Masimo Corp (MASI) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Masimo first-quarter 2014 earnings conference call. The Company's press release is available at www.masimo.com. (Operator Instructions)

I am pleased to introduce Mr. Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations. Please go ahead, sir.

Hello, everyone. Joining me today are Chairman and CEO, Joe Kiani; and Executive Vice President of Finance and CFO, Mark de Raad.

This call will contain forward-looking statements which reflect Masimo's current judgment. However, they are subject to risks and uncertainties that could cause actual results to differ materially.

Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail on our SEC filings, including our most recent Form 10-K and Form 10-Q. You will find these in the investors section of our website.

I will now pass the call to Joe Kiani.

Thank you, Eli. Good afternoon and thank you for joining us for Masimo's first-quarter earnings call in 2014. In the quarter we achieved solid rainbow and strong international revenue growth. However, a historically weak US acute pulse oximetry business, driven by the impact of low census in Q1; the Affordable Care Act; and strong contract renewals, with over 150 hospitals in 2013 at new average selling prices that were approximately 15% class than the original contract -- average selling prices that were contracted years earlier, impeded our overall growth.

Excluding the $2.6 million that we took out of our revenue due to the distributor inventory adjustment that Mark will discuss in more detail later, most of this softness was anticipated as we went into the first quarter. In fact, we came very close to our internal expectations.

I do want to let you know that US hospitals are recognizing the value of technologies that help them get things right the first time. And that has served us well in our ability to not only convert hospitals to Masimo, but not have to compete based on price with Covidien.

With the advent of the Affordable Care Act, customers are more than ever considering the overall cost of technology choices, which include patient safety, patient outcome, and process consideration versus strictly the price. This is not to suggest customers will pay any price, but they will pay a fair price, especially when considering the other factors.

As for our international business, we had a 30% increase in the outside-US business, with strength in both our direct and OEM outside-US businesses. Our worldwide 23% increase in rainbow revenues to $12.9 million, our worldwide shipment of 41,400 drivers, were also strong. This is now the fourth quarter in a row of unit shipments in excess of 40,000 units -- forming a continued growth in our global installed base, which we estimate rose to 1,231,000, up 10% year to year, once again significantly exceeding the overall market growth rate.

In conjunction with the 25th anniversary of our incorporation on May 2, 1989, we have plans for many exciting product rollouts. Beginning in May and for the remainder of the year, we expect to introduce at least one new clinically significant product a month, which will either round out our noninvasive measurements, root, or our consumer product category.

In fact, in January we announced the CE marking of our new organ oximetry device, O3, that utilizes Root. And in February we announced the launch of our new iSpO2 pulse oximeter for Android mobile devices.

I will provide additional comments about the overall business in a few minutes. But first, Mark will review our first-quarter financial performance and also provide you with an update to our 2014 financial guidance. Mark?

Thank you, Joe, and hello, everybody. Reported total revenue and product revenue for the first quarter was $139.8 million and $132.2 million, respectively. As indicated in our press release today, these numbers include the $2.6 million first-quarter adjustment, which I will describe in more detail shortly. Having said that, the rest of my comments regarding our Q1 total and product revenues will exclude the impact of that same Q1 product revenue adjustment.

First-quarter 2014 total revenue, including royalties, was $142.4 million on an adjusted basis, up 4.7% or 5.2% on a constant currency basis versus the first quarter of 2013. Product revenue was $134.8 million on an adjusted basis, up 4.8% or 5.3% on a constant currency basis versus the first quarter of 2013. Compared to the prior-year quarter, our Q1 2014 product revenues were negatively impacted by approximately $650,000, due primarily to the weakening of the yen versus the US dollar.

Our first-quarter GAAP product revenues included a reduction of $2.6 million in product sales related to a true-up of prior-period estimated deferred revenues for one US distributor. For the last nine quarters we have not been able to secure inventory reports on reasonable terms from this one US distributor; and as a result, we were required to estimate their quarter-end inventory levels.

