Form 8-K MASIMO CORP For: Jul 31
UNITED STATES | ||
SECURITIES AND EXCHANGE COMMISSION | ||
WASHINGTON, D.C. 20549 | ||
________________________________________________ | ||
FORM 8-K | ||
________________________________________________ | ||
CURRENT REPORT | ||
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
Date of Report (Date of earliest event reported): July 31, 2019 | ||
________________________________________________ | ||
 | ||
________________________________________________ | ||
MASIMO CORPORATION | ||
(Exact name of registrant as specified in its charter) | ||
________________________________________________ | ||
Delaware | 001-33642 | 33-0368882 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||
52 Discovery Irvine, California | 92618 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (949) 297-7000 | ||
Not Applicable | ||
(Former name or former address, if changed since last report) | ||
__________________________ | ||
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | ||
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2 (b)) | |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933(§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). | ||
Emerging growth company | o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | o | |
Securities Registered pursuant to Section 12(b) of the Act: | ||||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.001 par value | MASI | The Nasdaq Stock Market LLC | ||
Item 2.02. | Results of Operations and Financial Condition. |
On July 31, 2019, Masimo Corporation (the “Company”) issued a press release announcing its financial results for the quarter ended June 29, 2019. A copy of the press release is furnished as Exhibit 99.1 to this Current Report.
In accordance with General Instructions B.2 of Form 8-K, the information in Item 2.02 of this Current Report on Form 8-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Item 7.01. | Regulation FD Disclosure. |
In connection with the Company’s conference call scheduled to be held on July 31, 2019, the Company’s Chief Financial Officer will review supplemental information regarding the Company’s financial results for the quarter ended June 29, 2019, as well as the Company’s updated outlook for fiscal 2019. The Company’s supplemental information is furnished as Exhibit 99.2 to this Current Report.
In addition, the Company is making available to investors supplemental financial information for fiscal 2017, fiscal 2018 and the second quarter of fiscal 2019 pursuant to the materials furnished as Exhibit 99.3 to this Current Report.
In accordance with General Instructions B.2 of Form 8-K, the information in Item 7.01 of this Current Report on Form 8-K shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Item 9.01. | Financial Statements and Exhibits. |
(d) The following items are filed as exhibits to the Current Report on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Masimo Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MASIMO CORPORATION | ||||||||
Date: July 31, 2019 | By: | /s/ MICAH YOUNG | ||||||
Micah Young | ||||||||
Executive Vice President, Finance & Chief Financial Officer | ||||||||
(Principal Financial Officer) | ||||||||
Exhibit 99.1
Masimo Reports Second Quarter 2019 Financial Results
Q2 2019 Highlights
■ | Total revenue, including royalty and other revenue, was $229.7 million; | ||
■ | Product revenue increased 13.6% to $229.5 million, or 14.8% on a constant currency basis; | ||
■ | GAAP net income per diluted share was $0.79; and | ||
■ | Non-GAAP net income per diluted share increased 24.6% to $0.76. | ||
Irvine, California, July 31, 2019 - Masimo (NASDAQ: MASI) today announced its financial results for the second quarter ended June 29, 2019.
Second Quarter 2019 Results:
Total revenue, including royalty and other revenue, was $229.7 million. Product revenue increased 13.6% to $229.5 million, or 14.8% on a constant currency basis. Shipments of noninvasive technology boards and monitors increased approximately 2.9% to 60,400 in the second quarter of 2019, compared to 58,700 in the second quarter of 2018.
GAAP operating margin was 22.6%. Non-GAAP operating margin increased 200 basis points to 23.1%, compared to 21.1% in the prior year period.
For the second quarter of 2019, GAAP net income was $44.9 million or $0.79 per diluted share. Non-GAAP net income was $43.1 million or $0.76 per diluted share, a 24.6% increase compared to $0.61 per diluted share in the prior year period.
The Company repurchased approximately 208,000 shares of Masimo common stock for a total cost of approximately $27.9 million during the second quarter of 2019. Total cash and short-term investments was $588.8 million as of June 29, 2019.
As a result of the strong performance in the second quarter, Masimo is again raising its guidance for fiscal year 2019. The Company now expects product revenue of $925.0 million, which reflects reported growth of 11.5% and constant currency growth of 12.2%. Masimo is also raising its GAAP EPS guidance to $3.30 and its non-GAAP EPS guidance to $3.15.
Joe Kiani, Chairman and Chief Executive Officer of Masimo, said, “The first half of 2019 has been strong with second quarter constant currency product revenue growth of 14.8% and non-GAAP earnings per share growth of 25%. We are happy to report second quarter results that once again exceeded expectations. Our breakthrough technologies and solutions improve patient outcomes and reduce cost of care. In the first half of the year we introduced six important products, including Radius™ PPG, our Halo ION™, and a neonatal version of our O3® Cerebral Oximetry monitor, all of which should help fuel our momentum. With these new products added to our existing portfolio and ever increasing global footprint, we are delighted to be in a position to raise our revenue and earnings guidance for 2019.”
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2019 Financial Guidance
The Company provided the following updated estimates for its full year 2019 guidance:
2019 Updated Guidance(1) | Prior 2019 Guidance(1) | |||||||||||||||
(in millions, except percentages and earnings per share) | GAAP | Non-GAAP | GAAP | Non-GAAP | ||||||||||||
Total revenue | $ | 926.3 | $ | 925.0 | $ | 919.1 | $ | 918.0 | ||||||||
Product revenue | $ | 925.0 | $ | 925.0 | $ | 918.0 | $ | 918.0 | ||||||||
Percentage growth - as reported | 11.5 | % | 11.5 | % | 10.6 | % | 10.6 | % | ||||||||
Percentage growth - constant currency | N/A | 12.2 | % | N/A | 11.4 | % | ||||||||||
Royalty and other revenue | $ | 1.3 | $ | — | $ | 1.1 | $ | — | ||||||||
Gross margin | 66.8 | % | 66.8 | % | 66.8 | % | 66.8 | % | ||||||||
Operating margin | 23.9 | % | 24.0 | % | 23.9 | % | 24.0 | % | ||||||||
Diluted earnings per share | $ | 3.30 | $ | 3.15 | $ | 3.25 | $ | 3.12 | ||||||||
EBITDA | 26.4 | % | 30.5 | % | 26.4 | % | 30.5 | % | ||||||||
Estimated tax rate | 19.5 | % | 23.4 | % | 19.9 | % | 23.2 | % | ||||||||
______________
(1) | Updated guidance provided July 31, 2019. Prior guidance provided May 6, 2019. |
• | Total revenue, including royalty and other revenue, increasing to $926.3 million; |
• | Product revenue increasing 11.5% to $925.0 million, or 12.2% on a constant currency basis; |
• | GAAP diluted earnings per share increasing to $3.30; |
• | Non-GAAP diluted earnings per share increasing 18.9% to $3.15; and |
• | Included in our full year revenue guidance is approximately $6.0 million of year-over-year currency headwinds. |
Impact of Adoption of New Lease Accounting Standard
Effective December 30, 2018, we adopted Accounting Standards Codification (ASC) Topic 842, Leases (ASC 842). Our adoption of ASC 842 generally resulted in (a) the recognition of lessee right-of-use (ROU) assets for the right to use assets subject to operating leases; (b) the recognition of lessee lease liabilities for our obligation to make payments under operating leases; and (c) the acceleration of when we recognize certain revenue and costs as a lessor of equipment provided to end-user hospitals at no up-front charge under deferred equipment agreements with fixed multi-year sensor purchase commitments. For additional information with respect to the impact of the adoption of this new accounting standard, please reference Note 2 to our condensed consolidated financial statements that will be included in Part I, Item 1 of our Quarterly Report on Form 10-Q for the quarter ended June 29, 2019, once filed with the Securities and Exchange Commission (SEC) and Exhibit 99.3 that was included in our Current Report on Form 8-K that was filed with the SEC today.
Supplementary Non-GAAP Financial Information
For additional non-GAAP financial details, please visit the Investor Relations section of the Company’s website at www.masimo.com to access Supplementary Financial Information.
Non-GAAP Financial Measures
The non-GAAP financial measures contained herein are a supplement to the corresponding financial measures prepared in accordance with U.S. GAAP. The non-GAAP financial measures presented exclude the items described below. Management believes that adjustments for these items assist investors in making comparisons of period-to-period operating results. Furthermore, management also believes that these items are not indicative of the Company’s on-going core operating performance. These non-GAAP financial measures have certain limitations in that they do not reflect all of the costs associated with the operations of the Company’s business as determined in accordance with GAAP.
Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. The non-GAAP financial measures presented by the Company may be different from the non-GAAP financial measures used by other companies.
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The Company has presented the following non-GAAP measures to assist investors in understanding the Company’s core net operating results on an on-going basis: (i) constant currency product revenue growth %, (ii) non-GAAP net income, (iii) non-GAAP diluted earnings per share, (iv) non-GAAP gross profit/margin, (v) non-GAAP operating income/margin, (vi) adjusted EBITDA. These non-GAAP financial measures may also assist investors in making comparisons of the Company’s core operating results with those of other companies. Management believes constant currency product revenue growth, non-GAAP gross profit/margin, non-GAAP operating income/margin, non-GAAP net income, non-GAAP diluted earnings per share and adjusted EBITDA are important measures in the evaluation of the Company’s performance and uses these measures to better understand and evaluate our business.
The non-GAAP financial measures reflect adjustments for the following items, as well as the related income tax effects thereof:
Constant currency adjustments.
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 significantly from period to period depending on the average and quarter-end exchange rates during a respective period. We believe that comparing these foreign currency denominated revenues by holding the exchange rates constant with the prior year period is useful to management and investors in evaluating our product revenue growth rates on a period-to-period basis. We anticipate that fluctuations in foreign exchange rates and the related constant currency adjustments for calculation of our product revenue growth rate will continue to occur in future periods.
Royalty and other revenue, net of related costs.
