CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation.
The interim consolidated financial statements of Merit Medical Systems, Inc. ("Merit," "we" or "us") for the three-month periods ended
March 31, 2016
and 2015 are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods and, consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America. In the opinion of our management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of
March 31, 2016
and December 31, 2015, and our results of operations and cash flows for the three-month periods ended
March 31, 2016
and 2015. The results of operations for the three-month periods ended
March 31, 2016
and 2015 are not necessarily indicative of the results for a full-year period. These interim consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (the "SEC").
2. Inventories.
Inventories at
March 31, 2016
and December 31,
2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2016
|
|
2015
|
Finished goods
|
$
|
54,075
|
|
|
$
|
59,170
|
|
Work-in-process
|
12,323
|
|
|
8,540
|
|
Raw materials
|
44,328
|
|
|
38,289
|
|
|
|
|
|
Total
|
$
|
110,726
|
|
|
$
|
105,999
|
|
3. Stock-Based Compensation.
Stock-based compensation expense before income tax expense for the three-month periods ended
March 31, 2016
and
2015
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Cost of goods sold
|
$
|
123
|
|
|
$
|
93
|
|
Research and development
|
42
|
|
|
27
|
|
Selling, general, and administrative
|
459
|
|
|
400
|
|
Stock-based compensation expense before taxes
|
$
|
624
|
|
|
$
|
520
|
|
As of
March 31, 2016
, the total remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was approximately
$8.1 million
and is expected to be recognized over a weighted average period of
3.65
years.
During the three-month periods ended
March 31, 2016
and 2015, we granted awards representing
563,500
and
446,800
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 options granted during the three-month periods ended
March 31, 2016
and 2015, 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,
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.40%
|
|
1.53%
|
Expected option life
|
5.0
|
|
5.0
|
Expected dividend yield
|
—%
|
|
—%
|
Expected price volatility
|
37.06%
|
|
35.11%
|
For purposes of the foregoing analysis, 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 option. The expected term of the stock options is determined using the historical exercise behavior of employees. The expected price volatility is determined using a weighted average of daily historical volatility of our stock price over the corresponding expected option life and implied volatility based on recent trends of the daily
historical volatility. Compensation expense is recognized on a straight-line basis over the service period, which corresponds to the related vesting period.
4. Earnings Per Common Share (EPS).
The computation of weighted average shares outstanding and the basic and diluted earnings per common share for the following periods consisted of the following (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
Period ended March 31, 2016:
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
4,351
|
|
|
44,275
|
|
|
$0.10
|
Effect of dilutive stock options and warrants
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
$
|
4,351
|
|
|
44,579
|
|
|
$0.10
|
|
|
|
|
|
|
Stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive
|
|
|
978
|
|
|
|
|
|
|
|
|
|
Period ended March 31, 2015:
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
5,174
|
|
|
43,703
|
|
|
$0.12
|
Effect of dilutive stock options and warrants
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
$
|
5,174
|
|
|
44,145
|
|
|
$0.12
|
|
|
|
|
|
|
Stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive
|
|
|
383
|
|
|
|
|
|
|
|
|
|
5. Acquisitions and Strategic Investments.
On February 4, 2016, we purchased the HeRO®Graft device and other related assets from CryoLife, Inc., a developer of medical devices based in Kennesaw, Georgia ("CryoLife"). The purchase price was
$18.5 million
, which was paid in full during the quarter ended March 31, 2016. We accounted for this acquisition as a business combination. The purchase price was allocated as follows (in thousands):
|
|
|
|
|
Assets Acquired
|
|
|
Inventories
|
|
2,455
|
|
Fixed Assets
|
|
290
|
|
|
|
|
Intangibles
|
|
|
Developed Technology
|
|
12,100
|
|
Trademarks
|
|
700
|
|
Customer Lists
|
|
400
|
|
Goodwill
|
|
2,555
|
|
|
|
|
Total assets acquired
|
|
18,500
|
|
We are amortizing the developed HeroGraft technology asset over
ten years
, the trademarks over
5.5 years
, and the customer lists over
12 years
. The weighted average life of the intangible HeROGraft assets acquired is approximately
9.82 years
. Acquisition-related costs related to the HeROGraft during the quarter ended March 31, 2016, which were included in selling, general, and administrative expenses in the accompanying consolidated statements of income, were not material. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the three month period ended March 31, 2016, our net sales of the products acquired from CryoLife were approximately
$1.3 million
. It is not practical to separately report the earnings related to the products acquired from CryoLife, as we cannot split out sales costs related to those products, principally because our sales representatives are selling multiple products (including the HeROGraft device) in the cardiovascular business segment. The pro forma consolidated results of operations acquired from CryoLife are not presented, as we do not deem the pro forma effect of the transaction to be material.
