our Board has the authority to attach special rights, including voting and dividend rights, to this preferred stock, including pursuant to a stockholder rights plan. With these rights, preferred stockholders could make it more difficult for a third-party to acquire us. In addition, our amended and restated certificate of incorporation provides for a staggered board of directors, whereby directors serve for three year terms, with one-third of the directors coming up for reelection each year. A staggered Board will make it more difficult for a third-party to obtain control of our Board through a proxy contest, which may be a necessary step in an acquisition of us that is not favored by our Board.

We are also subject to anti-takeover provisions under the General Corporation Law of the State of Delaware. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage a third-party from making a takeover offer and could delay or prevent a change in control of us. For purposes of these provisions, an “interested stockholder” generally means someone owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in the General Corporation Law of the State of Delaware.

*We may elect not to declare cash dividends on our stock, may elect to only pay dividends on an infrequent or irregular basis, or may elect not to make any additional stock repurchases. As a result, any return on your investment may be limited to the value of our stock. In addition, the payment of any future dividends or the repurchase of our stock might limit our ability to pursue other growth opportunities.

Our Board may from time to time declare, and we may pay, dividends on our outstanding shares in the manner and upon the terms and conditions provided by law. However, we may elect to retain all future earnings for the operation and expansion of our business, rather than paying cash dividends on our stock. Any payment of cash dividends on our stock will be at the discretion of our Board and will depend upon our results of operations, earnings, capital requirements, financial condition, business prospects, contractual restrictions and other factors deemed relevant by our Board. In addition, under certain circumstances, our Restated Credit Facility may limit or restrict our ability to pay cash dividends. In the event our Board declares any dividends, there is no assurance with respect to the amount, timing or frequency of any such dividends.

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In September 2015, our Board authorized a stock repurchase program, whereby we may purchase up to 5.0 million shares of our common stock over a period of up to three years. As of July 2, 2016, approximately 2.9 million shares remained available for repurchase under this program. Any repurchase of our common stock will be at the discretion of a committee comprised of our Chief Executive Officer and Chief Financial Officer, and will depend on several factors, including, but not limited to, results of operations, capital requirements, financial conditions, available capital from operations or other sources and the market price of our common stock. Therefore, there is no assurance with respect to the amount, price or timing of any such repurchases. We may elect to retain all future earnings for the operation and expansion of our business, rather than repurchasing additional outstanding shares. In addition, under certain circumstances, our Restated Credit Facility may limit or restrict our ability to repurchase our stock. In the event we pay dividends, or make any stock repurchases in the future, our ability to finance any material expansion of our business, including through acquisitions, investments or increased capital spending, or to fund our operations, may be limited. In addition, any repurchases we may make in the future may not prove to be at optimal prices. Our Board may modify or amend our stock repurchase program at any time at its discretion without stockholder approval.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Stock Repurchase Program

Stock repurchases during each fiscal month of the quarter ended July 2, 2016 were as follows:

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
April 3, 2016 to April 30, 2016	—	$	—	—	3,301,215
May 1, 2016 to May 28, 2016	—	—		—	3,301,215
May 29, 2016 to July 2, 2016	400,000	51.30		400,000	2,901,215
Total	400,000	$	51.30	400,000	2,901,215

⁽¹⁾   In September 2015, our board of directors authorized a stock repurchase program, whereby we may purchase up to 5.0 million shares of our common stock over a period of up to three years. The stock repurchase program, which was announced by the Company in a press release dated November 5, 2015, may be carried out at the discretion of a committee comprised of our Chief Executive Officer and Chief Financial Officer through open market purchases, Rule 10b5-1 trading plans, block trades and in privately negotiated transactions. As of July 2, 2016, 2.9 million shares remained authorized for repurchase under this program.

Item 6. Exhibits

The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report on Form 10-Q and such Exhibit Index is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MASIMO CORPORATION
Date: August 3, 2016	By:	/s/ JOE KIANI
		Joe Kiani
		Chief Executive Officer and Chairman
Date: August 3, 2016	By:	/s/ MARK P. DE RAAD
		Mark P. de Raad
		Executive Vice President and Chief Financial Officer

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EXHIBIT INDEX
Exhibit Number		Description of Document
3.1	(1)	Amended and Restated Certificate of Incorporation (Exhibit 3.2)
3.2	(2)	Amended and Restated Bylaws adopted on October 20, 2011 (Exhibit 3.2)
4.1	(1)	Form of Common Stock Certificate (Exhibit 4.1)
4.2	(1)	Fifth Amended and Restated Registration Rights Agreement made and entered into as of September 14, 1999, between Masimo Corporation and certain of its stockholders (Exhibit 4.2)
4.3#	(3)	Masimo Retirement Savings Plan (Exhibit 4.7)
10.1*		Single-Tenant Lease, relating to the premises at 9600 Jeronimo, dated as of July 13, 2016, by and between Masimo Corporation and The Irvine Company LLC
12.1*		Statement Regarding the Computation of Ratio of Earnings to Fixed Charges
31.1*		Certification of Joe Kiani, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
31.2*		Certification of Mark P. de Raad, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
32.1*		Certification of Joe Kiani, Chief Executive Officer, and Mark P. de Raad, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of July 2, 2016 and January 2, 2016, (ii) Condensed Consolidated Statements of Income for the six months ended July 2, 2016 and July 4, 2015, (iii) Condensed Consolidated Statements of Comprehensive Income for the six months ended July 2, 2016 and July 4, 2015, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2016 and July 4, 2015, and (v) Notes to Condensed Consolidated Financial Statements.

 _____________________________

(1) Incorporated by reference to the exhibits to the Company’s Registration Statement on Form S-1 (No. 333-142171), originally filed on April 17, 2007. The number given in parentheses indicates the corresponding exhibit number in such Form S-1, as amended.

(2) Incorporated by reference to the exhibit to the Company’s Current Report on Form 8-K filed on October 26, 2011. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K.

(3) Incorporated by reference to the exhibit to the Company’s Registration Statement on Form S-8 filed on February 11, 2008. The number given in parentheses indicates the corresponding exhibit number in such Form S-8.

# Indicates management or compensatory plan.

* Filed herewith.

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EX-10.1

Exhibit 10.1

LEASE

(Single-Tenant; Net; “AS IS”)

BETWEEN

THE IRVINE COMPANY LLC

AND

MASIMO CORPORATION

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INDEX TO LEASE

ARTICLE I.		BASIC LEASE PROVISIONS	1
ARTICLE II.		PREMISES	3
	SECTION 2.1.	LEASED PREMISES	3
	SECTION 2.2.	ACCEPTANCE OF PREMISES	3
	SECTION 2.3.	BUILDING NAME AND ADDRESS	3
	SECTION 2.4.	LANDLORD’S RESPONSIBILITIES	3
ARTICLE III.		TERM	3
	SECTION 3.1.	GENERAL	3
	SECTION 3.2.	DELAY IN POSSESSION	3
	SECTION 3.3.	EARLY ENTRY TO PREMISES	3
	SECTION 3.4.	RIGHT TO EXTEND THIS LEASE	3
ARTICLE IV.		RENT AND OPERATING EXPENSES	4
	SECTION 4.1.	BASIC RENT	4
	SECTION 4.2.	OPERATING EXPENSES	4
	SECTION 4.3.	SECURITY DEPOSIT	4
ARTICLE V.		USES	6
	SECTION 5.1.	USE	6
	SECTION 5.2.	SIGNS	7
	SECTION 5.3.	HAZARDOUS MATERIALS	7
ARTICLE VI.		COMMON AREAS; SERVICES	9
	SECTION 6.1.	UTILITIES AND SERVICES	9
	SECTION 6.2.	OPERATION AND MAINTENANCE OF COMMON AREAS	9
	SECTION 6.3.	USE OF COMMON AREAS	9
	SECTION 6.4.	PARKING	9
	SECTION 6.5.	CHANGES AND ADDITIONS BY LANDLORD	10
ARTICLE VII.		MAINTAINING THE PREMISES	10
	SECTION 7.1.	TENANT’S MAINTENANCE AND REPAIR	10
	SECTION 7.2.	LANDLORD’S MAINTENANCE AND REPAIR	10
	SECTION 7.3.	ALTERATIONS	10
	SECTION 7.4.	MECHANIC’S LIENS	11
	SECTION 7.5.	ENTRY AND INSPECTION	11
ARTICLE VIII.		TAXES AND ASSESSMENTS ON TENANT’S PROPERTY	12
ARTICLE IX.		ASSIGNMENT AND SUBLETTING	12
	SECTION 9.1.	RIGHTS OF PARTIES	12
	SECTION 9.2.	EFFECT OF TRANSFER	13
	SECTION 9.3.	SUBLEASE REQUIREMENTS	14
	SECTION 9.4.	CERTAIN TRANSFERS	14
ARTICLE X.		INSURANCE AND INDEMNITY	14
	SECTION 10.1.	TENANT’S INSURANCE	14
	SECTION 10.2.	LANDLORD’S INSURANCE	14
	SECTION 10.3.	TENANT’S INDEMNITY	15

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	SECTION 10.4.	LANDLORD’S NONLIABILITY	15
	SECTION 10.5.	WAIVER OF SUBROGATION	15
ARTICLE XI.		DAMAGE OR DESTRUCTION	15
	SECTION 11.1.	RESTORATION	15
	SECTION 11.2.	LEASE GOVERNS	16
ARTICLE XII.		EMINENT DOMAIN	16
	SECTION 12.1	TOTAL OR PARTIAL TAKING	16
	SECTION 12.2.	TEMPORARY TAKING	17
	SECTION 12.3.	TAKING OF PARKING AREA	17
ARTICLE XIII.		SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS	17
	SECTION 13.1.	SUBORDINATION	17
	SECTION 13.2.	ESTOPPEL CERTIFICATE	17
	SECTION 13.3.	FINANCIALS	17
ARTICLE XIV.		EVENTS OF DEFAULT AND REMEDIES	18
	SECTION 14.1.	TENANT’S DEFAULTS	18
	SECTION 14.2.	LANDLORD’S REMEDIES	18
	SECTION 14.3.	LATE PAYMENTS	19
	SECTION 14.4.	RIGHT OF LANDLORD TO PERFORM	20
	SECTION 14.5	DEFAULT BY LANDLORD	20
	SECTION 14.6.	EXPENSES AND LEGAL FEES	20
	SECTION 14.7.	WAIVER OF JURY TRIAL/JUDICIAL REFERENCE	20
	SECTION 14.8.	SATISFACTION OF JUDGMENT	21
ARTICLE XV.		END OF TERM	22
	SECTION 15.1.	HOLDING OVER	22
	SECTION 15.2.	MERGER ON TERMINATION	22
	SECTION 15.3.	SURRENDER OF PREMISES; REMOVAL OF PROPERTY	22
ARTICLE XVI.		PAYMENTS AND NOTICES	22
ARTICLE XVII.		RULES AND REGULATIONS	22
ARTICLE XVIII.		BROKER’S COMMISSION	23
ARTICLE XIX.		TRANSFER OF LANDLORD’S INTEREST	23
ARTICLE XX.		INTERPRETATION	23
	SECTION 20.1.	GENDER AND NUMBER	23
	SECTION 20.2.	HEADINGS	23
	SECTION 20.3.	JOINT AND SEVERAL LIABILITY	23
	SECTION 20.4.	SUCCESSORS	23
	SECTION 20.5.	TIME OF ESSENCE	23
	SECTION 20.6.	CONTROLLING LAW/VENUE	23
	SECTION 20.7.	SEVERABILITY	23
	SECTION 20.8.	WAIVER AND CUMULATIVE REMEDIES	23
	SECTION 20.9.	INABILITY TO PERFORM	23
	SECTION 20.10.	ENTIRE AGREEMENT	24
	SECTION 20.11.	QUIET ENJOYMENT	24
	SECTION 20.12	SURVIVAL	24
	SECTION 20.13	INTERPRETATION	24
ARTICLE XXI.		EXECUTION AND RECORDING	24
	SECTION 21.1.	COUNTERPARTS	24

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	SECTION 21.2.	CORPORATE, LIMITED LIABILITY COMPANY AND PARTNERSHIP AUTHORITY	24
	SECTION 21.3.	EXECUTION OF LEASE; NO OPTION OR OFFER	24
	SECTION 21.4.	RECORDING	24
	SECTION 21.5.	AMENDMENTS	24
	SECTION 21.6.	EXECUTED COPY	24
	SECTION 21.7.	ATTACHMENTS	24
ARTICLE XXII.		MISCELLANEOUS	24
	SECTION 22.1.	NONDISCLOSURE OF LEASE TERMS	24
	SECTION 22.2.	GUARANTEE	25
	SECTION 22.3.	CHANGES REQUESTED BY LENDER	25
	SECTION 22.4	MORTGAGEE PROTECTION	25
	SECTION 22.5.	COVENANTS AND CONDITIONS	25
	SECTION 22.6.	SECURITY MEASURES	25
	SECTION 22.7.	SDN LIST	25
EXHIBITS
	Exhibit A	Description of Premises
	Exhibit B	Environmental Questionnaire
	Exhibit C	Landlord’s Disclosures
	Exhibit D	Insurance Requirements
	Exhibit E	Rules and Regulations
	Exhibit Y	Project Site Plan

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LEASE

(Single-Tenant; Net; As Is)

THIS LEASE is made as of the day of , 2016, by and between THE IRVINE COMPANY LLC, a Delaware limited liability company hereafter called “Landlord,” and MASIMO CORPORATION, a Delaware corporation, hereinafter called “Tenant.”

ARTICLE I. BASIC LEASE PROVISIONS

Each reference in this Lease to the “Basic Lease Provisions” shall mean and refer to the following collective terms, the application of which shall be governed by the provisions in the remaining Articles of this Lease.

1. Premises: The Premises are more particularly described in Section 2.1.

Address of Building: 9600 Jeronimo Road, Irvine, CA

2. Project Description (if applicable): Jeronimo 5 & 6

3. Use of Premises: General office, warehouse and research and development related to medical devices (including ancillary laboratory use and manufacturing of prototypes of the medical devices), to the extent permitted by the City’s 5.4 Industrial Zoning Ordinance.

4. Commencement Date: December 1, 2016

5. Expiration Date:    November 30, 2026

6. Basic Rent: Commencing on the Commencement Date, the Basic Rent shall be Twenty Five Thousand Six Hundred Eighty-Nine Dollars ($25,689.00) per month, based on $.79 per rentable square foot.

Basic Rent is subject to adjustment as follows:

Commencing December 1, 2017, the Basic Rent shall be Twenty Six Thousand Six Hundred Sixty-Five Dollars ($26,665.00) per month, based on $.82 per rentable square foot.

Commencing December 1, 2018, the Basic Rent shall be Twenty Seven Thousand Six Hundred Forty Dollars ($27,640.00) per month, based on $.85 per rentable square foot.

Commencing December 1, 2019, the Basic Rent shall be Twenty Eight Thousand Nine Hundred Forty-One Dollars ($28,941.00) per month, based on $.89 per rentable square foot.

Commencing December 1, 2020, the Basic Rent shall be Twenty Nine Thousand Nine Hundred Seventeen Dollars ($29,917.00) per month, based on $.92 per rentable square foot.

Commencing December 1, 2021, the Basic Rent shall be Thirty One Thousand Two Hundred Seventeen Dollars ($31,217.00) per month, based on $.96 per rentable square foot.

Commencing December 1, 2022, the Basic Rent shall be Thirty Two Thousand Five Hundred Eighteen Dollars ($32,518.00) per month, based on $1.00 per rentable square foot.

Commencing December 1, 2023, the Basic Rent shall be Thirty Three Thousand Eight Hundred Nineteen Dollars ($33,819.00) per month, based on $1.04 per rentable square foot.

Commencing December 1, 2024, the Basic Rent shall be Thirty Five Thousand One Hundred Nineteen Dollars ($35,119.00) per month, based on $1.08 per rentable square foot.

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Commencing December 1, 2025, the Basic Rent shall be Thirty Six Thousand Four Hundred Twenty Dollars ($36,420.00) per month, based on $1.12 per rentable square foot.

Notwithstanding the above schedule of Basic Rent to the contrary, as long as no Event of Default (as defined in Section 14.1) has occurred under this Lease, Tenant shall be entitled to an abatement of 4 full calendar months of Basic Rent in the aggregate amount of $102,756.00 (i.e. $25,689.00 per month) (the “Abated Basic Rent”) for the initial 4 full calendar months of the Term (the “Abatement Period”). In the event this Lease terminates as a result of a Default by Tenant at any time during the Term, all unamortized Abated Basic Rent shall immediately become due and payable (based upon the full Abated Basic Rent being amortized over the entire initial Lease Term). The payment by Tenant of the Abated Basic Rent in the event of a Default shall not limit or affect any of Landlord’s other rights, pursuant to this Lease or at law or in equity. Only Basic Rent shall be abated during the Abatement Period and all other additional rent and other costs and charges specified in this Lease shall remain as due and payable pursuant to the provisions of this Lease.

7. Guarantor(s): None

8. Floor Area: Approximately 32,518 rentable square feet

9. Security Deposit: $0

10. Broker(s):“Landlord’s Broker”: Irvine Realty Company

“Tenant’s Broker”: Zuvich Corporate Advisors

11. Additional Insureds: None

12. Address for Payments and Notices:

Payment Address:

LANDLORD	TENANT
Payment Address:
THE IRVINE COMPANY LLC Department #0293 Los Angeles, CA 90084-0293 Attn: Senior Vice President, Property Operations Irvine Office Properties	MASIMO CORPORATION 52 Discovery Irvine, CA 92618 Attn: Chief Information Officer
Notice Address:	with a copy to:
THE IRVINE COMPANY LLC 550 Newport Center Drive Newport Beach, CA 92660 Attn: Senior Vice President, Property Operations Irvine Office Properties	MASIMO CORPORATION 52 Discovery Irvine, CA 92618 Attn: Legal Department
	and with a copy to:
	Stuart Kane LLP 620 Newport Center Drive, Suite 200 Newport Beach, CA 92660 Attn: Josh C. Grushkin

13. Address for Payments: All payments due under this Lease shall be made to the address shown on the invoice for the payment due, or if no address is shown, to Landlord’s notice address above.

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14. Tenant’s Liability Insurance Requirement: $2,000,000.00

15. Vehicle Parking Spaces: Ninety (90)

ARTICLE II. PREMISES

SECTION 2.1.LEASED PREMISES. Landlord leases to Tenant and Tenant leases from Landlord the Premises shown in Exhibit A (the “Premises”), containing approximately the floor area set forth in Item 8 of the Basic Lease Provisions (the “Floor Area”). The Premises consist of all of the Floor Area of the building identified in Item 2 of the Basic Lease Provisions (the “Building”), which is a portion of the project described in Item 2 (the “Project”). Landlord and Tenant stipulate and agree that the Floor Area of Premises set forth in Item 8 of the Basic Lease Provisions is correct and shall not be re-measured during the Term. The Premises shall include the non-exclusive right of Tenant to use and have access to the janitorial closets and electrical and telephone rooms on the floors of the Building which contains the Premises as well as the use of and access to the ceilings, walls and floors of the Premises for purposes of installing, maintaining, repairing and replacing wiring, conduit and cable serving Tenant’s equipment within the Premises, provided that any such installation, maintenance, repair and replacement shall be performed in accordance with, and subject to, the terms and provisions of this Lease. Landlord shall also have the right to the use of and access to all such areas consistent with the terms and provisions of this Lease for the purpose of performing its obligations and exercising its rights hereunder.

SECTION 2.2.ACCEPTANCE OF PREMISES. Tenant’s lease of the Premises shall be on an “as is” basis without further alteration, addition or improvement to the Premises whatsoever, except that Landlord shall provide a “Landlord’s Contribution” to Tenant for Tenant’s construction of the “Tenant Improvements” work in the Premises as provided in Exhibit X attached hereto.  Tenant acknowledges that, except as expressly set forth in this Lease, neither Landlord nor any representative of Landlord has made any representation or warranty with respect to the Premises, the Building or the Project or the suitability or fitness of either for any purpose, except as set forth in this Lease.  Tenant acknowledges that the flooring materials which may be installed within portions of the Premises located on the ground floor of the Building may be limited by the moisture content of the Building slab and underlying soils.  The taking of possession or use of the Premises by Tenant for any purpose other than construction shall conclusively establish that the Premises and the Building were in satisfactory condition and in conformity with the provisions of this Lease in all respects.

SECTION 2.3.BUILDING NAME AND ADDRESS. Tenant shall not utilize any name selected by Landlord from time to time for the Building and/or the Project as any part of Tenant’s corporate or trade name. Landlord shall have the right to change the name, address, number or designation of the Building or Project without liability to Tenant. Notwithstanding the foregoing, Landlord shall reimburse Tenant for all reasonable out-of-pocket expenses incurred by Tenant, including without limitation, Tenant’s costs of obtaining new business cards, stationery and informing Tenant’s customers and vendors of Tenant’s new address, not to exceed Five Thousand Dollars ($5,000.00) in the aggregate, resulting from any changed name, number or designation of the Building or Project initiated by Landlord.

SECTION 2.4.     LANDLORD’S RESPONSIBILITIES. Landlord warrants to Tenant that the plumbing, fire sprinkler system, lighting, heating, ventilation and air conditioning systems and electrical systems serving the Premises shall be in good operating condition on the Commencement Date of this Lease. Provided that Tenant shall notify Landlord of a non-compliance with the foregoing warranty not later than 30 days following the Commencement Date of the Lease, then Landlord shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Tenant setting forth the nature and extent of such non-compliance, rectify same at Landlord’s sole cost and expense (and not as a Project Cost).

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ARTICLE III. TERM

SECTION 3.1.     GENERAL. The Term of this Lease (“Term”)shall commence (“Commencement Date”) on the date set forth in Item 4 of the Basic Lease Provisions, and shall expire on the date (the “Expiration Date”) set forth in Item 5 of the Basic Lease Provisions. The parties shall memorialize on a form provided by Landlord (the “Commencement Date Memorandum”) the actual Commencement Date and the Expiration Date of this Lease. Should Tenant fail to execute and return the Commencement Date Memorandum to Landlord within five (5) business days (or provide specific written objections thereto within that period), then Landlord’s determination of the Commencement and Expiration Dates as set forth in the Commencement Date Memorandum shall be conclusive.

SECTION 3.2.     EXISTING MASTER LEASE. It is understood and agreed that Tenant is currently in possession and leasing the Premises pursuant to a lease dated June 22, 2012 (the “Existing Master Lease”). The Existing Master Lease is scheduled to terminate as to the Premises by its terms at midnight on the day preceding the Commencement Date of this Lease.

SECTION 3.3.     RIGHT TO EXTEND THIS LEASE. Provided that no Event of Default has occurred under any provision of this Lease, either at the time of exercise of the extension right granted herein or at the time of the commencement of such extension, and provided further that Tenant or its successor pursuant to a Permitted Transfer is occupying the entire Premises and has not assigned or sublet any of its interest in this Lease (except in connection with a Permitted Transfer), then Tenant may extend the Term of this Lease for 1 extension period of 60 months. Tenant shall exercise its right to extend the Term by and only by delivering to Landlord, not less than 9 months or more than 12 months prior to the Expiration Date of the Term, Tenant’s irrevocable written notice of its commitment to extend (the “Commitment Notice”). The Basic Rent payable under the Lease during any extension of the Term shall be determined as provided in the following provisions.

If Landlord and Tenant have not by then been able to agree upon the Basic Rent for the extension of the Term, then not less than 90 days or more than 120 days prior to the Expiration Date of the Term, Landlord shall notify Tenant in writing of the Basic Rent that would reflect the prevailing market rental rate for a 60-month renewal of comparable and similarly improved space within Landlord’s portfolio of properties in the immediate vicinity of the Building and the Project (together with any increases thereof during the extension period) as of the commencement of the extension period (“Landlord’s Determination”).

Should Tenant disagree with the Landlord’s Determination, then Tenant shall, not later than 20 days thereafter, notify Landlord in writing of Tenant’s determination of those rental terms (“Tenant’s Determination”). Within 10 days following delivery of the Tenant’s Determination, the parties shall attempt to agree on an appraiser to determine the fair market rental. If the parties are unable to agree in that time, then each party shall designate an appraiser within 10 days thereafter. Should either party fail to so designate an appraiser within that time, then the appraiser designated by the other party shall determine the fair market rental. Should each of the parties timely designate an appraiser, then the two appraisers so designated shall appoint a third appraiser who shall, acting alone, determine the fair market rental for the Premises. Any appraiser designated hereunder shall have an MAI certification with not less than 5 years experience in the valuation of commercial industrial buildings in the vicinity of the Project.

Within 30 days following the selection of the appraiser and such appraiser’s receipt of the Landlord’s Determination and the Tenant’s Determination, the appraiser shall determine whether the rental rate determined by Landlord or by Tenant more accurately reflects the fair market rental rate for the 60-month renewal of the Lease for the Premises, as reasonably extrapolated to the commencement of the extension period. Accordingly, either the Landlord’s Determination or the Tenant’s Determination shall be selected by the appraiser as the fair market rental rate for the extension period. In making such determination, the appraiser shall consider rental comparables for the Project together with comparables for similarly improved space owned by Landlord in the vicinity of the Project with appropriate adjustment for location and quality of project, but the appraiser shall not attribute any factor for brokerage commissions in making its determination of the fair market rental rate. At any time before the decision of the appraiser is rendered, either party may, by written notice to the other party, accept the rental terms submitted by the other party, in which event such terms shall be deemed adopted as the agreed fair market rental. The fees of the appraiser(s) shall be borne entirely by the party whose determination of the fair market rental rate was not accepted by the appraiser.

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Within 20 days after the determination of the fair market rental, Landlord shall prepare an appropriate amendment to this Lease for the extension period, and Tenant shall execute and return same to Landlord within 10 days after Tenant’s receipt of same. Should the fair market rental not be established by the commencement of the extension period, then Tenant shall continue paying rent at the rate in effect during the last month of the initial Term, and a lump sum adjustment shall be made promptly upon the determination of such new rental.

If Tenant fails to timely exercise the extension right granted herein within the time period expressly set forth for exercise by Tenant in the initial paragraph of this Section , Tenant’s right to extend the Term shall be extinguished and the Lease shall automatically terminate as of the expiration date of the Term, without any extension and without any liability to Landlord. Tenant’s rights under this Section shall belong solely to Masimo Corporation, a Delaware corporation, and its successors pursuant to a Permitted Transfer, and except in connection with a Permitted Transfer, any attempted assignment or transfer of such rights shall be void and of no force and effect. Tenant shall have no other right to extend the Term beyond the single 60 month extension period created by this Section. Unless agreed to in a writing signed by Landlord and Tenant, any extension of the Term, whether created by an amendment to this Lease or by a holdover of the Premises by Tenant, or otherwise, shall be deemed a part of, and not in addition to, any duly exercised extension period permitted by this Section.

ARTICLE IV. RENT AND OPERATING EXPENSES

SECTION 4.1.     BASIC RENT. From and after the Commencement Date, Tenant shall pay to Landlord without deduction or offset, the rental amount for the Premises shown in Item 6 of the Basic Lease Provisions (the “Basic Rent”), including subsequent adjustments, if any. If the Commencement Date is other than the first day of the calendar month, any rental adjustments shown in Item 6 occurring with reference to the monthly anniversary of the Commencement Date, shall be deemed to occur on the first day of the next calendar month following the specified monthly anniversary of the Commencement Date. The rent shall be due and payable in advance commencing on the Commencement Date (as prorated for any partial month) and continuing thereafter on the first day of each successive calendar month of the Term. No demand, notice or invoice shall be required for the payment of Basic Rent. An installment of rent in the amount of one (1) full month’s Basic Rent at the initial rate specified in Item 6 of the Basic Lease Provisions and one (1) month’s estimated Tenant’s Share of Operating Expenses (as defined in Section 4.2) shall be delivered to Landlord concurrently with Tenant’s execution of this Lease and shall be applied against the Basic Rent and Operating Expenses first due hereunder.

SECTION 4.2.     OPERATING EXPENSES.

(a)    From and after the Commencement Date, Tenant shall pay to Landlord, as additional rent, Tenant’s Share of all Operating Expenses, as defined in Section 4.2(f), incurred by Landlord in the operation of the Building and the Project. The term “Tenant’s Share” means 100% of the Operating Expenses determined by Landlord to benefit or relate substantially to the Building, plus that portion of any Operating Expenses determined by multiplying the cost of such item by a fraction, the numerator of which is the Floor Area and the denominator of which is the total rentable square footage, as determined from time to time by Landlord, of all or some of the buildings in the Project, for expenses determined by Landlord to benefit or relate substantially to all or some of the buildings in the Project rather than specifically to the Building or any other specific building.Landlord reserves the right to allocate to the entire Project any Operating Expenses which may benefit or substantially relate to a particular building within the Project in order to maintain greater consistency of Operating Expenses among buildings within the Project. In the event that Landlord determines in its sole but commercially reasonable discretion that the Premises or the Building incur a non-proportional benefit from any expense, or is the non-proportional cause of any such expense, Landlord may allocate a greater percentage of such Operating Expense to the Premises or the Building. In the event that any management and/or overhead fee payable or imposed by Landlord for the management of Tenant’s Premises is calculated as a percentage of the rent payable by Tenant and other tenants of Landlord, then the full amount of such management and/or overhead fee which is attributable to the rent paid by Tenant shall be additional rent payable by Tenant, in full, provided, however, that Landlord may elect to include such full amount as part of Tenant’s Share of Operating Expenses.

(b)    Prior to the start of each full Expense Recovery Period (as defined in this Section 4.2), Landlord shall give Tenant a written estimate of the amount of Tenant’s Share of Operating Expenses for the applicable Expense Recovery Period. Any delay or failure by Landlord in providing such estimate shall not relieve Tenant from its obligation

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to pay Tenant’s Share of Operating Expenses or estimated amounts thereof, if and when Landlord provides such estimate or final payment amount. Tenant shall pay the estimated amounts to Landlord in equal monthly installments, in advance concurrently with payments of Basic Rent. If Landlord has not furnished its written estimate for any Expense Recovery Period by the time set forth above, Tenant shall continue to pay monthly the estimated Tenant’s Share of Operating Expenses in effect during the prior Expense Recovery Period; provided that when the new estimate is delivered to Tenant, Tenant shall, at the next monthly payment date, pay any accrued estimated Tenant’s Share of Operating Expenses based upon the new estimate. For purposes hereof, “Expense Recovery Period” shall mean every twelve month period during the Term (or portion thereof for the first and last lease years) commencing July 1 and ending June 30, provided that Landlord shall have the right to change the date on which an Expense Recovery Period commences in which event appropriate reasonable adjustments shall be made to Tenant’s Share of Operating Expenses so that the amount payable by Tenant shall not materially vary as a result of such change.

(c)    Within one hundred twenty (120) days after the end of each Expense Recovery Period, Landlord shall furnish to Tenant a statement (a “Reconciliation Statement”) showing in reasonable detail the actual or prorated Tenant’s Share of Operating Expenses incurred by Landlord during such Expense Recovery Period, and the parties shall within thirty (30) days thereafter make any payment or allowance necessary to adjust Tenant’s estimated payments of Tenant’s Share of Operating Expenses, if any, to the actual Tenant’s Share of Operating Expenses as shown by the Reconciliation Statement. Any delay or failure by Landlord in delivering any Reconciliation Statement shall not constitute a waiver of Landlord’s right to require Tenant to pay Tenant’s Share of Operating Expenses pursuant hereto. Any amount due Tenant shall be credited against installments next coming due under this Section 4.2, and any deficiency shall be paid by Tenant together with the next installment. Should Tenant fail to object in writing to Landlord’s determination of Tenant’s Share of Operating Expenses within sixty (60) days following delivery of Landlord’s Reconciliation Statement, Landlord’s determination of Tenant’s Share of Operating Expenses for the applicable Expense Recovery Period shall be conclusive and binding on the parties for all purposes and any future claims to the contrary shall be barred.

(d)    Even though this Lease has terminated and the Tenant has vacated the Premises, when the final determination is made of Tenant’s Share of Operating Expenses for the Expense Recovery Period in which this Lease terminates, Tenant shall within thirty (30) days of written notice pay the entire increase over the estimated Tenant’s Share of Operating Expenses already paid. Conversely, any overpayment by Tenant shall be rebated by Landlord to Tenant not later than thirty (30) days after such final determination.

(e)    If, at any time during any Expense Recovery Period, any one or more of the Operating Expenses are increased to a rate(s) or amount(s) in excess of the rate(s) or amount(s) used in calculating the estimated Tenant’s Share of Operating Expenses for the year, then the estimate of Tenant’s Share of Operating Expenses may be increased by written notice from Landlord for the month in which such rate(s) or amount(s) becomes effective and for all succeeding months by an amount equal to the estimated amount of Tenant’s Share of the increase. If Landlord gives Tenant written notice of the amount or estimated amount of the increase and the month in which the increase will or has become effective, then Tenant shall pay the increase to Landlord as a part of Tenant’s monthly payments of the estimated Tenant’s Share of Operating Expenses as provided in Section 4.2(b), commencing with the month following delivery of Landlord’s notice. In addition, Tenant shall pay upon written request any such increases which were incurred prior to the Tenant commencing to pay such monthly increase.

(f)    The term “Operating Expenses” shall mean and include all Project Costs, as defined in subsection (g), and Property Taxes, as defined in subsection (h).

(g)    The term “Project Costs” shall mean all expenses of operation, management, repair, replacement and maintenance of the Building and the Project, including without limitation all appurtenant Common Areas (as defined in Section 6.2), and shall include the following charges by way of illustration but not limitation: water and sewer charges; insurance premiums and deductibles and/or reasonable premium and deductible equivalents should Landlord elect to self - insure all or any portion of any risk that Landlord is authorized to insure hereunder; license, permit, and inspection fees; light; power; window washing; trash pickup; janitorial services to any interior Common Areas; heating, ventilating and air conditioning; supplies; materials; equipment; tools; the cost of any environmental, insurance, tax, legal or other consultant utilized by Landlord in connection with the Building and/or Project; establishment of reasonable

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reserves for replacements and/or repairs; costs incurred in connection with compliance with any laws or changes in laws applicable to the Building or the Project; the cost of any capital improvements or replacements (other than tenant improvements for specific tenants) to the extent of the amortized amount thereof over the useful life of such capital improvements or replacements (or, if such capital improvements or replacements are anticipated to achieve a cost savings as to the Operating Expenses, any shorter estimated period of time over which the cost of the capital improvements or replacements would be recovered from the estimated cost savings) calculated at a market cost of funds, all as determined by Landlord, for each year of useful life or shorter recovery period of such capital expenditure whether such capital expenditure occurs during or prior to the Term; costs associated with the maintenance of an air conditioning, heating and ventilation service agreement, and maintenance of an intrabuilding network cable service agreement for any intrabuilding network cable telecommunications lines within the Project, and any other maintenance, repair and replacement costs associated with such lines; capital costs associated with a requirement related to demands on utilities by Project tenants, including without limitation the cost to obtain additional phone connections; labor; reasonably allocated wages and salaries, fringe benefits, and payroll taxes for administrative and other personnel directly applicable to the Building and/or Project, including both Landlord’s personnel and outside personnel; any expense incurred pursuant to Sections 6.1, 6.2, 6.4, 7.2, and 10.2; and reasonable overhead and/or management fees for the professional operation of the Project. It is understood and agreed that Project Costs may include competitive charges for direct services (including, without limitation, management and/or operations services) provided by any subsidiary, division or affiliate of Landlord.

(h)    The term “Property Taxes” as used herein shall include any form of federal, state, county or local government or municipal taxes, fees, charges or other impositions of every kind (whether general, special, ordinary or extraordinary) related to the ownership, leasing or operation of the Premises, Building or Project, including without limitation, the following: (i) all real estate taxes or personal property taxes levied against the Premises, the Building or Project, as such property taxes may be reassessed from time to time; and (ii) other taxes, charges and assessments which are levied with respect to this Lease or to the Building and/or the Project, and any improvements, fixtures and equipment and other property of Landlord located in the Building and/or the Project, (iii) all assessments and fees for public improvements, services, and facilities and impacts thereon, including without limitation arising out of any Community Facilities Districts, “Mello Roos” districts, similar assessment districts, and any traffic impact mitigation assessments or fees; (iv) any tax, surcharge or assessment which shall be levied in addition to or in lieu of real estate or personal property taxes, other than taxes covered by Article VIII; and (v) taxes based on the receipt of rent (including gross receipts or sales taxes applicable to the receipt of rent), and (vi) costs and expenses incurred in contesting the amount or validity of any Property Tax by appropriate proceedings. Notwithstanding the foregoing, general net income or franchise taxes imposed against Landlord shall be excluded.

(i)    Notwithstanding anything to the contrary in this Section 4.2, Operating Expenses shall not include:

(1) Any ground lease rental;

(2) Costs incurred by Landlord for the repair of damage to the Building or the Project to the extent that Landlord is actually reimbursed by insurance proceeds;

(3) Costs, including permit, license and inspection costs, incurred with respect to the installation of improvements made for new tenants or other occupants in the Building or the Project or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Building or the Project;

(4) Marketing costs, including leasing commission, attorneys’ fees, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions or disputes with present or prospective tenants or other occupants of the Building or the Project;

(5) Except to the extent expressly permitted in Section 4.2(g), costs of capital nature, including, without limitation, capital improvements, capital repairs (except as otherwise permitted herein), capital equipment and capital tools;

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(6) Expenses in connection with services or other benefits which are made available to other tenants of the Building or Project but not made available to Tenant;

(7) Costs incurred by Landlord due to the violation by Landlord of the terms of this Lease;

(8) Overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or services in the Building or the Project to the extent the same exceeds the costs of such goods and/or services rendered by unaffiliated third parties on a competitive basis;

(9) Interest, principal, points and fees on debt or amortization on any mortgage or mortgages or any other debt instrument encumbering the Building, the underlying land or the Project;

(10) Advertising and promotional expenditures, and costs of the acquisition and/or installation (but excluding maintenance costs) of signs in or on the Building or the Project identifying the owner or any tenant;

(11) Tax penalties incurred as a result of Landlord’s negligence, inability or unwillingness to make Property Tax payments when due;

(12) Costs arising from Landlord’s charitable or political contributions; and

(13) Costs for the acquisition or installation (but excluding maintenance costs) of sculpture, paintings or other objects of art.