We derive royalty and other revenue, net of related costs, from certain non-recurring contractual arrangements that we do not expect to continue in the future. We believe the exclusion of royalty and other revenue, net of related costs, associated with these non-recurring revenue streams is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis.
Acquisition/strategic investment related costs, including depreciation and amortization.
In the event the Company acquires, invests in or divests certain business operations, there may be non-recurring gains, losses or expenses that will be recognized related to the assets and/or liabilities sold or acquired that are not representative of normal on-going cash flows. Furthermore, there may be depreciation and amortization related to the revaluation of assets and liabilities (primarily intangible assets, property, plant and equipment adjustments, inventory revaluation, lease liabilities, etc.) to fair value through purchase accounting related to value created by the seller prior to the acquisition/strategic investment that does not reflect the normal on-going costs of operating our core business. We believe that exclusion of these gains, losses or costs in presenting non-GAAP financial measures provides management and investors a more effective means of evaluating historical performance and projected costs and the potential for realizing cost efficiencies within our core business. Depreciation and amortization related to the revaluation of acquisition related assets and liabilities will generally recur in future periods.
Litigation damages, awards and settlements.
In connection with litigation proceedings arising in the course of our business, we have recorded expenses as a defendant in such proceedings in the form of damages, as well as gains as a plaintiff in such proceedings in the form of litigation awards and settlement proceeds. We believe that exclusion of these gains and losses is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. In this regard, we note that these expenses and gains are generally unrelated to our core business and/or infrequent in nature.
Realized and unrealized gains or losses from foreign currency transactions.
We are exposed to foreign currency gains or losses on outstanding foreign currency denominated receivables and payables related to certain customer sales agreements, product costs and other operating expenses. As the Company does not actively hedge these currency exposures, changes in the underlying currency rates relative to the U.S. Dollar may result in realized and unrealized foreign currency gains and losses between the time these receivables and payables arise and the time that they are settled in cash. Since such realized and unrealized foreign currency gains and losses are the result of macro-economic factors and can vary significantly from one period to the next, we believe that exclusion of such realized and unrealized gains and losses are useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. Realized and unrealized foreign currency gains and losses are likely to recur in future periods.
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Excess tax benefits from stock-based compensation.
Current authoritative accounting guidance requires that excess tax benefits or costs recognized on stock-based compensation expense be reflected in our provision for income taxes rather than paid-in capital. Since we cannot control or predict when stock option awards will be exercised or the price at which such awards will be exercised, the impact of such guidance can create significant volatility in our effective tax rate from one period to the next. We believe that exclusion of these excess tax benefits or costs is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. These excess tax benefits or costs will generally recur in future periods as long as we continue to issue equity awards to our employees.
Tax impacts that may not be representative of the ongoing results of our core operations.
From time-to-time, we may experience significant non-recurring tax events, such as changes in tax laws and regulations or the derecognition of uncertain tax positions related to non-recurring transactions due to the expiration of the statutes of limitations. We believe that exclusion of such tax charges or benefits is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. In this regard, we note that these tax items are unrelated to our core business and generally unique and non-recurring in nature.
Adjusted EBITDA.
The Company defines adjusted EBITDA as earnings before non-operating income/expense, taxes, depreciation and amortization, as adjusted for the applicable non-GAAP adjustments described above and further excluding non-cash stock based compensation expense. We believe these adjustments to EBITDA provide investors and management with a more consistent measurement of business performance and aid in comparability from period to period.
Second Quarter 2019 Actuals versus Second Quarter 2018 Actuals
RECONCILIATION OF GAAP TO NON-GAAP CONSTANT CURRENCY PRODUCT REVENUE: | |||||||||||
Three Months Ended | |||||||||||
(in thousands, except percentages) | June 29, 2019 | June 30, 2018 | |||||||||
GAAP product revenue | $ | 229,510 | $ | 202,004 | |||||||
Non-GAAP constant currency adjustments: | |||||||||||
Constant currency F/X adjustments | 2,351 | N/A | |||||||||
Total non-GAAP constant currency adjustments | 2,351 | N/A | |||||||||
Non-GAAP constant currency product revenue | $ | 231,861 | $ | 202,004 | |||||||
Product revenue growth %: | |||||||||||
GAAP | 13.6 | % | |||||||||
Non-GAAP constant currency | 14.8 | % | |||||||||
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RECONCILIATION OF GAAP TO NON-GAAP NET INCOME AND NET INCOME PER DILUTED SHARE(1): | |||||||||||||||||
Three Months Ended | |||||||||||||||||
June 29, 2019 | June 30, 2018 | ||||||||||||||||
(in thousands, except per share amounts) | $ | Per Diluted Share | $ | Per Diluted Share | |||||||||||||
GAAP net income | $ | 44,888 | $ | 0.79 | $ | 43,853 | $ | 0.79 | |||||||||
Non-GAAP adjustments: | |||||||||||||||||
Royalty and other revenue, net of related costs | (111 | ) | — | (9,415 | ) | (0.17 | ) | ||||||||||
Acquisition/strategic investment related costs | 1,136 | 0.02 | 361 | 0.01 | |||||||||||||
Non-operating other (income) expense | (7 | ) | — | 566 | 0.01 | ||||||||||||
Tax impact of pre-tax non-GAAP adjustments above | (179 | ) | — | 2,344 | 0.04 | ||||||||||||
Excess tax benefits from stock-based compensation | (2,608 | ) | (0.05 | ) | (3,947 | ) | (0.07 | ) | |||||||||
Total non-GAAP adjustments | (1,768 | ) | (0.03 | ) | (10,091 | ) | (0.18 | ) | |||||||||
Non-GAAP net income | $ | 43,120 | $ | 0.76 | $ | 33,763 | $ | 0.61 | |||||||||
Weighted average shares outstanding - diluted | 57,066 | 55,742 | |||||||||||||||
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(1) | May not foot due to rounding. |
RECONCILIATION OF GAAP TO NON-GAAP OPERATING MARGIN(1): | ||||||||||
Three Months Ended | ||||||||||
June 29, 2019 | June 30, 2018 | |||||||||
(in thousands, except percentages) | $ | $ | ||||||||
GAAP operating income/margin | $ | 52,004 | $ | 51,612 | ||||||
Non-GAAP adjustments: | ||||||||||
Royalty and other revenue, net of related costs | (111 | ) | (9,415 | ) | ||||||
Acquisition/strategic investment related costs | 1,136 | 361 | ||||||||
Total non-GAAP adjustments | 1,025 | (9,054 | ) | |||||||
Non-GAAP operating income/margin | $ | 53,030 | $ | 42,559 | ||||||
GAAP operating income/margin % | 22.6 | % | 24.4 | % | ||||||
Non-GAAP operating income/margin % | 23.1 | % | 21.1 | % | ||||||
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(1) | May not foot due to rounding. |
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Full Year 2019 Guidance versus Full Year 2018 Actuals
RECONCILIATION OF GAAP PRODUCT REVENUE GROWTH % TO CONSTANT CURRENCY PRODUCT REVENUE GROWTH %: | ||||||||||
(in thousands, except percentages) | Full Year 2019 Updated Guidance(1) | Full Year 2018 Actuals | ||||||||
GAAP product revenue | $ | 925,000 | $ | 829,874 | ||||||
Non-GAAP constant currency adjustments: | ||||||||||
Constant currency F/X adjustments | 6,000 | N/A | ||||||||
Total non-GAAP constant currency adjustments | 6,000 | N/A | ||||||||
Non-GAAP constant currency product revenue | $ | 931,000 | $ | 829,874 | ||||||
Product revenue growth %: | ||||||||||
GAAP | 11.5 | % | ||||||||
Non-GAAP constant currency | 12.2 | % | ||||||||
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(1) | Updated guidance provided July 31, 2019. Prior guidance provided May 6, 2019. |
RECONCILIATION OF GAAP TO NON-GAAP NET INCOME AND NET INCOME PER DILUTED SHARE(1): | ||||||||||||||||
Full Year 2019 Updated Guidance(2) | Full Year 2018 Actuals | |||||||||||||||
(in thousands, except per share amounts) | $ | Per Diluted Share | $ | Per Diluted Share | ||||||||||||
GAAP net income | $ | 188,804 | $ | 3.30 | $ | 193,543 | $ | 3.45 | ||||||||
Non-GAAP adjustments: | ||||||||||||||||