On January 20, 2016, we paid
$2.0 million
for
2.0 million
preferred limited liability company units of Cagent Vascular, LLC, a medical device company. Our purchase price, which represents an ownership interest of approximately
15%
of the company, has been accounted for at cost.
On December 4, 2015, we entered into a license agreement with ArraVasc Limited, an Irish medial device company, for the right to manufacture and sell certain percutaneous transluminal angioplasty balloon catheter products. As of December 31, 2015, we had paid
$500,000
in connection with the license agreement. During the three-month period ended March 31, 2016, we paid an additional
$500,000
as certain milestones set forth in the license agreement were met during that period. We are obligated to pay an additional
$1.0 million
if additional milestones set forth in the license agreement are reached. We accounted for the transaction as an asset purchase and intend to amortize the license agreement intangible asset over a period of
12 years
.
On July 14, 2015, we entered into an asset purchase agreement with Quellent, LLC, a California limited liability company ("Quellent"), for superabsorbent pad technology. The purchase price for the asset was
$1.0 million
, payable in two installments. We accounted for this acquisition as a business combination. The first payment of
$500,000
was paid as of December 31, 2015, and the second payment of
$500,000
was recorded as an accrued liability as of December 31, 2015. We also recorded
$270,000
of contingent consideration related to royalties payable to Quellent pursuant to this agreement as of December 31, 2015. The sales and results of operations related to this business combination have been included in our cardiovascular segment since the acquisition date and were not material. The purchase price was allocated as follows:
$1.21 million
to a developed technology intangible asset and
$60,000
to goodwill as of December 31, 2015. We intend to amortize the developed technology intangible asset over
13 years
. The pro forma consolidated results of operations are not presented, as we do not deem the pro forma effect of the transaction to be material.
The goodwill arising from the acquisitions discussed above consists largely of the synergies and economies of scale we hope to achieve from combining the acquired assets and operations with our historical operations (see Note 12). The goodwill recognized from these acquisitions is expected to be deductible for income tax purposes.
6. Segment Reporting.
We report our operations in
two
operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of cardiology and radiology medical device products which assist in diagnosing and treating coronary artery disease, peripheral vascular disease and other non-vascular diseases and includes embolization devices and CRM/EP devices. Our endoscopy segment consists of gastroenterology and pulmonology medical device products 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 operating income (loss).
Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three-month periods ended March 31, 2016 and 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Revenues
|
|
|
|
|
|
Cardiovascular
|
$
|
132,544
|
|
|
$
|
124,764
|
|
Endoscopy
|
5,533
|
|
|
4,813
|
|
Total revenues
|
138,077
|
|
|
129,577
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
Cardiovascular
|
6,648
|
|
|
8,069
|
|
Endoscopy
|
1,058
|
|
|
635
|
|
Total operating income
|
7,706
|
|
|
8,704
|
|
7. Recent Accounting Pronouncements
. In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
. This ASU requires companies to record excess tax benefits and deficiencies in income rather than the current requirement to record them through equity. It also allows companies the option to recognize forfeitures of share-based awards when they occur rather than the current requirement to make an estimate upon the grant of the awards. This ASU is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption will be permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We are assessing the impact this new standard is anticipated to have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. This ASU requires lessees to recognize (with the exception of short-term leases) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged and lessees will no longer be provided with a source of off-balance sheet financing. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are assessing the impact this new standard is anticipated to have on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. This update amends the guidance regarding the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, it clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This ASU is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. Upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. We are assessing the impact this new standard is anticipated to have on our consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, which will require deferred tax assets and deferred tax liabilities to be presented as noncurrent within a classified balance sheet. The ASU simplifies the current guidance which requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified balance sheet. The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected. The ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period, and this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We have elected not to early adopt this ASU, and we are evaluating whether to apply the provisions prospectively or retrospectively upon adoption. We do not presently anticipate that the adoption of this standard will have a material impact on our financial statements.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
. This standard requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory measured using last-in, first-out or the retail inventory method are excluded from the scope of this update which is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We do not anticipate that the implementation of ASU 2015-11 will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued authoritative guidance amending the FASB Accounting Standards Codification and creating a new Topic 606,
Revenue from Contracts with Customers
. The new guidance clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP applicable to revenue transactions. This guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The existing industry guidance will be eliminated when the new guidance becomes effective and annual disclosures will be substantially revised. Additional disclosures will also be required under the new standard. In July 2015, the FASB approved a proposal that extended the required implementation date one year to the first quarter of 2018 but also would permit companies to adopt the standard at the original effective date of 2017. Implementation may be either through retrospective application to each period from the first quarter of 2016 or with a cumulative effect adjustment upon adoption in 2018. We are assessing the impact this new standard is anticipated to have on our consolidated financial statements.
8. Income Taxes.
Our overall effective tax rate for the three months ended March 31, 2016 and 2015 was
26.3%
and
30.7%
, respectively, which resulted in a provision for income taxes of
$1.6 million
and
$2.3 million
, respectively. The decrease in the effective income tax rate for the first quarter of 2016, when compared to the first quarter of 2015, was due primarily to the
reinstatement of the federal research and development credit and a higher mix of earnings from our foreign operations, which are generally taxed at lower rates than our U.S. operations.
9. Long-term Debt.
We entered into an Amended and Restated Credit Agreement, dated December 19, 2012, with the lenders who are or may become party thereto (collectively, the "Lenders") and Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent for the Lenders, which was amended on February 3, 2016 by a Third Amendment to the Amended and Restated Credit Agreement by and among Merit, certain subsidiaries of Merit, the Lenders and Wells Fargo as administrative agent for the Lenders (as amended, the "Credit Agreement"). Pursuant to the terms of the Credit Agreement, the Lenders have agreed to make revolving credit loans up to an aggregate amount of
$225 million
. The Lenders also made a term loan in the amount of
$100 million
, repayable in quarterly installments in the amounts provided in the Credit Agreement until the maturity date of December 19, 2017, at which time the term and revolving credit loans, together with accrued interest thereon, will be due and payable. In addition, certain mandatory prepayments are required to be made upon the occurrence of certain events described in the Credit Agreement. Wells Fargo has agreed, upon satisfaction of certain conditions, to make swingline loans from time to time through the maturity date in amounts equal to the difference between the amounts actually loaned by the Lenders and the aggregate revolving credit commitment. The Credit Agreement is collateralized by substantially all of our assets. At any time prior to the maturity date, we may repay any amounts owing under all revolving credit loans, term loans, and all swingline loans in whole or in part, subject to certain minimum thresholds, without premium or penalty, other than breakage costs.
