The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
Period Ended June 30, 2016
(Unaudited)
1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, needed to fairly present the financial results of Surmodics, Inc. and subsidiaries (“Surmodics” or the “Company”) for the periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The results of operations for the three and nine months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the entire 2016 fiscal year.
In accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the audited consolidated financial statements of the Company. These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the fiscal year ended September 30, 2015, and footnotes thereto included in the Company’s Form 10-K as filed with the SEC on December 4, 2015, and as amended on May 10, 2016.
On July 11, 2016, we amended our articles of incorporation to change our name from SurModics, Inc., to Surmodics, Inc., which change became effective immediately. The name change was effected by our board of directors.
During the nine months ended June 30, 2016 the Company recorded an out-of-period adjustment of $1.1 million in the second quarter of fiscal 2016 to correct an estimated cumulative overstatement of royalty revenue with a customer, of which $1.0 million related to years prior to fiscal 2016. The overstatement was evaluated and concluded to not be material to fiscal 2016, the nine- months ended June 30, 2016, or any prior periods. During the quarter ended June 30, 2016, the Company entered into a settlement agreement with this customer and agreed to pay the customer a total of $1.4 million to settle this matter. The additional obligation amount settled was considered to be a change in estimate and was recorded as a reduction of royalty revenue during the quarter ended June 30, 2016. The total settlement amount of $1.4 million was included in the Due to Customer liability on the consolidated balance sheet at June 30, 2016 and was paid in July 2016.
On April 29, 2016, a customer reported $2.9 million,
of royalties was owed to the Company for the period from fiscal 2009 through
fiscal
2016. Payment of this amount was received and royalty revenue was recognized in the third quarter of fiscal 2016, when collectability was reasonably assured and completion of the earnings process occurred, consistent with the Company’s revenue recognition policy.
2. New Accounting Pronouncements
Accounting Standards to be Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Update No. 2014-09,
Revenue from Contracts with Customers (ASC Topic 606)
. Principles of this guidance
require entities to recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration an entity expects to be entitled to in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting standard will be effective for the Company beginning in the first quarter of fiscal year 2019 (October 1, 2018) using one of two prescribed retrospective methods. The Company is currently evaluating the impact that the adoption of this standard will have on the Company’s results of operations, cash flows and financial position.
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02,
Leases (ASC Topic 842)
. The new guidance primarily affects lessee accounting, while accounting by lessors will not be significantly impacted by the update. The update maintains two classifications of leases: finance leases, which replace capital leases, and operating leases. Lessees will need to recognize a right-of-use asset and a lease liability on the statement of financial position for those leases previously classified as operating leases under the old guidance. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for direct costs. The accounting standard will be effective for the Company beginning the
7
first quarter of fiscal year 2020 (October 1, 2019) using a modified retrospective approach. The Company is currently evaluating the impact that the adoption of this standard will
have on the Company’s results of operations, cash flows and financial position.
In March 2016, the FASB issued ASU No 2016-09,
Compensation – Stock Compensation (ASC Topic 718): Improvements to Employee Share-Based Payment Accounting
. The accounting standard intends to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The accounting standard will be effective for the Company beginning in the first quarter of fiscal 2018 (October 1, 2017), and early adoption is permitted. We currently are evaluating the impact that the adoption of this standard will have on the Company’s results of operations, cash flows and financial position.
In June 2016, the FASB issued ASU No 2016-13,
Financial Instruments – Credit Losses (ASU Topic 326), Measurement of Credit Losses on Financial Statements
.
This ASU requires a financial asset (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The accounting standard will be effective for the Company beginning in the first quarter of fiscal 2020 (October 1, 2019), and early adoption is permitted. We currently are evaluating the impact that the adoption of this standard will have on the Company’s results of operations, cash flows and financial position.
Accounting Standards Adopted
In September 2015, the FASB issued ASU 2015-16,
Business Combinations (ASC Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.
The update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amounts as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. The accounting standard is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this accounting standard in the first quarter of fiscal 2016 without any material impact on the Company’s financial position or financial results.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
, which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. This accounting standard is effective for the Company beginning in its first quarter of fiscal year 2018 and early implementation is permitted using either the prospectively or retroactive adoption method. The Company prospectively adopted this accounting standard in the first quarter of fiscal 2016.
No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.
3. Business Combinations
For all business combinations, the Company records all assets and liabilities of the acquired business, including goodwill and other identified intangible assets, generally at their fair values starting in the period when the acquisition is completed. Contingent consideration, if any, is recognized at its fair value on the acquisition date and changes in fair value are recognized in earnings until settlement. Acquisition-related transaction costs are expensed as incurred.
Creagh Medical Ltd.
On November 20, 2015, the Company acquired 100% of the outstanding common shares and voting shares of Creagh Medical Ltd. (“Creagh Medical”) located in Ballinasloe, Ireland. The results of Creagh Medical’s operations have been included in the Company’s condensed consolidated financial statements as of the Creagh Medical acquisition date. The acquisition was financed with cash on hand. The Company acquired Creagh Medical for up to €30 million (approximately $32 million as of the acquisition date), including an upfront payment of €18 million (approximately $19.3 million as of the acquisition date), and up to €12 million (approximately $12.8 million as of the acquisition date) based on achievement of revenue and value-creating operational milestones through September 30, 2018. The payment of the milestones if met will occur in the quarter ending December 31, 2018. As of June 30, 2016, the Company had paid $18.4 million in cash for this acquisition, in addition to $0.8 million to an escrow account to fund the repurchase of certain Creagh Medical debt classified securities during fiscal 2016. As these securities were not initially legally defeased by the establishment of the escrow fund, the Company recorded a corresponding restricted cash and business combination consideration payable in prior periods. These securities were repaid in the third quarter of fiscal 2016. The Company also assumed
8
$0.8 million of debt that was repaid in the second quarter of fiscal 2016. Total transaction, integration and other costs associated with the Creagh Medical acquisition aggr
egated less than $0.1 million and $2.7 million for the three and nine months ended June 30, 2016, respectively. Creagh Medical is included in the Company’s Medical Device reporting segment.