(14) Any bad debt loss, rent loss, or reserves for bad debts or rent loss;

(15) Costs associated with the operation of the business of the partnership or entity which constitutes the Landlord, as the same are distinguished from the costs of the operation, management, repair, replacement and maintenance of the Project, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except as the actions of Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord’s interest in the Project, and costs incurred in connection with any disputes between Landlord and its employees, between Landlord and Project management, or between Landlord and other tenants or occupants;

(16) The wages and benefits of any employee who does not devote substantially all of his or her employed time to the Project unless such wages and benefits are prorated to reflect time spent on operating and managing the Project vis-à-vis time spent on matters unrelated to operating and managing the Project; provided that in no event shall Operating Costs include wages and/or benefits attributable to personnel above the level of portfolio property manager or chief engineer;

(17) Costs incurred by Landlord for improvements or replacements (including structural additions), repairs, equipment and tools which are of a “capital” nature and/or which are considered “capital” improvements or replacements under GAAP, except to the extent included in Project Costs pursuant to the definition in subsection (e) above or by other express terms of this Lease;

(18) Legal fees and costs, settlements, judgments or awards paid or incurred because of disputes between Landlord and other tenants or prospective occupants or prospective tenants/occupants or providers of goods and services to the Project; and

SECTION 4.3.     SECURITY DEPOSIT. Concurrently with Tenant’s delivery of this Amendment, Tenant shall deposit with Landlord the sum, if any, stated in Item 9 of the Basic Lease Provisions (the “Security Deposit”), to be held by Landlord as security for the full and faithful performance of Tenant’s obligations under this Lease, to pay any rental sums, including without limitation such additional rent as may be owing under any provision hereof, and to

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maintain the Premises as required by Sections 7.1 and 15.2 or any other provision of this Lease. Upon any Event of Default (as defined in Section 14.1) by Tenant, Landlord may apply all or part of the Security Deposit as full or partial compensation. If any portion of the Security Deposit is so applied, Tenant shall within 10 business days after written demand by Landlord deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. In no event may Tenant utilize all or any portion of the Security Deposit as a payment toward any rental sum due under this Lease. Any unapplied balance of the Security Deposit shall be returned to Tenant or, at Landlord’s option, to the last assignee of Tenant’s interest in this Lease within 30 days following the termination of this Lease and Tenant’s vacation of the Premises. Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code, or any similar or successor laws now or hereafter in effect, in connection with Landlord’s application of the Security Deposit to prospective rent that would have been payable by Tenant but for the early termination due to Tenant’s Default (as defined herein).

ARTICLE V. USES

SECTION 5.1.     USE. Tenant shall use the Premises only for the purposes stated in Item 3 of the Basic Lease Provisions, all in accordance with applicable laws and restrictions and pursuant to approvals to be obtained by Tenant from all relevant and required governmental agencies and authorities. The parties agree that any contrary use shall be deemed to cause material and irreparable harm to Landlord and shall entitle Landlord to injunctive relief in addition to any other available remedy. Tenant, at its expense, shall procure, maintain and make available for Landlord’s inspection throughout the Term, all governmental approvals, licenses and permits required for the proper and lawful conduct of Tenant’s permitted use of the Premises. Tenant shall not knowingly do or permit anything to be done in or about the Premises which will in any way interfere with the rights of other occupants of the Building or the Project, or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant permit any nuisance or commit any waste in the Premises or the Project. Tenant shall not perform any work or conduct any business whatsoever in the Project other than inside the Premises. Provided that Landlord has given Tenant written notice of any invalidity or increased cost of an insurance policy(ies) or of any applicable insurance underwriter’s rules and 30 days notice to “cure”, Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any insurance policy(ies) covering the Building, the Project and/or their contents, and shall comply with all applicable insurance underwriters rules. Tenant shall comply at its expense with all present and future laws, ordinances, restrictions, regulations, orders, rules and requirements of all governmental authorities that pertain to Tenant or its use of the Premises, including without limitation all federal and state occupational health and safety requirements, whether or not Tenant’s compliance will necessitate expenditures or interfere with its use and enjoyment of the Premises. Tenant shall comply at its expense with all existing covenants, conditions, easements or restrictions now affecting or encumbering the Building and/or Project, including without limitation the payment by Tenant of any periodic or special dues or assessments charged against the Premises or Tenant which may be allocated to the Premises or Tenant in accordance with the provisions thereof. Tenant shall also comply at its expense with any future amendments or modifications to such existing covenants, conditions, easements or reservations, and with any future covenants, conditions, easements or restrictions hereafter affecting or encumbering the Building and/or the Project, provided some do not materially impair Tenant’s use and enjoyment of the Premises. Tenant shall, within five (5) business days after Landlord’s demand therefore; reimburse Landlord for any additional insurance premium charged by reason of Tenant’s use of the Premises. Notwithstanding anything to the contrary contained in this Section 5.1, in the event Tenant’s obligation for compliance with all future and present laws, ordinances, restrictions, regulations, orders, rules and requirements of all governmental authorities, and with all present and future covenants, conditions, easements or restrictions now or hereafter affecting or encumbering the Building and/or the Project, results in a “capital” improvement on Tenant’s part (or Tenant’s being obligated to reimburse Landlord for a “capital” improvement), Tenant shall only be responsible for the amortized cost of such “capital” improvement (amortized at a market cost of funds) over the useful life of said improvement during the Term, except in the event such obligation for a capital improvement is required due to Tenant’s own particular use of the Premises (in which case Tenants shall be fully responsible for the entire cost and installation of such “capital” improvement).

SECTION 5.2.     SIGNS. Except for one (1) exterior “building-top” sign and Landlord’s standard suite signage identifying Tenant’s name and/or logo and installed at a location designated by Landlord, Tenant shall have no right to maintain signs in any location in, on or about the Premises, the Building or the Project and shall not place or

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erect any signs that are visible from the exterior of the Building. The size, design, graphics, material, style, color and other physical aspects of any permitted sign shall be subject to Landlord’s written determination, as determined solely by Landlord, prior to installation, that signage is in compliance with any covenants, conditions or restrictions encumbering the Premises and Landlord’s signage program for the Project, as in effect from time to time and approved by the City in which the Premises are located (“Signage Criteria”). Prior to placing or erecting any such signs, Tenant shall obtain and deliver to Landlord a copy of any applicable municipal or other governmental permits and approvals and comply with any applicable insurance requirements for such signage. Tenant shall be responsible for all costs of any permitted sign, including, without limitation, the fabrication, installation, maintenance and removal thereof and the cost of any permits therefor. If Tenant fails to maintain its sign in good condition, or if Tenant fails to remove same upon termination of this Lease and repair and restore any damage caused by the sign or its removal, Landlord may do so at Tenant’s expense. Landlord shall have the right to temporarily remove any signs in connection with any repairs or maintenance in or upon the Building. The term “sign” as used in this Section shall include all signs, designs, monuments, displays, advertising materials, logos, banners, projected images, pennants, decals, pictures, notices, lettering, numerals or graphics. Tenant’s exterior signage rights under this Section 5.2 belong solely to Masimo Corporation and its successors pursuant to a Permitted Transfer, and, except in connection with a Permitted Transfer, any attempted assignment or transfer of such rights shall be void and of no force and effect.

SECTION 5.3.     HAZARDOUS MATERIALS.

(a)    For purposes of this Lease, the term “Hazardous Materials” means (i) any “hazardous material” as defined in Section 25501(o) of the California Health and Safety Code, (ii) hydrocarbons, polychlorinated biphenyls or asbestos, (iii) any toxic or hazardous materials, substances, wastes or materials as defined pursuant to any other applicable state, federal or local law or regulation, and (iv) any other substance or matter which may result in liability to any person or entity as a result of such person’s possession, use, storage, release or distribution of such substance or matter under any statutory or common law theory.

(b)    Tenant shall not cause or permit any Hazardous Materials to be brought upon, stored, used, generated, released or disposed of on, under, from or about the Premises (including without limitation the soil and groundwater thereunder) without the prior written consent of Landlord, which consent may be given or withheld in Landlord's sole and absolute discretion. Notwithstanding the foregoing, Tenant shall have the right, without obtaining prior written consent of Landlord, to utilize within the Premises a reasonable quantity of standard office products that may contain Hazardous Materials (such as photocopy toner, "White Out", and the like), providedhowever, that (i) Tenant shall maintain such products in their original retail packaging, shall follow all instructions on such packaging with respect to the storage, use and disposal of such products, and shall otherwise comply with all applicable laws with respect to such products, and (ii) all of the other terms and provisions of this Section 5.3 shall apply with respect to Tenant’s storage, use and disposal of all such products. Landlord may, in its sole and absolute discretion, place such conditions as Landlord deems appropriate with respect to Tenant’s use, storage and/or disposal of any Hazardous Materials requiring Landlord’s consent. Tenant understands that Landlord may utilize an environmental consultant to assist in determining conditions of approval in connection with the storage, use, release and/or disposal of Hazardous Materials by Tenant on or about the Premises, and/or to conduct periodic inspections of the storage, generation, use, release and/or disposal of such Hazardous Materials by Tenant on and from the Premises, and Tenant agrees that any costs incurred by Landlord in connection therewith shall be reimbursed by Tenant to Landlord as additional rent hereunder upon demand.

(c)    Prior to the execution of this Lease, Tenant shall complete, execute and deliver to Landlord an Environmental Questionnaire and Disclosure Statement (the “Environmental Questionnaire”) in the form of Exhibit B attached hereto. The completed Environmental Questionnaire shall be deemed incorporated into this Lease for all purposes, and Landlord shall be entitled to rely fully on the information contained therein. On each anniversary of the Commencement Date until the expiration or sooner termination of this Lease, Tenant shall disclose to Landlord in writing the names and amounts of all Hazardous Materials which were stored, generated, used, released and/or disposed of on, under or about the Premises for the twelve-month period prior thereto, and which Tenant desires to store, generate, use, release and/or dispose of on, under or about the Premises for the succeeding twelve-month period. In addition, to the extent Tenant is permitted to utilize Hazardous Materials upon the Premises, Tenant shall promptly provide Landlord with complete and legible copies of all the following environmental documents relating thereto: reports filed pursuant to any self-reporting requirements; permit applications, permits, monitoring reports, emergency response or action plans, workplace exposure and community exposure warnings or notices and all other reports, disclosures, plans or

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documents (even those which may be characterized as confidential) relating to water discharges, air pollution, waste generation or disposal, and underground storage tanks for Hazardous Materials; orders, reports, notices, listings and correspondence (even those which may be considered confidential) of or concerning the release, investigation, compliance, cleanup, remedial and corrective actions, and abatement of Hazardous Materials; and all complaints, pleadings and other legal documents filed by or against Tenant related to Tenant’s storage, generation, use, release and/or disposal of Hazardous Materials.

(d)    Landlord and its agents shall have the right, but not the obligation, to inspect, sample and/or monitor the Premises and/or the soil or groundwater thereunder at any time to determine whether Tenant is complying with the terms of this Section 5.3, and in connection therewith Tenant shall provide Landlord with full access to all facilities, records and personnel related thereto upon at least one (1) business day’s prior written notice from Landlord. If Tenant is not in compliance with any of the provisions of this Section 5.3, or in the event of a release of any Hazardous Material on, under or about the Premises caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees, Landlord and its agents shall have the right, but not the obligation, without limitation upon any of Landlord’s other rights and remedies under this Lease, to immediately enter upon the Premises without notice and to discharge Tenant’s obligations under this Section 5.3 at Tenant’s expense, including without limitation the taking of emergency or long-term remedial action. Landlord and its agents shall endeavor to minimize interference with Tenant’s business in connection therewith, but shall not be liable for any such interference. In addition, Landlord, at Tenant’s expense, shall have the right, but not the obligation, to join and participate in any legal proceedings or actions initiated in connection with any claims arising out of the storage, generation, use, release and/or disposal by Tenant or its agents, employees, contractors, licensees or invitees of Hazardous Materials on, under, from or about the Premises.

(e)    If the presence of any Hazardous Materials on, under, from or about the Premises or the Project caused or permitted by Tenant or its agents, employees, contractors, licensees or invitees results in (i) injury to any person, (ii) injury to or any contamination of the Premises or the Project, or (iii) injury to or contamination of any real or personal property wherever situated, Tenant, at its expense, shall promptly take all actions necessary to return the Premises and the Project and any other affected real or personal property owned by Landlord to the condition existing prior to the introduction of such Hazardous Materials and to remedy or repair any such injury or contamination, including without limitation, any cleanup, remediation, removal, disposal, neutralization or other treatment of any such Hazardous Materials. Notwithstanding the foregoing, Tenant shall not, without Landlord’s prior written consent, which consent may be given or withheld in Landlord’s sole and absolute discretion, take any remedial action in response to the presence of any Hazardous Materials on, under, from or about the Premises or the Project or any other affected real or personal property owned by Landlord or enter into any similar agreement, consent, decree or other compromise with any governmental agency with respect to any Hazardous Materials claims; provided however, Landlord’s prior written consent shall not be necessary in the event that the presence of Hazardous Materials on, under, from or about the Premises or the Project or any other affected real or personal property owned by Landlord (i) imposes an immediate threat to the health, safety or welfare of any individual and (ii) is of such a nature that an immediate remedial response is necessary and it is not possible to obtain Landlord’s consent before taking such action. To the fullest extent permitted by law, Tenant shall indemnify, hold harmless, protect and defend (with attorneys acceptable to Landlord) Landlord and any successors to all or any portion of Landlord’s interest in the Premises and the Project and any other real or personal property owned by Landlord from and against any and all liabilities, losses, damages, diminution in value, judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses (including without limitation attorneys’ fees, court costs and other professional expenses), whether foreseeable or unforeseeable, arising directly or indirectly out of the use, generation, storage, treatment, release, on- or off-site disposal or transportation of Hazardous Materials on, into, from, under or about the Premises, the Building or the Project and any other real or personal property owned by Landlord caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees. Such indemnity obligation shall specifically include, without limitation, the cost of any required or necessary repair, restoration, cleanup or detoxification of the Premises, the Building and the Project and any other real or personal property owned by Landlord, the preparation of any closure or other required plans, whether such action is required or necessary during the Term or after the expiration of this Lease and any loss of rental due to the inability to lease the Premises or any portion of the Building or Project as a result of such Hazardous Materials, the remediation thereof or any repair, restoration or cleanup related thereto. If it is at any time discovered that Tenant or its agents, employees, contractors, licensees or invitees may have caused or permitted the release of any Hazardous Materials on, under, from or about the Premises, the Building or the Project or any other real or personal property owned by Landlord, Tenant shall, at Landlord’s request, immediately

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prepare and submit to Landlord a comprehensive plan, subject to Landlord’s approval, specifying the actions to be taken by Tenant to return the Premises, the Building or the Project or any other real or personal property owned by Landlord to the condition existing prior to the introduction of such Hazardous Materials. Upon Landlord’s approval of such plan, Tenant shall, at its expense, and without limitation of any rights and remedies of Landlord under this Lease or at law or in equity, immediately implement such plan and proceed to cleanup, remediate and/or remove all such Hazardous Materials in accordance with all applicable laws and as required by such plan and this Lease. The provisions of this Section 5.3(e) shall expressly survive the expiration or sooner termination of this Lease.

(f)    Landlord hereby discloses to Tenant, and Tenant hereby acknowledges, certain facts relating to Hazardous Materials at the Project known by Landlord to exist as of the date of this Lease, as more particularly described in Exhibit C attached hereto. Tenant shall have no liability or responsibility with respect to the Hazardous Materials facts described in Exhibit C, nor with respect to any Hazardous Materials which were not caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees. Notwithstanding the preceding two sentences, Tenant agrees to notify its agents, employees, contractors, licensees, and invitees of any exposure or potential exposure to Hazardous Materials at the Premises that Landlord brings to Tenant’s attention. Tenant hereby acknowledges that this disclosure satisfies any obligation of Landlord to Tenant pursuant to California Health & Safety Code Section 25359.7, or any amendment or substitute thereto or any other disclosure obligations of Landlord.

ARTICLE VI. COMMON AREAS; SERVICES

SECTION 6.1.     UTILITIES AND SERVICES. Tenant shall be responsible for and shall pay promptly, directly to the appropriate supplier, all charges for water, gas, electricity, sewer, heat, light, power, telephone, telecommunications service, refuse pickup, janitorial service, interior landscape maintenance and all other utilities, materials and services furnished directly to Tenant or the Premises or used by Tenant in, on or about the Premises during the Term, together with any taxes thereon. If any utilities or services are not separately metered or assessed to Tenant, Landlord shall make a reasonable determination of Tenant’s proportionate share of the cost of such utilities and services, and Tenant shall pay such amount to Landlord, as an item of additional rent, within thirty (30) days after delivery of Landlord’s statement or invoice therefor. Alternatively, Landlord may elect to include such cost in the definition of Project Costs in which event Tenant shall pay Tenant’s proportionate share of such costs in the manner set forth in Section 4.2. Tenant shall also pay to Landlord as an item of additional rent, within thirty (30) days after delivery of Landlord’s statement or invoice therefor, Landlord’s “standard charges” (as hereinafter defined, which shall be in addition to the electricity charge paid to the utility provider) for “after hours” usage by Tenant of each HVAC unit servicing the Premises. “After hours” shall mean more than sixty-six (66) hours of usage during any week during the Term. “After hours” usage shall be determined based upon the operation of the applicable HVAC unit during each week on a “non-cumulative” basis (that is, without regard to Tenant’s usage or nonusage of other unit(s) serving the Premises, or of the applicable unit during other weeks of the Term). As used herein, “standard charges” shall mean (i) $5.00 per hour for 1-5 ton HVAC units, (ii) $7.50 per hour for 6-9 ton HVAC units and (iii) $10.00 per hour for HVAC units of greater than 9 tons(in addition to the applicable electricity charges paid to the utility provider). Landlord shall not be liable for damages or otherwise for any failure or interruption of any utility or other service furnished to the Premises, and no such failure or interruption shall be deemed an eviction or entitle Tenant to terminate this Lease or withhold or abate any rent due hereunder. Landlord shall at all reasonable times have free access to the Building and Premises to install, maintain, repair, replace or remove all electrical and mechanical installations of Landlord. Tenant acknowledges that the costs incurred by Landlord related to providing above-standard utilities and services to Tenant, including, without limitation, telephone lines, may be charged to Tenant.

Landlord shall not be liable for damages or otherwise for any failure or interruption of any utility or other service furnished to the Premises, and no such failure or interruption shall be deemed an eviction or entitle Tenant to terminate this Lease or withhold or abate any rent due hereunder; provided, however, if as a result of the direct actions of Landlord, its employees, contractors or authorized agents, for more than 3 consecutive business days following written notice to Landlord there is no electricity, HVAC or elevator services to all or a portion of the Premises, or such an interruption of other essential utilities and building services, such as fire protection or water, so that all or a portion of the Premises cannot be used by Tenant, then Tenant’s Basic Rent (or an equitable portion of such Basic Rent to the extent that less than all of the Premises are affected) shall thereafter be abated until the Premises are again usable by Tenant; provided, however, that if Landlord is diligently pursuing the repair of such utilities or services and Landlord

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provides substitute services reasonably suitable for Tenant’s purposes, as for example, bringing in portable air-conditioning equipment, then there shall not be an abatement of Basic Rent. Landlord shall at all reasonable times have free access to the Building and Premises to install, maintain, repair, replace or remove all electrical and mechanical installations of Landlord.

SECTION 6.2.     OPERATION AND MAINTENANCE OF COMMON AREAS. During the Term, Landlord shall operate and maintain all Common Areas within the Building and the Project in the manner Landlord may determine to be appropriate. All costs incurred by Landlord for the maintenance and operation of the Common Areas shall be included in Project Costs except to the extent any particular cost incurred is related to or associated with a specific tenant and can be charged to such tenant of the Project. The term “Common Areas” shall mean all areas within the exterior boundaries of the Building and other buildings in the Project which are not held for exclusive use by persons entitled to occupy space, and all other appurtenant areas and improvements within the Project provided by Landlord for the common use of Landlord and tenants and their respective employees and invitees, including without limitation parking areas and structures, driveways, sidewalks, landscaped and planted areas, hallways and interior stairwells not located within the premises of any tenant, common electrical rooms and roof access entries, common entrances and lobbies, elevators, and restrooms not located within the premises of any tenant.

SECTION 6.3.     USE OF COMMON AREAS. The occupancy by Tenant of the Premises shall include the use of the Common Areas in common with Landlord and with all others for whose convenience and use the Common Areas may be provided by Landlord, subject, however, to compliance with all rules and regulations as are prescribed from time to time by Landlord. Landlord shall at all times during the Term have exclusive control of the Common Areas, and may restrain or permit any use or occupancy, except as authorized by Landlord’s rules and regulations. Tenant shall keep the Common Areas clear of any obstruction or unauthorized use related to Tenant’s operations or use of Premises, including without limitation, planters and furniture. Nothing in this Lease shall be deemed to impose liability upon Landlord for any damage to or loss of the property of, or for any injury to, Tenant, its invitees or employees. Landlord may temporarily close any portion of the Common Areas for repairs, remodeling and/or alterations, to prevent a public dedication or the accrual of prescriptive rights, or for any other reason deemed sufficient by Landlord, without liability to Tenant. Landlord’s temporary closure of any portion of the Common Areas for such purposes shall not deprive Tenant of reasonable access to the Premises.

SECTION 6.4.     PARKING. Tenant shall be entitled to the number of vehicle parking spaces set forth in Item 15 of the Basic Lease Provisions, which spaces shall be unreserved and unassigned, on those portions of the Common Areas designated by Landlord for parking. Tenant shall not use more parking spaces than such number. All parking spaces shall be used only for parking of vehicles no larger than full size passenger automobiles, sport utility vehicles or pickup trucks. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant’s employees, suppliers, shippers, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described above, then Landlord shall have the right, without notice, in addition to such other rights and remedies that Landlord may have, to remove or tow away the vehicle involved and charge the costs to Tenant. Parking within the Common Areas shall be limited to striped parking stalls, and no parking shall be permitted in any driveways, access ways or in any area which would prohibit or impede the free flow of traffic within the Common Areas. There shall be no parking of any vehicles for longer than a forty-eight (48) hour period, other than overnight parking of one (1) trailer parked in the loading dock adjacent to the Building, unless otherwise authorized by Landlord, and vehicles which have been abandoned or parked in violation of the terms hereof may be towed away at the owner’s expense. Nothing contained in this Lease shall be deemed to create liability upon Landlord for any damage to motor vehicles of visitors or employees, for any loss of property from within those motor vehicles, or for any injury to Tenant, its visitors or employees, unless ultimately determined to be caused by the sole active negligence or willful misconduct of Landlord, its agents, employees or contractors. Landlord shall have the right to establish, and from time to time amend, and to enforce against all users all reasonable rules and regulations (including the designation of areas for employee parking) that Landlord may deem necessary and advisable for the proper and efficient operation and maintenance of parking within the Common Areas. Landlord shall have the right to construct, maintain and operate lighting facilities within the parking areas; to change the area, level, location and arrangement of the parking areas and improvements therein; to restrict parking by tenants, their officers, agents and employees to employee parking areas; after the expiration of the initial 18 month Term of this Lease, to enforce parking charges (by operation of meters or otherwise); and to do and perform such other acts in and

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to the parking areas and improvements therein as, in the use of good business judgment, Landlord shall determine to be advisable. Any person using the parking area shall observe all directional signs and arrows and any posted speed limits. In no event shall Tenant interfere with the use and enjoyment of the parking area by other tenants of the Project or their employees or invitees. Parking areas shall be used only for parking vehicles. Washing, waxing, cleaning or servicing of vehicles, or the storage of vehicles for longer than 48-hours, is prohibited unless otherwise authorized by Landlord. Tenant shall be liable for any damage to the parking areas caused by Tenant or Tenant’s employees, suppliers, shippers, customers or invitees, including without limitation damage from excess oil leakage. Tenant shall have no right to install any fixtures, equipment or personal property in the parking areas.

SECTION 6.5.     CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves the right to make alterations or additions to the Building or the Project, or to the attendant fixtures, equipment and Common Areas. Landlord may at any time relocate or remove any of the various buildings, parking areas, and other Common Areas, and may add buildings and areas to the Project from time to time. No change shall entitle Tenant to any abatement of rent or other claim against Landlord. No such change shall deprive Tenant of reasonable access to or use of the Premises.

ARTICLE VII. MAINTAINING THE PREMISES

SECTION 7.1.     TENANT’S MAINTENANCE AND REPAIR. Tenant at its sole expense shall maintain and make all repairs and replacements necessary to keep the Premises in the condition as existed on the Commencement Date (or on any later date that the improvements may have been installed), excepting ordinary wear and tear, including without limitation all interior glass, doors, door closures, hardware, fixtures, electrical, plumbing, fire extinguisher equipment and other equipment installed in the Premises and all Alterations constructed by Tenant pursuant to Section 7.3 below. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Tenant. As part of its maintenance obligations hereunder, Tenant shall assure that the Premises remain free of moisture conditions which could cause mold and promptly repair any moisture conditions occurring within the Premises, and Tenant shall, at Landlord’s request, provide Landlord with copies of all maintenance schedules, reports and notices prepared by, for or on behalf of Tenant. All repairs and replacements shall be at least equal in quality to the original work, shall be made only by a licensed contractor approved in writing in advance by Landlord and shall be made only at the time or times approved by Landlord. Any contractor utilized by Tenant shall be subject to Landlord’s standard requirements for contractors, as modified from time to time. Landlord may impose reasonable restrictions and requirements with respect to repairs and replacements, as provided in Section 7.3, and the provisions of Section 7.4 shall apply to all repairs and replacements. If Tenant fails to properly maintain and/or repair the Premises as herein provided following Landlord’s notice and the expiration of the applicable cure period (or earlier if Landlord determines that such work must be performed prior to such time in order to avoid damage to the Premises or Building or other detriment), then Landlord may elect, but shall have no obligation, to perform any repair or maintenance required hereunder on behalf of Tenant and at Tenant’s expense, and Tenant shall reimburse Landlord upon demand for all costs incurred.

SECTION 7.2.    LANDLORD’S MAINTENANCE AND REPAIR. Subject to Section 7.1 and Article XI, Landlord shall provide service, maintenance and repair with respect to any air conditioning, ventilating or heating equipment which serves the Premises (exclusive, however, of supplemental HVAC equipment serving only the Premises), and shall maintain in good repair the roof, foundations, footings, the exterior surfaces of the exterior walls of the Building (including exterior glass), the structural, electrical and mechanical systems (including elevators, if any, serving the Building), except that Tenant at its expense shall make all repairs which Landlord deems reasonably necessary as a result of the act or negligence of Tenant, its agents, employees, invitees, subtenants or contractors. Landlord shall have the right to employ or designate any reputable person or firm, including any employee or agent of Landlord or any of Landlord’s affiliates or divisions, to perform any service, repair or maintenance function. Landlord need not make any other improvements or repairs except as specifically required under this Lease, and nothing contained in this Section shall limit Landlord’s right to reimbursement from Tenant for maintenance, repair costs and replacement costs as provided elsewhere in this Lease. Tenant understands that it shall not perform any maintenance or make any repairs or replacements at Landlord’s expense and shall have no right to any rental offset for any maintenance, repairs or replacements performed by Tenant. Tenant further understands that Landlord shall not be required to make any repairs to the roof, foundations, footings, the exterior surfaces of the exterior walls of the Building (excluding exterior glass), or structural, electrical or mechanical systems unless and until Tenant has notified Landlord in writing, or Landlord

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otherwise becomes aware, of the need for such repair and Landlord shall have a reasonable period of time thereafter to commence and complete said repair, if warranted. All costs of any maintenance, repairs and replacements on the part of Landlord provided hereunder shall be considered part of Project Costs. Tenant further agrees that if Tenant fails to report any such need for repair in writing within sixty (60) days of its discovery by Tenant, Tenant shall be responsible for any costs and expenses and other damages related to such repair which are in excess of those which would have resulted had such need for repair been reported to Landlord within such sixty (60) day period.

SECTION 7.3.     ALTERATIONS. Except for (a) constructing and securing racks and similar items to walls and floors (collectively, the “Racking”), (b) installing necessary phone and data cabling infrastructure (collectively, the “Cabling”), and (c) cosmetic alteration projects that do not exceed $100,000 during each calendar year which satisfy the criteria in the next following sentence, Tenant shall make no alterations, additions, fixtures or improvements (“Alterations”) to the Premises or the Building without the prior written consent of Landlord, which consent may be granted or withheld in Landlord’s sole and absolute discretion.In the event that any requested Alteration would result in a change from Landlord’s building standard materials and specifications for the Project (“Standard Improvements”), Landlord may withhold consent to such Alteration in its sole and absolute discretion. In the event Landlord so consents to a change from the Standard Improvements (such change being referred to as a “Non-Standard Improvement”), Tenant shall be responsible for the cost of replacing suchNon-Standard Improvement with the applicable Standard Improvement (“Replacements”) which Replacements shall be completed prior to the Expiration Date or earlier termination of this Lease. Landlord shall not unreasonably withhold its consent to any Alterations which cost less than One Dollar ($1.00) per square foot of the improved portions of the Premises (excluding warehouse square footage) and do not (i) affect the exterior of the Building or outside areas (or be visible from adjoining sites), or (ii) affect or penetrate any of the structural portions of the Building, including but not limited to the roof, or (iii) require any change to the basic floor plan of the Premises (including, without limitation, the adding of any additional “office” square footage) or any change to any structural or mechanical systems of the Premises, or (iv) fail to comply with any applicable governmental requirements or require any governmental permit as a prerequisite to the construction thereof, or (v) result in the Premises requiring building services beyond the level normally provided to other tenants, or (vi) interfere in any manner with the proper functioning of, or Landlord’s access to, any mechanical, electrical, plumbing, elevator or HVAC systems, facilities or equipment located in or serving the Building, or (vii) diminish the value of the Premises including, without limitation, using lesser quality materials than those existing in the Premises, or (viii) alter or replace Standard Improvements. Landlord may impose any condition to its consent, including but not limited to a requirement that the installation and/or removal of all Alterations and Replacements be covered by a lien and completion bond satisfactory to Landlord in its sole and absolute discretion and requirements as to the manner and time of performance of such work. Landlord shall in all events, whether or not Landlord’s consent is required, have the right to approve prior to the commencement of any work the contractor performing the installation and removal of Alterations and Replacements and Tenant shall not permit any contractor not approved by Landlord to perform any work on the Premises or on the Building. Tenant shall obtain all required permits for the installation and removal of Alterations and Replacements and shall perform the installation and removal of Alterations and Replacements in compliance with all applicable laws, regulations and ordinances, including without limitation the Americans with Disabilities Act, all covenants, conditions and restrictions affecting the Project, and the Rules and Regulations as described in Article XVII. Tenant understands and agrees that Landlord shall be entitled to a supervision fee in the amount of three percent (3%) of the cost of the Alterations. Under no circumstances shall Tenant make any Alterations or Replacements which incorporate any Hazardous Materials, including without limitation asbestos-containing construction materials into the Premises, the Building or the Common Area. In no event shall Tenant prosecute any Alterations that would reasonably result in picketing or labor demonstrations in or about the Building or Project. If any governmental entity requires, as a condition to any proposed Alterations by Tenant, that improvements be made to the Common Areas, and if Landlord consents to such improvements to the Common Areas (which consent may be withheld in the sole and absolute discretion of Landlord), then Tenant shall, at Tenant’s sole expense, make such required improvements to the Common Areas in such manner, utilizing such materials, and with such contractors, architects and engineers as Landlord may require in its sole and absolute discretion. Landlord shall have the right, but not the obligation, to elect to make any such improvements to be made to the Common Areas at Tenant’s expense, in which case Tenant shall reimburse Landlord upon demand for all costs incurred in making such improvements. Any request for Landlord’s consent to any proposed Alterations shall be made in writing and shall contain architectural plans describing the work in detail reasonably satisfactory to Landlord. Landlord may elect to cause its architect to review Tenant’s architectural plans, and the reasonable cost of that review shall be reimbursed by Tenant. Should the work proposed by Tenant and consented to

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by Landlord modify the basic floor plan of the Premises, then Tenant shall, at its expense, furnish Landlord with as-built drawings and CAD disks compatible with Landlord’s systems and standards. Unless Landlord otherwise agrees in writing, all Alterations made or affixed to the Premises, the Building or to the Common Areas, but excluding moveable trade fixtures and furniture, shall become the property of Landlord and shall be surrendered with the Premises at the end of the Term; except that (A) Tenant shall remove all Racking and Cabling and shall repair all resulting damage to the Premises by the Expiration Date, or sooner termination of the Lease, and (B) Landlord may, by notice to Tenant given at the time that Landlord grants its initial consent to any other Alterations, require Tenant to remove by the Expiration Date, or sooner termination date of this Lease, all or any of such other Alterations installed either by Tenant or by Landlord at Tenant’s request, and to repair any damage to the Premises, the Building or the Common Areas arising from that removal and restore the Premises to their condition prior to making such Alterations.

SECTION 7.4.     MECHANIC’S LIENS. Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished, or obligations incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause any such lien to be released by posting a bond in accordance with California Civil Code Section 8424 or any successor statute. In the event that Tenant shall not, within 20 days following Tenant’s receipt of written notice of the imposition of any lien, cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other available remedies, the right to cause the lien to be released by any means it deems proper, including payment of or defense against the claim giving rise to the lien. All expenses so incurred by Landlord, including Landlord’s reasonable attorneys’ fees, shall be reimbursed by Tenant within 30 days following Landlord’s written demand. Tenant shall give Landlord no less than 20 days’ prior notice in writing before commencing construction of any kind on the Premises.

SECTION 7.5.     ENTRY AND INSPECTION. Landlord shall at all reasonable times, upon written or oral notice (except in emergencies, when no notice shall be required) have the right to enter the Premises to inspect them, to supply services in accordance with this Lease, to perform any work required or permitted to be performed by Landlord within the Premises, to have access to install, repair, maintain, replace or remove all electrical and mechanical installations of Landlord and to protect the interests of Landlord in the Premises, and to submit the Premises to prospective or actual purchasers or encumbrance holders (or, during the last one hundred and eighty (180) days of the Term or when an Event of Default exists, to prospective tenants), all without being deemed to have caused an eviction of Tenant and without abatement of rent except as provided elsewhere in this Lease. Landlord shall have the right, if desired, to retain a key which unlocks all of the doors in the Premises, excluding Tenant’s vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord as provided in Section 7.5 shall not be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or any eviction of Tenant from the Premises.

ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT’S PROPERTY

Tenant shall be liable for and shall pay, at least ten (10) days before delinquency, all taxes and assessments levied against all personal property of Tenant located in the Premises, and, if required by Landlord, against all Non Standard Improvements to the Premises (as defined in Section 7.3) made by Landlord or Tenant, and against any Alterations (as defined in Section 7.3) made to the Premises or the Building by or on behalf of Tenant. If requested by Landlord, Tenant shall cause its personal property, Non-Standard Improvementsand Alterations to be assessed and billed separately from the real property of which the Premises form a part. If any taxes required to be paid by Tenant on Tenant’s personal property, Non-Standard Improvements and/or Alterations are levied against Landlord or Landlord’s property and if Landlord pays the same, or if the assessed value of Landlord’s property is increased by the inclusion of a value placed upon Tenant’s personal property, Non-Standard Improvements and/or Alterations and if Landlord pays the taxes based upon the increased assessment, Landlord shall have the right to require that Tenant pay to Landlord the taxes so levied against Landlord or the proportion of the taxes resulting from the increase in the assessment. In calculating what portion of any tax bill which is assessed against Landlord separately, or Landlord and Tenant jointly, is attributable to Tenant’s Non-Standard Improvements, Alterations and personal property, Landlord’s reasonable determination shall be conclusive.

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ARTICLE IX. ASSIGNMENT AND SUBLETTING

SECTION 9.1.     RIGHTS OF PARTIES.

(a)    Notwithstanding any provision of this Lease to the contrary, and except as to transfers expressly permitted without Landlord’s consent pursuant to Section 9.4, Tenant will not, either voluntarily or by operation of law, assign, sublet, encumber, or otherwise transfer all or any part of Tenant’s interest in this Lease or the Premises, or permit the Premises to be occupied by anyone other than Tenant, without Landlord’s prior written consent, which consent shall not unreasonably be withheld in accordance with the provisions of Section 9.1(b). No assignment (whether voluntary, involuntary or by operation of law), subletting or other transfer shall be valid or effective without Landlord’s prior written consent and, at Landlord’s election, any such assignment, subletting or other transfer shall be void and of no force and effect and any such attempted assignment, subletting or other transfer shall constitute an Event of Default of this Lease. Landlord shall not be deemed to have given its consent to any assignment, subletting or other transfer by any course of action, including without limitation its acceptance of rent or any other payment due under this Lease from any person or entity other than Tenant or its acceptance of any name for listing in the Building directory, other than Landlord’s written consent. To the extent not prohibited by provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq., (the “Bankruptcy Code”), including Section 365(f)(1), Tenant on behalf of itself and its creditors, administrators and assigns waives the applicability of Section 365(e) of the Bankruptcy Code unless the proposed assignee of the Trustee for the estate of the bankrupt meets Landlord’s standard for consent as set forth in Section 9.1(b) of this Lease. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations to be delivered in connection with the assignment shall be delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed to have assumed all of the obligations arising under this Lease on and after the date of the assignment, and shall upon demand execute and deliver to Landlord an instrument confirming that assumption.

(b)    If Tenant desires to assign, sublease or otherwise transfer an interest in this Lease or the Premises, it shall first notify Landlord of its desire and shall submit in writing to Landlord: (i) the name and address of the proposed assignee, subtenant or transferee; (ii) the nature of any proposed assignee’s, subtenant’s or transferee's business to be carried on in the Premises; (iii) the terms and provisions of any proposed assignment, sublease or other transfer, including a copy of the proposed assignment, sublease or transfer form; (iv) evidence that the proposed assignee, subtenant or transferee will comply with the requirements of Exhibit D hereto; (v) a completed Environmental Questionnaire from the proposed assignee, subtenant or transferee; (vi) any other information requested by Landlord and reasonably related to the transfer and (vii) the fee described in Section 9.1(e). Except as provided in Section 9.1 (c), Landlord shall not unreasonably withhold its consent, provided that the parties agree that it shall be reasonable for Landlord to withhold its consent if: (1) the use of the Premises will not be consistent with the provisions of this Lease or with Landlord’s commitment to other tenants of the Building and Project; (2) the proposed assignee, subtenant or transferee has been required by any prior landlord, lender or governmental authority to take remedial action in connection with Hazardous Materials contaminating a property arising out of the proposed assignee’s, subtenant’s or transferee’s actions or use of the property in question or is subject to any enforcement order issued by any governmental authority in connection with the use, disposal or storage of a Hazardous Material; (3) insurance requirements of the proposed assignee or subtenant may not be brought into conformity with Landlord’s then current leasing practice; (4) the proposed assignee, subtenant or transferee has not demonstrated to the reasonable satisfaction of Landlord that it has the financial means to fulfill its obligations under this Lease (or the applicable sublease) or has failed to submit to Landlord all reasonable information as requested by Landlord concerning the proposed assignee, subtenant or transferee, including, but not limited to, a certified balance sheet of the proposed assignee, subtenant or transferee as of a date within ninety (90) days of the request for Landlord’s consent, statements of income or profit and loss of the proposed assignee, subtenant or transferee for the two-year period preceding the request for Landlord’s consent, and/or a certification signed by the proposed assignee, subtenant or transferee that it has not been evicted from or been in arrears in rent at any other leased premises for the 3-year period preceding the request for Landlord’s consent; (5) the proposed assignee, subtenant or transferee has not demonstrated to Landlord’s reasonable satisfaction a record of successful experience in business; (6) the proposed subtenant, assignee or transferee is neither an existing tenant of the Building or Project with whom Landlord has been “actively negotiating” (as hereinafter defined) to expand or relocate in the Building or Project nor a prospect with whom Landlord has been actively negotiating to become a tenant at the Building or Project; or (7) the proposed

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assignment, sublease or transfer will impose additional burdens or adverse tax effects on Landlord. Tenant’s exterior signage rights are personal to Tenant and may not be assigned or transferred to any assignee of this Lease or subtenant of the Premises. Notwithstanding the foregoing, Landlord shall not unreasonably withhold its consent to a transfer of such signage rights in connection with Tenant’s assignment of this Lease, provided that Landlord shall have the right of prior approval that such signage continues to comply with the Sign Criteria and the other requirements of Section 5.2 of this Lease, and provided further that any name and/or graphics on such signage do not materially devalue the Project as determined by Landlord in its sole and absolute discretion. As used herein, “actively negotiating” shall mean that Landlord and the existing or prospective tenant have exchanged written communications concerning the leased space in the Building or the Project within 120 days prior to the date of Tenant’s request for Landlord’s consent.