In the most recent quarter we were able to obtain these reports, including reports from prior periods. These new reports indicated that our prior estimates of this US distributor's channel inventory in 2011 and 2012 had been too low by approximately $1 million and $1.6 million, respectively. Because this is a correction of an estimate, we have accounted for this cumulative change in this estimate by reducing Q1 2014 product revenues by $2.6 million.

Rainbow revenue grew 23% in the first quarter to $12.9 million, attributable primarily to higher sensor sales. In addition, continuing the trend observed last year, approximately 50% of our first-quarter total rainbow revenues were consumables.

Our first-quarter rainbow sales were supported by the direct shipment of the remaining quantities of a large international disposable CO sensor order that we first noted in Q4 2013. And in a few moments Joe will provide some additional information on our Q1 2014 SpHb revenues.

Our worldwide end-user or direct business, which includes sales through just-in-time distributors, grew 5.3% in the first quarter on an adjusted basis to $113.7 million versus $108 million in the year-ago period. Our direct business represented 84% of total product revenue in the quarter, consistent with the prior-year period.

OEM sales, which made up the remaining 16%, rose by 2.4% to $21.1 million compared to $20.6 million in the same period of 2013.

By geography, total adjusted US product revenue declined by 3.9% to $90.6 million compared to $94.3 million in the same quarter of 2013. We believe that the decline was a result of a combination of factors, including the near 5% decline in year-over-year hospital census, which in turn may have been caused in part by the unusually difficult winter weather on the East Coast this past quarter, and/or the impact of the Affordable Care Act rollout.

In addition, as we noted on our last call, we continued to experience the negative short-term pricing impact of having closed a record amount of contract renewals in 2013. Although these contract renewals provide us with the long-term benefit of having secured additional sensor purchase commitments, the short-term negative impact is immediate as the new lower sensor pricing goes into effect. And Joe will speak to the current US hospital environment in a little bit more detail later on.

In the meantime, the great news in the quarter was that our international product revenues of $44.2 million rose 29% in the first quarter of 2014, or 30% on a constant-currency basis, versus $34.4 million in the same period last year. The increase is due primarily to growth in both our EMEA and Asia-Pacific regions.

And because of the strong first-quarter international results, our international revenues represented approximately 33% of total product revenue in the first quarter of 2014, which was up from 27% a year ago. This strong O-US growth helped, of course, to offset the product revenue decline in the US acute care business. Together, the combination allowed us to achieve nearly $135 million in adjusted product revenue, which, as Joe noted previously, was consistent with our own internal expectations.

Our first-quarter product gross profit margins was 64.1% compared to 64% in the year-ago period. The first-quarter product gross profit margins were negatively impacted by 20 basis points, due to the changes in foreign-exchange rates on our reported revenues. Our first-quarter total gross profit margin, including royalties, was 66%, which was flat from the year-ago period.

First-quarter 2014 operating expenses were $62.1 million, a decline of 6.5% versus the year-ago quarter. This decline was the result of the Q1 2014 $8 million reversal of an arbitration award and associated legal fees we had previously accrued in Q4 2013.

Without the impact of the reversal, our total operating expenses rose by 5.5% versus the year-ago period. This was below our original expectations, due mostly to a deferral of the timing of various engineering, project-related, and selected marketing expenses.

SG&A expenses declined by 8% versus the year-ago period to $46.5 million, due again to the previously-noted $8 million arbitration award and legal fee reversal. Without this reduction, our SG&A expenses rose by 7.9%, from $50.5 million to $54.5 million. And this increase was due primarily to higher staffing levels related to the full impact of our new worldwide blood management sales team now being on board and higher legal fees.

R&D spending of $14 million was flat with the year-ago period, as some engineering project and related equipment and supply spending has been deferred into later in the year.

First-quarter of 2014 operating income was $30.2 million, up 22% compared to $23.1 million in the year-ago period. The $7.1 million increase in operating income was primarily attributable, again, to the $8 million arbitration award and the full-fee expense reversal, as I previously mentioned.