Creagh Medical designs and manufactures high-quality percutaneous transluminal angioplasty (“PTA”) balloon catheters. Since 2006, Creagh Medical has grown its technical and product capability with PTA products approved throughout the world, including Europe, the United States, and Japan. With these resources, the Company is uniquely positioned to offer a total solutions approach from product design and development, through in-house extrusion, balloon forming, top-assembly, packaging and regulatory capabilities to approved products for exclusive distribution. The acquisition is a major step forward in the Company’s strategy to transform its Medical Device segment from being a provider of coatings technologies to offering whole-product solutions to medical device customers in the large and growing global interventional vascular market.
The purchase price of Creagh Medical consisted of the following:
(Dollars in thousands)
|
|
|
|
|
Cash paid
|
|
$
|
18,417
|
|
Debt assumed
|
|
|
793
|
|
Contingent consideration
|
|
|
9,064
|
|
Total purchase price
|
|
|
28,274
|
|
Less cash and cash equivalents acquired
|
|
|
(251
|
)
|
Total purchase price, net of cash acquired
|
|
$
|
28,023
|
|
The following table summarizes the preliminary allocation of the purchase price to the fair values assigned to the assets acquired and the liabilities assumed at the date of the Creagh Medical acquisition:
|
|
Fair Value
(Dollars
in
thousands)
|
|
Estimated
Useful
Life
(In
years)
|
Current assets
|
|
$
|
708
|
|
N/A
|
Property and equipment
|
|
|
634
|
|
1.0-10.0
|
Trade name
|
|
|
75
|
|
N/A
|
Developed technology
|
|
|
1,787
|
|
7.0
|
In-process research and development
|
|
|
942
|
|
N/A
|
Customer relationships
|
|
|
11,119
|
|
7.0-10.0
|
Other noncurrent assets
|
|
|
81
|
|
N/A
|
Current liabilities
|
|
|
(923
|
)
|
N/A
|
Deferred tax liabilities
|
|
|
(9
|
)
|
N/A
|
Net assets acquired
|
|
|
14,414
|
|
|
Goodwill
|
|
|
13,609
|
|
N/A
|
Total purchase price, net of cash acquired
|
|
$
|
28,023
|
|
|
The Creagh Medical goodwill is a result of acquiring and retaining the Creagh Medical existing workforce and expected synergies from integrating their business into Surmodics. The goodwill will not be deductible for tax purposes. Purchase accounting is considered preliminary, subject to revision, mainly with respect to working capital, income taxes and goodwill, as final information was not available as of June 30, 2016.
As a result of the Creagh Medical acquisition, the Company has adopted a foreign currency translation policy. Assets and liabilities of non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars at the period-end exchange rates, and revenues and expenses are translated at the average exchange rate for the period. The net effect of these translation adjustments in the condensed consolidated financial statements are recorded as a foreign currency translation adjustment, as a component of accumulated other comprehensive income. Foreign currency transaction gains and losses are included in other, income (loss) net in our Condensed Consolidated Statements of Income.
NorMedix, Inc.
On January 8, 2016, the Company acquired 100% of the shares of NorMedix, Inc. (“NorMedix”), a privately owned design and development company focused on ultra thin-walled, minimally invasive catheter technologies based in Plymouth, Minnesota. The acquisition was financed with cash on hand. The Company acquired NorMedix for $14.0 million, including an upfront payment of
9
$6.9 million, and up to $7.0 million based on achievement of revenue and value-creating operational milestones through September 30, 2019. Contingent consideration associated with the NorMedix transaction is
payable as earned. This acquisition strengthens the Company’s vascular device expertise and Research and Development (“R&D) capabilities. This acquisition positions the Company to make significant progress on its strategy to offer whole-product solutions
to medical device customers, while continuing its commitment to consistently deliver innovation in coating technologies and in vitro diagnostics. Total transaction, integration and other costs associated with the NorMedix acquisition aggregated $0.0 millio
n and $0.3 million for the three and nine months, respectively, ended June 30, 2016. NorMedix is included in the Company’s Medical Device reporting segment.
The purchase price of NorMedix consisted of the following:
(Dollars in thousands)
|
|
|
|
|
Cash paid
|
|
$
|
6,905
|
|
Contingent consideration
|
|
|
3,740
|
|
Total purchase price
|
|
|
10,645
|
|
Less cash and cash equivalents acquired
|
|
|
(17
|
)
|
Total purchase price, net of cash acquired
|
|
$
|
10,628
|
|
|
|
|
|
|
The following table summarizes the allocation of the preliminary purchase price to the fair values assigned to the assets acquired and the liabilities assumed at the date of the NorMedix acquisition:
|
|
Fair Value
(Dollars
in
thousands)
|
|
Estimated Useful Life (In years)
|
Net current assets
|
|
$
|
196
|
|
N/A
|
Property and equipment
|
|
|
76
|
|
N/A
|
Developed technology
|
|
|
6,850
|
|
10.0-14.0
|
Customer relationships
|
|
|
900
|
|
4.0
|
Deferred tax asset
|
|
|
812
|
|
N/A
|
Other noncurrent asset
|
|
|
12
|
|
N/A
|
Deferred tax liabilities
|
|
|
(2,597
|
)
|
N/A
|
Net assets acquired
|
|
|
6,249
|
|
|
Goodwill
|
|
|
4,379
|
|
N/A
|
Total purchase price, net of cash acquired
|
|
$
|
10,628
|
|
|
The NorMedix goodwill is a result of acquiring and retaining the NorMedix existing workforce and expected synergies from integrating their business into Surmodics. The goodwill will not be deductible for tax purposes. Purchase accounting is considered preliminary, subject to revision, mainly with respect to working capital, income taxes and goodwill, as final information was not available as of June 30, 2016.
These strategic acquisitions combine the best-in-class capabilities of NorMedix’s catheter-based technologies, Creagh Medical’s PTA balloon platform capabilities, and Surmodics’ innovative coating and drug delivery technologies to develop highly differentiated delivery and therapeutic intravascular solutions. The result is an organization with unique device design and development expertise, rich technology content, manufacturing capabilities, and a state-of-the-art facility equipped for medical device R&D and manufacturing.
