SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
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 0-18592
MERIT MEDICAL SYSTEMS, INC.
(Exact name of Registrantregistrant as specified in its charter)
Utah | 87-0447695 | |
(State or other jurisdiction of incorporation or organization) | | ( |
1600 West Merit Parkway, South Jordan UT , Utah84095
(Address of Principal Executive Offices,principal executive offices, including Zip Code)
Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading Symbol | Name of exchange on which registered |
Common Stock, no par | MMSI | NASDAQ Global Select Market |
Indicate by check mark whether the Registrant:registrant (1) has filed all reports required to be filed by SectionsSection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitiondefinitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | Accelerated Filer | Non-Accelerated Filer | Smaller 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
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Title or class | | Shares outstanding as of |
Common Stock, no par | |
57,493,643 |
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ITEM 1. FINANCIAL STATEMENTS
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2017 AND DECEMBER 31, 2016 (In thousands) | |||||||
September 30, 2017 | December 31, 2016 | ||||||
ASSETS | (unaudited) | ||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 23,362 | $ | 19,171 | |||
Trade receivables — net of allowance for uncollectible accounts — 2017 — $1,547 and 2016 — $1,587 | 101,394 | 80,521 | |||||
Employee receivables | 147 | 198 | |||||
Other receivables | 5,900 | 5,445 | |||||
Inventories | 145,598 | 120,695 | |||||
Prepaid expenses and other assets | 20,581 | 6,226 | |||||
Prepaid income taxes | 2,792 | 2,525 | |||||
Deferred income tax assets | — | 8,219 | |||||
Income tax refund receivables | 91 | 423 | |||||
Total current assets | 299,865 | 243,423 | |||||
PROPERTY AND EQUIPMENT: | |||||||
Land and land improvements | 19,804 | 19,379 | |||||
Buildings | 144,084 | 139,119 | |||||
Manufacturing equipment | 193,061 | 178,110 | |||||
Furniture and fixtures | 49,035 | 43,433 | |||||
Leasehold improvements | 31,345 | 30,413 | |||||
Construction-in-progress | 34,625 | 28,180 | |||||
Total property and equipment | 471,954 | 438,634 | |||||
Less accumulated depreciation | (181,672 | ) | (162,061 | ) | |||
Property and equipment — net | 290,282 | 276,573 | |||||
OTHER ASSETS: | |||||||
Intangible assets: | |||||||
Developed technology — net of accumulated amortization — 2017 — $67,320 and 2016 — $52,843 | 172,796 | 135,358 | |||||
Other — net of accumulated amortization — 2017 — $34,985 and 2016 — $30,048 | 55,707 | 47,339 | |||||
Goodwill | 234,043 | 211,927 | |||||
Deferred income tax assets | 2,046 | 171 | |||||
Other assets | 32,412 | 28,012 | |||||
Total other assets | 497,004 | 422,807 | |||||
TOTAL | $ | 1,087,151 | $ | 942,803 | |||
See condensed notes to consolidated financial statements. | (continued) |
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2017 AND DECEMBER 31, 2016 (In thousands) | |||||||
September 30, 2017 | December 31, 2016 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | (unaudited) | ||||||
CURRENT LIABILITIES: | |||||||
Trade payables | $ | 32,291 | $ | 30,619 | |||
Accrued expenses | 56,508 | 44,947 | |||||
Current portion of long-term debt | 16,962 | 10,000 | |||||
Advances from employees | 542 | 572 | |||||
Income taxes payable | 1,435 | 2,193 | |||||
Total current liabilities | 107,738 | 88,331 | |||||
LONG-TERM DEBT | 260,978 | 314,373 | |||||
DEFERRED INCOME TAX LIABILITIES | 23,764 | 25,981 | |||||
LIABILITIES RELATED TO UNRECOGNIZED TAX BENEFITS | 438 | 438 | |||||
DEFERRED COMPENSATION PAYABLE | 10,319 | 9,211 | |||||
DEFERRED CREDITS | 2,439 | 2,550 | |||||
OTHER LONG-TERM OBLIGATIONS | 14,659 | 3,730 | |||||
Total liabilities | 420,335 | 444,614 | |||||
COMMITMENTS AND CONTINGENCIES (Notes 5, 9, 10 and 13) | |||||||
STOCKHOLDERS’ EQUITY: | |||||||
Preferred stock — 5,000 shares authorized as of September 30, 2017 and December 31, 2016; no shares issued | |||||||
Common stock, no par value; shares authorized — 100,000; issued and outstanding as of September 30, 2017 - 50,194 and December 31, 2016 - 44,645 | 351,321 | 206,186 | |||||
Retained earnings | 314,602 | 293,885 | |||||
Accumulated other comprehensive income (loss) | 893 | (1,882 | ) | ||||
Total stockholders’ equity | 666,816 | 498,189 | |||||
TOTAL | $ | 1,087,151 | $ | 942,803 | |||
See condensed notes to consolidated financial statements. | (concluded) |
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (In thousands, except per share amounts - unaudited) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
NET SALES | $ | 179,337 | $ | 156,975 | $ | 536,955 | $ | 446,123 | |||||||
COST OF SALES | 98,823 | 89,160 | 296,358 | 251,354 | |||||||||||
GROSS PROFIT | 80,514 | 67,815 | 240,597 | 194,769 | |||||||||||
OPERATING EXPENSES: | |||||||||||||||
Selling, general and administrative | 54,716 | 53,198 | 169,896 | 138,556 | |||||||||||
Research and development | 12,838 | 11,424 | 38,676 | 33,440 | |||||||||||
Contingent consideration (benefit) expense | 20 | (94 | ) | 39 | 99 | ||||||||||
Acquired in-process research and development | 12,061 | 300 | 12,136 | 400 | |||||||||||
Total operating expenses | 79,635 | 64,828 | 220,747 | 172,495 | |||||||||||
INCOME FROM OPERATIONS | 879 | 2,987 | 19,850 | 22,274 | |||||||||||
OTHER INCOME (EXPENSE): | |||||||||||||||
Interest income | 94 | 29 | 266 | 55 | |||||||||||
Interest expense | (1,590 | ) | (3,022 | ) | (5,935 | ) | (6,120 | ) | |||||||
Gain on bargain purchase | (778 | ) | — | 10,796 | — | ||||||||||
Other income (expense) — net | (810 | ) | 1 | (376 | ) | (445 | ) | ||||||||
Other income (expense) — net | (3,084 | ) | (2,992 | ) | 4,751 | (6,510 | ) | ||||||||
INCOME (LOSS) BEFORE INCOME TAXES | (2,205 | ) | (5 | ) | 24,601 | 15,764 | |||||||||
INCOME TAX EXPENSE (BENEFIT) | 1,364 | (978 | ) | 3,884 | 3,149 | ||||||||||
NET INCOME (LOSS) | $ | (3,569 | ) | $ | 973 | $ | 20,717 | $ | 12,615 | ||||||
EARNINGS PER COMMON SHARE: | |||||||||||||||
Basic | $ | (0.07 | ) | $ | 0.02 | $ | 0.43 | $ | 0.28 | ||||||
Diluted | $ | (0.07 | ) | $ | 0.02 | $ | 0.42 | $ | 0.28 | ||||||
AVERAGE COMMON SHARES: | |||||||||||||||
Basic | 50,150 | 44,447 | 48,332 | 44,346 | |||||||||||
Diluted | 51,599 | 45,000 | 49,555 | 44,763 | |||||||||||
See condensed notes to consolidated financial statements. |
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (In thousands - unaudited) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income (loss) | $ | (3,569 | ) | $ | 973 | $ | 20,717 | $ | 12,615 | ||||||
Other comprehensive income (loss): | |||||||||||||||
Cash flow hedges | (144 | ) | (103 | ) | 166 | (984 | ) | ||||||||
Less income tax benefit (expense) | 56 | 40 | (64 | ) | 383 | ||||||||||
Foreign currency translation adjustment | 721 | 454 | 2,925 | 1,259 | |||||||||||
Less income tax benefit (expense) | — | — | (252 | ) | (210 | ) | |||||||||
Total other comprehensive income | 633 | 391 | 2,775 | 448 | |||||||||||
Total comprehensive income (loss) | (2,936 | ) | 1,364 | 23,492 | 13,063 | ||||||||||
See condensed notes to consolidated financial statements. |
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (In thousands - unaudited) | |||||||
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net income | $ | 20,717 | $ | 12,615 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 39,388 | 31,594 | |||||
Gain on bargain purchase | (10,796 | ) | — | ||||
Losses on sales and/or abandonment of property and equipment | 219 | 102 | |||||
Write-off of patents and intangible assets | 86 | 90 | |||||
Acquired in-process research and development | 12,136 | 400 | |||||
Fair value changes in contingent liabilities/assets | — | 99 | |||||
Amortization of deferred credits | (111 | ) | (128 | ) | |||
Amortization of long-term debt issuance costs | 514 | 779 | |||||
Deferred income taxes | (290 | ) | 187 | ||||
Excess tax benefits from stock-based compensation | — | (527 | ) | ||||
Stock-based compensation expense | 2,883 | 1,913 | |||||
Changes in operating assets and liabilities, net of effects from acquisitions: | |||||||
Trade receivables | (10,963 | ) | (5,166 | ) | |||
Employee receivables | 54 | 42 | |||||
Other receivables | (503 | ) | 3,385 | ||||
Inventories | (9,922 | ) | 220 | ||||
Prepaid expenses and other assets | (1,587 | ) | (452 | ) | |||
Prepaid income taxes | (231 | ) | (63 | ) | |||
Income tax refund receivables | 280 | 514 | |||||
Other assets | (2,992 | ) | (1,591 | ) | |||
Trade payables | (876 | ) | (9,018 | ) | |||
Accrued expenses | 4,514 | 1,693 | |||||
Advances from employees | (44 | ) | (50 | ) | |||
Income taxes payable | (764 | ) | (183 | ) | |||
Liabilities related to unrecognized tax benefits | — | (366 | ) | ||||
Deferred compensation payable | 1,107 | 500 | |||||
Other long-term obligations | 574 | (251 | ) | ||||
Total adjustments | 22,676 | 23,723 | |||||
Net cash provided by operating activities | 43,393 | 36,338 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Capital expenditures for: | |||||||
Property and equipment | (29,522 | ) | (26,492 | ) | |||
Intangible assets | (1,927 | ) | (1,594 | ) | |||
Proceeds from sale of cost method investment | — | 1,089 | |||||
Proceeds from the sale of property and equipment | 9 | 5 | |||||
Cash paid in acquisitions, net of cash acquired | (103,500 | ) | (119,808 | ) | |||
Net cash used in investing activities | (134,940 | ) | (146,800 | ) | |||
See condensed notes to consolidated financial statements. | (continued) |
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (In thousands - unaudited) | |||||||
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds from issuance of common stock | $ | 143,069 | $ | 4,422 | |||
Payment of offering costs related to issuance of common stock | (816 | ) | — | ||||
Proceeds from issuance of long-term debt | 151,462 | 203,478 | |||||
Payments on long-term debt | (197,962 | ) | (82,658 | ) | |||
Excess tax benefits from stock-based compensation | — | 527 | |||||
Long-term debt issuance costs | — | (1,948 | ) | ||||
Contingent payments related to acquisitions | (45 | ) | (199 | ) | |||
Payment of taxes related to an exchange of common stock | — | (86 | ) | ||||
Net cash provided by financing activities | 95,708 | 123,536 | |||||
EFFECT OF EXCHANGE RATES ON CASH | 30 | 67 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 4,191 | 13,141 | |||||
CASH AND CASH EQUIVALENTS: | |||||||
Beginning of period | 19,171 | 4,177 | |||||
End of period | $ | 23,362 | $ | 17,318 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||
Cash paid during the period for: | |||||||
Interest (net of capitalized interest of $371 and $337, respectively) | $ | 5,953 | $ | 6,223 | |||
Income taxes | $ | 4,029 | $ | 2,237 | |||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES | |||||||
Property and equipment purchases in accounts payable | $ | 1,394 | $ | 2,709 | |||
Acquisition purchases in accrued expenses and other long-term obligations | $ | 12,000 | $ | 293 | |||
Contingent receivable in exchange for sale of cost method investment | $ | — | $ | 711 | |||
Merit common stock surrendered (0 and 14 shares, respectively) in exchange for exercise of stock options | $ | — | $ | 346 | |||
See condensed notes to consolidated financial statements. | (concluded) |
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
| | | | | | |
|
| March 31, |
| December 31, | ||
ASSETS |
| 2023 |
| 2022 | ||
| | | (unaudited) | | | |
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 57,945 | | $ | 58,408 |
Trade receivables — net of allowance for credit losses — 2023 — $8,248 and 2022 — $8,423 | |
| 170,182 | |
| 164,677 |
Other receivables | |
| 14,559 | |
| 12,992 |
Inventories | |
| 289,581 | |
| 265,991 |
Prepaid expenses and other current assets | |
| 19,961 | |
