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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2024
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 001-33642
masimologoq32019.jpg
________________________________________________
MASIMO CORPORATION
(Exact Name of Registrant as Specified in its Charter)
________________________________________________
Delaware33-0368882
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
52 DiscoveryIrvine,California92618
(Address of Principal Executive Offices)(Zip Code)
(949)297-7000
(Registrant’s Telephone Number, Including Area Code)
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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)     
Yes
No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
Number of Shares Outstanding as of
March 30, 2024
Common stock, $0.001 par value
53,085,556


MASIMO CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 30, 2024
TABLE OF CONTENTS
 
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 5.
Item 6.

2

PART I. FINANCIAL INFORMATION
Item 1.     Financial Statements
MASIMO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in millions, except par values)
March 30,
2024
December 30,
2023
ASSETS
Current assets
Cash and cash equivalents$157.6 $163.0 
Trade accounts receivable, net of allowance for credit losses of $4.7 million and $4.8 million at March 30, 2024 and December 30, 2023, respectively
330.7 355.5 
Inventories506.1 545.0 
Assets held for sale11.4  
Other current assets159.8 168.4 
Total current assets1,165.6 1,231.9 
Lease receivable, non-current70.3 71.4 
Deferred costs and other contract assets57.9 57.3 
Property and equipment, net415.0 424.4 
Customer relationships, net - (Note 9)169.3 177.7 
Acquired technologies, net - (Note 9)119.9 129.4 
Other intangible assets, net - (Note 9)124.0 112.8 
Trademarks - (Note 9)222.7 232.4 
Goodwill396.0 407.7 
Deferred tax assets107.1 107.2 
Other non-current assets109.9 89.3 
Total assets$2,957.7 $3,041.5 
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Accounts payable$203.1 $251.5 
Accrued compensation65.2 62.6 
Deferred revenue and other contract liabilities, current70.0 87.3 
Other current liabilities165.9 162.4 
Total current liabilities504.2 563.8 
Long-term debt841.4 871.7 
Deferred tax liabilities106.9 111.7 
Other non-current liabilities140.0 129.5 
Total liabilities1,592.5 1,676.7 
Commitments and contingencies - (Note 24)
Stockholders’ equity
Preferred stock, $0.001 par value; 5.0 million shares authorized; 0 shares issued and outstanding
  
Common stock, $0.001 par value; 100.0 million shares authorized; 53.1 million and 52.8 million shares issued and outstanding at March 30, 2024 and December 30, 2023, respectively
0.1 0.1 
Treasury stock, 19.5 million and 19.5 million shares at March 30, 2024 and December 30, 2023, respectively
(1,169.2)(1,169.2)
Additional paid-in capital794.9 783.4 
Accumulated other comprehensive loss(75.3)(45.3)
Retained earnings1,814.7 1,795.8 
Total stockholders’ equity1,365.2 1,364.8 
Total liabilities and stockholders’ equity$2,957.7 $3,041.5 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in millions, except per share amounts)
 
Three Months Ended
March 30,
2024
April 1,
2023
Revenue$492.8 $565.0 
Cost of goods sold251.1 280.2 
Gross profit241.7 284.8 
Operating expenses:
Selling, general and administrative159.9 196.3 
Research and development47.8 50.5 
Total operating expenses207.7 246.8 
Operating income34.0 38.0 
Non-operating loss(9.1)(11.8)
Income before provision for income taxes24.9 26.2 
Provision for income taxes6.0 4.9 
Net income$18.9 $21.3 
Net income per share:
Basic$0.36 $0.40 
Diluted$0.35 $0.39 
Weighted-average shares used in per share calculations:
Basic53.0 52.6 
Diluted54.2 54.4 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited, in millions)
 
Three Months Ended
March 30,
2024
April 1,
2023
Net income$18.9 $21.3 
Other comprehensive loss, net of tax:
Unrealized losses from foreign currency translation adjustments(35.6)(22.8)
       Change in pension benefits0.7 (2.2)
       Unrealized gain (loss) on cash flow hedges4.9 (4.3)
Total comprehensive loss$(11.1)$(8.0)


The accompanying notes are an integral part of these condensed consolidated financial statements.
5


MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
Three Months Ended March 30, 2024
Common StockTreasury StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive (Loss)
Retained
Earnings
Total
Stockholders’
Equity
SharesAmountSharesAmount
Balance at December 30, 202352.8 $0.1 19.5 $(1,169.2)$783.4 $(45.3)$1,795.8 $1,364.8 
Stock options exercised0.2 — — — 7.2 — — 7.2 
Restricted/Performance stock units vested0.1 — — — — — — — 
Shares paid for tax withholding— — — — (5.3)— — (5.3)
Stock-based compensation— — — — 9.6 — — 9.6 
Net income— — — — — — 18.9 18.9 
Foreign currency translation adjustment— — — — — (35.6)— (35.6)
Change in pension benefits— — — — — 0.7 — 0.7 
Unrealized gain on cash flow hedge— — — — — 4.9 — 4.9 
Balance at March 30, 202453.1 $0.1 19.5 $(1,169.2)$794.9 $(75.3)$1,814.7 $1,365.2 

Three Months Ended April 1, 2023
Common StockTreasury StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Stockholders’
Equity
SharesAmountSharesAmount
Balance at December 31, 202252.5 $0.1 19.5 $(1,169.2)$782.2 $11.5 $1,714.3 $1,338.9 
Stock options exercised0.1 — — — 4.3 — — 4.3 
Restricted/Performance stock units vested0.2 — — — — — — — 
Shares paid for tax withholding— — — — (12.2)— — (12.2)
Stock-based compensation— — — — 7.3 — — 7.3 
Net income— — — — — — 21.3 21.3 
Foreign currency translation adjustment— — — — — (22.8)— (22.8)
Change in pension benefits— — — — — (2.2)— (2.2)
Unrealized loss on cash flow hedge— — — — — (4.3)— (4.3)
Balance at April 1, 202352.8 $0.1 19.5 $(1,169.2)$781.6 $(17.8)$1,735.6 $1,330.3 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

MASIMO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
Three Months Ended
March 30,
2024
April 1,
2023
Cash flows from operating activities:
Net income$18.9 $21.3 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization24.3 26.1 
Stock-based compensation expense9.6 7.3 
Provision for credit losses0.1 0.4 
Amortization of debt issuance cost0.5 0.5 
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable22.4 34.8 
Decrease (increase) in inventories23.9 (7.1)
Decrease (increase) in other current assets7.0 (5.9)
Decrease (increase) in lease receivable, net0.7 (8.8)
Decrease (increase) in deferred costs and other contract assets(0.6)(1.0)
Decrease (increase) in other non-current assets(0.8)(2.7)
Increase (decrease) in accounts payable(40.6)(27.1)
Increase (decrease) in accrued compensation3.2 (16.5)
Increase (decrease) in accrued liabilities2.3 (21.8)
Increase (decrease) in income tax payable(5.8)(8.3)
Increase (decrease) in deferred revenue and other contract-related liabilities(13.9)0.9 
Increase (decrease) in other non-current liabilities(5.4)8.3 
Net cash provided by (used in) operating activities45.8 0.4 
Cash flows from investing activities:
Purchases of property and equipment, net(8.2)(8.5)
Increase in intangible assets(10.6)(9.7)
Business combinations, net of cash acquired 7.5 
Other strategic investing activities(0.1)(0.4)
Net cash (used in) provided by investing activities(18.9)(11.1)
Cash flows from financing activities:
Borrowings under line of credit64.0 44.4 
Repayments on line of credit(92.3)(72.4)
Proceeds from issuance of common stock7.1 4.9 
Payroll tax withholdings on behalf of employees for vested equity awards(5.3)(12.1)
Net cash (used in) provided by financing activities(26.5)(35.2)
Effect of foreign currency exchange rates on cash(4.6)17.4 
Net decrease in cash, cash equivalents and restricted cash(4.2)(28.5)
Cash, cash equivalents and restricted cash at beginning of period168.2 209.6 
Cash, cash equivalents and restricted cash at end of period$164.0 $181.1 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7

MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Description of the Company
Masimo Corporation is a global technology company that develops, manufactures and markets a wide array of patient monitoring technologies, as well as automation and connectivity solutions. The Company’s mission is to improve patient outcomes, reduce the cost of care and take noninvasive monitoring to new sites and applications. The Company operates two business segments: healthcare and non-healthcare.
The Company’s healthcare products and patient monitoring solutions generally incorporate a monitor or circuit board, proprietary single-patient use or reusable sensors, software and/or cables. The Company primarily sells its healthcare products to hospitals, emergency medical service providers, home care providers, physician offices, veterinarians, long-term care facilities and consumers through its direct sales force, distributors and original equipment manufacturer (OEM) partners.
On April 11, 2022, the Company acquired Viper Holdings Corporation, the parent company of DEI Sales, Inc., d/b/a Sound United (Sound United), via the Company’s wholly-owned subsidiary, Sonic Boom Acquisition Corp (Sonic) (Sound United Acquisition). For additional information on the Company’s acquisition of Sound United, see Note 18, “Business Combinations”.
The Company’s non-healthcare consumer products and home integration technologies are primarily sold or licensed direct-to-consumers, or through authorized retailers and wholesalers.
The terms “the Company” and “Masimo” refer to Masimo Corporation and, where applicable, its consolidated subsidiaries.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. The accompanying condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, including normal recurring accruals, necessary to present fairly the Company’s condensed consolidated financial statements. The accompanying condensed consolidated balance sheet as of December 30, 2023 was derived from the Company’s audited consolidated financial statements at that date. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2023 (fiscal year 2023), filed with the SEC on February 28, 2024. The results for the three months ended March 30, 2024 are not necessarily indicative of the results to be expected for the fiscal year ending December 28, 2024 (fiscal year 2024) or for any other interim period or for any future year.
Fiscal Periods
The Company follows a conventional 52/53 week fiscal year. Under a conventional 52/53 week fiscal year, a 52 week fiscal year includes four quarters of 13 weeks while a 53 week fiscal year includes three 13 week fiscal quarters and one 14 week fiscal quarter. The Company’s last 53 week fiscal year was fiscal year 2020. Fiscal year 2024 is a 52 week fiscal year ending December 28, 2024. All references to years in these notes to condensed consolidated financial statements are fiscal years unless otherwise noted.
Reclassifications
Certain amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the current period presentation, including certain balance sheet asset accounts in the consolidated financial statements for the year ended December 30, 2023. There was no impact on previously reported total assets, liabilities, stockholders’ equity or net income.
8

MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Use of Estimates
The Company prepares its financial statements in conformity with GAAP, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the determination of standalone selling prices, variable consideration, total consideration allocated to each performance obligation within a contract, inventory valuation, valuation of the Company’s equity awards, valuation of identifiable assets and liabilities connected with business combinations, impairment of long-lived assets, intangible assets and goodwill; derivative and equity instruments, deferred taxes and any associated valuation allowances, deferred revenue, accounting for pensions, uncertain income tax positions, litigation costs, and related accruals. See Note 24, “Commitments and Contingencies”. Actual results could differ from such estimates.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) Topic 805, Business Combinations, which requires that once control is obtained, assets acquired, liabilities assumed and noncontrolling interests in the acquired entity, if applicable, are recorded at their respective fair values at the date of acquisition, with the exception of acquired contract assets and contract liabilities (i.e., deferred revenue) from contracts with customers. These are recognized and measured in accordance with ASC Topic 606, Revenue from Contracts with Customers. The excess of the purchase price over fair values of identifiable assets, liabilities and noncontrolling interests in the acquired entity, if applicable, is recorded as goodwill.
Fair Value Measurements
The Company accounts for certain financial instruments at their fair values as either assets or liabilities on the balance sheet. The Company determines the fair value of its financial instruments using the framework prescribed by ASC Topic 820, Fair Value Measurements and Disclosures, and considers the estimated amount the Company would receive or pay to transfer these instruments at the reporting date with respect to current currency exchange rates, interest rates, the creditworthiness of the counterparty for unrealized gain positions and the Company’s creditworthiness for unrealized loss positions. In certain instances, the Company may utilize financial models to measure the fair value of its financial instruments. In doing so, the Company uses inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability and inputs derived principally from, or corroborated by, observable market data by correlation or other means.
Recurring Fair Value Measurement
On a recurring basis, the Company measures certain financial assets and financial liabilities at fair value based upon quoted market prices. Where quoted market prices or other observable inputs are not available, the Company applies valuation techniques to estimate fair value. Authoritative guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
●    Level 1—Quoted prices in active markets for identical assets or liabilities.
●    Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active; or other inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities.
●    Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
9

MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
The following tables represent the Company’s financial assets, measured at fair value on a recurring basis at March 30, 2024:
Total Carrying
Value
Fair Value Measurement Hierarchy
(in millions)Level 1Level 2Level 3
Assets
Cash and cash equivalents$81.9 $81.9 $ $ 
Money market funds75.7 75.7   
Equity securities1.7 1.7   
Pension assets22.9 16.6 6.3  
Derivative instruments - cash flow hedges(1)
14.4  14.4  
Derivative instruments - warrants0.9 0.9   
Total assets$197.5 $176.8 $20.7 $ 
Liabilities
Derivative instruments - cash flow hedges
$ $ $ $ 
Pension benefit obligation32.1 32.1   
Total liabilities$32.1 $32.1 $ $ 
______________
(1)     Includes accrued interest.
The following tables represent the Company’s financial assets, measured at fair value on a recurring basis at December 30, 2023:
Total Carrying
Value
Fair Value Measurement Hierarchy
(in millions)Level 1Level 2Level 3
Assets
Cash and cash equivalents$87.0 $87.0 $ $ 
Money market funds76.0 76.0   
Pension assets
23.1 16.8 6.3  
Equity securities1.7 1.7   
Derivative instruments - cash flow hedges(1)
11.6  11.6  
Derivative instruments - warrants1.0 1.0   
Total assets$200.4 $182.5 $17.9 $ 
Liabilities
Derivative instruments - cash flow hedges$3.6 $3.6 $ $ 
Pension benefit obligation32.6 32.6   
Total liabilities$36.2 $36.2 $ $ 
______________
(1)     Includes accrued interest.
The Company invests in checking, savings and money market fund accounts, which are classified within Level 1 of the fair value hierarchy as they are valued using quoted market prices. These investments are classified as cash and cash equivalents within the Company’s accompanying condensed consolidated balance sheets, in accordance with GAAP and its accounting policies.
10

MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
The Company has certain strategic investments in privately-held companies (non-marketable equity securities) and companies that have completed initial public offerings (marketable equity securities). The Company’s marketable equity securities, whose price is based on quoted market price in an active market, are classified within Level 1 of the fair value hierarchy. Equity securities are classified as current, short-term investments, or non-current, recorded in other non-current assets, based on the nature of the securities and their availability for use in current operations. The changes in the fair value of those equity securities are measured at each reporting date and changes in the value of these investments between reporting dates are recorded within non-operating loss.
The Company’s pension assets consist of Level 1 and Level 2 investments. The fair value of Level 2 assets is based on observable inputs such as prices or quotes for similar assets, adjusted for any differences in terms or conditions that may affect the value of the instrument being valued. The valuation techniques used for Level 2 assets may include the use of models or other valuation techniques, but these methods are all based on observable market inputs.
The Company also has investments in certain derivative instruments, which are measured at fair value and classified within Level 1 of the fair value hierarchy.
Non-Recurring Fair Value Measurements
For certain other financial assets and liabilities, including restricted cash, accounts receivable, accounts payable and other current assets and liabilities, the carrying amounts approximate their fair value primarily due to the relatively short maturity of these balances. The Company also measures certain non-financial assets at fair value on a non-recurring basis, primarily goodwill, intangible assets and operating lease right-of-use assets, in connection with periodic evaluations for potential impairment.
Furthermore, the Company did not elect to apply the fair value option to specific assets or liabilities on a contract-by-contract basis. The Company did not have any transfers between Level 2 and Level 3 during the three months ended March 30, 2024.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less, or highly liquid investments that are readily convertible into known amounts of cash, to be cash equivalents. The Company carries cash and cash equivalents at cost, which approximates fair value, and they are Level 1 under the fair value hierarchy.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable consist of trade receivables recorded at the time of invoicing of product sales, reduced by reserves for estimated bad debts and returns. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Credit is extended based on an evaluation of the customer’s financial condition. Collateral is generally not required. The Company records an allowance for credit losses that it does not expect to collect based on relevant information, including historical experience, current conditions, and reasonable and supportable forecasts. Accounts are charged off against the allowance when the Company believes they are uncollectible. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Based on the risk characteristics, the Company has identified U.S. and international customers as separate portfolios for both segments, and measures expected credit losses on such receivables using an aging methodology.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using a standard cost method, which approximates the first in, first out method, and includes material, labor and overhead costs. Inventory valuation adjustments are recorded for inventory items that have become excess or obsolete or are no longer used in current production and for inventory items that have a market price less than the carrying value in inventory. The Company generally determines inventory valuation adjustments based on an evaluation of the expected future use of its inventory on an item by item basis and applies historical obsolescence rates to estimate the loss on inventory expected to have a recovery value below cost. The Company also records other specific inventory valuation adjustments when it becomes aware of unique events or circumstances that result in an expected recovery value below cost. For inventory items that have been written down, the reduced value becomes the new cost basis.
11

MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over estimated useful lives as follows:
Useful Lives
Buildings and building improvements
7 to 39 years
Computer equipment and software
2 to 12 years
Demonstration units
2 to 3 years
Furniture and office equipment
2 to 15 years
Leasehold improvementsLesser of useful life or term of lease
Machinery, equipment and tooling
3 to 20 years
Operating lease assetsLesser of useful life or term of lease
Transportation, vehicles and other
1 to 20 years
Land is not depreciated and construction-in-progress is not depreciated until placed in service. Normal repair and maintenance costs are expensed as incurred, whereas significant improvements that materially increase values or extend useful lives are capitalized and depreciated over the remaining estimated useful lives of the related assets. Upon sale or retirement of depreciable assets, the related cost and accumulated depreciation or amortization are removed from the accounts and any gain or loss on the sale or retirement is recognized in income.
Lessee Right-of-Use (ROU) Assets and Lease Liabilities
The Company determines if an arrangement contains a lease at inception. ROU assets represent the Company’s right to use an asset underlying an operating lease for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from an operating lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company generally estimates the applicable discount rate used to determine the net present value of lease payments based on available information at the lease commencement date. Many of the Company’s lessee agreements include options to extend the lease, which the Company does not include in its lease terms unless they are reasonably certain to be exercised. The Company utilizes a portfolio approach to account for the ROU assets and liabilities associated with certain equipment leases.
The Company has also made an accounting policy election not to separate lease and non-lease components for its real estate leases and to exclude short-term leases with a term of twelve months or less from its ROU assets and lease liabilities. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Intangible Assets
Intangible assets consist primarily of patents, trademarks, software development costs, customer relationships and acquired technology. Costs related to patents and trademarks, which include legal and application fees, are capitalized and amortized over the estimated useful lives using the straight-line method. Patent and trademark amortization commences once final approval of the patent or trademark has been obtained. Patent costs are amortized over the lesser of 10 years or the patent’s remaining legal life, which assumes renewals, and trademark costs are amortized over 17 years, and their associated amortization cost is included in selling, general and administrative expense in the accompanying condensed consolidated statements of operations. For intangibles purchased in an asset acquisition or business combination, which mainly include patents, trademarks, customer relationships and acquired technologies, the useful life is determined largely by valuation estimates of remaining economic life.
The Company’s policy is to renew its patents and trademarks. Costs to renew patents and trademarks are capitalized and amortized over the remaining useful life of the intangible asset. The Company periodically evaluates the amortization period and carrying basis of patents and trademarks to determine whether any events or circumstances warrant a revised estimated useful life or reduction in value. Capitalized application costs are charged to operations when it is determined that the patent or trademark will not be obtained or is abandoned.
12

MASIMO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Software development costs are accounted for in accordance with ASC Topic 985-20, Software - Costs of Software to be Sold, Leased, or Marketed. Once technological feasibility has been established, qualifying costs incurred in development are capitalized until available for general release to customers, and subsequently reported at the lower of unamortized cost or net realizable value.