Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. MASIMO CORP (937556) 10-Q published on May 06, 2019 at 5:18 pm
Reporting Period: Mar 29, 2019
As further discussed below in this Note 2 to these condensed consolidated financial statements, the Company adopted ASC 842 effective December 30, 2018. 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 application of ASC 842. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). Subsequent to the issuance of ASU 2016-02, the FASB clarified the guidance through several ASUs. The collective guidance was codified by the FASB in ASC 842, which, among other things (i) requires the Company to recognize an ROU asset and a lease liability for all operating leases for which the Company is the lessee; (ii) changes the classification of certain embedded leases within the Company’s deferred equipment agreements with its customers from operating to sales-type leases, resulting in the acceleration of revenue under certain contracts, as well as the immediate expensing of certain costs that were previously deferred and expensed over the term of the lease; and (iii) requires disclosures by the Company as a lessor and lessee about the amount, timing and uncertainty of cash flows arising from its leases.
On December 30, 2018, the Company adopted ASC 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning December 30, 2018 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840, Leases. Adoption of this new accounting standard had a material impact on the Company’s condensed consolidated balance sheet as of March 30, 2019, but did not have a significant impact on the Company’s consolidated net earnings and cash flows for the three months ended March 30, 2019. For leases that commenced before the effective date of ASC 842, the Company did not elect any of the permitted practical expedients. However, the Company utilized a portfolio approach for purposes of determining the discount rate associated with certain equipment leases and made certain accounting policy elections 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 application of ASC 842.
We determine if an arrangement contains a lease at inception. ROU assets represent our right to use an asset underlying an operating lease for the lease term and lease liabilities represent our 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. We generally estimate 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 our lessee agreements include options to extend the lease, which we do not include in our lease terms unless they are reasonably certain to be exercised. We utilize a portfolio approach to account for the ROU assets and liabilities associated with certain equipment leases. We have also made a policy election not to separate lease and non-lease components for our real estate leases and to exclude short-term leases with a
Our global manufacturing and distribution are dependent upon our manufacturing facilities in Mexico, and the expedient importation of raw materials and exportation of finished goods between the U.S. and Mexico. Undue delays and/or closures of the proximal cross-border transit facilities may adversely affect our ability to fulfill orders to customers and to source raw materials in a timely manner. In April 2019, U.S. Customs and Border Patrol discussed the re-assignment of resources, which could impact timely processing of cross-border traffic. In addition, announcements have also been made by the U.S. federal administration about completely closing the U.S.-Mexico border, which could significantly restrict the movement of any goods across the border. Accordingly, delays in U.S.-Mexico cross-border traffic or an abrupt closure of U.S.-Mexico border may significantly impact our ability to supply our healthcare provider customers with essential replenishment supplies and may impact the continuity of their care to patients, as well as adversely impact our business, operating results and financial condition.
Mr. Muhsin’s annual base salary was increased from $447,784 to $550,000 and he will continue to be eligible to receive an annual performance bonus under our 2017 Executive Bonus Incentive Plan. Additionally, effective as of May 9, 2019, we granted Mr. Muhsin an option to purchase 50,000 shares of our common stock (the “Option”) under our 2017 Equity Incentive Plan. The Option will vest, subject to Mr. Muhsin’s continued employment with the Company, over a five year period, with 20% of the shares subject to the Option vesting on each anniversary of the grant date.
Mr. Muhsin is also a participant in our 2007 Severance Protection Plan (the “Plan”), which provides, among other things, that (a) if Mr. Muhsin’s employment is terminated by us without Cause (as defined in the Plan), he will receive a Basic Severance Benefit (as defined in the Plan) equal to his annual salary and (b) in the event of a Change in Control, 50% of Mr. Muhsin’s unvested and outstanding stock options or other equity-based awards will immediately vest and (i) if Mr. Muhsin’s employment is terminated on the date of a Change in Control specifically because his current job, or similar job, is not offered to him on the date of such Change in Control, the remainder of his unvested and outstanding stock options or other equity-based awards will immediately vest and he will receive a Change in Control Severance Benefit (as defined in the Plan) equal to the sum of his annual salary and his average annual bonus over the last three years or (ii) if Mr. Muhsin’s employment is terminated by us without Cause or if he terminates his employment with us for Good Reason upon or within 36 months after a Change in Control, other than for the reason set forth in clause (i) above, the remainder of his unvested and outstanding stock options or other equity-based awards will immediately vest and he will receive a Change in Control Severance Benefit equal to the sum of two times his annual salary and one times his average annual bonus over the last three years. Additionally, in each case, Mr. Muhsin and his COBRA qualifying beneficiaries will be entitled to COBRA continuation coverage at our expense for a period of 12 months and we will make life insurance coverage for the first twelve months following Mr. Muhsin’s termination available for purchase. The Company has also entered into an indemnification agreement with Mr. Muhsin in the same form entered into by the Company and its other executive officers.