| 22,324 |
Prepaid income taxes | |
| 3,920 | |
| 3,913 |
Income tax refund receivables | |
| 1,069 | |
| 779 |
Total current assets | |
| 557,217 | |
| 529,084 |
| | | | | | |
Property and equipment: | |
|
| |
|
|
Land and land improvements | |
| 26,017 | |
| 25,940 |
Buildings | |
| 189,947 | |
| 189,148 |
Manufacturing equipment | |
| 303,547 | |
| 299,089 |
Furniture and fixtures | |
| 64,762 | |
| 61,128 |
Leasehold improvements | |
| 50,826 | |
| 49,673 |
Construction-in-progress | |
| 63,786 | |
| 61,269 |
Total property and equipment | |
| 698,885 | |
| 686,247 |
Less accumulated depreciation | |
| (311,435) | |
| (303,271) |
Property and equipment — net | |
| 387,450 | | | 382,976 |
| | | | | | |
Other assets: | |
|
| |
|
|
Intangible assets: | |
|
| |
|
|
Developed technology — net of accumulated amortization — 2023 — $285,008 and 2022 — $274,570 | |
| 227,203 | |
| 237,522 |
Other — net of accumulated amortization — 2023 — $71,742 and 2022 — $69,780 | |
| 36,681 | |
| 38,350 |
Goodwill | |
| 360,291 | |
| 359,821 |
Deferred income tax assets | |
| 6,665 | |
| 6,599 |
Right-of-use operating lease assets | | | 62,881 | | | 65,262 |
Other assets | |
| 45,721 | |
| 44,352 |
Total other assets | |
| 739,442 | |
| 751,906 |
| | | | | | |
Total assets | | $ | 1,684,109 | | $ | 1,663,966 |
| |
See condensed notes to consolidated financial statements. | (continued) |
3
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
| | | | | | |
|
| March 31, |
| December 31, | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| 2023 |
| 2022 | ||
| | | (unaudited) | | | |
Current liabilities: |
| |
| | |
|
Trade payables | | $ | 65,588 | | $ | 68,504 |
Accrued expenses | |
| 119,197 | |
| 123,189 |
Current portion of long-term debt | |
| 11,250 | |
| 11,250 |
Short-term operating lease liabilities | | | 10,898 | | | 11,005 |
Income taxes payable | |
| 9,019 | |
| 6,697 |
Total current liabilities | |
| 215,952 | |
| 220,645 |
| | | | | | |
Long-term debt | |
| 186,423 | |
| 186,759 |
Deferred income tax liabilities | |
| 18,478 | |
| 18,462 |
Long-term income taxes payable | |
| 347 | |
| 347 |
Liabilities related to unrecognized tax benefits | |
| 1,912 | |
| 1,912 |
Deferred compensation payable | |
| 15,868 | |
| 15,264 |
Deferred credits | |
| 1,682 | |
| 1,708 |
Long-term operating lease liabilities | | | 57,893 | |
| 59,736 |
Other long-term obligations | |
| 13,899 | |
| 14,736 |
Total liabilities | |
| 512,454 | |
| 519,569 |
| | | | | | |
Commitments and contingencies | |
|
| |
|
|
| | | | | | |
Stockholders' equity: | |
|
| |
|
|
Preferred stock — 5,000 shares authorized as of March 31, 2023 and December 31, 2022; no shares issued | |
| — | |
| — |
Common stock, no par value; 100,000 shares authorized; issued and outstanding as of March 31, 2023 - 57,472 and December 31, 2022 - 57,306 | |
| 681,108 | |
| 675,174 |
Retained earnings | |
| 501,476 | |
| 480,773 |
Accumulated other comprehensive loss | |
| (10,929) | |
| (11,550) |
Total stockholders’ equity | |
| 1,171,655 | |
| 1,144,397 |
| | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,684,109 | | $ | 1,663,966 |
| |
See condensed notes to consolidated financial statements. | (concluded) |
4
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts - unaudited)
| | | | | | | |
|
| Three Months Ended | | ||||
| | March 31, | | ||||
|
| 2023 |
| 2022 | | ||
Net sales | | $ | 297,565 | | $ | 275,415 | |
Cost of sales | |
| 159,203 | |
| 154,508 | |
Gross profit | |
| 138,362 | |
| 120,907 | |
| | | | | | | |
Operating expenses: | |
|
| |
|
| |
Selling, general and administrative | |
| 90,144 | |
| 84,015 | |
Research and development | |
| 21,314 | |
| 17,387 | |
Impairment charges | |
| — | |
| 1,672 | |
Contingent consideration expense | |
| 521 | |
| 2,600 | |
Total operating expenses | |
| 111,979 | |
| 105,674 | |
| | | | | | | |
Income from operations | |
| 26,383 | |
| 15,233 | |
| | | | | | | |
Other income (expense): | |
|
| |
|
| |
Interest income | |
| 131 | |
| 104 | |
Interest expense | |
| (2,011) | |
| (1,002) | |
Other income (expense) — net | |
| 997 | |
| (164) | |
Total other expense — net | |
| (883) | |
| (1,062) | |
| | | | | | | |
Income before income taxes | |
| 25,500 | |
| 14,171 | |
| | | | | | | |
Income tax expense | |
| 4,797 | |
| 3,626 | |
| | | | | | | |
Net income | | $ | 20,703 | | $ | 10,545 | |
| | | | | | | |
Earnings per common share | |
|
| |
|
| |
Basic | | $ | 0.36 | | $ | 0.19 | |
Diluted | | $ | 0.36 | | $ | 0.18 | |
| | | | | | | |
Weighted average shares outstanding | |
|
| |
|
| |
Basic | |
| 57,352 | |
| 56,593 | |
Diluted | |
| 58,183 | |
| 57,531 | |
See condensed notes to consolidated financial statements.
5
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands - unaudited)
| | | | | | | |
|
| Three Months Ended | | ||||
| | March 31, | | ||||
|
| 2023 |
| 2022 | | ||
Net income | | $ | 20,703 | | $ | 10,545 | |
Other comprehensive income (loss): | |
|
| |
|
| |
Cash flow hedges | |
| (1,691) | |
| 2,907 | |
Income tax benefit (expense) | |
| 406 | |
| (712) | |
Foreign currency translation adjustment | |
| 1,925 | |
| (793) | |
Income tax expense | |
| (19) | |
| (64) | |
Total other comprehensive income | |
| 621 | |
| 1,338 | |
Total comprehensive income | | $ | 21,324 | | $ | 11,883 | |
See condensed notes to consolidated financial statements.
6
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands - unaudited)
| | | | | | | | | | | | | | |
| | Common Stock | | Retained | | Accumulated Other | | | | |||||
|
| Shares |
| Amount |
| Earnings |
| Comprehensive Loss |
| Total | ||||
| | | | | | | | | | | | | | |
Balance — January 1, 2023 |
| 57,306 | | $ | 675,174 | | $ | 480,773 | | $ | (11,550) | | $ | 1,144,397 |
Net income |
|
| |
|
| |
| 20,703 | |
|
| |
| 20,703 |
Other comprehensive income |
|
| |
|
| |
|
| |
| 621 | |
| 621 |
Stock-based compensation expense |
|
| |
| 3,498 | |
|
| |
|
| |
| 3,498 |
Options exercised |
| 123 | |
| 3,726 | |
|
| |
|
| |
| 3,726 |
Issuance of common stock under Employee Stock Purchase Plan |
| 4 | |
| 302 | |
|
| |
|
| |
| 302 |
Shares issued from time-vested restricted stock units | | 61 | | | — | | | | | | | | | — |
Shares surrendered in exchange for payment of payroll tax liabilities |
| (22) | |
| (1,592) | | | | | | | | | (1,592) |
Balance — March 31, 2023 |
| 57,472 | | $ | 681,108 | | $ | 501,476 | | $ | (10,929) | | $ | 1,171,655 |
| |
| |
| | | | | | | | | | | | | | |
| | Common Stock | | Retained | | Accumulated Other | | | | |||||
|
| Shares |
| Amount |
| Earnings |
| Comprehensive Loss |
| Total | ||||
Balance — January 1, 2022 |
| 56,570 | | $ | 641,533 | | $ | 406,257 | | $ | (7,991) | | $ | 1,039,799 |
Net income |
|
| |
|
| |
| 10,545 | |
|
| |
| 10,545 |
Other comprehensive income |
| | |
| | |
| | |
| 1,338 | |
| 1,338 |
Stock-based compensation expense |
| | |
| 4,212 | |
| | |
| | |
| 4,212 |
Options exercised |
| 52 | |
| 1,320 | |
| | |
| | |
| 1,320 |
Issuance of common stock under Employee Stock Purchase Plan |
| 5 | |
| 320 | |
| | |
| | |
| 320 |
Shares issued from time-vested restricted stock units | | 44 | | | — | | | | | | | | | — |
Shares surrendered in exchange for payment of payroll tax liabilities |
| (16) | |
| (1,015) | | | | | | | | | (1,015) |
Balance — March 31, 2022 |
| 56,655 | | $ | 646,370 | | $ | 416,802 | | $ | (6,653) | | $ | 1,056,519 |
| |
See condensed notes to consolidated financial statements. | |
7
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
| | | | ||
Net income | | $ | 20,703 | | $ | 10,545 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
|
|
Depreciation and amortization | |
| 20,537 | |
| 20,466 |
Loss on sale or abandonment of property and equipment | |
| 207 | |
| 94 |
Write-off of certain intangible assets and other long-term assets | |
| — | |
| 1,672 |
Amortization of right-of-use operating lease assets | | | 2,662 | | | 2,584 |
Adjustments related to contingent consideration liabilities | | | 521 | | | 2,600 |
Amortization of deferred credits | |
| (26) | |
| (27) |
Amortization of long-term debt issuance costs | |
| 151 | |
| 151 |
Stock-based compensation expense | |
| 3,969 | |
| 4,642 |
Changes in operating assets and liabilities, net of acquisitions and divestitures: | |
| | |
| |
Trade receivables | |
| (4,880) | |
| (3,851) |
Other receivables | |
| (1,465) | |
| 5,854 |
Inventories | |
| (22,974) | |
| (9,177) |
Prepaid expenses and other current assets | |
| 1,386 | |
| (1,307) |
Income tax refund receivables | |
| (270) | |
| 196 |
Other assets | |
| (79) | |
| 833 |
Trade payables | |
| (2,963) | |
| 2,670 |
Accrued expenses | |
| (3,571) | |
| (23,508) |
Income taxes payable | |
| 2,658 | |
| 1,147 |
Deferred compensation payable | |
| 605 | |
| (1,307) |
Operating lease liabilities | | | (2,237) | | | (2,841) |
Other long-term obligations | |
| (389) | |
| 574 |
Total adjustments | |
| (6,158) | |
| 1,465 |
Net cash, cash equivalents, and restricted cash provided by operating activities | |
| 14,545 | |
| 12,010 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
|
| |
|
|
Capital expenditures for: | |
|
| |
|
|
Property and equipment | |
| (12,785) | |
| (9,526) |
Intangible assets | |
| (271) | |
| (342) |
Proceeds from the sale of property and equipment | |
| 200 | |
| — |
Cash paid in acquisitions, net of cash acquired | |
| (2,000) | |
| — |
Net cash, cash equivalents, and restricted cash used in investing activities | | $ | (14,856) | | $ | (9,868) |
| |
See condensed notes to consolidated financial statements. | (continued) |
8
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
| | | | | | |
|
| Three Months Ended | ||||
| | March 31, | ||||
| | 2023 | | 2022 | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
| | | | ||
Proceeds from issuance of common stock | | $ | 4,028 | | $ | 1,641 |
Proceeds from issuance of long-term debt | |
| 49,687 | |
| 80,524 |
Payments on long-term debt | | | (50,052) | | | (70,899) |
Contingent payments related to acquisitions | |
| (2,568) | |
| (24,491) |
Payment of taxes related to an exchange of common stock | |
| (1,592) | |
| (1,015) |
Net cash, cash equivalents, and restricted cash used in financing activities | |
| (497) | |
| (14,240) |
Effect of exchange rates on cash, cash equivalents, and restricted cash | |
| 376 | |
| 111 |
Net decrease in cash, cash equivalents and restricted cash | |
| (432) | |
| (11,987) |
| | | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | |
|
| |
|
|
Beginning of period | | | 60,558 | | | 67,750 |
End of period | | $ | 60,126 | | $ | 55,763 |
| | | | | | |
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS: | | | | | | |
Cash and cash equivalents | | | 57,945 | | | 53,875 |
Restricted cash reported in prepaid expenses and other current assets | | | 2,181 | | | 1,888 |
Total cash, cash equivalents and restricted cash | | $ | 60,126 | | $ | 55,763 |
| | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |
|
| |
|
|
Cash paid during the period for: | |
|
| |
|
|
Interest (net of capitalized interest of $311 and $126, respectively) | | $ | 2,002 | | $ | 993 |
Income taxes | | | 2,467 | | | 2,411 |
| | | | | | |
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES | |
|
| |
|
|
Property and equipment purchases in accounts payable | | $ | 3,587 | | $ | 2,442 |
Acquisition purchases in other long-term obligations | | | 3,596 | | | — |
Right-of-use operating lease assets obtained in exchange for operating lease liabilities | | | 87 | | | 1,404 |
| |
See condensed notes to consolidated financial statements. | (concluded) |
9
(Unaudited)
Basis of Presentation.
2. Recently Issued Financial Accounting Standards. In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which was filed withprovides temporary optional expedients and exceptions in accounting for modifications of contracts that reference the Securities and Exchange Commission (the "SEC"London interbank offered rate (“LIBOR”) on March 1, 2017.