The term loan and any revolving credit loans made under the Credit Agreement bear interest, at our election, at either (i) the
base rate
(described below) plus
0.25%
(subject to adjustment if the Consolidated Total Leverage Ratio, as defined in the Credit Agreement, is at or greater than
2.25
to 1), (ii) the
London Inter-Bank Offered Rate (“LIBOR”) Market Index Rate
(as defined in the Credit Agreement) plus
1.25%
(subject to adjustment if the Consolidated Total Leverage Ratio, as defined in the Credit Agreement, is at or greater than
2.25
to 1), or (iii) the
LIBOR Rate
(as defined in the Credit Agreement) plus
1.25%
(subject to adjustment if the Consolidated Total Leverage Ratio, as defined in the Credit Agreement, is at or greater than
2.25
to 1). Initially, the term loan and revolving credit loans under the Credit Agreement bear interest, at our election, at either (x) the
base rate
plus
1.00%
, (y) the
LIBOR Market Index Rate
, plus
2.00%
, or (z) the
LIBOR Rate
plus
2.00%
. Swingline loans bear interest at the LIBOR Market Index Rate plus
1.25%
(subject to adjustment if the Consolidated Total Leverage Ratio, as defined in the Credit Agreement, is at or greater than
2.25
to 1). Initially, swingline loans bear interest at the
LIBOR Market Index Rate
plus
2.00%
. Interest on each loan featuring the base rate or the
LIBOR Market Index Rate
is due and payable on the last business day of each calendar month; interest on each loan featuring the LIBOR Rate is due and payable on the last day of each interest period selected by us when selecting the LIBOR Rate as the benchmark for interest calculation. For purposes of the Credit Agreement, the base rate means the highest of (i) the
prime rate (as announced by Wells Fargo)
, (ii) the
federal funds rate
plus
0.50%
, and (iii)
LIBOR for an interest period of one month
plus
1.00%
.
The Credit Agreement contains customary covenants, representations and warranties and other terms customary for revolving credit loans of this nature. In this regard, the Credit Agreement requires us to not, among other things, (a) permit the Consolidated Total Leverage Ratio (as defined in the Credit Agreement) to be greater than
4.75
to 1 through the end of 2013, no more than
4.00
to 1 as of the fiscal quarter ending March 31, 2014, no more than
3.75
to 1 as of the fiscal quarter ending June 30, 2014, no more than
3.50
to 1 as of the fiscal quarter ending September 30, 2014, no more than
3.25
to 1 as of the fiscal quarter ending December 31, 2014, no more than
3.00
to 1 as of any fiscal quarter ending during 2015, no more than
3.25
to 1 as of any fiscal quarter ending thereafter; (b) for any period of
four
consecutive fiscal quarters, permit the ratio of Consolidated EBITDA (as defined in the Credit Agreement and subject to certain adjustments) to Consolidated Fixed Charges (as defined in the Credit Agreement) to be less than
1.75
to 1; (c) subject to certain adjustments, permit Consolidated Net Income (as defined in the Credit Agreement) for certain periods to be less than
$0
; or (d) subject to certain conditions and adjustments, permit the aggregate amount of all Facility Capital Expenditures (as defined in the Credit Agreement) in any fiscal year beginning in 2013 to exceed
$30 million
. Additionally, the Credit Agreement contains various negative covenants with which we must comply, including, but not limited to, limitations respecting: the incurrence of indebtedness, the creation of liens or pledges on our assets, mergers or similar combinations or liquidations, asset dispositions, the repurchase or redemption of equity interests or debt, the issuance of equity, the payment of dividends and certain distributions, the entry into related party transactions and other provisions customary in similar types of agreements. As of
March 31, 2016
, we were in compliance with all covenants set forth in the Credit Agreement.
We had originally entered into an unsecured credit agreement, dated September 30, 2010, with certain lenders who were or became party thereto and Wells Fargo, as administrative agent for the lenders. Pursuant to the terms of that credit agreement, the lenders agreed to make revolving credit loans up to an aggregate amount of
$175 million
. Wells Fargo also agreed to make swingline loans from time to time through the maturity date of September 10, 2015 in amounts equal to the difference between the amount actually loaned by the lenders and the aggregate credit agreement. The unsecured credit agreement was amended and restated as of December 19, 2012, as the Credit Agreement.