Pro Forma Results
The following unaudited pro forma financial information presents the combined results of operation of the Company as if the acquisitions of Creagh Medical and NorMedix had occurred as of October 1, 2014. The Company has realized $2.8 million of revenue and a net loss of $2.3 million from the Creagh Medical and NorMedix operations since their acquisitions.
The fiscal 2016 nine month pro forma financial information includes adjustments for additional amortization expense on identifiable intangible assets of $0.4 million and contingent consideration accretion expense of $0.3 million, eliminating non-recurring transactional professional fees of $3.0 million, and tax effect impact of $0.1 million.
The fiscal 2015 three and nine month pro forma financial information includes adjustments for additional amortization expense on identifiable intangible assets of $0.6 million and $1.9 million, contingent consideration accretion expense of $0.1 million and $0.9 million and tax effect impact of $0.1 million and $0.4 million, respectively.
10
The tax impact of the adjustments in
all periods reflects no tax benefit from contingent consideration accretion as well as a significant portion of our transaction related costs in fiscal 2016 as they are not deductible for tax purposes. Further, Creagh Medical amortization expense does no
t reflect an Irish tax benefit as we acquired a net operating loss carryforward as of the acquisition date that was offset in the aggregate by deferred tax liabilities and valuation allowance. Therefore, the amortization of Creagh Medical intangible asset
s results in a decrease in deferred tax liabilities with a corresponding increase to a deferred tax valuation allowance. NorMedix amortization expense reflects a tax benefit based on our incremental U.S. tax rate.
The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year. Additionally, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company.
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
(In thousands, except per share data)
|
(Unaudited)
|
|
(Unaudited)
|
|
Revenue
|
|
$
|
16,858
|
|
|
$
|
54,262
|
|
|
$
|
46,922
|
|
Net income
|
|
$
|
1,232
|
|
|
$
|
6,857
|
|
|
$
|
2,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.09
|
|
|
$
|
0.53
|
|
|
$
|
0.18
|
|
Diluted net income per share
|
|
$
|
0.09
|
|
|
$
|
0.52
|
|
|
$
|
0.18
|
|
4. Fair Value Measurements
The accounting guidance on fair value measurements defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The guidance is applicable for all financial assets and financial liabilities and for all nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability (an exit price) at the measurement date under current market conditions. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.
Fair Value Hierarchy
Accounting guidance on fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.
The Company did not have any Level 1 assets as of June 30, 2016 or September 30, 2015.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
The Company’s Level 2 assets as of June 30, 2016 consisted of money market funds, commercial paper instruments and corporate debt securities. Fair market values for these assets are based on quoted vendor prices and broker pricing where all significant inputs are observable. To ensure the accuracy of quoted vendor prices and broker pricing, the Company performs regular reviews of investment returns to industry benchmarks and sample tests of individual securities to validate quoted vendor prices with other available market data.
Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
11
Includ
ed in Level 3 liabilities as of June 30, 2016 is $13.9 million of noncurrent contingent consideration liabilities related to achievement of revenue and value-creating milestones associated with the Creagh Medical and NorMedix acquisitions. There were no Le
vel 3 instruments as of September 30, 2015.
In valuing assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2016:
(Dollars in thousands)
|
|
Quoted
Prices in
Active Markets
for Identical
Instruments
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Total Fair
Value as of
June 30,
2016
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
—
|
|
|
$
|
26,087
|
|
|
$
|
—
|
|
|
$
|
26,087
|
|
Available-for-sale debt securities
|
|
|
—
|
|
|
|
9,523
|
|
|
|
—
|
|
|
|
9,523
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
35,610
|
|
|
$
|
—
|
|
|
$
|
35,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - noncurrent
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(13,950
|
)
|
|
$
|
(13,950
|
)
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(13,950
|
)
|
|
$
|
(13,950
|
)
|
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2015:
(Dollars in thousands)
|
|
Quoted
Prices in
Active Markets
for Identical
Instruments
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Total Fair
Value as of
September 30,
2015
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
—
|
|
|
$
|
53,591
|
|
|
$
|
—
|
|
|
$
|
53,591
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
53,591
|
|
|
$
|
—
|
|
|
$
|
53,591
|
|
12
Included in Level 3 fair value measurements as of June 30, 2016 was a $13.9 million noncurrent contingent consideration liability related to achievement of reven
ue and value-creating milestones associated with the Creagh Medical and NorMedix acquisitions. The following table summarizes the changes in the noncurrent contingent consideration liability for the three and nine month periods ended June 30, 2016:
(Dollars in thousands)
|
|
|
|
|
Current and noncurrent contingent consideration liability as of September 30, 2015
|
|
$
|
—
|
|
Additions
|
|
|
9,064
|
|
Fair value adjustments
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
Interest accretion
|
|
|
109
|
|
Foreign currency translation loss
|
|
|
135
|
|
Current and noncurrent contingent consideration liability as of December 31, 2015
|
|
|
9,308
|
|
Additions
|
|
|
3,517
|
|
Fair value adjustments
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
Interest accretion
|
|
|
392
|
|
Foreign currency translation loss
|
|
|
429
|
|
Current and noncurrent contingent consideration liability as of March 31, 2016
|
|
|
13,646
|
|
Additions
|
|
|
—
|
|
Fair value adjustments
|
|
|
70
|
|
Settlements
|
|
|
—
|
|
Interest accretion
|
|
|
485
|
|
Foreign currency translation gain
|
|
|
(251
|
)
|
Current and noncurrent contingent consideration liability as of June 30, 2016
|
|
$
|
13,950
|
|
Valuation Techniques
The valuation techniques used to measure the fair value of assets are as follows:
Cash equivalents — These assets are classified as Level 2 and are carried at historical cost, which is a reasonable estimate of fair value because of the relatively short time between origination of the instrument and its expected realization.
Available-for-sale debt securities — These assets are classified as Level 2 and includes corporate debt securities. These securities ae valued based on quoted vendor prices in active markets underlying the securities.