Nonoperating income was about $200,000 in the first quarter, primarily due to the translation impact of movements in our foreign exchange rates. This compares with nonoperating expense of $2.3 million in the year-ago period, which was primarily attributable to the negative effects of changes in the value of the US dollar versus the yen and euro.

Our first-quarter 2014 effective tax rate was 26%, up from 21.2% in the same period last year. The lower prior-period rate resulted from the Q1 2013 recognition of the R&D tax benefit from 2012. This 26% was slightly lower than our original expectations of 27% to 29%, due to the changes in our projections of our US/O-US revenues and a decline in the projected 2014 loss of a noncontrolling entity, which we are consolidating with our financial statements.

First-quarter 2014 net income was, therefore, $22.6 million or $0.39 per diluted share compared to $16.4 million or $0.28 per diluted share in the same prior-year period. Our first-quarter earnings per share include a benefit of $0.09 per diluted share, due to the $8 million reversal of the arbitration award and legal fees. Excluding the $0.09 per diluted share, our Q1 2014 earnings per diluted share would have been $0.30, up from $0.28 in the year-ago period.

As of March 29, 2014, our days sales outstanding was 51 compared to 52 as of the end of December 28, 2013. And over the same period, inventory turns declined slightly to 3.4 from 3.7.

Total cash and cash equivalents as of March 29, 2014 were $117.5 million compared to $95.5 million as of December 28, 2013. The change reflects net cash generated from operations, offset partially by capital expenditures.

Now I will discuss our updated 2014 financial guidance, which is based on the best information that we have at this point in time and assumes a slightly more conservative outlook for our fiscal 2014 US acute business, based upon the current overall macro US hospital environment, and is reflected in the lower part of our updated product revenue range. With that, we are now updating our 2014 financial guidance as follows.

We are increasing our projected 2014 royalty revenue range from our original $8 million to $28 million to $28 million. This is being done because we did not receive notice of Covidien's intent to discontinue its covenant under the royalty agreement. And at this point, we expect royalties to continue until about October 2018 in view of expiration dates in our current patent portfolio as it relates to the N600.

We are now expanding our projected 2014 product revenue range from $570 million to a range of $560 million to $570 million, given that we now have to account for $2.6 million less in revenues related to our Q1 distributor inventory adjustment; also, additional census pressures that we believe are possibly related to the Affordable Care Act implementation; and the downward adjustment of our US acute care ASP assumptions, for some of the reasons we noted earlier.

In addition, due to the adjustment of our projected ASPs for the remainder of the year; a slight reduction in our projected favorable purchase price variances; and the impact of potentially lower total product revenues, we now believe that our product margins will be approximately 65% to 65.5%, slightly lower than the original 66% guidance.

Importantly, this revised product gross profit margin will still represent a significant improvement over our 2013 product gross profit margins. And therefore, despite the factors impacting revenues that I noted before, we still expect to deliver the product cost reductions that we had included in our original gross profit margin guidance back in February.

We are lowering our revised operating expense guidance, excluding the medical device tax, from $292 million to $284 million. This new guidance includes the $8 million Q1 reduction due to the arbitration and related expense accrual reversal. And importantly, this new operating expense projection includes our best current assessment of our 2014 legal expenses.

Although the second-half [24] trial dates with both Philips and Mindray have been budgeted in these numbers, we still cannot project with any certainty whether our budgeted legal costs for 2014 are sufficient for these or any other legal matters. Because of this unusual level of uncertainty of our legal expenses, we will continue to update you as the year progresses and as we begin to gain some more clarity on the status of the various legal matters currently in progress.

Finally, we now expect that our fiscal tax rate will be in the range of 26% to 28% compared to 27% to 29% previously. The slight decline is due to a more favorable mix shift in our updated 2014 revenue forecast as well as the reduction in losses related to a noncontrolling interest entity which we are required to consolidate.

