NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
. Merit Medical Systems, Inc. (“Merit,” “we,” or “us”) designs, develops, manufactures and markets single-use medical products for interventional and diagnostic procedures. For financial reporting purposes, we report our operations in
two
operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of 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 embolotherapeutic, cardiac rhythm management, electrophysiology, critical care, and interventional oncology and spine devices. Our endoscopy segment consists of gastroenterology and pulmonology devices which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors. Within those
two
operating segments, we offer products focused in
six
core product groups: peripheral intervention, cardiac intervention, interventional oncology and spine, cardiovascular and critical care, breast cancer localization and guidance, and endoscopy.
We manufacture our products in plants located in the U.S., Mexico, The Netherlands, Ireland, France, Brazil, Australia, and Singapore. We export sales to dealers and have direct or modified direct sales forces in the U.S., Canada, Western Europe, Australia, Brazil, Russia, Japan, China, Malaysia, South Korea, UAE, India, New Zealand and South Africa (see Note 13). Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The following is a summary of the more significant of such policies.
Use of Estimates in Preparing Financial Statements
. The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of 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 period. Actual results could differ from those estimates.
Principles of Consolidation
. The consolidated financial statements include our wholly owned subsidiaries. Intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
.
For purposes of the statements of cash flows, we consider interest bearing deposits with an original maturity date of three months or less to be cash equivalents.
Receivables
.
Trade accounts receivable are recorded at the net invoice value and are not interest bearing. An allowance for uncollectible accounts receivable is recorded based on our historical bad debt experience and on management’s evaluation of our ability to collect individual outstanding balances. Once collection efforts have been exhausted and a receivable is deemed to be uncollectible, such balance is charged against the allowance for uncollectible accounts.
Inventories
. We value our inventories at the lower of cost, at approximate costs determined on a first-in, first-out method, 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 costs include material, labor and manufacturing overhead. We review inventories on hand at least quarterly and record provisions for estimated excess, slow moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable value. The regular and systematic inventory valuation reviews include a current assessment of future product demand, historical experience and product expiration.
Goodwill and Intangible Assets
.
We test goodwill balances for impairment on an annual basis as of July 1 or whenever impairment indicators arise. We utilize several reporting units in evaluating goodwill for impairment. We assess the estimated fair value of reporting units using a combination of a guideline public company market-based approach and a discounted cash flow income-based approach. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an impairment charge is recognized in an amount equal to the excess of the carrying amount of the reporting unit goodwill over the implied fair value of that goodwill.
Finite-lived intangible assets including developed technology, customer lists, distribution agreements, license agreements, trademarks, covenants not to compete and patents are subject to amortization. Intangible assets are amortized over their estimated useful life on a straight-line basis, except for customer lists, which are generally amortized on an accelerated basis. Estimated useful lives are determined considering the period the assets are expected to contribute to future cash flows. We evaluate the recoverability of our finite-lived intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate impairment exists.
In-process technology intangible assets, which are not subject to amortization until projects reach commercialization, are assessed for impairment at least annually and more frequently if events occur that would indicate a potential reduction in the fair value of the assets below their carrying value. An impairment charge would be recognized to the extent the carrying amount of the in-process technology exceeded its fair value.
Long-Lived Assets
. We periodically review the carrying amount of our depreciable long-lived assets for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow.
Property and Equipment
. Property and equipment is stated at the historical cost of construction or purchase. Construction costs include interest costs capitalized during construction. Maintenance and repairs of property and equipment are charged to operations as incurred. Leasehold improvements are amortized over the lesser of the base term of the lease or estimated life of the leasehold improvements. Construction-in-process consists of new buildings and various production equipment being constructed internally and externally. Assets in construction-in-process will commence depreciating once the asset has been placed in service. Depreciation is computed using the straight-line method over estimated useful lives as follows:
|
|
|
|
|
|
|
|
Buildings
|
40 years
|
|
Manufacturing equipment
|
4
|
-
|
20 years
|
|
Furniture and fixtures
|
3
|
-
|
20 years
|
|
Land improvements
|
10
|
-
|
20 years
|
|
Leasehold improvements
|
4
|
-
|
25 years
|
Depreciation expense related to property and equipment for the years ended
December 31, 2018
,
2017
and
2016
was approximately
$28.3 million
,
$26.8 million
, and
$24.5 million
, respectively.
Deferred Compensation
. We have a deferred compensation plan that permits certain management employees to defer a portion of their salary until the future. We established a Rabbi trust to finance obligations under the plan with corporate-owned variable life insurance contracts. The cash surrender value totaled approximately
$11.7 million
and
$11.7 million
at
December 31, 2018
and
2017
, respectively, which is included in other assets in our consolidated balance sheets. We have recorded a deferred compensation payable of approximately
$11.2 million
and
$11.2 million
at
December 31, 2018
and
2017
, respectively, to reflect the liability to our employees under this plan.
Other Assets
.
Other assets consist of our deferred compensation plan cash surrender value discussed above, unamortized issuance costs on revolving debt, investments in privately-held companies, notes receivable issued to third-parties, a long-term income tax refund receivable, deposits related to various leases, and the long-term assets related to derivatives.
We analyze our investments to determine if they should be accounted for using the equity method based on our ability to exercise significant influence over operating and financial policies of the investment. Our share of earnings associated with equity method investments is reported within other income (expense) in our consolidated statements of income. Investments not accounted for under the equity method of accounting are accounted for under the cost method of accounting wherein impairment charges are recognized if circumstances suggest that the value of the investment has changed.
Deferred Credits
. Deferred credits consist of grant money received from the Irish government. Grant money is received for a percentage of expenditures on eligible property and equipment, specific research and development projects and costs of hiring and training employees. Amounts related to the acquisition of property and equipment are amortized as a reduction of depreciation expense over the lives of the corresponding property and equipment.
Revenue Recognition
.
We sell our medical products through a direct sales force in the U.S. and through OEM relationships, custom procedure tray manufacturers and a combination of direct sales force and independent distributors in international markets. Revenue is recognized when a customer obtains control of promised goods based on the consideration we expect to receive in exchange for these goods. This core principle is achieved through the following steps:
Identify the contract with the customer
. A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We do not
have significant costs to obtain contracts with customers. For commissions on product sales, we have elected the practical expedient to expense the costs as incurred if the amortization period would have been one year or less.
Identify the performance obligations in the contract
. Generally, our contracts with customers do not include multiple performance obligations to be completed over a period of time. Our performance obligations generally relate to delivering single-use medical products to a customer, subject to the shipping terms of the contract. Limited warranties are provided, under which we typically accept returns and provide either replacement parts or refunds. We do not have significant returns. We do not typically offer extended warranty or service plans.
Determine the transaction price
. Payment by the customer is due under customary fixed payment terms, and we evaluate if collectability is reasonably assured. None of our contracts as of December 31, 2018 contained a significant financing component. Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns, rebates, discounts, and other adjustments. The estimates of variable consideration are based on historical payment experience, historical and projected sales data, and current contract terms. Variable consideration is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.