Contingent consideration — The contingent consideration liabilities were determined based on discounted cash flow analyses that included revenue estimates, probability of strategic milestone achievement and a discount rate, which are considered significant unobservable inputs as of the acquisition date and June 30, 2016. For the revenue based milestones, the Company discounted forecasted revenue by 14.1% to 22.8%, which represents the Company’s weighted average cost of capital for each transaction, adjusted for the short-term nature of the cash flows. The resulting present value of revenue was used as an input into an option pricing approach, which also considered the Company’s risk of non-payment of the revenue-based milestones. Non-revenue milestones are assumed to have a 75% to 100% probability of achievement and related payments were discounted using the Company’s estimated cost of debt, or 5.6% to 6.7%. To the extent that these assumptions were to change, the fair value of the contingent consideration liabilities could change significantly. Included in the condensed consolidated statement of income for the third quarter and first nine months ended June 30, 2016 is $0.5 million and $1.1 million, respectively, of expense related to the accretion of the contingent consideration. The €12 million contingent consideration related to the Creagh Medical acquisition is denominated in Euros and is not hedged. The Company recorded a $0.3 million and $(0.3) million foreign currency exchange gain (loss) in the third quarter and first nine months of fiscal 2016, respectively, related to this contingent consideration.
5. Investments
Investments consist principally of corporate debt securities and are classified as available-for-sale as of June 30, 2016. Available-for-sale securities are reported at fair value with unrealized gains and losses, net of tax, excluded from the condensed consolidated statements of income and reported in the condensed consolidated statements of comprehensive income as well as a separate component of stockholders’ equity in the condensed consolidated balance sheets, except for other-than-temporary impairments, which are reported as a charge to current earnings. A loss would be recognized when there is an other-than-temporary impairment in the fair value of any individual security classified as available-for-sale, with the associated net unrealized loss
13
re
classified out of accumulated other comprehensive income with a corresponding adjustment to other income. This adjustment results in a new cost basis for the investment. Interest earned on debt securities, including amortization of premiums and accretion
of discounts, is included in other income. Realized gains and losses from the sales of debt securities, which are included in other income, are determined using the specific identification method.
The amortized cost, unrealized holding gains and losses, and fair value of available for sale securities as of June 30, 2016 were as follows:
|
|
June 30, 2016
|
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
Corporate bonds
|
|
$
|
9,562
|
|
|
$
|
1
|
|
|
$
|
(40
|
)
|
|
$
|
9,523
|
|
Total
|
|
$
|
9,562
|
|
|
$
|
1
|
|
|
$
|
(40
|
)
|
|
$
|
9,523
|
|
During the year ended September 30, 2015, the Company liquidated its investment portfolio to support corporate initiatives, as a result the ending balance of available-for-sale investments as of September 30, 2015 was zero.
The following table summarizes sales of available-for-sale debt securities:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Proceeds from sales
|
|
$
|
—
|
|
|
$
|
19,071
|
|
|
$
|
—
|
|
|
$
|
21,722
|
|
Gross realized gains
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
26
|
|
Gross realized losses
|
|
$
|
—
|
|
|
$
|
(65
|
)
|
|
$
|
—
|
|
|
$
|
(73
|
)
|
6. Inventories
Inventories are principally stated at the lower of cost or market using the specific identification method and include direct labor, materials and overhead, with cost of product sales determined on a first-in, first-out basis. Inventories consisted of the following components:
|
|
June 30,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
1,630
|
|
|
$
|
1,264
|
|
Finished products
|
|
|
1,715
|
|
|
|
1,715
|
|
Total
|
|
$
|
3,345
|
|
|
$
|
2,979
|
|
7. Other Assets
Other assets consist principally of the following:
|
|
June 30,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
ViaCyte, Inc.
|
|
$
|
479
|
|
|
$
|
479
|
|
Other noncurrent assets
|
|
|
195
|
|
|
|
—
|
|
Other assets, net
|
|
$
|
674
|
|
|
$
|
479
|
|
The Company has invested a total of $5.3 million in ViaCyte, Inc. (“ViaCyte”), a privately-held California-based biotechnology firm that is developing a unique treatment for diabetes using coated islet cells, the cells that produce insulin in the human body. The balance of the investment of $0.5 million, which is net of previously recorded other-than-temporary impairments of $4.8 million is accounted for under the cost method and represents less than a 1% ownership interest. The Company does not exert significant influence over ViaCyte’s operating or financial activities.
The carrying value of each cost method investment is reviewed quarterly for changes in circumstances or the occurrence of events that suggest the Company’s investment may not be recoverable. The fair value of cost method investments is not adjusted if there are no identified events or changes in circumstances that may have a material adverse effect on the fair value of the investment.
14
8. Intangible Assets
Intangible assets consist principally of acquired patents and technology, customer relationships, licenses and trademarks. In the first nine months of fiscal 2016, the Company acquired 100% of the shares of Creagh Medical and 100% of the shares of NorMedix. The Company acquired and recorded amounts for certain intangible assets in both the Creagh Medical and NorMedix transactions. The Company recorded amortization expense of $0.8 million and $0.2 million for the third quarter ended June 30, 2016 and 2015, respectively. For the nine months ended June 30, 2016 and 2015, the Company recorded amortization expense of $1.9 million and $0.6 million, respectively.