September 30, | December 31, | ||||||
2017 | 2016 | ||||||
Finished goods | $ | 80,708 | $ | 63,852 | |||
Work-in-process | 18,162 | 11,008 | |||||
Raw materials | 46,728 | 45,835 | |||||
Total | $ | 145,598 | $ | 120,695 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Cost of goods sold | $ | 189 | $ | 105 | $ | 453 | $ | 369 | |||||||
Research and development | 110 | 51 | 262 | 147 | |||||||||||
Selling, general, and administrative | 893 | 347 | 2,168 | 1,397 | |||||||||||
Stock-based compensation expense before taxes | $ | 1,192 | $ | 503 | $ | 2,883 | $ | 1,913 |
Nine Months Ended September 30, | |||
2017 | 2016 | ||
Risk-free interest rate | 1.77% - 1.83% | 1.15% - 1.40% | |
Expected option life | 5.0 years | 5.0 years | |
Expected dividend yield | —% | —% | |
Expected price volatility | 33.81% - 34.07% | 36.30% - 37.06% |
Three Months | Nine Months | ||||||||||||||||||||
Net Income | Shares | Per Share Amount | Net Income | Shares | Per Share Amount | ||||||||||||||||
Period ended September 30, 2017: | |||||||||||||||||||||
Basic EPS | $ | (3,569 | ) | 50,150 | $ | (0.07 | ) | $ | 20,717 | 48,332 | $ | 0.43 | |||||||||
Effect of dilutive stock options and warrants | 1,449 | 1,223 | |||||||||||||||||||
Diluted EPS | $ | (3,569 | ) | 51,599 | $ | (0.07 | ) | $ | 20,717 | 49,555 | $ | 0.42 | |||||||||
Stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive | 200 | 434 | |||||||||||||||||||
Period ended September 30, 2016: | |||||||||||||||||||||
Basic EPS | $ | 973 | 44,447 | $ | 0.02 | $ | 12,615 | 44,346 | $ | 0.28 | |||||||||||
Effect of dilutive stock options and warrants | 553 | 417 | |||||||||||||||||||
Diluted EPS | $ | 973 | 45,000 | $ | 0.02 | $ | 12,615 | 44,763 | $ | 0.28 | |||||||||||
Stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive | 408 | 864 |
We currently believe that all other issued and not yet effective accounting standards are not materially relevant to the assets acquiredour financial statements.
3. Revenue from Laurane (in thousands):
Preliminary Allocation | ||||
Net Assets Acquired | ||||
Inventories | $ | 579 | ||
Intangibles | ||||
Developed technology | 14,920 | |||
Customer list | 120 | |||
Goodwill | 6,381 | |||
Total net assets acquired | $ | 22,000 |
Preliminary Allocation | ||||
Net Assets Acquired | ||||
Inventories | $ | 1,023 | ||
Property and equipment | 58 | |||
Intangibles | ||||
Developed technology | 5,400 | |||
Customer list | 200 | |||
Goodwill | 159 | |||
Total net assets acquired | $ | 6,840 |
Preliminary Allocation | Adjustments (1) | Revised Preliminary Allocation | ||||||||||
Net Assets Acquired | ||||||||||||
Intangibles | ||||||||||||
Developed technology | $ | 7,800 | $ | — | $ | 7,800 | ||||||
In-process technology | 850 | 250 | 1,100 | |||||||||
Goodwill | 4,323 | (153 | ) | 4,170 | ||||||||
Deferred tax liabilities | (3,073 | ) | (97 | ) | (3,170 | ) | ||||||
Total net assets acquired | $ | 9,900 | $ | — | $ | 9,900 | ||||||
(1) | Amounts represent adjustments to the preliminary purchase price allocation first presented in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 resulting from our ongoing activities, including reassessment of the assets acquired and liabilities assumed, with respect to finalizing our purchase price allocation for this acquisition. |
Preliminary Allocation | Adjustments (2) | Revised Preliminary Allocation | ||||||||||
Assets Acquired | ||||||||||||
Cash and cash equivalents | $ | 1,436 | $ | — | $ | 1,436 | ||||||
Trade receivables | 8,351 | — | 8,351 | |||||||||
Inventories | 12,217 | (995 | ) | 11,222 | ||||||||
Prepaid expenses and other assets | 1,275 | — | 1,275 | |||||||||
Property and equipment | 2,667 | (348 | ) | 2,319 | ||||||||
Deferred tax assets | 184 | 19 | 203 | |||||||||
Intangibles | ||||||||||||
Developed technology | 2,600 | (400 | ) | 2,200 | ||||||||
Customer lists | 1,300 | 200 | 1,500 | |||||||||
Trademarks | 1,500 | (600 | ) | 900 | ||||||||
Total assets acquired | 31,530 | (2,124 | ) | 29,406 | ||||||||
Liabilities Assumed | ||||||||||||
Trade payables | (2,306 | ) | (109 | ) | (2,415 | ) | ||||||
Accrued expenses | (5,083 | ) | — | (5,083 | ) | |||||||
Income taxes payable | (2 | ) | — | (2 | ) | |||||||
Deferred income tax liabilities | (999 | ) | (11 | ) | (1,010 | ) | ||||||
Total liabilities assumed | (8,390 | ) | (120 | ) | (8,510 | ) | ||||||
Total net assets acquired | 23,140 | (2,244 | ) | 20,896 | ||||||||
Gain on bargain purchase (1) | (12,243 | ) | 1,447 | (10,796 | ) | |||||||
Total purchase price | $ | 10,897 | $ | (797 | ) | $ | 10,100 | |||||
(1) | The total fair value of the net assets acquired from Argon exceeded the purchase price, resulting in a gain on bargain purchase which was recorded within other income (expense) in our consolidated statements of income, and includes a negative adjustment of $778,000 in the three-month period ended September 30, 2017 (in addition to the negative adjustment of $669,000 in the three-month period ended June 30, 2017). We believe the reason for the provisional gain on bargain purchase was a result of the divestiture of a non-strategic, slow-growth critical care business for Argon. It is our understanding that the divestiture allows Argon to focus on its higher growth interventional portfolio. | |||||||||||
(2) | Amounts represent adjustments to the preliminary purchase price allocation first presented in our March 31, 2017 Form 10-Q resulting from our ongoing activities, including reassessment of the assets acquired and liabilities assumed, with respect to finalizing our purchase price allocation for this acquisition. |
Disaggregation of Revenue
Our revenue is disaggregated based on reporting segment, product category and $7.0 million, respectively. It is not practical to separately report the earnings related to the products acquired from Catheter Connections, as we cannot split out sales costs related solely to those products, principally because our sales representatives sell multiple products (including the DualCap System) in the cardiovascular business segment. The purchase price was preliminarily allocated as follows (in thousands):
Preliminary Allocation | Adjustments (1) | Revised Preliminary Allocation | ||||||||||
Assets Acquired | ||||||||||||
Trade receivables | $ | 952 | $ | 7 | $ | 959 | ||||||
Inventories | 2,244 | (87 | ) | 2,157 | ||||||||
Prepaid expenses and other assets | 181 | (96 | ) | 85 | ||||||||
Property and equipment | 1,472 | — | 1,472 | |||||||||
Intangibles | ||||||||||||
Developed technology | 22,900 | (1,800 | ) | 21,100 | ||||||||
Customer lists | 100 | 600 | 700 | |||||||||
Trademarks | 2,900 | — | 2,900 | |||||||||
Goodwill | 7,612 | 1,376 | 8,988 | |||||||||
Total assets acquired | 38,361 | — | 38,361 | |||||||||
Liabilities Assumed | ||||||||||||
Trade payables | (338 | ) | — | (338 | ) | |||||||
Accrued expenses | (23 | ) | — | (23 | ) | |||||||
Total liabilities assumed | (361 | ) | — | (361 | ) | |||||||
Net assets acquired | $ | 38,000 | $ | — | $ | 38,000 | ||||||
(1) | Amounts represent adjustments to the preliminary purchase price first presented in our Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2017, resulting from our ongoing activities with respect to finalizing our purchase price allocation for this acquisition. The larger adjustments primarily relate to the valuation of the acquired intangible assets. |
Assets Acquired | |||
Trade receivables | $ | 4,054 | |
Other receivables | 6 | ||
Inventories | 8,585 | ||
Prepaid expenses | 630 | ||
Property and equipment | 1,630 | ||
Other long-term assets | 145 | ||
Intangibles | |||
Developed technology | 67,600 | ||
Customer lists | 2,400 | ||
Trademarks | 4,400 | ||
Goodwill | 24,818 | ||
Total assets acquired | 114,268 | ||
Liabilities Assumed | |||
Trade payables | (1,790 | ) | |
Accrued expenses | (5,298 | ) | |
Deferred income tax liabilities - current | (701 | ) | |
Deferred income tax liabilities - noncurrent | (10,844 | ) | |
Total liabilities assumed | (18,633 | ) | |
Net assets acquired, net of cash received of $1,327 | $ | 95,635 |
Assets Acquired | |||
Inventories | $ | 2,455 | |
Property and equipment | 290 | ||
Intangibles | |||
Developed technology | 12,100 | ||
Trademarks | 700 | ||
Customers Lists | 400 | ||
Goodwill | 2,555 | ||
Total assets acquired | $ | 18,500 |
Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||||||||||
September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||||||||||
As Reported | Pro Forma | As Reported | Pro Forma | As Reported | Pro Forma | ||||||||||||||||||
Net Sales | $ | 156,975 | $ | 167,321 | $ | 536,955 | $ | 539,715 | $ | 446,123 | $ | 494,589 | |||||||||||
Net Income | 973 | 1,174 | 20,717 | 10,047 | 12,615 | 16,454 | |||||||||||||||||
Earnings per common share: | |||||||||||||||||||||||
Basic | $ | 0.02 | $ | 0.03 | $ | 0.43 | $ | 0.21 | $ | 0.28 | $ | 0.37 | |||||||||||
Diluted | $ | 0.02 | $ | 0.03 | $ | 0.42 | $ | 0.20 | $ | 0.28 | $ | 0.37 |
10
The following tables present revenue from contracts with customers by reporting segment, product category and reconciliations to the consolidated totalsgeographical region for the three and nine-monththree-month periods ended September 30, 2017March 31, 2023 and 2016,2022 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | ||||||||||||||
| | March 31, 2023 | | March 31, 2022 | ||||||||||||||
|
| United States |
| International |
| Total |
| United States |
| International |
| Total | ||||||
Cardiovascular |
| |
|
| | |
| |
|
| |
|
| |
|
| |
|
Peripheral Intervention | | $ | 68,667 | | $ | 45,116 | | $ | 113,783 | | $ | 62,100 | | | 43,673 | | $ | 105,773 |
Cardiac Intervention | |
| 34,305 | | | 51,023 | |
| 85,328 | |
| 28,549 | | | 52,938 | |
| 81,487 |
Custom Procedural Solutions | |
| 26,799 | | | 20,902 | |
| 47,701 | |
| 26,555 | | | 19,707 | |
| 46,262 |
OEM | |
| 32,564 | | | 8,600 | |
| 41,164 | |
| 27,796 | | | 5,618 | |
| 33,414 |
Total | |
| 162,335 | | | 125,641 | |
| 287,976 | |
| 145,000 | |
| 121,936 | |
| 266,936 |
| |
| | | | | | | | | | | | | | | | |
Endoscopy | | | | | | | | | | | | | | | | | | |
Endoscopy Devices | |
| 9,025 | |
| 564 | |
| 9,589 | |
| 7,992 | | | 487 | |
| 8,479 |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 171,360 | | $ | 126,205 | | $ | 297,565 | | $ | 152,992 | | $ | 122,423 | | $ | 275,415 |
4. Acquisitions. During January 2023, we paid $2.0 million to acquire shares of Series Seed-1 Preferred Stock of Solo Pace Inc. ("Solo Pace"), owner and developer of a temporary external pulse generator and grounding pad with associated remote control module. Our investment has been recorded as an equity investment accounted for at cost and reflected within other assets in the accompanying consolidated balance sheets because the equity interest does not have a readily determinable fair value and because we are not able to exercise significant influence over the operations of Solo Pace. Our investment in Solo Pace represents an ownership of approximately 19% of its outstanding capital stock.
5. Inventories. Inventories at March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
| | | | | | |
|
| March 31, 2023 |
| December 31, 2022 | ||
Finished goods | | $ | 153,275 | | $ | 147,051 |
Work-in-process | |
| 34,646 | |
| 29,534 |
Raw materials | |
| 101,660 | |
| 89,406 |
Total inventories | | $ | 289,581 | | $ | 265,991 |
6. Goodwill and Intangible Assets. The change in the carrying amount of goodwill for the three-month period ended March 31, 2023 is detailed as follows (in thousands):
| | | |
|
| 2023 | |
Goodwill balance at January 1 | | $ | 359,821 |
Effect of foreign exchange | |
| 470 |
Goodwill balance at March 31 | | $ | 360,291 |
Total accumulated goodwill impairment losses aggregated $8.3 million as of March 31, 2023 and December 31, 2022. We did not have any goodwill impairments for the three-month periods ended March 31, 2023 and 2022. The total goodwill balances as of March 31, 2023 and December 31, 2022 were related to our cardiovascular segment.