If Landlord consents to the proposed transfer, Tenant may within ninety (90) days after the date of the consent effect the transfer upon the terms described in the information furnished to Landlord; provided that any material change in the terms shall be subject to Landlord’s consent as set forth in this Section 9.1. Landlord shall approve or disapprove any requested transfer within thirty (30) days following delivery of Tenant’s written request, the information set forth above, and the fee set forth below.

(c)    Notwithstanding the provisions of Section 9.1(b) above, in lieu of consenting to a proposed assignment or subletting, Landlord may elect, within the thirty (30) day period permitted for Landlord to approve or disapprove a requested transfer, to (i) sublease the Premises (or the portion proposed to be subleased), or take an assignment of Tenant’s interest in this Lease, upon substantially the same terms as offered to the proposed subtenant or assignee (excluding terms relating to the purchase of personal property, the use of Tenant’s name or the continuation of Tenant’s business), respectively, or (ii) terminate this Lease as to the portion of the Premises proposed to be subleased or assigned with a proportionate abatement in the rent payable under this Lease, and the sublease, assignment or termination elected by Landlord shall be effective thirty (30) days following written notice by Landlord of its election. Landlord may thereafter, at its option, assign, sublet or re-let any space so sublet, obtained by assignment or obtained by termination to any third party, including without limitation the proposed transferee of Tenant. In the event of any termination of this Lease as to a portion of the Premises pursuant to this Section 9.1(c), Landlord shall promptly prepare and deliver to Tenant an amendment to this Lease appropriately amending those provisions of the Lease affected by such termination, and Tenant shall execute and return same to Landlord within twenty (20) business days thereafter subject to Tenant’s reasonable review and approval thereof.

(d)    In the event that Landlord approves the requested assignment, subletting or other transfer, Landlord shall be entitled to receive fifty percent (50%) of any amounts paid by the assignee or subtenant, however described, in excess of (i) the Basic Rent payable by Tenant hereunder, or in the case of a sublease of a portion of the Premises, in excess of the Basic Rent reasonably allocable to such portion as determined by Landlord, plus (ii) Tenant’s direct out-of-pocket costs which Tenant certifies to Landlord have been paid to provide occupancy related services to such assignee or subtenant of a nature commonly provided by landlords of similar space, with such costs to be amortized on a straight-line basis over the then remaining term of this Lease or any shorter term of any sublease of the Premises or a portion thereof. The amounts due Landlord under this Section 9.1(d), shall be payable directly to Landlord by the assignee or subtenant concurrently with such assignee’s or subtenant’s payment(s) to Tenant, or, at Landlord’s option, by Tenant within ten (10) days of Tenant’s receipt thereof. Landlord shall have the right to review or audit the books and records of Tenant, or have such books and records reviewed or audited by an outside accountant, to confirm any such direct out-of-pocket costs. In the event that such direct out-of-pocket costs claimed by Tenant are overstated by more than five percent (5%), Tenant shall reimburse Landlord for any of Landlord’s costs related to such review or audit. At Landlord’s request, a written agreement shall be entered into by and among Tenant, Landlord and the proposed assignee or subtenant confirming the requirements of this Section 9.1(d).

(e)    Tenant shall pay to Landlord a fee equal to the greater of (i) Landlord’s actual costs related to such assignment, subletting or other transfer or (ii) Five Hundred Dollars ($500.00), to process any request by Tenant for an assignment, subletting or other transfer under this Lease. Tenant shall pay Landlord the sum of Five Hundred Dollars ($500.00) concurrently with Tenant’s request for consent to any assignment, subletting or other transfer, and Landlord shall have no obligation to consider such request unless accompanied by such payment. Tenant shall pay Landlord upon demand any costs in excess of such payment to the extent Landlord’s actual costs related to such request exceeds

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$500.00. Such fee is hereby acknowledged as a reasonable amount to reimburse Landlord for its costs of review and evaluation of a proposed transfer.

SECTION 9.2.     EFFECT OF TRANSFER. No assignment, subletting or other transfer, even with the consent of Landlord, shall relieve Tenant of its obligation to pay rent and to perform all its other obligations under this Lease. Moreover, Tenant shall indemnify and hold Landlord harmless, as provided in Section 10.3, for any act or omission by an assignee, subtenant or transferee. Each assignee, other than Landlord, shall assume all obligations of Tenant under this Lease and shall be liable jointly and severally with Tenant for the payment of all rent, and for the due performance of all of Tenant’s obligations, under this Lease. No assignment, subletting or transfer shall be effective or binding on Landlord unless documentation in form and substance satisfactory to Landlord in its reasonable discretion evidencing the transfer, and in the case of an assignment, the assignee’s assumption of the obligations of Tenant under this Lease, is delivered to Landlord and both the assignee/subtenant and Tenant deliver to Landlord an executed consent to transfer instrument prepared by Landlord and consistent with the requirements of this Article. Consent by Landlord to one or more transfers shall not operate as a waiver or estoppel to the future enforcement by Landlord of its rights under this Lease or as a consent to any subsequent transfer.

SECTION 9.3.     SUBLEASE REQUIREMENTS. The following terms and conditions shall apply to any subletting by Tenant of all or any part of the Premises and shall be deemed included in each sublease:

(a)    Each and every provision contained in this Lease (other than with respect to the payment of rent hereunder) is incorporated by reference into and made a part of such sublease, with “Landlord” hereunder meaning the sublandlord therein and “Tenant” hereunder meaning the subtenant therein.

(b)    Tenant hereby irrevocably assigns to Landlord all of Tenant’s interest in all rentals and income arising from any sublease of the Premises, and Landlord may collect such rent and income and apply the same toward Tenant’s obligations under this Lease; provided, however, that until there is an Event of Default by Tenant, Tenant shall have the right to receive and collect the sublease rentals. Landlord shall not, by reason of this assignment or the collection of sublease rentals, be deemed liable to the subtenant for the performance of any of Tenant’s obligations under the sublease. Tenant hereby irrevocably authorizes and directs any subtenant, upon receipt of a written notice from Landlord stating that an Event of Default exists in the performance of Tenant’s obligations under this Lease, to pay to Landlord all sums then and thereafter due under the sublease. Tenant agrees that the subtenant may rely on that notice without any duty of further inquiry and notwithstanding any notice or claim by Tenant to the contrary. Tenant shall have no right or claim against the subtenant or Landlord for any rentals so paid to Landlord.

(c)    In the event of the termination of this Lease for any reason, including without limitation as the result of an Event of Default by Tenant or by the mutual agreement of Landlord and Tenant, Landlord may, at its sole option, take over Tenant’s entire interest in any sublease and, upon notice from Landlord, the subtenant shall attorn to Landlord. In no event, however, shall Landlord be liable for any previous act or omission by Tenant under the sublease or for the return of any advance rental payments or deposits under the sublease that have not been actually delivered to Landlord, nor shall Landlord be bound by any sublease modification executed without Landlord’s consent or for any advance rental payment by the subtenant in excess of one month’s rent. The provisions of this Lease (other than with respect to the payment of rent), including without limitation those pertaining to insurance and indemnification, shall be deemed incorporated by reference into the sublease despite the termination of this Lease. In the event Landlord does not elect to take over Tenant’s interest in a sublease in the event of any such termination of this Lease, such sublease shall terminate concurrently with the termination of this Lease and such subtenant shall have no further rights under such sublease and Landlord shall have no obligations to such subtenant.

SECTION 9.4.     CERTAIN TRANSFERS. The following shall be deemed to constitute an assignment of this Lease; (a) the sale of all or substantially all of Tenant’s assets (other than bulk sales in the ordinary course of business), (b) if Tenant is a corporation, an unincorporated association, a limited liability company or a partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association, limited liability company or partnership in the aggregate of twenty-five percent (25%) (except for publicly traded shares of stock constituting a transfer of twenty-five percent (25%) or more in the aggregate, so long as no change in the controlling interest of Tenant occurs as a result thereof), or (c) any other direct or indirect change of control of Tenant, including,

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without limitation, change of control of Tenant’s parent company or a merger by Tenant or its parent company. Notwithstanding the foregoing, Landlord’s consent shall not be required for the assignment of this Lease or the subletting of all or any portion of the Premises to any entity controlling, controlled by or under common control with, Tenant, or as a result of the sale of all or substantially all of Tenant’s business assets, a merger by Tenant with or into another entity or a reorganization of Tenant (collectively, a “Permitted Transfer”), so long as (i) in the case of an assignment of this Lease, the net worth of the successor or reorganized entity after such Permitted Transfer is at least equal to the greater of the net worth of Tenant as of the execution of this Lease by Landlord or the net worth of Tenant immediately prior to the date of such Permitted Transfer, evidence of which, satisfactory to Landlord, shall be presented to Landlord prior to such Permitted Transfer, (ii) Tenant shall provide to Landlord, prior to such Permitted Transfer, written notice of such Permitted Transfer and such assignment or sublease documentation and other information as Landlord may reasonably require in connection therewith, and (iii) all of the terms and requirements of Sections 9.2 and 9.3 shall apply with respect to such Permitted Transfer.

ARTICLE X. INSURANCE AND INDEMNITY

SECTION 10.1.     TENANT’S INSURANCE. Tenant, at its sole cost and expense, shall provide and maintain in effect the insurance described in Exhibit D. Evidence of that insurance must be delivered to Landlord prior to the Commencement Date or any earlier date on which Tenant may enter upon or take possession of the Premises for any reason whatsoever.

SECTION 10.2.    LANDLORD’S INSURANCE. Landlord may, at its election, provide any or all of the following types of insurance, with or without deductible and in amounts and coverages as may be determined by Landlord in its sole and absolute discretion: property insurance, subject to standard exclusions, covering the Building and/or Project, and such other risks as Landlord or its mortgagees may from time to time deem appropriate, including coverage for the Tenant Improvements constructed by Landlord pursuant to the Work Letter (if any) attached hereto, and commercial general liability coverage. Landlord shall not be required to carry insurance of any kind on Tenant’s Alterations or on Tenant’s other property, including, without limitation, Tenant’s trade fixtures, furnishings, equipment, signs and all other items of personal property, and Landlord shall not be obligated to repair or replace that property should damage occur. All proceeds of insurance maintained by Landlord upon the Building and/or Project shall be the property of Landlord, whether or not Landlord is obligated to or elects to make any repairs. At Landlord’s option, Landlord may self-insure all or any portion of the risks for which Landlord may elect to provide insurance hereunder.

SECTION 10.3.    TENANT’S INDEMNITY. To the fullest extent permitted by law, but subject to the express limitations on liability contained in this Lease (including, without limitation, the provisions of Section 10.5 and 14.8 of this Lease, Tenant shall defend, indemnify, protect, save and hold harmless Landlord, its agents, and any and all affiliates of Landlord, including, without limitation, any corporations or other entities controlling, controlled by or under common control with Landlord, from and against any and all third party claims, demands, actions, losses, liabilities, costs or expenses arising either before or after the Commencement Date from Tenant’s use or occupancy of the Premises, the Building or the Common Areas, including, without limitation, the use by Tenant, its agents, employees, invitees or licensees of any recreational facilities within the Common Areas; the conduct of Tenant’s business; any activity, work, or thing done, permitted or suffered by Tenant or its agents, employees, invitees or licensees in or about the Premises, the Building or the Common Areas; any Event of Default in the performance of any obligation on Tenant’s part to be performed under this Lease; or any act or negligence of Tenant or its agents, employees, visitors, patrons, guests, invitees or licensees. Landlord may, at its option, require Tenant to assume Landlord’s defense in any claim, action or proceeding covered by this Section through counsel reasonably satisfactory to Landlord. The provisions of this Section shall expressly survive the expiration or sooner termination of this Lease. Tenant’s obligations under this Section shall not apply in the event that the claim, demand, action, loss, liability, cost or expense is caused solely by the active negligence or willful misconduct of Landlord. Landlord shall reimburse Tenant for reasonable attorneys’ fees and costs to the extent and in the proportion that any injury or damage is ultimately determined by a court of competent jurisdiction (or in connection with any negotiated settlement agreed to by Landlord) to be attributable to the negligence or willful misconduct of Landlord. Additionally, to the fullest extent permitted by law, but subject to the express limitations on Landlord’s liability contained in this Lease (including, without limitation, the provisions of Section 10.4 below), Landlord shall indemnify and hold harmless Tenant, and Tenant’s agents, employees, lenders, and affiliates, from and against any and all claims, liabilities, damages, costs or expenses arising either before or after the

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Commencement Date from the negligence or willful misconduct of Landlord, its affiliates, agents, employees, or contractors in connection with its obligations with respect to the Project or this Lease.

SECTION 10.4.    LANDLORD’S NONLIABILITY. Landlord, its agents, and any and all affiliates of Landlord, shall not be liable to Tenant, its employees, agents and/or invitees, and Tenant hereby waives all claims against Landlord, its agents, and any and all affiliates of Landlord, for and knowingly assumes the risk of loss of or damage to any property, or loss or interruption of business or income, or any other loss, cost, damage, injury or liability whatsoever (including without limitation any consequential damages and lost profit or opportunity costs), resulting from, but not limited to, Acts of God, acts of civil disobedience or insurrection, acts or omissions of third parties and/or of other tenants within the Project or their agents, employees, contractors, guests or invitees, fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak or flow from or into any part of the Premises, mold, or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical works, roof, windows or other fixtures in the Building (whether the damage or injury results from conditions arising in the Premises or in other portions of the Building), regardless of the negligence of Landlord, its agents or any and all affiliates of Landlord in connection with any of the foregoing. It is understood that any such condition may require the temporary evacuation or closure of all or a portion of the Building. Landlord shall have no liability whatsoever (including without limitation consequential damages and lost profit or opportunity costs) and, except as provided in Sections 11.1 and 12.1 below, there shall be no abatement of rent, by reason of any injury to or interference with Tenant’s business arising from the making of any repairs, alterations or improvements to any portion of the Building, including repairs to the Premises, nor shall any related activity by Landlord constitute an actual or constructive eviction. In making repairs, alterations or improvements, however, Landlord shall interfere as little as reasonably practicable with the conduct of Tenant’s business in the Premises. Should Tenant elect to receive any service or products from a concessionaire, licensee or third party tenant of Landlord, Landlord shall have no liability for any services or products so provided or for any breach of contract by such third party provider. Neither Landlord nor its agents shall be liable for interference with light or other similar intangible interests. Tenant shall immediately notify Landlord in case of fire or accident in the Premises, the Building or the Project and of defects in any improvements or equipment.

SECTION 10.5.    WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives all rights of recovery against the other and the other’s agents on account of loss and damage occasioned to the property of such waiving party to the extent that the waiving party is entitled to proceeds for such loss or damage under any property insurance policies carried or required to be carried by the provisions of this Lease; provided however, that the foregoing waiver shall not apply to the extent of Tenant’s obligations to pay deductibles under any such policies and this Lease. By this waiver it is the intent of the parties that neither Landlord nor Tenant shall be liable to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage insured against under any property insurance policies contemplated by this Lease, even though such loss or damage might be occasioned by the negligence of such party, its agents, employees, contractors, guests or invitees.

ARTICLE XI. DAMAGE OR DESTRUCTION

SECTION 11.1.RESTORATION.

(a)    If the Premises or the Building or a part thereof are materially damaged by any fire, flood, earthquake or other casualty, Landlord shall have the right to terminate this Lease upon written notice to Tenant if: (i) Landlord reasonably determines that proceeds necessary to pay the full cost of repair are not available from Landlord’s insurance, including without limitation earthquake insurance, plus such additional amounts Tenant elects, at its option, to contribute, excluding however the deductible (for which Tenant shall be responsible for Tenant’s Share); (ii) Landlord reasonably determines that the Premises cannot, with reasonable diligence, be fully repaired by Landlord (or cannot be safely repaired because of the presence of hazardous factors, including without limitation Hazardous Materials, earthquake faults, and other similar dangers) within two hundred seventy (270) days after the date of the damage; (iii) an Event of Default by Tenant has occurred; or (iv) the material damage occurs during the final twelve (12) months of the Term. Landlord shall notify Tenant in writing (“Landlord’s Notice”) within sixty (60) days after the damage occurs as to (A) whether Landlord is terminating this Lease as a result of such material damage and (B) if Landlord is not terminating this Lease, the number of days within which Landlord estimates that the Premises, with reasonable diligence, are likely to be fully repaired. In the event Landlord elects to terminate this Lease, this Lease shall terminate as of the date

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specified for termination by Landlord’s Notice (which termination date shall in no event be later than sixty (60) days following the date of the damage, or, if no such date is specified, such termination shall be the date of Landlord’s Notice).

(b)    If Landlord has the right to terminate this Lease pursuant to Section 11.1(a) and does not elect to so terminate this Lease, and provided that at the time of Landlord's Notice neither an Event of Default exists nor has Landlord delivered Tenant a notice of any failure by Tenant to fulfill an obligation under this Lease which, unless cured by Tenant within the applicable grace period, would constitute an Event of Default, then within ten (10) days following delivery of Landlord's Notice pursuant to Section 11.1(a), Tenant may elect to terminate this Lease by written notice to Landlord, but only if (i) Landlord's Notice specifies that Landlord has determined that the Premises cannot be repaired, with reasonable diligence, within two hundred seventy (270) days after the date of damage or (ii) the casualty has occurred within the final twelve (12) months of the Term and such material damage has a materially adverse impact on Tenant's continued use of the Premises. If Tenant fails to provide such termination notice within such ten (10) day period, Tenant shall be deemed to have waived any termination right under this Section 1l.1(b) or any other applicable law.

(c)    In the event that neither Landlord nor Tenant terminates this Lease pursuant to this Section 11.1 as a result of material damage to the Building or Premises resulting from a casualty, Landlord shall repair all material damage to the Premises or the Building as soon as reasonably possible and this Lease shall continue in effect for the remainder of the Term. Landlord’s repair of material damage shall be at Landlord’s sole cost and expense except for any insurance deductible (for which Tenant shall be responsible for Tenant’s Share). Landlord shall have the right, but not the obligation, to repair or replace any other leasehold improvements made by Tenant or any Alterations (as defined in Section 7.3) constructed by Tenant as part of Landlord’s repair of material damage, in which case Tenant shall make available to Landlord upon demand insurance proceeds from insurance required to be maintained by Tenant. If Landlord elects to repair or replace such leasehold improvements and/or Alterations, all insurance proceeds available for such repair or replacement shall be made available to Landlord. Landlord shall have no liability to Tenant in the event that the Premises or the Building has not been fully repaired within the time period specified by Landlord in Landlord’s Notice to Tenant as described in Section 11.1(a). Notwithstanding the provisions of this Article XI, the repair of damage to the Premises to the extent such damage is not material shall be governed by Sections 7.1 and 7.2.

(d)    Commencing on the date of such material damage to the Building, and ending on the sooner of the date the damage is repaired or the date this Lease is terminated, the rental to be paid under this Lease shall be abated in the same proportion that the Floor Area of the Premises that is rendered unusable by the damage from time to time bears to the total Floor Area of the Premises, as determined by Landlord, but only to the extent that Landlord is entitled to reimbursement from the proceeds of the business interruption insurance required to be maintained by Tenant pursuant to Exhibit D.

(e)    Landlord shall not be required to repair or replace any improvements or fixtures that Tenant is obligated to repair or replace pursuant to Section 7.1 or any other provision of this Lease and Tenant shall continue to be obligated to so repair or replace any such improvements or fixtures, notwithstanding any provisions to the contrary in this Article XI. In addition, but subject to the provisions of Section 10.5, in the event the damage or destruction to the Premises or Building are due in substantial part to the fault or neglect of Tenant or its employees, subtenants, invitees or representatives, the costs of such repairs or replacement to the Premises or Building shall be borne by Tenant, and in addition, Tenant shall not be entitled to terminate this Lease as a result, notwithstanding the provisions of Section 11.1(b).

(f)    Tenant shall fully cooperate with Landlord in removing Tenant's personal property and any debris from the Premises to facilitate all inspections of the Premises and the making of any repairs. Notwithstanding anything to the contrary contained in this Lease, if Landlord in good faith believes there is a risk of injury to persons or damage to property from entry into the Building or Premises following any damage or destruction thereto, Landlord may restrict entry into the Building or the Premises by Tenant, its employees, agents and contractors in a non-discriminatory manner, without being deemed to have violated Tenant's rights of quiet enjoyment to, or made an unlawful detainer of, or evicted Tenant from, the Premises. Upon request, Landlord shall consult with Tenant to determine if there are safe methods of entry into the Building or the Premises solely in order to allow Tenant to retrieve files, data in computers, and

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necessary inventory, subject however to all indemnities and waivers of liability from Tenant to Landlord contained in this Lease and any additional indemnities and waivers of liability which Landlord may require.

SECTION 11.2.LEASE GOVERNS. Tenant agrees that the provisions of this Lease, including without limitation Section 11.1, shall govern any damage or destruction and shall accordingly supersede any contrary statute or rule of law.

ARTICLE XII. EMINENT DOMAIN

SECTION 12.1.    TOTAL OR PARTIAL TAKING. If all or a material portion of the Premises is taken by any lawful authority by exercise of the right of eminent domain, or sold to prevent a taking, either Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to the authority. In the event title to a portion of the Building or Project, whether or not including a portion of the Premises, is taken or sold to prevent taking, and if Landlord elects to restore the Building in such a way as to alter the Premises materially, either party may terminate this Lease, by written notice to the other party, effective on the date of vesting of title. In the event neither party has elected to terminate this Lease as provided above, then Landlord shall promptly, after receipt of a sufficient condemnation award, proceed to restore the Premises to substantially their condition prior to the taking, and a proportionate allowance shall be made to Tenant for the rent corresponding to the time during which, and to the part of the Premises of which, Tenant is deprived on account of the taking and restoration. In the event of a taking, Landlord shall be entitled to the entire amount of the condemnation award without deduction for any estate or interest of Tenant; provided that nothing in this Section shall be deemed to give Landlord any interest in, or prevent Tenant from seeking any award against the taking authority for, the taking of personal property and fixtures belonging to Tenant or for relocation or business interruption expenses recoverable from the taking authority.

SECTION 12.2.    TEMPORARY TAKING. No temporary taking of the Premises shall terminate this Lease or give Tenant any right to abatement of rent, and any award specifically attributable to a temporary taking of the Premises shall belong entirely to Tenant. A temporary taking shall be deemed to be a taking of the use or occupancy of the Premises for a period of not to exceed ninety (90) days.

SECTION 12.3.    TAKING OF PARKING AREA. In the event there shall be a taking of the parking area such that Landlord can no longer provide sufficient parking to comply with this Lease, Landlord may substitute reasonably equivalent parking in a location reasonably close to the Building; provided that if Landlord fails to make that substitution within ninety (90) days following the taking and if the taking materially impairs Tenant’s use and enjoyment of the Premises, Tenant may, at its option, terminate this Lease by written notice to Landlord. If this Lease is not so terminated by Tenant, there shall be no abatement of rent and this Lease shall continue in effect.

ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS

SECTION 13.1.SUBORDINATION. At the option of Landlord or any lender of Landlord’s that obtains a security interest in the Building, this Lease shall be either superior or subordinate to all ground or underlying leases, mortgages and deeds of trust, if any, which may hereafter affect the Building, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, that so long as no Event of Default exists under this Lease, Tenant’s possession and quiet enjoyment of the Premises shall not be disturbed and this Lease shall not terminate in the event of termination of any such ground or underlying lease, or the foreclosure of any such mortgage or deed of trust, to which this Lease has been subordinated pursuant to this Section. Within ten (10) days after receipt of written notice, Tenant shall execute and deliver any commercially reasonable documents or agreements requested by Landlord or such lessor or lender which provide Tenant with the non-disturbance protections set forth in this Section. In the event of a termination or foreclosure, Tenant shall become a tenant of and attorn to the successor-in-interest to Landlord upon the same terms and conditions as are contained in this Lease, and shall execute any instrument reasonably required by Landlord’s successor for that purpose. Tenant shall also, within ten (10) days after written request of Landlord, execute and deliver all commercially reasonable instruments as may be required from time to time to subordinate the rights of Tenant under this Lease to any ground or underlying lease or to the lien of any mortgage or deed of trust (provided that such instruments include the nondisturbance and attornment provisions set forth above), or, if requested by Landlord, to subordinate, in whole or in part, any ground or underlying lease or the lien of any mortgage or deed of

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trust to this Lease. Tenant agrees that any purchaser at a foreclosure sale or lender taking title under a deed-in-lieu of foreclosure shall not be responsible for any act or omission of a prior landlord, shall not be subject to any offsets or defenses Tenant may have against a prior landlord, and shall not be liable for the return of the security deposit to the extent it is not actually received by such purchaser or bound by any rent paid for more than the current month in which the foreclosure occurred.

SECTION 13.2.    ESTOPPEL CERTIFICATE. Tenant shall, within 10 business days after receipt of a written request from Landlord, execute and deliver a commercially reasonable estoppel certificate in favor of those parties as are reasonably requested by Landlord (including a Mortgagee or a prospective purchaser of the Building or the Project).

SECTION 13.3.    FINANCIALS. The application, financial statements and tax returns, if any, submitted and certified to by Tenant as an accurate representation of its financial condition have been prepared, certified and submitted to Landlord as an inducement and consideration to Landlord to enter into this Lease. Tenant shall during the Term (but no more than once per calendar year unless an uncured Event of Default has occurred) furnish Landlord with current annual financial statements accurately reflecting Tenant’s financial condition upon written request from Landlord within 10 business days following Landlord’s request; provided, however, that so long as Tenant or Tenant’s parent company is a publicly traded corporation on a nationally recognized stock exchange, the foregoing obligation to deliver the statements shall be waived.

ARTICLE XIV. EVENTS OF DEFAULT AND REMEDIES

SECTION 14.1.    TENANT’S DEFAULTS. The occurrence of any one or more of the following events (following the expiration of any cure period set forth below, if any is provided) shall constitute an “Event of Default” by Tenant:

(a)    The failure by Tenant to make any payment of Basic Rent or additional rent required to be made by Tenant, as and when due, where the failure continues for a period of three (3) days after written notice from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended. For purposes of these Events of Default and remedies provisions, the term “additional rent” shall be deemed to include all amounts of any type whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of this Lease and the Work Letter.

(b)    The assignment, sublease, encumbrance or other transfer of this Lease by Tenant, either voluntarily or by operation of law, whether by judgment, execution, transfer by intestacy or testacy, or other means, without the prior written consent of Landlord when consent is required by this Lease.

(c)    The discovery by Landlord that any financial statement provided by Tenant, or by any affiliate, successor or guarantor of Tenant, was materially false.

(d)    The failure of Tenant to timely and fully provide any subordination agreement, estoppel certificate or financial statements in accordance with the requirements of Article XIII.

(e)    The abandonment of the Premises by Tenant.

(f)    The failure or inability by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in this Section 14.1, where the failure continues for a period of thirty (30) days after written notice from Landlord to Tenant or such shorter period as is specified in any other provision of this Lease; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended. However, if the nature of the failure is such that more than thirty (30) days are reasonably required for its cure, then an Event of Default shall not be deemed to have occurred if Tenant commences the cure within thirty (30) days, and thereafter diligently pursues the cure to completion.

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(g)    (i) The making by Tenant of any general assignment for the benefit of creditors; (ii) the filing by or against Tenant of a petition to have Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code, to have debts discharged or for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within thirty (30) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, if possession is not restored to Tenant within thirty (30) days; (iv) the attachment, execution or other judicial seizure of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where the seizure is not discharged within thirty (30) days; (v) Tenant’s convening of a meeting of its creditors for the purpose of effecting a moratorium upon or composition of its debts or (vi) the failure of Tenant to pay its material obligations to creditors as and when they become due and payable, other than as a result of a good faith dispute by Tenant as to the amount due to such creditors. Landlord shall not be deemed to have knowledge of any event described in this Section 14.1(g) unless notification in writing is received by Landlord, nor shall there be any presumption attributable to Landlord of Tenant’s insolvency. In the event that any provision of this Section 14.1(g) is contrary to applicable law, the provision shall be of no force or effect.

(h)    Any other breach of this Lease which this Lease provides is an Event of Default.

SECTION 14.2.    LANDLORD’S REMEDIES.

(a)    If an Event of Default by Tenant occurs, then in addition to any other remedies available to Landlord, Landlord may exercise the following remedies:

(i)    Landlord may terminate Tenant’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. Such termination shall not affect any accrued obligations of Tenant under this Lease. Upon termination, Landlord shall have the right to reenter the Premises and remove all persons and property. Landlord shall also be entitled to recover from Tenant (and to retain, use or apply any Security Deposit held by Landlord towards amounts estimated by Landlord as):

(1)    The worth at the time of award of the unpaid Basic Rent and additional rent which had been earned at the time of termination;

(2)    The worth at the time of award of the amount by which the unpaid Basic Rent and additional rent which would have been earned after termination until the time of award exceeds the amount of such loss that Tenant proves could have been reasonably avoided;

(3)    The worth at the time of award of the amount by which the unpaid Basic Rent and additional rent for the balance of the Term after the time of award exceeds the amount of such loss that Tenant proves could be reasonably avoided;

(4)    Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result from Tenant’s Event of Default, including, but not limited to, the cost of recovering possession of the Premises, refurbishment of the Premises, marketing costs, commissions and other expenses of reletting, including necessary repair, the unamortized portion of any tenant improvements and brokerage commissions funded by Landlord in connection with this Lease, reasonable attorneys’ fees, and any other reasonable costs; and

(5)    At Landlord’s election, all other amounts in addition to or in lieu of the foregoing as may be permitted by law. The term “rent” as used in the Lease shall be deemed to mean the Basic Rent, Tenant’s Share of Operating Expenses and any other sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease whether or not designated as additional rent hereunder, including, without limitation, any sums that may be owing from Tenant pursuant to Section 4.3 of this Lease. Any sum, other than Basic Rent, shall be computed on the basis of the average monthly amount accruing during the twenty‑four (24) month period immediately prior to the Event of Default, except that if it becomes necessary to compute such rental before the twenty‑four (24) month period has occurred, then the computation shall be on the basis of the average monthly amount during the shorter period. As

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used in Sections 14.2(a)(i) (1) and (2) above, the “worth at the time of award” shall be computed by allowing interest at the rate of ten percent (10%) per annum. As used in Section 14.2(a)(i)(3) above, the “worth at the time of award” shall be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

(ii)    Landlord may elect not to terminate Tenant’s right to possession of the Premises, and to continue to enforce all of its rights and remedies under this Lease, including the right to collect all rent as it becomes due as provided in Civil Code Section 1951.4. Efforts by the Landlord to maintain, preserve or relet the Premises, or the appointment of a receiver to protect the Landlord’s interests under this Lease, shall not constitute a termination of the Tenant’s right to possession of the Premises. In the event that Landlord elects to avail itself of the remedy provided by this Section 14.2(a)(ii), Landlord shall not unreasonably withhold its consent to an assignment or subletting of the Premises subject to the reasonable standards for Landlord’s consent as are contained in this Lease.

(b)    Landlord shall be under no obligation to observe or perform any covenant of this Lease on its part to be observed or performed which accrues after the date of any Event of Default by Tenant unless and until the Event of Default is cured by Tenant, it being understood and agreed that the performance by Landlord of its obligations under this Lease are expressly conditioned upon Tenant’s full and timely performance of its obligations under this Lease. The various rights and remedies reserved to Landlord in this Lease or otherwise shall be cumulative and, except as otherwise provided by California law, Landlord may pursue any or all of its rights and remedies at the same time.

(c)    No delay or omission of Landlord to exercise any right or remedy shall be construed as a waiver of the right or remedy or of any breach or Event of Default by Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any preceding breach or Event of Default by Tenant of any provision of this Lease, other than the failure of Tenant to pay the particular rent accepted, regardless of Landlord’s knowledge of the preceding breach or Event of Default at the time of acceptance of rent, or (ii) a waiver of Landlord’s right to exercise any remedy available to Landlord by virtue of the breach or Event of Default. The acceptance of any payment from a debtor in possession, a trustee, a receiver or any other person acting on behalf of Tenant or Tenant’s estate shall not waive or cure a breach or Event of Default under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser amount than the rent required by this Lease shall be deemed to be other than a partial payment on account of the earliest due stipulated rent, nor shall any endorsement or statement on any check or letter be deemed an accord and satisfaction and Landlord shall accept the check or payment without prejudice to Landlord’s right to recover the balance of the rent or pursue any other remedy available to it. No act or thing done by Landlord or Landlord’s agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender shall be valid unless in writing and signed by Landlord. No employee of Landlord or of Landlord’s agents shall have any power to accept the keys to the Premises prior to the termination of this Lease, and the delivery of the keys to any employee shall not operate as a termination of this Lease or a surrender of the Premises.

(d)    Any agreement for free or abated rent or other charges, or for the giving or paying by Landlord to or for Tenant of any cash or other bonus, inducement or consideration for Tenant’s entering into this Lease or any other concession agreed to by Landlord hereunder (“Inducement Provisions”) shall be deemed conditioned upon Tenant’s full and faithful performance of the terms, covenants and conditions of this Lease. Upon an Event of Default under this Lease by Tenant, any such Inducement Provisions shall automatically be deemed deleted from this Lease and of no further force or effect and the amount of any rent reduction or abatement or other bonus, inducement or consideration or other concession already given by Landlord or received by Tenant as an inducement shall be immediately due and payable by Tenant to Landlord, notwithstanding any subsequent cure of said Event of Default by Tenant.

SECTION 14.3.    LATE PAYMENTS.

(a)    Any payment due to Landlord under this Lease, including without limitation Basic Rent, Tenant's Share of Operating Expenses or any other payment due to Landlord under this Lease whether or not designated as additional rent hereunder, that is not received by Landlord within five (5) days following the date due shall bear interest at the lesser of 10% per annum or the maximum rate permitted by law from the date due until fully paid. The payment of interest shall not cure any breach or Event of Default by Tenant under this Lease. In addition, Tenant acknowledges that the late payment by Tenant to Landlord of Basic Rent and Tenant's Share of Operating Expenses will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable

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to ascertain. Those costs may include, but are not limited to, administrative, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any Basic Rent or Tenant's Share of Operating Expenses due from Tenant shall not be received by Landlord or Landlord's designee within five (5) days following the date due, then Tenant shall pay to Landlord, in addition to the interest provided above, a late charge, which the Tenant agrees is reasonable, in a sum equal to the greater of five percent (5%) of the amount overdue or One Hundred Dollars ($100.00) for each delinquent payment. Acceptance of a late charge by Landlord shall not constitute a waiver of Tenant's breach or Event of Default with respect to the overdue amount, nor shall it prevent Landlord from exercising any of its other rights and remedies.

(b)    Following each second installment of Basic Rent and/or the payment of Tenant's Share of Operating Expenses within any twelve (12) month period that is not paid within five (5) days following the date due, Landlord shall have the option (i) to require that beginning with the first payment of Basic Rent next due, Basic Rent and the Tenant's Share of Operating Expenses shall no longer be paid in monthly installments but shall be payable quarterly three (3) months in advance and/or (ii) to require that Tenant increase the amount, if any, of the Security Deposit by one hundred percent (100%). Should Tenant deliver to Landlord, at any time during the Term, two (2) or more insufficient checks, the Landlord may require that all monies then and thereafter due from Tenant be paid to Landlord by cashier's check. If any check for any payment to Landlord hereunder is returned by the bank for any reason, such payment shall not be deemed to have been received by Landlord and Tenant shall be responsible for any applicable late charge, interest payment and the charge to Landlord by its bank for such returned check. Nothing in this Section shall be construed to compel Landlord to accept Basic Rent, Tenant's Share of Operating Expenses or any other payment from Tenant if there exists an Event of Default unless such payment fully cures any and all such Events of Default. Any acceptance of any such payment shall not be deemed to waive any other right of Landlord under this Lease. Any payment by Tenant to Landlord may be applied by Landlord, in its sole and absolute discretion, in any order determined by Landlord to any amounts then due to Landlord.

SECTION 14.4.    RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be performed by Tenant under this Lease shall be performed at Tenant’s sole cost and expense and without any abatement of rent or right of set-off. If Tenant fails to pay any sum of money, other than rent payable to Landlord, or fails to perform any other act on its part to be performed under this Lease, and the failure continues beyond any applicable grace period set forth in Section 14.1, then in addition to any other available remedies, Landlord may, at its election make the payment or perform the other act on Tenant’s part and Tenant hereby grants Landlord the right to enter onto the Premises in order to carry out such performance. Landlord’s election to make the payment or perform the act on Tenant’s part shall not give rise to any responsibility of Landlord to continue making the same or similar payments or performing the same or similar acts nor shall Landlord be responsible to Tenant for any damage caused to Tenant as the result of such performance by Landlord. Tenant shall, promptly upon demand by Landlord, reimburse Landlord for all sums paid by Landlord and all necessary incidental costs, together with interest at the maximum rate permitted by law from the date of the payment by Landlord.

SECTION 14.5.    DEFAULT BY LANDLORD. Landlord shall not be deemed to be in default in the performance of any obligation under this Lease, and Tenant shall have no rights to take any action against Landlord, unless and until Landlord has failed to perform the obligation within thirty (30) days after written notice by Tenant to Landlord specifying in reasonable detail the nature and extent of the failure; provided, however, that if the nature of Landlord’s obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it commences performance within the thirty (30) day period and thereafter diligently pursues the cure to completion. In the event of Landlord’s default under this Lease, Tenant’s sole remedies shall be to seek damages or specific performance from Landlord, provided that any damages shall be limited to Tenant’s actual out-of-pocket expenses and shall in no event include any consequential damages, lost profits or opportunity costs.

SECTION 14.6.    EXPENSES AND LEGAL FEES. All sums reasonably incurred by Landlord in connection with any Event of Default by Tenant under this Lease or holding over of possession by Tenant after the expiration or earlier termination of this Lease, or any action related to a filing for bankruptcy or reorganization by Tenant, including without limitation all costs, expenses and actual accountants, appraisers, attorneys and other professional fees, and any collection agency or other collection charges, shall be due and payable to Landlord on demand, and shall bear interest at the rate of the lesser of ten percent (10%) per annum or the maximum rate permitted by law from the date due until

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paid. Should either Landlord or Tenant bring any action in connection with this Lease, the prevailing party shall be entitled to recover as a part of the action its reasonable attorneys’ fees, and all other costs. The prevailing party for the purpose of this Section shall be determined by the trier of the facts.

SECTION 14.7.    WAIVER OF JURY TRIAL/JUDICIAL REFERENCE.

(a)LANDLORD AND TENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND, TO THE EXTENT ENFORCEABLE UNDER CALIFORNIA LAW, EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT’S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE.FURTHERMORE, THIS WAIVER AND RELEASE OF ALL RIGHTS TO A JURY TRIAL IS DEEMED TO BE INDEPENDENT OF EACH AND EVERY OTHER PROVISION, COVENANT, AND/OR CONDITION SET FORTH IN THIS LEASE.