Intangible assets consisted of the following:
|
|
June 30, 2016
|
|
(Dollars in thousands)
|
|
Weighted Average Original
Life (Years)
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and relationships
|
|
|
7.8
|
|
|
$
|
17,547
|
|
|
$
|
(5,842
|
)
|
|
$
|
11,705
|
|
Core technology
|
|
|
8.0
|
|
|
|
530
|
|
|
|
(530
|
)
|
|
|
—
|
|
Developed technology
|
|
|
11.8
|
|
|
|
8,701
|
|
|
|
(417
|
)
|
|
|
8,284
|
|
Non-compete
|
|
|
5.0
|
|
|
|
230
|
|
|
|
(46
|
)
|
|
|
184
|
|
Patents and other
|
|
|
16.5
|
|
|
|
2,321
|
|
|
|
(1,238
|
)
|
|
|
1,083
|
|
Subtotal
|
|
|
|
|
|
|
29,329
|
|
|
|
(8,073
|
)
|
|
|
21,256
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
|
|
|
|
|
975
|
|
|
|
—
|
|
|
|
975
|
|
Trademarks and trade names
|
|
|
|
|
|
|
658
|
|
|
|
—
|
|
|
|
658
|
|
Total
|
|
|
|
|
|
$
|
30,962
|
|
|
$
|
(8,073
|
)
|
|
$
|
22,889
|
|
|
|
September 30, 2015
|
|
(Dollars in thousands)
|
|
Weighted Average Original Life
(Years)
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
|
9.0
|
|
|
$
|
5,132
|
|
|
$
|
(4,363
|
)
|
|
$
|
769
|
|
Core technology
|
|
|
8.0
|
|
|
|
530
|
|
|
|
(530
|
)
|
|
|
—
|
|
Non-compete
|
|
|
5.0
|
|
|
|
230
|
|
|
|
(12
|
)
|
|
|
218
|
|
Patents and other
|
|
|
16.8
|
|
|
|
2,321
|
|
|
|
(1,128
|
)
|
|
|
1,193
|
|
Subtotal
|
|
|
|
|
|
|
8,213
|
|
|
|
(6,033
|
)
|
|
|
2,180
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
580
|
|
|
|
—
|
|
|
|
580
|
|
Total
|
|
|
|
|
|
$
|
8,793
|
|
|
$
|
(6,033
|
)
|
|
$
|
2,760
|
|
Based on the intangible assets in service as of June 30, 2016 and the projected completion of in-process research and development assets in fiscal 2017, estimated amortization expense for the remainder of fiscal 2016 and each of the next five fiscal years is as follows:
(Dollars in thousands)
|
|
|
|
|
Remainder of 2016
|
|
$
|
750
|
|
2017
|
|
|
2,570
|
|
2018
|
|
|
2,523
|
|
2019
|
|
|
2,523
|
|
2020
|
|
|
2,348
|
|
2021
|
|
|
2,209
|
|
Future amortization amounts presented above are estimates. Actual future amortization expense may be different as a result of completion of the purchase price allocations for Creagh Medical and NorMedix, future acquisitions, impairments, completion of in-process research and development (“IPR&D”) intangible assets, foreign currency fluctuations, changes in amortization periods, or other factors.
The Company defines IPR&D as the value of technology acquired for which the related projects have substance and are incomplete. IPR&D acquired in a business acquisition is recognized at fair value and requires the IPR&D to be capitalized as an
15
indefinite-lived intangible asset until completion of the IPR&D project or
abandonment. Upon completion of the development projec
t (generally when regulatory approval to market the
product is obtained), an impairment assessment is performed prior to amortizing the asset over its estimated
useful life. If the IPR&D projects are abandoned, the related IPR&D assets would be written off
.
9. Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value assigned to the assets purchased and liabilities assumed in connection with a business acquisition. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment in accordance with accounting guidance for goodwill. The carrying amount of goodwill is evaluated annually, and between annual evaluations if events occur or circumstances change indicating that the carrying amount of goodwill may be impaired.
Goodwill as of June 30, 2016 and September 30, 2015 totaled $26.5 million and $8.0 million, respectively. The $8.0 million of goodwill as of September 30, 2015 is related to the In Vitro Diagnostics reporting unit and represents the gross value from the acquisition of BioFX Laboratories, Inc. (“BioFX”) in 2007. The goodwill was not impaired based on the outcome of the fiscal 2015 annual impairment test, and there have been no events or circumstances that have occurred in the first nine months of fiscal 2016 to indicate that the goodwill has been impaired.
In the first quarter of fiscal 2016, the Company purchased Creagh Medical. The purchase price of Creagh Medical exceeded the net acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $13.6 million. The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible, but no later than one year from the acquisition date.
In the second quarter of fiscal 2016, the Company purchased NorMedix. The purchase price of NorMedix exceeded the net acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $4.4 million. The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible, but no later than one year from the acquisition date.
The change in the carrying amount of goodwill by segment for the nine months ended June 30, 2016 was as follows:
(Dollars in thousands)
|
|
In Vitro Diagnostics
|
|
|
Medical Device
|
|
|
Total
|
|
Balance as of September 30, 2015
|
|
$
|
8,010
|
|
|
$
|
—
|
|
|
$
|
8,010
|
|
Additions (See Note 3)
|
|
|
—
|
|
|
|
17,988
|
|
|
|
17,988
|
|
Translation adjustment
|
|
|
—
|
|
|
|
546
|
|
|
|
546
|
|
Balance as of June 30, 2016
|
|
$
|
8,010
|
|
|
$
|
18,534
|
|
|
$
|
26,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Stock-based Compensation
The Company has stock-based compensation plans under which it grants stock options, restricted stock awards, performance share awards, restricted stock units and deferred stock units. Accounting guidance requires all share-based payments to be recognized as an operating expense, based on their fair values, over the requisite service period.
The Company’s stock-based compensation expenses were allocated to the following expense categories:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Product costs
|
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
12
|
|
|
$
|
18
|
|
Research and development
|
|
|
101
|
|
|
|
56
|
|
|
|
220
|
|
|
|
171
|
|
Selling, general and administrative
|
|
|
725
|
|
|
|
568
|
|
|
|
2,497
|
|
|
|
1,652
|
|
Total
|
|
$
|
830
|
|
|
$
|
629
|
|
|
$
|
2,729
|
|
|
$
|
1,841
|
|
As of June 30, 2016, approximately $4.7 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.2 years. The unrecognized compensation costs above include $1.8 million, remaining to be expensed over the life of the awards, based on payout levels associated with performance share awards that are currently anticipated to be fully expensed because the performance conditions are expected to exceed minimum threshold levels.