Royalty and other revenue, net of related costs | (1,159 | ) | (0.02 | ) | (27,704 | ) | (0.49 | ) | ||||||||
Acquisition/strategic investment related costs | 2,209 | 0.04 | 1,442 | 0.03 | ||||||||||||
Litigation damages, awards and settlements | — | — | 425 | 0.01 | ||||||||||||
Non-operating other (income) expense | (541 | ) | (0.01 | ) | 2,027 | 0.04 | ||||||||||
Tax impact of pre-tax non-GAAP adjustments above | 63 | — | 5,532 | 0.10 | ||||||||||||
Excess tax benefits from stock-based compensation | (9,290 | ) | (0.16 | ) | (22,036 | ) | (0.39 | ) | ||||||||
Expiration of certain statutes of limitations related to unique and non-recurring tax positions | — | — | (4,169 | ) | (0.07 | ) | ||||||||||
2017 U.S. Tax Reform | — | — | (675 | ) | (0.01 | ) | ||||||||||
Total non-GAAP adjustments | (8,718 | ) | (0.15 | ) | (45,157 | ) | (0.81 | ) | ||||||||
Non-GAAP product net income | $ | 180,087 | $ | 3.15 | $ | 148,385 | $ | 2.65 | ||||||||
Weighted average shares outstanding - diluted | 57,219 | 56,039 | ||||||||||||||
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(1) | May not foot due to rounding. |
(2) | Updated guidance provided July 31, 2019. Prior guidance provided May 6, 2019. |
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RECONCILIATION OF GAAP TO NON-GAAP GROSS PROFIT AND OPERATING MARGIN(1): | ||||||||||
Full Year 2019 Updated Guidance(2) | Full Year 2018 Actuals | |||||||||
(in thousands, except percentages) | $ | $ | ||||||||
GAAP gross margin | $ | 618,601 | $ | 574,892 | ||||||
Non-GAAP adjustments: | ||||||||||
Royalty and other revenue, net of related costs | (1,159 | ) | (27,704 | ) | ||||||
Acquisition/strategic investment related costs | 458 | 458 | ||||||||
Total non-GAAP adjustments | (701 | ) | (27,246 | ) | ||||||
Non-GAAP gross margin | $ | 617,900 | $ | 547,645 | ||||||
GAAP gross margin % | 66.8 | % | 67.0 | % | ||||||
Non-GAAP gross margin % | 66.8 | % | 66.0 | % | ||||||
GAAP operating income/margin | $ | 220,950 | $ | 208,044 | ||||||
Non-GAAP adjustments: | ||||||||||
Royalty and other revenue, net of related costs | (1,159 | ) | (27,704 | ) | ||||||
Acquisition/strategic investment related costs | 2,209 | 1,442 | ||||||||
Litigation damages, awards and settlements | — | 425 | ||||||||
Total non-GAAP adjustments | 1,050 | (25,837 | ) | |||||||
Non-GAAP operating income/margin | $ | 222,000 | $ | 182,206 | ||||||
GAAP operating income/margin % | 23.9 | % | 24.2 | % | ||||||
Non-GAAP operating income/margin % | 24.0 | % | 22.0 | % | ||||||
__________________
(1) | May not foot due to rounding. |
(2) | Updated guidance provided July 31, 2019. Prior guidance provided May 6, 2019. |
RECONCILIATION OF EBITDA TO ADJUSTED EBITDA(1): | |||||||||||||||
Full Year 2019 Updated Guidance(2) | Full Year 2018 Actuals | ||||||||||||||
(in thousands, except percentages) | $ | % of Revenue | $ | % of Revenue | |||||||||||
GAAP net income | $ | 188,804 | 20.4 | % | $ | 193,543 | 22.5 | % | |||||||
Other (income)/expense(3) | (13,641 | ) | (1.5 | ) | (5,732 | ) | (0.7 | ) | |||||||
Provision for income taxes | 45,787 | 4.9 | 20,233 | 2.4 | |||||||||||
Depreciation and amortization | 23,363 | 2.5 | 21,127 | 2.5 | |||||||||||
EBITDA | 244,313 | 26.4 | 229,171 | 26.7 | |||||||||||
Add: Non-cash stock-based compensation expense | 38,079 | 4.1 | 27,417 | 3.2 | |||||||||||
Add: Litigation damages, awards and settlements | — | — | 425 | — | |||||||||||
Adjusted EBITDA | $ | 282,392 | 30.5 | % | $ | 257,013 | 29.9 | % | |||||||
__________________
(1) | May not foot due to rounding. |
(2) | Updated guidance provided July 31, 2019. Prior guidance provided May 6, 2019. |
(3) | Other (income)/expense consists primarily of interest (income)/expense and net foreign currency (gains)/losses. |
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Conference Call
Masimo will hold a conference call today at 1:30 p.m. PT (4:30 p.m. ET) to discuss the results. A live webcast of the call will be available online from the investor relations page of the Company’s website at www.masimo.com. The dial-in numbers are (888) 520-7182 for domestic callers and +1 (706) 758-3929 for international callers. The reservation code for both dial-in numbers is 3195569. After the live webcast, the call will be available on Masimo’s website through August 7, 2019. In addition, a telephonic replay of the call will be available through August 30, 2019. The replay dial-in numbers are (855) 859-2056 for domestic callers and +1 (404) 537-3406 for international callers. Please use reservation code 3195569.
About Masimo
Masimo (NASDAQ: MASI) is a global leader in innovative noninvasive monitoring technologies. Our mission is to improve patient outcomes and reduce the cost of care. In 1995, the Company debuted Masimo SET® Measure-through Motion and Low Perfusion® pulse oximetry, which has been shown in multiple studies to significantly reduce false alarms and accurately monitor for true alarms. Masimo SET® is estimated to be used on more than 100 million patients in leading hospitals and other healthcare settings around the world. In 2005, Masimo introduced rainbow® Pulse CO-Oximetry technology, allowing noninvasive and continuous monitoring of blood constituents that previously could only be measured invasively, including total hemoglobin (SpHb®), oxygen content (SpOC), carboxyhemoglobin (SpCO®), methemoglobin (SpMet®), Pleth Variability Index (PVi®) and more recently, Oxygen Reserve Index (ORi™), in addition to SpO2, pulse rate and perfusion index (PI). In 2014, Masimo introduced Root™, an intuitive patient monitoring and connectivity platform with the Masimo Open Connect® (MOC-9®) interface. Masimo is also taking an active leadership role in mobile health applications (mHealth) with products such as the Radius-7® wearable patient monitor and the MightySat™ fingertip pulse oximeter. Additional information about Masimo and its products may be found at www.masimo.com.
Forward-Looking Statements
All statements other than statements of historical facts included in this press release that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our expectations for full fiscal year GAAP and non-GAAP 2019 total revenue, product revenue, royalty and other revenues, gross margin, operating margin, diluted earnings per share, EBITDA, estimated tax rate and our long-term outlook; demand for our products; anticipated revenue and earnings growth; our financial condition, results of operations and business generally; expectations regarding our ability to design and deliver innovative new noninvasive technologies and reduce the cost of care; and demand for our technologies. These forward-looking statements are based on management’s current expectations and beliefs and are subject to uncertainties and factors, all of which are difficult to predict and many of which are beyond our control and could cause actual results to differ materially and adversely from those described in the forward-looking statements. These risks include, but are not limited to, those related to: our dependence on Masimo SET® and Masimo rainbow SET™ products and technologies for substantially all of our revenue; any failure in protecting our intellectual property exposure to competitors’ assertions of intellectual property claims; the highly competitive nature of the markets in which we sell our products and technologies; any failure to continue developing innovative products and technologies; the lack of acceptance of any of our current or future products and technologies; obtaining regulatory approval of our current and future products and technologies; the risk that the implementation of our international realignment will not continue to produce anticipated operational and financial benefits, including a continued lower effective tax rate; the loss of our customers; the failure to retain and recruit senior management; product liability claims exposure; a failure to obtain expected returns from the amount of intangible assets we have recorded; the maintenance of our brand; the amount and type of equity awards that we may grant to employees and service providers in the future; our ongoing litigation and related matters; and other factors discussed in the “Risk Factors” section of our most recent periodic reports filed with the Securities and Exchange Commission (“SEC”), including our most recent Form 10-K and Form 10-Q, all of which you may obtain for free on the SEC’s website at www.sec.gov. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, even if subsequently made available by us on our website or otherwise. We do not undertake any obligation to update, amend or clarify these forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
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Investor Contact: Eli Kammerman | Media Contact: Irene Paigah | |
(949) 297-7077 | (858) 859-7001 | |
Masimo, SET, Signal Extraction Technology, Improving Patient Outcome and Reducing Cost of Care... by Taking Noninvasive Monitoring to New Sites and Applications, rainbow, SpHb, SpOC, SpCO, SpMet, PVI and ORI are trademarks or registered trademarks of Masimo Corporation.