So as a result of these assumptions, we are now projecting a 2014 GAAP earnings per share of $1.24 to $1.33. To reiterate, the $1.24 earnings per diluted share assumes $560 million in product revenue and $28 million in Covidien royalties, while the $1.33 earnings per share assumes $570 million in product revenue and $28 million in Covidien royalties.

With that, I will turn the call back to Joe.

Thank you, Mark. Despite a lower-than-expected start to 2014 and a slightly lower in 2014 product revenue guidance, we continue to be optimistic about our overall long-term business outlook and our ability to meet both our mission and financial goals. In fact, despite the slightly lower-than-projected Q1 2014 product revenues, mostly due to the catch-up deferred revenue adjustment that Mark noted earlier, we were able to deliver first-quarter earnings slightly above our own expectations.

As we stated in our initial fiscal 2014 financial guidance earlier in this year, and as Mark noted before, we continue our focus on delivering future product cost reductions and have in place additional cost controls designed to allow us to deliver upon the financial leverage that I noted as a key focus for us over the upcoming years.

Having said that, we are concerned about what we are seeing in the US hospital marketplace. Whether it is the result of implementation of the Affordable Care Act or whether it is related to the unusually severe winter weather, there is no question, as the Deutsche Bank report indicated, that US hospital admissions were down significantly in the Q1 period.

I am also wondering if the impact of the Affordable Care Act will, as it did in Massachusetts during their mandated insurance program implementation, cause a longer-than-normal level of confusion in the insurance marketplace -- which may, in turn, result in fewer visits to the hospitals until 2018 with less procedures, when it is expected to complete and settle.

Also, consolidation of hospitals into large IDNs has and will undoubtedly cause pressure on product purchases, but we believe the Affordable Care Act favors products that make a clinical difference, as evidenced by our strong contract booking last year and ability to stabilize prices and not get in a price war with Covidien for pulse oximetry sensors.

Consistent with our theories of what is going on, our overall worldwide unit placements of 41,400 new pulse oximeters and pulse co-oximeters that we once again shipped into the marketplace indicates that while procedure volume may have dropped, we are continuing to expand our footprint amongst hospitals all over the world. In fact, as I noted earlier, this is the fourth quarter in a row and the fifth out of six that Masimo has shipped more than 40,000 drivers in a quarter.

In addition to strong driver shipments in the quarter, noteworthy contract wins for us in the first quarter include Care New England Health System in Rhode Island; Connecticut Children's Medical Center, Hartford; Excela Health in southwestern Pennsylvania; and Norwegian American Hospital in Chicago.

Importantly, we also see overall market interest continuing to expand within the general core of our hospital customers. The value of reliable, continuous pulse oximetry, made possible by our measure-through motion and low-perfusion pulse oximetry breakthrough in this setting includes reduced failure to rescue events and fewer ICU transfers, both of which have high human and financial costs for hospitals.

Encouragingly, during the first quarter we saw significant revenue contribution from our new blood management team. We expect this new team to continue to increase their quarterly revenue contributions throughout the year. In the quarter we recorded $2.8 million in total SpHb revenues, including continuous measurement as well as spot-check tests and devices, a 46% increase over the same prior period.

During Q1 we once again realize continued quarter-over-quarter growth in revenues of monitors and sensors sold by the new blood management team for continuous SpHb monitoring. Even more significant is the continued increase in a number of acute care hospitals that have made a clinical decision to deploy SpHb broadly across multiple departments, with this total now at 42 hospitals and growing monthly, leading to a substantial backlog of pending sales of monitors equipped with SpHb and PVI licenses. Together, we have projected annual sensor purchases that will noticeably contribute to our revenues.

The blood management team is over 80% staffed, and more than 50% of the team has been in place for nine months or more, which is about the length of time it takes to become fully effective. Through the efforts of this new team, the combination of continuous SpHb and PVI rainbow parameters is being increasingly recognized as a valuable tool in the operating room and in post-operative critical care units to help physicians optimize blood transfusions, facilitate earlier detection of post-operative bleeding, and make patient-centered fluid management decisions -- all benefits which lead to improved patient outcomes and reduced cost of care for hospitals.