16
Stock Option Awards
The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options granted. The weighted average per share fair values of stock options granted during the three months ended June 30, 2016 and 2015 were $6.49 and $8.85, respectively. The weighted average per share fair values of stock options granted during the nine months ended June 30, 2016 and 2015 were $6.85 and $7.25, respectively. The assumptions used as inputs in the model were as follows:
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rates
|
|
|
1.3
|
%
|
|
|
1.2
|
%
|
|
|
1.9
|
%
|
|
|
1.4
|
%
|
Expected life (years)
|
|
|
4.7
|
|
|
|
4.4
|
|
|
|
4.6
|
|
|
|
4.5
|
|
Expected volatility
|
|
|
35.2
|
%
|
|
|
38.5
|
%
|
|
|
36.8
|
%
|
|
|
43.2
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award. The expected life of options granted was determined based on the Company’s experience. Expected volatility was based on the Company’s stock price movement over a period approximating the expected term. Based on management’s judgment, dividend yields were expected to be 0.0% for the expected life of the options. The Company also estimates forfeitures of options granted, which were based on historical experience.
Non-qualified stock options are granted at fair market value on the date of grant. Non-qualified stock options expire in seven to ten years or upon termination of employment or service as a Board member. With respect to members of our Board, non-qualified stock options generally become exercisable on a pro-rata basis within the one-year period following the date of grant. With respect to our employees, non-qualified stock options generally become exercisable with respect to 25% of the shares on each of the first four anniversaries following the grant date.
The total pre-tax intrinsic value of options exercised during the three and nine months ended June 30, 2016 was $0.4 million and $1.7 million, respectively.
The total pre-tax intrinsic value of options exercised during the three and nine months ended June 30, 2015 was $0.3 million and $1.7 million, respectively. The intrinsic value represents the difference between the average exercise price and the fair market value of the Company’s common stock on the last day of the periods.
Restricted Stock Awards
The Company has entered into restricted stock agreements with certain key employees, covering the issuance of common stock (“Restricted Stock”). Under accounting guidance, these shares are considered to be non-vested shares. The Restricted Stock is released to the key employees if they are employed by the Company at the end of the vesting period. Compensation expense has been recognized for the estimated fair value of the common shares and is being charged to income over the vesting term. The stock-based compensation expense table includes Restricted Stock expenses recognized related to these awards, which totaled less than $0.1 million and $0.1 million
in each of the three months ended June 30, 2016 and 2015, respectively.
The stock-based compensation expense table includes Restricted Stock expenses recognized related to these awards, which totaled $0.2 million
in each of the nine months ended June 30, 2016 and 2015, respectively.
Performance Share Awards
The Company has entered into performance share agreements with certain key employees and executives, covering the issuance of common stock (“Performance Shares”). Performance Shares vest upon the achievement of all or a portion of certain performance objectives (which may include financial or project objectives), which must be achieved during the performance period. The Organization and Compensation Committee of the Board of Directors (the “Committee”) approves the performance objectives used for our executive compensation programs, which objectives were cumulative earnings per share and cumulative revenue for the three-year performance periods for fiscal 2014 (2014 – 2016) and are cumulative revenue and cumulative earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for fiscal year 2015 (2015 – 2017) and fiscal 2016 (2016 – 2018). Assuming that the minimum performance level is attained, the number of shares that may actually vest will vary based on performance from 20% (minimum) to 200% (maximum) of the target number of shares. Shares will be issued to participants as soon as practicable following the end of the performance periods subject to Committee approval and verification of results. The fiscal 2013 awards were finalized in the three months ended December 31, 2015 and resulted in the issuance of 42,458 shares (maximum was 85,506 shares) based on the performance objectives and actual results. The compensation cost related to the number of shares to be granted under each performance period is fixed on the grant date. Compensation expense was recognized in each period based on management’s best estimate of the achievement level of actual and forecasted results, as appropriate, compared with the specified performance objectives
17
for Performance Shares.
For the three and nine months
ended June 30, 2016, the Company recognized expense of $0.3 million and $1.3 million, respectively. For the three and nine months ended June 30, 2015, the Company recognized expense of $0.2 million and $0.5 million, respectively.
The stock-based compensati
on expense table includes the Performance Shares expense.
The fair values of the Performance Shares, at target, were $1.3 million, $0.9 million and $0.9 million in each fiscal year for grants awarded in fiscal 2016, 2015 and 2014, respectively.
The aggregate number of shares that could be awarded to our executives if the minimum, target and maximum performance goals are met, based on the fair value at the date of grant is as follows:
Performance Period
|
|
Minimum Shares
|
|
|
Target Shares
|
|
|
Maximum
Shares
|
|
Fiscal 2014 – 2016
|
|
|
7,861
|
|
|
|
39,303
|
|
|
|
78,606
|
|
Fiscal 2015 – 2017
|
|
|
8,440
|
|
|
|
42,199
|
|
|
|
84,398
|
|
Fiscal 2016 – 2018
|
|
|
13,268
|
|
|
|
66,338
|
|
|
|
132,676
|
|
Employee Stock Purchase Plan
Under the 1999 Employee Stock Purchase Plan (“Stock Purchase Plan”), the Company is authorized to issue up to 400,000 shares of common stock. All full-time and part-time U.S. employees can choose to have up to 10% of their annual compensation withheld, with a limit of $25,000, to purchase the Company’s common stock at purchase prices defined within the provisions of the Stock Purchase Plan. As of June 30, 2016 and 2015, there was $0.1 million of employee contributions included in accrued liabilities in the condensed consolidated balance sheets. Stock compensation expense recognized related to the Stock Purchase Plan for the three and nine months ended June 30, 2016 and 2015 totaled $0.1 million or less in each period. The stock-based compensation table includes the Stock Purchase Plan expenses.
Restricted Stock and Deferred Stock Units
In the nine months ended June 30, 2016, the Company awarded 18,877 restricted stock units (“RSUs”). The Company has awarded a total of 23,736 RSUs in fiscal 2015 and 2014 under the 2009 Equity Incentive Plan to non-employee directors with forfeiture of 3,068 RSUs in fiscal 2015. RSU awards are not considered issued or outstanding common stock of the Company until they vest. The estimated fair value of the RSU awards was calculated based on the closing market price of Surmodics’ common stock on the date of grant. Compensation expense has been recognized for the estimated fair value of the common shares and is being charged to income over the vesting term. The stock-based compensation table includes RSU expenses recognized related to these awards, which totaled less than $0.1 million and $0.1 million for the three months and nine months ended June 30, 2016, respectively, and less than $0.1 million and $0.2 million during the three months and nine months ended June 30, 2015, respectively.