11
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net Sales (1) | |||||||||||||||
Cardiovascular | $ | 172,723 | $ | 150,503 | $ | 517,140 | $ | 428,571 | |||||||
Endoscopy | 6,614 | 6,472 | 19,815 | 17,552 | |||||||||||
Total net sales | 179,337 | 156,975 | 536,955 | 446,123 | |||||||||||
Operating Income (Loss)(1) | |||||||||||||||
Cardiovascular | (1,207 | ) | 1,858 | 14,239 | 19,385 | ||||||||||
Endoscopy | 2,086 | 1,129 | 5,611 | 2,889 | |||||||||||
Total operating income | 879 | 2,987 | 19,850 | 22,274 |
Other intangible assets at March 31, 2023 and operating income have been adjusted from earlier reported year-to-date amountsDecember 31, 2022 consisted of the following (in thousands):
| | | | | | | | | |
| | March 31, 2023 | |||||||
| | Gross Carrying | | Accumulated | | Net Carrying | |||
|
| Amount |
| Amortization |
| Amount | |||
Patents | | $ | 29,716 | | $ | (10,888) | | $ | 18,828 |
Distribution agreements | |
| 3,250 | |
| (2,766) | |
| 484 |
License agreements | |
| 11,119 | |
| (7,536) | |
| 3,583 |
Trademarks | |
| 30,229 | |
| (18,522) | |
| 11,707 |
Customer lists | |
| 34,109 | |
| (32,030) | |
| 2,079 |
Total | | $ | 108,423 | | $ | (71,742) | | $ | 36,681 |
| | | | | | | | | |
| | December 31, 2022 | |||||||
| | Gross Carrying | | Accumulated | | Net Carrying | |||
|
| Amount |
| Amortization |
| Amount | |||
Patents | | $ | 29,445 | | $ | (10,203) | | $ | 19,242 |
Distribution agreements | |
| 3,250 | |
| (2,715) | |
| 535 |
License agreements | |
| 11,109 | |
| (7,250) | |
| 3,859 |
Trademarks | |
| 30,221 | |
| (17,863) | |
| 12,358 |
Customer lists | |
| 34,105 | |
| (31,749) | |
| 2,356 |
Total | | $ | 108,130 | | $ | (69,780) | | $ | 38,350 |
Aggregate amortization expense for 2017the three-month period ended March 31, 2023 and 2016 to reflect2022 was $12.3 million and $12.2 million, respectively.
We evaluate long-lived assets, including amortizing intangible assets, for impairment whenever events or changes in product classifications between our operating segments,circumstances indicate that their carrying amounts may not be recoverable. We perform the impairment analysis at the asset group for which were made to be consistent with updates in the managementlowest level of our product portfolios inidentifiable cash flows is largely independent of the third quartercash flows of 2017.
assessment.
During the three-month period ended March 31, 2022, we identified indicators of impairment associated with its carrying amountcertain acquired intangible assets based on our qualitative assessment, which led us to complete an interim quantitative impairment assessment. The primary indicator of impairment was our planned divestiture of the STD Pharmaceutical Products Limited (“STD Pharmaceutical”) business acquired in our August 2019 acquisition of Fibrovein Holdings Limited. On April 30, 2022, we completed the divestiture of Fibrovein Holdings Limited, in exchange for the termination of our obligations arising from the acquisition transaction in August 2019 and recognizingthe purchaser’s agreement to make potential future payments upon a qualifying disposition of the STD Pharmaceutical business. We recorded an impairment charge for the amount bycarrying value of $1.7 million of intangible assets during the three months ended March 31, 2022, all of which pertained to our cardiovascular segment. There were no impairments during the carrying amount exceeds the reporting unit’s fair value. We adopted ASU 2017-04 effective January 1, 2017 on a prospective basis,three-month period ended March 31, 2023.
Estimated amortization expense for developed technology and it did not have a material impact on our consolidated financial statementsother intangible assets for the nine months ended September 30, 2017.
| | | |
|
| Estimated Amortization Expense | |
Remaining 2023 | | $ | 35,625 |
2024 | |
| 44,621 |
2025 | |
| 42,715 |
2026 | | | 32,126 |
2027 | |
| 29,034 |
12
7. Income Taxes.
Our provision for income taxes for the8. Revolving Credit Facility and Long-termLong-Term Debt.
September 30, 2017 | December 31, 2016 | ||||||
2016 Term loan | $ | 87,500 | $ | 145,000 | |||
2016 Revolving credit loans | 184,000 | 180,000 | |||||
2017 Debt facility | 6,962 | — | |||||
Less debt issuance costs | (522 | ) | (627 | ) | |||
Total debt | 277,940 | 324,373 | |||||
Less current portion | 16,962 | 10,000 | |||||
Long-term portion | $ | 260,978 | $ | 314,373 |
| | | | | | |
|
| March 31, 2023 |
| December 31, 2022 | ||
Term loans | | $ | 121,875 | | $ | 124,688 |
Revolving credit loans | |
| 75,948 | |
| 73,500 |
Less unamortized debt issuance costs | |
| (150) | |
| (179) |
Total long-term debt | |
| 197,673 | |
| 198,009 |
Less current portion | |
| 11,250 | |
| 11,250 |
Long-term portion | | $ | 186,423 | | $ | 186,759 |
Third Amended and Restated Credit Agreement
On February 23, 2017,July 31, 2019, we entered into a loan agreement with HSBC Bank USA, National Association ("HSBC Bank") whereby HSBC Bank agreed to provide us with a loan in the amount of approximately $7.0 million. The loan matures on February 1, 2018, with an extension available at our option, subject to certain conditions. The loan agreement bears interest at the three-month London Inter-Bank Offered Rate (“LIBOR”) plus 1.0%, which resets quarterly. The loan is secured by assets equal to the currently outstanding loan balance. The loan contains covenants, representations and warranties and other terms customary for loans of this nature. As of September 30, 2017, our interest rate on the loan was a variable rate of 2.32%.
Revolving credit loans denominated in dollars and term loans made under the SecondThird Amended Credit Agreement bear interest, at our election, at either athe Base Rate or the Eurocurrency Base Rate (as such terms are defined in the SecondThird Amended Credit Agreement) plus the applicable margin, which increases as our Consolidated Total Leverage RatioApplicable Margin (as defined in the SecondThird Amended Credit Agreement) increases.. Revolving credit loans denominated in an Alternative Currency (as defined in the SecondThird Amended Credit Agreement) bear interest at the Eurocurrency rateRate plus the applicable margin.Applicable Margin. Swingline loans bear interest at the base rateBase Rate plus the applicable margin. Upon an event of default,Applicable Margin (as defined in the interest rate may be increased by 2.0%Third Amended Credit Agreement). The revolving credit commitment will also carry a commitment fee of 0.15% to 0.40% per annumInterest on each Base Rate loan is due and payable on the unused portion.
The SecondThird Amended Credit Agreement is collateralized by substantially all our assets. The SecondThird Amended Credit Agreement contains affirmative and negative covenants, representations and warranties, events of default and other terms customary for loans of this nature. The SecondIn particular, the Third Amended Credit Agreement requires that we maintain certain financial covenants, as follows:
| | | | | |
| Covenant Requirement | | |||
Consolidated Total Leverage Ratio (1) | | 4.0 to 1.0 | | ||
Consolidated Interest Coverage Ratio (2) | | 3.0 to 1.0 | |
13
Facility Capital Expenditures | | | $ | | |
(1) | Maximum Consolidated Total Net Leverage Ratio (as defined in the |
(2) | Minimum ratio of Consolidated EBITDA (as defined in the |
(3) | |||
Maximum level of the aggregate amount of all Facility Capital Expenditures (as defined in the |
We believe we were in compliance with all covenants set forth in the SecondThird Amended Credit Agreement.
As of September 30, 2017,March 31, 2023, we had outstanding borrowings of approximately $271.5$197.8 million and issued letter of credit guarantees of $3.2 million under the SecondThird Amended Credit Agreement, with additional available borrowings of approximately $91.0$521 million, based on the maximum net leverage ratio requiredand the aggregate revolving credit commitment pursuant to the SecondThird Amended Credit Agreement. Our interest rate as of September 30, 2017March 31, 2023 was a fixed rate of 2.23% on $126.32.71% with respect to $75 million and a fixed rate of 2.37% on $48.8 millionthe principal amount, as a result of an interest rate swapsswap (see Note 10)9), a variable floating rate of 2.49% on $84.5 million and a variable floating rate of 2.49% on $12.0 million.5.84% with respect to $122.8 million of the principal amount. Our interest rate as of December 31, 20162022 was a fixed rate of 2.98%2.71% on $130.0 million and 3.12% on $45.0$75 million as a result of an interest rate swapsswap and a variable floating rate of 2.77%5.38% on $150.0$123.2 million.
Future minimum principal payments on our long-term debt, as of September 30, 2017, areMarch 31, 2023, were as follows (in thousands):
Years Ending | Future Minimum | |||
December 31 | Principal Payments | |||
Remaining 2017 | 2,500 | |||
2018 | 19,462 | |||
2019 | 15,000 | |||
2020 | 17,500 | |||
2021 | 224,000 | |||
Total future minimum principal payments | $ | 278,462 |
| | | |
Years Ending | | Future Minimum | |
December 31, |
| Principal Payments | |
Remaining 2023 |
| $ | 8,438 |
2024 | | | 189,385 |
Total future minimum principal payments | | $ | 197,823 |
9. Derivatives.
General.
Our earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates, and we seek to mitigate a portion of
We formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment initially and on an ongoing basis. ChangesFor qualifying hedges, the change in the fair value of derivatives that qualify for hedge accounting treatment are recorded, net of applicable taxes,is deferred in accumulated other comprehensive income, (loss), a component of stockholders’ equity in the accompanying consolidated balance sheets. Forsheets, and recognized in earnings at the ineffective portions of qualifying hedges,same time the change in fair value is recorded through earnings in the period of change.hedged item affects earnings. Changes in the fair value of derivativesderivative instruments not designated as hedging instruments are recorded in earnings throughout the term of the derivative.
Interest Rate Risk.
14
Derivative Instruments Designated as Cash Flow Hedges
On December 19, 2012,23, 2019, we entered into a pay-fixed, receive-variable interest rate swap having an initialwith a notional amount of $150$75 million with Wells Fargo to fix the one-month LIBOR rate at 0.98%. The variableon that portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). The interest rates under both the interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid on a monthly basis. The notional amount of the interest rate swap is reduced quarterly by 50% of the minimum principal payment dueour borrowings under the terms of our SecondThird Amended Credit Agreement. The interest rate swap is scheduledAgreement at 1.71% for the period from July 6, 2021 to expire on December 19, 2017.
On March 31, 2023 and December 31, 2022, our interest rate swap increases quarterly by an amount equal to the decrease of the hedge entered into on December 19, 2012, up to the amount of $175.0 million. The interest rate swap is scheduled to expire on July 6, 2021.
Foreign Currency Risk
Derivative Instruments Designated as Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is temporarily reported as a component of other comprehensive income (loss) and then reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion) or hedge components excluded from the assessment of effectiveness, are recognized in earnings during the current period. We enterentered into forward contracts on various foreign currencies to manage the risk associated with forecasted exchange rates which impact revenues, cost of sales, and operating expenses in various international markets. The objective of the hedges is to reduce the variability of cash flows associated with the forecasted purchase or sale of the associated foreign currencies.
We enter into approximately 100 cash flow foreign currency cash flow hedges every month. As of September 30, 2017,March 31, 2023 and December 31, 2022, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with the followingaggregate notional amounts (in thousandsof $98.0 million and in local currencies):
Derivative Instruments Not Designated as Cash Flow Hedges
We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and we enter into foreign currency forward contracts to mitigate that exposure. We enter into approximately 2050 foreign currency fair value hedges every month. As of September 30, 2017,March 31, 2023 and December 31, 2022, we had entered into foreign currency forward contracts related to those balance sheet accounts with the followingaggregate notional amounts (in thousandsof $129.0 million and in local currencies):
Balance Sheet Presentation of Derivatives.