Allocate the transaction price to performance obligations in the contract
. We typically do not have multiple performance obligations in our contracts with customers. As such, we generally recognize revenue upon transfer of the product to the customer's control at contractually stated pricing.
Recognize revenue when or as we satisfy a performance obligation.
We generally satisfy performance obligations at a point in time upon either shipment or delivery of goods, in accordance with the terms of each contract with the customer. We do not have significant service revenue.
Reserves are recorded as a reduction in net sales and are not considered material to our consolidated statements of income for the years ended
December 31, 2018
,
2017
and
2016
. In addition, we invoice our customers for taxes assessed by governmental authorities such as sales tax and value added taxes. We present these taxes on a net basis.
Shipping and Handling
. We bill our customers for shipping and handling charges, which are included in net sales for the applicable period, and the corresponding shipping and handling expense is reported in cost of sales.
Cost of Sales
. We include product costs (i.e. material, direct labor and overhead costs), shipping and handling expense, product royalty expense, developed technology amortization expense, production-related depreciation expense and product license agreement expense in cost of sales.
Research and Development
. Research and development costs are expensed as incurred.
Income Taxes
. Under our accounting policies, we initially recognize a tax position in our financial statements when it becomes more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax positions that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities assuming full knowledge of the position and all relevant facts. Although we believe our provisions for unrecognized tax positions are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our income tax provisions and accruals. The tax law is subject to varied interpretations, and we have taken positions related to certain matters where the law is subject to interpretation. Such differences could have a material impact on our income tax provisions and operating results in the period(s) in which we make such determination.
Earnings per Common Share
. Net income per common share is computed by both the basic method, which uses the weighted average number of our common shares outstanding, and the diluted method, which includes the dilutive common shares from stock options and warrants, as calculated using the treasury stock method.
Fair Value Measurements
.
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined in the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Stock-Based Compensation
.
We recognize the fair value compensation cost relating to stock-based payment transactions in accordance with ASC 718,
Compensation — Stock Compensation
. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized over the employee’s requisite service period, which is generally the vesting period. The fair value of our stock options is estimated using a Black-Scholes option valuation model. Stock-based compensation expense for the years ended
December 31, 2018
,
2017
and
2016
was approximately
$6.1 million
,
$4.1 million
and
$2.5 million
, respectively.
Concentration of Credit Risk
. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We provide credit, in the normal course of business, primarily to hospitals and independent third-party custom procedure tray manufacturers and distributors. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses. Sales to our single largest customer accounted for approximately
2%
,
2%
, and
3%
of net sales for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Foreign Currency
. The financial statements of our foreign subsidiaries are measured using local currencies as the functional currency, with the exception of our subsidiaries in Ireland and Mexico, which each use the U.S. Dollar as its functional currency. Assets and liabilities are translated into U.S. Dollars at year-end rates of exchange and results of operations are translated at average rates for the year. Gains and losses resulting from these translations are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Foreign currency transactions denominated in a currency other than the entity’s functional currency are included in determining net income for the period.
Derivatives
.
We use forward contracts to mitigate our exposure to volatility in foreign exchange rates, and we use interest rate swaps to hedge changes in the benchmark interest rate related to our Second Amended Credit Agreement described in Note 8. All derivatives are recognized in the consolidated balance sheets at fair value. Classification of each hedging instrument is based upon whether the maturity of the instrument is less than or greater than 12 months. We do not purchase or hold derivative financial instruments for speculative or trading purposes (see Note 9).
Accumulated Other Comprehensive Income (Loss)
. As of
December 31, 2018
, accumulated other comprehensive loss included approximately
$3.5 million
(net of tax of
$(2.2) million
) related to cash flow hedges and
$(5.6) million
(net of tax of
$(9,000)
) related to foreign currency translation. As of
December 31, 2017
, accumulated other comprehensive income included approximately
$3.5 million
(net of tax of
$(2.2) million
) related to cash flow hedges and
$(1.9) million
(net of tax of
$0
) related to foreign currency translation.
New Financial Accounting Standards
.
Recently Adopted
In October 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory
, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 became effective for us as of January 1, 2018. The adoption of ASU 2016-16 did not have a material impact on our consolidated financial statements for the year ended December 31, 2018.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 became effective for us on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements for the year ended December 31, 2018.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
, which 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, ASU 2016-01 clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on
available-for-sale debt securities. We adopted ASU 2016-01 on January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on our consolidated financial statements for the year ended December 31, 2018.
The FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We adopted this ASU (and all subsequent ASUs that modified Topic 606) effective January 1, 2018 on a modified retrospective basis. Adoption of this standard did not result in significant changes to our accounting policies, business processes, systems or controls, or have a material impact on our financial position, results of operations or cash flows. As such, prior period amounts are not adjusted and continue to be reported under accounting standards then in effect, and we did not record a cumulative adjustment to the opening equity balance of retained earnings as of January 1, 2018. However, additional disclosures have been added in accordance with the requirements of Topic 606 and are reflected in Note 2.
Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842),
("ASC 842"). The objective of the guidance in ASC 842 is to increase transparency and comparability among organizations by recognizing lease assets and liabilities in the balance sheet and disclosing key information. ASC 842 amends previous lease guidance to require a lessee to recognize a lease liability and a right-of-use asset on the entity’s balance sheet for all leases with terms that exceed one year. ASC 842 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASC 842 provides that 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.
We have completed our assessment of all our leases, and we estimate that the impact of the adoption of ASC 842 will result in recognition of operating right-of-use assets and lease liabilities of approximately
$80 million
. We do not expect the adoption to have a material impact on our statements of operations or cash flows. ASC 842 allows for several practical expedients which permit the following: no reassessment of lease classification or initial direct costs; use of the standard’s effective date as the date of initial application; and no separation of non-lease components from the related lease components and, instead, to account for those components as a single lease component if certain criteria are met. We expect to elect these practical expedients and adopt ASC 842 on January 1, 2019 using the effective date as our date of initial application. Therefore, financial information and disclosures under ASC 842 will not be provided for periods prior to January 1, 2019.
In February 2018, the FASB issued ASU 2018-02,
Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted in December 2017. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We do not believe that the adoption of ASU 2018-02 will have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We do not anticipate the impact of adopting ASU 2017-12 will be material to our consolidated financial statements.
All other issued and not yet effective accounting standards are not relevant to our financial statements.