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MASIMO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited, in thousands) | |||||||
June 29, 2019 | December 29, 2018 | ||||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 408,784 | $ | 552,490 | |||
Short-term investments | 180,000 | — | |||||
Accounts receivable, net of allowance for doubtful accounts | 120,580 | 109,629 | |||||
Inventories | 98,785 | 94,732 | |||||
Other current assets | 55,894 | 29,227 | |||||
Total current assets | 864,043 | 786,078 | |||||
Lease receivable, noncurrent | 44,284 | — | |||||
Deferred costs and other contract assets | 13,998 | 126,105 | |||||
Property and equipment, net | 202,810 | 165,972 | |||||
Intangible assets, net | 27,633 | 27,924 | |||||
Goodwill | 22,384 | 23,297 | |||||
Deferred tax assets | 30,475 | 21,210 | |||||
Other non-current assets | 24,219 | 4,232 | |||||
Total assets | $ | 1,229,846 | $ | 1,154,818 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities | |||||||
Accounts payable | $ | 36,472 | $ | 40,388 | |||
Accrued compensation | 42,439 | 49,486 | |||||
Deferred revenue and other contract-related liabilities, current | 25,874 | 33,106 | |||||
Other current liabilities | 31,289 | 24,627 | |||||
Total current liabilities | 136,074 | 147,607 | |||||
Other non-current liabilities | 53,898 | 38,146 | |||||
Total liabilities | 189,972 | 185,753 | |||||
Commitments and contingencies | |||||||
Stockholders’ equity | |||||||
Common stock | 53 | 53 | |||||
Treasury stock | (516,880 | ) | (489,026 | ) | |||
Additional paid-in capital | 564,697 | 533,164 | |||||
Accumulated other comprehensive loss | (6,484 | ) | (6,199 | ) | |||
Retained earnings | 998,488 | 931,073 | |||||
Total stockholders’ equity | 1,039,874 | 969,065 | |||||
Total liabilities and stockholders’ equity | $ | 1,229,846 | $ | 1,154,818 | |||
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MASIMO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share amounts) | |||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 29, 2019 | June 30, 2018 | June 29, 2019 | June 30, 2018 | ||||||||||||
Revenue: | |||||||||||||||
Product | $ | 229,510 | $ | 202,004 | $ | 460,058 | $ | 406,393 | |||||||
Royalty and other revenue | 142 | 9,617 | 1,258 | 18,181 | |||||||||||
Total revenue | 229,652 | 211,621 | 461,316 | 424,574 | |||||||||||
Cost of goods sold | 75,313 | 69,474 | 155,335 | 138,766 | |||||||||||
Gross profit | 154,339 | 142,147 | 305,981 | 285,808 | |||||||||||
Operating expenses: | |||||||||||||||
Selling, general and administrative | 78,160 | 70,450 | 152,364 | 140,667 | |||||||||||
Research and development | 24,175 | 20,085 | 45,590 | 39,644 | |||||||||||
Total operating expenses | 102,335 | 90,535 | 197,954 | 180,311 | |||||||||||
Operating income | 52,004 | 51,612 | 108,027 | 105,497 | |||||||||||
Non-operating income | 3,529 | 1,405 | 7,415 | 3,052 | |||||||||||
Income before provision for income taxes | 55,533 | 53,017 | 115,442 | 108,549 | |||||||||||
Provision for income taxes | 10,645 | 9,164 | 21,232 | 19,066 | |||||||||||
Net income | $ | 44,888 | $ | 43,853 | $ | 94,210 | $ | 89,483 | |||||||
Net income per share: | |||||||||||||||
Basic | $ | 0.84 | $ | 0.84 | $ | 1.77 | $ | 1.72 | |||||||
Diluted | $ | 0.79 | $ | 0.79 | $ | 1.65 | $ | 1.60 | |||||||
Weighted-average shares used in per share calculations: | |||||||||||||||
Basic | 53,356 | 51,999 | 53,283 | 52,047 | |||||||||||
Diluted | 57,066 | 55,742 | 56,940 | 55,842 | |||||||||||
The following table presents details of the stock-based compensation expense that is included in each functional line item in the condensed consolidated statements of operations (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||||
June 29, 2019 | June 30, 2018 | June 29, 2019 | June 30, 2018 | ||||||||||||
Cost of goods sold | $ | 132 | $ | 73 | $ | 229 | $ | 151 | |||||||
Selling, general and administrative | 8,888 | 5,293 | 14,613 | 9,329 | |||||||||||
Research and development | 2,453 | 1,354 | 3,948 | 2,572 | |||||||||||
Total | $ | 11,473 | $ | 6,720 | $ | 18,790 | $ | 12,052 | |||||||
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MASIMO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) | |||||||
Six Months Ended | |||||||
June 29, 2019 | June 30, 2018 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 94,210 | $ | 89,483 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 11,641 | 10,794 | |||||
Stock-based compensation | 18,790 | 12,049 | |||||
Loss on disposal of property, equipment and intangibles | 93 | 632 | |||||
Provision from doubtful accounts | 622 | (356 | ) | ||||
Provision (benefit) from deferred income taxes | 21 | (274 | ) | ||||
Changes in operating assets and liabilities: | |||||||
(Increase) decrease in accounts receivable | (11,705 | ) | 20,209 | ||||
(Increase) decrease in inventories | (4,159 | ) | 1,075 | ||||
Increase in other current assets | (7,147 | ) | (1,694 | ) | |||
Increase in lease receivable, net | (6,238 | ) | — | ||||
Decrease (increase) in deferred costs and other contract assets | 8,723 | (7,809 | ) | ||||
(Increase) decrease in other non-current assets | (177 | ) | 430 | ||||
(Decrease) increase in accounts payable | (2,841 | ) | 1,820 | ||||
Decrease in accrued compensation | (6,997 | ) | (2,771 | ) | |||
(Decrease) increase in accrued liabilities | (2,966 | ) | 1,776 | ||||
Increase (decrease) in income tax payable | 2,109 | (895 | ) | ||||
Increase in deferred revenue and other contract-related liabilities | 5,566 | 3,397 | |||||
Increase in other non-current liabilities | 1,234 | 33 | |||||
Net cash provided by operating activities | 100,779 | 127,899 | |||||
Cash flows from investing activities: | |||||||
Purchases of short-term investments | (180,000 | ) | — | ||||
Purchases of property and equipment, net | (47,323 | ) | (9,430 | ) | |||
Increase in intangible assets | (2,019 | ) | (3,643 | ) | |||
Net cash used in investing activities | (229,342 | ) | (13,073 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from issuance of common stock | 12,870 | 19,778 | |||||
Payroll tax withholdings on behalf of employees for vested equity awards | (123 | ) | (168 | ) | |||
Repurchases of common stock | (27,854 | ) | (18,478 | ) | |||
Net cash (used in) provided by financing activities | (15,107 | ) | 1,132 | ||||
Effect of foreign currency exchange rates on cash | (32 | ) | (1,647 | ) | |||
Net (decrease) increase in cash, cash equivalents, and restricted cash | (143,702 | ) | 114,311 | ||||
Cash, cash equivalents and restricted cash at beginning of period | 552,641 | 315,483 | |||||
Cash, cash equivalents and restricted cash at end of period | $ | 408,939 | $ | 429,794 | |||
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Second Quarter 2019 Improving Patient Outcomes Earnings Presentation | July 31, 2019 Reducing the Cost of Care®
FORWARD-LOOKING STATEMENTS These presentations contain forward-looking statements within the meaning of federal securities laws, including, among others, statements about our expectations, plans, strategies or prospects. We generally use the words “may,” “will,” “expect,” “believe,” “anticipate,” “plan,” “estimate,” “project,” “assume,” “guide,” “target,” “forecast,” “see,” “seek,” “can,” “should,” “could,” “would,” “intend” “predict,” “potential,” “strategy,” “is confident that,” “future,” “opportunity,” “work toward,” and similar expressions to identify forward-looking statements. All statements other than statements of historical or current fact are, or may be deemed to be, forward-looking statements. Such statements are based upon the current beliefs, expectations and assumptions of management and are subject to significant risks, uncertainties and changes in circumstances that could cause actual results to differ materially from the forward-looking statements. Forward-looking statements speak only as of the date they are made, and we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers of these presentations are cautioned not to rely on these forward-looking statements, since there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in these presentations. The risks and uncertainties that may cause actual results to differ materially from Masimo’s current expectations are more fully described in Masimo’s reports filed with the U.S. Securities and Exchange Commission (SEC), including our most recent Form 10-K and Form 10-Q. Copies of these filings, as well as subsequent filings, are available online at www.sec.gov, www.masimo.com or upon request.
NON-GAAP FINANCIAL MEASURES The non-GAAP financial measures contained herein are a supplement to the corresponding financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP). The non-GAAP financial measures presented exclude certain items that are more fully described in the Appendix. Management believes that adjustments for these items assist investors in making comparisons of period-to-period operating results and that these items are not indicative of the company’s on-going core operating performance. These non-GAAP financial measures have certain limitations in that they do not reflect all of the costs associated with the operations of the Company’s business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. The non-GAAP financial measures presented by the Company may be different from the non-GAAP financial measures used by other companies. The Company has presented the following non-GAAP measures to assist investors in understanding the Company’s core net operating results on an on-going basis: (i) constant currency product revenue, (ii) non-GAAP gross margin %, (iii) non-GAAP operating expense %, (iv) non-GAAP operating margin %, (v) non-GAAP earnings per diluted share and (vi) adjusted free cash flow. These non-GAAP financial measures may also assist investors in making comparisons of the company’s core operating results with those of other companies. Management believes constant currency product revenue, non-GAAP gross profit, non-GAAP net income and non- GAAP net income per diluted share are important measures in the evaluation of the Company’s performance and uses these measures to better understand and evaluate our business. For additional financial details, including GAAP to non-GAAP reconciliations, please visit the Investor Relations section of the Company’s website at www.masimo.com to access Supplementary Financial Information.
Second Quarter 2019 Highlights Total revenue, including royalty and other revenue, was $229.7 million Revenue Product revenue increased 13.6% to $229.5 million, or 14.8% on a constant currency basis(1) Shipments Shipments of noninvasive technology boards and monitors increased 2.9% to 60,400 GAAP operating margin was 22.6% Profitability Non-GAAP operating margin(1) improved 200 bps to 23.1% GAAP EPS was $0.79 per diluted share EPS Non-GAAP EPS(1) increased 24.6% to $0.76 per diluted share Adjusted free cash flow(1) was $18.0 million Cash Cash and investments balance was $588.8 million Repurchased approximately 208,000 shares of common stock at a total cost of $27.9 million (1) Non-GAAP measures shown exclude the impact of Royalty and Other Revenue, net of related costs. Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information.
Second Quarter 2019 Results GAAP Non-GAAP (1) vs. Prior Year Constant (in millions; except % and EPS) Reported Q2 2019 Q2 2019 Q2 2018 Currency Product Revenue $229.5 $229.5 $202.0 13.6% 14.8% Royalty and Other Revenue 0.1 - - - - Revenue $229.7 $229.5 $202.0 13.6% 14.8% Gross Margin 67.2% 67.2% 65.8% 140 bps SG&A Expense 34.0% 33.6% 34.8% (120 bps) (% of Revenue) R&D Expense 10.5% 10.5% 9.9% 60 bps (% of Revenue) Operating Expenses 44.6% 44.1% 44.7% (60 bps) (% of Revenue) Operating Margin 22.6% 23.1% 21.1% 200 bps Earnings Per Share $0.79 $0.76 $0.61 24.6% (1) Non-GAAP measures shown exclude the impact of Royalty and Other Revenue, net of related costs. Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information. May not foot due to rounding.
Second Quarter 2019 Results Non-GAAP (1) Non-GAAP (1) Product Revenue Operating Margin EPS $230M 23.1% $0.76 21.1% $202M $0.61 Constant Currency +14.8%Growth (1) +200 bps +24.6% Q2 2018 Q2 2019 Q2 2018 Q2 2019 Q2 2018 Q2 2019 (1) Non-GAAP measures shown exclude the impact of Royalty and Other Revenue, net of related costs. Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information.
Full Year 2019 Financial Guidance Total revenue, including royalty and other revenue, of $926.3 million Revenue Product revenue increasing 11.5% to $925.0 million, or 12.2% on a constant currency basis(1) GAAP operating margin of 23.9% Profitability Non-GAAP operating margin(1) improving 200 bps to 24.0% GAAP EPS of $3.30 per diluted share EPS Non-GAAP EPS(1) increasing 18.9% to $3.15 per diluted share (1) Non-GAAP measures shown exclude the impact of Royalty and Other Revenue, net of related costs. Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information.
