Variable Interest Entity (VIE)

The Company follows authoritative guidance for the consolidation of its 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. Changes in the noncontrolling interest for the consolidated VIE for each period are presented in the accompanying consolidated statements of equity.

Cercacor Laboratories, Inc. (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 has also entered into an administrative services agreement with Cercacor that governs certain general and administrative services the Company provides to Cercacor; a consulting services agreement with Cercacor that governs certain engineering consulting and clinical studies support services that Cercacor may provide to the Company from time-to-time and a sublease agreement with Cercacor for approximately 16,830 square feet of excess office and laboratory space located at 40 Parker, Irvine, California. See Note 4 to these consolidated financial statements for additional information on these agreements and other transactions with 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 consolidated statement of operations.

Cercacor continues to be included within these 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 consolidated statements of operations. The consolidating balance sheet as of January 2, 2016, and statements of operations for the years ended January 2, 2016 and January 3, 2015 reflecting the Company, Cercacor and related eliminations (in thousands) are as follows.



	January 2, 2016
Consolidating Balance Sheet:	Masimo Corp			Cercacor			Cercacor Elim			Total
ASSETS
Cash and cash equivalents	$	131,554		$	763		$	—		$	132,317
Accounts receivable, net	80,937			23			—			80,960
Inventories	62,038			—			—			62,038
Prepaid income taxes	2,342			62			—			2,404
Other current assets	21,230			1,277			(1,084		)	21,423
Deferred cost of goods sold	66,844			—			—			66,844
Property and equipment, net	131,877			589			—			132,466
Intangible assets, net	29,045			2,858			(4,347		)	27,556
Goodwill	20,394			—			—			20,394
Deferred income taxes	44,320			—			—			44,320
Other assets	11,013			—			—			11,013
Total assets	$	601,594		$	5,572		$	(5,431	)	$	601,735
LIABILITIES
Accounts payable	$	25,798		$	67		$	—		$	25,865
Accrued compensation	37,715			700			—			38,415
Accrued liabilities	45,142			164			(1,084		)	44,222
Income taxes payable	2,565			212			—			2,777
Deferred revenue	21,280			376			(376		)	21,280
Current portion of capital lease obligations	74			—			—			74
Deferred revenue	298			3,406			(3,406		)	298
Long-term debt	185,071			—			—			185,071
Other liabilities	7,964			57			—			8,021
EQUITY
Common stock	50			14			(14		)	50
Treasury stock	(340,873		)	(100		)	100			(340,873		)
Additional paid-in capital	332,417			842			(842		)	332,417
Accumulated other comprehensive loss	(4,739		)	—			—			(4,739		)
Retained earnings (deficit)	288,832			(166		)	(106		)	288,560
Total Masimo Corporation stockholders’ equity	275,687			590			(862		)	275,415
Noncontrolling interest	—			—			297			297
Total equity	275,687			590			(565		)	275,712
Total liabilities and equity	$	601,594		$	5,572		$	(5,431	)	$	601,735



	Year ended January 2, 2016												Year ended January 3, 2015
Consolidating Statements of Operations:	Masimo Corp			Cercacor			Cercacor Elim			Total			Masimo Corp			Cercacor			Cercacor Elim			Total
Total revenue	$	630,111		$	6,910		$	(6,910	)	$	630,111		$	586,643		$	5,970		$	(5,970	)	$	586,643
Cost of goods sold	226,788			—			(6,660		)	220,128			201,334			—			(5,470		)	195,864
Gross profit	403,323			6,910			(250		)	409,983			385,309			5,970			(500		)	390,779
Operating expenses:
Selling, general and administrative	250,627			2,348			(250		)	252,725			238,674			2,842			(500		)	241,016
Research and development	50,292			6,325			—			56,617			53,449			3,132			—			56,581
Litigation settlement, award and/or defense costs	(19,609		)	—			—			(19,609		)	(8,010		)	(2,321		)	—			(10,331		)
Total operating expenses	281,310			8,673			(250		)	289,733			284,113			3,653			(500		)	287,266
Operating income (loss)	122,013			(1,763		)	—			120,250			101,196			2,317			—			103,513
Non-operating expense (income)	3,910			(571		)	566			3,905			1,505			(33		)	—			1,472
Income (loss) before provision for income taxes	118,103			(1,192		)	(566		)	116,345			99,691			2,350			—			102,041
Provision for income taxes	34,803			42			—			34,845			27,173			505			—			27,678
Net income (loss) including noncontrolling interests	83,300			(1,234		)	(566		)	81,500			72,518			1,845			—			74,363
Net (loss) income attributable to noncontrolling interests	—			—			(1,800		)	(1,800		)	—			—			1,845			1,845
Net income (loss) attributable to Masimo Corporation stockholders	$	83,300		$	(1,234	)	$	1,234		$	83,300		$	72,518		$	1,845		$	(1,845	)	$	72,518