2. REVENUES
The following table presents sales by operating segment disaggregated based on type of product and geographic region for the years ended
December 31, 2018
,
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
|
United States
|
|
International
|
|
Total
|
|
United States
|
|
International
|
|
Total
|
|
United States
|
|
International
|
|
Total
|
|
Cardiovascular
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stand-alone devices
|
$
|
202,129
|
|
|
$
|
159,484
|
|
|
$
|
361,613
|
|
|
$
|
148,620
|
|
|
$
|
126,836
|
|
|
$
|
275,456
|
|
|
$
|
105,250
|
|
|
$
|
85,877
|
|
|
$
|
191,127
|
|
|
Cianna Medical
|
6,292
|
|
|
—
|
|
|
6,292
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Custom kits and procedure trays
|
92,975
|
|
|
41,781
|
|
|
134,756
|
|
|
92,474
|
|
|
33,615
|
|
|
126,089
|
|
|
93,109
|
|
|
26,138
|
|
|
119,247
|
|
|
Inflation devices
|
31,717
|
|
|
60,702
|
|
|
92,419
|
|
|
31,848
|
|
|
48,027
|
|
|
79,875
|
|
|
35,506
|
|
|
38,410
|
|
|
73,916
|
|
|
Catheters
|
68,708
|
|
|
86,817
|
|
|
155,525
|
|
|
62,284
|
|
|
65,463
|
|
|
127,747
|
|
|
56,899
|
|
|
56,468
|
|
|
113,367
|
|
|
Embolization devices
|
20,433
|
|
|
29,605
|
|
|
50,038
|
|
|
22,374
|
|
|
27,158
|
|
|
49,532
|
|
|
24,075
|
|
|
21,960
|
|
|
46,035
|
|
|
CRM/EP
|
41,970
|
|
|
6,864
|
|
|
48,834
|
|
|
36,746
|
|
|
5,168
|
|
|
41,914
|
|
|
32,561
|
|
|
3,898
|
|
|
36,459
|
|
|
Total
|
464,224
|
|
|
385,253
|
|
|
849,477
|
|
|
394,346
|
|
|
306,267
|
|
|
700,613
|
|
|
347,400
|
|
|
232,751
|
|
|
580,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy devices
|
32,189
|
|
|
1,087
|
|
|
33,276
|
|
|
26,357
|
|
|
882
|
|
|
27,239
|
|
|
22,950
|
|
|
737
|
|
|
23,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
496,413
|
|
|
$
|
386,340
|
|
|
$
|
882,753
|
|
|
$
|
420,703
|
|
|
$
|
307,149
|
|
|
$
|
727,852
|
|
|
$
|
370,350
|
|
|
$
|
233,488
|
|
|
$
|
603,838
|
|
Note: Certain revenue categories for 2017 and 2016 have been adjusted from prior disclosures to reflect changes in product classifications to be consistent with updates in management of our product portfolios during 2018. Also note that Cianna Medical is a new category in 2018 as a result of the acquisition in November 2018 (see Note 3).
3. ACQUISITIONS
On December 14, 2018, we consummated an acquisition transaction contemplated by an asset purchase agreement with Vascular Insights, LLC and VI Management, Inc. (combined "Vascular Insights") and acquired Vascular Insight's intellectual property rights, inventory and certain other assets, including, the ClariVein® IC system and the ClariVein OC system. The ClariVein systems are specialty infusion and occlusion catheter systems with rotating wire tips designed for the controlled 360-degree dispersion of physician-specified agents to the targeted treatment area. We accounted for this acquisition as a business combination. The purchase consideration included an upfront payment of
$40 million
, and we are obligated to pay up to an additional
$20 million
based on achieving certain revenue milestones specified in the asset purchase agreement. The sales and results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs associated with the Vascular Insights acquisition, which were included in selling, general and administrative expenses in our consolidated statements of income, were not material. Given the circumstances of this acquisition, which closed in December 2018, as well as the complexity of the transaction, the purchase price allocation disclosed herein is considered provisional at this time and subject to adjustment. We are in the process of finalizing the net working capital adjustment pursuant to the asset purchase agreement and the valuation of the acquired intangible assets and contingent consideration. The purchase price was preliminarily allocated as follows (in thousands):
|
|
|
|
|
|
|
|
Inventories
|
$
|
1,308
|
|
|
Intangibles
|
|
|
Developed technology
|
32,830
|
|
|
Customer list
|
840
|
|
|
Trademarks
|
1,410
|
|
|
Goodwill
|
21,832
|
|
|
|
|
|
Total assets acquired
|
$
|
58,220
|
|
We are amortizing the developed technology intangible assets over
12 years
, the related trademarks over
nine years
and the customer list on an accelerated basis over
eight years
. The total weighted-average amortization period for these acquired intangible assets is approximately
11.8 years
.
On November 13, 2018 we consummated an acquisition transaction contemplated by a merger agreement to acquire Cianna Medical, Inc. ("Cianna Medical"). The purchase consideration consisted of an upfront payment of
$135 million
plus an
initial working capital adjustment of
$1 million
in cash, with potential earn-out payments of an additional
$15 million
for achievement of supply chain and scalability metrics, and up to an additional
$50 million
for achievement of sales milestones. Cianna Medical developed the first non-radioactive, wire-free breast cancer localization system. Its SCOUT® and SAVI® Brachy technologies are FDA-cleared and address unmet needs in the delivery of radiation therapy, tumor localization and surgical guidance. We accounted for this acquisition as a business combination. During the year ended December 31, 2018, our net sales of Cianna Medical products were approximately
$6.3 million
. It is not practical to separately report earnings related to the products acquired from Cianna Medical, as we cannot split out sales costs related solely to the products we acquired from Cianna Medical, principally because our sales representatives sell multiple products (including the products we acquired from Cianna Medical) in our cardiovascular business segment. Acquisition-related costs associated with the Cianna Medical acquisition, which are included in selling, general and administrative expenses in the accompanying consolidated statements of income, were approximately
$3.5 million
for the year ended December 31, 2018. The following table summarizes the preliminary purchase price allocated to the net assets acquired from Cianna Medical (in thousands):
|
|
|
|
|
|
|
|
Assets Acquired
|
|
|
Trade receivables
|
$
|
6,151
|
|
|
Inventories
|
5,803
|
|
|
Prepaid expenses and other assets
|
315
|
|
|
Property and equipment
|
1,047
|
|
|
Other long-term assets
|
14
|
|
|
Intangibles
|
|
|
Developed technology
|
134,510
|
|
|
Customer lists
|
3,330
|
|
|
Trademarks
|
7,080
|
|
|
Goodwill
|
65,885
|
|
|
Total assets acquired
|
224,135
|
|
|
|
|
|
Liabilities Assumed
|
|
|
Trade payables
|
(1,497
|
)
|
|
Accrued expenses
|
(2,384
|
)
|
|
Other long-term liabilities
|
(1,527
|
)
|
|
Deferred tax liabilities
|
(30,363
|
)
|
|
Total liabilities assumed
|
(35,771
|
)
|
|
|
|
|
Total net assets acquired
|
$
|
188,364
|
|
We are amortizing the developed technology intangible assets over
11 years
, the related trademarks over
ten years
and the customer lists on an accelerated basis over
eight years
. The total weighted-average amortization period for these acquired intangible assets is approximately
10.7 years
.
During July 2018, we purchased
1,786,000
preferred limited liability company units of Cagent Vascular, LLC, a medical device company ("Cagent"), for approximately
$2.2 million
. We had previously purchased
3,000,000
preferred limited liability company units for approximately
$3.0 million
during 2016 and 2017. Our investment has been recorded as an equity investment accounted for at cost and reflected within other assets in the accompanying consolidated balance sheets because we are not able to exercise significant influence over the operations of Cagent. Our total current investment in Cagent represents an ownership of approximately
19.5%
of the outstanding stock.
