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 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 was reported within non-operating income in the consolidated statement of operations.

Cercacor continues to be included within these consolidated financial statements for the period ended January 2, 2016. Accordingly, for such period, 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, 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 for such period. The consolidating statement of operations for the year ended January 2, 2016 reflecting the Company, Cercacor and related eliminations (in thousands) are as follows:



	Year ended January 2, 2016
Consolidating Statements of Operations:	Masimo Corp			Cercacor			Cercacor Elim			Total
Total revenue	$	630,111		$	6,910		$	(6,910	)	$	630,111
Cost of goods sold	226,788			—			(6,660		)	220,128
Gross profit	403,323			6,910			(250		)	409,983
Operating expenses:
Selling, general and administrative	250,627			2,348			(250		)	252,725
Research and development	50,292			6,325			—			56,617
Litigation settlement, award and/or defense costs	(19,609		)	—			—			(19,609		)
Total operating expenses	281,310			8,673			(250		)	289,733
Operating income (loss)	122,013			(1,763		)	—			120,250
Non-operating expense (income)	3,910			(571		)	566			3,905
Income (loss) before provision for income taxes	118,103			(1,192		)	(566		)	116,345
Provision for income taxes	34,803			42			—			34,845
Net income (loss) including noncontrolling interests	83,300			(1,234		)	(566		)	81,500
Net income (loss) attributable to noncontrolling interests	—			—			(1,800		)	(1,800		)
Net income (loss) attributable to Masimo Corporation stockholders	$	83,300		$	(1,234	)	$	1,234		$	83,300