In summary, principal balances under our long-term debt as of
March 31, 2016
and
December 31, 2015
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Term loan
|
$
|
62,462
|
|
|
$
|
64,962
|
|
Revolving credit loans
|
165,940
|
|
|
142,631
|
|
Total long-term debt
|
228,402
|
|
|
207,593
|
|
Less current portion
|
10,000
|
|
|
10,000
|
|
Long-term portion
|
$
|
218,402
|
|
|
$
|
197,593
|
|
Future minimum principal payments on our long-term debt as of March 31, 2016, are as follows (in thousands):
|
|
|
|
|
|
Years Ending
|
|
Future Minimum
|
December 31
|
|
Principal Payments
|
2016
|
|
7,500
|
|
2017
|
|
220,902
|
|
Total future minimum principal payments
|
|
$
|
228,402
|
|
As of
March 31, 2016
, we had outstanding borrowings of approximately
$228.4 million
under the Credit Agreement, with available borrowings of approximately
$49.6 million
, based on the leverage ratio in the terms of the Credit Agreement. Our interest rate as of
March 31, 2016
was a fixed rate of
2.48%
on
$133.7 million
as a result of an interest rate swap (see Note 10), a variable floating rate of
1.94%
on
$90.1 million
and a variable floating rate of
2.13%
on approximately
$4.6 million
. Our interest rate as of
December 31, 2015
was a fixed rate of
2.48%
on
$135.0 million
as a result of an interest rate swap, variable floating rate of
1.74%
on
$65.8 million
and a variable floating rate of
2.12%
on approximately
$6.8 million
.
10. Derivatives.
Interest Rate Swap.
A portion of our debt bears interest at variable interest rates and, therefore, we are subject to variability in the cash paid for interest expense. In order to mitigate a portion of this risk, we use a hedging strategy to reduce the variability of cash flows in the interest payments associated with a portion of the variable-rate debt outstanding under the Credit Agreement that is solely due to changes in the benchmark interest rate.
On December 19, 2012, we entered into a pay-fixed, receive-variable interest rate swap having an initial notional amount of
$150 million
with Wells Fargo to fix the one-month LIBOR rate at
0.98%
. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). On a monthly basis, 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. The notional amount of the interest rate swap is reduced quarterly by
50%
of the minimum principal payment due under the terms of our Credit Agreement. The interest rate swap is scheduled to expire on December 19, 2017.
At
March 31, 2016
and
December 31, 2015
, our interest rate swap qualified as a cash flow hedge. The fair value of our interest rate swap at
March 31, 2016
was a liability of approximately
$727,000
, which was partially offset by approximately
$283,000
in deferred taxes. The fair value of our interest rate swap at
December 31, 2015
was an asset of approximately
$2,000
, which was offset by approximately
$1,000
in deferred taxes.
During the three-month periods ended
March 31, 2016
and
March 31, 2015
, the amount reclassified from accumulated other comprehensive income to earnings due to hedge effectiveness were included in interest expense in the accompanying consolidated statements of income and were not material.
Foreign Currency Forward Contracts
. We forecast our net exposure to various currencies and enter into foreign currency forward contracts to mitigate that exposure. As of
March 31, 2016
, we had entered into the following foreign currency forward contracts (amounts in thousands and in local currencies):
|
|
|
|
|
Currency
|
Symbol
|
Forward Notional Amount
|
|
Euro
|
EUR
|
662
|
|
British Pound
|
GBP
|
626
|
|
Chinese Yuan Renminbi
|
CNY
|
44,670
|
|
Mexican Peso
|
MXN
|
30,000
|
|
Brazilian Real
|
BRL
|
1,007
|
|
Australian Dollar
|
AUD
|
2,100
|
|
Hong Kong Dollar
|
HKD
|
6,725
|
|
We enter into similar transactions at various times during the year to partially offset exchange rate risks we bear throughout the year. These contracts are marked to market at each month-end, and the fair value of our open positions at
March 31, 2016
were not material.
On October 23, 2015, we entered into a foreign currency forward contract to partially offset the currency risk related to an intercompany loan denominated in CNY. The loan matures and the forward contract is deliverable on September 16, 2016. The notional amount of the forward contract is approximately
46.3 million
CNY. This contract is marked to market at each month-end. The fair value of our open position as of
March 31, 2016
was a liability of approximately
$46,000
.
The effect on our consolidated statements of income for the three-month periods ended
March 31, 2016
and
March 31, 2015
of all forward contracts was not material.