Full Year 2019 Financial Guidance GAAP Non-GAAP (1) vs. Prior Year Constant (in millions; except % and EPS) Reported FY 2019 FY 2019 FY 2018 Currency Product Revenue $925.0 $925.0 $829.9 11.5% 12.2% Royalty and Other Revenue 1.3 - - - - Revenue $926.3 $925.0 $829.9 11.5% 12.2% Gross Margin 66.8% 66.8% 66.0% 80 bps Operating Expenses 42.9% 42.8% 44.0% (120 bps) (% of Revenue) Operating Margin 23.9% 24.0% 22.0% 200 bps Earnings Per Share $3.30 $3.15 $2.65 18.9% (1) Non-GAAP measures shown exclude the impact of Royalty and Other Revenue, net of related costs. Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information. May not foot due to rounding.
Full Year 2019 Financial Guidance Non-GAAP (1) Non-GAAP (1) Product Revenue Operating Margin EPS $925M 24.0% $3.15 22.0% $830M $2.65 Constant Currency +12.2%Growth (1) +200 bps +18.9% FY 2018 FY 2019 FY 2018 FY 2019 FY 2018 FY 2019 (1) Non-GAAP measures shown exclude the impact of Royalty and Other Revenue, net of related costs. Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information.
APPENDICES Improving Patient Outcomes GAAP to Non-GAAP Reducing the Cost of Care® Adjustments and Reconciliations
Description of Non-GAAP Adjustments The non-GAAP financial measures reflect adjustments for the following items, as well as the related income tax effects thereof: Constant currency adjustments 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 significantly from period to period depending on the average and quarter-end exchange rates during a respective period. We believe that comparing these foreign currency denominated revenues by holding the exchange rates constant with the prior year period is useful to management and investors in evaluating our product revenue growth rates on a period-to-period basis. We anticipate that fluctuations in foreign exchange rates and the related constant currency adjustments for calculation of our product revenue growth rate will continue to occur in future periods. Royalty and other revenue, net of related costs We derive royalty and other revenue, net of related costs, associated with certain non-recurring contractual arrangements that we do not expect to continue in the future. We believe the exclusion of royalty and other revenue, net of related costs, associated with these certain non-recurring revenue streams is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. Acquisition/strategic investment-related costs, including depreciation and amortization Depreciation and amortization related to the revaluation of assets and liabilities (primarily intangible assets, property, plant and equipment adjustments, inventory revaluation, lease liabilities, etc.) to fair value through purchase accounting related to value created by the seller prior to the acquisition/strategic investment rather than ongoing costs of operating our core business. As a result, we believe that exclusion of these costs in presenting non-GAAP financial measures provides management and investors a more effective means of evaluating historical performance and projected costs and the potential for realizing cost efficiencies within our core business. Depreciation and amortization related to the revaluation of acquisition related assets and liabilities will generally recur in future periods. In the event the Company acquires, invests in or divests certain business operations, there may be non-recurring gains, losses or expenses that will be recognized related to the assets and/or liabilities sold or acquired that are not representative of normal on-going cash flows. These gains, losses or expenses are excluded from non-GAAP earnings. Litigation damages, awards and settlements In connection with litigation proceedings arising in the course of our business, we have recorded expenses as a defendant in such proceedings in the form of damages, as well as gains as a plaintiff in such proceedings in the form of litigation awards and settlement proceeds. We believe that exclusion of these gains and losses is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. In this regard, we note that these expenses and gains are generally unrelated to our core business and/or infrequent in nature.
Description of Non-GAAP Adjustments Realized and unrealized gains or losses from foreign currency transactions: We are exposed to foreign currency gains or losses on outstanding foreign currency denominated receivables and payables related to certain customer sales agreements, product costs and other operating expenses. As the Company does not actively hedge these currency exposures, changes in the underlying currency rates relative to the U.S. Dollar may result in realized and unrealized foreign currency gains and losses between the time these receivables and payables arise and the time that they are settled in cash. Since such realized and unrealized foreign currency gains and losses are the result of macro-economic factors and can vary significantly from one period to the next, we believe that exclusion of such realized and unrealized gains and losses are useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. Realized and unrealized foreign currency gains and losses are likely to recur in future periods. Excess tax benefits from stock-based compensation Current authoritative accounting guidance requires that excess tax benefits or costs recognized on stock-based compensation expense be reflected in our provision for income taxes rather than paid-in capital. Since we cannot control or predict when stock option awards will be exercised or the price at which such awards will be exercised, the impact of such guidance can create significant volatility in our effective tax rate from one period to the next. We believe that exclusion of these excess tax benefits or costs is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. These excess tax benefits or costs will generally recur in future periods as long as we continue to issue equity awards to our employees. Tax impacts that may not be representative of the ongoing results of our core operations The Tax Cuts and Jobs Act of 2017 (2017 Tax Act) was signed into law in December 2017, and became effective January 1, 2018. The 2017 Tax Act included a number of changes to existing U.S. federal tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 35% to 21%, a one-time transition tax on the “deemed repatriation” of cumulative undistributed foreign earnings as of December 31, 2017 and changes in the prospectivetaxationofthe foreign operations of U.S. multinational companies. From time to time, we may also record tax benefits relating to the de-recognition of uncertain tax positions due to the expiration of the statutes of limitations. During the twelve months ended December 29, 2018, we recorded a significant tax benefit due to the expiration of the applicable statutes of limitations related to certain non-recurring transactions. We believe that exclusion of the tax charges related to the 2017 Tax Act and the tax benefit resulting from the expiration of certain statutes of limitations related to non- recurring transactions is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. In this regard, we note that these tax items are unrelated to our core business and non-recurring in nature. Adjusted Free Cash Flow Represents free cash flow (cash flow from operations less cash used for the purchase of property, plant and equipment) adjusted for the impact of cash receipts or payments relating to certain previously described non-GAAP adjustments, which may impact period over period comparability.
Constant Currency Product Revenue (1),(2) RECONCILIATION OF GAAP PRODUCT REVENUE GROWTH TO CONSTANT CURRENCY PRODUCT REVENUE GROWTH (3) (in thousands, except percentages) Q2 2018 FY 2018 Q2 2019 2019 Guidance GAAP product revenue $ 202,004 $ 829,874 $ 229,510 $ 925,000 Constant currency F/X adjustments N/A N/A 2,351 6,000 Constant currency (non-GAAP) product revenue $ 202,004 $ 829,874 $ 231,861 $ 931,000 GAAP product revenue growth 13.6% 11.5% Constant currency (non-GAAP) product revenue growth 14.8% 12.2% (1) Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information. (2) Reported amounts may vary from amounts previously reported due to rounding conventions; Note items may not foot due to rounding. (3) Updated for most recent guidance provided on July 31, 2019.
Non-GAAP Gross Margin % (1),(2) RECONCILIATION OF GAAP GROSS PROFIT/MARGIN TO NON-GAAP GROSS PROFIT/MARGIN: (3) (in thousands, except percentages) Q2 2018 FY 2018 Q2 2019 2019 Guidance GAAP gross profit/margin $ 142,147 $ 574,892 $ 154,339 $ 618,601 Non-GAAP adjustments: Royalty and other revenue, net of related costs (9,415) (27,704) (111) (1,159) Acquisition & investment related costs 114 458 114 458 Total non-GAAP gross profit/margin adjustments (9,300) (27,246) 3 (701) Non-GAAP gross profit/margin$ 132,847 $ 547,645 $ 154,343 $ 617,900 (4) Non-GAAP gross margin % 65.8% 66.0% 67.2% 66.8% (1) Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information. (2) Reported amounts may vary from amounts previously reported due to rounding conventions; Note items may not foot due to rounding. (3) Updated for most recent guidance provided on July 31, 2019. (4) Calculated as a percentage of product revenue.
Non-GAAP Operating Expense % (1),(2) RECONCILIATION OF GAAP OPERATING EXPENSES TO NON-GAAP OPERATING EXPENSES: (3) (in thousands, except percentages) Q2 2018 FY 2018 Q2 2019 2019 Guidance GAAP selling, general and administrative operating expenses$ 70,450 $ 285,417 $ 78,160 Non-GAAP adjustments: Acquisition & investment related costs (246) (984) (1,022) Non-GAAP selling, general and administrative operating expenses $ 70,203 $ 284,433 $ 77,138 GAAP research and development operating expenses$ 20,085 $ 81,006 $ 24,175 Non-GAAP adjustments: Acquisition & investment related costs - - - Non-GAAP research and development operating expenses$ 20,085 $ 81,006 $ 24,175 GAAP litigation settlement, award and/or defense costs$ - $ 425 $ - Non-GAAP adjustments: Litigation damages, awards and settlements - (425) - Non-GAAP litigation settlement, award and/or defense costs$ - $ - $ - GAAP operating expenses $ 90,535 $ 366,848 $ 102,335 $ 397,651 Non-GAAP adjustments: Acquisition & investment related costs (246) (984) (1,022) (1,751) Litigation damages, awards and settlements - (425) - - Total non-GAAP operating expense adjustments (246) (1,409) (1,022) (1,751) Non-GAAP operating expenses$ 90,288 $ 365,439 $ 101,312 $ 395,900 (4) Non-GAAP operating expenses % 44.7% 44.0% 44.1% 42.8% (1) Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information. (2) Reported amounts may vary from amounts previously reported due to rounding conventions; Note items may not foot due to rounding. (3) Updated for most recent guidance provided on July 31, 2019. (4) Calculated as a percentage of product revenue.
Non-GAAP Operating Margin % (1),(2) RECONCILIATION OF GAAP OPERATING INCOME/MARGIN TO NON-GAAP OPERATING INCOME/MARGIN: (3) (in thousands, except percentages) Q2 2018 FY 2018 Q2 2019 2019 Guidance GAAP operating income/margin$ 51,612 $ 208,044 $ 52,004 $ 220,950 Non-GAAP adjustments: Royalty and other revenue, net of related costs (9,415) (27,704) (111) (1,159) Acquisition & investment related costs 361 1,442 1,136 2,209 Litigation damages, awards and settlements - 425 - - Total non-GAAP operating income/margin adjustments (9,054) (25,837) 1,025 1,050 Non-GAAP operating income/margin$ 42,559 $ 182,206 $ 53,030 $ 222,000 Non-GAAP operating income % (4) 21.1% 22.0% 23.1% 24.0% (1) Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information. (2) Reported amounts may vary from amounts previously reported due to rounding conventions; Note items may not foot due to rounding. (3) Updated for most recent guidance provided on July 31, 2019. (4) Calculated as a percentage of product revenue.