On May 23, 2018, we entered into an asset purchase agreement with DirectACCESS Medical, LLC (“DirectACCESS”) to acquire its assets, including, certain product distribution agreements for the FirstChoice™ Ultra High Pressure PTA Balloon Catheter. We accounted for this acquisition as a business combination. The purchase price for the assets was approximately
$7.3 million
. The sales and results of operations related to the acquisition have been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs associated with the DirectACCESS acquisition, which were included in selling, general and administrative expenses in our consolidated statements of income, were not material. The purchase price was preliminarily allocated as follows (in thousands):
|
|
|
|
|
|
|
|
Inventories
|
$
|
971
|
|
|
Intangibles
|
|
|
Developed technology
|
4,840
|
|
|
Customer list
|
120
|
|
|
Trademarks
|
400
|
|
|
Goodwill
|
938
|
|
|
|
|
|
Total assets acquired
|
$
|
7,269
|
|
We are amortizing the developed technology intangible asset over
ten years
, the related trademarks over
ten years
and the customer list on an accelerated basis over
five years
. The total weighted-average amortization period for these acquired intangible assets is approximately
9.9 years
.
On May 18, 2018, we paid
$750,000
for a distribution agreement with QXMédical, LLC ("QXMédical") for the Q50® PLUS Stent Graft Balloon Catheter. We accounted for this acquisition as an asset purchase. We are amortizing the distribution
agreement intangible asset over a period of
ten years
.
On April 6, 2018, we entered into long-term agreements with NinePoint Medical, Inc. (“NinePoint”), pursuant to which we (a) became the exclusive worldwide distributor for the NvisionVLE® Imaging System with Real-time Targeting™ using Optical Coherence Tomography (OCT) and (b) acquired an option to purchase up to
100%
of the outstanding equity in NinePoint throughout a three-month period commencing 18 months subsequent to the agreement date, both in exchange for total consideration of
$10 million
. We accounted for this transaction as an asset purchase. In addition, we made a loan to NinePoint for
$10.5 million
with a maturity date of April 6, 2023, at which time the loan, together with accrued interest thereon, will be due and payable. The loan bears interest at a rate of
9.0%
and is collateralized by NinePoint's rights, interest and title to the NvisionVLE® Imaging System and any other product owned or licensed by NinePoint utilizing OCT. This loan has been recorded as a note receivable within other long-term assets in our consolidated balance sheets.
We utilized the consolidation of variable interest entities guidance to determine whether or not NinePoint was a variable interest entity ("VIE"), and if so, whether we are the primary beneficiary of NinePoint. As of
December 31, 2018
, we concluded that NinePoint is a VIE based on the fact that the equity investment at risk in NinePoint is not sufficient to finance its activities. We have also determined that Merit is not the primary beneficiary of NinePoint as we do not have the power to direct NinePoint's most significant activities. Our exposure to loss related to our transaction with NinePoint is the carrying value of the amounts paid to and due from NinePoint. The results of operations related to the NinePoint distribution agreement have been included in our endoscopy segment since the acquisition date. During the year ended December 31, 2018, our net sales of NinePoint products were approximately
$3.0 million
. We believe the NinePoint products will enhance the product offerings of our Endotek operating segment and will be another step in our strategy to add therapy and disease-state products to our portfolio.
On February 14, 2018, we acquired certain divested assets from Becton, Dickinson and Company ("BD"), for an aggregate purchase price of
$100.3 million
. We also recorded a contingent consideration liability of
$1.6 million
related to milestone payments payable pursuant to the terms of the acquired contract with Sontina Medical LLC. The assets acquired include the soft tissue core needle biopsy products sold under the tradenames of Achieve® Programmable Automatic Biopsy System, Temno® Biopsy System, Tru-Cut® Biopsy Needles as well as Aspira® Pleural Effusion Drainage Kits, and the Aspira® Peritoneal Drainage System. We accounted for this acquisition as a business combination.
During the year ended December 31, 2018, our net sales of BD products were approximately
$42.1 million
. It is not practical to separately report earnings related to the products acquired from BD, as we cannot split out sales costs related solely to the products we acquired from BD, principally because our sales representatives sell multiple products (including the products we acquired from BD) in our cardiovascular business segment. Acquisition-related costs associated with the BD acquisition, which are included in selling, general and administrative expenses in the accompanying consolidated statements of income, were approximately
$1.8 million
for the year ended December 31, 2018. During the measurement period, which ended in December 2018, adjustments were made to finalize the allocation of purchase price related to intangible assets, goodwill and contingent liabilities. The following table summarizes the purchase price allocated to the assets acquired from BD (in thousands):
|
|
|
|
|
|
|
|
Inventories
|
$
|
5,804
|
|
|
Property and equipment
|
748
|
|
|
Intangibles
|
|
|
Developed technology
|
74,000
|
|
|
Customer list
|
4,200
|
|
|
Trademarks
|
4,900
|
|
|
In-process technology
|
2,500
|
|
|
Goodwill
|
9,728
|
|
|
|
|
|
Total assets acquired
|
$
|
101,880
|
|
We are amortizing the developed technology intangible assets over
eight years
, the related trademarks over
nine years
, and the customer lists on an accelerated basis over
seven years
. The total weighted-average amortization period for these acquired intangible assets is approximately
8 years
.
On October 2, 2017 we acquired a custom procedure pack business located in Melbourne, Australia from ITL Healthcare Pty Ltd. ("ITL"), for an aggregate purchase price of
$11.3 million
. We accounted for this acquisition as a business combination. The following table summarizes the aggregate purchase price allocated to the assets acquired from ITL (in thousands):
|
|
|
|
|
|
|
|
Assets Acquired
|
|
|
Trade receivables
|
$
|
1,287
|
|
|
Other receivables
|
56
|
|
|
Inventories
|
1,808
|
|
|
Prepaid expenses and other assets
|
65
|
|
|
Property and equipment
|
1,053
|
|
|
Intangibles
|
|
|
Customer lists
|
5,940
|
|
|
Goodwill
|
3,945
|
|
|
Total assets acquired
|
14,154
|
|
|
|
|
|
Liabilities Assumed
|
|
|
Trade payables
|
(216
|
)
|
|
Accrued expenses
|
(747
|
)
|
|
Deferred tax liabilities
|
(1,901
|
)
|
|
Total liabilities assumed
|
(2,864
|
)
|
|
|
|
|
Total net assets acquired
|
$
|
11,290
|
|
We are amortizing the customer list on an accelerated basis over
seven years
. Acquisition-related costs associated with the ITL acquisition, which are 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 years ended
December 31, 2018
and
2017
, our net sales of ITL products were approximately
$8.0 million
and
$3.3 million
, respectively. It is not practical to separately report the earnings related to the ITL acquisition, as we cannot split out sales costs related solely to the products we acquired from ITL, principally because our sales representatives sell multiple products (including the products we acquired from ITL) in our cardiovascular business segment.