11. Fair Value Measurements.
Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of March 31, 2016 and December 31,
2015
, 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
|
Description
|
|
March 31, 2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
$
|
(727
|
)
|
|
$
|
—
|
|
|
$
|
(727
|
)
|
|
$
|
—
|
|
Foreign currency contracts (2)
|
|
$
|
(46
|
)
|
|
$
|
—
|
|
|
$
|
(46
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Fair
|
|
Quoted prices in
|
|
Significant other
|
|
Significant
|
|
|
Value at
|
|
active markets
|
|
observable inputs
|
|
Unobservable inputs
|
Description
|
|
December 31, 2015
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Foreign currency contracts (2)
|
|
$
|
(278
|
)
|
|
$
|
—
|
|
|
$
|
(278
|
)
|
|
$
|
—
|
|
(1) The fair value of the interest rate contracts is determined using Level 2 fair value inputs and is recorded as other long-term obligations or other long-term assets in the Consolidated Balance Sheets.
(2) The fair value of the foreign currency contracts is determined using Level 2 fair value inputs and is recorded as accrued expenses in the Consolidated Balance Sheets.
Certain of our 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 milestones. See Note 2 for further information regarding these acquisitions. The contingent consideration liability is re-measured at the estimated fair value at each reporting period with the change in fair value recognized within operating expenses in the accompanying consolidated statements of income. 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 liability during the three-month periods ended March 31, 2016 and 2015, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
1,024
|
|
|
$
|
1,886
|
|
Fair value adjustments recorded to income during the period
|
71
|
|
|
122
|
|
Contingent payments made
|
(167
|
)
|
|
(166
|
)
|
Ending balance
|
$
|
928
|
|
|
$
|
1,842
|
|
The recurring Level 3 measurement of our contingent consideration liability includes the following significant unobservable inputs at March 31, 2016 and December 31, 2015 (amount in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liability (asset)
|
|
Fair value at March 31, 2016
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
Revenue-based payments
|
|
$
|
928
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
5% - 15%
|
|
|
|
|
|
Probability of milestone payment
|
|
100%
|
|
|
|
|
|
|
Projected year of payments
|
|
2016-2028
|
|
|
|
|
|
|
|
|
|
Contingent Receivable
|
|
$
|
(681
|
)
|
|
Discounted cash flow
|
|
Discount rate
|
|
10%
|
|
|
|
|
|
Probability of milestone payment
|
|
75%
|
|
|
|
|
|
|
Projected year of payments
|
|
2016-2019
|
Contingent consideration liability
|
|
Fair value at December 31, 2015
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
Revenue-based payments
|
|
$
|
874
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
5% - 15%
|
|
|
|
|
|
Probability of milestone payment
|
|
100%
|
|
|
|
|
|
|
Projected year of payments
|
|
2016-2028
|
|
|
|
|
|
|
|
|
|
Other payments
|
|
$
|
150
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
—%
|
|
|
|
|
|
Probability of milestone payment
|
|
100%
|
|
|
|
|
|
|
Projected year of payments
|
|
2016
|
|
|
|
|
|
|
|
|
|
The contingent consideration liability is re-measured to fair value each reporting period using projected revenues, discount rates, probabilities of payment, and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases (decreases) in discount rates and the time to payment may result in lower (higher) fair value measurements. A decrease in the probability of any milestone payment may result in lower fair value measurements. An increase (decrease) in either the discount rate or the time to payment, in isolation, may result in a significantly lower (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 as part of our cardiovascular segment in our consolidated statements of income. As of March 31, 2016, approximately
$826,000
was included in other long-term obligations and
$102,000
was included in accrued expenses in our consolidated balance sheet. As of December 31, 2015, approximately
$775,000
was included in other long-term obligations and
$249,000
was included in accrued expenses in our consolidated balance sheet. The cash paid to settle the contingent consideration liability recognized at fair value as of the acquisition date (including measurement-period adjustments) has been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows.