Non-GAAP Net Income and Diluted EPS (1),(2) RECONCILIATION OF GAAP NET INCOME TO NON-GAAP NET INCOME: (3) (in thousands, except EPS) Q2 2018 FY 2018 Q2 2019 2019 Guidance GAAP net income $ 43,853 $ 193,543 $ 44,888 $ 188,804 Non-GAAP adjustments: Royalty and other revenue, net of related costs (9,415) (27,704) (111) (1,159) Acquisition & investment related costs: Cost of goods sold 114 458 114 458 Operating expenses 246 984 1,022 1,751 Subtotal - Acquisition & investment related costs 361 1,442 1,136 2,209 Litigation damages, awards and settlements Operating expenses - 425 - - Non-operating other (income) expense: Realized and unrealized foreign currency gains or losses 566 2,027 (7) (541) Tax impact of non-GAAP net income adjustments 2,344 5,532 (179) 63 Expiration of certain statues of limitation related to unique and non-recurring tax positions - (4,169) - - Excess tax benefits from stock-based compensation (3,947) (22,036) (2,608) (9,290) 2017 U.S. Tax Reform - (675) - - Total non-GAAP net income adjustments (10,091) (45,157) (1,768) (8,718) Non-GAAP net income $ 33,763 $ 148,385 $ 43,120 $ 180,087 Weighted average shares outstanding - diluted 55,742 56,039 57,066 57,219 Non-GAAP net income per diluted share$ 0.61 $ 2.65 $ 0.76 $ 3.15 (1) Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information. (2) Reported amounts may vary from amounts previously reported due to rounding conventions; Note items may not foot due to rounding. (3) Updated for most recent guidance provided on July 31, 2019.
Adjusted Free Cash Flow (1),(2) RECONCILIATION OF FREE CASH FLOW TO ADJUSTED FREE CASH FLOW (in thousands) Q2 2018 FY 2018 Q2 2019 Net cash provided by operating activities Net cash provided by operating activities$ 55,904 $ 239,527 $ 58,311 Purchases of property and equipment, net (5,642) (17,126) (40,360) Free cash flow 50,262 222,401 17,951 Litigation damages, awards and settlements - - - Tax payments related to litigation awards and damages - - - Adjusted free cash flow $ 50,262 $ 222,401 $ 17,951 (1) Please visit the Investor Relations section of the Company’s website at www.masimo.com to access additional information related to our Non-GAAP adjustments and Supplementary Financial Information. (2) Reported amounts may vary from amounts previously reported due to rounding conventions; Note items may not foot due to rounding.
MASIMO CORPORATION SUPPLEMENTAL NON-GAAP INFORMATION (unaudited in thousands, except per share amounts)(1) (2) All statements other than statements of historical facts included in this Supplemental Non-GAAP information that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our expectations for full fiscal year GAAP and non-GAAP 2019 total revenue, product revenue, royalty and other revenues, gross profit/margin, selling, general and administrative operating expenses, research and development operating expenses, litigation settlement, award and/or defense costs, operating expenses, operating income/margin, net income, diluted earnings per share, non-operating income, provision for income taxes, adjusted EBITDA, adjusted free cash flow; our long-term outlook; demand for our products; anticipated revenue and earnings growth; our financial condition, results of operations and business generally; expectations regarding our ability to design and deliver innovative new noninvasive technologies and reduce the cost of care; and demand for our technologies. These forward-looking statements are based on management’s current expectations and beliefs and are subject to uncertainties and factors, all of which are difficult to predict and many of which are beyond our control and could cause actual results to differ materially and adversely from those described in the forward-looking statements. These risks include, but are not limited to, those related to: our dependence on Masimo SET® and Masimo rainbow SET™ products and technologies for substantially all of our revenue; any failure in protecting our intellectual property exposure to competitors’ assertions of intellectual property claims; the highly competitive nature of the markets in which we sell our products and technologies; any failure to continue developing innovative products and technologies; the lack of acceptance of any of our current or future products and technologies; obtaining regulatory approval of our current and future products and technologies; the risk that the implementation of our international realignment will not continue to produce anticipated operational and financial benefits, including a continued lower effective tax rate; the loss of our customers; the failure to retain and recruit senior management; product liability claims exposure; a failure to obtain expected returns from the amount of intangible assets we have recorded; the maintenance of our brand; the amount and type of equity awards that we may grant to employees and service providers in the future; our ongoing litigation and related matters; and other factors discussed in the “Risk Factors” section of our most recent periodic reports filed with the Securities and Exchange Commission (“SEC”), including our most recent Form 10-K and Form 10-Q, all of which you may obtain for free on the SEC’s website at www.sec.gov. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, even if subsequently made available by us on our website or otherwise. We do not undertake any obligation to update, amend or clarify these forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. For additional information related to the definitions of our Non-GAAP measures, please visit the Investor Relations section of the Company's website at www.masimo.com. Page 1
MASIMO CORPORATION SUPPLEMENTAL NON-GAAP INFORMATION (unaudited in thousands, except per share amounts)(1) (2) GAAP TOTAL REVENUE 2019 Full Year FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Guidance (3) GAAP revenue Product revenue $ 738,242 $ 204,389 $ 202,004 $ 202,068 $ 221,413 $ 829,874 $ 230,548 $ 229,510 $ 460,058 $ 925,000 Royalty and other revenue 52,006 8,564 9,617 8,515 1,719 28,415 1,116 142 1,258 1,258 GAAP total revenue $ 790,248 $ 212,953 $ 211,621 $ 210,583 $ 223,132 $ 858,289 $ 231,664 $ 229,652 $ 461,316 $ 926,258 RECONCILIATION OF GAAP GROSS PROFIT/MARGIN TO NON-GAAP GROSS PROFIT/MARGIN: 2019 Full Year FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Guidance (3) GAAP gross profit/margin $ 522,032 $ 143,661 $ 142,147 $ 140,753 $ 148,331 $ 574,892 $ 151,642 $ 154,339 $ 305,981 $ 618,601 Non-GAAP adjustments: Royalty and other revenue, net of related costs (48,384) (8,390) (9,415) (8,364) (1,535) (27,704) (1,048) (111) (1,159) (1,159) Acquisition & investment related costs 500 114 114 114 114 458 114 114 229 #REF! 458 Total non-GAAP gross profit/margin adjustments (47,884) (8,275) (9,300) (8,250) (1,421) (27,246) (934) 3 (930) (701) Non-GAAP gross profit/margin $ 474,147 $ 135,386 $ 132,847 $ 132,503 $ 146,910 2 $ 547,645 $ 150,708 $ 154,343 $ 305,051 $ 617,900 (4) Non-GAAP gross margin % 64.2% 66.2% 65.8% 65.6% 66.4% 66.0% 65.4% 67.2% 66.3% 66.8% RECONCILIATION OF GAAP OPERATING EXPENSES TO NON-GAAP OPERATING EXPENSES: 2019 Full Year FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Guidance (3) GAAP selling, general and administrative operating expenses$ 273,011 $ 70,217 $ 70,450 $ 71,037 $ 73,713 $ 285,417 $ 74,204 $ 78,160 $ 152,364 Non-GAAP adjustments: Acquisition & investment related costs (1,097) (246) (246) (246) (246) (984) (246) (1,022) (1,268) Non-GAAP selling, general and administrative operating expenses$ 271,915 $ 69,971 $ 70,203 $ 70,791 $ 73,467 $ 284,433 $ 73,958 $ 77,138 $ 151,096 GAAP research and development operating expenses$ 65,234 $ 19,559 $ 20,085 $ 20,575 $ 20,788 $ 81,006 $ 21,415 $ 24,175 $ 45,590 Non-GAAP adjustments: Acquisition & investment related costs - - - - - - - - - Non-GAAP research and development operating expenses$ 65,233 $ 19,559 $ 20,085 $ 20,575 $ 20,788 $ 81,006 $ 21,415 $ 24,175 $ 45,590 GAAP litigation settlement, award and/or defense costs $ - $ - $ - $ 500 $ (75) $ 425 $ - $ - $ - Non-GAAP adjustments: Litigation damages, awards and settlements - - - (500) 75 (425) - - - Non-GAAP litigation settlement, award and/or defense costs$ - $ - $ - $ - $ - $ - 4 $ - $ - $ - 4 GAAP operating expenses $ 338,245 $ 89,776 $ 90,535 $ 92,112 $ 94,425 $ 366,848 $ 95,619 $ 102,335 $ 197,954 $ 397,651 Non-GAAP adjustments: Acquisition & investment related costs (1,097) (246) (246) (246) (246) (984) (246) (1,022) (1,268) (1,751) Litigation damages, awards and settlements - - - (500) 75 (425) - - - - Total non-GAAP operating expense adjustments (1,097) (246) (246) (746) (171) (1,409) (246) (1,022) (1,268) (1,751) Non-GAAP operating expenses$ 337,149 $ 89,530 $ 90,288 $ 91,366 $ 94,255 $ 365,439 $ 95,374 $ 101,312 $ 196,686 $ 395,900 (4) Non-GAAP operating expenses % 45.7% 43.8% 44.7% 45.2% 42.6% 44.0% 41.4% 44.1% 42.8% 42.8% Page 2