(b)IN THE EVENT THAT THE JURY WAIVER PROVISIONS OF SECTION 14.7(a) ARE NOT ENFORCEABLE UNDER CALIFORNIA LAW, THEN THE PROVISIONS OF THIS SECTION 14.7(b) SHALL APPLY. IT IS THE DESIRE AND INTENTION OF THE PARTIES TO AGREE UPON A MECHANISM AND PROCEDURE UNDER WHICH CONTROVERSIES AND DISPUTES ARISING OUT OF THIS LEASE OR RELATED TO THE PREMISES WILL BE RESOLVED IN A PROMPT AND EXPEDITIOUS MANNER. ACCORDINGLY, EXCEPT WITH RESPECT TO ACTIONS FOR UNLAWFUL OR FORCIBLE DETAINER OR WITH RESPECT TO THE PREJUDGMENT REMEDY OF ATTACHMENT, ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT’S USE OR OCCUPANCY OF THE PREMISES AND/OR ANY CLAIM OF INJURY OR DAMAGE, SHALL BE HEARD AND RESOLVED BY A REFEREE UNDER THE PROVISIONS OF THE CALIFORNIA CODE OF CIVIL PROCEDURE, SECTIONS 638 - 645.1, INCLUSIVE (AS SAME MAY BE AMENDED, OR ANY SUCCESSOR STATUTE(S) THERETO) (THE “REFEREE SECTIONS”). ANY FEE TO INITIATE THE JUDICIAL REFERENCE PROCEEDINGS SHALL BE PAID BY THE PARTY INITIATING SUCH PROCEDURE; PROVIDED HOWEVER, THAT THE COSTS AND FEES, INCLUDING ANY INITIATION FEE, OF SUCH PROCEEDING SHALL ULTIMATELY BE BORNE IN ACCORDANCE WITH SECTION 14.6 ABOVE. THE VENUE OF THE PROCEEDINGS SHALL BE IN THE COUNTY IN WHICH THE PREMISES ARE LOCATED. WITHIN TEN (10) DAYS OF DELIVERY BY ANY PARTY TO THE OTHER PARTY OF A WRITTEN REQUEST TO RESOLVE ANY DISPUTE OR CONTROVERSY PURSUANT TO THIS SECTION 14.7(b), THE PARTIES SHALL AGREE UPON A SINGLE REFEREE WHO SHALL TRY ALL ISSUES, WHETHER OF FACT OR LAW, AND REPORT A FINDING AND JUDGMENT ON SUCH ISSUES AS REQUIRED BY THE REFEREE SECTIONS. IF THE PARTIES ARE UNABLE TO AGREE UPON A REFEREE WITHIN SUCH TEN (10) DAY PERIOD, THEN ANY PARTY MAY THEREAFTER FILE A LAWSUIT IN THE COUNTY IN WHICH THE PREMISES ARE LOCATED FOR THE PURPOSE OF APPOINTMENT OF A REFEREE UNDER CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 638 AND 640, AS SAME MAY BE AMENDED OF ANY SUCCESSOR STATUTE(S) THERETO. IF THE REFEREE IS APPOINTED BY THE COURT, THE REFEREE SHALL BE A NEUTRAL AND IMPARTIAL RETIRED JUDGE WITH SUBSTANTIAL EXPERIENCE IN THE RELEVANT MATTERS TO BE DETERMINED, FROM JAMS/ENDISPUTE, INC., THE AMERICAN ARBITRATION ASSOCIATION OR SIMILAR MEDIATION/ARBITRATION ENTITY. THE PROPOSED REFEREE MAY BE CHALLENGED BY ANY PARTY FOR ANY OF THE GROUNDS LISTED IN SECTION 641 OF THE CALIFORNIA CODE OF CIVIL PROCEDURE, AS SAME MAY BE AMENDED OR ANY SUCCESSOR STATUTE(S) THERETO. THE REFEREE SHALL HAVE THE POWER TO DECIDE ALL ISSUES OF FACT AND LAW AND REPORT HIS OR HER DECISION ON SUCH ISSUES, AND TO ISSUE ALL RECOGNIZED REMEDIES AVAILABLE AT LAW OR IN EQUITY FOR ANY CAUSE OF ACTION THAT IS BEFORE THE REFEREE, INCLUDING AN AWARD OF ATTORNEYS’ FEES AND COSTS IN

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ACCORDANCE WITH CALIFORNIA LAW. THE REFEREE SHALL NOT, HOWEVER, HAVE THE POWER TO AWARD PUNITIVE DAMAGES, NOR ANY OTHER DAMAGES WHICH ARE NOT PERMITTED BY THE EXPRESS PROVISIONS OF THIS LEASE, AND THE PARTIES HEREBY WAIVE ANY RIGHT TO RECOVER ANY SUCH DAMAGES. THE PARTIES SHALL BE ENTITLED TO CONDUCT ALL DISCOVERY AS PROVIDED IN THE CALIFORNIA CODE OF CIVIL PROCEDURE, AND THE REFEREE SHALL OVERSEE DISCOVERY AND MAY ENFORCE ALL DISCOVERY ORDERS IN THE SAME MANNER AS ANY TRIAL COURT JUDGE, WITH RIGHTS TO REGULATE DISCOVERY AND TO ISSUE AND ENFORCE SUBPOENAS, PROTECTIVE ORDERS AND OTHER LIMITATIONS ON DISCOVERY AVAILABLE UNDER CALIFORNIA LAW. THE REFERENCE PROCEEDING SHALL BE CONDUCTED IN ACCORDANCE WITH CALIFORNIA LAW (INCLUDING THE RULES OF EVIDENCE), AND IN ALL REGARDS, THE REFEREE SHALL FOLLOW CALIFORNIA LAW APPLICABLE AT THE TIME OF THE REFERENCE PROCEEDING. IN ACCORDANCE WITH SECTION 644 OF THE CALIFORNIA CODE OF CIVIL PROCEDURE, THE DECISION OF THE REFEREE UPON THE WHOLE ISSUE MUST STAND AS THE DECISION OF THE COURT, AND UPON THE FILING OF THE STATEMENT OF DECISION WITH THE CLERK OF THE COURT, OR WITH THE JUDGE IF THERE IS NO CLERK, JUDGMENT MAY BE ENTERED THEREON IN THE SAME MANNER AS IF THE ACTION HAD BEEN TRIED BY THE COURT. THE PARTIES SHALL PROMPTLY AND DILIGENTLY COOPERATE WITH ONE ANOTHER AND THE REFEREE, AND SHALL PERFORM SUCH ACTS AS MAY BE NECESSARY TO OBTAIN A PROMPT AND EXPEDITIOUS RESOLUTION OF THE DISPUTE OR CONTROVERSY IN ACCORDANCE WITH THE TERMS OF THIS SECTION 14.7(b). TO THE EXTENT THAT NO PENDING LAWSUIT HAS BEEN FILED TO OBTAIN THE APPOINTMENT OF A REFEREE, ANY PARTY, AFTER THE ISSUANCE OF THE DECISION OF THE REFEREE, MAY APPLY TO THE COURT OF THE COUNTY IN WHICH THE PREMISES ARE LOCATED FOR CONFIRMATION BY THE COURT OF THE DECISION OF THE REFEREE IN THE SAME MANNER AS A PETITION FOR CONFIRMATION OF AN ARBITRATION AWARD PURSUANT TO CODE OF CIVIL PROCEDURE SECTION 1285 ET SEQ. (AS SAME MAY BE AMENDED OR ANY SUCCESSOR STATUTE(S) THERETO).

SECTION 14.8.SATISFACTION OF JUDGMENT. The obligations of Landlord and Tenant do not constitute the personal obligations of their respective individual partners, trustees, directors, officers, members or shareholders (or those of their constituent partners or members). Should Tenant recover a money judgment against Landlord, such judgment shall be satisfied only from the interest of Landlord in the Project and out of the rent or other income from such property receivable by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord’s right, title or interest in the Project and no action for any deficiency may be sought or obtained by Tenant.

ARTICLE XV. END OF TERM

SECTION 15.1.HOLDING OVER. If Tenant holds over for any period after the Expiration Date (or earlier termination of the Term) without the prior written consent of Landlord, such tenancy shall constitute a tenancy at sufferance only and an Event of Default by Tenant; such holding over with the prior written consent of Landlord shall constitute a month-to-month tenancy commencing on the 1st day following the termination of this Lease and terminating 30 days following delivery of written notice of termination by either Landlord or Tenant to the other. In either of such events, possession shall be subject to all of the terms of this Lease, except that for the first 60 days of such holdover, the monthly rental shall be 150% of the total monthly rental for the month immediately preceding the date of termination. Thereafter, such monthly rental rate shall be subject to Landlord’s right to modify same upon 30 days’ notice to Tenant. The acceptance by Landlord of monthly hold-over rental in a lesser amount shall not constitute a waiver of Landlord’s right to recover the full amount due unless otherwise agreed in writing by Landlord. If Tenant fails to surrender the Premises following the expiration of this Lease despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including without limitation, any claims made by any succeeding tenant relating to such failure to surrender. The foregoing provisions of this Section 15.1 are in addition to and do not affect Landlord’s right of re-entry or any other rights of Landlord under this Lease or at law.

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SECTION 15.2.MERGER ON TERMINATION. The voluntary or other surrender of this Lease by Tenant, or a mutual termination of this Lease, shall terminate any or all existing subleases unless Landlord, at its option, elects in writing to treat the surrender or termination as an assignment to it of any or all subleases affecting the Premises.

SECTION 15.3.SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Subject to the provisions of Section 7.3 of this Lease and of the Work Letter, if any, attached hereto, upon the Expiration Date or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the Premises to Landlord in as good order, condition and repair as when received or as hereafter may be improved by Landlord or Tenant, reasonable wear and tear and repairs which are Landlord’s obligation excepted, and shall, without expense to Landlord, remove or cause to be removed from the Premises all personal property, removable trade fixtures, and equipment and debris and perform all work required under Section 7.3 of this Lease and/or the Work Letter, if any, attached hereto, as to Replacements of Non-Standard Improvements and removal of Alterations, except for any items that Landlord may by written authorization allow to remain. Tenant shall repair all damage to the Premises resulting from the removal, which repair shall include the patching and filling of holes and repair of structural damage, provided that Landlord may instead elect to repair any structural damage at Tenant’s expense. If Tenant shall fail to comply with the provisions of this Section, Landlord may effect the removal and/or make any repairs, and the cost to Landlord shall be additional rent payable by Tenant upon demand. If Tenant fails to remove Tenant’s personal property from the Premises upon the expiration of the Term, Landlord may remove, store, dispose of and/or retain such personal property, at Landlord’s option, in accordance with then applicable laws, all at the expense of Tenant. If requested by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an instrument in writing releasing and quitclaiming to Landlord all right, title and interest of Tenant in the Premises.

ARTICLE XVI. PAYMENTS AND NOTICES

All sums payable by Tenant to Landlord shall be deemed to be rent under this Lease and shall be paid, without deduction or offset, in lawful money of the United States to Landlord at the address specified in Item 13 of the Basic Lease Provisions, or at any other place as Landlord may designate in writing. Unless this Lease expressly provides otherwise, as for example in the payment of Basic Rent and the Tenant’s Share of Operating Expenses pursuant to Sections 4.1 and 4.2, all payments shall be due and payable within five (5) days after demand. All payments requiring proration shall be prorated on the basis of the number of days in the pertinent calendar month or year, as applicable. Any notice, election, demand, consent, approval or other communication to be given or other document to be delivered by either party to the other may be delivered in person or by courier or overnight delivery service to the other party, or may be deposited in the United States mail, duly registered or certified, postage prepaid, return receipt requested, and addressed to the other party at the address set forth in Item 12 of the Basic Lease Provisions, or if to Tenant, at that address or, from and after the Commencement Date, at the Premises (whether or not Tenant has departed from, abandoned or vacated the Premises). Either party may, by written notice to the other, served in the manner provided in this Article, designate a different address. If any notice or other document is sent by mail, duly registered or certified, it shall be deemed served or delivered seventy-two (72) hours after mailing. If more than one person or entity is named as Tenant under this Lease, service of any notice upon any one of them shall be deemed as service upon all of them.

ARTICLE XVII. RULES AND REGULATIONS

Tenant agrees to observe faithfully and comply strictly with the Rules and Regulations, attached as Exhibit E, and any reasonable and nondiscriminatory amendments, modifications and/or additions as may be adopted and published by written notice to tenants by Landlord for the safety, care, security, good order, or cleanliness of the Premises, Building, Project and Common Areas. Landlord shall not be liable to Tenant for any violation of the Rules and Regulations or the breach of any covenant or condition in any lease by any other tenant or such tenant’s agents, employees, contractors, guests or invitees. One or more waivers by Landlord of any breach of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a waiver of any subsequent breach of that rule or any other. Tenant’s failure to keep and observe the Rules and Regulations shall constitute a breach of this Lease. In the case of any conflict between the Rules and Regulations and this Lease, this Lease shall be controlling. Notwithstanding anything to the contrary contained in this Lease, Landlord agrees that the Rules and Regulations shall not be modified or enforced by Landlord in a manner

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that would unreasonably interfere with Tenant’s use of or access to the Premises, the Building, the Project, or the parking areas in accordance with Tenant’s rights under this Lease.

ARTICLE XVIII. BROKER’S COMMISSION

The parties recognize as the broker(s) who negotiated this Lease the firm(s), whose name(s) is (are) stated in Item 10 of the Basic Lease Provisions, and agree that Landlord shall be responsible for the payment of brokerage commissions to those broker(s) unless otherwise provided in this Lease. It is understood and agreed that Landlord’s Broker represents only Landlord in this transaction and that Tenant’s Broker (if any) represents only Tenant. Each party warrants that it has had no dealings with any other real estate broker or agent in connection with the negotiation of this Lease, and agrees to indemnify and hold the other party harmless from any cost, expense or liability (including reasonable attorneys’ fees) for any compensation, commissions or charges claimed by any other real estate broker or agent employed by the indemnifying party in connection with the negotiation of this Lease. The foregoing agreement shall survive the termination of this Lease.

ARTICLE XIX. TRANSFER OF LANDLORD’S INTEREST

In the event of any transfer of Landlord’s interest in the Premises, following the assumption by the transferee of the obligations of “Landlord” under this Lease accruing from and after the effective date of such transfer, the transferor shall be automatically relieved of all obligations on the part of Landlord accruing under this Lease from and after the effective date of such transfer, provided that any funds held by the transferor in which Tenant has an interest shall be turned over, subject to that interest, to the transferee and Tenant is notified of the transfer as required by law. No beneficiary of a deed of trust to which this Lease is or may be subordinate, and no landlord under a so called sale‑leaseback, shall be responsible in connection with the Security Deposit, unless the mortgagee or beneficiary under the deed of trust or the landlord actually receives the Security Deposit. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject to the foregoing, be binding on Landlord, its successors and assigns, only during and with respect to obligations arising during their respective successive periods of ownership.

ARTICLE XX. INTERPRETATION

SECTION 20.1.GENDER AND NUMBER. Whenever the context of this Lease requires, the words “Landlord” and “Tenant” shall include the plural as well as the singular, and words used in neuter, masculine or feminine genders shall include the others.

SECTION 20.2.HEADINGS. The captions and headings of the articles and sections of this Lease are for convenience only, are not a part of this Lease and shall have no effect upon its construction or interpretation.

SECTION 20.3.JOINT AND SEVERAL LIABILITY. If more than one person or entity is named as Tenant, the obligations imposed upon each shall be joint and several and the act of or notice from, or notice or refund to, or the signature of, any one or more of them shall be binding on all of them with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, termination or modification of this Lease.

SECTION 20.4.SUCCESSORS. Subject to Articles IX and XIX, all rights and liabilities given to or imposed upon Landlord and Tenant shall extend to and bind their respective heirs, executors, administrators, successors and assigns. Nothing contained in this Section is intended, or shall be construed, to grant to any person other than Landlord and Tenant and their successors and assigns any rights or remedies under this Lease.

SECTION 20.5.TIME OF ESSENCE. Time is of the essence with respect to the performance of every provision of this Lease.

SECTION 20.6.CONTROLLING LAW/VENUE. This Lease shall be governed by and interpreted in accordance with the laws of the State of California. Any litigation commenced concerning any matters whatsoever arising out of or in any way connected to this Lease shall be initiated in the Superior Court of the county in which the Project is located.

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SECTION 20.7.SEVERABILITY. If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party or the deletion of which is consented to by the party adversely affected, shall be held invalid or unenforceable to any extent, the remainder of this Lease shall not be affected and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.

SECTION 20.8.WAIVER AND CUMULATIVE REMEDIES. One or more waivers by Landlord or Tenant of any breach of any term, covenant or condition contained in this Lease shall not be a waiver of any subsequent breach of the same or any other term, covenant or condition. Consent to any act by one of the parties shall not be deemed to render unnecessary the obtaining of that party’s consent to any subsequent act. No breach by Tenant of this Lease shall be deemed to have been waived by Landlord unless the waiver is in a writing signed by Landlord. The rights and remedies of Landlord under this Lease shall be cumulative and in addition to any and all other rights and remedies which Landlord may have.

SECTION 20.9.INABILITY TO PERFORM. In the event that either party shall be delayed or hindered in or prevented from the performance of any work or in performing any act required under this Lease by reason of any cause beyond the reasonable control of that party, other than financial inability, then the performance of the work or the doing of the act shall be excused for the period of the delay and the time for performance shall be extended for a period equivalent to the period of the delay. The provisions of this Section shall not operate to excuse Tenant from the prompt payment of rent or from the timely performance of any other obligation under this Lease within Tenant’s reasonable control.

SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other attachments cover in full each and every agreement of every kind between the parties concerning the Premises, the Building, and the Project, and all preliminary negotiations, oral agreements, understandings and/or practices, except those contained in this Lease, are superseded and of no further effect. Tenant waives its rights to rely on any representations or promises made by Landlord or others which are not contained in this Lease. No verbal agreement or implied covenant shall be held to modify the provisions of this Lease, any statute, law, or custom to the contrary notwithstanding.

SECTION 20.11.QUIET ENJOYMENT. Upon the observance and performance of all the covenants, terms and conditions on Tenant’s part to be observed and performed, and subject to the other provisions of this Lease, Tenant shall have the right of quiet enjoyment and use of the Premises for the Term without hindrance or interruption by Landlord or any other person claiming by or through Landlord.

SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which reasonably would be intended to survive the expiration or sooner termination of this Lease, including without limitation any warranty or indemnity hereunder, shall so survive and continue to be binding upon and inure to the benefit of the respective parties and their successors and assigns.

SECTION 20.13. INTERPRETATION. This Lease shall not be construed in favor of or against either party, but shall be construed as if both parties prepared this Lease.

ARTICLE XXI. EXECUTION AND RECORDING

SECTION 21.1.COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement.

SECTION 21.2.CORPORATE, LIMITED LIABILITY COMPANY AND PARTNERSHIP AUTHORITY. If Tenant is a corporation, limited liability company or partnership, each individual executing this Lease on behalf of the corporation, limited liability company or partnership represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of the corporation, limited liability company or partnership, and that this Lease is binding upon the corporation, limited liability company or partnership in accordance with its terms.

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SECTION 21.3.EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of this Lease to Tenant shall be for examination purposes only, and shall not constitute an offer to or option for Tenant to lease the Premises. Execution of this Lease by Tenant and its return to Landlord shall not be binding upon Landlord, notwithstanding any time interval, until Landlord has in fact executed and delivered this Lease to Tenant, it being intended that this Lease shall only become effective upon execution by Landlord and delivery of a fully executed counterpart to Tenant.

SECTION 21.4.RECORDING. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a “short form” memorandum of this Lease for recording purposes.

SECTION 21.5.AMENDMENTS. No amendment or termination of this Lease shall be effective unless in writing signed by authorized signatories of Tenant and Landlord, or by their respective successors in interest. No actions, policies, oral or informal arrangements, business dealings or other course of conduct by or between the parties shall be deemed to modify this Lease in any respect.

SECTION 21.6.EXECUTED COPY. Any fully executed photocopy or similar reproduction of this Lease shall be deemed an original for all purposes.

SECTION 21.7.ATTACHMENTS. All exhibits, amendments, riders and addenda attached to this Lease are hereby incorporated into and made a part of this Lease.

ARTICLE XXII. MISCELLANEOUS

SECTION 22.1.    NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord’s relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, members, shareholders, officers, directors, employees and attorneys, shall not intentionally and voluntarily disclose, by public filings or otherwise, the terms and conditions of this Lease (“Confidential Information”) to any third party, either directly or indirectly, without the prior written consent of Landlord, which consent may be given or withheld in Landlord’s sole and absolute discretion. The foregoing restriction shall not apply if either: (i) Tenant is required to disclose the Confidential Information in response to a subpoena or other regulatory, administrative or court order, (ii) independent legal counsel to Tenant delivers a written opinion to Landlord that Tenant is required to disclose the Confidential Information to, or file a copy of this Lease with, any governmental agency or any stock exchange; provided however, that in such event, Tenant shall, before making any such disclosure (A) provide Landlord with prompt written notice of such required disclosure, (B) at Tenant’s sole cost, take all reasonable legally available steps to resist or narrow such requirement, including without limitation preparing and filing a request for confidential treatment of the Confidential Information and (C) if disclosure of the Confidential Information is required by subpoena or other regulatory, administrative or court order, Tenant shall provide Landlord with as much advance notice of the possibility of such disclosure as practical so that Landlord may attempt to stop such disclosure or obtain an order concerning such disclosure. The form and content of a request by Tenant for confidential treatment of the Confidential Information shall be provided to Landlord at least five (5) business days before its submission to the applicable governmental agency or stock exchange and is subject to the prior written approval of Landlord. In addition, Tenant may disclose the terms of this Lease to its attorneys, accountants and advisors, as well as to prospective assignees of this Lease and prospective subtenants under this Lease with whom Tenant is actively negotiating such an assignment or sublease.

SECTION 22.2.    GUARANTEE. As a condition to the execution of this Lease by Landlord, the obligations, covenants and performance of the Tenant as herein provided shall be guaranteed in writing by the Guarantor(s) listed in Item 7 of the Basic Lease Provisions (“Guarantor”), if any, on a form of guaranty provided by Landlord (“Guarantee”). Any default by a Guarantor under the Guarantee shall be deemed to be an Event of Default under the terms of this Lease. In addition, any filing by or against a Guarantor of a petition to have such Guarantor adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts discharged or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against such Guarantor, the same is dismissed

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within thirty (30) days), a Guarantor’s convening of a meeting of its creditors for the purpose of effecting a moratorium upon or composition of its debts or the failure of a Guarantor to pay its material obligations to creditors as and when they become due and payable, other than as a result of a good faith dispute by such Guarantor, shall be deemed to be an Event of Default by Tenant.

SECTION 22.3.    CHANGES REQUESTED BY LENDER. If, in connection with obtaining financing for the Project, the lender shall request reasonable modifications in this Lease as a condition to the financing, Tenant will not unreasonably withhold or delay its consent, provided that the modifications do not materially increase the obligations of Tenant or materially and adversely affect the leasehold interest created by this Lease.

SECTION 22.4.    MORTGAGEE PROTECTION. No act or failure to act on the part of Landlord which would otherwise entitle Tenant to be relieved of its obligations hereunder shall result in such a release or termination unless (a) Tenant has given notice by registered or certified mail to any beneficiary of a deed of trust or mortgage encumbering the Premises whose address has been furnished to Tenant in writing and (b) such beneficiary is afforded a reasonable opportunity to cure the default by Landlord (which in no event shall be less than sixty (60) days), including, if necessary to effect the cure, time to obtain possession of the Premises by power of sale or judicial foreclosure provided that such foreclosure remedy is diligently pursued. Tenant agrees that each beneficiary of a deed of trust or mortgage encumbering the Premises is an express third party beneficiary hereof, Tenant shall have no right or claim for the collection of any deposit from such beneficiary or from any purchaser at a foreclosure sale unless such beneficiary or purchaser shall have actually received and not refunded the deposit, and Tenant shall comply with any written directions by any beneficiary to pay rent due hereunder directly to such beneficiary without determining whether a default exists under such beneficiary’s deed of trust.

SECTION 22.5.    COVENANTS AND CONDITIONS. All of the provisions of this Lease shall be construed to be conditions as well as covenants as though the words specifically expressing or imparting covenants and conditions were used in each separate provision.

SECTION 22.6.    SECURITY MEASURES. Tenant hereby acknowledges that Landlord shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Project. Tenant assumes all responsibility for the protection of Tenant, its employees, agents, invitees and property from acts of third parties. Nothing herein contained shall prevent Landlord, at its sole option, from providing security protection for the Project or any part thereof, in which event the cost thereof shall be included within the definition of Project Costs.

SECTION 22.7.    SDN LIST. Tenant hereby represents and warrants that neither Tenant nor any officer, director, partner, member or other principal of Tenant (collectively, “Tenant Parties”) is listed as a Specially Designated National and Blocked Person (“SDN”) on the list of such persons and entities issued by the U.S. Treasury Office of Foreign Assets Control (OFAC). Landlord hereby represents and warrants that neither Landlord nor any officer, director, partner, member or other principal of Landlord is listed as a SDN on the list of such persons and entities issued by the OFAC.

SECTION 22.8.    BROKER DISCLOSURE. By the execution of this Lease, each of Landlord and Tenant hereby acknowledge and confirm (a) receipt of a copy of a Disclosure Regarding Real Estate Agency Relationship conforming to the requirements of California Civil Code 2079.16, and (b) the agency relationships specified in Section 10 of the Basic Lease Provisions, which acknowledgment and confirmation is expressly made for the benefit of Tenant’s Broker identified in Section 10 of the Basic Lease Provisions.  If there is no Tenant’s Broker so identified in Section 10 of the Basic Lease Provisions, then such acknowledgment and confirmation is expressly made for the benefit of Landlord’s Broker.  By the execution of this Lease, Landlord and Tenant are executing the confirmation of the agency relationships set forth in Section 10 of the Basic Lease Provisions.

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LANDLORD:		TENANT:
THE IRVINE COMPANY LLC,		MASIMO CORPORATION
a Delaware limited liability company		a Delaware corporation
By:	/s/ STEVEN M. CASE	By:	/s/ YONGSAM LEE
	Steven M. Case, Executive Vice President, Office Properties		Yongsam Lee, CIO
By:	/s/ MICHAEL T. BENNETT	By:	/s/ MARK DE RAAD
	Michael T. Bennett, Senior Vice President, Office Properties		Mark de Raad, EVP and CFO

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9600 JERONIMO

EXHIBIT A

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EXHIBIT B

THE IRVINE COMPANY - INVESTMENT PROPERTIES GROUP

HAZARDOUS MATERIAL SURVEY FORM

The purpose of this form is to obtain information regarding the use of hazardous substances on Investment Properties Group (“IPG”) property. Prospective tenants and contractors should answer the questions in light of their proposed activities on the premises. Existing tenants and contractors should answer the questions as they relate to ongoing activities on the premises and should update any information previously submitted.

If additional space is needed to answer the questions, you may attach separate sheets of paper to this form. When completed, the form should be sent to the following address:

THE IRVINE COMPANY MANAGEMENT OFFICE

111 Innovation Drive

Irvine, CA 92617

Your cooperation in this matter is appreciated. If you have any questions, please call your property manager at (949) 720-4400 for assistance.

1. GENERAL INFORMATION.

Name of Responding Company: _____________________________________________

Check all that apply:    Tenant( )Contractor( )

Prospective( )Existing( )

Mailing Address: _________________________________________________________

Contact person & Title: ____________________________________________________

Telephone Number: ( ) _____________

Current TIC Tenant(s):

Address of Lease Premises: ________________________________________________

Length of Lease or Contract Term: ___________________________________________

Prospective TIC Tenant(s):

Address of Leased Premises: _______________________________________________

Address of Current Operations: _____________________________________________

Describe the proposed operations to take place on the property, including principal products manufactured or services to be conducted. Existing tenants and contractors should describe any proposed changes to ongoing operations. ____________________________________________________________________________________________________________________________________________________________

______________________________________________________________________________

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2. HAZARDOUS MATERIALS. For the purposes of this Survey Form, the term “hazardous material” means any raw material, product or agent considered hazardous under any state or federal law. The term does not include wastes which are intended to be discarded.

2.1 Will any hazardous materials be used or stored on site?

Chemical ProductsYes( )No( )

Biological Hazards/

Infectious WastesYes( )No( )

Radioactive MaterialsYes( )No( )

Petroleum ProductsYes( )No( )

2.2 List any hazardous materials to be used or stored, the quantities that will be on-site at any given time, and the location and method of storage (e.g., bottles in storage closet on the premises).

Location and Method

Hazardous Materialsof StorageQuantity

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

2.3 Is any underground storage of hazardous materials proposed or currently conducted on the premises? Yes ( ) No ( )

If yes, describe the materials to be stored, and the size and construction of the tank. Attach copies of any permits obtained for the underground storage of such substances. ________________________________________________________________________________________________________________________________________________________________________________________________________________________

3. HAZARDOUS WASTE. For the purposes of this Survey Form, the term “hazardous waste” means any waste (including biological, infectious or radioactive waste) considered hazardous under any state or federal law, and which is intended to be discarded.

3.1 List any hazardous waste generated or to be generated on the premises, and indicate the quantity generated on a monthly basis.

Hazardous MaterialsLocation and Method of StorageQuantity

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

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3.2 Describe the method(s) of disposal (including recycling) for each waste. Indicate where and how often disposal will take place.

Hazardous MaterialsLocation and Method of StorageDisposal Method

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

3.3 Is any treatment or processing of hazardous, infectious or radioactive wastes currently conducted or proposed to be conducted on the premise?

Yes ( ) No ( )

If yes, please describe any existing or proposed treatment methods. ________________________________________________________________________________________________________________________________________________________________________________________________________________________

3.4 Attach copies of any hazardous waste permits or licenses issued to your company with respect to its operations on the premises.

4. SPILLS

4.1 During the past year, have any spills or releases of hazardous materials occurred on the premises?Yes ( )No ( )

If so, please describe the spill and attach the results of any testing conducted to determine the extent of such spills. ________________________________________________________________________________________________________________________________________________

________________________________________________________________________

4.2 Were any agencies notified in connection with such spills?Yes ( )No ( )

If so, attach copies of any spill reports or other correspondence with regulatory agencies.

4.3 Were any clean-up actions undertaken in connection with the spills?Yes ( )No ( )

If so, briefly describe the actions taken. Attach copies of any clearance letters obtained from any regulatory agencies involved and the results of any final soil or groundwater sampling done upon completion of the clean-up work. ________________________________________________________________________________________________________________________________________________

________________________________________________________________________

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5. WASTEWATER TREATMENT/DISCHARGE

5.1 Do you discharge industrial wastewater to:

_____storm drain?_____sewer?

_____surface water?_____no industrial discharge

5.2 Is your industrial wastewater treated before discharge?Yes ( ) No ( )

If yes, describe the type of treatment conducted. ________________________________________________________________________________________________________________________________________________

________________________________________________________________________

5.3 Attach copies of any wastewater discharge permits issued to your company with respect to its operations on the premises.

6.AIR DISCHARGES.

6.1 Do you have any air filtration systems or stacks that discharge into the air?

Yes ( )No ( )

6.2 Do you operate any equipment that requires air emissions permits?

Yes ( )No ( )

6.3 Attach copies of any air discharge permits pertaining to these operations.

7.HAZARDOUS MATERIALS DISCLOSURES.

7.1 Does your company handle an aggregate of at least 500 pounds, 55 gallons or 200 cubic feet of hazardous material at any given time? Yes ( )No ( )

7.2 Has your company prepared a Hazardous Materials Disclosure - Chemical Inventory and Business Emergency Plan or similar disclosure document pursuant to state or county requirements?Yes ( )No ( )

If so, attach a copy.

7.3 Are any of the chemicals used in your operations regulated under Proposition 65?

If so, describe the procedures followed to comply with these requirements. ________________________________________________________________________________________________________________________________________________________________________________________________________________________

7.4 Is your company subject to OSHA Hazard Communication Standard Requirements?Yes ( )No ( )

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If so, describe the procedures followed to comply with these requirements. ________________________________________________________________________________________________________________________________________________

________________________________________________________________________

8. ANIMAL TESTING.

8.1 Does your company bring or intend to bring live animals onto the premises for research or development purposes?Yes ( )No ( )

If so, describe the activity. ________________________________________________________________________________________________________________________________________________________________________________________________________________________

8.2 Does your company bring or intend to bring animal body parts or bodily fluids onto the premises for research or development purposes?Yes ( ) No ( )

If so, describe the activity. ________________________________________________________________________________________________________________________________________________

________________________________________________________________________

9. ENFORCEMENT ACTIONS, COMPLAINTS.

9.1 Has your company ever been subject to any agency enforcement actions, administrative orders, lawsuits, or consent orders/decrees regarding environmental compliance or health and safety?Yes ( )No ( )

If so, describe the actions and any continuing obligations imposed as a result of these actions. ________________________________________________________________________________________________________________________________________________________________________________________________________________________

9.2 Has your company ever received any request for information, notice of violation or demand letter, complaint, or inquiry regarding environmental compliance or health and safety?Yes ( )No ( )

9.3 Has an environmental audit ever been conducted which concerned operations or activities on premises occupied by you?Yes ( )No ( )

9.4 If you answered “yes” to any questions in this section, describe the environmental action or complaint and any continuing compliance obligation imposed as a result of the same. ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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By: ________________________________

Name: _______________________

Title: ________________________

Date: _________________________

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EXHIBIT C

LANDLORD’S DISCLOSURES

SPECTRUM

The capitalized terms used and not otherwise defined in this Exhibit shall have the same definitions as set forth in the Lease. The provisions of this Exhibit shall supersede any inconsistent or conflicting provisions of the Lease.

1. Landlord has been informed that the El Toro Marine Corps Air Station (MCAS) has been listed as a Federal Superfund site as a result of chemical releases occurring over many years of occupancy. Various chemicals including jet fuel, motor oil and solvents have been discharged in several areas throughout the MCAS site. A regional study conducted by the Orange County Water District has estimated that groundwaters beneath more than 2,900 acres have been impacted by Trichloroethlene (TCE), an industrial solvent. There is a potential that this substance may have migrated into the ground water underlying the Premises. The U.S. Environmental Protection Agency, the Santa Ana Region Quality Control Board, and the Orange County Health Care Agency are overseeing the investigation/cleanup of this contamination. To the Landlord’s current actual knowledge, the ground water in this area is used for irrigation purposes only, and there is no practical impediment to the use or occupancy of the Premises due to the El Toro discharges.

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EXHIBIT D

TENANT’S INSURANCE

The following requirements for Tenant’s insurance shall be in effect at the Building, and Tenant shall also cause any subtenant to comply with these requirements. Landlord reserves the right to adopt reasonable nondiscriminatory modifications and additions to these insurance requirements. Tenant agrees to obtain and present evidence to Landlord that it has fully complied with the insurance requirements.

1. Tenant shall, at its sole cost and expense, commencing on the date Tenant is given access to the Premises for any purpose and during the entire Term, procure, pay for and keep in full force and effect: (i) commercial general liability insurance with respect to the Premises and the operations of or on behalf of Tenant in, on or about the Premises, including but not limited to coverage for personal injury, contractual liability, independent contractors, broad form property damage, fire legal liability, products liability (if a product is sold from the Premises), and liquor law liability (if alcoholic beverages are sold, served or consumed within the Premises), which policy(ies) shall be written on an “occurrence” basis and for not less than the amount set forth in Item 14 of the Basic Lease Provisions, with a combined single limit (with a $50,000 minimum limit on fire legal liability) per occurrence for bodily injury, death, and property damage liability, or the current limit of liability carried by Tenant, whichever is greater, and subject to such increases in amounts as Landlord may determine from time to time; (ii) workers’ compensation insurance coverage as required by law, together with employers’ liability insurance of at least One Million Dollars ($1,000,000.00); (iii) with respect to Alterations and the like required or permitted to be made by Tenant under this Lease, builder’s risk insurance in an amount equal to the replacement cost of the work; (iv) insurance against fire, vandalism, malicious mischief and such other additional perils as may be included in a standard “special form” policy, insuring Tenant’s Alterations, trade fixtures, furnishings, equipment and items of personal property of Tenant located in the Premises, in an amount equal to not less than ninety percent (90%) of their actual replacement cost (with replacement cost endorsement); and (v) business interruption coverage in amounts satisfactory to cover one (1) year of loss. In no event shall the limits of any policy be considered as limiting the liability of Tenant under this Lease.

2. In the event Landlord consents to Tenant’s use, generation or storage of Hazardous Materials on, under or about the Premises pursuant to Section 5.3 of this Lease, Landlord shall have the continuing right to require Tenant, at Tenant’s sole cost and expense (provided the same is available for purchase upon commercially reasonable terms), to purchase insurance specified and approved by Landlord, with coverage not less than Five Million Dollars ($5,000,000.00), insuring (i) any Hazardous Materials shall be removed from the Premises, (ii) the Premises shall be restored to a clean, healthy, safe and sanitary condition, and (iii) any liability of Tenant, Landlord and Landlord’s officers, directors, shareholders, agents, employees and representatives, arising from such Hazardous Materials.

3. All policies of insurance required to be carried by Tenant pursuant to this Exhibit D shall be written by responsible insurance companies authorized to do business in the State of California and with a general policyholder rating of not less than “A-“ and financial rating of not less than “VIII” in the most current Best’s Insurance Report. The deductible or other retained limit under any policy carried by Tenant shall be commercially reasonable, and Tenant shall be responsible for payment of such retained limit with full waiver of subrogation in favor of Landlord. Any insurance required of Tenant may be furnished by Tenant under any blanket policy carried by it or under a separate policy. A true and exact copy of each paid up policy evidencing the insurance (appropriately authenticated by the insurer) or a certificate of insurance, certifying that the policy has been issued, provides the coverage required by this Exhibit D and contains the required provisions, together with endorsements acceptable to Landlord evidencing the waiver of subrogation and additional insured provisions required below, shall be delivered to Landlord prior to the date Tenant is given the right of possession of the Premises. Proper evidence of the renewal of any insurance coverage shall also be delivered to Landlord not less than thirty (30) days prior to the expiration of the coverage. In the event of a loss covered by any policy under which Landlord is an additional insured, Landlord shall be entitled to review a copy of such policy.

4. Each policy evidencing insurance required to be carried by Tenant pursuant to this Exhibit D shall contain the following provisions and/or clauses reasonably satisfactory to Landlord: (i) with respect to Tenant’s commercial general liability insurance, a provision that the policy and the coverage provided shall be primary and that any coverage

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carried by Landlord shall be in excess of and noncontributory with respect to any policies carried by Tenant, together with a provision including Landlord, the Additional Insureds identified in Item 11 of the Basic Lease Provisions and any other parties in interest designated by Landlord, as additional insureds; (ii) except with respect to Tenant’s commercial general liability insurance, a waiver by the insurer of any right to subrogation against Landlord, its agents, employees, contractors and representatives which arises or might arise by reason of any payment under the policy or by reason of any act or omission of Landlord, its agents, employees, contractors or representatives; and (iii) a provision that the insurer will not cancel or reduce the coverage provided by the policy without first giving Landlord thirty (30) days prior written notice. Tenant shall also name Landlord, the Additional Insureds identified in Item 11 of the Basic Lease Provisions and any other parties in interest designated by Landlord, as additional insureds on any excess or umbrella liability insurance policy carried by Tenant.

5. In the event that Tenant fails to procure, maintain and/or pay for, at the times and for the durations specified in this Exhibit D, any insurance required by this Exhibit D, or fails to carry insurance required by any governmental authority, Landlord may at its election procure that insurance and pay the premiums, in which event Tenant shall repay Landlord all sums paid by Landlord, together with interest at the maximum rate permitted by law and any related costs or expenses incurred by Landlord, within ten (10) days following Landlord’s written demand to Tenant.