15
The fair value of derivative instruments on a gross basis iswas as follows on the dates indicated (in thousands):
Fair Value | |||||||||
Balance Sheet Location | September 30, 2017 | December 31, 2016 | |||||||
Derivatives designated as hedging instruments | |||||||||
Assets | |||||||||
Interest rate swaps | Prepaid expenses and other assets (current) | $ | 79 | $ | — | ||||
Interest rate swaps | Other assets (long-term) | 4,309 | 4,991 | ||||||
Foreign currency forward contracts | Prepaid expenses and other assets (current) | 646 | 116 | ||||||
Foreign currency forward contracts | Other assets (long-term) | 158 | 18 | ||||||
(Liabilities) | |||||||||
Foreign currency forward contracts | Accrued expenses (current) | $ | (286 | ) | $ | (275 | ) | ||
Foreign currency forward contracts | Other long-term obligations | (96 | ) | (18 | ) | ||||
Derivatives not designated as hedging instruments | |||||||||
Assets | |||||||||
Foreign currency forward contracts | Prepaid expenses and other assets (current) | $ | 485 | $ | 220 | ||||
(Liabilities) | |||||||||
Foreign currency forward contracts | Accrued expenses (current) | (210 | ) | (171 | ) |
| | | | | | | | |
Fair Value of Derivative Instruments Designated as Hedging Instruments |
| Balance Sheet Location |
| March 31, 2023 |
| December 31, 2022 | ||
Assets |
|
|
| |
|
| |
|
Interest rate swaps |
| Other assets (long-term) | | $ | 2,791 | | $ | 3,444 |
Foreign currency forward contracts |
| Prepaid expenses and other assets | | | 2,397 | | | 3,215 |
Foreign currency forward contracts |
| Other assets (long-term) | | | 120 | |
| 56 |
| | | | | | | | |
(Liabilities) |
|
| |
|
| |
|
|
Foreign currency forward contracts |
| Accrued expenses | |
| (1,456) | |
| (1,509) |
Foreign currency forward contracts |
| Other long-term obligations | |
| (500) | |
| (531) |
| | | | | | | | |
Fair Value of Derivative Instruments Not Designated as Hedging Instruments |
| Balance Sheet Location |
| March 31, 2023 |
| December 31, 2022 | ||
Assets |
|
| |
|
| |
|
|
Foreign currency forward contracts |
| Prepaid expenses and other assets | | $ | 1,884 | | $ | 1,512 |
| | | | | | | | |
(Liabilities) |
|
| |
|
| |
|
|
Foreign currency forward contracts |
| Accrued expenses | |
| (1,503) | |
| (1,946) |
Income Statement Presentation of Derivatives
Derivative Instruments Designated as Cash Flow Hedges
Derivative instruments designated as cash flow hedges had the following effects, before income taxes, on other comprehensive income (“OCI”), accumulated other comprehensive income (“AOCI”), and net earnings in our consolidated statements of income, consolidated statements of comprehensive income and consolidated balance sheets (in thousands):
Amount of Gain/(Loss) recognized in OCI | Amount of Gain/(Loss) reclassified from AOCI | |||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
Derivative instrument | Location in Statements of Income | |||||||||||||
Interest rate swaps | $ | 1 | $ | (256 | ) | Interest expense | $ | 96 | $ | (153 | ) | |||
Foreign currency forward contracts | 100 | — | Revenue | (101 | ) | — | ||||||||
Cost of goods sold | 250 | — |
Amount of Gain/(Loss) recognized in OCI | Amount of Gain/(Loss) reclassified from AOCI | |||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
Derivative instrument | Location in Statements of Income | |||||||||||||
Interest rate swaps | $ | (611 | ) | $ | (1,503 | ) | Interest expense | $ | (8 | ) | $ | (519 | ) | |
Foreign currency forward contracts | 841 | — | Revenue | (141 | ) | — | ||||||||
Cost of goods sold | 213 | — |
| | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain/(Loss) | | | | Consolidated Statements | | Amount of Gain/(Loss) | ||||||||||||
| | Recognized in OCI | | | | of Income | | Reclassified from AOCI | ||||||||||||
| | Three Months Ended March 31, |
| |
| Three Months Ended March 31, | | Three Months Ended March 31, | ||||||||||||
Derivative instrument |
| 2023 |
| 2022 |
| Location in statements of income |
| 2023 |
|
| 2022 |
| 2023 |
|
| 2022 | ||||
Interest rate swaps | | $ | (119) | | $ | 2,314 | | Interest expense | | $ | (2,011) | | $ | (1,002) | | $ | 534 | | $ | (294) |
Foreign currency forward contracts | |
| 239 | |
| (270) | | Revenue | |
| 297,565 | |
| 275,415 | |
| 1,327 | |
| (386) |
| | | | | | | | Cost of sales | |
| (159,203) | |
| (154,508) | |
| (50) | |
| (183) |
As of September 30, 2017, approximately $461,000,March 31, 2023, $1.7 million, or $282,000$1.3 million after taxes, was expected to be reclassified from accumulated other comprehensive incomeAOCI to earnings in revenue and cost of sales over the succeeding twelve months. As of September 30, 2017, approximately $624,000,March 31, 2023, $2.3 million, or $381,000$1.7 million after taxes, was expected to be reclassified from accumulated other comprehensive incomeAOCI to earnings in interest expense over the succeeding twelve months.
Derivative Instruments Not Designated as Hedging Instruments
The following gains/(losses) from these derivative instruments were recognized in our consolidated statements of income for the periods presented (in thousands):
| | | | | | | | | |
|
| |
| Three Months Ended March 31, |
| ||||
Derivative Instrument |
| Location in statements of income |
| 2023 |
| 2022 |
| ||
Foreign currency forward contracts |
| Other income (expense) — net | | $ | 1,059 | | $ | (1,112) | |
16
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Derivative Instrument | Location in Statements of Income | |||||||||||||||
Foreign currency forward contracts | Other income (expense) | $ | (1,459 | ) | $ | (76 | ) | $ | (4,150 | ) | $ | (222 | ) |
Fair Value Measurements Using | ||||||||||||||||
Total Fair | Quoted prices in | Significant other | Significant | |||||||||||||
Value at | active markets | observable inputs | unobservable inputs | |||||||||||||
Description | September 30, 2017 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Interest rate contracts (1) | $ | 4,388 | $ | — | $ | 4,388 | $ | — | ||||||||
Foreign currency contract assets, current and long-term (2) | $ | 1,289 | $ | — | $ | 1,289 | $ | — | ||||||||
Foreign currency contract liabilities, current and long-term (3) | $ | (592 | ) | $ | — | $ | (592 | ) | $ | — | ||||||
Fair Value Measurements Using | ||||||||||||||||
Total Fair | Quoted prices in | Significant other | Significant | |||||||||||||
Value at | active markets | observable inputs | unobservable inputs | |||||||||||||
Description | December 31, 2016 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Interest rate contracts (1) | $ | 4,991 | $ | — | $ | 4,991 | $ | — | ||||||||
Foreign currency contract assets, current and long-term (2) | $ | 354 | $ | — | $ | 354 | $ | — | ||||||||
Foreign currency contract liabilities, current and long-term (3) | $ | (464 | ) | $ | — | $ | (464 | ) | $ | — |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Beginning balance | $ | 5,572 | $ | 898 | $ | 683 | $ | 1,024 | |||||||
Contingent consideration liability recorded as the result of acquisitions (see Note 5) | 5,500 | — | 10,400 | — | |||||||||||
Fair value adjustments recorded to income during the period | 20 | (193 | ) | 39 | (136 | ) | |||||||||
Contingent payments made | (15 | ) | (16 | ) | (45 | ) | (199 | ) | |||||||
Ending balance | $ | 11,077 | $ | 689 | $ | 11,077 | $ | 689 |
Contingent consideration asset or liability | Fair value at September 30, 2017 | Valuation technique | Unobservable inputs | Range | ||||||
Revenue-based payments | $ | 11,077 | Discounted cash flow | Discount rate | 9.9% - 15% | |||||
contingent liability | Probability of milestone payment | 100% | ||||||||
Projected year of payments | 2017-2037 | |||||||||
Contingent receivable | $ | 528 | Discounted cash flow | Discount rate | 10% | |||||
asset | Probability of milestone payment | 57% | ||||||||
Projected year of payments | 2017-2019 | |||||||||
Contingent consideration asset or liability | Fair value at December 31, 2016 | Valuation technique | Unobservable inputs | Range | ||||||
Revenue-based payments | $ | 683 | Discounted cash flow | Discount rate | 9.9% - 15% | |||||
contingent liability | Probability of milestone payment | 100% | ||||||||
Projected year of payments | 2017-2028 | |||||||||
Contingent receivable | $ | 528 | Discounted cash flow | Discount rate | 10% | |||||
asset | Probability of milestone payment | 57% | ||||||||
Projected year of payments | 2017-2019 |
2017 | |||
Goodwill balance at January 1 | $ | 211,927 | |
Effect of foreign exchange | 2,418 | ||
Additions as the result of acquisitions | 19,698 | ||
Goodwill balance at September 30 | $ | 234,043 |
September 30, 2017 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
Patents | $ | 15,972 | $ | (3,586 | ) | $ | 12,386 | ||||
Distribution agreements | 6,626 | (4,248 | ) | 2,378 | |||||||
License agreements | 23,804 | (4,387 | ) | 19,417 | |||||||
Trademarks | 16,220 | (4,342 | ) | 11,878 | |||||||
Covenants not to compete | 1,028 | (961 | ) | 67 | |||||||
Customer lists | 25,942 | (17,461 | ) | 8,481 | |||||||
In-process technology | 1,100 | — | 1,100 | ||||||||
Total | $ | 90,692 | $ | (34,985 | ) | $ | 55,707 |
December 31, 2016 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
Patents | $ | 14,130 | $ | (3,165 | ) | $ | 10,965 | ||||
Distribution agreements | 6,626 | (3,527 | ) | 3,099 | |||||||
License agreements | 20,695 | (3,422 | ) | 17,273 | |||||||
Trademarks | 12,380 | (3,330 | ) | 9,050 | |||||||
Covenants not to compete | 1,028 | (936 | ) | 92 | |||||||
Customer lists | 22,261 | (15,401 | ) | 6,860 | |||||||
Royalty agreements | 267 | (267 | ) | — | |||||||
Total | $ | 77,387 | $ | (30,048 | ) | $ | 47,339 |
Year Ending December 31 | |||
Remaining 2017 | $ | 6,745 | |
2018 | 26,152 | ||
2019 | 25,678 | ||
2020 | 24,524 | ||
2021 | 18,013 |
10. Commitments and Contingencies.
Litigation. In the ordinary course of business, we are involved in various proceedings, legal actions and claims. These proceedings, actions and claims and litigation matters. These claims and litigation matters may include actions involvinginvolve product liability, intellectual property, contractual,contract disputes, employment, governmental inquiries, audits or proceedings, or other matters, including those more fully described below. The outcomes of these matters will generally not be known for prolonged periods of time. In certain proceedings, the claimants may seek damages as well as other compensatory and employment matters. We do not believeequitable relief that any such actions are likely to be, individually orcould result in the aggregate, materialpayment of significant amounts and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which our management had sufficient information to reasonably estimate our
SEC Inquiry
We have received requests from the Division of Enforcement of the U.S. Securities and Exchange Commission (“SEC”)
seeking the voluntary production of information relating to the business activities of Merit’s subsidiary in China, including interactions with hospitals and health care officials in China. We are cooperating with the requests and investigating the matter and, at this time, are unable to predict the scope, timing, significance or liquidity. However, in the eventoutcome of unexpected further developments, itthis matter.
It is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to our business, financial condition, results of operations or liquidity. Legal costs for these matters such as outside counsel fees and expenses are charged to expense in the period incurred.
11. Earnings Per Common Share (EPS). The computation of weighted average shares outstanding and the basic and diluted earnings per common share for the three-month periods ended March 31, 2023 and 2022 consisted of the following (in thousands, except per share amounts):
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
| | 2023 | | 2022 | | ||
Net income | | $ | 20,703 | | $ | 10,545 | |
Average common shares outstanding | |
| 57,352 | |
| 56,593 | |
Basic EPS | | $ | 0.36 | | $ | 0.19 | |
| | | | | | | |
Average common shares outstanding | | | 57,352 | | | 56,593 | |
Effect of dilutive stock awards | | | 831 | | | 938 | |
Total potential shares outstanding | | | 58,183 | | | 57,531 | |
Diluted EPS | | $ | 0.36 | | $ | 0.18 | |
| | | | | | | |
Equity awards excluded as the impact was anti-dilutive (1) | | | 912 | | | 1,553 | |
(1) | Does not reflect the impact of incremental repurchases under the treasury stock method. |
12. Stock-Based Compensation Expense. Stock-based compensation expense before income tax expense for the three-month periods ended March 31, 2023 and 2022 consisted of the following (in thousands):
17
| | | | | | | |
| | | Three Months Ended | ||||
| | | March 31, | ||||
|
|
| 2023 |
| 2022 | ||
Cost of sales | | | | | | | |
Nonqualified stock options | | | $ | 441 | | $ | 588 |
Research and development | | |
| | | | |
Nonqualified stock options | | | | 428 | |
| 486 |
Selling, general and administrative | | |
| | | | |
Nonqualified stock options | | | | 1,370 | |
| 1,924 |
Performance-based restricted stock units | | | | 815 | | | 815 |
Restricted stock units | | | | 444 | | | 399 |
Cash-settled performance-based share-based awards ("Liability Awards") | | | | 471 | | | 430 |
Total selling, general and administrative | | | | 3,100 | | | 3,568 |
| | | | | | | |
Stock-based compensation expense before taxes | | | $ | 3,969 | | $ | 4,642 |
We recognize stock-based compensation expense (net of Commona forfeiture rate), for those awards which are expected to vest, on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on our historical experience and expectations about future forfeitures.
Nonqualified Stock
During the three-month periods ended March 28, 2017,31, 2023 and 2022, we closed a public offering of 5,175,000granted stock options representing 293,294 and 123,606 shares of our common stock, respectively. We use the Black-Scholes methodology to value the stock-based compensation expense for options. In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted was estimated using the following assumptions for the periods indicated below:
| | | | |
| | Three Months Ended | ||
| | March 31, | ||
| | 2023 | | 2022 |
Risk-free interest rate |
| 3.7% - 4.5% |
| 1.4% - 1.8% |
Expected option term |
| 4.0 years |
| 4.0 years |
Expected dividend yield |
| — |
| — |
Expected price volatility |
| 47.1% |
| 46.2% - 46.6% |
The average risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock award. We determine the expected term of stock options using the historical exercise behavior of employees. The expected price volatility was determined using a weighted average of daily historical volatility of our stock price over the corresponding expected option term and received proceedsimplied volatility based on recent trends of approximately $136.6the daily historical volatility. For awards with a vesting period, compensation expense is recognized on a straight-line basis over the service period, which corresponds to the vesting period.
As of March 31, 2023, the total remaining unrecognized compensation cost related to non-vested stock options was $25.5 million, which was expected to be recognized over a weighted average period of 2.6 years.
Stock-Settled Performance-Based Restricted Stock Units (“Performance Stock Units”)
During the three-month periods ended March 31, 2023 and 2022, we granted performance stock units which represent up to 301,230 and 109,178 shares of our common stock, respectively. Conversion of the performance stock units occurs at the end of the relevant performance periods, or one year after the agreement date, whichever is later. The number of shares delivered upon vesting at the end of the performance periods are based upon performance against specified financial performance metrics and relative total shareholder return as compared to the Russell 2000 Index (“rTSR”), as defined in the award agreements.