On September 1, 2017, we acquired intellectual property rights associated with a steerable guidewire system from IntelliMedical Technologies Pty. Ltd. ("IntelliMedical"). We made an initial payment of approximately
$11.9 million
in September 2017, and we are obligated to pay up to an additional
A$15.0 million
(Australian dollars) if certain milestones set forth in the share purchase agreement with IntelliMedical are achieved. We are also required to pay royalties equal to
6%
of net sales, commencing upon the first commercial sale of the product and throughout the term of the applicable patents. We accounted for this transaction as an asset purchase. The initial payment has been included in the accompanying consolidated statements of income as acquired
in-process research and development expense for the year ended December 31, 2017, because both technological feasibility of the underlying research and development project had not yet been reached and such technology had no identified future alternative use as of the date of acquisition.
On August 4, 2017 we acquired from Laurane Medical S.A.S. ("Laurane") and its shareholders inventories and the intellectual property rights associated with certain manual bone biopsy devices, manual bone marrow needles and muscle biopsy kits for an aggregate purchase price of
$16.5 million
. We also recorded a contingent consideration liability of
$5.5 million
related to royalties potentially payable to Laurane's shareholders pursuant to the terms of an intellectual property purchase agreement. We accounted for this acquisition as a business combination. The following table summarizes the aggregate purchase price (including contingent royalty payment liabilities) allocated to the assets acquired from Laurane (in thousands):
|
|
|
|
|
|
|
|
|
|
Inventories
|
$
|
594
|
|
|
|
Intangibles
|
|
|
|
Developed technology
|
14,920
|
|
|
|
Customer list
|
120
|
|
|
|
Goodwill
|
6,366
|
|
|
|
|
|
|
|
Total net assets acquired
|
$
|
22,000
|
|
We are amortizing the developed technology intangible asset over
12 years
and the customer list on an accelerated basis over
one year
. The total weighted-average amortization period for these acquired intangible assets is
11.9 years
. The sales and results of operations related to the acquisition have been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs associated with the Laurane acquisition, which are included in selling, general and administrative expenses in the accompanying consolidated statements of income, were not material.
On July 3, 2017, we acquired from Osseon LLC (“Osseon”) substantially all the assets related to Osseon’s vertebral augmentation products. We accounted for this acquisition as a business combination. The purchase price for the assets was approximately
$6.8 million
. Acquisition-related costs associated with the Osseon acquisition, which are 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 years ended
December 31, 2018
and
2017
, our net sales of Osseon products were approximately
$2.1 million
and
$942,000
, respectively. It is not practical to separately report the earnings related to the Osseon acquisition, as we cannot split out sales costs related solely to the products we acquired from Osseon, principally because our sales representatives sell multiple products (including the products we acquired from Osseon) in our cardiovascular business segment. The following table summarizes the purchase price allocated to the assets acquired (in thousands):
|
|
|
|
|
|
|
|
|
|
Inventories
|
$
|
979
|
|
|
|
Property and equipment
|
58
|
|
|
|
Intangibles
|
|
|
|
Developed technology
|
5,400
|
|
|
|
Customer list
|
200
|
|
|
|
Goodwill
|
203
|
|
|
|
|
|
|
|
Total net assets acquired
|
$
|
6,840
|
|
We are amortizing the developed technology intangible asset over
nine years
and customer lists on an accelerated basis over
eight years
. The total weighted-average amortization period for these acquired intangible assets is approximately
9.0 years
.
On July 1, 2017, we entered into an exclusive license agreement with Pleuratech ApS ("Pleuratech") to acquire the rights to manufacture and sell the KatGuide
TM
chest tube insertion tool. As of
December 31, 2018
, we had paid
$2.0 million
in connection with this agreement. We are obligated to pay an additional
$5.0 million
if certain milestones set forth in the license agreement are met. We are also required to pay royalties equal to
6%
of net sales throughout the term of the license agreement. We accounted for this transaction as an asset purchase. We recorded the amount paid upon closing as a license agreement intangible asset, which we are amortizing over
15 years
.
On June 16, 2017, we acquired from Lazarus Medical Technologies, LLC the patent rights and other intellectual property related to the Repositionable Chest Tube
TM
and related devices. As of
December 31, 2018
, we had paid
$620,000
in connection
with this agreement. We are also obligated to pay an additional
$700,000
if certain milestones set forth in the purchase agreement are met. We are also required to pay royalties equal to
6%
of net sales throughout the term of the purchase agreement. We accounted for this transaction as an asset purchase. We recorded the amount paid upon closing as a license agreement intangible asset, which we are amortizing over
15 years
.
On May 23, 2017, we paid
$2.5 million
to acquire
182,000
shares of preferred stock of Fusion Medical, Inc. ("Fusion"), a developer of medical devices designed primarily for clot removal. The shares of preferred stock we acquired, which represent an ownership interest of approximately
19.5%
, have been accounted for as an equity method investment of
$2.5 million
reflected within other assets in the accompanying consolidated balance sheets because we may be deemed to exercise significant influence over the operations of Fusion.
On May 19, 2017, we terminated our distribution agreement with Sheen Man Co., Ltd. and Sugan Co, Ltd., ("Sugan"), a Japanese medical device distributor and entered into a business purchase agreement, distribution agreement and a supply agreement with Sugan. Pursuant to these agreements, we acquired the customer list Sugan used in the distribution of our products in Japan. The purchase price is recorded as a customer list intangible asset of approximately
$1.2 million
. We are amortizing the customer list intangible asset on an accelerated basis over
five years
. In addition, we granted to Sugan the right to continue to distribute a limited number of our products, related to fluid administration, through December 31, 2021 and to manufacture and sell to Sugan certain contrast injector products during a term of
four years
, subject to extensions.
On May 1, 2017, we entered into an agreement and plan of merger with Vascular Access Technologies, Inc. ("VAT"), pursuant to which we acquired the SAFECVAD™ device. We accounted for this acquisition as a business combination. The purchase price for the business was
$5.0 million
. We also recorded
$4.9 million
of contingent consideration related to royalties potentially payable to VAT pursuant to the merger agreement. The following table summarizes the purchase price allocated to the net assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
|
|
|
Intangibles
|
|
|
Developed technology
|
$
|
7,800
|
|
|
In-process technology
|
920
|
|
|
Goodwill
|
4,281
|
|
|
Deferred tax liabilities
|
(3,101
|
)
|
|
|
|
|
Total net assets acquired
|
$
|
9,900
|
|
We are amortizing the developed technology intangible asset over
15 years
. The sales and results of operations related to the acquisition have been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs associated with the VAT acquisition, which are included in selling, general and administrative expenses in the accompanying consolidated statements of income, were not material.
On January 31, 2017, we acquired Argon’s critical care division, including a manufacturing facility in Singapore, the related commercial operations in Europe and Japan, and certain inventories and intellectual property rights within the U.S. We made an initial payment of approximately
$10.9 million
and received a subsequent reduction to the purchase price of approximately
$797,000
related to a working capital adjustment according to the terms of the purchase agreement. We accounted for the acquisition as a business combination.