NOTICE TO TENANT: IN ACCORDANCE WITH THE TERMS OF THIS LEASE, TENANT MUST PROVIDE EVIDENCE OF THE REQUIRED INSURANCE TO LANDLORD’S MANAGEMENT AGENT PRIOR TO BEING AFFORDED ACCESS TO THE PREMISES.

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EXHIBIT E

RULES AND REGULATIONS

This Exhibit sets forth the rules and regulations governing Tenant’s use of the Premises leased to Tenant pursuant to the terms, covenants and conditions of the Lease to which this Exhibit is attached and therein made part thereof. In the event of any conflict or inconsistency between this Exhibit and the Lease, the Lease shall control.

1. Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall, which may appear unsightly from outside the Premises.

2. The walls, walkways, sidewalks, entrance passages, elevators, stairwells, courts and vestibules shall not be obstructed or used for any purpose other than ingress and egress of pedestrian travel to and from the Premises, and shall not be used for smoking, loitering or gathering, or to display, store or place any merchandise, equipment or devices, or for any other purpose. The walkways, sidewalks, entrance passageways, courts, vestibules and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of the Landlord shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of Tenant’s business unless such persons are engaged in illegal activities. Smoking is permitted outside the building and within the Project only in areas designated by Landlord. Neither Tenant nor its employees, agents, contractors, invitees or licensees shall bring any firearm, whether loaded or unloaded, into the Project at any time. No tenant or employee or invitee or agent of any tenant shall be permitted upon the roof of the Building without prior written approval from Landlord.

3. No awnings or other projection shall be attached to the outside walls of the Building. No security bars or gates, curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises without the prior written consent of Landlord. Neither the interior nor exterior of any windows shall be coated or otherwise sunscreened without the express written consent of Landlord.

4. Tenant shall not mark, nail, paint, drill into, or in any way deface any part of the Premises or the Building except to affix standard pictures or other wall hangings on the interior walls of the premises so long as they are not visible from the exterior of the building. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by Landlord in writing. The expense of repairing any damage resulting from a violation of this rule or removal of any floor covering shall be borne by Tenant.

5. The toilet rooms, urinals, wash bowls and other plumbing apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. Any pipes or tubing used by Tenant to transmit water to an appliance or device in the Premises must be made of copper or stainless steel, and in no event shall plastic tubing be used for that purpose. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, caused it.

6. Landlord shall direct electricians as to the manner and location of any future telephone wiring. No boring or cutting for wires will be allowed without the prior consent of Landlord. The locations of the telephones, call boxes and other office equipment affixed to the Premises shall be subject to the prior written approval of Landlord.

7. The Premises shall not be used for manufacturing or for the storage of merchandise except as such storage may be incidental to the permitted use of the Premises. No exterior storage shall be allowed at any time without the prior written approval of Landlord. The Premises shall not be used for cooking or washing clothes without the prior written consent of Landlord, or for lodging or sleeping or for any immoral or illegal purposes.

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8. Tenant shall not make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises or those having business with them, whether by the use of any musical instrument, radio, phonograph, noise, or otherwise. Tenant shall not use, keep or permit to be used, or kept, any foul or obnoxious gas or substance in the Premises or permit or suffer the Premises to be used or occupied in any manner offensive or objectionable to Landlord or other occupants of this or neighboring buildings or premises by reason of any odors, fumes or gases.

9. No animals, except for seeing eye dogs, shall be permitted at any time within the Premises.

10. Tenant shall not use the name of the Building or the Project in connection with or in promoting or advertising the business of Tenant, except as Tenant’s address, without the written consent of Landlord. Landlord shall have the right to prohibit any advertising by any Tenant which, in Landlord’s reasonable opinion, tends to impair the reputation of the Project or its desirability for its intended uses, and upon written notice from Landlord any Tenant shall refrain from or discontinue such advertising.

11. Canvassing, soliciting, peddling, parading, picketing, demonstrating or otherwise engaging in any conduct that unreasonably impairs the value or use of the Premises or the Project are prohibited and each Tenant shall cooperate to prevent the same. Landlord shall have full and absolute authority to regulate or prohibit the entrance to the Premises of any vendor, supplier, purveyor, petitioner, proselytizer or other similar person if, in the good faith judgment of Landlord, such person will be involved in general solicitation activities, or the proselytizing, petitioning, or disturbance of other tenants or their customers or invitees, or engaged or likely to engage in conduct which may in Landlord’s opinion distract from the use of the Premises for its intended purpose. Notwithstanding the foregoing, Landlord reserves the absolute right and discretion to limit or prevent access to the Buildings by any food or beverage vendor, whether or not invited by Tenant, and Landlord may condition such access upon the vendor’s execution of an entry permit agreement which may contain provisions for insurance coverage and/or the payment of a fee to Landlord.

12. No equipment of any type shall be placed on the Premises which in Landlord’s opinion exceeds the load limits of the floor or otherwise threatens the soundness of the structure or improvements of the Building.

13. Regular building hours of operation are from 6:00 AM to 6:00 PM Monday through Friday and 9:00 AM to 1:00 PM on Saturday. No air conditioning unit or other similar apparatus shall be installed or used by any Tenant without the prior written consent of Landlord.

14. The entire Premises, including vestibules, entrances, parking areas, doors, fixtures, windows and plate glass, shall at all times be maintained in a safe, neat and clean condition by Tenant. All trash, refuse and waste materials shall be regularly removed from the Premises by Tenant and placed in the containers at the locations designated by Landlord for refuse collection. All cardboard boxes must be “broken down” prior to being placed in the trash container. All styrofoam chips must be bagged or otherwise contained prior to placement in the trash container, so as not to constitute a nuisance. Pallets must be immediately disposed of by tenant and may not be disposed of in the Landlord provided trash container or enclosures. Pallets may be neatly stacked in an exterior location on a temporary basis (no longer than 5 days) so long as Landlord has provided prior written approval. The burning of trash, refuse or waste materials is prohibited.

15. Tenant shall use at Tenant’s cost such pest extermination contractor as Landlord may direct and at such intervals as Landlord may require.

16. All keys for the Premises shall be provided to Tenant by Landlord and Tenant shall return to Landlord any of such keys so provided upon the termination of the Lease. Tenant shall not change locks or install other locks on doors of the Premises, without the prior written consent of Landlord. In the event of loss of any keys furnished by Landlord for Tenant, Tenant shall pay to Landlord the costs thereof. Upon the termination of its tenancy, Tenant shall deliver to Landlord all the keys to lobby(s), suite(s) and telephone & electrical room(s) which have been furnished to Tenant or which Tenant shall have had made.

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17. No person shall enter or remain within the Project while intoxicated or under the influence of liquor or drugs. Landlord shall have the right to exclude or expel from the Project any person who, in the absolute discretion of Landlord, is under the influence of liquor or drugs.

18. The moving of large or heavy objects shall occur only between those hours as may be designated by, and only upon previous written notice to, Landlord, and the persons employed to move those objects in or out of the Building must be reasonably acceptable to Landlord. Without limiting the generality of the foregoing, no freight, furniture or bulky matter of any description shall be received into or moved out of the lobby of the Building or carried in the elevator.

19. Tenant shall not install equipment, such as but not limited to electronic tabulating or computer equipment, requiring electrical or air conditioning service in excess of that to be provided by Landlord under the Lease without prior written consent of Landlord.

20. Landlord may from time to time grant other tenants of the Project individual and temporary variances from these Rules, provided that any variance does not have a material adverse effect on the use and enjoyment of the Premises by Tenant.

21. Landlord reserves the right to amend or supplement the foregoing Rules and Regulations and to adopt and promulgate additional rules and regulations applicable to the Premises. Notice of such rules and regulations and amendments and supplements thereto, if any, shall be given to the Tenant.

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EXHIBIT X

WORK LETTER

(Tenant Buildout with Landlord’s Contribution)

I.    TENANT IMPROVEMENTS

The tenant improvement work (“Tenant Improvements” or the “Tenant Improvement Work”) shall consist of the work required to complete certain improvements to the Premises pursuant to approved “Working Drawings and Specifications” (as defined below). Tenant shall employ a licensed architect reasonably acceptable to Landlord (the “Architect”) for preparation of the “Preliminary Plan” and “Working Drawings and Specifications” (as hereinafter defined), and shall cause the Architect to inspect the Premises to become acquainted with all existing conditions. Tenant shall contract with the “TI Contractor” (as defined below) to construct the Tenant Improvements. The Tenant Improvement Work shall be undertaken and prosecuted in accordance with the following requirements:

A. Tenant shall submit the following to Landlord: (i) a preliminary pricing plan for the Tenant Improvements prepared by the Architect, which shall include interior partitions, ceilings, interior finishes, interior doors, suite entrance, floor coverings, window coverings, lighting, electrical and telephone outlets, plumbing connections, heavy floor loads and other special requirements (“Preliminary Plan”), (ii) working drawings and specifications prepared by the Architect based on the approved Preliminary Plan (the “Working Drawings and Specifications”), and (iii) any change proposed by Tenant to the approved Working Drawings and Specifications (“Change”). Within 5 business days following its submission to Landlord, Landlord shall approve (by signing a copy thereof) or shall disapprove the Preliminary Plan and/or any Change, and within 10 business days following its submission to Landlord, Landlord shall approve or shall disapprove the Working Drawings and Specifications. If Landlord disapproves the Preliminary Plan, Working Drawings and Specifications or Change, Landlord shall specify in detail the reasons for disapproval and Tenant shall cause the Architect to modify the Preliminary Plan, Working Drawings and Specifications or Change to incorporate Landlord’s suggested revisions in a mutually satisfactory manner. Tenant agrees and acknowledges that Landlord will not check the Preliminary Plan, the Working Drawings and Specifications and/or any Change for building code compliance (or other federal, state or local law, ordinance or regulations compliance), and that Tenant and its Architect shall be solely responsible for such matters. Notwithstanding the foregoing, but subject to Section I.O below, Landlord may only provide its disapproval of the Working Drawings and Specifications or a Change in the event such submittal: (i) shall not comply with applicable law or building code, (ii) adversely affects the Building or Project systems or structural components, (iii) adversely affects other tenants in the Project, or (iv) affects the exterior of the Building in any manner.

B. The Tenant Improvements shall only include actual improvements to the Premises approved by Landlord as provided above, and shall exclude (but not by way of limitation) Tenant’s furniture, trade fixtures, partitions, equipment and signage improvements, if any. Further, to the extent applicable, the Tenant Improvements shall incorporate Landlord's building standard materials and specifications for the Project as set forth in Schedule I (“Standard Improvements”); provided, however, the Tenant Improvements shall include materials, finishes and specifications set forth in the Preliminary Plan, even if the same is of higher quality than the Standard Improvements (the “Approved Improvements”). Notwithstanding the foregoing, no deviations from the Standard Improvements may be required by Tenant with respect to doors and frames, finish hardware, entry graphics, the ceiling system, light fixtures and controls, mechanical systems, fire life and safety systems and/or window coverings; provided that Landlord may, authorize in writing one or more of such deviations, in which event Tenant shall be solely responsible for the cost of replacing same with the applicable Standard Improvements upon the expiration or termination of this Lease. All other deviations from the Standard Improvements or the Approved Improvements (such deviations referred to herein as the

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“Non-Standard Improvements”) shall be subject to the prior approval of Landlord, which approval shall not be unreasonably withheld, provided, however that Landlord shall in no event be required to approve any Non-Standard Improvement if Landlord determines that such Non-Standard Improvements (i) are of a lesser quality than the corresponding Standard Improvements or Approved Improvements, (ii) fails to conform to applicable governmental requirements, (iii) requires building services beyond the level Landlord has agreed to provide Tenant under this Lease, (iv) interferes in any manner with the proper functioning of, or Landlord’s access to, any mechanical, electrical, plumbing or HVAC systems, facilities or equipment in or serving the Building, or (v) would have an adverse aesthetic impact to the Premises or would cause material additional expenses to Landlord in reletting the Premises.

C. Tenant shall contract with a licensed general contractor reasonably approved by Landlord (the “TI Contractor”) for construction of the Tenant Improvements. The TI Contractor shall solicit bids from at least 3 subcontractors (reasonably acceptable to Landlord) for each major subtrade, provided that the drywall and acoustical subcontractors shall be union contractors. If required by Landlord, Tenant shall use the electrical, mechanical, plumbing and fire/life safety engineers reasonably acceptable to Landlord; if Tenant elects to use contractors other than Landlord’s designated electrical, mechanical, plumbing and fire/life safety engineers, and if such election is approved by Landlord, Landlord shall be entitled to have its designated contractors perform a “peer review” of such contractors work, and the reasonable cost thereof shall be borne solely by Tenant, but may be paid for by Tenant using any unused portion of the Landlord’s Contribution. Following the competitive bidding of the major subtrade work, Tenant shall enter into a construction contract (the “TI Contract”) with the TI Contractor for construction of the Tenant Improvements. If requested by Landlord, Tenant shall deliver copy of the TI Contract to Landlord. Tenant shall cause the Tenant Improvements to be constructed in a good and workmanlike manner in accordance with the approved Working Drawings and Specifications.

D. Intentionally omitted.

E. Prior to the commencement of the Tenant Improvement Work, Tenant shall deliver to Landlord a copy of the final application for permit and issued permit for the work.

F. The TI Contractor shall comply with Landlord’s requirements as generally imposed on third party contractors, including without limitation all insurance coverage requirements and the obligation to furnish appropriate certificates of insurance to Landlord, prior to commencement of construction or the Tenant Improvement Work.

G. A construction schedule shall be provided to Landlord prior to commencement of the construction of the Tenant Improvement Work, and weekly updates shall be supplied during the progress of the work.

H. Tenant shall give Landlord at least 10 business days prior written notice of the commencement of construction of the Tenant Improvement Work so that Landlord may cause an appropriate notice of non-responsibility to be posted.

I. The Tenant Improvement Work shall be subject to inspection at all times by Landlord and its construction manager, and Landlord and/or its construction manager shall be permitted to attend weekly job meetings with the TI Contractor.

J. Upon completion of the Tenant Improvement Work, Tenant shall cause to be provided to Landlord a close-out package which shall include, without limitation, the following: (i) as-built drawings of the Tenant Improvements work signed by the Architect, (ii) CAD files of the improved space compatible with Landlord’s CAD standards, (iii) a final punch list signed by Tenant, (iv) final and

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unconditional lien waivers from the TI Contractor and all subcontractors, and (v) a certificate of occupancy for the Premises (collectively, the “Close-Out Package”).

K. The Tenant Improvements work shall be prosecuted at all times in accordance with all state, federal and local laws, regulations and ordinances, including without limitation all OSHA and other safety laws, the Americans with Disabilities Act (“ADA”) and all applicable governmental permit and code requirements.

L. All of the provisions of this Lease (including, without limitation, the provisions of Sections 7.4, 10.1 and 10.3, except for the covenants to pay rent, shall apply to and shall be binding on Tenant with respect to the construction of the Tenant Improvements.

A. Tenant hereby designates Yongsam Lee, Telephone (949) 697-4232, Email: ylee@masimo.com, as its representative, agent and attorney-in-fact for the purpose of receiving notices, approving submittals and issuing requests for Changes, and Landlord shall be entitled to rely upon authorizations and directives of such person(s) as if given directly by Tenant. Any notices or submittals to, or requests of, Tenant related to this Work Letter and/or the Tenant Improvement Work may be sent to Tenant’s Construction Representative at the email address above provided. Tenant may amend the designation of its construction representative(s) at any time upon delivery of written notice to Landlord.

B. Tenant and the TI Contractor and its subcontractors shall be permitted to enter the Premises prior to the Commencement Date for the Premises to construct the Tenant Improvements. The foregoing license to enter the Premises prior to the Commencement Date for the Premises is, however, conditioned upon the compliance by the TI Contractor with all requirements imposed by Landlord on third party contractors, including without limitation the maintenance of workers’ compensation and public liability and property damage insurance by the TI Contractor in amounts and with companies and on forms satisfactory to Landlord, with certificates of such insurance being furnished to Landlord prior to proceeding with any such entry. Landlord will provide all utilities for the construction of the Tenant Improvements at the Premises (i.e., electrical, HVAC during normal business hours, water, etc.) at no cost to Tenant or the TI Contractor. Landlord shall not be liable in any way for any injury, loss or damage which may occur to any such work being performed by Tenant, the same being solely at Tenant’s risk. Tenant further agrees that the Commencement Date for the Premises is not conditioned upon, nor shall such Date be extended by, the completion of the foregoing Tenant Improvements.

C. All of the Tenant Improvements shall become the property of Landlord and shall be surrendered with the Premises at the expiration or sooner termination of this Lease, except that Landlord shall have the right, by written notice to Tenant given at the time of Landlord’s approval of the Preliminary Plan, the Working Drawings and Specifications and any Change, to require Tenant either to remove all or any of the Tenant Improvements approved in the Preliminary Plan or in the Working Drawings and Specifications or by way of such Change (as specified in such written notice, a “Required Removal Item”), to repair any damage to the Premises or the Common Areas arising from such removal of any Required Removal Item, and to replace any Non-Standard Improvements or Approved Improvements so approved with the applicable Building Standard Improvement, or to reimburse Landlord for the reasonable cost of such removal, repair and replacement upon demand. Any such removals, repairs and replacements by Tenant shall be completed by the Expiration Date or sooner termination of this Lease. Notwithstanding anything to the contrary contained in the foregoing, no such removal or restoration shall be required for any of the components of the Tenant Improvements shown in any Preliminary Plan, the Working Drawings and Specifications or any Change once the same has been approved by Landlord and not designated by Landlord in writing as a Required Removal Item when so approved.

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II.    COST OF THE TENANT IMPROVEMENTS WORK

A. Landlord shall provide to Tenant a tenant improvement allowance in the amount of $162,590.00 (the “Landlord’s Contribution”), based on $5.00 per rentable square foot of the Premises, towards the “Completion Cost” of the Tenant Improvements (as hereinafter defined), with any excess cost of the Tenant Improvements to be borne solely by Tenant. If the actual cost of completion of the Tenant Improvements is less than the maximum amount provided for the Landlord’s Contribution, such savings shall inure to the benefit of Landlord and Tenant shall not be entitled to any credit or payment other than the Rent Contribution Amount (defined below). It is further understood and agreed that the Tenant Improvements shall be scheduled and shall be substantially completed not later than twenty four (24) months following the Commencement Date (except in the event of a matter beyond the reasonable control of either party, in which case such date shall be extended on a day for day basis) to be eligible for funding by Landlord, and that Landlord shall not be obligated to fund any portion of the Landlord’s Contribution towards Tenant Improvements completed after such date (as the same may be so extended). Notwithstanding the foregoing, Tenant may utilize a portion of the Landlord’s Contribution, not to exceed the amount of $97,554.00, based on $3.00 per usable square foot of the Premises, as credits to reduce the scheduled installments of Basic Rent next due and payable under this Lease (the “Rent Contribution Amount”).

B. The “Completion Cost” shall mean the costs of completing the Tenant Improvements in accordance with the approved Working Drawings and Specifications, including but not limited to the following: (i) payments made to the TI Contractor, architects, engineers, subcontractors, project managers (not to exceed 3% of the Completion Cost) and other third party consultants in the performance of the work, (ii) permit fees and other sums paid to governmental agencies, and (iii) costs of all materials incorporated into the work or used in connection with the work. The Completion Cost shall also include an administrative/overhead fee to be paid to Landlord or to Landlord’s management agent in the amount of 3% of the Completion Cost, and Landlord’s reasonable “peer review” fees for the review of the Preliminary Plan and Working Drawings and Specifications by Landlord’s project architect and its MEP engineers, which fees shall be paid from the Landlord’s Contribution.

C. Landlord shall fund the Landlord’s Contribution (less any applicable deductions for the above-described administrative/overhead fee and all “peer review” charges) in installments (not more frequently than monthly) as and when costs are incurred and a payment request therefor is submitted by Tenant, which payment request shall include a copy of all supporting invoices, lien waivers (in the form prescribed by the California Civil Code), and pertinent reasonable back-up information (all of which can be in the form of an email (i.e. PDF copies)).  Landlord shall fund the payment request within 30 days following receipt of the application and supporting materials; provided that a 10% retention shall be held on payments to Tenant until Landlord receives the complete Close-Out Package.  Such 10% retention of the Landlord Contribution towards the Completion Cost shall be funded within 30 days following Landlord’s receipt of the completed Close-Out Package. 

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Schedule I

Tenant Improvement / Interior Construction Outline Specifications

(By Tenant/Tenant Allowance)

Note During preliminary walk throughs, construction management is to confirm re-use of existing building components and provide direction to: 1) match existing , or 2) provide new building standard at all remodel conditions; or 3) provide upgrade to building standard based on project team input. Each suite to be reviewed on a case-by-case basis.

Tenant Standard General Office:

CARPET Direct glue broadloom carpet. VINYL COMPOSITION TILE (VCT) 12” x 12” VCT Armstrong Standard Excelon. WALLS Standard Walls: 5/8” gypsum drywall on 2-1/2” x 25 ga. metal studs 16” o.c., floor to ceiling construction. No walls shall penetrate the grid unless required by code. All walls shall be straight, and parallel to building exterior walls. All offices and rooms shall be constructed of a standard size and tangent to a building shell or core wall. Exterior Walls (First Generation Only): 5/8” gypsum drywall furring on 25 ga. metal studs, with R-13 insulation. PAINT Paint finish, one standard color to be Benjamin Moore AC-40, Glacier White, flat finish. Dark colors subject to Landlord approval. BASE 2-1/2” Burke rubber base; straight at cut pile carpet, coved at resilient flooring and loop carpet. RUBBER TRANSITION STRIP Transition strip between carpet and resilient flooring to be Burke #150, color: to match adjacent V.C.T. PLASTIC LAMINATE Plastic laminate color at millwork: Nevamar “Smoky White”, Textured #S-7-27T.

CEILING 2x4 USG Radar Illusions #2842 scored ceiling tile, installed in building standard 9/16” or 15/16” T-bar grid. Continuous grid throughout.

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	LIGHTING All spaces are to be illuminated with building standard 2 x 4 direct/indirect fixtures, approved by the Landlord.
	DOORS 1-3/4” solid core, 3’’-0” x 8’-10” plain sliced white oak, Western Integrated clear anodized aluminum frames, Schlage “D” series “Sparta” latchset hardware, dull chrome finish.
	OFFICE SIDELITES All interior offices to have sidelite glazing adjacent to office entry door, 4’ wide x door height, Western Integrated clear anodized aluminum frame integral to door frame with clear tempered glass.
	WINDOW COVERINGS Vertical blinds: Mariak Industries PVC blinds at building perimeter windows, Model M-3000, Color: Light Grey.
Tenant Standard Mechanical (continued):	Mid-Tech / Manufacturing Building: Air distribution downstream of packaged rooftop units and/or split system fan coil units shall be provided complete with ductwork, 2’x2’ perforated face ceiling diffusers, 2’x2’ perforated return air grilles and air balance. All ductwork shall be sheet metal constructed per SMACNA standards and insulated per the latest Title 24 requirements. Interior zone shall be limited to a maximum of 2500 square feet. Packaged rooftop units and/or split system units shall be connected to existing Irvine Company Energy Management System. Thermostats shall be located adjacent to light switch at 48” above finished floor. EMS shall be Andover and installed by AAS. New packaged rooftop units larger than 5-ton shall be provided with seismic isolation curb with minimum 1-inch spring deflection. New packaged rooftop units larger than 6.25 ton shall be provided with economizer with barometric relief damper.

Tenant Standard Fire Protection:	FIRE PROTECTION Pendant satin chrome plated, recessed heads, adjustable canopies, minimum K factor to be 5.62, located at center of 2’ x 2’ section of scored ceiling tile. Ceiling drops from shell supply loop.
Tenant Standard Fire Sprinkler:	FIRE SPRINKLER Hard pipe to be used. Any substitutions to be submitted for Landlord review and approval prior to install. Center sprinkler head in 2x2 ceiling tile.

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Tenant Standard Electrical: ELECTRICAL SYSTEM A 277/480 volt, three phase, four wire tenant metered distribution section will be added to main service at Main Electrical Room. Tenant Electrical Room, located within the lease space, as directed by the Landlord, to include 277/480 volt and 120/208 volt panels, transformer, lighting control panel, as required. Standard tenant electrical capacity will be provided in the following capacity: Lighting 277V: Minimum of 1.2 watt watts per s.f. General 277V Power: As required to accommodate tenant loads. HVAC Power 277/480V: As required to accommodate the HVAC equipment. General 120/208V Power: Minimum of 8.0 watts per s.f. LIGHTING All spaces are to be illuminated with building standard 2’ x 4’, direct/indirect fixtures based on one (1) fixture per 96 square feet. All lighting shall be controlled by occupancy sensors and ½ switched per Title 24. Provide wall mounted dual relay occupancy sensors in small spaces and ceiling mounted paired with two switches in double gang box, Leviton “Decora” style switches with a white plastic coverplate, 48” AFF to switch centerline. Exit signs: Internally illuminated, white sign face with green text. OUTLETS Power: Leviton “Decora” style 15 / 20 amp 125-volt specification grade white duplex receptacle mounted vertically, 18” AFF to centerline, with a white plastic coverplate. All furniture systems will be assumed to be a four (4) circuit / eight (8) wire configuration. All furniture system workstations are assumed to have personal computers only and will be connected at a ratio of eight (8) workstations per four (4) circuit / eight (8) wire homerun. All wall mounted furniture system communication feeds will be provided with (2) 1 ½” conduit (non-fire rated / non-insulated walls) OR (2) 1 ¼” conduit (fire rated / insulated walls); a 4S/DP box and a double-gang mud ring in the wall. One (1) furniture system communication feeds will be assumed to be capable of providing enough cabling capacity for eight (8) work stations. Power and Telecom Feeds to systems furniture by Tenant to be via walls, furred columns or ceiling J-box. All wall mounted general communication outlets in non-fire rated / non-insulated walls will be provided a 2-gang mud ring and a pull string in the wall. All wall mounted communication outlets in fire-rated and insulated walls will be provided with ¾” conduit (voice and / or data only) OR a 1” conduit (combination voice / data), stubbed into the accessible ceiling space, 4S/DP box and a single gang mud ring in the wall. Cover plate, jacks and cables by tenant. A single tenant telecom room will be provided with a single 4’ x 8’ backboard. An empty 2” conduit will be routed from this backboard to the building’s main telephone backboard. An empty 4” conduit sleeve will be stubbed into the accessible ceiling space.

12

Tenant Standard Warehouse/Shipping and Receiving (if applicable):	FLOORS Sealed concrete.
	WALLS 5/8” gypsum wallboard standard partition, height and construction subject to Landlord approval. At furred walls, paint to match Benjamin Moore AC-40 Glacier White. Provide rated partition at occupancy separation, as required by code.
	CEILING Exposed structure, non-painted.
	WINDOWS None
	ACCESS 7’-6” H x 7’-6” W glazed service doors. Glazing is bronze reflective glass.
	HVAC None
	PLUMBING Single accommodation restroom, if required. Sheet vinyl flooring to be Armstrong Classic Corlon “Seagate” #86526 Oyster, with Smooth White FRP panel wainscot to 48” high. Painted walls and ceiling to be Benjamin Moore AC-40 Glacier White, semi-gloss finish.
	LIGHTING T5 High Bay, 2 x 4 fixtures.
	OTHER ELECTRICAL Convenience outlets; surface mounted at exposed concrete walls.
	SECURITY Lockable doors.

13

EXHIBIT Y

Jeronimo 5&6

14

EX-12.1

Exhibit 12.1

Masimo Corporation Ratio of Earnings to Fixed Charges (Dollars in thousands)
	Six Months Ended		Fiscal Year Ended
	July 2, 2016		January 2, 2016		January 3, 2015		December 28, 2013		December 29, 2012		December 31, 2011
Ratio of earnings to fixed charges:
Income before provision for income taxes	$	74,735	$	116,345	$	102,041	$	75,726	$	83,821	$	86,531
Fixed charges	2,414		5,524		3,381		2,705		2,514		1,910
Noncontrolling interests in pre-tax (income) loss	—		1,757		2,350		607		744		(58		)
Total earnings	$	77,149	$	123,626	$	107,772	$	79,038	$	87,079	$	88,383
Fixed charges
Interest expensed	$	1,789	$	3,494	$	594	$	28	$	44	$	116
Estimated of interest within rental expense	625		2,030		2,787		2,677		2,470		1,794
Total fixed charges	$	2,414	$	5,524	$	3,381	$	2,705	$	2,514	$	1,910
Ratio of earnings to fixed charges	31.96		22.38		31.88		29.22		34.64		46.27

In the periods presented, there were no shares of preferred stock outstanding and no dividends paid on preferred stock. Therefore, the ratios of earnings to fixed charges and preferred stock dividends are not different from the ratios of earnings to fixed charges.

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Joe Kiani, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Masimo Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ JOE KIANI
Date: August 3, 2016	Joe Kiani
	Chairman of the Board and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Mark P. de Raad, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Masimo Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ MARK P. DE RAAD
Date: August 3, 2016	Mark P. de Raad
	Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATIONS OF

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Joe Kiani, Chief Executive Officer of Masimo Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:

1. The Quarterly Report on Form 10-Q of the Company for the period ended July 2, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ JOE KIANI
Date: August 3, 2016	Joe Kiani
	Chairman of the Board and Chief Executive Officer
	(Principal Executive Officer)

I, Mark P. de Raad, Executive Vice President and Chief Financial Officer of Masimo Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:

1. The Quarterly Report on Form 10-Q of the Company for the period ended July 2, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ MARK P. DE RAAD
Date: August 3, 2016	Mark P. de Raad
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

A signed original of these certifications has been provided to Masimo Corporation and will be retained by Masimo Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

These certifications are being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Masimo Corporation, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

XML

Document and Entity Information	6 Months Ended
	Jul. 02, 2016 shares
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jul. 02, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q2
Trading Symbol	MASI
Entity Registrant Name	MASIMO CORP
Entity Central Index Key	0000937556
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding	49,351,459

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016
Current assets
Cash and cash equivalents	$ 116,055	$ 132,317
Accounts receivable, net of allowance for doubtful accounts of $1,718 and $1,967 at July 2, 2016 and January 2, 2016, respectively.	84,805	80,960
Inventories	62,312	62,038
Prepaid income taxes	9,803	2,404
Other current assets	22,995	21,423
Total current assets	295,970	299,142
Deferred Costs, Noncurrent	73,362	71,718
Property and equipment, net	133,037	132,466
Intangible assets, net	28,264	27,556
Goodwill	20,384	20,394
Deferred tax assets	39,410	44,320
Other assets	12,256	6,139
Total assets	602,683	601,735
Current liabilities
Accounts payable	30,710	25,865
Accrued compensation	33,956	38,415
Accrued liabilities	26,781	44,222
Income taxes payable	2,304	2,777
Deferred revenue	26,622	21,280
Long-term Debt and Capital Lease Obligations, Current	75	74
Total current liabilities	120,448	132,633
Deferred revenue	219	298
Long-term Debt and Capital Lease Obligations	175,001	185,071
Deferred Credits and Other Liabilities	11,866	8,021
Total liabilities	307,534	326,023
Commitments and contingencies
Masimo Corporation stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; 0 shares issued and outstanding at July 2, 2016 and January 2, 2016	0	0
Common stock, $0.001 par value; 100,000 shares authorized; 49,351 and 49,881 shares issued and outstanding at July 2, 2016 and January 2, 2016	49	50
Treasury stock 14,255 and 12,759 at July 2, 2016 and January 2, 2016	(404,276)	(340,873)
Additional paid-in capital	357,766	332,417
Accumulated other comprehensive loss	(4,549)	(4,739)
Retained earnings	346,159	288,560
Total Masimo Corporation stockholders’ equity	295,149	275,415
Noncontrolling interest	0	297
Total equity	295,149	275,712
Total liabilities and equity	$ 602,683	$ 601,735

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)	Jul. 02, 2016	Jan. 02, 2016
Statement of Financial Position [Abstract]
Accounts receivable, allowance for doubtful accounts	$ 1,718	$ 1,967
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares outstanding	49,351	49,881
Treasury stock, shares	14,255	12,759

XML

Condensed Consolidated Statement of Income Statement - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended		9 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015	Sep. 27, 2014
Sales Revenue, Goods, Net	$ 164,607	$ 147,612	$ 327,897	$ 294,969	$ 294,969
Royalty	8,029	8,114	15,906	15,294
Total revenue	172,636	155,726	343,803	310,263
Cost of goods sold	57,501	52,825	114,455	104,257
Gross profit	115,135	102,901	229,348	206,006
Selling, general and administrative	63,888	61,666	126,399	122,465
Research and Development Expense	14,818	13,394	29,183	28,323
Operating Expenses	78,706	75,060	155,582	150,788
Operating Income (Loss)	36,429	27,841	73,766	55,218
Nonoperating Income (Expense)	471	(1,125)	969	(972)
Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Extraordinary Items, Noncontrolling Interest	36,900	26,716	74,735	54,246
Provision for income taxes	6,877	8,020	17,135	15,728
Net income including noncontrolling interest	30,023	18,696	57,600	38,518
Net Income (Loss) Attributable to Noncontrolling Interest	0	655	0	1,356
Net income attributable to Masimo Corporation stockholders	30,023	19,351	57,600	39,874
Foreign currency translation adjustments	(1,209)	584	190	(2,358)
Comprehensive Income (Loss), Net of Tax, Attributable to Parent	$ 28,814	$ 19,935	$ 57,790	$ 37,516
Basic (in usd per share)	$ 0.61	$ 0.38	$ 1.17	$ 0.77
Diluted (in usd per share)	$ 0.57	$ 0.36	$ 1.10	$ 0.74
Basic (in shares)	49,256	51,300	49,340	51,993
Diluted (in shares)	52,703	53,675	52,404	53,908

XML

Condensed Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Income Statement [Abstract]
Net income including noncontrolling interest	$ 30,023	$ 18,696	$ 57,600	$ 38,518
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(1,209)	584	190	(2,358)
Total comprehensive income	28,814	19,280	57,790	36,160
Net loss attributable to the noncontrolling interest	0	655	0	1,356
Comprehensive income attributable to Masimo Corporation stockholders	$ 28,814	$ 19,935	$ 57,790	$ 37,516

XML

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015
Cash flows from operating activities:
Net income including noncontrolling interest	$ 57,600	$ 38,518
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities:
Depreciation and amortization	8,132	7,697
Stock-based compensation	6,204	5,429
Gain (Loss) on Disposition of Property Plant Equipment	401	252
Deconsolidation, Gain (Loss), Amount	(273)	0
Provision for doubtful accounts	(51)	162
Changes in operating assets and liabilities:
Increase in accounts receivable	(3,739)	(3,121)
Increase in inventories	(297)	(2,060)
(Increase) decrease in deferred cost of goods sold	(1,566)	1,987
Increase in prepaid income taxes	(7,462)	(5,852)
Increase in other assets	(6,596)	(4,892)
Increase (decrease) in accounts payable	8,084	(7,378)
Increase (Decrease) in Accounts Payable, Related Parties	(1,092)	0
Decrease in accrued compensation	(3,937)	(4,271)
(Decrease) increase in accrued liabilities	(12,534)	3,805
Decrease in income tax payable	(322)	(2,147)
Increase in deferred revenue	5,263	836
Increase (decrease) in other liabilities	3,875	(342)
Net cash provided by operating activities	56,691	28,623
Deferred Income Tax Expense (Benefit)	5,001	0
Cash flows from investing activities:
Purchases of property and equipment, net	(10,734)	(24,672)
Increase in intangible assets	(1,349)	(2,589)
Deconsolidation, Variable Interest Entity, Reduction of Cash	(763)	0
Net cash used in investing activities	(12,846)	(27,261)
Cash flows from financing activities:
Proceeds from (Repayments of) Lines of Credit	45,000	65,000
Repayments of Lines of Credit	(55,000)	(12,500)
Payments of Debt Issuance Costs	(621)	0
Repayments of capital lease obligations	(69)	(77)
Proceeds from issuance of common stock	18,997	15,178
Repurchases of common stock	(68,218)	(81,700)
Issuance of equity by noncontrolling interest, net of equity issued	0	3
Net cash used in financing activities	(59,911)	(14,568)
Effect of foreign currency exchange rates on cash	(196)	(1,850)
Net decrease in cash and cash equivalents	(16,262)	(15,056)
Cash and cash equivalents at beginning of period	132,317	134,453
Cash and cash equivalents at end of period	116,055	119,397
Payments Related to Tax Withholding for Share-based Compensation	$ 0	$ (472)

XML

Description of the Company

6 Months Ended

Jul. 02, 2016

Accounting Policies [Abstract]

Description of the Company

Description of the Company

Masimo Corporation (the Company) is a global medical technology company that develops, manufactures and markets a variety of noninvasive patient monitoring technologies. The Company’s mission is to improve patient outcomes and reduce cost of care by taking noninvasive monitoring to new sites and applications. The Company’s patient monitoring solutions generally incorporate a monitor or circuit board, proprietary single-patient use, reusable or resposable sensors, software and/or cables. The Company primarily sells its products to hospitals, emergency medical service providers, home care providers, physician offices, veterinarians, long term care facilities and consumers through its direct sales force, distributors and original equipment manufacturer (OEM) partners.

The Company invented Masimo Signal Extraction Technology^®(SET^®), which provides the capabilities of Measure-through Motion and Low Perfusion^™ pulse oximetry to address the primary limitations of conventional pulse oximetry. Over the years, the Company’s product offerings have expanded significantly to also include noninvasive optical blood constituent monitoring, optical organ oximetry monitoring, electrical brain function monitoring, acoustic respiration monitoring and optical gas monitoring. The Company also developed the Root^® patient monitoring and connectivity platform and the Masimo Patient SafetyNet^™ remote patient surveillance monitoring system. These solutions and related products are based upon Masimo SET^®, rainbow^® and other proprietary algorithms. These software-based technologies are incorporated into a variety of product platforms depending on customers’ specifications. This technology is supported by a substantial intellectual property portfolio that the Company has built through internal development and, to a lesser extent, acquisitions and license agreements.

XML

Summary of Significant Accounting Policies

6 Months Ended

Jul. 02, 2016

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

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 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 condensed consolidated balance sheet as of January 2, 2016 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 2, 2016 (fiscal year 2015), filed with the SEC on February 24, 2016. The results for the six months ended July 2, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2016 (fiscal year 2016) or for any other interim period or for any future year.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and through January 2, 2016, Cercacor Laboratories, Inc. (Cercacor), the variable interest entity (VIE) of which the Company was the primary beneficiary. Effective January 3, 2016, the Company discontinued consolidating Cercacor within its consolidated financial statements based on its determination that the Company was no longer the primary beneficiary of Cercacor. All intercompany balances and transactions have been eliminated in consolidation. In accordance with GAAP, current authoritative guidance is applied when determining whether an entity is subject to consolidation.

Fiscal Periods

The Company follows a conventional 52/53 week fiscal year. Under a conventional 52/53 week fiscal year, a 52 week fiscal year includes four quarters of 13 fiscal weeks while a 53 week fiscal year includes three 13 fiscal week quarters and one 14 fiscal week quarter. The Company’s last 53 week fiscal year was fiscal year 2014. Fiscal year 2016 is a 52 week fiscal year. 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. Significant estimates include the determination of accounts receivable allowances, inventory reserves, warranty reserves, rebate accruals, valuation of the Company’s stock options, goodwill valuation, deferred taxes and any associated valuation allowances, distributor channel inventory, royalty revenues, deferred revenue, uncertain income tax positions, litigation costs and related accruals. Actual results could differ from such estimates.