During the three-month period ended March 31, 2016, we sold a cost method investment for cash and for the right to receive additional payments based on various contingent milestones. We determined the fair value of the contingent payments using the inputs indicated in the table above, and we recorded a contingent receivable asset of approximately
$681,000
as of March 31, 2016. We intend to record any change in fair value to operating expenses as part of our cardiovascular segment in our consolidated
statements of income. As of March 31, 2016, approximately
$512,000
was included in other long-term assets and approximately
$169,000
was included in other receivables as a current asset in our consolidated balance sheet.
During the three-month periods ended March 31, 2016 and
2015
, we had losses of approximately
$0
and
$14,000
, respectively, related to the measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.
The carrying amount of cash and cash equivalents, receivables, and trade payables approximates fair value because of the immediate, short-term maturity of these financial instruments. The carrying amount of long-term debt approximates fair value, as determined by borrowing rates estimated to be available to us for debt with similar terms and conditions. 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 are Level 1 inputs.
12. Goodwill and Intangible Assets.
The changes in the carrying amount of goodwill for the three months ended
March 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
2016
|
Goodwill balance at January 1
|
$
|
184,472
|
|
Effect of foreign exchange
|
20
|
|
Additions as the result of acquisitions
|
2,555
|
|
Goodwill balance at March 31
|
$
|
187,047
|
|
As of
March 31, 2016
, we had recorded
$8.3 million
of accumulated goodwill impairment charges. All of the goodwill balance as of
March 31, 2016
and December 31,
2015
related to our cardiovascular segment.
Other intangible assets at
March 31, 2016
and December 31,
2015
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Patents
|
$
|
12,496
|
|
|
$
|
(2,691
|
)
|
|
$
|
9,805
|
|
Distribution agreements
|
5,626
|
|
|
(3,000
|
)
|
|
2,626
|
|
License agreements
|
19,639
|
|
|
(2,616
|
)
|
|
17,023
|
|
Trademarks
|
7,974
|
|
|
(2,702
|
)
|
|
5,272
|
|
Covenants not to compete
|
1,028
|
|
|
(886
|
)
|
|
142
|
|
Customer lists
|
21,216
|
|
|
(15,443
|
)
|
|
5,773
|
|
Royalty agreements
|
267
|
|
|
(267
|
)
|
|
—
|
|
|
|
|
|
|
|
Total
|
$
|
68,246
|
|
|
$
|
(27,605
|
)
|
|
$
|
40,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Patents
|
$
|
12,014
|
|
|
$
|
(2,595
|
)
|
|
$
|
9,419
|
|
Distribution agreements
|
5,626
|
|
|
(2,853
|
)
|
|
2,773
|
|
License agreements
|
19,109
|
|
|
(2,438
|
)
|
|
16,671
|
|
Trademarks
|
7,259
|
|
|
(2,554
|
)
|
|
4,705
|
|
Covenants not to compete
|
1,028
|
|
|
(873
|
)
|
|
155
|
|
Customer lists
|
20,793
|
|
|
(15,023
|
)
|
|
5,770
|
|
Royalty agreements
|
267
|
|
|
(267
|
)
|
|
—
|
|
|
|
|
|
|
|
Total
|
$
|
66,096
|
|
|
$
|
(26,603
|
)
|
|
$
|
39,493
|
|
Aggregate amortization expense for the three-month periods ended
March 31, 2016
and 2015 was approximately
$3.9 million
and
$3.6 million
, respectively.
Estimated amortization expense for the developed technology and other intangible assets for the next five years consists of the following as of
March 31, 2016
(in thousands):
|
|
|
|
|
Year Ending December 31
|
|
Remaining 2016
|
$
|
13,252
|
|
2017
|
16,983
|
|
2018
|
16,395
|
|
2019
|
16,058
|
|
2020
|
15,084
|
|
13. Commitments and Contingencies.
In the ordinary course of business, we are involved in various claims and litigation matters. These claims and litigation matters may include actions involving product liability, intellectual property, contractual, and employment matters. We do not believe that any such actions are likely to be, individually or in the aggregate, material to our business, financial condition, results of operations or liquidity. However, in the event of unexpected further developments, 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.