Directors can also elect to receive their annual fees for services to the Board in deferred stock units (“DSUs”). Certain directors elected this option beginning on January 1, 2013 with deferral elections made annually, which has resulted in 2,134 and 6,646 units issued with a total fair value of less than $0.1 million and $0.1 million in the three months and nine months ended June 30, 2016, respectively, and 1,547 and 4,433 DSUs issued with a total value of less than $0.1 million in the three months and nine months ended June 30, 2015, respectively. These DSUs are fully vested. Stock-based compensation expense related to DSU awards totaled $0.1 million and $0.1 million during the third quarter and nine months ended June 30, 2016, respectively and less than $0.1 million in both the three months and nine months ended June 30, 2015, respectively.
11. Revolving Credit Facility
On November 4, 2013, the Company entered into a three-year $20.0 million secured revolving credit facility. The Company’s obligations under the credit facility are secured by substantially all of its and its subsidiaries’ assets, other than intellectual property and real estate. Borrowings under the credit facility, if any, will bear interest at a benchmark rate plus a margin ranging from 1.375% to 2.00% based on the Company’s leverage ratio. A facility fee is payable on unused commitments at a rate of 0.20% per annum.
On November 5, 2014, the credit facility was amended and modified to increase the size of stock repurchases that may be effected by the Company up to $30.0 million without the consent of the lender. During the year ended September 30, 2015, the Company repurchased $20.0 million of common stock. On November 20, 2015, the credit facility was further amended and modified to replenish the size of stock repurchases that may be effected by the Company to up to $30.0 million without the consent of the lender. On March 4, 2016 the credit facility was further amended to consider the Company’s foreign subsidiaries in the credit agreement.
18
In connection with the credit facility, the Company is required to maintain financial covenants related to a maximum leverage ratio and a minimum EBITDA amount and to comply with nonfina
ncial covenants. As of June 30, 2016, the Company has no debt outstanding and was in compliance with all financial covenants.
12. Net Income Per Share Data
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. The Company’s potentially dilutive common shares are those that result from dilutive common stock options, non-vested stock relating to restricted stock awards, restricted stock units, deferred stock units and performance shares.
The following table sets forth the denominator for the computation of basic and diluted net income per share:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income available to common shareholders
|
|
$
|
4,003
|
|
|
$
|
3,924
|
|
|
$
|
7,341
|
|
|
$
|
10,590
|
|
Basic weighted average shares outstanding
|
|
|
12,995
|
|
|
|
13,002
|
|
|
|
12,969
|
|
|
|
13,057
|
|
Dilutive effect of outstanding stock options, non-vested
restricted stock, restricted stock units, deferred stock
units and performance shares
|
|
|
289
|
|
|
|
277
|
|
|
|
234
|
|
|
|
267
|
|
Diluted weighted average shares outstanding
|
|
|
13,284
|
|
|
|
13,279
|
|
|
|
13,203
|
|
|
|
13,324
|
|
The calculation of weighted average diluted shares outstanding excludes outstanding stock options associated with the right to purchase 0.3 million shares of common stock for each of the three months ended June 30, 2016 and 2015, respectively, and 0.2 million and 0.3 million for the nine months ended June 30, 2016 and June 30, 2015, respectively, as their inclusion would have had an antidilutive effect on diluted net income per share.
On November 5, 2014, the Company’s Board of Directors authorized it to repurchase up to $30.0 million of the Company’s outstanding common stock in open-market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, tender offers or by any combination of such methods. The authorization has no fixed expiration date. The Company used $20.0 million of this authorization for the share repurchase discussed below.
On November 11, 2014, the Company entered into an accelerated share repurchase (“ASR”) program with Wells Fargo Bank, National Association. In connection with this agreement, the Company made a $20.0 million payment to the bank and immediately received an initial delivery of 758,143 shares of its common stock with a fair value of $16.0 million as of the purchase date. Effective as of the date of the initial share purchase, the transaction was accounted for as a share retirement, resulting in a reduction of common stock of less than $0.1 million, additional paid-in capital of $2.5 million and retained earnings of $13.5 million. The remaining $4.0 million of the Company’s payment was also reported as a reduction in retained earnings. The specific number of shares that the Company ultimately purchased under the ASR agreement was based on the volume weighted average price (“VWAP”) of the Company’s common stock during the purchase period, less an agreed upon discount. In the aggregate, the Company purchased 847,864 shares under the ASR program for an average price of $23.59 per share. Based on the facts associated with the agreement, the forward contract was indexed to the Company’s common stock and met the U.S. GAAP requirements to be classified as permanent equity as of July 8, 2015, the date the ASR program was completed.
On November 6, 2015, the Company’s Board of Directors authorized the repurchase of up to $20.0 million of the Company’s outstanding common stock in addition to the $10.0 million authorization which remains available from the November 5, 2014 authorization.
13. Income Taxes
For interim income tax reporting, we are required to estimate our annual effective tax rate and apply it to year-to-date pretax income excluding unusual or infrequently occurring discrete items. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded. The Company recorded income tax provisions of $2.9 million and $1.9 million for the three months ended
June 30,
2016 and 2015, respectively, representing effective tax rates of 41.6% and 33.0%, respectively. The Company recorded income tax provisions of $5.5 million and $4.9 million for the nine months ended June 30, 2016 and 2015, respectively, representing effective tax rates of 42.9% and 31.5%, respectively. The effective income tax rates for the three and nine months ended June 30, 2016 differ from
19
the U.S. federal statutory tax rate of 35.0% primarily due to transaction costs and contingent consideration accretion associated with the Creagh
Medical and NorMedix acquisitions, the domestic production manufacturing deduction and the U.S. federal research and development income tax credit. The effective income tax rate for the three and nine months ended June 30, 2016 differs from the three and
nine months ended June 30, 2015 primarily due to transaction costs, contingent consideration accretion, and foreign currency gain (losses) associated with the fiscal 2016 acquisitions.