Acquisition-related costs associated with the acquisition of the Argon critical care division during the year ended December 31, 2017, which are included in selling, general and administrative expenses in the accompanying consolidated statements of income, were approximately
$2.6 million
. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the years ended
December 31, 2018
and
2017
, our net sales of the Argon critical care products were approximately
$45.5 million
and
$41.2 million
, respectively. It is not practical to separately report the earnings related to the Argon critical care acquisition, as we cannot split out sales costs related solely to the products we acquired from Argon, principally because our sales representatives sell multiple products (including the products we acquired from Argon) in our cardiovascular business segment.
The assets and liabilities in the purchase price allocation for the Argon critical care acquisition are stated at fair value based on estimates of fair value using available information and making assumptions our management believes are reasonable. The following table summarizes the purchase price allocated to the net tangible and intangible assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
|
|
|
|
|
Assets Acquired
|
|
|
|
Cash and cash equivalents
|
$
|
1,436
|
|
|
|
Trade receivables
|
8,351
|
|
|
|
Inventories
|
11,222
|
|
|
|
Prepaid expenses and other assets
|
1,275
|
|
|
|
Income tax refund receivable
|
165
|
|
|
|
Property and equipment
|
2,319
|
|
|
|
Deferred tax assets
|
202
|
|
|
|
Intangibles
|
|
|
|
Developed technology
|
2,200
|
|
|
|
Customer lists
|
1,500
|
|
|
|
Trademarks
|
900
|
|
|
|
Total assets acquired
|
29,570
|
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
Trade payables
|
(2,414
|
)
|
|
|
Accrued expenses
|
(5,083
|
)
|
|
|
Income taxes payable
|
—
|
|
|
|
Deferred income tax liabilities
|
(934
|
)
|
|
|
Total liabilities assumed
|
(8,431
|
)
|
|
|
|
|
|
|
Total net assets acquired
|
21,139
|
|
|
|
Gain on bargain purchase
(1)
|
(11,039
|
)
|
|
|
Total purchase price
|
$
|
10,100
|
|
|
|
|
|
|
(1)
|
The total fair value of the net assets acquired from Argon exceeded the purchase price, resulting in a gain on bargain purchase which was recorded within other income (expense) in our consolidated statements of income. We believe the reason for the gain on bargain purchase was a result of the divestiture of a non-strategic, slow-growth critical care business for Argon. It is our understanding that the divestiture allows Argon to focus on its higher growth interventional portfolio.
|
With respect to the Argon critical care assets, we are amortizing developed technology over
seven years
and customer lists on an accelerated basis over
five years
. While U.S. trademarks can be renewed indefinitely, we currently estimate that we will generate cash flow from the acquired trademarks for a period of
five years
from the acquisition date. The total weighted-average amortization period for these acquired intangible assets is
6.0 years
.
On January 31, 2017, we acquired substantially all the assets, including intellectual property covered by approximately
40
patents and pending applications, and assumed certain liabilities, of Catheter Connections, Inc. (“Catheter Connections”), in exchange for payment of
$38.0 million
. Catheter Connections, based in Salt Lake City, Utah, developed and marketed the DualCap® System, an innovative family of disinfecting products designed to protect patients from intravenous infections resulting from infusion therapy. We accounted for this acquisition as a business combination.
Acquisition-related costs associated with the Catheter Connections acquisition during the year ended December 31, 2017, which are included in selling, general and administrative expenses in the accompanying consolidated statements of income, were approximately
$482,000
. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the years ended
December 31, 2018
and
2017
, our net sales of the products acquired from Catheter Connections were approximately
$13.7 million
and
$10.0 million
, respectively. It is not practical to separately report the earnings related to the products acquired from Catheter Connections, as we cannot split out sales costs related solely to those products, principally because our sales representatives sell multiple products (including the DualCap System) in the cardiovascular business segment. The purchase price was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
Assets Acquired
|
|
|
Trade receivables
|
$
|
958
|
|
|
Inventories
|
2,157
|
|
|
Prepaid expenses and other assets
|
85
|
|
|
Property and equipment
|
1,472
|
|
|
Intangibles
|
|
|
Developed technology
|
21,100
|
|
|
Customer lists
|
700
|
|
|
Trademarks
|
2,900
|
|
|
Goodwill
|
8,989
|
|
|
Total assets acquired
|
38,361
|
|
|
|
|
|
Liabilities Assumed
|
|
|
Trade payables
|
(338
|
)
|
|
Accrued expenses
|
(23
|
)
|
|
Total liabilities assumed
|
(361
|
)
|
|
|
|
|
Net assets acquired
|
$
|
38,000
|
|
We are amortizing the Catheter Connections developed technology asset over
12 years
, the related trademarks over
ten years
, and the associated customer list over
eight years
. We have estimated the weighted average life of the intangible Catheter Connections assets acquired to be approximately
11.7 years
.
On December 19, 2016, we paid
$5.0 million
for
1,251,878
shares of common stock and a distribution agreement with Bluegrass Vascular Technologies, Inc. ("Bluegrass"). The common stock, which represents an ownership interest of approximately
19.5%
, has been accounted for as a cost method investment of
$4.0 million
reflected within other assets in the accompanying consolidated balance sheets because we are not able to exercise significant influence over the operations of Bluegrass. The distribution agreement intangible asset was valued at
$1.0 million
and will be amortized over a period of
three years
.
On July 6, 2016, we acquired all of the issued and outstanding shares of DFINE Inc. ("DFINE"). The DFINE acquisition added a line of vertebral augmentation products for the treatment of vertebral compression fractures ("VCF") as well as medical devices used to treat metastatic spine tumors. We made an initial payment of
$97.5 million
to certain DFINE stockholders on July 6, 2016 and paid approximately
$578,000
related to a net working capital adjustment subject to review by Merit and the preferred stockholders of DFINE. We accounted for the acquisition as a business combination. In the three-month period ended December 31, 2016, we negotiated the final net working capital adjustment resulting in a reduction to the purchase price of approximately
$1.1 million
. As a result, we recorded measurement period adjustments to reduce inventories by approximately
$89,000
, reduce property and equipment by approximately
$109,000
, reduce goodwill by approximately
$1.2 million
, reduce accrued expenses by approximately
$407,000
and increase the associated deferred tax liabilities by approximately
$113,000
. Under U.S. GAAP, measurement period adjustments are recognized on a prospective basis in the period of change, instead of restating prior periods. There was no impact to reported earnings in connection with these measurement period adjustments.
Acquisition-related costs during the year ended December 31, 2016, which are included in selling, general, and administrative expenses in the accompanying consolidated statements of income, were approximately
$1.6 million
. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the years ended December 31, 2018, 2017 and 2016, our net sales of DFINE products were approximately
$26.6 million
,
$27.0 million
and
$13.5 million
, respectively. It is not practical to separately report the earnings related to the DFINE acquisition, as we cannot split out sales costs related to DFINE products, principally because our sales representatives are selling multiple products (including DFINE products) in the cardiovascular business segment.