Reclassifications

Certain amounts in the condensed consolidated financial statements for prior periods have been reclassified to conform to the current period presentation.

Fair Value Measurements

Authoritative guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

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

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

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

Pursuant to current authoritative guidance, entities are allowed an irrevocable option to elect the fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to apply the fair value option under this guidance to specific assets or liabilities on a contract-by-contract basis. There were no transfers between Level 1, Level 2 and Level 3 inputs during the six months ended July 2, 2016. The Company carries cash and cash equivalents at cost, which approximates fair value. As of July 2, 2016 and January 2, 2016, the Company did not have any short-term investments.

The following tables represent the Company’s financial assets (in thousands), measured at fair value on a recurring basis:

July 2, 2016	Adjusted Basis Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value		Cash and Cash Equivalents
Cash	$	61,055	$	—	$	—	$	61,055	$	61,055
Level 1:
Bank Time Deposits	55,000		—		—		55,000		55,000
Money Market Funds	—		—		—		—		—
Subtotal	55,000		—		—		55,000		55,000
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
Total assets measured at fair value	$	116,055	$	—	$	—	$	116,055	$	116,055

January 2, 2016	Adjusted Basis Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value		Cash and Cash Equivalents
Cash	$	57,168	$	—	$	—	$	57,168	$	57,168
Level 1:
Bank Time Deposits	55,000		—		—		55,000		55,000
Money Market Funds	20,149		—		—		20,149		20,149
Subtotal	75,149		—		—		75,149		75,149
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
Total assets measured at fair value	$	132,317	$	—	$	—	$	132,317	$	132,317

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity from date of purchase of three months or less, or highly liquid investments that are readily convertible into known amounts of cash, to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of trade receivables recorded upon recognition of revenue for product revenues, 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 evaluation of the customer’s financial condition. Collateral is generally not required. The allowance for doubtful accounts is determined based on historical write-off experience, current customer information and other relevant factors, including specific identification of past due accounts, based on the age of the receivable in excess of the contemplated or contractual due date. Accounts are charged off against the allowance when the Company believes they are uncollectible.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using a standard cost method, which approximates FIFO (first in, first out) and includes material, labor and overhead costs. Inventory reserves 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.

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	39 years
Building improvements	7 to 15 years
Leasehold improvements	Lesser of useful life or term of lease
Machinery and equipment	5 to 7 years
Vehicles	5 years
Tooling	3 years
Computer equipment	2 to 6 years
Furniture and office equipment	2 to 6 years
Demonstration units	3 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.

Intangible Assets

The Company’s policy is to renew its patents and trademarks. Total renewal costs for patents and trademarks were $0.3 million for each of the six months ended July 2, 2016 and July 4, 2015. As of July 2, 2016, the weighted-average number of years until the next renewal was one year for patents and five years for trademarks. Costs to renew patents and trademarks are capitalized and amortized over the remaining useful life of the intangible asset. The Company continually evaluates the amortization period and carrying basis of patents and trademarks to determine whether any events or circumstances warrant a revised estimated useful life or reduction in value. Capitalized application costs are charged to operations when it is determined that the patent or trademark will not be obtained or is abandoned.

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 for each of its reporting units, the Company has the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macroeconomic, industry-specific and Company-specific factors, including: (i) severe adverse industry or economic trends; (ii) significant Company-specific actions; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if the Company concludes otherwise, then the Company is required to perform the first step of the two-step impairment test by comparing the fair value of the reporting unit, determined using future projected discounted operating cash flows, with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, goodwill is considered impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill. The Company also has the option to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. The annual impairment test is performed during the fourth fiscal quarter.

The Company reviews long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow 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.

No impairment of goodwill, intangible assets or other long-lived assets was recorded during the three and six months ended July 2, 2016 and July 4, 2015.

Revenue Recognition and Deferred Revenue

The Company follows the current authoritative guidance for revenue recognition. Based on these requirements, the Company recognizes revenue from the sale of products or services when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. In the case of the license or sale of software that does not function together with hardware components to provide the essential functionality of the hardware, revenue is recognized pursuant to the software revenue recognition guidance.

The Company derives the majority of its revenue from four primary sources: (i) direct sales under long-term sensor purchase agreements with end-user hospitals where the Company provides certain monitoring-related equipment, software, installation, training and/or warranty support 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 direct customers, many of which have long-term sensor purchase agreements with the Company; and (iv) sales of integrated circuit boards to OEM customers who incorporate the Company’s embedded software technology into their multi-parameter monitoring devices.

The Company enters into agreements to sell its noninvasive monitoring solutions and services, sometimes as part of multiple deliverable arrangements that include various combinations of products and services. While the majority of the Company’s sales transactions contain standard business terms and conditions, there are some transactions that contain non-standard business terms and conditions. As a result, contract interpretation and analysis is sometimes required to determine the appropriate accounting, including: (i) how the arrangement consideration should be allocated among the deliverables when multiple deliverables exist, (ii) when to recognize revenue on the deliverables, and (iii) whether undelivered elements are essential to the functionality of the delivered elements. Changes in judgments on these assumptions and estimates could materially impact the timing of revenue recognition.

In the case of multiple deliverable arrangements, the authoritative guidance provides a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence (VSOE) of fair value, (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE of fair value is defined as the price charged when the same element is sold separately. VSOE generally exists only when the deliverable is sold separately and is the price actually charged for that deliverable. TPE generally does not exist for the majority of the Company’s products. The objective of ESP is to determine the price at which the Company would transact a sale if the product was sold on a stand-alone basis. In the absence of VSOE and TPE, the Company determines ESP for its products 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 market conditions.

A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. Most of the Company’s products in a multiple deliverable arrangement qualify as separate units of accounting. In the case of the Company’s monitoring equipment containing embedded Masimo SET^® or rainbow^® SET software, the Company has determined that the hardware and software components function together to deliver the equipment’s essential functionality and, therefore, represent a single deliverable. However, software deliverables, such as rainbow^® parameter software, which do not function together with hardware components to provide the equipment’s essential functionality, are accounted for under software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverables and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the revenue recognition accounting guidance for arrangements with multiple deliverables.

Sales under long-term sensor purchase contracts are generally structured such that the Company agrees to provide at no up-front charge certain monitoring-related equipment, software, installation, training and/or warranty support in exchange for the hospital’s agreement to purchase sensors over the term of the agreement, which generally ranges from three to six years. The sensors are essential to the functionality of the monitoring equipment and, therefore, represent a substantive performance obligation. The Company generally does not recognize any revenue when the monitoring-related equipment and software are delivered to the hospitals, but rather recognizes revenue for these delivered elements on a pro-rata basis as the sensors are delivered under the long-term purchase commitment, when installation and training are complete. Accordingly, the cost of the monitoring-related equipment initially placed at the hospitals is deferred and amortized to cost of goods sold over the life of the underlying long-term sensor purchase contract. Some of the Company’s long-term sensor contracts also contain provisions for certain cash payments to be made directly to the end-user hospital customer at the inception of the arrangement. These cash payments are generally treated as prepaid discounts that are deferred and amortized on a straight-line basis as contra-revenue over the life of the underlying long-term sensor purchase contract. Many of the Company’s distributors purchase sensor products which they then resell to end-user hospitals that are typically fulfilling their purchase obligations to the Company under such end-user hospital’s long-term sensor purchase commitments. Upon shipment to the distributor, revenue is deferred until the distributor ships the product to the Company’s end-user customers based on an estimate of the inventory held by these distributors at the end of the accounting period.

The Company also earns revenue from the sale of integrated circuit boards and other products, as well as from rainbow^® parameter software licenses, to OEMs under various agreements. Revenue from the sale of products to the OEMs is generally recognized at the time of shipment. Revenue related to software licenses to OEMs is generally recognized upon shipment of the OEM’s product to its customers, as represented to the Company by the OEM.

The Company also provides certain customers with the ability to purchase sensors under rebate programs. Under these programs, the customers may earn rebates based on their purchasing activity. The Company estimates and provides allowances for these programs at the time of sale as a reduction to revenue.

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 and accounts receivable. The Company estimates returns based on several factors, including contractual limitations and past returns history.

The Company’s royalty revenue arises from one agreement with Medtronic plc (Medtronic, formerly Covidien Ltd.), and is due and payable quarterly based on U.S. sales of Medtronic’s infringing products. An estimate of these royalty revenues is recorded quarterly in the period earned based on the prior quarter’s historical results, adjusted for any new information or trends known to management at the time of estimation. This estimated revenue is adjusted prospectively when the Company receives the royalty report from Medtronic, approximately 60 days after the end of the previous quarter.

Product Warranty

The Company generally provides a warranty against defects in material and workmanship for a period ranging from six to forty-eight months, depending on the product type. In the case of long-term sales agreements, the Company typically warrants the products for the term of the agreement, which generally ranges from three to six years. In traditional sales activities, including direct and OEM sales, the Company establishes an accrual for the estimated costs of warranty at the time of revenue recognition. Estimated warranty expenses are recorded as an accrued liability, with a corresponding provision to cost of sales. In long-term sales agreements, revenue related to extended warranty is recognized over the life of the contract, while the product warranty costs related to the long-term sales agreements are expensed as incurred.

Changes in the product warranty accrual were as follows (in thousands):

	Six Months Ended
	July 2, 2016			July 4, 2015
Warranty accrual, beginning of period	$	1,222		$	1,416
Accrual for warranties issued	521			585
Changes to pre-existing warranties (including changes in estimates)	(40		)	(134		)
Settlements made	(488		)	(490		)
Warranty accrual, end of period	$	1,215		$	1,377

Litigation Costs and Contingencies

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

Comprehensive Income

Authoritative accounting guidance establishes requirements for reporting and disclosure of comprehensive income and its components. Comprehensive income includes foreign currency translation adjustments and any related tax benefits that have been excluded from net income including noncontrolling interest, and reflected in Masimo Corporation stockholders’ equity.

The change in accumulated other comprehensive loss was as follows (in thousands):

	Six Months Ended   July 2, 2016
Accumulated other comprehensive loss, beginning of period	$	(4,739	)
Foreign currency translation adjustments	190
Accumulated other comprehensive loss, end of period	$	(4,549	)

Net Income Per Share

Basic net income per share attributable to Masimo Corporation for the three and six months ended July 2, 2016 and July 4, 2015 is computed by dividing net income attributable to Masimo Corporation stockholders by the weighted-average number of shares outstanding during each period. The diluted net income per share attributable to Masimo Corporation stockholders for the three and six months ended July 2, 2016 and July 4, 2015 is computed by dividing the net income attributable to Masimo Corporation stockholders by the weighted-average number of shares and potential shares outstanding during each 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 restricted share units (RSUs). For the three and six months ended July 2, 2016, 1.6 million and 1.4 million, respectively, weighted options to purchase shares of common stock were outstanding, but were 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 three and six months ended July 4, 2015, 0.6 million and 1.0 million, respectively, weighted options to purchase shares of common stock were outstanding, but were 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 three and six months ended July 2, 2016, certain RSUs were 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 July 2, 2016, 2.7 million weighted average shares related to such RSUs have been excluded from the calculation of potential shares. Based on authoritative accounting guidance, the Company adjusted its net income including noncontrolling interest by the amount of net (income) loss attributable to the noncontrolling interest for the three and six months ended July 4, 2015 to determine its net income attributable to its stockholders. Since the Company discontinued consolidating Cercacor effective January 3, 2016, a similar adjustment was not required for the three and six months ended July 2, 2016.

A reconciliation of basic and diluted net income per share attributable to Masimo Corporation stockholders is as follows (in thousands, except per share amounts):

	Three Months Ended				Six Months Ended
	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
Net income attributable to Masimo Corporation stockholders:
Net income including noncontrolling interest	$	30,023	$	18,696	$	57,600	$	38,518
Net loss attributable to the noncontrolling interest	—		655		—		1,356
Net income attributable to Masimo Corporation stockholders	$	30,023	$	19,351	$	57,600	$	39,874
Basic net income per share attributable to Masimo Corporation stockholders:
Net income attributable to Masimo Corporation stockholders	$	30,023	$	19,351	$	57,600	$	39,874
Weighted-average shares outstanding - basic	49,256		51,300		49,340		51,993
Basic net income per share attributable to Masimo Corporation stockholders	$	0.61	$	0.38	$	1.17	$	0.77
Diluted net income per share attributable to Masimo Corporation stockholders:
Weighted-average shares outstanding - basic	49,256		51,300		49,340		51,993
Diluted share equivalent: stock options and RSUs	3,447		2,375		3,064		1,915
Weighted-average shares outstanding - diluted	52,703		53,675		52,404		53,908
Diluted net income per share attributable to Masimo Corporation stockholders	$	0.57	$	0.36	$	1.10	$	0.74

Supplemental Cash Flow Information

Supplemental cash flow information includes the following (in thousands):

	Six Months Ended
	July 2, 2016		July 4, 2015
Cash paid during the year for:
Interest (net of amounts capitalized)	$	2,603	$	952
Income taxes	19,292		23,523
Noncash investing and financing activities:
Assets acquired under capital leases	$	—	$	36
Unpaid purchases of property, plant and equipment	1,168		6,251
Unsettled common stock proceeds from option exercises	187		25
Unsettled stock repurchases	—		—

Seasonality

The healthcare business in the United States and overseas is subject to quarterly fluctuations in hospital and other alternative care admissions. Historically, the Company has typically experienced higher product revenues during the traditional “flu season” that often increases hospital and acute care facility admissions in the Company’s first and fourth fiscal quarters. At the same time, the Company has frequently experienced a sequential decline in product revenues in its second and/or third fiscal quarters, primarily due to the summer vacation season during which the flu season has moderated and people tend to avoid and/or delay elective procedures. Because the Company’s non-sales variable operating expenses often do not fluctuate in the same manner as its quarterly product sales, its quarterly operating income may fluctuate disproportionately to its quarterly revenue.

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The new standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on stock-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of stock-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company early adopted this standard during the three months ended April 2, 2016. The early adoption of this standard resulted in a $5.1 million reduction to the Company’s income tax provision for the six months ended July 2, 2016.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810):Amendments to the Consolidation Analysis (ASU 2015-02). The amended standard applies to entities in all industries and eliminates the deferral of certain consolidation standards for entities considered to be investment companies, as well as modifies the consolidation analysis performed on certain types of legal entities. ASU 2015-02 is effective for annual and interim fiscal reporting periods beginning after December 15, 2015, and may be applied retrospectively, with early application permitted. The Company adopted this standard during the first quarter of the fiscal year ending December 31, 2016, and its adoption did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The new standard requires entities to use a current expected credit loss (CECL) model which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect. The entity’s estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts. ASU 2016-13 is effective for annual and interim fiscal reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the expected impact of this standard but does not expect it to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842): (ASU 2016-02). The new standard requires lessees to recognize most leases on their balance sheets but continue to recognize lease expenses in their income statement in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Expense related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement. ASU 2016-02 is effective for annual and interim fiscal reporting periods beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the expected impact of this standard on its consolidated financial statements, but anticipates that the required recognition of a lease liability and related right-of-use asset will likely increase both the assets and liabilities recognized and reported on its balance sheet.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue (Topic 606): Revenue from Contracts with Customers (ASU 2014-09). The new standard provides a single, principles-based five-step model to be applied to all contracts with customers while enhancing disclosures about revenue, providing additional guidance for transactions that were not previously addressed comprehensively and improving guidance for multiple-element arrangements. ASU 2014-09 will replace most existing revenue recognition guidance under GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method upon adoption. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606):Deferral of the Effective Date (ASU 2015-14), which amended ASU 2014-09, providing for a one year deferral period for the implementation of ASU 2014-09. ASU 2014-09 will now be effective for annual and interim periods beginning on or after December 15, 2017. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations under FASB ASC Topic 606 (ASU 2016-08), which provides guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing (ASU 2016-10) which amended ASU 2014-09 by providing clarity in identifying performance obligations and licensing implementation guidance.

In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients (ASU 2016-12), which further amended ASU 2016-09 by providing additional clarity in recognizing revenue from contracts that have been modified prior to the transition period to the new standard, as well as providing additional disclosure requirements for businesses and other organizations that make the transition to the new standard by adjusting amounts from prior reporting periods via retrospective application. The Company is continuing to evaluate the expected impact of this standard on its consolidated financial statements but anticipates, among other things, that the adoption of such standard will result in the acceleration of certain revenue from product sales to distributors that is currently deferred under the “sell-through” method, as well as the deferral of certain contract-related costs that are currently expensed when incurred.

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Variable Interest Entity (VIE)

6 Months Ended

Jul. 02, 2016

Variable Interest Entity [Abstract]

Variable Interest Entity (VIE)

Cercacor

Cercacor is an independent entity spun off from the Company to its stockholders in 1998. Joe Kiani, the Company’s Chairman and Chief Executive Officer, is also the Chairman and Chief Executive Officer of Cercacor. The Company is a party to a Cross-Licensing Agreement with Cercacor, which was most recently amended and restated effective January 1, 2007 (the Cross-Licensing Agreement), that governs each party’s rights to certain intellectual property held by the two companies. In addition, the Company entered into a Services Agreement with Cercacor effective January 1, 2007, which governs the general and administrative services the Company provides to Cercacor.

As a result of recent changes in the capital structure of Cercacor, as well as certain of its contractual relationships with the Company, the Company completed a re-evaluation of the authoritative consolidation guidance during the first quarter of 2016 and determined that although Cercacor remains a VIE, the Company is no longer its primary beneficiary as it can no longer be deemed to have the power to direct the activities of Cercacor that most significantly impact Cercacor’s economic performance and can no longer be deemed to have an obligation to absorb Cercacor’s losses pursuant to the Company’s on-going contractual relationships with Cercacor. Based on such determination, the Company discontinued consolidating Cercacor within its consolidated financial statements effective as of January 3, 2016. However, Cercacor continues to be a related party following its deconsolidation. The Company recognized a gain of $0.3 million upon such deconsolidation, which has been reported within non-operating income in the condensed consolidated statement of operations. See Note 4 to these condensed consolidated financial statements for a description of the Company’s continuing business relationships with Cercacor.

Cercacor continues to be included within the Company’s condensed consolidated financial statements for all periods prior to January 3, 2016. Accordingly, for periods prior to January 3, 2016, all intercompany royalties, option and license fees and other charges between the Company and Cercacor, as well as all intercompany payables and receivables, have been eliminated in consolidation. However, for periods prior to January 3, 2016, all direct operating expenses that were incurred by the Company and charged to Cercacor, or that were incurred by Cercacor and charged to the Company, have not been eliminated and are included within operating expenses in the Company’s condensed consolidated statements of operations. The consolidating statement of operations for the three and six months ended July 4, 2015, which reflect the Company, Cercacor and related eliminations (in thousands), is included below:

Variable Interest Entity (VIE)

The Company follows authoritative guidance for the consolidation of a VIE, which requires an enterprise to determine whether its variable interest gives it a controlling financial interest in a VIE. Determination about whether an enterprise should consolidate a VIE is required to be evaluated continuously as changes to existing relationships or future transactions may result in consolidating or deconsolidating the VIE.

Cercacor

Cercacor is an independent entity spun off from the Company to its stockholders in 1998. Joe Kiani, the Company’s Chairman and Chief Executive Officer, is also the Chairman and Chief Executive Officer of Cercacor. The Company is a party to a Cross-Licensing Agreement with Cercacor, which was most recently amended and restated effective January 1, 2007 (the Cross-Licensing Agreement), that governs each party’s rights to certain intellectual property held by the two companies. In addition, the Company entered into a Services Agreement with Cercacor effective January 1, 2007, which governs the general and administrative services the Company provides to Cercacor.

As a result of recent changes in the capital structure of Cercacor, as well as certain of its contractual relationships with the Company, the Company completed a re-evaluation of the authoritative consolidation guidance during the first quarter of 2016 and determined that although Cercacor remains a VIE, the Company is no longer its primary beneficiary as it can no longer be deemed to have the power to direct the activities of Cercacor that most significantly impact Cercacor’s economic performance and can no longer be deemed to have an obligation to absorb Cercacor’s losses pursuant to the Company’s on-going contractual relationships with Cercacor. Based on such determination, the Company discontinued consolidating Cercacor within its consolidated financial statements effective as of January 3, 2016. However, Cercacor continues to be a related party following its deconsolidation. The Company recognized a gain of $0.3 million upon such deconsolidation, which has been reported within non-operating income in the condensed consolidated statement of operations. See Note 4 to these condensed consolidated financial statements for a description of the Company’s continuing business relationships with Cercacor.

Cercacor continues to be included within the Company’s condensed consolidated financial statements for all periods prior to January 3, 2016. Accordingly, for periods prior to January 3, 2016, all intercompany royalties, option and license fees and other charges between the Company and Cercacor, as well as all intercompany payables and receivables, have been eliminated in consolidation. However, for periods prior to January 3, 2016, all direct operating expenses that were incurred by the Company and charged to Cercacor, or that were incurred by Cercacor and charged to the Company, have not been eliminated and are included within operating expenses in the Company’s condensed consolidated statements of operations. The consolidating statement of operations for the three and six months ended July 4, 2015, which reflect the Company, Cercacor and related eliminations (in thousands), is included below:

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Related Party Transactions (notes)

6 Months Ended

Jul. 02, 2016

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

Related Party Transactions

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

• Cross-Licensing Agreement - The Company is party to a cross-licensing agreement with Cercacor (the Cross-Licensing Agreement), which governs each party’s rights to certain intellectual property held by the two companies. The Company is subject to certain annual minimum aggregate royalty obligations for use of the rainbow^® licensed technology. The current annual minimum royalty obligation is $5.0 million. Actual aggregate royalty liabilities to Cercacor under the license were $1.6 million and $3.2 million for the three and six months ended July 2, 2016, respectively. Actual aggregate royalty liabilities to Cercacor under the license were $1.3 million and $2.6 million for the three and six months ended July 4, 2015, respectively, which were eliminated in consolidation. The Company had no sales to Cercacor for the three months ended July 2, 2016, and less than $0.1 million for the six months ended July 2, 2016 under the Cross-Licensing Agreement. There were no similar sales during the three and six months ended July 4, 2015.

• Administrative Services Agreement - The Company is a party to an administrative services agreement with Cercacor (G&A Services Agreement), which governs certain general and administrative services that the Company provides to Cercacor. Amounts charged by the Company pursuant to the G&A Services Agreement were less than $0.1 million for each of the three and six months ended July 2, 2016 and July 4, 2015.

• Consulting Services Agreement - The Company is also a party to a consulting services agreement (Consulting Agreement) with Cercacor that governs certain engineering consulting and clinical studies support services that Cercacor may provide to the Company from time-to-time. Expenses incurred by the Company related to this Consulting Agreement were less than $0.1 million for the three and six months ended July 2, 2016 and approximately $0.1 million and $0.2 million for the three and six months ended July 4, 2015, respectively.

• Sublease Agreement - In March 2016, the Company entered into a sublease agreement with Cercacor for approximately 16,830 square feet of excess office and laboratory space located at 40 Parker, Irvine, California (Cercacor Sublease). The Cercacor Sublease began on May 1, 2016 and expires on November 30, 2019. The Company recognized less than $0.1 million in sublease income for both the three and six months ended July 2, 2016.

Net amounts due to Cercacor at July 2, 2016 and January 2, 2016 were less than approximately $0.1 million and $1.1 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. The Company’s Chief Financial Officer (CFO) is also a Director of the Masimo Foundation.

The Company’s CEO is the Chairman of both the Patient Safety Movement Foundation (PSMF), a non-profit organization that was founded in 2013 to work with hospitals, medical technology companies and patient advocates to unite the healthcare ecosystem and eliminate the more than 200,000 U.S. preventable hospital deaths that occur every year by 2020, and the Patient Safety Movement Coalition (PSMC), a not-for-profit social welfare organization that was founded in 2013 to promote patient safety legislation. The Company’s CFO serves as the Treasurer and Secretary of PSMF, as well as the Secretary of PSMC.

The Company’s CEO also serves on the board of directors of Atheer Labs, which is working with the Company on the development of next generation Root^® applications, and the board of directors of Children’s Hospital of Orange County and CHOC Children’s at Mission Hospital, two non-profit hospitals devoted exclusively to caring for children, both of which are also customers of the Company.

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Inventories

6 Months Ended

Jul. 02, 2016

Inventory Disclosure [Abstract]

Inventories

Inventories

Inventories consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Raw materials	$	29,836	$	25,781
Work-in-process	5,489		4,337
Finished goods	26,987		31,920
Total inventories	$	62,312	$	62,038

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Other Current Assets (Notes)

6 Months Ended

Jul. 02, 2016

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Other Current Assets [Text Block]

Other Current Assets

Other current assets consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Prepaid expenses	$	13,170	$	9,930
Royalties receivable	7,500		7,200
Employee loans and advances	308		320
Due from related party	9		—
Other current assets	2,008		3,973
Total other current assets	$	22,995	$	21,423

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Property and Equipment Property, Plant and Equipment

6 Months Ended

Jul. 02, 2016

Property, Plant and Equipment [Abstract]

Property and Equipment

Property and Equipment

Property and equipment, net, consists of the following (in thousands):

	July 2, 2016			January 2, 2016
Building and building improvements	$	85,546		$	78,877
Machinery and equipment	43,106			42,460
Land	23,738			23,738
Computer equipment	15,202			15,023
Tooling	13,113			13,079
Furniture and office equipment	9,336			8,885
Leasehold improvements	7,777			7,734
Demonstration units	978			973
Vehicles	45			45
Construction-in-progress	2,186			7,124
Total property and equipment	201,027			197,938
Accumulated depreciation and amortization	(67,990		)	(65,472		)
Property and equipment, net	$	133,037		$	132,466

During the six months ended July 2, 2016, the Company completed construction on its initial renovations to its new corporate headquarters and research and development facility in Irvine, California, resulting in the reclassification of approximately $6.2 million from construction-in-progress to building and improvements. Approximately $1.2 million of construction costs related to this facility are included in accounts payable as of July 2, 2016.

The gross value of furniture and office equipment under capital lease obligations was $0.4 million as of both July 2, 2016 and January 2, 2016, with accumulated depreciation of $0.3 million as of both July 2, 2016 and January 2, 2016.

For the six months ended July 2, 2016 and July 4, 2015, depreciation expense of property and equipment was $6.3 million and $5.6 million, respectively.

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Intangible Assets Intangible Assets

6 Months Ended

Jul. 02, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets

Intangible Assets

Intangible assets, net, consist of the following (in thousands):

	July 2, 2016			January 2, 2016
Patents	$	18,931		$	21,619
Customer relationships	7,669			7,669
Licenses(1)	7,500			—
Acquired technology	5,580			5,580
Trademarks	3,681			3,944
Capitalized software development costs	2,539			2,539
Other	2,529			2,541
Total intangible assets	48,429			43,892
Accumulated amortization	(20,165		)	(16,336		)
Intangible assets, net	$	28,264		$	27,556

⁽¹⁾ As a result of the deconsolidation of the Company’s prior VIE, Cercacor, $7.5 million of licenses that were previously eliminated in consolidation are now included as part of the Company’s intangible assets at July 2, 2016.

Total amortization expense for the six months ended July 2, 2016 and July 4, 2015 was $1.8 million and $2.4 million, respectively. All of these intangible assets have a 10 year weighted average amortization period.

Estimated amortization expense for future fiscal years is as follows (in thousands):

Fiscal year	Amount
2016 (balance of year)	$	4,099
2017	3,791
2018	3,554
2019	3,156
2020	2,849
Thereafter	10,815
Total	$	28,264

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Income Taxes

6 Months Ended

Jul. 02, 2016

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company has provided for income taxes in fiscal 2016 interim periods based on the estimated effective income tax rate for the complete fiscal year. The income tax provision is computed on the estimated pretax income of the consolidated entities located within each taxing jurisdiction based on legislation enacted as of the balance sheet date. 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 July 2, 2016, the liability for income taxes associated with uncertain tax positions was approximately $8.9 million. If fully recognized, approximately $7.6 million (net of federal benefit on state taxes) would impact the Company’s effective tax rate. The remaining balance relates to timing differences. 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 2011. The Company’s 2012 income tax return is currently under examination by the U.S. Internal Revenue Service. All material state, local and foreign income tax matters have been concluded through fiscal year 2008. The Company does not believe that the results of any tax authority examination would have a significant impact on its financial statements.

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Accrued Liabilities (Notes)

6 Months Ended

Jul. 02, 2016

Accrued Liabilities [Abstract]

Schedule of Accrued Liabilities [Table Text Block]

Accrued liabilities consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Accrued customer rebates, fees and reimbursements	$	14,484	$	11,857
Accrued taxes	3,618		5,263
Accrued legal fees	2,620		5,785
Accrued warranty	1,215		1,222
Accrued donations	107		5,612
Accrued stock repurchases	—		4,815
Accrued arbitration award	—		5,391
Accrued other	4,737		4,277
Total accrued liabilities	$	26,781	$	44,222

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Long-term debt Debt instruments (Notes)

6 Months Ended

Jul. 02, 2016

Debt Disclosure [Abstract]

Line of Credit

Long Term Debt

Long term debt consists of the following (in thousands):

	July 2, 2016		January 2, 2016
Revolving line of credit	$	175,000	$	185,000
Long term portion of capital lease obligations acquisition	1		71
Total long term debt	$	175,001	$	185,071

In January 2016, the Company entered into an Amended and Restated Credit Agreement (Restated Credit Facility) with JPMorgan Chase Bank, N.A., as Administrative Agent and a Lender, Bank of America, N.A., as Syndication Agent and a Lender, Citibank, N.A., as Documentation Agent and a Lender, and various other Lenders (collectively, the Lenders). The Restated Credit Facility amends and restates the Company’s prior credit agreement dated April 23, 2014, as amended (the Amended Credit Agreement), and provides for up to $450.0 million in borrowings in multiple currencies, with an option, subject to certain conditions, for the Company to increase the aggregate borrowing capacity to up to $550.0 million in the future. The Restated Credit Facility also provides for a sublimit of up to $50.0 million for the issuance of letters of credit and a sublimit of $125.0 million in specified foreign currencies. All unpaid principal under the Restated Credit Facility will become due and payable on January 8, 2021.

Borrowings under the Restated Credit Facility will be deemed, at the Company’s election, either: (i) an Alternate Base Rate (ABR) Loan, which bears interest at the ABR plus a spread (ABR Spread) based upon a Company leverage ratio, or (ii) a Eurodollar Loan, which bears interest at the Adjusted LIBO Rate (as defined below) plus a spread (Eurodollar Spread) based upon a Company leverage ratio. The ABR Spread is 0.125% to 1.00% and the Eurodollar Spread is 1.125% to 2.0%. Subject to certain conditions, the Company may also request swingline loans from time to time (Swingline Loans) that bear interest similar to an ABR Loan.

The ABR is determined by taking the greatest of (i) the prime rate, (ii) the federal funds effective rate plus 0.50%, and (iii) the one-month Adjusted LIBO Rate plus 1.0%. The Adjusted LIBO Rate is equal to LIBOR for the applicable interest period multiplied by the statutory reserve rate for such period.

The Company is obligated under the Restated Credit Facility to pay a fee ranging from 0.175% to 0.300% per annum, based upon a Company leverage ratio, with respect to any unused portion of the line of credit. This fee and interest on any ABR Loan are due and payable quarterly in arrears. Interest on any Eurodollar Loan is due and payable at the end of the applicable interest period (or at each three month interval in the case of loans with interest periods greater than three months). Interest on any Swingline Loan is due and payable on the date that the Swingline Loan is required to be repaid. The Company may prepay the loans and terminate the commitments in whole at any time, without premium or penalty, subject to reimbursement of certain costs in the case of Eurodollar Loans.

Pursuant to the terms of the Restated Credit Facility, the Company is subject to certain covenants, including financial covenants related to a leverage ratio and an interest charge coverage ratio, and other customary negative covenants. The Company’s obligations under the Restated Credit Facility are secured by substantially all of the Company’s personal property, including certain equity interests in U.S. domestic and first-tier foreign subsidiaries.

As of July 2, 2016, the Restated Credit Facility had outstanding Eurodollar Loan draws totaling $175.0 million at an effective interest rate of 1.75% and outstanding standby letters of credit totaling $0.3 million. The Company was in compliance with all covenants under the Restated Credit Facility as of July 2, 2016.

The Company incurred interest expense related to the Restated Credit Facility of $1.2 million for the six months ended July 2, 2016. The Company incurred interest expense related to the Amended Credit Agreement of $2.1 million for the six months ended July 4, 2015.

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Other Liabilities, Long Term Other LIabilities, Long Term

6 Months Ended

Jul. 02, 2016

Other Liabilities, Long Term [Abstract]

Other Liabilities Disclosure [Text Block]

Other Non-Current Liabilities

Other non-current liabilities consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Unrecognized tax benefit	$	8,008	$	7,747
Deposits, long-term	3,215		—
Deferred rent, long-term	419		76
Deferred tax liability, long-term	194		194
Other	30		4
Total other liabilities, long-term	$	11,866	$	8,021

Unrecognized tax benefit relates 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 16 to these condensed consolidated financial statements for further details.

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Stock-Based Compensation

6 Months Ended

Jul. 02, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

Equity

Series A Junior Participating Preferred Stock and Stockholder Rights Plan

In November 2007, 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 November 26, 2007 (the Record Date) pursuant to a Rights Agreement, dated as of November 9, 2007, with Computershare Trust Company, N.A., as Rights Agent (the Rights Agreement). In addition, one Right was issued with each share of common stock that became outstanding after the Record Date. Each Right entitled 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 $136.00 per Right, subject to adjustment.

On February 12, 2016, the Company entered into an amendment to the Rights Agreement (the Rights Amendment). The Rights Amendment accelerated the expiration of the Rights from the close of business on February 8, 2017 to the close of business on February 16, 2016, and had the effect of terminating the Rights Agreement on that date. Upon the termination of the Rights Agreement, all of the Rights distributed to holders of the Company’s common stock pursuant to the Rights Agreement expired.

Stock Repurchase Programs

In September 2015, the Board authorized a stock repurchase program, whereby the Company may purchase up to 5.0 million shares of its common stock over a period of up to three years (2015 Repurchase Program). The 2015 Repurchase Program may be carried out at the discretion of a committee comprised of the Company’s Chief Executive Officer and Chief Financial Officer through open market purchases, one or more Rule 10b5-1 trading plans, block trades and in privately negotiated transactions. The total remaining shares authorized for repurchase under the 2015 Repurchase Program approximated 2.9 million shares as of July 2, 2016. The Company expects to fund the 2015 Repurchase Program through its available cash, future cash from operations, funds available under the Restated Credit Facility or other potential sources of capital.

The following table provides a summary of the Company’s stock repurchase activities during the three and six months ended July 2, 2016 and July 4, 2015 (in thousands, except per share amounts):

	Three Months Ended				Six Months Ended
	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
Shares repurchased	400		2,126		1,496		2,376
Average cost per share	$	51.30	$	34.56	$	42.39	$	34.39
Value of shares repurchased	$	20,519	$	73,467	$	63,403	$	81,628

Share-Based Compensation

Stock-Based Compensation

Stock-Based Award Activity

The number and weighted-average exercise price of options issued and outstanding under all of the Company’s stock option plans are as follows (in thousands, except for exercise prices):

	Six Months Ended   July 2, 2016
	Shares		Average Exercise Price
Options outstanding, beginning of period	9,202		$	25.46
Granted	1,189		38.33
Canceled	(120	)	28.61
Exercised	(965	)	19.83
Options outstanding, end of period	9,306		$	27.64
Options exercisable, end of period	5,358		$	25.87

The number of RSUs issued and outstanding under all of the Company’s stock option plans are as follows (in thousands, except for grant date fair value amounts):

	Six Months Ended   July 2, 2016
	Units	Weighted Average Grant  Date Fair Value
RSUs outstanding, beginning of period	2,703	$	41.45
Granted	6	43.09
Canceled	—	—
Expired	—	—
Vested	—	—
RSUs outstanding, end of period	2,709	$	41.45

Approximately 2.7 million of the total RSUs outstanding were awarded to the Company’s Chairman and Chief Executive Officer in connection with the previous amendment and restatement of his employment agreement (see “Employment and Severance Agreements” in Note 14 to these condensed consolidated financial statements for further details).

At July 2, 2016, an aggregate of 16.4 million shares of common stock were reserved for future issuance under the Company’s 2007 Stock Incentive Plan (the 2007 Plan) and prior equity incentive plans, of which 4.4 million shares were available for future grant under the 2007 Plan.

Valuation of Stock-Based Award Activity

The fair value of each RSU award 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		Six Months Ended
	July 2, 2016	July 4, 2015	July 2, 2016	July 4, 2015
Risk-free interest rate	1.1% to 1.5%	1.4% to 1.9%	1.1% to 1.9%	1.3% to 1.9%
Expected term (in years)	5.7	5.5	5.7	5.5
Estimated volatility	31.7% to 32.8%	32.0% to 34.0%	31.7% to 35.7%	32.0% to 37.4%
Expected dividends	0%	0%	0%	0%
Weighted-average fair value of options granted	$14.70	$12.45	$13.24	$11.64

The total stock-based compensation expense for the six months ended July 2, 2016 and July 4, 2015 was $6.2 million and $5.4 million, respectively.

The aggregate intrinsic value of options is calculated as the positive difference, if any, between the market value of the Company’s common stock on the date of exercise or the respective period end, as appropriate, and the exercise price of the options. The aggregate intrinsic value of options outstanding, with an exercise price less than the closing price of the Company’s common stock, as of July 2, 2016 was $142.5 million. The aggregate intrinsic value of options exercisable, with an exercise price less than the closing price of the Company’s common stock, as of July 2, 2016 was $231.0 million. The aggregate intrinsic value of options exercised during the three and six months ended July 2, 2016 was $20.8 million and $25.3 million, respectively.

The unrecognized stock-based compensation expense related to unvested options granted after January 1, 2006 was $30.2 million as of July 2, 2016. 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 July 2, 2016 was 3.5 years. The weighted-average remaining contractual term of options exercisable, with an exercise price less than the closing price of the Company’s common stock, as of July 2, 2016 was 4.1 years.

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Stock Repurchase Program

6 Months Ended

Jul. 02, 2016

Equity [Abstract]

Stock Repurchase Program

The following table provides a summary of the Company’s stock repurchase activities during the three and six months ended July 2, 2016 and July 4, 2015 (in thousands, except per share amounts):

	Three Months Ended				Six Months Ended
	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
Shares repurchased	400		2,126		1,496		2,376
Average cost per share	$	51.30	$	34.56	$	42.39	$	34.39
Value of shares repurchased	$	20,519	$	73,467	$	63,403	$	81,628

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Commitments and Contingencies

6 Months Ended

Jul. 02, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Leases

The Company leases certain facilities in North America, Europe and Asia under operating lease agreements expiring at various dates through May 2026. Certain facility leases contain predetermined price escalations and in some cases renewal options. The Company recognizes the lease costs using a straight-line method based on total lease payments. The Company has received leasehold improvement incentives in connection with certain leased facilities in the U.S. These leasehold improvement incentives have been recorded as deferred rent and are being amortized as a reduction to rent expense on a straight-line basis over the life of the lease. As of each of July 2, 2016 and January 2, 2016, rent expense accrued in excess of the amount paid aggregated $0.5 million and $0.2 million, respectively, which is classified within liabilities in the accompanying condensed consolidated balance sheets. In addition, the Company leases automobiles in the U.S. and Europe that are classified as operating leases and expire at various dates through June 2020. The majority of these leases are non-cancellable. The Company also has outstanding capital leases for office equipment and computer equipment, all of which are non-cancellable.