18
We use Monte-Carlo simulations to estimate the grant-date fair value of the performance stock units linked to total shareholder return. The fair value of each performance stock unit was estimated as of the grant date using the following assumptions for awards granted in the periods indicated below:
| | | | |
| | Three Months Ended | ||
| | March 31, | ||
| | 2023 | | 2022 |
Risk-free interest rate |
| 4.6% |
| 1.6% |
Performance period |
| 2.8 years |
| 2.8 years |
Expected dividend yield |
| — |
| — |
Expected price volatility |
| 32.6% |
| 42.6% |
The risk-free interest rate of return was determined using the U.S. Treasury rate at the time of grant with a term equal to the expected term of the award. The expected volatility was based on the weighted average volatility of our stock price and the average volatility of our compensation peer group's stock price. The expected dividend yield was assumed to be zero because, at the time of the grant, we had no plans to declare a dividend.
Compensation expense is recognized using the grant-date fair value for the number of shares that are probable of being awarded based on the performance metrics. Each reporting period, this probability assessment is updated, and cumulative adjustments are recorded based on the financial performance metrics expected to be achieved. At the end of the performance period, cumulative expense is calculated based on the actual performance metrics achieved. As of March 31, 2023, the total remaining unrecognized compensation cost related to stock-settled performance stock units was $15.9 million, which is expected to be recognized over a weighted average period of 2.4 years.
Liability Awards
During the three-month periods ended March 31, 2023 and 2022, we granted liability awards to our Chief Executive Officer with total target cash incentives in the amount of $1.3 million and $1.0 million, respectively. These awards entitle him to a target cash payment based upon the Company’s relative shareholder return as compared to the rTSR and achievement of specified performance metrics, as defined in the award agreements.
The fair value of these awards is measured at each reporting period until the awards are settled. These awards are classified as liabilities and reported in accrued expenses and other long-term obligations within our consolidated balance sheet. As of March 31, 2023, the total remaining unrecognized compensation cost related to cash-settled performance-based share-based awards was $4.5 million, which is expected to be recognized over a weighted average period of 2.3 years.
Restricted Stock Units
On June 24, 2022, we granted restricted stock units to our non-employee directors representing a total of 30,500 shares of our common stock. The expense recognized for restricted stock units is equal to the closing stock price on the date of grant, which is recognized over the vesting period. Restricted stock units granted to each director are subject to such director’s continued service through the vesting date, which is one year from the date of grant. As of March 31, 2023, the total remaining unrecognized compensation cost related to restricted stock units was $0.3 million, which will be recognized over the remaining vesting period.
13. Segment Reporting. We report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of four product categories: peripheral intervention, cardiac intervention, custom procedural solutions, and OEM. Within these product categories, we sell a variety of products, including cardiology and radiology devices (which assist in diagnosing and treating coronary arterial disease, peripheral vascular disease and other non-vascular diseases), as well as embolotherapeutic, cardiac rhythm management, electrophysiology, critical care, breast cancer localization and guidance, biopsy, and interventional oncology and spine devices. Our endoscopy segment consists of gastroenterology and pulmonology devices which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors. We evaluate the performance of our operating segments based on net sales and income from operations.
19
Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three-month periods ended March 31, 2023 and 2022, were as follows (in thousands):
| | | | | | |
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2023 |
| 2022 | ||
Net sales |
| |
|
| |
|
Cardiovascular | | $ | 287,976 | | $ | 266,936 |
Endoscopy | |
| 9,589 | |
| 8,479 |
Total net sales | |
| 297,565 | |
| 275,415 |
| | | | | | |
Income from operations | |
|
| |
|
|
Cardiovascular | |
| 23,934 | |
| 13,126 |
Endoscopy | |
| 2,449 | |
| 2,107 |
Total income from operations | |
| 26,383 | |
| 15,233 |
| | | | | | |
Total other expense — net | |
| (883) | |
| (1,062) |
Income tax expense | |
| 4,797 | |
| 3,626 |
| | | | | | |
Net income | | $ | 20,703 | | $ | 10,545 |
14. Fair Value Measurements.
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
Our financial assets and (liabilities) carried at fair value and measured on a recurring basis as of March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
| | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | |||||||
| | Total Fair | | Quoted prices in | | Significant other | | Significant | ||||
| | Value at | | active markets | | observable inputs | | unobservable inputs | ||||
|
| March 31, 2023 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Marketable securities (1) | | $ | 103 | | $ | 103 | | $ | — | | $ | — |
Interest rate contract asset, long-term (2) | | $ | 2,791 | | $ | — | | $ | 2,791 | | $ | — |
Foreign currency contract assets, current and long-term (3) | | $ | 4,401 | | $ | — | | $ | 4,401 | | $ | — |
Foreign currency contract liabilities, current and long-term (4) | | $ | (3,459) | | $ | — | | $ | (3,459) | | $ | — |
Contingent consideration liabilities | | $ | (16,000) | | $ | — | | $ | — | | $ | (16,000) |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | |||||||
| | Total Fair | | Quoted prices in | | Significant other | | Significant | ||||
| | Value at | | active markets | | observable inputs | | unobservable inputs | ||||
|
| December 31, 2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Marketable securities (1) | | $ | 138 | | $ | 138 | | $ | — | | | — |
Interest rate contract asset, long-term (2) | | $ | 3,444 | | $ | — | | $ | 3,444 | | $ | — |
Foreign currency contract assets, current and long-term (3) | | $ | 4,783 | | $ | — | | $ | 4,783 | | $ | — |
Foreign currency contract liabilities, current and long-term (4) | | $ | (3,986) | | $ | — | | $ | (3,986) | | $ | — |
Contingent consideration liabilities | | $ | (18,073) | | $ | — | | $ | — | | $ | (18,073) |
(1) | Our marketable securities, which consist entirely of available-for-sale equity securities, are valued using market prices in active markets. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
20
(2) | The fair value of the interest rate contract is determined using Level 2 fair value inputs and is reported with other long-term assets in the consolidated balance sheets. |
(3) | The fair value of the foreign currency contract assets (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as prepaid expenses and other current assets or other long-term assets in the consolidated balance sheets. |
(4) | The fair value of the foreign currency contract liabilities (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as accrued expenses or other long-term obligations in the consolidated balance sheets. |
Certain of our past business combinations involve the potential for the payment of future contingent consideration, generally based on a percentage of future product sales or upon attaining specified future revenue or other milestones. The contingent consideration liability is re-measured at the estimated fair value at the end of each reporting period with the change in fair value recognized within operating expenses in the accompanying consolidated statements of income for such period. We measure the initial liability and re-measure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. Changes in the fair value of our contingent consideration liabilities during the three-month periods ended March 31, 2023 and 2022 consisted of the following (in thousands):
| | | | | | | |
|
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
| 2023 |
| 2022 |
| ||
Beginning balance | | $ | 18,073 | | $ | 48,234 | |
Contingent consideration expense | |
| 521 | |
| 2,600 | |
Contingent payments made | |
| (2,594) | |
| (24,491) | |
Effect of foreign exchange | | | — | | | (10) | |
Ending balance | | $ | 16,000 | | $ | 26,333 | |
As of March 31, 2023, $2.4 million in underwriting discounts and commissions and approximately $816,000contingent consideration liability was included in other directlong-term obligations and $13.6 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet. As of December 31, 2022, $2.3 million in contingent consideration liability was included in other long-term obligations and $15.8 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet.
Payments related to the settlement of the contingent consideration liability recognized at fair value as of the applicable acquisition date of $2.6 million and $24.5 million for the three-month periods ended March 31, 2023 and 2022, respectively, have been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows. Payments related to increases in the contingent consideration liability subsequent to the date of acquisition of $26,000 for the three-month period ended March 31, 2023 are reflected as operating cash flows.
21
The recurring Level 3 measurement of our contingent consideration liabilities included the following significant unobservable inputs at March 31, 2023 and December 31, 2022 (amounts in thousands):
| | | | | | | | | | | |
| | Fair value at | | | | | | |
| | |
| | March 31, | | Valuation | | | | | | Weighted | |
Contingent consideration liability |
| 2023 |
| technique |
| Unobservable inputs |
| Range | | Average(1) | |
Revenue-based royalty payments contingent liability | | $ | 2,209 |
| Discounted cash flow |
| Discount rate | | 12% - 16% | | 14.8% |
| |
|
|
| |
| Projected year of payments | | 2023-2034 | | 2027 |
| | | | | | | | | | | |
Revenue milestones contingent liability | | $ | 13,375 |
| Monte Carlo simulation |
| Discount rate | | 0% - 13.0% | | 0.1% |
| |
|
|
| |
| Projected year of payments | | 2023-2035 | | 2023 |
| | | | | | | | | | | |
Regulatory approval contingent liability | | $ | 416 | | Scenario-based method | | Discount rate | | 5.1% | | |
| | | | | | | Probability of milestone payment | | 50.0% | | |
| | | | | | | Projected year of payment | | 2023-2030 | | 2030 |
| | | | | | | | | | | |
| | Fair value at | | | | | | |
| | |
| | December 31, | | Valuation | | | | | | Weighted | |
Contingent consideration liability |
| 2022 |
| technique |
| Unobservable inputs |
| Range | | Average(1) | |
Revenue-based royalty payments contingent liability | | $ | 2,097 |
| Discounted cash flow |
| Discount rate | | 14% - 17% | | 15.7% |
| |
|
|
| |
| Projected year of payments | | 2023-2034 | | 2026 |
| | | | | | | | | | | |
Revenue milestones contingent liability | | $ | 13,064 |
| Monte Carlo simulation |
| Discount rate | | 5.1% - 14.0% | | 5.2% |
| |
|
|
| |
| Projected year of payments | | 2023-2033 | | 2023 |
| | | | | | | | | | | |
Regulatory approval contingent liability | | $ | 2,912 | | Scenario-based method | | Discount rate | | 5.7% | | |
| | | | | | | Probability of milestone payment | | 90% | | |
| | | | | | | Projected year of payment | | 2023-2030 | | 2024 |
(1) | Unobservable inputs were weighted by the relative fair value of the instruments. No weighted average is reported for contingent consideration liabilities without a range of unobservable inputs. |
The contingent consideration liability is re-measured to fair value each reporting period. Significant increases or decreases in projected revenues, based on our most recent internal operational budgets and long-range strategic plans, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement.Our determination of the fair value of the contingent consideration liability could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We intend to record any such change in fair value to operating expenses in our consolidated statements of income.
22
Contingent Payments to Related Parties
During the three-month period ended March 31, 2022, we made a contingent payment of $1.6 million to a currently former director of Merit who is a former shareholder of Cianna Medical, Inc. (“Cianna Medical”), which we acquired in 2018. The terms of the acquisition, including contingent consideration payments, were determined prior to the appointment of the former Cianna Medical shareholder as a Merit director. As a former shareholder of Cianna Medical, the former Merit director is also eligible for additional payments for the achievement of sales milestones specified in our merger agreement with Cianna Medical. We made no such payments during the three-month period ended March 31, 2023.
Fair Value of Other Assets (Liabilities)
The carrying amount of cash and cash equivalents, receivables, and trade payables approximate fair value because of the immediate, short-term maturity of these financial instruments. Our long-term debt re-prices frequently due to variable rates and entails no significant changes in credit risk and, as a result, we believe the fair value of long-term debt approximates carrying value. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents, which use Level 1 inputs.
We analyze our investments in privately-held companies to determine if they should be accounted for using the equity method based on our ability to exercise significant influence over operating and financial policies of the company in which we have invested. Investments not accounted for under the equity method of accounting are accounted for at cost incurredminus impairment, if applicable, plus or minus changes in valuation resulting from observable transactions for identical or similar investments.
Impairment Charges
We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property and paid by usequipment, right-of-use operating lease assets, equity investments, intangible assets and goodwill in connection with this equity offering. impairment evaluations. Such assets are reported at carrying value and are not subject to recurring fair value measurements. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Fair value is generally determined based on discounted future cash flow. All our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.
Intangible Assets. During the three-month period ended March 31, 2023, we had no losses related to acquired intangible assets. During the three-month period ended March 31, 2022, we recorded an impairment charge of $1.7 million related to the acquired intangible assets from our August 2019 acquisition of STD Pharmaceutical (see note 6).
Current Expected Credit Losses
Our outstanding long-term notes receivable, including accrued interest and an allowance for current expected credit losses, were $2.4 million and $2.4 million as of March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023 and December 31, 2022, we had an allowance for current expected credit losses of $290,000 and $281,000, respectively, associated with these notes receivable. We assess the allowance for current expected credit losses on an individual security basis, due to the limited number of securities, using a probability of default model, which is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the expected collectability of securities, and other security specific factors.