With a typical hospital sales cycle of four to six months to complete the steps to make a clinical decision to deploy SpHb and initiate purchase processes, followed by a capital budgeting process, we have an expanding list of blood management customers with expectations that notable SpHb purchases will materialize with each passing quarter.

Unlike the equipment placement business, the pulse oximetry model often used in the hospital-wide SpO2 business, continuous SpHb and PVI sales in hospitals involve capital expenditures for our monitors as well as SpHb and PVI parameter licenses.

On a related note, we now have four centers actively enrolling patients in the NACHO trial investigating the value of SpHb for surgical blood management. And there are five additional sites that are engaged in the IRB process to enable their participation in the trial. We expect enrollment in the NACHO trial to be complete in 2015.

Later this year we continue to expect GE and Philips to launch their initial versions of devices with our breakthrough rainbow technology. In Q1 we were gratified to see the State of Wisconsin joining 31 other states in requiring all newborn babies to be tested for critical congenital heart disease. Our measure-through motion and low-perfusion pulse oximetry breakthrough have been instrumental in facilitating this type of testing. And Masimo is an active participant in the collaboration with the Newborn Foundation for making birth oximetry routine for newborns under the BORN program.

In 2014 Masimo will celebrate its 25th anniversary and its history of innovation for improving healthcare. As I stated earlier, we intend to celebrate that milestone with a number of new product launches during the year.

As you probably noticed from our 8-K filing yesterday, we announced that we have secured a new $125 million five-year credit line facility with JPMorgan. This line of credit facility is intended to finance the purchase of our new headquarters in Irvine and, in addition, provide us with additional financial resources for further business expansion opportunities and/or potential stock repurchase activities.

We are excited about our new corporate headquarter facility, primarily because we expect to be able to improve our operational efficiency by combining all of our nonmanufacturing operations in Irvine on one campus. We intend to occupy our new headquarters by the end of 2014.

As Phasein and Masimo Semiconductor become further integrated, we continue to see significant benefits from these acquisitions. So with regard to potential future business acquisitions, as I have noted before, we are constantly searching for small, high-potential businesses with innovative technologies that can complement our portfolio. While we expect to add to our technology portfolio in the future, there no transactions currently in progress.

Also, I would like to take just a moment to introduce Craig Reynolds, who just joined the Masimo Board this past quarter. Craig brings a tremendous amount of medical and life science industry experience to our Board. In addition, in his prior roles as Chief Operating Officer and Chief Executive Officer, he will also provide us with strong operational experience and perspective. We are very happy to have Craig join the Board.

And with that, I will now open up for your questions. Thank you.

(Operator Instructions) Tao Levy, Wedbush.

So a couple of quick questions. First, given the reduction in the product revenue guidance, or at least the inclusion of a $10 million lower end, are you assuming that there won't be a recovery throughout the year related to more patients being insured and going to the hospitals?

Tao, first of all, as we have said numerous times, we don't think the Affordable Care Act, while giving millions of people access to primary physicians and pharmaceuticals, will increase the census in US hospitals. And in fact, in our effort as an industry, we presented to legislators data that showed in Massachusetts, which saw the Affordable Care Act go into effect between 2006 and 2011 -- we saw a reduction in both sensor volume and revenue for Masimo compared to other states. Our growth in Massachusetts was 1/16 of the rest of the country to 1/17, depending on the neighboring state, versus the entire country. So first, I just wanted to say that.

But secondly, one of the things we are not sure about, Tao -- we are not sure if the census drop in Q1 and also Q4 2013 is due to the harsh winter or is it due to Affordable Care Act that has reduced the census. If you look at our analysis of Massachusetts, we have a theory that it actually may be due to the Affordable Care Act, where, one, there's a confusion in the marketplace -- people losing insurance before gaining them, and deductibles going higher.