Future minimum lease payments, including interest, under operating and capital leases for each of the following fiscal years ending on or about December 31 are (in thousands):

	As of July 2, 2016
	Operating Leases		Capital Leases		Total
2016 (balance of year)	$	2,721	$	5	$	2,726
2017	5,282		75		5,357
2018	4,885		—		4,885
2019	4,011		—		4,011
2020	2,119		—		2,119
Thereafter	5,811		—		5,811
Total	$	24,829	$	80	$	24,909

In January 2016, the Company entered into the Third Amendment to Lease with The Irvine Company LLC (Third Amendment) relating to the rental of space in a building located in Irvine, California pursuant to a Single-Tenant Lease originally dated June 22, 2012. Pursuant to the terms of the Third Amendment, the Company’s current lease of certain premises was set to terminate in exchange for the Company’s leasing of approximately 70,700 square feet of space in another building in Irvine, California, located near the Company’s new corporate headquarters (New Premises). The Third Amendment also extended the term of the original lease to the end of the month in which the ten-year anniversary of the date of commencement (Commencement Date) of the lease for the New Premises occurs. The Commencement Date will occur following the completion of certain improvements to the New Premises, which the Company currently expects to be no later than November 2016.

In July 2016, the Company entered into a Single-Tenant Lease with The Irvine Company LLC (New Lease), relating to the rental of space in a building located in Irvine, California that was to have been terminated by the Third Amendment. The date of commencement of the New Lease will be December 2016, and the New Lease will continue in effect for a period of ten years, until November 2026.

Rental expense related to operating leases was $1.2 million and $2.3 million for the three and six months ended July 2, 2016, respectively, and $1.4 million and $2.9 million for the three and six months ended July 4, 2015, respectively. Included in the future capital lease payments as of July 2, 2016 is interest aggregating less than $0.1 million.

Employee Retirement Savings Plan

The Company maintains a 401(k) plan, the Masimo Retirement Savings Plan (the Plan), covering the Company’s full-time U.S. employees who meet certain eligibility requirements. In general, the Company matches an employee’s contribution up to 3% of the employee’s compensation, subject to a maximum amount. The Company may also contribute to the Plan on a discretionary basis. The Company contributed $0.5 million and $1.1 million to the Plan for the three and six months ended July 2, 2016, respectively, and $0.5 million and $1.0 million to the Plan for the three and six months ended July 4, 2015 respectively.

Employment and Severance Agreements

On November 4, 2015, the Company entered into an Amended and Restated Employment Agreement with Joe Kiani, the Company’s Chairman and Chief Executive Officer (the Restated Employment Agreement). The Restated Employment Agreement, among other things, eliminates the tax gross-up payments, “single trigger” change in control payments and certain survival provisions, as well as phases out the fixed annual stock option grants guaranteed to Mr. Kiani under his previous employment agreement. Pursuant to the terms of the Restated Employment Agreement, upon a “Qualifying Termination” (as defined in the Restated Employment Agreement, including a change in control), 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. In addition, upon a Qualifying Termination prior to 2018, Mr. Kiani will receive 2.7 million shares of common stock (subject to adjustment for recapitalizations, stock splits, stock dividends and the like) upon the vesting of certain RSUs granted to Mr. Kiani in connection with the Restated Employment Agreement, and an additional cash payment of $35.0 million related to a Non-Competition and Confidentiality Agreement between Mr. Kiani and the Company (collectively, the Special Payment).

For any Qualifying Termination occurring on or after January 1, 2018, the number of shares to be issued to Mr. Kiani pursuant to the RSUs and the cash payment will each be reduced by 10% of the original amount each year so that after December 31, 2026, no Special Payment will be due to Mr. Kiani upon a Qualifying Termination. As of July 2, 2016, the expense related to the Special Payment that would be recognized in the Company’s condensed consolidated financial statements upon the occurrence of a Qualifying Termination under the Restated Employment Agreement approximated $176.7 million.

As of July 2, 2016, the Company had severance plan participation agreements with seven other executive officers. The participation agreements (the Agreements) are governed by the terms and conditions of the Company’s 2007 Severance Protection Plan (the Severance Plan), which became effective on July 19, 2007 and which was amended effective December 31, 2008. Under each of the Agreements, the applicable executive officer may be entitled to receive certain salary, equity, medical and life insurance benefits if he is terminated by the Company without cause or if he terminates his employment for good reason under certain circumstances. The executive officers are also required to give the Company six months advance notice of their resignation under certain circumstances.

Purchase Commitments

Pursuant to contractual obligations with vendors, the Company had $56.6 million of purchase commitments as of July 2, 2016, which are expected to be purchased within one year. These purchase commitments have been made for certain inventory items in order to secure sufficient levels of those items and to achieve better pricing.

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 July 2, 2016, the Company had approximately $0.5 million in 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 July 2, 2016, 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 its excess cash deposits in time deposits and money market accounts with major financial institutions. As of July 2, 2016, the Company had $61.1 million of bank balances, of which $2.7 million was covered by either the U.S. Federal Deposit Insurance Corporation limit or foreign countries’ deposit insurance organizations. As of July 2, 2016, the Company had $55.0 million of bank time deposits that are not guaranteed by the U.S. Federal government.

While the Company and its contract manufacturers rely on sole source suppliers for certain components, steps have been taken to minimize the impact of a shortage or stoppage of shipments, such as maintaining a safety stock of inventory and designing products that could be modified to use different components. However, there can be no assurance that a shortage or stoppage of shipments of the materials or components that the Company purchases will not result in a delay in production or adversely affect the Company’s business.

The Company’s ability to sell its products to U.S. hospitals depends in part on its relationships with GPOs. Many existing and potential customers for the Company’s products become members of GPOs. GPOs negotiate pricing arrangements and contracts, sometimes exclusively, with medical supply manufacturers and distributors, and these negotiated prices are made available to a GPO’s affiliated hospitals and other members. During the three and six months ended July 2, 2016, revenue from the sale of the Company’s products to U.S. hospitals that are member of GPOs amounted to $93.3 million and $185.3 million, respectively, and for the three and six months ended July 4, 2015, revenue from the sale of the Company’s products to U.S. hospitals that are members of GPOs amounted to $84.5 million and $170.8 million, respectively.

For the three months ended July 2, 2016, the Company had sales through two just-in-time distributors that represented 14.8% and 12.7% of total revenue, respectively. For the three months ended July 4, 2015, the Company had sales through the same two just-in-time distributors that represented 15.4% and 11.9% of total revenue, respectively.

For the six months ended July 2, 2016, the Company had sales through the same two just-in-time distributors that represented 15.4% and 11.9% of total revenue, respectively. For the six months ended July 4, 2015, the Company had sales through the same two just-in-time distributors that represented 14.7% and 12.3% of total revenue, respectively.

As of July 2, 2016, two of the same just-in-time distributors represented 7.6% and 9.0% of the Company’s accounts receivable balance, respectively. As of January 2, 2016, one of these just-in-time distributors represented 5.3% of the Company’s accounts receivable balance, and one customer represented 5.5% of the Company’s accounts receivable balance.

For the six months ended July 2, 2016 and July 4, 2015, the Company recorded $15.9 million and $15.3 million, respectively, in royalty revenues from Medtronic pursuant to the original settlement agreement and amendments. In exchange for these royalty payments, the Company has provided Medtronic the ability to ship its patent infringing product with a covenant not to sue Medtronic as long as Medtronic abides by the terms of the agreement. The current royalty rate is 7.75% and the amended agreement can be terminated by Medtronic upon 60 days written notice.

Litigation

On February 3, 2009, the Company filed a patent infringement suit in the U.S. District Court for the District of Delaware against Philips Electronics North America Corporation and Philips Medizin Systeme Böblingen GmbH (collectively, Philips) related to Philips’ FAST pulse oximetry technology and certain of Philips’ patient monitors. On June 15, 2009, Philips answered the Company’s complaint and Philips Electronics North America Corporation filed antitrust and patent infringement counterclaims against the Company, as well as counterclaims seeking declaratory judgments of invalidity of the patents asserted by the Company against Philips. On July 9, 2009, the Company filed its answer denying Philips’ counterclaims and asserting various defenses. The Company also asserted counterclaims against Philips for fraud and intentional interference with prospective economic advantage and for declaratory judgments of noninfringement and invalidity with respect to the patents asserted by Philips against the Company. Philips later added a claim for infringement of one additional patent. Subsequently, the Court bifurcated Philips’ antitrust claims and its patent misuse defense, as well as stayed the discovery phase on those claims pending trial in the patent case. In addition, the Company asserted additional patents in 2012, and the Court ordered that these patents and some of the originally asserted patents be tried in a second phase.

On May 23, 2014, Philips filed a motion for leave to amend its answer and counterclaims to allege inequitable conduct. The Court granted Philips’ motion for leave to amend. A jury trial commenced on September 15, 2014 with respect to two of the Company’s patents and one of Philips’ patents. On October 1, 2014, the jury determined that both of the Company’s patents were valid and that the damages amount for Philips’ infringement was $466.8 million. The jury also determined that the Company did not infringe the Philips patent. Philips has indicated that it intends to appeal the damages award once a final judgment has been rendered in the case. On September 18, 2015, the Court set a schedule for the trials related to Masimo’s second phase patents against Philips and Philips’ antitrust counterclaims and patent misuse defense, with both trials scheduled to take place in the first quarter of 2017. On November 16, 2015, the Company asserted three antitrust claims against Philips. On December 9, 2015, the Court dismissed with prejudice Philips’ sole remaining patent infringement claim against the Company. On January 4, 2016, the Court granted Philips’ motion to strike the Company’s antitrust counterclaims, ruling that the Company must bring these claims in a separate litigation. On March 4, 2016, the Company filed an additional case against Philips alleging antitrust violations and patent infringement in the District of Delaware. On May 31, 2016, Philips filed a motion to dismiss the Company’s antitrust claims, which is pending before the Court. On June 27, 2016, Philips filed a motion for summary judgment, and a motion to exclude certain testimony by the Company’s experts with respect to the Company’s second phase patent infringement claims, both of which are pending before the Court. The Company believes that it has good and substantial defenses to the remaining antitrust claims asserted by Philips. The Company is unable to determine whether any loss will occur or to estimate the range of such potential loss; therefore, no amount of loss has been accrued by the Company as of the date of filing of this Quarterly Report on Form 10-Q. Furthermore, there is no guarantee that the Company will prevail in this suit or receive any damages or other relief if it does prevail.

In April 2011, the Company was informed by the United States Attorney’s Office for the Central District of California, Civil Division, that a qui tam complaint had been filed against the Company in the U.S. District Court for the Central District of California by three of the Company’s former physician office sales representatives. The qui tam complaint alleged, among other things, that the Company’s noninvasive hemoglobin products failed to meet their accuracy specifications, and that the Company misled the U.S. Food and Drug Administration and customers regarding the accuracy of the products. In November 2011, the United States declined to intervene in the case, and in October 2013, the District Court granted summary judgment in favor of the Company. The former sales representatives appealed the District Court’s decision and an argument on the appeal was held in the Ninth Circuit Court of Appeals on February 1, 2016.On February 19, 2016, the Ninth Circuit Court of Appeals affirmed the summary judgment of the District Court.

In September 2011, two of the same former sales representatives filed employment-related claims against the Company in arbitration also stemming from their allegations regarding the Company’s noninvasive hemoglobin products. On January 16, 2014, the Company was notified that the arbitrator awarded the plaintiffs approximately $5.4 million in damages (the Arbitration Award). The Company challenged the Arbitration Award in the U.S. District Court for the Central District of California, and on April 3, 2014, the District Court vacated the award. The former sales representatives appealed the District Court’s decision, and the appeal argument was held in the Ninth Circuit Court of Appeals on February 1, 2016. On February 19, 2016, the Ninth Circuit Court of Appeals reversed the decision of the District Court vacating the award, and remanded the case to the District Court with instructions to confirm the Arbitration Award. On March 23, 2016, the District Court entered final judgment confirming the Arbitration Award, and on April 8, 2016 the Company remitted $6.2 million to the plaintiffs in full payment of the Arbitration Award and related interest. On May 18, 2016, the Company filed a petition for a writ of certiorari with the United States Supreme Court seeking reversal of the decision of the Ninth Circuit Court of Appeals. The former sales representatives’ response to the petition is due August 11, 2016.

On July 20, 2016, the Company was notified that its insurance carrier was seeking reimbursement of certain defense costs previously advanced by the carrier in light of the decision by the Ninth Circuit Court of Appeals reinstating the Arbitration Award. The Company believes it has good and substantial grounds to dispute the coverage determination of the insurance carrier, but there is no guarantee that the Company will prevail. The Company has not recorded a charge related to this insurance coverage dispute and is unable to determine whether any loss will ultimately occur. However, the Company estimates that the potential incremental loss related to this insurance coverage dispute would approximate $2.6 million plus potential interest at the rate of 10% per annum from the date such payments were advanced by the insurance carrier.

On January 2, 2014, a putative class action complaint was filed against the Company in the U.S. District Court for the Central District of California by Physicians Healthsource, Inc. The complaint alleges that the Company sent unsolicited facsimile advertisements in violation of the Junk Fax Protection Act of 2005 and related regulations. The complaint seeks $500 for each alleged violation, treble damages if the District Court finds the alleged violations to be knowing, plus interest, costs and injunctive relief.

On April 14, 2014, the Company filed a motion to stay the case pending a decision on a related petition filed by the Company with the Federal Communications Commission (FCC). On May 22, 2014, the District Court granted the motion and stayed the case pending a ruling by the FCC on the petition. On October 30, 2014, the FCC granted some of the relief and denied some of the relief requested in the Company’s petition. Both parties appealed the FCC’s decision on the petition. On November 25, 2014, the District Court granted the parties’ joint request that the stay remain in place pending a decision on the appeal. The Company believes it has good and substantial defenses to the claims, but there is no guarantee that the Company will prevail. The Company is unable to determine whether any loss will ultimately occur or to estimate the range of such loss; therefore, no amount of loss has been accrued by the Company as of the date of filing of this Quarterly Report on Form 10-Q.

On January 31, 2014, an amended putative class action complaint was filed against the Company in the U.S. District Court for the Northern District of Alabama by and on behalf of two participants in the Surfactant, Positive Pressure, and Oxygenation Randomized Trial at the University of Alabama. On April 21, 2014, a further amended complaint was filed adding a third participant. The complaint alleges product liability and negligence claims in connection with pulse oximeters the Company modified and provided at the request of study investigators for use in the trial. On August 13, 2015, the U.S. District Court for the Northern District of Alabama granted summary judgment in favor of the Company on all claims. The plaintiffs have appealed the U.S. District Court for the Northern District of Alabama’s decision. 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 as of the date of filing of this Quarterly Report on Form 10-Q.

On October 21, 2015, Medtronic plc (Medtronic) filed three separate inter partes review petitions (IPR Petitions) with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office (PTO), challenging several of the claims of the Company’s U.S. Patent Nos. 7,496,393 (the ‘393 Patent), titled “Signal processing apparatus”, which expires in September 2016, and 8,560,034 (the ‘034 Patent), also titled “Signal processing apparatus”, which expires in October 2018. On April 27, 2016, the PTAB denied Medtronic’s IPR Petitions with respect to the ‘034 Patent. On April 28, 2016, the PTAB granted Medtronic’s IPR Petition for review of certain claims of the ‘393 Patent, and denied Medtronic’s IPR Petition for review of other claims of the ‘393 Patent. The Company is defending the claims of the ‘393 Patent for which review was granted. Although the Company believes it has good and substantial positions for the patentability review and trial of the ‘393 Patent, there is no guarantee that the Company will prevail.

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.

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Segment Information and Enterprise Reporting

6 Months Ended

Jul. 02, 2016

Segment Reporting [Abstract]

Segment Information and Enterprise Reporting

Segment Information and Enterprise Reporting

The Company’s chief decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region, for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single reporting segment, specifically noninvasive patient monitoring solutions and related products. The Company does not assess the performance of its geographic regions on other measures of income or expense, such as depreciation and amortization, operating income or net income including noncontrolling interest. In addition, the Company’s assets are primarily located in the U.S. The Company does not produce reports for, or measure the performance of, its geographic regions on any asset-based metrics. Therefore, geographic information is presented only for revenues and long-lived assets.

The following schedule presents an analysis of the Company’s product revenues based upon the geographic area to which the product was shipped (in thousands, except percentages):

	Three Months Ended								Six Months Ended
	July 2, 2016				July 4, 2015				July 2, 2016				July 4, 2015
Geographic area by destination:
United States	$	117,045	71.1	%	$	106,236	72.0	%	$	230,549	70.3	%	$	213,512	72.4	%
Europe, Middle East and Africa	25,988		15.8		24,335		16.5		57,958		17.7		48,396		16.4
Asia and Australia	16,602		10.1		12,751		8.6		30,184		9.2		24,569		8.3
North and South America (excluding United States)	4,972		3.0		4,290		2.9		9,206		2.8		8,492		2.9
Total product revenue	$	164,607	100.0	%	$	147,612	100.0	%	$	327,897	100.0	%	$	294,969	100.0	%

The Company’s consolidated long-lived assets and net assets by geographic area are (in thousands, except percentages):

	July 2, 2016				January 2, 2016
Long-lived assets by geographic area:
United States	$	211,136	96.5	%	$	203,553	96.8	%
International	7,666		3.5		6,770		3.2
Total	$	218,802	100.0	%	$	210,323	100.0	%

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jul. 02, 2016

Accounting Policies [Abstract]

Basis of Presentation

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 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 condensed consolidated balance sheet as of January 2, 2016 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 2, 2016 (fiscal year 2015), filed with the SEC on February 24, 2016. The results for the six months ended July 2, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2016 (fiscal year 2016) or for any other interim period or for any future year.

Principles of Consolidation

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and through January 2, 2016, Cercacor Laboratories, Inc. (Cercacor), the variable interest entity (VIE) of which the Company was the primary beneficiary. Effective January 3, 2016, the Company discontinued consolidating Cercacor within its consolidated financial statements based on its determination that the Company was no longer the primary beneficiary of Cercacor. All intercompany balances and transactions have been eliminated in consolidation. In accordance with GAAP, current authoritative guidance is applied when determining whether an entity is subject to consolidation.

Fiscal Periods

Fiscal Periods

The Company follows a conventional 52/53 week fiscal year. Under a conventional 52/53 week fiscal year, a 52 week fiscal year includes four quarters of 13 fiscal weeks while a 53 week fiscal year includes three 13 fiscal week quarters and one 14 fiscal week quarter. The Company’s last 53 week fiscal year was fiscal year 2014. Fiscal year 2016 is a 52 week fiscal year. All references to years in these notes to condensed consolidated financial statements are fiscal years unless otherwise noted.

Use of Estimates

Use of Estimates

The Company prepares its financial statements in conformity with GAAP, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the determination of accounts receivable allowances, inventory reserves, warranty reserves, rebate accruals, valuation of the Company’s stock options, goodwill valuation, deferred taxes and any associated valuation allowances, distributor channel inventory, royalty revenues, deferred revenue, uncertain income tax positions, litigation costs and related accruals. Actual results could differ from such estimates.

Reclassification, Policy [Policy Text Block]

Reclassifications

Certain amounts in the condensed consolidated financial statements for prior periods have been reclassified to conform to the current period presentation.

Fair Value Measurements

Fair Value Measurements

Authoritative guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

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

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

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

Pursuant to current authoritative guidance, entities are allowed an irrevocable option to elect the fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to apply the fair value option under this guidance to specific assets or liabilities on a contract-by-contract basis. There were no transfers between Level 1, Level 2 and Level 3 inputs during the six months ended July 2, 2016. The Company carries cash and cash equivalents at cost, which approximates fair value. As of July 2, 2016 and January 2, 2016, the Company did not have any short-term investments.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of trade receivables recorded upon recognition of revenue for product revenues, 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 evaluation of the customer’s financial condition. Collateral is generally not required. The allowance for doubtful accounts is determined based on historical write-off experience, current customer information and other relevant factors, including specific identification of past due accounts, based on the age of the receivable in excess of the contemplated or contractual due date. Accounts are charged off against the allowance when the Company believes they are uncollectible.

Inventory, Policy [Policy Text Block]

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using a standard cost method, which approximates FIFO (first in, first out) and includes material, labor and overhead costs. Inventory reserves 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.

Property, Plant and Equipment, Policy [Policy Text Block]

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	39 years
Building improvements	7 to 15 years
Leasehold improvements	Lesser of useful life or term of lease
Machinery and equipment	5 to 7 years
Vehicles	5 years
Tooling	3 years
Computer equipment	2 to 6 years
Furniture and office equipment	2 to 6 years
Demonstration units	3 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.

Intangible Assets

Intangible Assets

The Company’s policy is to renew its patents and trademarks. Total renewal costs for patents and trademarks were $0.3 million for each of the six months ended July 2, 2016 and July 4, 2015. As of July 2, 2016, the weighted-average number of years until the next renewal was one year for patents and five years for trademarks. Costs to renew patents and trademarks are capitalized and amortized over the remaining useful life of the intangible asset. The Company continually evaluates the amortization period and carrying basis of patents and trademarks to determine whether any events or circumstances warrant a revised estimated useful life or reduction in value. Capitalized application costs are charged to operations when it is determined that the patent or trademark will not be obtained or is abandoned.

Impairment of Goodwill and Intangible assets

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 for each of its reporting units, the Company has the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macroeconomic, industry-specific and Company-specific factors, including: (i) severe adverse industry or economic trends; (ii) significant Company-specific actions; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if the Company concludes otherwise, then the Company is required to perform the first step of the two-step impairment test by comparing the fair value of the reporting unit, determined using future projected discounted operating cash flows, with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, goodwill is considered impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill. The Company also has the option to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. The annual impairment test is performed during the fourth fiscal quarter.

The Company reviews long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow 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.

No impairment of goodwill, intangible assets or other long-lived assets was recorded during the three and six months ended July 2, 2016 and July 4, 2015.

Revenue Recognition

Revenue Recognition and Deferred Revenue

The Company follows the current authoritative guidance for revenue recognition. Based on these requirements, the Company recognizes revenue from the sale of products or services when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. In the case of the license or sale of software that does not function together with hardware components to provide the essential functionality of the hardware, revenue is recognized pursuant to the software revenue recognition guidance.

The Company derives the majority of its revenue from four primary sources: (i) direct sales under long-term sensor purchase agreements with end-user hospitals where the Company provides certain monitoring-related equipment, software, installation, training and/or warranty support 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 direct customers, many of which have long-term sensor purchase agreements with the Company; and (iv) sales of integrated circuit boards to OEM customers who incorporate the Company’s embedded software technology into their multi-parameter monitoring devices.

The Company enters into agreements to sell its noninvasive monitoring solutions and services, sometimes as part of multiple deliverable arrangements that include various combinations of products and services. While the majority of the Company’s sales transactions contain standard business terms and conditions, there are some transactions that contain non-standard business terms and conditions. As a result, contract interpretation and analysis is sometimes required to determine the appropriate accounting, including: (i) how the arrangement consideration should be allocated among the deliverables when multiple deliverables exist, (ii) when to recognize revenue on the deliverables, and (iii) whether undelivered elements are essential to the functionality of the delivered elements. Changes in judgments on these assumptions and estimates could materially impact the timing of revenue recognition.

In the case of multiple deliverable arrangements, the authoritative guidance provides a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence (VSOE) of fair value, (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE of fair value is defined as the price charged when the same element is sold separately. VSOE generally exists only when the deliverable is sold separately and is the price actually charged for that deliverable. TPE generally does not exist for the majority of the Company’s products. The objective of ESP is to determine the price at which the Company would transact a sale if the product was sold on a stand-alone basis. In the absence of VSOE and TPE, the Company determines ESP for its products 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 market conditions.

A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. Most of the Company’s products in a multiple deliverable arrangement qualify as separate units of accounting. In the case of the Company’s monitoring equipment containing embedded Masimo SET^® or rainbow^® SET software, the Company has determined that the hardware and software components function together to deliver the equipment’s essential functionality and, therefore, represent a single deliverable. However, software deliverables, such as rainbow^® parameter software, which do not function together with hardware components to provide the equipment’s essential functionality, are accounted for under software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverables and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the revenue recognition accounting guidance for arrangements with multiple deliverables.

Sales under long-term sensor purchase contracts are generally structured such that the Company agrees to provide at no up-front charge certain monitoring-related equipment, software, installation, training and/or warranty support in exchange for the hospital’s agreement to purchase sensors over the term of the agreement, which generally ranges from three to six years. The sensors are essential to the functionality of the monitoring equipment and, therefore, represent a substantive performance obligation. The Company generally does not recognize any revenue when the monitoring-related equipment and software are delivered to the hospitals, but rather recognizes revenue for these delivered elements on a pro-rata basis as the sensors are delivered under the long-term purchase commitment, when installation and training are complete. Accordingly, the cost of the monitoring-related equipment initially placed at the hospitals is deferred and amortized to cost of goods sold over the life of the underlying long-term sensor purchase contract. Some of the Company’s long-term sensor contracts also contain provisions for certain cash payments to be made directly to the end-user hospital customer at the inception of the arrangement. These cash payments are generally treated as prepaid discounts that are deferred and amortized on a straight-line basis as contra-revenue over the life of the underlying long-term sensor purchase contract. Many of the Company’s distributors purchase sensor products which they then resell to end-user hospitals that are typically fulfilling their purchase obligations to the Company under such end-user hospital’s long-term sensor purchase commitments. Upon shipment to the distributor, revenue is deferred until the distributor ships the product to the Company’s end-user customers based on an estimate of the inventory held by these distributors at the end of the accounting period.

The Company also earns revenue from the sale of integrated circuit boards and other products, as well as from rainbow^® parameter software licenses, to OEMs under various agreements. Revenue from the sale of products to the OEMs is generally recognized at the time of shipment. Revenue related to software licenses to OEMs is generally recognized upon shipment of the OEM’s product to its customers, as represented to the Company by the OEM.

The Company also provides certain customers with the ability to purchase sensors under rebate programs. Under these programs, the customers may earn rebates based on their purchasing activity. The Company estimates and provides allowances for these programs at the time of sale as a reduction to revenue.

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 and accounts receivable. The Company estimates returns based on several factors, including contractual limitations and past returns history.

The Company’s royalty revenue arises from one agreement with Medtronic plc (Medtronic, formerly Covidien Ltd.), and is due and payable quarterly based on U.S. sales of Medtronic’s infringing products. An estimate of these royalty revenues is recorded quarterly in the period earned based on the prior quarter’s historical results, adjusted for any new information or trends known to management at the time of estimation. This estimated revenue is adjusted prospectively when the Company receives the royalty report from Medtronic, approximately 60 days after the end of the previous quarter.

Product Warranty

Product Warranty

The Company generally provides a warranty against defects in material and workmanship for a period ranging from six to forty-eight months, depending on the product type. In the case of long-term sales agreements, the Company typically warrants the products for the term of the agreement, which generally ranges from three to six years. In traditional sales activities, including direct and OEM sales, the Company establishes an accrual for the estimated costs of warranty at the time of revenue recognition. Estimated warranty expenses are recorded as an accrued liability, with a corresponding provision to cost of sales. In long-term sales agreements, revenue related to extended warranty is recognized over the life of the contract, while the product warranty costs related to the long-term sales agreements are expensed as incurred.

Changes in the product warranty accrual were as follows (in thousands):

	Six Months Ended
	July 2, 2016			July 4, 2015
Warranty accrual, beginning of period	$	1,222		$	1,416
Accrual for warranties issued	521			585
Changes to pre-existing warranties (including changes in estimates)	(40		)	(134		)
Settlements made	(488		)	(490		)
Warranty accrual, end of period	$	1,215		$	1,377

Legal Matters and Contingencies [Text Block]

Litigation Costs and Contingencies

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

Comprehensive Income

Comprehensive Income

Authoritative accounting guidance establishes requirements for reporting and disclosure of comprehensive income and its components. Comprehensive income includes foreign currency translation adjustments and any related tax benefits that have been excluded from net income including noncontrolling interest, and reflected in Masimo Corporation stockholders’ equity.

The change in accumulated other comprehensive loss was as follows (in thousands):

Net Income Per Share

Net Income Per Share

Basic net income per share attributable to Masimo Corporation for the three and six months ended July 2, 2016 and July 4, 2015 is computed by dividing net income attributable to Masimo Corporation stockholders by the weighted-average number of shares outstanding during each period. The diluted net income per share attributable to Masimo Corporation stockholders for the three and six months ended July 2, 2016 and July 4, 2015 is computed by dividing the net income attributable to Masimo Corporation stockholders by the weighted-average number of shares and potential shares outstanding during each 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 restricted share units (RSUs). For the three and six months ended July 2, 2016, 1.6 million and 1.4 million, respectively, weighted options to purchase shares of common stock were outstanding, but were 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 three and six months ended July 4, 2015, 0.6 million and 1.0 million, respectively, weighted options to purchase shares of common stock were outstanding, but were 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 three and six months ended July 2, 2016, certain RSUs were 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 July 2, 2016, 2.7 million weighted average shares related to such RSUs have been excluded from the calculation of potential shares. Based on authoritative accounting guidance, the Company adjusted its net income including noncontrolling interest by the amount of net (income) loss attributable to the noncontrolling interest for the three and six months ended July 4, 2015 to determine its net income attributable to its stockholders. Since the Company discontinued consolidating Cercacor effective January 3, 2016, a similar adjustment was not required for the three and six months ended July 2, 2016.

A reconciliation of basic and diluted net income per share attributable to Masimo Corporation stockholders is as follows (in thousands, except per share amounts):

New Accounting Pronouncement

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The new standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on stock-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of stock-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company early adopted this standard during the three months ended April 2, 2016. The early adoption of this standard resulted in a $5.1 million reduction to the Company’s income tax provision for the six months ended July 2, 2016.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810):Amendments to the Consolidation Analysis (ASU 2015-02). The amended standard applies to entities in all industries and eliminates the deferral of certain consolidation standards for entities considered to be investment companies, as well as modifies the consolidation analysis performed on certain types of legal entities. ASU 2015-02 is effective for annual and interim fiscal reporting periods beginning after December 15, 2015, and may be applied retrospectively, with early application permitted. The Company adopted this standard during the first quarter of the fiscal year ending December 31, 2016, and its adoption did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The new standard requires entities to use a current expected credit loss (CECL) model which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect. The entity’s estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts. ASU 2016-13 is effective for annual and interim fiscal reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the expected impact of this standard but does not expect it to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842): (ASU 2016-02). The new standard requires lessees to recognize most leases on their balance sheets but continue to recognize lease expenses in their income statement in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Expense related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement. ASU 2016-02 is effective for annual and interim fiscal reporting periods beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the expected impact of this standard on its consolidated financial statements, but anticipates that the required recognition of a lease liability and related right-of-use asset will likely increase both the assets and liabilities recognized and reported on its balance sheet.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue (Topic 606): Revenue from Contracts with Customers (ASU 2014-09). The new standard provides a single, principles-based five-step model to be applied to all contracts with customers while enhancing disclosures about revenue, providing additional guidance for transactions that were not previously addressed comprehensively and improving guidance for multiple-element arrangements. ASU 2014-09 will replace most existing revenue recognition guidance under GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method upon adoption. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606):Deferral of the Effective Date (ASU 2015-14), which amended ASU 2014-09, providing for a one year deferral period for the implementation of ASU 2014-09. ASU 2014-09 will now be effective for annual and interim periods beginning on or after December 15, 2017. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations under FASB ASC Topic 606 (ASU 2016-08), which provides guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing (ASU 2016-10) which amended ASU 2014-09 by providing clarity in identifying performance obligations and licensing implementation guidance.

In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients (ASU 2016-12), which further amended ASU 2016-09 by providing additional clarity in recognizing revenue from contracts that have been modified prior to the transition period to the new standard, as well as providing additional disclosure requirements for businesses and other organizations that make the transition to the new standard by adjusting amounts from prior reporting periods via retrospective application. The Company is continuing to evaluate the expected impact of this standard on its consolidated financial statements but anticipates, among other things, that the adoption of such standard will result in the acceleration of certain revenue from product sales to distributors that is currently deferred under the “sell-through” method, as well as the deferral of certain contract-related costs that are currently expensed when incurred.

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Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jul. 02, 2016

Accounting Policies [Abstract]

Fair Value Hierarchy for Financial Assets

The following tables represent the Company’s financial assets (in thousands), measured at fair value on a recurring basis:

July 2, 2016	Adjusted Basis Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value		Cash and Cash Equivalents
Cash	$	61,055	$	—	$	—	$	61,055	$	61,055
Level 1:
Bank Time Deposits	55,000		—		—		55,000		55,000
Money Market Funds	—		—		—		—		—
Subtotal	55,000		—		—		55,000		55,000
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
Total assets measured at fair value	$	116,055	$	—	$	—	$	116,055	$	116,055

January 2, 2016	Adjusted Basis Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value		Cash and Cash Equivalents
Cash	$	57,168	$	—	$	—	$	57,168	$	57,168
Level 1:
Bank Time Deposits	55,000		—		—		55,000		55,000
Money Market Funds	20,149		—		—		20,149		20,149
Subtotal	75,149		—		—		75,149		75,149
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
Total assets measured at fair value	$	132,317	$	—	$	—	$	132,317	$	132,317

January 2, 2016	Adjusted Basis Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value		Cash and Cash Equivalents
Cash	$	57,168	$	—	$	—	$	57,168	$	57,168
Level 1:
Bank Time Deposits	55,000		—		—		55,000		55,000
Money Market Funds	20,149		—		—		20,149		20,149
Subtotal	75,149		—		—		75,149		75,149
Level 2:
None	—		—		—		—		—
Level 3:
None	—		—		—		—		—
Total assets measured at fair value	$	132,317	$	—	$	—	$	132,317	$	132,317

Changes in Product Warranty Accrual

Changes in the product warranty accrual were as follows (in thousands):

	Six Months Ended
	July 2, 2016			July 4, 2015
Warranty accrual, beginning of period	$	1,222		$	1,416
Accrual for warranties issued	521			585
Changes to pre-existing warranties (including changes in estimates)	(40		)	(134		)
Settlements made	(488		)	(490		)
Warranty accrual, end of period	$	1,215		$	1,377

Schedule of Change in Accumulated Other Comprehensive Income

The change in accumulated other comprehensive loss was as follows (in thousands):

	Six Months Ended   July 2, 2016
Accumulated other comprehensive loss, beginning of period	$	(4,739	)
Foreign currency translation adjustments	190
Accumulated other comprehensive loss, end of period	$	(4,549	)

Reconciliation of Basic and Diluted Net Income Per Share

reconciliation of basic and diluted net income per share attributable to Masimo Corporation stockholders is as follows (in thousands, except per share amounts):

	Three Months Ended				Six Months Ended
	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
Net income attributable to Masimo Corporation stockholders:
Net income including noncontrolling interest	$	30,023	$	18,696	$	57,600	$	38,518
Net loss attributable to the noncontrolling interest	—		655		—		1,356
Net income attributable to Masimo Corporation stockholders	$	30,023	$	19,351	$	57,600	$	39,874
Basic net income per share attributable to Masimo Corporation stockholders:
Net income attributable to Masimo Corporation stockholders	$	30,023	$	19,351	$	57,600	$	39,874
Weighted-average shares outstanding - basic	49,256		51,300		49,340		51,993
Basic net income per share attributable to Masimo Corporation stockholders	$	0.61	$	0.38	$	1.17	$	0.77
Diluted net income per share attributable to Masimo Corporation stockholders:
Weighted-average shares outstanding - basic	49,256		51,300		49,340		51,993
Diluted share equivalent: stock options and RSUs	3,447		2,375		3,064		1,915
Weighted-average shares outstanding - diluted	52,703		53,675		52,404		53,908
Diluted net income per share attributable to Masimo Corporation stockholders	$	0.57	$	0.36	$	1.10	$	0.74

Schedule of Cash Flow, Supplemental Disclosures [Table Text Block]

Supplemental cash flow information includes the following (in thousands):

	Six Months Ended
	July 2, 2016		July 4, 2015
Cash paid during the year for:
Interest (net of amounts capitalized)	$	2,603	$	952
Income taxes	19,292		23,523
Noncash investing and financing activities:
Assets acquired under capital leases	$	—	$	36
Unpaid purchases of property, plant and equipment	1,168		6,251
Unsettled common stock proceeds from option exercises	187		25
Unsettled stock repurchases	—		—

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Inventories (Tables)

6 Months Ended

Jul. 02, 2016

Inventory Disclosure [Abstract]

Components of Inventory

Inventories consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Raw materials	$	29,836	$	25,781
Work-in-process	5,489		4,337
Finished goods	26,987		31,920
Total inventories	$	62,312	$	62,038

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Other Current Assets (Tables)

6 Months Ended

Jul. 02, 2016

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Schedule of Other Assets [Table Text Block]

Other current assets consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Prepaid expenses	$	13,170	$	9,930
Royalties receivable	7,500		7,200
Employee loans and advances	308		320
Due from related party	9		—
Other current assets	2,008		3,973
Total other current assets	$	22,995	$	21,423

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Property and Equipment Property and Equipment (Tables)

6 Months Ended

Jul. 02, 2016

Property, Plant and Equipment [Abstract]

Property, Plant 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	39 years
Building improvements	7 to 15 years
Leasehold improvements	Lesser of useful life or term of lease
Machinery and equipment	5 to 7 years
Vehicles	5 years
Tooling	3 years
Computer equipment	2 to 6 years
Furniture and office equipment	2 to 6 years
Demonstration units	3 years

Property and equipment, net, consists of the following (in thousands):

	July 2, 2016			January 2, 2016
Building and building improvements	$	85,546		$	78,877
Machinery and equipment	43,106			42,460
Land	23,738			23,738
Computer equipment	15,202			15,023
Tooling	13,113			13,079
Furniture and office equipment	9,336			8,885
Leasehold improvements	7,777			7,734
Demonstration units	978			973
Vehicles	45			45
Construction-in-progress	2,186			7,124
Total property and equipment	201,027			197,938
Accumulated depreciation and amortization	(67,990		)	(65,472		)
Property and equipment, net	$	133,037		$	132,466

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Intangible Assets Intangible Assets (Tables)

6 Months Ended

Jul. 02, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Finite-Lived Intangible Assets

Intangible assets, net, consist of the following (in thousands):

	July 2, 2016			January 2, 2016
Patents	$	18,931		$	21,619
Customer relationships	7,669			7,669
Licenses(1)	7,500			—
Acquired technology	5,580			5,580
Trademarks	3,681			3,944
Capitalized software development costs	2,539			2,539
Other	2,529			2,541
Total intangible assets	48,429			43,892
Accumulated amortization	(20,165		)	(16,336		)
Intangible assets, net	$	28,264		$	27,556

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

Estimated amortization expense for future fiscal years is as follows (in thousands):

Fiscal year	Amount
2016 (balance of year)	$	4,099
2017	3,791
2018	3,554
2019	3,156
2020	2,849
Thereafter	10,815
Total	$	28,264

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Accrued Liabilities (Tables)

6 Months Ended

Jul. 02, 2016

Accrued Liabilities [Abstract]

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Accrued customer rebates, fees and reimbursements	$	14,484	$	11,857
Accrued taxes	3,618		5,263
Accrued legal fees	2,620		5,785
Accrued warranty	1,215		1,222
Accrued donations	107		5,612
Accrued stock repurchases	—		4,815
Accrued arbitration award	—		5,391
Accrued other	4,737		4,277
Total accrued liabilities	$	26,781	$	44,222