The net proceeds fromtable below presents a rollforward of the offeringallowance for current expected credit losses on our notes receivable for the three-month periods ended March 31, 2023 and 2022 (in thousands):
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2023 |
| 2022 | ||
Beginning balance | | $ | 281 | | $ | 199 |
Provision for credit loss expense | | | 9 | | | — |
Ending balance | | $ | 290 | | $ | 199 |
23
15. Accumulated Other Comprehensive Income (Loss). The changes in each component of accumulated other comprehensive income (loss) for the three-month periods ended March 31, 2023 and 2022 were used primarily to repay outstanding indebtedness under our Second Amended Credit Agreement (including our term loan and revolving credit loans).as follows:
| | | | | | | | |
| Cash Flow Hedges |
| Foreign Currency Translation |
| Total | |||
Balance as of January 1, 2023 | $ | 4,366 | | $ | (15,916) | | $ | (11,550) |
| | | | | | | | |
Other comprehensive income (loss) |
| 120 | | | 1,925 | | | 2,045 |
Income taxes |
| 406 | | | (19) | | | 387 |
Reclassifications to: | | | | | | | | |
Revenue | | (1,327) | | | | | | (1,327) |
Cost of sales | | 50 | | | | | | 50 |
Interest expense | | (534) | | | | | | (534) |
Net other comprehensive income (loss) | | (1,285) | | | 1,906 | | | 621 |
| | | | | | | | |
Balance as of March 31, 2023 | $ | 3,081 | | $ | (14,010) | | $ | (10,929) |
| | | | | | | | |
| Cash Flow Hedges |
| Foreign Currency Translation |
| Total | |||
Balance as of January 1, 2022 | $ | (2,464) | | $ | (5,527) | | $ | (7,991) |
| | | | | | | | |
Other comprehensive income (loss) |
| 2,044 | | | (793) | | | 1,251 |
Income taxes |
| (712) | | | (64) | | | (776) |
Reclassifications to: | | | | | | | | |
Revenue | | 386 | | | | | | 386 |
Cost of sales | | 183 | | | | | | 183 |
Interest expense | | 294 | | | | | | 294 |
Net other comprehensive income (loss) | | 2,195 | | | (857) | | | 1,338 |
| | | | | | | | |
Balance as of March 31, 2022 | $ | (269) | | $ | (6,384) | | $ | (6,653) |
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ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related condensed notes thereto, which are included in Part I of this report. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties that may adversely impact our operations and financial results. These risks and uncertainties are discussed in Part I, Item 1A “Risk Factors” in the 2022 Annual Report on Form 10-K and in Part II, Item 1A “Risk Factors” in this report.
OVERVIEW
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related condensed notes thereto, which are included in Part I of this report.
We design, develop, manufacture, market and sell medical products for interventional and diagnostic procedures. For financial reporting purposes, we report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of four product categories: peripheral intervention, cardiac intervention, custom procedural solutions, and OEM. Within these product categories, we sell a variety of products, including cardiology and radiology devices (which assist in diagnosing and treating coronary arterial disease, peripheral vascular disease and other non-vascular diseases), as well as embolotherapeutic, cardiac rhythm management, electrophysiology, critical care, breast cancer localization and guidance, biopsy, and interventional oncology and spine devices. Our endoscopy segment consists of gastroenterology and pulmonology devices which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors.
For the three-month period ended March 31, 2023, we reported sales of $297.6 million, an increase of $22.2 million or 8.0%, compared to sales for the three-month period ended March 31, 2022 of $275.4 million. For the three-month period ended March 31, 2023, foreign currency fluctuations (net of hedging) decreased our net sales by $4.9 million, assuming applicable foreign exchange rates in effect during the comparable prior-year periods.
Gross profit as a percentage of sales increased to 46.5% for the three-month period ended March 31, 2023, compared to 43.9% for the three-month period ended March 31, 2022.
Net income for the three-month period ended March 31, 2023 was $20.7 million, or $0.36 per share, compared to net income of $10.5 million, or $0.18 per share, for the three-month period ended March 31, 2022.
Recent Developments and Trends
In addition to the trends identified in the 2022 Annual Report on Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview,” our business in 2023 has been impacted, and we believe will continue to be impacted, by the following recent developments and trends:
● | Our revenue results during the three-month period ended March 31, 2023 were driven primarily by stronger than anticipated demand in the U.S. and more favorable than anticipated international sales trends, particularly in the EMEA region. |
● | Our dedication to the Foundations for Growth program has helped offset inflationary cost pressures in certain raw materials, shipping, and freight expenses. |
● | As of March 31, 2023, we had cash, cash equivalents, and restricted cash of $60.1 million and net available borrowing capacity of approximately $521 million. |
25
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of sales for the periods indicated:
| | | | | |
| | Three Months Ended | | ||
| | March 31, | | ||
|
| 2023 |
| 2022 |
|
Net sales |
| 100 | % | 100 | % |
Gross profit |
| 46.5 | | 43.9 |
|
Selling, general and administrative expenses |
| 30.3 | | 30.5 |
|
Research and development expenses |
| 7.2 | | 6.3 |
|
Impairment charges |
| — | | 0.6 |
|
Contingent consideration expense |
| 0.2 | | 0.9 |
|
Income from operations |
| 8.9 | | 5.5 |
|
Income before income taxes |
| 8.6 | | 5.1 |
|
Net income |
| 7.0 | | 3.8 |
|
Sales
Sales for the three-month period ended March 31, 2023 increased by 8.0%, or $22.2 million, compared to the corresponding period in 2022. Listed below are the sales by product category within each of our financial reporting segments for the three-month periods ended March 31, 2023 and 2022 (in thousands, other than percentage changes):
| | | | | | | | | |
|
| | | | Three Months Ended | ||||
|
| | | | March 31, | ||||
|
| % Change |
| | 2023 |
| 2022 | ||
Cardiovascular | | | | | | | | | |
Peripheral Intervention |
| 7.6 | % | | $ | 113,783 | | $ | 105,773 |
Cardiac Intervention |
| 4.7 | % | |
| 85,328 | |
| 81,487 |
Custom Procedural Solutions |
| 3.1 | % | |
| 47,701 | |
| 46,262 |
OEM |
| 23.2 | % | |
| 41,164 | |
| 33,414 |
Total |
| 7.9 | % | |
| 287,976 | |
| 266,936 |
| | | | | | | | | |
Endoscopy | | | | | | | | | |
Endoscopy Devices |
| 13.1 | % | |
| 9,589 | |
| 8,479 |
| | | | | | | | | |
Total |
| 8.0 | % | | $ | 297,565 | | $ | 275,415 |
Cardiovascular Sales. Our cardiovascular sales for the three-month period ended March 31, 2023 were $288.0 million, up 7.9% when compared to the corresponding period of 2022 of $266.9 million. Sales for the three-month period ended March 31, 2023 were favorably affected by increased sales of:
(a) | Peripheral intervention products, which increased by $8.0 million, or 7.6%, from the corresponding period of 2022. This increase was driven primarily by sales of our access, drainage, and radar localization products, offset partially by decreased sales of our intervention products. |
(b) | Cardiac intervention products, which increased by $3.8 million, or 4.7%, from the corresponding period of 2022. This increase was driven primarily by sales of our access, angiography and cardiac rhythm management/electrophysiology (“CRM/EP”) products, offset partially by decreased sales of our intervention products. |
(c) | Custom procedural solutions products, which increased by $1.4 million, or 3.1%, from the corresponding period of 2022. This increase was driven primarily by increased sales of our kits and trays, offset partially by decreased sales of our critical care products. |
26
(d) | OEM products, which increased by $7.8 million, or 23.2%, from the corresponding period of 2022. This increase was driven primarily by sales of our CRM/EP and intervention products, and kits. |
Endoscopy Sales. Our endoscopy sales for the three-month period ended March 31, 2023 were $9.6 million, up 13.1% when compared to sales in the corresponding period of 2022 of $8.5 million. Sales for the three-month period ended March 31, 2023 compared to the corresponding period in 2022 were favorably affected by increased sales of our Aero Mini fully covered tracheobronchial stent, EndoMAXX® fully covered esophageal stent products and Elation Pulmonary Balloon Dilator, offset partially by decreased sales of our other stents.
Geographic Sales
Listed below are sales by geography for the three-month periods ended March 31, 2023 and 2022 (in thousands, other than percentage changes):
| | | | | | | | | |
|
| | | | Three Months Ended | ||||
|
| | | | March 31, | ||||
|
| % Change |
| | 2023 |
| 2022 | ||
United States | | 12.0 | % | | $ | 171,360 | | $ | 152,992 |
International | | 3.1 | % | | | 126,205 | | | 122,423 |
Total |
| 8.0 | % | | $ | 297,565 | | $ | 275,415 |
United States Sales.U.S. sales for the three-month period ended March 31, 2023 were $171.4 million, or 57.6% of net sales, up 12.0% when compared to the corresponding period of 2022. The increase in our domestic sales was driven primarily by our U.S. Direct and OEM businesses.
International Sales. International sales for the three-month period ended March 31, 2023 were $126.2 million, or 42.4% of net sales, up 3.1% when compared to the corresponding period of 2022 of $122.4 million. The increase in our international sales for the three-month period ended March 31, 2023, compared to the corresponding period of 2022, included increased sales in our EMEA operations of $6.1 million or 11.7%, increased sales in our rest of the world (“ROW”) operations of $0.7 million or 6.7%, offset partially by decreased sales in our Asia Pacific operations of $(3.0) million or (4.9)%.
Gross Profit
Our gross profit as a percentage of sales increased to 46.5% for the three-month period ended March 31, 2023, compared to 43.9% for the three-month period ended March 31, 2022. The increase in gross profit percentage was primarily due to favorable changes in product mix, efficiencies gained in our Foundations for Growth program, lower freight and distribution costs, lower intangible asset amortization expense as a percentage of sales, and lower obsolescence expense as a percentage of sales.
Operating Expenses
Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses increased $6.1 million, or 7.3%, for the three-month period ended March 31, 2023 compared to the corresponding period of 2022. As a percentage of sales, SG&A expenses were 30.3% for the three-month period ended March 31, 2023, compared to 30.5% for the corresponding period of 2022. For the three-month period ended March 31, 2023, SG&A expenses increased compared to the corresponding period of 2022 primarily due to increased labor-related costs associated with headcount and severance, as well as increased travel and marketing costs to promote sales as restrictions continue to lift post pandemic.
27
Research and Development Expenses. Research and development (”R&D”) expenses for the three-month period ended March 31, 2023 were $21.3 million, up 22.6%, when compared to R&D expenses in the corresponding period of 2022 of $17.4 million. The increases in R&D expenses for the three-month period ended March 31, 2023 compared to the corresponding periods in 2022 were largely due to higher regulatory expenses incurred to comply with the E.U. Medical Device Regulation (“MDR”).
Impairment Charges. For the three-month period ended March 31, 2023, we recorded no impairment charges. For the three-month period ended March 31, 2022, we recorded impairment charges of $1.7 million of intangible assets due to the planned divestiture of the STD Pharmaceutical business, which we completed on April 30, 2022.
Contingent Consideration Expense. For the three-month period ended March 31, 2023, we recognized contingent consideration expense from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions of $0.5 million compared to contingent consideration expense of $2.6 million for the three-month period ended March 31, 2022. Expense in each period related to changes in the probability and timing of achieving certain revenue and operational milestones, as well as expense for the passage of time.
Operating Income
The following table sets forth our operating income by financial reporting segment for the three-month periods ended March 31, 2023 and 2022 (in thousands):
| | | | | |
| Three Months Ended | ||||
| March 31, | ||||
| 2023 |
| 2022 | ||
Operating Income (Loss) | | | | | |
Cardiovascular | $ | 23,934 | | $ | 13,126 |
Endoscopy |
| 2,449 | |
| 2,107 |
Total operating income (loss) | $ | 26,383 | | $ | 15,233 |
Cardiovascular Operating Income. Our cardiovascular operating income for the three-month period ended March 31, 2023 was $23.9 million, compared to cardiovascular operating income in the corresponding period of 2022 of $13.1 million. The increase in cardiovascular operating income during the three-month period ended March 31, 2023 compared to the corresponding period of 2022 was primarily a result of higher sales ($288.0 million compared to $266.9 million) and higher gross margin, partially offset by higher SG&A and R&D expenses.
Endoscopy Operating Income. Our endoscopy operating income for the three-month period ended March 31, 2023 was $2.4 million, compared to endoscopy operating income of $2.1 million for the corresponding period of 2022. The increase in endoscopy operating income for the three-month period ended March 31, 2023 compared to the corresponding period of 2022 was primarily a result of increased sales and gross margin, offset partially by higher SG&A expenses.
Other Expense – Net
Our other expense for the three-month periods ended March 31, 2023 and 2022 was $0.9 million and $1.1 million, respectively. The change in other expense was primarily related to decreased expense from realized and unrealized foreign currency losses, partially offset by an increase in interest expense associated with rising interest rates.
Effective Tax Rate
Our provision for income taxes for the three-month periods ended March 31, 2023 and 2022 was a tax expense of $4.8 million and $3.6 million, respectively, which resulted in an effective tax rate of 18.8% and 25.6%, respectively. The decrease in the effective income tax rate for the three-month period ended March 31, 2023, when compared to the prior-year period, was primarily due to increased benefit from discrete items such as contingent liabilities and deferred compensation, and the increase in the income tax expense when compared to the prior-year period was primarily due to increased pre-tax book income.
28
Net Income
Our net income for the three-month periods ended March 31, 2023 and 2022 was $20.7 million and $10.5 million, respectively. The increase in our net income for the three-month period ended March 31, 2023 was primarily the result higher sales and higher gross margins as a percentage of sales, partially offset by higher SG&A and R&D expenses.
LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments, Contractual Obligations and Cash Flows
At March 31, 2023 and December 31, 2022, our current assets exceeded current liabilities by $341.3 million and $308.4 million, respectively, and we had cash, cash equivalents and restricted cash of $60.1 million and $60.6 million, respectively, of which $57.6 million and $49.6 million, respectively, were held by foreign subsidiaries. We currently believe future repatriation of cash and other property held by our foreign subsidiaries will generally not be subject to U.S. federal income tax. As a result, we are not permanently reinvested with respect to our historic unremitted foreign earnings. In addition, cash held by our subsidiary in China is subject to local laws and regulations that require government approval for the transfer of such funds to entities located outside of China. As of March 31, 2023, and December 31, 2022, we had cash, cash equivalents and restricted cash of $32.2 million and $26.1 million, respectively, within our subsidiary in China.
Cash flows provided by operating activities. We generated cash from operating activities of $14.5 million and $12.0 million during the three-month periods ended March 31, 2023 and 2022, respectively. Significant factors affecting operating cash flows during these periods included:
● | Net income was $20.7 million and $10.5 million for the three-month periods ended March 31, 2023 and 2022, respectively. |
● | Cash (used for) provided by other receivables was ($1.5) million and $5.8 million for the three-month periods ended March 31, 2023 and 2022, respectively, due primarily to the collection of approximately $8.2 million during 2022 for insurance proceeds in connection with the consolidated securities class action lawsuit we settled. |
● | Cash used for inventories was ($23.0) million and ($9.2) million for the three-month periods ended March 31, 2023 and 2022, respectively. The increase in inventory was associated with our strategy to proactively invest in our inventory balances to encourage high customer service levels as well as to build bridge inventory for production line transfers and increases in safety stock due to vendor supply delays. |
● | Cash used for accrued expenses was ($3.6) million and ($23.5) million for the three-month periods ended March 31, 2023 and 2022, respectively, due primarily to the timing and payment of compensation-related accruals, and during 2022, payment of approximately $18.25 million into escrow in connection with the settlement of a securities class action lawsuit. |
Cash flows used in investing activities. We used cash in investing activities of $14.9 million and $9.9 million for the three-month periods ended March 31, 2023 and 2022, respectively. We used cash for capital expenditures of property and equipment of $12.8 million and $9.5 million in the three-month periods ended March 31, 2023 and 2022, respectively. Capital expenditures in each period were primarily related to investment in property and equipment to support development and production of our products. Historically, we have incurred significant expenses in connection with facility construction, production automation, product development and the introduction of new products. We anticipate that we will spend approximately $55 to $60 million in 2023 for property and equipment.
Cash outflows invested in acquisitions for the three-month period ended March 31, 2023 were $2.0 million and were related to our investment in Solo Pace. There were no cash outflows invested in acquisitions for the three-month period ended March 31, 2022.
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Cash flows used in financing activities.Cash used in financing activities for the three-month periods ended March 31, 2023 and 2022 was $0.5 million and $14.2 million, respectively. We completed payment of contingent consideration of $2.6 million and $24.5 million for the three-month periods ended March 31, 2023 and 2022, respectively, principally related to sales milestone payments connected to our acquisitions completed in prior years of Brightwater Medical, Inc. and Cianna Medical, respectively.
As of March 31, 2023, we had outstanding borrowings of $197.8 million and issued letter of credit guarantees of $3.2 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $521 million, based on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Third Amended Credit Agreement. Our interest rate as of March 31, 2023 was a fixed rate of 2.71% with respect to $75 million of the principal amount as a result of an interest rate swap and a variable floating rate of 5.84% with respect to $122.8 million of the principal amount. Our interest rate as of December 31, 2022 was a fixed rate of 2.71% on $75 million as a result of an interest rate swap and a variable floating rate of 5.38% on $123.2 million.
We currently believe that our existing cash balances, anticipated future cash flows from operations and borrowings under the Third Amended Credit Agreement will be adequate to fund our current and currently planned future operations for the next twelve months and the foreseeable future. In the event we pursue and complete significant transactions or acquisitions in the future, additional funds will likely be required to meet our strategic needs, which may require us to raise additional funds in the debt or equity markets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial results are affected by the selection and application of accounting policies and methods. In the three-month period ended March 31, 2023 there were no changes to the application of critical accounting policies previously disclosed in Part II, Item 7 of the 2022 Annual Report on Form 10-K.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Reportreport includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this Report,report, other than statements of historical fact, are forward-looking statements“forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of our
management for future operations, any statements concerning proposed new products or services, any statements regarding the integration, development or commercialization of the business or any assets acquired from other parties, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this Report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “seeks,” “believes,” “estimates,” “potential,” “forecasts,” “continue,” or other forms of these words or similar words or expressions, or the negative thereof or other comparable terminology. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and our actual results will likely vary,differ, and may varycould differ materially, from those projected or assumed in the forward-looking statements. Prospective investorsInvestors are cautioned not to unduly rely on any such forward-looking statements.
All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Our actual results will likely differ, and may differ materially, from anticipated results. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results,results. All forward-looking statements included in this report are made as of the date hereof and weare based on information available to us as of such date. We assume no obligation to update any forward-looking statement. If we do update or disclose revisions to those estimates. Additional factorscorrect one or more forward-looking statements, investors and others should not conclude that may have a direct bearing on our operating results are discussed in Part I, Item 1A “Risk Factors” in the 2016 Form 10-K.we will make additional updates or corrections.
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NOTICE REGARDING TRADEMARKS
This report includes trademarks, tradenames and service marks that are our property or the property of other third parties.others. Solely for convenience, such trademarks and tradenames sometimes appear without any “™” or “®” symbol. However, failure to include such symbols is not intended to suggest, in any way, that we will not assert our rights or the rights of any applicable licensor, to these trademarks and tradenames.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2017 | 2016 | 2017 | 2016 | ||||
Net sales | 100% | 100% | 100% | 100% | |||
Gross profit | 44.9 | 43.2 | 44.8 | 43.7 | |||
Selling, general and administrative expenses | 30.5 | 33.9 | 31.6 | 31.1 | |||
Research and development expenses | 7.2 | 7.3 | 7.2 | 7.5 | |||
Contingent consideration expense (benefit) | — | (0.1) | — | — | |||
Acquired in-process research and development | 6.7 | 0.2 | 2.3 | 0.1 | |||
Income from operations | 0.5 | 1.9 | 3.7 | 5.0 | |||
Other income (expense) - net | (1.7) | (1.9) | 0.9 | (1.5) | |||
Income (loss) before income taxes | (1.2) | — | 4.6 | 3.5 | |||
Net income (loss) | (2.0) | 0.6 | 3.9 | 2.8 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
% Change | 2017 | 2016 | % Change | 2017 | 2016 | ||||||||||||||
Cardiovascular (1) | |||||||||||||||||||
Stand-alone devices | 34.2% | $ | 68,724 | $ | 51,195 | 45.6% | $ | 203,434 | $ | 139,729 | |||||||||
Custom kits and procedure trays | 0.7% | 30,436 | 30,223 | 2.2% | 91,107 | 89,164 | |||||||||||||
Inflation devices | 9.0% | 20,033 | 18,371 | 8.3% | 59,329 | 54,774 | |||||||||||||
Catheters | 5.3% | 31,751 | 30,139 | 12.2% | 94,357 | 84,078 | |||||||||||||
Embolization devices | 9.3% | 12,252 | 11,207 | 8.8% | 36,936 | 33,937 | |||||||||||||
CRM/EP | 1.7% | 9,527 | 9,368 | 18.9% | 31,977 | 26,889 | |||||||||||||
Total | 14.8% | 172,723 | 150,503 | 20.7% | 517,140 | 428,571 | |||||||||||||
Endoscopy (1) | |||||||||||||||||||
Endoscopy devices | 2.2% | 6,614 | 6,472 | 12.9% | 19,815 | 17,552 | |||||||||||||
Total | 14.2% | $ | 179,337 | $ | 156,975 | 20.4% | $ | 536,955 | $ | 446,123 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||
Operating Income (Loss) (1) | |||||||||||
Cardiovascular | (1,207 | ) | 1,858 | 14,239 | 19,385 | ||||||
Endoscopy | 2,086 | 1,129 | 5,611 | 2,889 | |||||||
Total operating income | 879 | 2,987 | 19,850 | 22,274 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about exchange rate risk relates to changesare included in Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in the value of the Euro (EUR), Chinese Yuan Renminbi (CNY), and British Pound (GBP) relative to the value of the U.S. Dollar (USD). We also have a limited market risk relating to the Hong Kong Dollar (HKD), Mexican Peso (MXN), Australian Dollar (AUD), Canadian Dollar (CAD), Brazilian Real (BRL), Swiss Franc (CHF), Swedish Krona (SEK), Danish Krone (DKK), Singapore Dollar (SGD), Japanese Yen (JPY), and South Korean Won (KRW). Our consolidated financial statements are denominated in, and our principal currency is, the U.S. Dollar. For2022 Annual Report on Form 10-K. In the three-month period ended September 30, 2017, a portion of our net sales (approximately $53.4 million, representing approximately 29.8% of our aggregate net sales), was attributable to sales thatMarch 31, 2023, there were denominated in foreign currencies. All other international sales were denominated in U.S. Dollars. Our Euro-denominated revenue represents our largest single currency risk. However, our Euro-denominated expenses associated with our European operations (manufacturing sites, a distribution facility and sales representatives) provide a natural hedge. Accordingly, a strengthening ofno material changes from the U.S. Dollar against the Euro, will positively affect our net income. Excluding the effect of our hedging program, a strengthening U.S. Dollar against the Euro of 10% would increase our annual net income by approximately $2.2 million. Conversely, a weakening U.S. Dollar against the Euro of 10% would decrease our annual net income by approximately $2.2 million. A strengthening U.S. Dollar against the Chinese Yuan Renminbi of 10% would decrease our annual net income by approximately $5.5 million. Conversely, a weakening U.S. Dollar against the Chinese Yuan Renminbi of 10% would increase our annual net income by approximately $5.5 million dollars. During the three-month period ended September 30, 2017, using the foreign exchange rates in effect during the comparable prior-year period, exchange rate fluctuations of foreign currencies against the U.S. Dollar resulted in an increase in our gross revenues of approximately $1.0 million, or 0.6%, and an increase in gross margin of approximately $0.8 million, or 1.0% (or approximately 50 basis points in gross margin percentage), primarily as a result of favorable impacts to revenue due to sales denominated in EUR, CAD, BRL, and AUD, partially offset by unfavorable impacts due to decreases in manufacturing costs from our facility in Tijuana, Mexico denominated in MXN and from our facility in Ireland denominated in EUR.
ITEM 4. CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining adequate disclosure controls and procedures for our company. Consequently, our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of September 30, 2017.March 31, 2023. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control overOver Financial Reporting
During the quarterthree-month period ended September 30, 2017,March 31, 2023, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
ITEM 1. LEGAL PROCEEDINGS
See Note 1310 “Commitments and Contingencies” set forth in the condensed notes to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report.
ITEM 1A. RISK FACTORS
In addition to other information set forth in this Report,report, readers should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" of the 20162022 Annual Report on Form 10-K, whichas updated and supplemented below. Any of the risk factors disclosed in our reports could materially affect our business, financial condition or future results. The risks described here and in the 2016our 2022 Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely
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affect our business, financial condition and/or operating results. The discussion of the risk factors below updates the corresponding disclosure under the same headings in the 2022 Annual Report on Form 10-K and may contain material changes to the corresponding risk factor discussion in our 2022 Annual Report on Form 10-K.
Our international operations make us subject to the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in non-U.S. jurisdictions, and our failure, or the failure of our distributors and agents, to comply with these laws could subject us to civil and criminal penalties and adversely affect our business.
We currently conduct our business in various foreign countries, and we expect to continue to expand our foreign operations. As a result, we are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act, and similar anti-corruption laws in non-U.S. jurisdictions. These laws generally prohibit companies and their intermediaries from illegally offering things of value to any individual for the purpose of obtaining or retaining business.
Compliance with the FCPA and other anti-bribery laws presents challenges to our operations. Our policies mandate compliance with the FCPA and all other applicable anti-bribery laws. Further, we expect our employees, distributors, agents and others who work for us or on our behalf to comply with these anti-bribery laws. Despite our training and compliance programs, our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees, distributors or agents. If our employees, distributors or agents violate the provisions of the FCPA or other anti-bribery laws, or even if there are allegations of such violations, we could be subject to investigations or civil and criminal penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations, financial condition or cash flows.
As disclosed in Note 10 “Commitments and Contingencies” to our consolidated financial statements, although we are unable to predict the scope, timing, significance or outcome of the SEC inquiry referenced in that note, the inquiry may cause a diversion of our management’s time and attention and could have a material adverse effect on our reputation, business, results of operations, financial condition or cash flows.
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ITEM 6. EXHIBITS
Exhibit No. | Description | |
3.1 | | |
Second Amended and Restated Articles of | ||
3.2 | | |
10.1 | | Performance Stock Unit Award Agreement (Three Year Performance Period), dated February 28, |
10.2 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101 | | |
The following financial information from the quarterly report on Form 10-Q |
tagged in detail. | ||
104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the |
* These exhibits are incorporated herein by reference.
† Indicates management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | ||
| MERIT MEDICAL SYSTEMS, INC. | ||||
| | | |||
Date: April 28, 2023 | By: | /s/ FRED P. LAMPROPOULOS | |||
| | Fred P. | |||
| | Chief Executive Officer | |||
| | | | ||
Date: April 28, 2023 | By: | /s/ | |||
| | Raul Parra | |||
| | Chief Financial Officer and Treasurer | |||
| | | | ||
| | | |
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