And secondly, with especially the Affordable Care Act, there is no incentive of getting it wrong anymore for hospitals. If they do a procedure, and that requires a second procedure or a third procedure, they -- some of them, they won't get paid for it now; and they anticipates in the future they won't get paid for any of them. So I think there is a census drop, with this additional potential procedure drop even for patients.

So having said all that, and not knowing what is ahead for sure, we thought it would be prudent to assume the census decrease in Q4 and Q1 may have been related to the ACA more than the harsh winter. And that's why -- one of the reasons that we reduced our guidance on the bottom side and gave you a range of $560 million to $570 million.

So it's not as if you've seen some improvement in the last month or two, like March/April time frame, in any of your data points?

No, we have not. We have not seen that. And we might; things may pop in the second half of the year, or maybe May or June. But while we are seeing strong demand for our products, where hospitals are choosing what they're going to do for pulse oximetry, as we noted, we grew our installed base by 10%. Yet if you look at our revenue, it increased by 5%, roughly.

So that means that there is a 5% gap. And that gap could be driven by the census issue, especially in the US, in conjunction with the procedure reduction issue.

Okay, perfect. Thanks. And just one clarification on the guidance. I'm trying to figure out -- on the EPS front, what does that guidance look like on an apples-to-apples basis versus what you had issued before?

Mark, do you want to take that?

Sure. I think, Tao, it depends on the initial range of guidance. Because if you go to the -- initially, when we started the year, we were at $1.13 to $1.28. So comparing that now to the new guidance, obviously both of those are up.

Part of that is, of course, because of the benefit of the $8 million legal expense and arbitration award reversal that we had in this quarter. Because we have now moved to the upper end of the royalty revenue range that we provided before, there really isn't any overall change related to that.

And then, as I alluded to earlier, because we are suggesting that our gross profit product margins will come down a little bit from the initial guidance, there's a little bit of EPS reduction as a result of that. So those are basically the pieces that move you from the original guidance to where we are right now.

Okay, thanks.

Chris Lewis, ROTH Capital Partners.

I wanted to start on the royalty guidance. I understand that you changed the methodology there, so maybe just walk us through what has changed since you introduced that range last quarter. I understand they didn't send a notice, so you expect payments to continue. But maybe just walk us through your outlook there, and if there is still a possibility they could stop paying, regardless of them not sending the notice?

Sure, Chris. First of all, this is our best expectation. Secondly, we have not had dialog with Covidien that has resulted in this new projection.

The thing that made us decide to give you $28 million instead of the range at the beginning of the quarter -- because at the beginning of the quarter, there was a 60-day notice period as of March 14 that they could have provided us that notice. And we believe the next time they can provide us that notice is next March again, in 2015.

And given that we did not get the notice -- so we anticipate that at least in 2014 the royalties will continue. And then when we look at long term, when our patents around the N600 will expire; and we look at Covidien's comments about this issue; and the challenges with customers in changing products now, we are getting more comfortable that the most likely scenario is that Covidien will continue paying the royalties until October 2018.

Okay, great. And then on the blood management side, I think you mentioned 50% of the reps have been on board for at least nine months. So for those reps, how is the productivity tracking along versus your expectations?

We will know better at the end of this quarter. But so far we feel like based on the number of hospitals now in the pipeline to purchase noninvasive hemoglobin for the operating room and the post-operative care -- so not just onesies/twosies, but a whole change in process -- we've gone from 35 to 42 since last quarter, where we started off with 9 before this team got together, and before we knew how to better get the consumers to know how to test our products.

For example, when people want to test the accuracy of our noninvasive hemoglobin, now we ask them politely to do two invasive blood trials and put them in two supposed control gold standard, so they can kind of see for themselves the variations that occur in the invasive devices, let alone noninvasive. Because unfortunately, hemoglobin is fickle as far as how you draw the blood. It can really impact the number and not having a gold-standard product in the gold standards.

So anyway, those teaching from experience in addition to this focus is making us have really good results. And given that we are holding out for purchases of these products instead of giving them away for a sensor contract, we're having a delayed time from decision to purchase. So once that latency is gone, I think we will begin to really start seeing the numbers move, hopefully, in a nice appropriate fashion.