MASIMO CORPORATION SUPPLEMENTAL NON-GAAP INFORMATION (unaudited in thousands, except per share amounts)(1) (2) RECONCILIATION OF GAAP OPERATING INCOME/MARGIN TO NON-GAAP OPERATING INCOME/MARGIN: 2019 Full Year FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Guidance (3) GAAP operating income/margin $ 183,787 $ 53,885 $ 51,612 $ 48,641 $ 53,906 $ 208,044 $ 56,023 $ 52,004 $ 108,027 $ 220,950 Non-GAAP adjustments: Royalty and other revenue, net of related costs (48,384) (8,390) (9,415) (8,364) (1,535) (27,704) (1,048) (111) (1,159) (1,159) Acquisition & investment related costs 1,597 361 361 361 361 1,442 361 1,136 1,497 2,209 Litigation damages, awards and settlements - - - 500 (75) 425 - - - - Total non-GAAP operating income/margin adjustments (46,787) (8,029) (9,054) (7,504) (1,250) (25,837) (688) 1,025 337 1,050 Non-GAAP operating income/margin $ 136,999 $ 45,856 $ 42,559 $ 41,136 $ 52,655 $ 182,206 $ 55,334 $ 53,030 $ 108,365 $ 222,000 (4) Non-GAAP operating income % 18.6% 22.4% 21.1% 20.4% 23.8% 22.0% 24.0% 23.1% 23.6% 24.0% RECONCILIATION OF GAAP NET INCOME TO NON-GAAP NET INCOME: 2019 Full Year FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Guidance (3) GAAP net income$ 124,789 $ 45,630 $ 43,853 $ 57,126 $ 46,934 $ 193,543 $ 49,322 $ 44,888 $ 94,210 $ 188,804 Non-GAAP adjustments: Royalty and other revenue, net of related costs (48,384) (8,390) (9,415) (8,364) (1,535) (27,704) (1,048) (111) (1,159) (1,159) Acquisition & investment related costs: Cost of goods sold 500 114 114 114 114 458 114 114 229 458 Operating expenses 1,097 246 246 246 246 984 246 1,022 1,268 1,751 Subtotal - Acquisition & investment related costs 1,597 361 361 361 361 1,442 361 1,136 1,497 2,209 Litigation damages, awards and settlements Operating expenses - - - 500 (75) 425 - - - - Non-operating other (income) expense: Realized and unrealized foreign currency gains or losses 270 (1,113) 566 1,311 1,263 2,027 (534) (7) (541) (541) ## Tax impact of non-GAAP net income adjustments 16,100 2,101 2,344 1,599 (513) 5,532 359 (179) 181 63 Expiration of certain statues of limitation related to unique and non-recurring tax positions - - - (4,169) - (4,169) - - - - 9800Excess tax benefits from stock-based compensation (39,242) (3,148) (3,947) (14,647) (294) (22,036) (3,432) (2,608) (6,040) (9,290) 2017 U.S. Tax Reform 41,392 16 - (16) (675) (675) - - - Total non-GAAP net income adjustments (28,267) (10,173) (10,091) (23,425) (1,468) (45,157) (4,294) (1,768) (6,063) (8,718) Non-GAAP net income $ 96,520 $ 35,457 $ 33,763 $ 33,701 $ 45,465 $ 148,385 $ 45,027 $ 43,120 $ 88,147 $ 180,087 Page 3
MASIMO CORPORATION SUPPLEMENTAL NON-GAAP INFORMATION (unaudited in thousands, except per share amounts)(1) (2) RECONCILIATION OF GAAP NET INCOME PER DILUTED SHARE TO NON-GAAP NET INCOME PER DILUTED SHARE: 2019 Full Year FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Guidance (3) GAAP net income per diluted share $ 2.23 $ 0.82 $ 0.79 $ 1.02 $ 0.83 $ 3.45 $ 0.87 $ 0.79 $ 1.65 $ 3.30 Non-GAAP adjustments: Royalty and other revenue, net of related costs (0.87) (0.15) (0.17) (0.15) (0.03) (0.49) (0.02) (0.00) (0.02) (0.02) Acquisition & investment related costs 0.03 0.01 0.01 0.01 0.01 0.03 0.00 0.02 0.03 0.04 Litigation damages, awards and settlements - - - 0.01 (0.00) 0.01 - - - - Realized and unrealized foreign currency gains or losses 0.00 (0.02) 0.01 0.02 0.02 0.04 (0.01) (0.00) (0.01) (0.01) Tax impact of non-GAAP net income adjustments 0.29 0.04 0.04 0.03 (0.01) 0.10 0.01 (0.00) 0.00 0.00 Expiration of certain statues of limitation related to unique and non-recurring tax positions - - - (0.07) - (0.07) - - - - 9800Excess tax benefits from stock-based compensation (0.70) (0.06) (0.07) (0.26) (0.01) (0.39) (0.06) (0.05) (0.11) (0.16) 2017 U.S. Tax Reform 0.74 0.00 - (0.00) (0.01) (0.01) - - - - Total non-GAAP net income per diluted share adjustments (0.51) (0.18) (0.18) (0.42) (0.03) (0.81) (0.08) (0.03) (0.11) (0.15) Non-GAAP net income per diluted share$ 1.73 $ 0.64 $ 0.61 $ 0.60 $ 0.81 $ 2.65 $ 0.79 $ 0.76 $ 1.55 $ 3.15 Weighted average shares outstanding - diluted 55,874 55,495 55,742 56,237 56,449 56,039 56,799 57,066 56,941 57,219 RECONCILIATION OF GAAP NON-OPERATING INCOME (EXPENSE) TO NON-GAAP NON-OPERATING INCOME (EXPENSE): 2019 Full Year FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Guidance (3) GAAP Non-operating income (expense)$ 2,013 $ 1,647 $ 1,405 $ 1,028 $ 1,652 $ 5,732 $ 3,886 $ 3,529 $ 7,415 $ 13,641 Non-GAAP adjustments: Realized and unrealized foreign currency gains or lossesh 270 (1,113) 566 1,311 1,263 2,027 (534) (7) (541) (541) Non-GAAP non-operating income (expense) $ 2,283 $ 535 $ 1,970 $ 2,340 $ 2,915 $ 7,760 $ 3,351 $ 3,522 $ 6,874 $ 13,100 RECONCILIATION OF GAAP PROVISION FOR INCOME TAXES TO NON-GAAP PROVISION FOR INCOME TAXES: 2019 Full Year FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Guidance (3) GAAP provision for income taxes $ 61,011 $ 9,902 $ 9,164 $ (7,457) $ 8,624 $ 20,233 $ 10,587 $ 10,645 $ 21,232 $ 45,787 Non-GAAP adjustments: Excess tax benefits from stock-based compensation 39,242 3,148 3,947 14,647 294 22,036 3,432 2,608 6,040 9,290 Tax impact of pre-tax non-GAAP adjustments (16,100) (2,101) (2,344) (1,599) 513 (5,532) (359) 179 (181) (63) Expiration of certain statues of limitation related to unique and non-recurring tax positions - - - 4,169 - 4,169 - - - - 2017 U.S. Tax Reform (41,392) (16) - 16 675 675 - - - - Total non-GAAP provision for income tax adjustments (18,250) 1,031 1,602 17,233 1,482 21,348 3,072 2,787 5,859 9,227 Non-GAAP provision for income taxes $ 42,761 $ 10,934 $ 10,766 $ 9,775 $ 10,105 $ 41,580 $ 13,659 $ 13,433 $ 27,092 $ 55,013 Page 4
MASIMO CORPORATION SUPPLEMENTAL NON-GAAP INFORMATION (unaudited in thousands, except per share amounts)(1) (2) RECONCILIATION OF EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTIZATION TO ADJUSTED EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTIZATION: 2019 Full Year FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Guidance (3) GAAP net income$ 124,789 $ 45,630 $ 43,853 $ 57,126 $ 46,934 $ 193,543 $ 49,322 $ 44,888 $ 94,210 $ 188,804 Other (income) expense (2,013) (1,647) (1,405) (1,028) (1,652) (5,732) (3,886) (3,529) (7,415) (13,641) Provision for income taxes 61,011 9,902 9,164 (7,457) 8,624 20,233 10,587 10,645 21,232 45,787 Depreciation and amortization 20,061 5,241 5,553 5,166 5,167 21,127 5,418 6,223 11,641 23,363 Earnings before interest, tax, depreciation and amortization 203,848 59,126 57,165 53,807 59,073 229,171 61,441 58,227 119,669 244,313 Litigation damages, awards and settlements - - - 500 (75) 425 - - - - Non-cash stock based compensation 17,188 5,332 6,720 7,643 7,721 27,417 7,317 11,473 18,790 38,079 Adjusted earnings before interest, tax, depreciation and amortization $ 221,036 $ 64,458 $ 63,885 $ 61,950 $ 66,719 $ 257,013 $ 68,758 $ 69,700 $ 138,459 $ 282,392 Adjusted earnings before interest, tax, depreciation and amortization % 28.0% 30.3% 30.2% 29.4% 29.9% 29.9% 29.7% 30.4% 30.0% 30.5% RECONCILIATION OF EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTIZATION TO ADJUSTED EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTIZATION AS A PERCENTAGE: 2019 Full Year FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Guidance (3) GAAP net income as a percentage 15.8% 21.4% 20.7% 27.1% 21.0% 22.5% 21.3% 19.5% 20.4% 20.4% Other (income) expense (0.3%) (0.8%) (0.7%) (0.5%) (0.7%) (0.7%) (1.7%) (1.5%) (1.6%) (1.5%) Provision for income taxes 7.7% 4.7% 4.3% (3.5%) 3.9% 2.4% 4.6% 4.6% 4.6% 4.9% Depreciation and amortization 2.5% 2.5% 2.6% 2.5% 2.3% 2.5% 2.3% 2.7% 2.5% 2.5% Earnings before interest, tax, depreciation and amortization 25.8% 27.8% 27.0% 25.6% 26.5% 26.7% 26.5% 25.4% 25.9% 26.4% Litigation damages, awards and settlements 0.0% 0.0% 0.0% 0.2% (0.0%) 0.0% 0.0% 0.0% 0.0% 0.0% Non-cash stock based compensation 2.2% 2.5% 3.2% 3.6% 3.5% 3.2% 3.2% 5.0% 4.1% 4.1% Adjusted earnings before interest, tax, depreciation and amortization 28.0% 30.3% 30.2% 29.4% 29.9% 29.9% 29.7% 30.4% 30.0% 30.5% RECONCILIATION OF FREE CASH FLOW TO ADJUSTED FREE CASH FLOW FY 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 FY 2018 Q1 2019 Q2 2019 YTD 2019 Net cash provided by operating activities Net cash provided by operating activities $ 56,062 $ 71,995 $ 55,904 $ 48,406 $ 63,222 $ 239,527 $ 42,468 $ 58,311 $ 100,779 Purchases of property and equipment, net (43,684) (3,788) (5,642) (2,869) (4,827) (17,126) (6,963) (40,360) (47,323) Free cash flow 12,378 68,207 50,262 45,537 58,395 222,401 35,505 17,951 53,456 Litigation damages, awards and settlements - - - - - - - - - Tax payments related to litigation awards and damages 74,201 - - - - - - - - Adjusted free cash flow $ 86,579 $ 68,207 $ 50,262 $ 45,537 $ 58,395 $ 222,401 $ 35,505 $ 17,951 $ 53,456 (1) Totals may not foot due to rounding (2) Quarterly reported amounts may vary from amounts previously reported due to rounding conventions. (3) Updated for most recent guidance provided on July 31, 2019 (4) Calculated as a percentage of Product Revenue Page 5
Non-GAAP Measures, Adjustments and Definitions Revised 7/16/2019 © 2019 Masimo
Forward-Looking Statements Masimo Corporation (“Masimo,” “MASI,” or the “Company”) cautions you that statements included in this presentation that are not a description of historical facts are forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause the Company’s results to differ materially and adversely from historical results or those expressed or implied by such forward-looking statements. Further information on Masimo’s disclaimer and forward-looking statements and the potential risks and uncertainties that could cause actual results to differ materially are more fully described in the Company’s press releases and periodic filings with the Securities and Exchange Commission. © 2019 Masimo
Non-GAAP Measures & Adjustments Management uses certain non-GAAP financial measures such as constant currency product revenue, non- GAAP gross profit/margin %, non-GAAP operating expenses, non-GAAP operating expense %, non-GAAP operating income/margin %, non-GAAP net income and non-GAAP net income per diluted share. These non-GAAP financial measures may include certain adjustments related to the following items: > Constant currency > Royalty and other revenue, net of related costs > Acquisition-related costs such as amortization, depreciation, contingent consideration revaluation and asset/liability re-measurements > Litigation damages, awards and settlements > In process research and development (IPR&D) expenses or impairments > Acquisition, strategic investment and divestiture related gains, losses or expenses > Integration related charges > Acquired intangible assets impairment > Business consolidation costs > Realized and unrealized gains or losses from foreign currency transactions > Charges associated with the early repayment of debt and non-cash interest expense > Gains or losses related to certain significant non-recurring events > Tax charges and benefits associated with the above exclusions > Tax impacts that may not be representative of the ongoing results of our core operations > Excess tax benefits from stock-based compensation expense (ASU No. 2016-09) > Dilutive share impact related to certain financial instruments © 2019 Masimo