The total amount of unrecognized tax benefits, excluding interest and penalties that, if recognized, would affect the effective tax rate as of
June 30,
2016 and September 30, 2015, respectively, are $1.0 million and $0.9 million. Currently, the Company does not expect the liability for unrecognized tax benefits to change significantly in the next 12 months with the above balances classified on the condensed consolidated balance sheets in other long-term liabilities. Interest and penalties related to unrecognized tax benefits are recorded in income tax provision.
The Company files income tax returns, including returns for its subsidiaries, in the U.S. federal jurisdiction and in various state jurisdictions. Uncertain tax positions are related to tax years that remain subject to examination. U.S. income tax returns for years prior to fiscal 2012 are no longer subject to examination by federal tax authorities. For tax returns for state and local jurisdictions, the Company is no longer subject to examination for tax years generally before fiscal 2005.
14. Amounts Reclassified Out of Accumulated Other Comprehensive Income
Amounts reclassified out of accumulated other comprehensive income (“AOCI”) was $0.3 million on a pre-tax basis for the nine months ended June 30, 2015. There were no amounts reclassified out of AOCI for the three and nine months ended June 30, 2016. For the three months and nine months ended June 30, 2015, the amounts reclassified out of AOCI were associated with unrealized gains or losses on available-for-sale securities that were realized on the sale of the securities and were presented in other income, net in the condensed consolidated statements of income.
15. Reportable Segment Information
The accounting standards for reporting information about operating segments define operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, who is the Company’s Chief Executive Officer, in deciding how to allocate resources and in assessing performance. For financial accounting and reporting purposes, the Company reports its results for the two reportable segments as follows: (1) the Medical Device unit, which is comprised of surface modification coating technologies to improve access, deliverability, and predictable deployment of medical devices; international cardiology and peripheral balloon design, development and manufacturing; as well as drug delivery coating technologies to provide site-specific drug delivery from the surface of a medical device, with end markets that include coronary, peripheral, neuro-vascular and urology, among others, and (2) the In Vitro Diagnostics unit, which consists of component products and technologies for diagnostic test kits and biomedical research applications, with products that include protein stabilization reagents, substrates, antigens and surface coatings. During the first nine months of fiscal 2016, the Company acquired Creagh Medical and NorMedix, which are included in the Medical Device segment.
20
The table below presen
ts segment revenue, operating income and depreciation and amortization, as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Device
|
|
$
|
15,654
|
|
|
$
|
11,629
|
|
|
$
|
39,500
|
|
|
$
|
32,827
|
|
In Vitro Diagnostics
|
|
|
4,318
|
|
|
|
4,285
|
|
|
|
13,712
|
|
|
|
11,708
|
|
Total revenue
|
|
$
|
19,972
|
|
|
$
|
15,914
|
|
|
$
|
53,212
|
|
|
$
|
44,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Device
|
|
$
|
6,673
|
|
|
$
|
6,295
|
|
|
$
|
12,825
|
|
|
$
|
16,507
|
|
In Vitro Diagnostics
|
|
|
1,673
|
|
|
|
1,191
|
|
|
|
5,298
|
|
|
|
3,220
|
|
Total segment operating income
|
|
|
8,346
|
|
|
|
7,486
|
|
|
|
18,123
|
|
|
|
19,727
|
|
Corporate
|
|
|
(1,749
|
)
|
|
|
(1,629
|
)
|
|
|
(5,347
|
)
|
|
|
(4,903
|
)
|
Total operating income
|
|
$
|
6,597
|
|
|
$
|
5,857
|
|
|
$
|
12,776
|
|
|
$
|
14,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Device
|
|
$
|
982
|
|
|
$
|
288
|
|
|
$
|
2,440
|
|
|
$
|
852
|
|
In Vitro Diagnostics
|
|
|
222
|
|
|
|
215
|
|
|
|
647
|
|
|
|
645
|
|
Corporate
|
|
|
202
|
|
|
|
191
|
|
|
|
616
|
|
|
|
586
|
|
Total depreciation and amortization
|
|
$
|
1,406
|
|
|
$
|
694
|
|
|
$
|
3,703
|
|
|
$
|
2,083
|
|
The Corporate category includes expenses that are not fully allocated to Medical Device and In Vitro Diagnostics segments. These Corporate costs are related to functions, such as executive management, corporate accounting, legal, human resources and Board of Directors. Corporate may also include expenses, such as litigation, which are not specific to a segment and thus not allocated to the operating segments.
Asset information by operating segment is not presented because the Company does not provide its chief operating decision maker assets by operating segment, as the data is not readily available.
16. Commitments and Contingencies
Litigation.
From time to time, the Company has been, and may become, involved in various legal actions involving its operations, products and technologies, including intellectual property and employment disputes. The outcomes of these legal actions are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages as well as other relief, including injunctions barring the sale of products that are the subject of the lawsuit, which if granted, could require significant expenditures or result in lost revenue. The Company records a liability in the condensed consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.
InnoRx, Inc.
In January 2005, the Company entered into a merger agreement whereby the Company acquired all of the assets of InnoRx, Inc. (“InnoRx”), an early stage company developing drug delivery devices and therapies for the ophthalmology market. The Company will be required to issue up to approximately 480,059 additional shares of its common stock to the stockholders of InnoRx upon the successful completion of the remaining development and commercial milestones involving InnoRx technology acquired in the transaction. The Company has not recorded any accrual for this contingency as of June 30, 2016 as the milestones have not been achieved and the probability of achievement is remote.
InnoCore Technologies BV
. In March 2006, the Company entered into a license agreement whereby Surmodics obtained an exclusive license to a drug delivery coating for licensed products within the vascular field which included peripheral, coronary and neurovascular biodurable stent products. The license requires an annual minimum payment of 200,000 euros (equivalent to $221,660 using a euro to US dollar exchange rate of 1.1083 to the Euro as of June 30, 2016) until the last patent expires which is currently
21
estimated to be September 2027. The total minimum future payments associated with this license are approximately $2.7 million. The license is currently utilized by one of the Company’s drug delivery
customers.
22