The purchase price was allocated to the net tangible and intangible assets acquired and liabilities assumed, based on estimated fair values, as follows (in thousands):
|
|
|
|
|
|
|
|
Assets Acquired
|
|
|
Trade receivables
|
$
|
4,054
|
|
|
Other receivables
|
6
|
|
|
Inventories
|
8,585
|
|
|
Prepaid expenses
|
630
|
|
|
Property and equipment
|
1,630
|
|
|
Other long-term assets
|
145
|
|
|
Intangibles
|
|
|
Developed technology
|
67,600
|
|
|
Customer lists
|
2,400
|
|
|
Trademarks
|
4,400
|
|
|
Goodwill
|
24,818
|
|
|
Total assets acquired
|
114,268
|
|
|
|
|
|
Liabilities Assumed
|
|
|
Trade payables
|
(1,790
|
)
|
|
Accrued expenses
|
(5,298
|
)
|
|
Deferred income tax liabilities - current
|
(701
|
)
|
|
Deferred income tax liabilities - noncurrent
|
(10,844
|
)
|
|
Total liabilities assumed
|
(18,633
|
)
|
|
|
|
|
Net assets acquired, net of cash received of $1,327
|
$
|
95,635
|
|
The gross amount of trade receivables we acquired in the acquisition was approximately
$4.3 million
, of which approximately
$224,000
was expected to be uncollectible or returned. With respect to the DFINE assets, we are amortizing developed technology over
15 years
and customer lists on an accelerated basis over
nine years
. While U.S. trademarks can be renewed indefinitely, we currently estimate that we will generate cash flow from the acquired trademarks for a period of
15 years
from the acquisition date. The total weighted-average amortization period for these acquired intangible assets is
14.8 years
.
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 HeRO Graft is a fully subcutaneous vascular access system intended for use in maintaining long-term vascular access for chronic hemodialysis patients who have failing fistulas, grafts or are catheter dependent due to a central venous blockage. The purchase price was
$18.5 million
, which was paid in full during 2016. We accounted for this acquisition as a business combination. The purchase price was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
Assets Acquired
|
|
|
Inventories
|
$
|
2,455
|
|
|
Property and equipment
|
290
|
|
|
Intangibles
|
|
|
Developed technology
|
12,100
|
|
|
Trademarks
|
700
|
|
|
Customers Lists
|
400
|
|
|
Goodwill
|
2,555
|
|
|
|
|
|
Total assets acquired
|
$
|
18,500
|
|
We are amortizing the developed HeRO Graft technology asset over
ten years
, the related trademarks over
5.5 years
, and the associated customer lists over
12 years
. We have estimated the weighted average life of the intangible HeRO Graft assets acquired to be approximately
9.8 years
. Acquisition-related costs related to the HeRO Graft device and other related assets during the year ended December 31, 2016, which are 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 years ended December 31, 2018, 2017 and 2016, our net sales of the products acquired from CryoLife were approximately
$9.1 million
,
$8.6 million
and
$7.1 million
, respectively. 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 HeRO Graft device) in the cardiovascular business segment.
The following table summarizes our consolidated results of operations for the years ended December 31, 2018, 2017 and 2016, as well as unaudited pro forma consolidated results of operations as though the DFINE acquisition had occurred on January 1, 2015, the acquisition of the Argon critical care division had occurred on January 1, 2016 and the acquisition of Cianna Medical and Vascular Insights had occurred on January 1, 2017 (in thousands, except per common share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
As Reported
|
|
Pro Forma
|
|
As Reported
|
|
Pro Forma
|
|
As Reported
|
|
Pro Forma
|
|
Net sales
|
$
|
882,753
|
|
|
$
|
928,336
|
|
|
$
|
727,852
|
|
|
$
|
768,571
|
|
|
$
|
603,838
|
|
|
$
|
664,366
|
|
|
Net income (loss)
|
42,017
|
|
|
20,699
|
|
|
27,523
|
|
|
(13,720
|
)
|
|
20,121
|
|
|
23,054
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.80
|
|
|
$
|
0.40
|
|
|
$
|
0.56
|
|
|
$
|
(0.28
|
)
|
|
$
|
0.45
|
|
|
$
|
0.52
|
|
|
Diluted
|
$
|
0.78
|
|
|
$
|
0.38
|
|
|
$
|
0.55
|
|
|
$
|
(0.27
|
)
|
|
$
|
0.45
|
|
|
$
|
0.51
|
|
The unaudited pro forma information set forth above is for informational purposes only and includes adjustments related to the
step-up of acquired inventories, amortization expense of acquired intangible assets, stock-based compensation for cancelled or forfeited options, interest expense on long-term debt and changes in the timing of the recognition of the gain on bargain purchase. The pro forma information should not be considered indicative of actual results that would have been achieved if the acquisition of Cianna Medical and Vascular Insights had occurred on January 1, 2017, the acquisition of the Argon critical care division had occurred on January 1, 2016, or the acquisition of DFINE had occurred on January 1, 2015, or results that may be obtained in any future period. The pro forma consolidated results of operations do not include the acquisition of assets from BD because it was deemed impracticable to obtain information to determine net income associated with the acquired product lines which represent a small product line of a large, consolidated company without standalone financial information. The pro forma consolidated results of operations do not include the DirectACCESS, ITL, Laurane, Osseon, VAT, Catheter Connections or HeRO Graft acquisitions as we do not deem the pro forma effect of these transactions 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 5). The goodwill recognized from certain acquisitions is expected to be deductible for income tax purposes.
4. INVENTORIES
Inventories at
December 31, 2018
and
2017
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Finished goods
|
$
|
117,703
|
|
|
$
|
86,555
|
|
|
Work-in-process
|
14,380
|
|
|
12,799
|
|
|
Raw materials
|
65,453
|
|
|
55,934
|
|
|
|
|
|
|
|
Total
|
$
|
197,536
|
|
|
$
|
155,288
|
|
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the years ended
December 31, 2018
and
2017
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Goodwill balance at January 1
|
$
|
238,147
|
|
|
$
|
211,927
|
|
|
Effect of foreign exchange
|
(1,304
|
)
|
|
2,641
|
|
|
Additions as the result of acquisitions
|
98,590
|
|
|
23,579
|
|
|
Goodwill balance at December 31
|
$
|
335,433
|
|
|
$
|
238,147
|
|
Total accumulated goodwill impairment losses aggregated to
$8.3 million
as of
December 31, 2018
and
2017
. We did not have any goodwill impairments for the years ended
December 31, 2018
,
2017
and
2016
. The total goodwill balance as of
December 31, 2018
and
2017
, is related to our cardiovascular segment.