Great. And then just one more. For the OpEx guidance, Mark, can you just walk us through again? I think I may have missed it -- the update there and what you are assuming for the med device tax this year? Thanks.

Sure. The operating expense guidance essentially came down by $8 million for the year, specifically related to the $8 million reversal in the first quarter related to the arbitration and legal fees. So that change is actually very clear and very easy to explain.

And then in terms of the medical device tax, really no overall change there in terms of the percent. Obviously, it is 2.3% of the product that qualifies for that tax here in the US. Clearly, because we expanded the range of product revenues in this new guidance, if we were to see lower net US acute revenues in the year, obviously that would correspond into a slightly lower overall medical device tax number. But directionally, it will probably end up being somewhere in the range of about $7 million to $7.5 million for the year.

Great. Thank you.

Bill Quirk, Piper Jaffray.

It is Dave Clair in for Bill. First question for me: I was hoping to get some additional details on total hemoglobin in the quarter. Looks like it was down sequentially.

I believe it was, yes.

Yes, it certainly was, as we would expect coming off a very strong seasonal push at the end of the year in the fourth quarter. I think, importantly, as Joe noted earlier in his comments, year over year we are up 46%. So we were actually very, very pleased with the first-quarter performance.

Yes, we were not surprised, just so you know.

Okay. And then a quick one for Mark. You talked last time about additional spending if the royalty got extended, and a potential charitable contribution, as well. I'm assuming -- you know, it looks like the royalty is going to be collected for the year. So are those two things still something to expect?

Yes.

Okay. And then, we have a lot of cash on the balance sheet at this point. Can you give us any kind of update -- what your plans are for immediate spend, if any?

I believe I mentioned earlier, we actually drew on a line of credit for $125 million despite the cash on hand, because a lot of that cash is outside the US. So with that line of credit, we're not only buying our headquarters, but we have some cash left to even do acquisitions or do a stock repurchase, because we haven't done any for about a year now.

So that is currently our plan, our thinking. And given the low rate of interest for that line of credit, we thought it was the right thing to do.

And how much should we expect for the headquarters spending for the year?

Well, I think we indicated that the purchase price for the headquarters building is $56 million. And then there will be additional costs over the next 6 to 12 months as we retrofit the building and make it -- we realigned the building in a fashion that will be commensurate with how Masimo intends to deploy and occupy the building.

Okay, thank you.

Brian Weinstein, William Blair.

Just wanted to confirm -- I might have missed it. Did you guys offer up any additional or changes to the rainbow guidance, or are you confirming the $60 million?

We have not changed guidance on rainbow.

Okay. And then, can you talk about what the difference on the hemoglobin side was between spot and continuous, and how the spot is trending?

Mark, do you have that information, or we give that information?

Well, I think, Brian, in general, as I said in the prepared comments, we're continuing to see over 50% of our revenues from consumables. And that de facto means, certainly, the spot-check portion of our SpHb business is tracking relatively well.

Okay. And then to go back to this Affordable Care Act implementation, I don't want to over-read or misread what you're saying there, but it sounds like you are saying that you could see pressure on volumes here, essentially, through 2018. Am I overstating how you are thinking about things? I don't want to mischaracterize it, but it sounds like that is pretty negative for quite a long period of time here.

Well, if we are right, it's for though whole healthcare industry, med tech industries, not just for us. But yes, we believe there is a likelihood of that if you use Massachusetts as the yardstick to decide what is going to happen for the whole country.

Okay, thanks, guys.

(Operator Instructions) And I'm showing no further questions at this time. I'd like to hand the call back over to management for further remarks.

Okay. Well, thank you so much for joining us this afternoon. We look forward to our next call together and hope to see some of you here and on the road, and hopefully joining us for our 25th anniversary celebration. If you have not received an invitation and you would like to join us, please request an indentation.

Thank you so much and have a wonderful weekend. Thanks. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.