Non-GAAP Measures & Adjustments (continued) The Company also uses non-GAAP liquidity measures such as adjusted free cash flow, which excludes certain cash items related to the foregoing that may impact period over period comparability, and adjusted EBITDA, which excludes non-cash stock based compensation expense. Management calculates the non-GAAP financial measures excluding these items and uses these non-GAAP financial measures to enable it to further and more consistently analyze the period-to-period financial performance of its core business operations, which are generally designated as “non-GAAP …” measures herein. Management believes that providing investors with these non-GAAP financial measures gives investors additional information to enable them to assess, in the same way management assesses, the Company’s current and future core operating performance. These non-GAAP financial measures have certain limitations in that they do not reflect all of the costs associated with the operations of the Company’s business as determined in accordance with GAAP. Therefore, investors should consider these non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. The non-GAAP financial measures presented by the Company may be different from the non-GAAP financial measures used by other companies. Reconciliations of the non-GAAP financial measures to the comparable GAAP financial measures can be found on the Investor Relations section of the Company’s website. © 2019 Masimo
Non-GAAP Definitions > Constant currency revenue adjustments 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 significantly from period to period depending on the average and quarter-end exchange rates during a respective period. We believe that comparing these foreign currency denominated revenues by holding the exchange rates constant with the prior year period is useful to management and investors in evaluating our product revenue growth rates on a period-to-period basis. We anticipate that fluctuations in foreign exchange rates and the related constant currency adjustments for calculation of our product revenue growth rate will continue to occur in future periods. > Royalty and other revenue, net of related costs We derive royalty and other revenue, net of related costs, from certain non-recurring contractual arrangements that we do not expect to continue in the future. We believe the exclusion of royalty and other revenue, net of related costs, associated with these non-recurring revenue streams is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. > Acquisition-related costs such as amortization, depreciation, contingent consideration revaluation and asset/liability re-measurements Relates to establishing assets and liabilities (primarily intangible assets, property, plant and equipment adjustments, inventory revaluation, lease liabilities, etc.) through purchase accounting. These items, which do not represent normal ongoing business cash flows, are excluded from non-GAAP earnings. Depreciation and amortization related to the revaluation of acquisition related assets and liabilities will generally recur in future periods. © 2019 Masimo
Non-GAAP Definitions (continued) > Litigation damages, awards and settlements In connection with litigation proceedings arising in the course of our business, we have recorded expenses as a defendant in such proceedings in the form of damages, as well as gains as a plaintiff in such proceedings in the form of litigation awards and settlement proceeds. We believe that exclusion of these gains and losses is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. In this regard, we note that these expenses and gains are generally unrelated to our core business and/or infrequent in nature. > In process research and development (IPR&D) expenses or impairments Certain expenses are considered in process research and development. In acquiring these through an acquisition, they are reflected on the balance sheet as an intangible asset until the related project is completed or abandoned. In the event of completion, it is either amortized or written off as IPR&D expense. In addition, in asset purchases, the cost of acquiring IPR&D is expensed immediately unless a future alternative use can be identified. These costs are excluded from non-GAAP earnings. > Acquisition, strategic investment and divestiture related gains, losses or expenses In the event the Company acquires, invests in or divests certain business operations, there may be non-recurring gains, losses or expenses that will be recognized related to the assets and/or liabilities sold or acquired that are not representative of normal on-going cash flows. These gains, losses or expenses are excluded from non-GAAP earnings. © 2019 Masimo
Non-GAAP Definitions (continued) > Integration related charges As part of acquiring and divesting businesses, the Company may take actions that are considered non-recurring in nature to integrate the acquired business into the current Company structure as well as modify the current Company structure to account for the divested business. The costs that will be considered integration-related will be those costs not related to the on-going business, but rather, will be those costs that are considered non-recurring in the normal operations of the business and are excluded from non-GAAP earnings. > Acquired intangible assets impairment As needed, the Company will perform impairment tests related to intangible assets and assess whether the recoverability is less than the carrying value. In the event there is an intangible asset impairment, the Company may exclude these charges from non-GAAP earnings. > Business consolidation costs The Company, from time to time may enter into restructuring plans and incur costs along these lines, in order to rationalize footprint, product lines and re-adjust employee levels to optimize business results, and may accordingly exclude these costs from non-GAAP earnings. > Charges associated with the early repayment of debt and non-cash interest expense The Company may enter into convertible debt arrangements whereby certain instrument features are valued and expensed accordingly but are not necessarily indicative of the on-going cash flow generation of the Company and therefore excludes these costs from non-GAAP earnings. © 2019 Masimo
Non-GAAP Definitions (continued) > Realized and unrealized gains or losses from foreign currency transactions We are exposed to foreign currency gains or losses on outstanding foreign currency denominated receivables and payables related to certain customer sales agreements, product costs and other operating expenses. As the Company does not actively hedge these currency exposures, changes in the underlying currency rates relative to the U.S. Dollar may result in realized and unrealized foreign currency gains and losses between the time these receivables and payables arise and the time that they are settled in cash. Since such realized and unrealized foreign currency gains and losses are the result of macro-economic factors and can vary significantly from one period to the next, we believe that exclusion of such realized and unrealized gains and losses are useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis. Realized and unrealized foreign currency gains and losses are likely to recur in future periods. > Gains or losses related to certain significant non-recurring events In the event there are non-recurring items which impact period over period comparability and do not represent the underlying ongoing results of the business, the Company may choose to exclude these from non-GAAP earnings. > Tax charges and benefits associated with the above exclusions In order to reflect the tax effected impact of the non-GAAP adjustments, the Company will adjust the non-GAAP earnings by the approximate tax impact of these adjustments. > Tax impacts that may not be representative of the ongoing results of the core operations In the event there are non-recurring tax events that impact period over period comparability and do not represent the underlying ongoing results of the core operations, the Company may choose to exclude these from non-GAAP earnings. © 2019 Masimo
Non-GAAP Definitions (continued) > Excess tax benefits from stock-based compensation expense GAAP requires that excess tax benefits recognized on stock-based compensation expense be reflected in our provision for income taxes rather than paid-in capital. As these excess tax benefits may be highly variable from period to period, the Company may choose to exclude these tax benefits from non-GAAP earnings to facilitate comparability between periods and with peers. > Dilutive share impact related to certain financial instruments The Company may enter into certain financial instruments with potential dilutive effects for earnings per share purposes. For GAAP diluted earnings per share purposes, the Company cannot reflect the anti-dilutive impact, if applicable, in its diluted shares calculations. However, the Company believes that reflecting the anti-dilutive impact of these instruments in non-GAAP diluted earnings per share provides management and investors with useful information in evaluating the financial performance of the Company on a per share basis. > Adjusted Free Cash Flow Represents free cash flow (cash flow from operations less cash used for the purchase of property, plant and equipment) adjusted for the impact of cash receipts or payments relating to certain previously described non-GAAP adjustments, which may impact period over period comparability. > Adjusted EBITDA Represents earnings before non-operating income/expense, taxes, depreciation and amortization, as adjusted for the applicable non-GAAP adjustments previously described, and further excluding non-cash stock based compensation expense. © 2019 Masimo