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Long-term debt Debt disclosure (Tables)

6 Months Ended

Jul. 02, 2016

Debt Instrument [Line Items]

Schedule of Debt [Table Text Block]

	July 2, 2016		January 2, 2016
Revolving line of credit	$	175,000	$	185,000
Long term portion of capital lease obligations acquisition	1		71
Total long term debt	$	175,001	$	185,071

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Other Liabilities, Long Term (Tables)

6 Months Ended

Jul. 02, 2016

Other Liabilities, Long Term [Abstract]

Components Of Other Liabilities Long Term Table [Table Text Block]

Other non-current liabilities consist of the following (in thousands):

	July 2, 2016		January 2, 2016
Unrecognized tax benefit	$	8,008	$	7,747
Deposits, long-term	3,215		—
Deferred rent, long-term	419		76
Deferred tax liability, long-term	194		194
Other	30		4
Total other liabilities, long-term	$	11,866	$	8,021

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Stock-Based Compensation (Tables)

6 Months Ended

Jul. 02, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Share-based Compensation, Restricted Stock Units Award Activity [Table Text Block]

The number of RSUs issued and outstanding under all of the Company’s stock option plans are as follows (in thousands, except for grant date fair value amounts):

	Six Months Ended   July 2, 2016
	Units	Weighted Average Grant  Date Fair Value
RSUs outstanding, beginning of period	2,703	$	41.45
Granted	6	43.09
Canceled	—	—
Expired	—	—
Vested	—	—
RSUs outstanding, end of period	2,709	$	41.45

Number and Weighted Average Exercise Price of Options Issued and Outstanding under all Stock Option Plans

The number and weighted-average exercise price of options issued and outstanding under all of the Company’s stock option plans are as follows (in thousands, except for exercise prices):

	Six Months Ended   July 2, 2016
	Shares		Average Exercise Price
Options outstanding, beginning of period	9,202		$	25.46
Granted	1,189		38.33
Canceled	(120	)	28.61
Exercised	(965	)	19.83
Options outstanding, end of period	9,306		$	27.64
Options exercisable, end of period	5,358		$	25.87

Range of Assumptions Used and Resulting Weighted-Average Fair Value of Options Granted at Date of Grant

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		Six Months Ended
	July 2, 2016	July 4, 2015	July 2, 2016	July 4, 2015
Risk-free interest rate	1.1% to 1.5%	1.4% to 1.9%	1.1% to 1.9%	1.3% to 1.9%
Expected term (in years)	5.7	5.5	5.7	5.5
Estimated volatility	31.7% to 32.8%	32.0% to 34.0%	31.7% to 35.7%	32.0% to 37.4%
Expected dividends	0%	0%	0%	0%
Weighted-average fair value of options granted	$14.70	$12.45	$13.24	$11.64

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Commitments and Contingencies (Tables)

6 Months Ended

Jul. 02, 2016

Revenue from External Customer [Line Items]

Future Minimum Lease Payments Under Operating and Capital Leases

Future minimum lease payments, including interest, under operating and capital leases for each of the following fiscal years ending on or about December 31 are (in thousands):

	As of July 2, 2016
	Operating Leases		Capital Leases		Total
2016 (balance of year)	$	2,721	$	5	$	2,726
2017	5,282		75		5,357
2018	4,885		—		4,885
2019	4,011		—		4,011
2020	2,119		—		2,119
Thereafter	5,811		—		5,811
Total	$	24,829	$	80	$	24,909

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Segment Information and Enterprise Reporting (Tables)

6 Months Ended

Jul. 02, 2016

Revenues from External Customers and Long-Lived Assets [Line Items]

Long-lived Assets by Geographic Areas [Table Text Block]

The Company’s consolidated long-lived assets and net assets by geographic area are (in thousands, except percentages):

	July 2, 2016				January 2, 2016
Long-lived assets by geographic area:
United States	$	211,136	96.5	%	$	203,553	96.8	%
International	7,666		3.5		6,770		3.2
Total	$	218,802	100.0	%	$	210,323	100.0	%

Analysis of Product Revenues Based upon Geographic Area Shipped

The following schedule presents an analysis of the Company’s product revenues based upon the geographic area to which the product was shipped (in thousands, except percentages):

	Three Months Ended								Six Months Ended
	July 2, 2016				July 4, 2015				July 2, 2016				July 4, 2015
Geographic area by destination:
United States	$	117,045	71.1	%	$	106,236	72.0	%	$	230,549	70.3	%	$	213,512	72.4	%
Europe, Middle East and Africa	25,988		15.8		24,335		16.5		57,958		17.7		48,396		16.4
Asia and Australia	16,602		10.1		12,751		8.6		30,184		9.2		24,569		8.3
North and South America (excluding United States)	4,972		3.0		4,290		2.9		9,206		2.8		8,492		2.9
Total product revenue	$	164,607	100.0	%	$	147,612	100.0	%	$	327,897	100.0	%	$	294,969	100.0	%

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Summary of Significant Accounting Policies - Fair Value Hierarchy for Financial Assets (Detail) - Recurring - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjusted Basis Cost	$ 116,055	$ 132,317
Gross Unrealized Gains	0	0
Gross Unrealized (Losses)	0	0
Estimated Fair Value	116,055	132,317
Cash and Cash Equivalents	116,055	132,317
Cash
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjusted Basis Cost	61,055	57,168
Gross Unrealized Gains		0
Gross Unrealized (Losses)	0	0
Estimated Fair Value	61,055	57,168
Cash and Cash Equivalents	61,055	57,168
Level 1:
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjusted Basis Cost	55,000	75,149
Gross Unrealized Gains	0	0
Gross Unrealized (Losses)	0	0
Estimated Fair Value	55,000	75,149
Cash and Cash Equivalents	55,000	75,149
Level 1: | Bank Time Deposits
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjusted Basis Cost	55,000	55,000
Gross Unrealized Gains	0	0
Gross Unrealized (Losses)	0	0
Estimated Fair Value	55,000	55,000
Cash and Cash Equivalents	55,000	55,000
Level 1: | Money Market Funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjusted Basis Cost	0	20,149
Gross Unrealized Gains	0	0
Gross Unrealized (Losses)	0	0
Estimated Fair Value	0	20,149
Cash and Cash Equivalents	0	20,149
Level 2:
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjusted Basis Cost	0	0
Gross Unrealized Gains	0	0
Gross Unrealized (Losses)	0	0
Estimated Fair Value	0	0
Cash and Cash Equivalents	0	0
Level 3:
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjusted Basis Cost	0	0
Gross Unrealized Gains	0	0
Gross Unrealized (Losses)	0	0
Estimated Fair Value	0	0
Cash and Cash Equivalents	$ 0	$ 0

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Summary of Significant Accounting Policies - Additional Information (Detail)
shares in Millions

3 Months Ended

6 Months Ended

Jul. 02, 2016

USD ($)

shares

Jul. 04, 2015

USD ($)

shares

Jul. 02, 2016

USD ($)

segment

shares

Jul. 04, 2015

USD ($)

shares

Summary Of Significant Accounting Policies [Line Items]

Excess Tax Benefit from Share-based Compensation, Operating Activities

$ 5,100,000

Number of Sources of Product Revenue | segment

4

Interest Paid, Net

$ 2,603,000

$ 952,000

Depreciation

6,300,000

5,600,000

Impairment of goodwill, intangible assets and other long-lived assets

$ 0

$ 0

$ 0

$ 0

Number of days royalty revenue is adjusted subsequent to quarter end

60 days

Warranty period, minimum, long-term sales agreement

3 years

Warranty period, maximum, long-term sales agreement

6 years

Options to purchase of shares of common stock | shares

1.6

0.6

1.4

1.0

Impairment or Disposal of Long-Lived Assets, Including Intangible Assets, Policy [Policy Text Block]

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 for each of its reporting units, the Company has the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macroeconomic, industry-specific and Company-specific factors, including: (i) severe adverse industry or economic trends; (ii) significant Company-specific actions; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if the Company concludes otherwise, then the Company is required to perform the first step of the two-step impairment test by comparing the fair value of the reporting unit, determined using future projected discounted operating cash flows, with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, goodwill is considered impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill. The Company also has the option to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. The annual impairment test is performed during the fourth fiscal quarter.

The Company reviews long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow 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.

No impairment of goodwill, intangible assets or other long-lived assets was recorded during the three and six months ended July 2, 2016 and July 4, 2015.

Income Taxes Paid

$ 19,292,000

$ 23,523,000

Capital Lease Obligations Incurred

0

36,000

Capital Expenditures Incurred but Not yet Paid

1,168,000

6,251,000

Proceeds from stock options exercised, unsettled at period end

187,000

25,000

Stock repurchased, unsettled at period end

0

$ 0

Patents

Summary Of Significant Accounting Policies [Line Items]

Finite-Lived Intangible Assets, Cost Incurred to Renew or Extend

$ 300,000

Weighted average number of years until the next renewal

1 year

Trademarks

Summary Of Significant Accounting Policies [Line Items]

Weighted average number of years until the next renewal

5 years

Minimum

Summary Of Significant Accounting Policies [Line Items]

Warranty period for defects in material and workmanship

6 months

Maximum

Summary Of Significant Accounting Policies [Line Items]

Warranty period for defects in material and workmanship

48 months

Land, Buildings and Improvements [Member] | Minimum

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

7 years

Land, Buildings and Improvements [Member] | Maximum

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

15 years

Building [Member]

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

39 years

Computer equipment | Minimum

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

2 years

Computer equipment | Maximum

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

6 years

Computer equipment | Minimum

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

5 years

Computer equipment | Maximum

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

7 years

Vehicles

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

5 years

Tooling

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

3 years

Furniture and Office Equipment [Member] | Minimum

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

2 years

Furniture and Office Equipment [Member] | Maximum

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

6 years

Demonstration units

Summary Of Significant Accounting Policies [Line Items]

Property, Plant and Equipment, Useful Life

3 years

XML

Summary of Significant Accounting Policies - Changes in Product Warranty Accrual (Detail) - USD ($) $ in Thousands	6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015
Movement in Standard and Extended Product Warranty Accrual, Increase (Decrease) [Roll Forward]
Warranty accrual, beginning of period	$ 1,222	$ 1,416
Provision for warranty costs	521	585
Product Warranty Accrual, Preexisting, Increase (Decrease)	(40)	(134)
Settlements made	(488)	(490)
Warranty accrual, end of period	$ 1,215	$ 1,377

XML

Summary of Significant Accounting Policies - Schedule of Change in Accumulated Other Comprehensive Income (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Accounting Policies [Abstract]
Accumulated other comprehensive loss, beginning of period			$ (4,739)
Foreign currency translation adjustments	$ (1,209)	$ 584	190	$ (2,358)
Accumulated other comprehensive loss, end of period	$ (4,549)		$ (4,549)

XML

Summary of Significant Accounting Policies - Reconciliation of Basic and Diluted Net Income Per Share (Detail) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Accounting Policies [Abstract]
Options to purchase of shares of common stock	1,600	600	1,400	1,000
Net income attributable to stockholders of Masimo Corporation:
Net income including noncontrolling interest	$ 30,023	$ 18,696	$ 57,600	$ 38,518
Net loss attributable to the noncontrolling interest	0	655	0	1,356
Net income attributable to Masimo Corporation stockholders	30,023	19,351	57,600	39,874
Basic net income per share attributable to Masimo Corporation stockholders:
Net income attributable to Masimo Corporation stockholders	$ 30,023	$ 19,351	$ 57,600	$ 39,874
Weighted average shares outstanding - basic (in shares)	49,256	51,300	49,340	51,993
Basic net income per share attributable to Masimo Corporation stockholders (in usd per share)	$ 0.61	$ 0.38	$ 1.17	$ 0.77
Diluted net income per share attributable to Masimo Corporation stockholders:
Weighted average shares outstanding - basic (in shares)	49,256	51,300	49,340	51,993
Diluted share equivalent: stock options (in shares)	3,447	2,375	3,064	1,915
Weighted average shares outstanding - diluted (in shares)	52,703	53,675	52,404	53,908
Diluted net income per share attributable to Masimo Corporation stockholders (in usd per share)	$ 0.57	$ 0.36	$ 1.10	$ 0.74

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Cash and Cash Equivalents - Additional Information (Detail) $ in Millions	Jul. 02, 2016 USD ($)
Cash and Cash Equivalents [Abstract]
Cash balance	$ 61.1
Time Deposits, at Carrying Value	$ 55.0

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Variable Interest Entity (VIE) - Additional Information (Detail)		3 Months Ended
	Jan. 02, 2007 company	Apr. 02, 2016 USD ($)
Variable Interest Entity [Abstract]
Number of Companies with Rights to Intellectual Property | company	2
Deconsolidation, Revaluation of Retained Investment, Gain (Loss), Amount | $		$ 0.3

XML

Variable Interest Entity Variable Interest Entity (VIE) -Consolidating Statement of Operations (Details) - USD ($)	3 Months Ended		6 Months Ended		9 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015	Sep. 27, 2014
Sales Revenue, Goods, Net	$ 164,607,000	$ 147,612,000	$ 327,897,000	$ 294,969,000	$ 294,969,000
Royalty	8,029,000	8,114,000	15,906,000	15,294,000
Total revenue	172,636,000	155,726,000	343,803,000	310,263,000
Cost of goods sold	57,501,000	52,825,000	114,455,000	104,257,000
Gross profit	115,135,000	102,901,000	229,348,000	206,006,000
Selling, general and administrative	63,888,000	61,666,000	126,399,000	122,465,000
Research and Development Expense	14,818,000	13,394,000	29,183,000	28,323,000
Operating Expenses	78,706,000	75,060,000	155,582,000	150,788,000
Operating Income (Loss)	36,429,000	27,841,000	73,766,000	55,218,000
Nonoperating Income (Expense)	(471,000)	1,125,000	(969,000)	972,000
Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Extraordinary Items, Noncontrolling Interest	36,900,000	26,716,000	74,735,000	54,246,000
Provision for income taxes	6,877,000	8,020,000	17,135,000	15,728,000
Net income including noncontrolling interest	30,023,000	18,696,000	57,600,000	38,518,000
Net Income (Loss) Attributable to Noncontrolling Interest	0	655,000	0	1,356,000
Net Income (Loss) Attributable to Parent	$ 30,023,000	19,351,000	$ 57,600,000	39,874,000
Parent Company [Member]
Sales Revenue, Goods, Net		147,612,000		294,969,000
Royalty		8,114,000		15,294,000
Total revenue		155,726,000		310,263,000
Cost of goods sold		54,170,000		106,852,000
Gross profit		101,556,000		203,411,000
Selling, general and administrative		61,077,000		121,353,000
Research and Development Expense		11,983,000		25,484,000
Operating Expenses		73,060,000		146,837,000
Operating Income (Loss)		28,496,000		56,574,000
Nonoperating Income (Expense)		1,125,000		972,000
Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Extraordinary Items, Noncontrolling Interest		27,371,000		55,602,000
Provision for income taxes		8,020,000		15,728,000
Net income including noncontrolling interest		19,351,000		39,874,000
Net Income (Loss) Attributable to Noncontrolling Interest		0		0
Net Income (Loss) Attributable to Parent		19,351,000		39,874,000
Cercacor Laboratories [Member]
Sales Revenue, Goods, Net		0		0
Royalty		1,470,000		2,845,000
Total revenue		1,470,000		2,845,000
Cost of goods sold		0		0
Gross profit		1,470,000		2,845,000
Selling, general and administrative		714,000		1,362,000
Research and Development Expense		1,411,000		2,839,000
Operating Expenses		2,125,000		4,201,000
Operating Income (Loss)		(655,000)		(1,356,000)
Nonoperating Income (Expense)		0		0
Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Extraordinary Items, Noncontrolling Interest		(655,000)		(1,356,000)
Provision for income taxes		0		0
Net income including noncontrolling interest		(655,000)		(1,356,000)
Net Income (Loss) Attributable to Noncontrolling Interest		0		0
Net Income (Loss) Attributable to Parent		(655,000)		(1,356,000)
Cercacor Laboratories Inc Eliminations [Member]
Sales Revenue, Goods, Net		0		0
Royalty		(1,470,000)		(2,845,000)
Total revenue		(1,470,000)		(2,845,000)
Cost of goods sold		(1,345,000)		(2,595,000)
Gross profit		(125,000)		(250,000)
Selling, general and administrative		(125,000)		(250,000)
Research and Development Expense		0		0
Operating Expenses		(125,000)		(250,000)
Operating Income (Loss)		0		0
Nonoperating Income (Expense)		0		0
Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Extraordinary Items, Noncontrolling Interest		0		0
Provision for income taxes		0		0
Net income including noncontrolling interest		0		0
Net Income (Loss) Attributable to Noncontrolling Interest		655,000		1,356,000
Net Income (Loss) Attributable to Parent		655,000		1,356,000
Percentage of Revenue [Member]
Sales Revenue, Goods, Net		0.948		0.951
Royalty		0		0
Total revenue		0		0
Cost of goods sold		0		0
Gross profit		0		0
Selling, general and administrative		0		0
Research and Development Expense		0		0
Operating Expenses		0		0
Operating Income (Loss)		0		0
Nonoperating Income (Expense)		0		0
Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Extraordinary Items, Noncontrolling Interest		0		0
Provision for income taxes		0		0
Net income including noncontrolling interest		0		0
Net Income (Loss) Attributable to Noncontrolling Interest		0		0
Net Income (Loss) Attributable to Parent		0		0
Percentage of Revenue [Member] | Parent Company [Member]
Sales Revenue, Goods, Net		0.948		0.951
Royalty		0		0
Total revenue		0		0
Cost of goods sold		0		0
Gross profit		0		0
Selling, general and administrative		0		0
Research and Development Expense		0		0
Operating Expenses		0		0
Operating Income (Loss)		0		0
Nonoperating Income (Expense)		0		0
Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Extraordinary Items, Noncontrolling Interest		0		0
Provision for income taxes		0		0
Net income including noncontrolling interest		0		0
Net Income (Loss) Attributable to Noncontrolling Interest		(0.000)		(0.000)
Net Income (Loss) Attributable to Parent		$ 0		$ 0

XML

Related Party Transactions (Details)		3 Months Ended		6 Months Ended
	Jan. 26, 2016 ft²	Jul. 02, 2016 USD ($) death	Jul. 04, 2015 USD ($)	Jul. 02, 2016 USD ($) ft² death	Jul. 04, 2015 USD ($)	Jan. 02, 2016 USD ($)
Related Party Transaction [Line Items]
Property Plant and Equipment, Occupied Square Feet | ft²	70,700			16,830
Estimate of Annual Preventable Hospital Deaths Prevented by 2020 | death		200,000		200,000
Cercacor Laboratories [Member]
Related Party Transaction [Line Items]
Payments for Royalties		$ 1,600,000.0	$ 1,300,000.0	$ 3,200,000.0	$ 2,600,000.0
Payment for Administrative Fees		100,000	100,000	100,000	100,000
Costs Reimbursed			100,000	100,000	$ 200,000
Operating Leases, Income Statement, Sublease Revenue		100,000
Related Party Transaction, Other Revenues from Transactions with Related Party		0	$ 0	100,000
Related Party Transaction, Due from (to) Related Party		$ 100,000		100,000		$ 1,100,000
Variable Interest Entity, Not Primary Beneficiary [Member] | Minimum
Related Party Transaction [Line Items]
Payments for Royalties				$ 5,000,000.0

XML

Inventories - Components of Inventory (Detail) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016
Inventory Disclosure [Abstract]
Raw materials	$ 29,836	$ 25,781
Work-in-process	5,489	4,337
Finished goods	26,987	31,920
Total inventories	$ 62,312	$ 62,038

XML

Other Current Assets (Details) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]
Royalty Receivable	$ 7,500	$ 7,200
Prepaid Expense and Other Assets, Current [Abstract]
Prepaid Expense, Current	13,170	9,930
Due from Employees, Current	308	320
Accounts Receivable, Related Parties, Current	9	0
Other Assets, Miscellaneous, Current	2,008	3,973
Other current assets	$ 22,995	$ 21,423

XML

Property and Equipment Property and Equipment (Details) $ in Thousands		6 Months Ended
	Jan. 26, 2016 ft²	Jul. 02, 2016 USD ($) ft²	Jan. 02, 2016 USD ($)
Property, Plant and Equipment [Line Items]
Property Plant and Equipment, Occupied Square Feet | ft²	70,700	16,830
Property, Plant and Equipment, Transfers and Changes		$ 6,200
Property, plant and equipment, gross		201,027	$ 197,938
Accumulated depreciation and amortization		(67,990)	(65,472)
Property and equipment, net		133,037	132,466
Computer equipment
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross		43,106	42,460
Building and building improvements
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross		85,546	78,877
Land
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross		23,738	23,738
Computer equipment
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross		15,202	15,023
Tooling
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross		13,113	13,079
Leasehold improvements
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross		7,777	7,734
Furniture and office equipment
Property, Plant and Equipment [Line Items]
Capital Leased Assets, Gross		400
Property, plant and equipment, gross		9,336	8,885
Demonstration units
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross		978	973
Vehicles
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross		45	45
Construction-in-progress
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross		2,186	$ 7,124
Capital Lease Obligations [Member]
Property, Plant and Equipment [Line Items]
Accumulated depreciation and amortization		$ (300)

XML

Property and Equipment Property and Equipment Narrative (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jan. 02, 2016
Property, Plant and Equipment [Line Items]
Depreciation	$ 6,300	$ 5,600
Depreciation and amortization	8,132	$ 7,697
Property, plant and equipment, gross	201,027		$ 197,938
Accumulated depreciation	67,990		65,472
Construction-in-progress
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	2,186		7,124
Furniture and office equipment
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	9,336		$ 8,885
Capital Leased Assets, Gross	400
Capital Lease Obligations [Member]
Property, Plant and Equipment [Line Items]
Accumulated depreciation	300
Accounts Payable | Irvine, California | Construction-in-progress
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	$ 1,200

XML

Intangible Assets Intangible Assets - Schedule of Finite-Lived Intangible Assets (Details) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016	Jan. 03, 2015
Finite-Lived Intangible Assets [Line Items]
Total cost	$ 48,429		$ 43,892
Total accumulated amortization	(20,165)		(16,336)
Intangible assets, net	28,264		27,556
Patents
Finite-Lived Intangible Assets [Line Items]
Total cost	18,931		21,619
Customer relationships
Finite-Lived Intangible Assets [Line Items]
Total cost	7,669		7,669
Licensing Agreements [Member]
Finite-Lived Intangible Assets [Line Items]
Total cost	7,500	$ 0
Acquired technology
Finite-Lived Intangible Assets [Line Items]
Total cost	5,580		5,580
Trademarks
Finite-Lived Intangible Assets [Line Items]
Total cost	3,681		3,944
Capitalized software development costs
Finite-Lived Intangible Assets [Line Items]
Total cost	2,539		2,539
Other
Finite-Lived Intangible Assets [Line Items]
Total cost	$ 2,529		$ 2,541

XML

Intangible Assets Intangible Assets - Additional Information (Details) - USD ($) $ in Millions	6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015
Goodwill and Intangible Assets Disclosure [Abstract]
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life	10 years
Amortization of Intangible Assets	$ 1.8	$ 2.4

XML

Intangible Assets Intangible Assets - Future Amortization Expense (Details) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 03, 2015
Goodwill and Intangible Assets Disclosure [Abstract]
2015	$ 4,099
2016	3,791
2017	3,554
2018	3,156
2019	2,849
Thereafter	10,815
Intangible assets, net	$ 28,264	$ 27,556

XML

Accrued Liabilities (Details) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016
Accrued Liabilities [Abstract]
Accrued customer rebates, fees and reimbursement	$ 14,484	$ 11,857
Accrued Professional Fees	2,620	5,785
Accrued Donations, Current	107	5,612
Accrued Arbitration Award, Current	0	5,391
Taxes Payable, Current	3,618	5,263
Income taxes payable	2,304	2,777
Product Warranty Accrual, Current	1,215	1,222
Accrued Stock Repurchase, Current	0	4,815
Other Accrued Liabilities, Current	4,737	4,277
Accrued liabilities	$ 26,781	$ 44,222

XML

Long-term debt Debt Instrument (Details) - USD ($)		6 Months Ended
	Jan. 08, 2016	Jul. 02, 2016	Jul. 04, 2015	Jan. 02, 2016
Line of Credit Facility [Line Items]
Capital Lease Obligations, Noncurrent		$ 1,000		$ 71,000
Long-term Debt and Capital Lease Obligations		175,001,000		185,071,000
Letters of Credit Outstanding, Amount		300,000
Adjusted London Interbank Offered Rate (LIBOR) | Minimum
Line of Credit Facility [Line Items]
Debt Instrument, Basis Spread on Variable Rate	1.125%
Adjusted London Interbank Offered Rate (LIBOR) | Maximum
Line of Credit Facility [Line Items]
Debt Instrument, Basis Spread on Variable Rate	2.00%
Letter of Credit [Member]
Line of Credit Facility [Line Items]
Line of Credit Facility, Current Borrowing Capacity	$ 50,000,000.0
Revolving Credit Facility [Member]
Line of Credit Facility [Line Items]
Line of Credit Facility, Current Borrowing Capacity	450,000,000.0
Line of Credit Facility, Maximum Borrowing Capacity	$ 550,000,000.0
Long-term Line of Credit, Noncurrent		175,000,000		$ 185,000,000
Interest Expense, Debt		$ 1,200,000	$ 2,100,000
Revolving Credit Facility [Member] | Base Rate | Minimum
Line of Credit Facility [Line Items]
Debt Instrument, Basis Spread on Variable Rate	0.125%
Revolving Credit Facility [Member] | Base Rate | Maximum
Line of Credit Facility [Line Items]
Debt Instrument, Basis Spread on Variable Rate	1.00%
Other Foreign Currency Sublimit [Member]
Line of Credit Facility [Line Items]
Line of Credit Facility, Current Borrowing Capacity	$ 125,000,000.0
Revolving Credit Facility [Member]
Line of Credit Facility [Line Items]
Line of Credit Facility, Interest Rate at Period End		1.75%
Revolving Credit Facility [Member] | Minimum
Line of Credit Facility [Line Items]
Line of Credit Facility, Unused Capacity, Commitment Fee Percentage	0.175%
Revolving Credit Facility [Member] | Maximum
Line of Credit Facility [Line Items]
Line of Credit Facility, Unused Capacity, Commitment Fee Percentage	0.30%
Revolving Credit Facility [Member] | One Month Adjusted London Interbank Offered Rate (LIBOR)
Line of Credit Facility [Line Items]
Debt Instrument, Basis Spread on Variable Rate	1.00%
Revolving Credit Facility [Member] | Federal Fund
Line of Credit Facility [Line Items]
Debt Instrument, Basis Spread on Variable Rate	0.50%

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Other Liabilities, Long Term Other Liabilities, Long Term - Components of Other Liabilities (Detail) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016
Other Liabilities, Long Term [Abstract]
Unrecognized Tax Benefits Liabilities Noncurrent	$ 8,008	$ 7,747
Grant liability, noncurrent	3,215	0
Other liabilities	30	4
Deferred Rent Credit, Noncurrent	419	76
Deferred Tax Liabilities, Net, Noncurrent	194	194
Deferred Credits and Other Liabilities	$ 11,866	$ 8,021

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Equity (Details)	Nov. 08, 2007 shares $ / shares	Jul. 02, 2016 $ / shares	Jan. 02, 2016 $ / shares
Equity [Line Items]
Preferred stock, par value		$ 0.001	$ 0.001
Dividends Declared For Outstanding Common Stock	One preferred stock purchase right
Number Of Rights To Be Issued With Each Share Of Common Stock | shares	1
Preferred Stock Voting Rights Per Share	$ 1.000
Series A Preferred Stock [Member]
Equity [Line Items]
Preferred stock, par value	0.001
Purchase Price Per Right	$ 136.00

XML

Stock-Based Compensation - Additional Information (Detail) - USD ($) $ / shares in Units, $ in Millions		3 Months Ended		6 Months Ended
	Nov. 04, 2015	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015	Jan. 02, 2016	Sep. 01, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common Stock, Capital Shares Reserved for Future Issuance		16,400,000		16,400,000
Options to purchase of shares of common stock		1,600,000	600,000	1,400,000	1,000,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number		9,306,000		9,306,000		9,202,000
Number of common shares authorized to be repurchased under new stock repurchase program							5,000,000.0
Exercised				$ 19.83
Options available for grant, end of period		4,400,000		4,400,000
Share-based compensation expense				$ 6.2	$ 5.4
Aggregate intrinsic value of options outstanding		$ 142.5		142.5
Aggregate intrinsic value of options exercisable		231.0		231.0
Aggregate intrinsic value of options exercised		20.8		25.3
Unrecognized share-based compensation related to unvested options granted		$ 30.2		$ 30.2
Unrecognized share-based compensation related to unvested options granted, term				3 years 6 months 7 days
Weighted average remaining contractual term of options exercisable, years				4 years 26 days
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period				6,000
Employment Contracts [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Employment Agreement, Severance Terms	10.00%
Chief Executive Officer [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period				2,700,000

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Stock-Based Compensation - Number and Weighted Average Exercise Price of Options Issued and Outstanding under all Stock Option Plans (Detail) shares in Thousands	6 Months Ended
	Jul. 02, 2016 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Options outstanding, beginning of period	9,202
Granted	1,189
Canceled	(120)
Exercised	(965)
Options outstanding, end of period	9,306
Options exercisable, end of period	5,358
Options available for grant, end of period	4,400
Average Exercise Price
Options outstanding, beginning of period | $ / shares	$ 25.46
Granted | $ / shares	38.33
Canceled | $ / shares	28.61
Exercised | $ / shares	19.83
Options outstanding, end of period | $ / shares	27.64
Options exercisable, end of period | $ / shares	$ 25.87

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Stock-Based Compensation - Range of Assumptions Used and Resulting Weighted-Average Fair Value of Options Granted at Date of Grant (Detail) - $ / shares	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015
Range of assumptions used and resulting weighted-average fair value of options granted at the date of grant
Risk-free interest rate, minimum	1.30%	1.30%	1.30%	1.30%
Risk-free interest rate, maximum	1.90%	1.80%	1.90%	1.80%
Expected term (in years)	5 years 8 months 9 days	5 years 6 months	5 years 8 months 9 days	5 years 6 months
Estimated volatility, minimum	34.60%	33.50%	34.60%	33.50%
Estimated volatility, maximum	35.70%	37.40%	35.70%	37.40%
Expected dividends	0.00%	0.00%	0.00%	0.00%
Weighted-average fair value of options granted	$ 14.70	$ 12.45	$ 13.24	$ 11.64

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Stock-Based Compensation Stock-Based Compensaiton - Summary of Unvested RSU Activity (Details) - $ / shares shares in Thousands	6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jan. 02, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common Stock, Capital Shares Reserved for Future Issuance	16,400
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number	2,709		2,703
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value	$ 41.45		$ 41.45
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period	6
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value	$ 43.09
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Forfeited in Period	0
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Forfeitures, Weighted Average Grant Date Fair Value	$ 0
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Expired in Period	0	0
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Exercised in Period	0
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period, Weighted Average Grant Date Fair Value	$ 0

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Stock Repurchase Program - Additional Information (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015	Sep. 01, 2015
Class of Stock [Line Items]
Number of common shares authorized to be repurchased under new stock repurchase program					5,000,000.0
Stock Repurchase Program, Remaining Authorized Repurchase Amount	$ 2,900		$ 2,900
Stock repurchase program, number of shares repurchased	400,000	2,126,000	1,496,000	2,376,000
Stock repurchase program, average price per share	$ 51.30	$ 34.56	$ 42.39	$ 34.39
Stock repurchase program, total value	$ 20,519	$ 73,467	$ 63,403	$ 81,628

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Commitments and Contingencies - Additional Information (Detail)									1 Months Ended	3 Months Ended		6 Months Ended		12 Months Ended
	Jul. 20, 2016 USD ($)	Apr. 08, 2016 USD ($)	Jan. 26, 2016 ft²	Nov. 04, 2015 USD ($)	Oct. 01, 2014 USD ($)	Jan. 16, 2014 USD ($)	Jan. 03, 2014 USD ($)	Jul. 09, 2009 patent	Sep. 30, 2011 sales_representatives	Jul. 02, 2016 USD ($) distributor Agreement	Jul. 04, 2015 USD ($)	Jul. 02, 2016 USD ($) ft² distributor Agreement	Jul. 04, 2015 USD ($)	Jan. 02, 2016 USD ($) distributor	Oct. 21, 2015	Jan. 31, 2014 participant
Contingencies And Commitments [Line Items]
Property Plant and Equipment, Occupied Square Feet | ft²			70,700									16,830
Accrued rent expense										$ 500,000		$ 500,000		$ 200,000
Rental expense related to operating leases										1,200,000	$ 1,400,000	2,300,000	$ 2,900,000
Capital Leases, Future Minimum Payments, Interest Included in Payments										100,000		$ 100,000
Company contribution percentage based on employee contribution of up to 3% of employee's compensation												3.00%
Company's contribution to employee retirement savings plan										$ 500,000	500,000	$ 1,100,000	1,000,000
Severance plan participation agreements | Agreement										7		7
Supplemental Unemployment Benefits, Severance Benefits, Required Notice of Resignation												6 months
Purchase Commitment, Remaining Minimum Amount Committed										$ 56,600,000		$ 56,600,000
Other Commitment										500,000		500,000
Bank balances										61,100,000		61,100,000
Bank balance covered by Federal Deposit Insurance Corporation limit										2,700,000		2,700,000
Time Deposits, at Carrying Value										55,000,000		55,000,000
Royalty										$ 8,029,000	$ 8,114,000	$ 15,906,000	$ 15,294,000
Royalty Rate Percentage												7.75%
Number of former sales representatives | sales_representatives									2
Litigation settlement amount					$ 466,800,000
Number of participants in the surfactant, positive pressure, and oxygenation randomized trial | participant																2
Number of inter partes review petitions, Patent Trial and Appeal Board of the US Patent Office															3
Percentage Of Revenue One Customer										14.80%	15.40%	15.40%	14.70%
Percentage Of Revenue Two Customer										12.70%	11.90%	11.90%	12.30%
Number of days royalty revenue is adjusted subsequent to quarter end												60 days
Sales [Member]
Contingencies And Commitments [Line Items]
Concentration Risk, Just-in-time Distributors										2	2	2	2
Accounts Receivable [Member]
Contingencies And Commitments [Line Items]
Concentration Risk, Just-in-time Distributors | distributor												2		1
Sales Revenue, Product Line [Member]
Contingencies And Commitments [Line Items]
Revenue Customer Concentration										$ 93,300,000	$ 84,500,000	$ 185,300,000	$ 170,800,000
Just in time distributor one [Member]
Contingencies And Commitments [Line Items]
Percentage Of Accounts Receivable Balance From Two Just In Time Distributor												7.60%		5.30%
Just in time distributor two [Member]
Contingencies And Commitments [Line Items]
Percentage Of Accounts Receivable Balance From Two Just In Time Distributor												9.00%
Just In Time Distributor Three [Member]
Contingencies And Commitments [Line Items]
Percentage Of Accounts Receivable Balance From Two Just In Time Distributor														5.50%
Masimo vs. Philips
Contingencies And Commitments [Line Items]
Number of patents allegedly infringed | patent								1
Masimo vs Former Physician Office Sales Representatives
Contingencies And Commitments [Line Items]
Litigation settlement amount		$ 6,200,000				$ 5,400,000
Masimo vs. Physicians Healthsource, Inc.
Contingencies And Commitments [Line Items]
Loss contingency, damages sought							$ 500
Parent Company [Member]
Contingencies And Commitments [Line Items]
Royalty											$ 8,114,000		$ 15,294,000
Number of patents allegedly infringed | patent								2
Philips Patent [Member]
Contingencies And Commitments [Line Items]
Number of patents allegedly infringed | patent								1
Employment Contracts [Member]
Contingencies And Commitments [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Terms of Award				2.7
Employment Agreement, Severance Terms				$ 35,000,000
Employment Agreement, Severance Terms				10.00%
Employment Agreement, Severance Benefits, Special Payment, Qualifying Termination												$ 176,700,000
Subsequent Event [Member] | Masimo vs Former Physician Office Sales Representatives
Contingencies And Commitments [Line Items]
Litigation Settlement, Expense	$ 2,600,000

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Commitments and Contingencies - Future Minimum Lease Payments Under Operating and Capital Leases (Detail) $ in Thousands	Jul. 02, 2016 USD ($)
Operating Leases
2016 (balance of year)	$ 2,721
2016	5,282
2017	4,885
2018	4,011
2019	2,119
Thereafter	5,811
Total	24,829
Capital Leases
2016 (balance of year)	5
2016	75
2017	0
2018	0
2019	0
Thereafter	0
Total	80
Total
2016 (balance of year)	2,726
2016	5,357
2017	4,885
2018	4,011
2019	2,119
Thereafter	5,811
Total	$ 24,909

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Segment Information and Enterprise Reporting - Analysis of Product Revenues Based upon Geographic Area Shipped (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		9 Months Ended
	Jul. 02, 2016	Jul. 04, 2015	Jul. 02, 2016	Jul. 04, 2015	Sep. 27, 2014
Analysis of Product Revenues Based upon the Geographic Area Shipped
Total product revenue	$ 164,607	$ 147,612	$ 327,897	$ 294,969	$ 294,969
Total product revenue, in percentage	100.00%	100.00%	100.00%		100.00%
North and South America | Reportable Geographical Components
Analysis of Product Revenues Based upon the Geographic Area Shipped
Total product revenue	$ 4,972	$ 4,290	$ 9,206	$ 8,492
Total product revenue, in percentage	3.00%	2.90%	2.80%	2.90%
Europe, Middle East and Africa | Reportable Geographical Components
Analysis of Product Revenues Based upon the Geographic Area Shipped
Total product revenue	$ 25,988	$ 24,335	$ 57,958	$ 48,396
Total product revenue, in percentage	15.80%	16.50%	17.70%	16.40%
Asia and Australia | Reportable Geographical Components
Analysis of Product Revenues Based upon the Geographic Area Shipped
Total product revenue	$ 16,602	$ 12,751	$ 30,184	$ 24,569
Total product revenue, in percentage	10.10%	8.60%	9.20%	8.30%
United States | Reportable Geographical Components
Analysis of Product Revenues Based upon the Geographic Area Shipped
Total product revenue	$ 117,045	$ 106,236	$ 230,549	$ 213,512
Total product revenue, in percentage	71.10%	72.00%	70.30%	72.40%

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Long Lived Assets by Geographical Areas (Details) - USD ($) $ in Thousands	Jul. 02, 2016	Jan. 02, 2016
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-Lived Assets	$ 218,802	$ 210,323
Concentration Risk, Long-lived Asset Geographic Area, Percentage	100.00%	100.00%
Reportable Geographical Components [Member] | United States
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-Lived Assets	$ 211,136	$ 203,553
Concentration Risk, Long-lived Asset Geographic Area, Percentage	96.50%	96.80%
Reportable Geographical Components [Member] | International
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-Lived Assets	$ 7,666	$ 6,770
Concentration Risk, Long-lived Asset Geographic Area, Percentage	3.50%	3.20%

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Income Taxes - Additional Information (Detail) $ in Millions	Jul. 02, 2016 USD ($)
Income Tax Disclosure [Abstract]
Gross unrecognized tax benefit	$ 8.9
Unrecognized tax benefit that would affect effective tax rate	$ 7.6