Other intangible assets at
December 31, 2018
and
2017
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Patents
|
$
|
19,378
|
|
|
$
|
(5,012
|
)
|
|
$
|
14,366
|
|
|
Distribution agreements
|
8,012
|
|
|
(5,766
|
)
|
|
2,246
|
|
|
License agreements
|
26,930
|
|
|
(7,411
|
)
|
|
19,519
|
|
|
Trademarks
|
29,998
|
|
|
(6,586
|
)
|
|
23,412
|
|
|
Covenants not to compete
|
1,028
|
|
|
(1,000
|
)
|
|
28
|
|
|
Customer lists
|
39,936
|
|
|
(23,361
|
)
|
|
16,575
|
|
|
In-process technology
|
3,420
|
|
|
—
|
|
|
3,420
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
128,702
|
|
|
$
|
(49,136
|
)
|
|
$
|
79,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Patents
|
$
|
16,528
|
|
|
$
|
(3,737
|
)
|
|
$
|
12,791
|
|
|
Distribution agreements
|
7,262
|
|
|
(4,686
|
)
|
|
2,576
|
|
|
License agreements
|
23,783
|
|
|
(5,568
|
)
|
|
18,215
|
|
|
Trademarks
|
16,224
|
|
|
(4,686
|
)
|
|
11,538
|
|
|
Covenants not to compete
|
1,028
|
|
|
(968
|
)
|
|
60
|
|
|
Customer lists
|
31,935
|
|
|
(18,482
|
)
|
|
13,453
|
|
|
In-process technology
|
920
|
|
|
—
|
|
|
920
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
97,680
|
|
|
$
|
(38,127
|
)
|
|
$
|
59,553
|
|
Aggregate amortization expense for the years ended
December 31, 2018
,
2017
and
2016
was approximately
$41.2 million
,
$26.8 million
and
$19.3 million
, respectively.
We evaluate long-lived assets, including amortizing intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We perform the impairment analysis at the asset group for which the lowest level of identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We compare the carrying value of the amortizing intangible assets acquired to the undiscounted cash flows expected to result from the asset group and determine whether the carrying amount is recoverable. We determine the fair value of our amortizing assets based on estimated future cash flows discounted back to their present value using a discount rate that reflects the risk profiles of the underlying activities. During the years ended
December 31, 2018
and
2017
, we recorded impairment charges of
$657,000
, related to our July 2015 acquisition of certain assets from Quellent, LLC, and
$809,000
, related to our July 2015 acquisition of certain assets from Distal Access, LLC, respectively, all of which pertained to our cardiovascular segment. Some of the factors that influenced our estimated cash flows were slower than anticipated sales growth in the products acquired from our Quellent and Distal Access acquisitions and uncertainty about future sales growth. We did
no
t record any impairment charges during the year ended December 31, 2016.
Estimated amortization expense for the developed technology and other intangible assets for the next five years consists of the following as of
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
Year Ending December 31
|
|
|
2019
|
$
|
58,035
|
|
|
2020
|
55,341
|
|
|
2021
|
48,084
|
|
|
2022
|
46,648
|
|
|
2023
|
45,417
|
|
6. INCOME TAXES
On December 22, 2017, U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (“TCJA”) was signed into law. Significant provisions that have impacted (and will in the future impact) our effective tax rate include the reduction in the corporate tax rate from
35%
to
21%
, effective in 2018; a one-time deemed repatriation (“transition tax”) on earnings of certain foreign subsidiaries that were previously tax deferred; and new taxes on certain foreign sourced earnings. At December 31, 2017, we had not completed our accounting for the tax effects of the TCJA; however, in certain cases, as described below, we made reasonable estimates of the effects on our existing deferred tax balances and impact of the one-time transition tax. In accordance with SEC Staff Accounting Bulletin 118 (“SAB 118”), income tax effects of the TCJA may be refined upon obtaining, preparing, and/or analyzing additional information during the measurement period and such changes could be material. During the measurement period, provisional amounts may also be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies.
As of December 31, 2017, we were able to determine a reasonable estimate and recognize the provisional impacts of the rate reduction on our existing deferred tax balances and the impact of the transition tax. The reduction in the U.S. corporate tax rate resulted in a net tax benefit of approximately
$8.4 million
related to the revaluation of our U.S. net deferred tax liability. The transition tax resulted in a one-time tax expense of approximately
$10.6 million
.
As of December 31, 2018, we have revised these estimated amounts based upon further analysis of the TCJA and notices and regulations issued and proposed by the U.S. Department of Treasury and the Internal Revenue Service. We recognized an additional tax benefit of approximately
$71,000
on the difference between the 2017 U.S. enacted tax rate of 35%, and the 2018 enacted tax rate of 21%. We recognized a tax benefit of approximately
$3.3 million
from the revised transition tax calculation, which included the completion of our calculation of the total post-1986 foreign earnings and profits (“E&P”) of our foreign subsidiaries, and related foreign tax credits. We elected to pay our transition tax over the eight-year period provided by the TCJA.
For tax years beginning after December 31, 2017, the TCJA introduces new provisions of U.S. taxation of certain Global Intangible Low-Tax Income (“GILTI”). The FASB provided guidance that companies should make an accounting policy election to either treat taxes on GILTI as period costs or use the deferred method. We have elected to treat taxes on GILTI as period costs and recognized tax expense of approximately
$347,000
in December 2018.
As of December 31, 2018, we have completed our accounting for the tax effects of the enactment of the TCJA; however, we continue to expect U.S. regulatory and standard-setting bodies to issue guidance and regulations that could have a material financial statement impact on our effective tax rate in future periods.
We have historically asserted indefinite reinvestment of the earnings of certain non-U.S. subsidiaries outside the U.S. The TCJA eliminated certain material tax effects on the repatriation of cash to the U.S. As such, future repatriation of cash and other property held by our foreign subsidiaries will generally not be subject to U.S. federal income tax. Therefore, after reevaluation of the permanent reinvestment assertion, we no longer consider our foreign earnings to be permanently reinvested as of December 31, 2018. As a result of the change in the assertion, during 2018 we recorded tax expense of approximately
$5.6 million
for foreign withholding taxes on unremitted foreign earnings as of December 31, 2018.
For the years ended
December 31, 2018
,
2017
and
2016
, income before income taxes is broken out between U.S. and foreign-sourced operations and consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Domestic
|
$
|
21,084
|
|
|
$
|
14,531
|
|
|
$
|
6,174
|
|
|
Foreign
|
28,435
|
|
|
21,350
|
|
|
19,212
|
|
|
Total
|
$
|
49,519
|
|
|
$
|
35,881
|
|
|
$
|
25,386
|
|
The components of the provision for income taxes for the years ended
December 31, 2018
,
2017
and
2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Current expense (benefit):
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(1,132
|
)
|
|
$
|
3,849
|
|
|
$
|
1,933
|
|
|
State
|
582
|
|
|
645
|
|
|
492
|
|
|
Foreign
|
6,000
|
|
|
5,168
|
|
|
3,802
|
|
|
Total current expense
|
5,450
|
|
|
9,662
|
|
|
6,227
|
|
|
|
|
|
|
|
|
|
Deferred expense (benefit):
|
|
|
|
|
|
|
|
|
|
Federal
|
4,400
|
|
|
(314
|
)
|
|
(144
|
)
|
|
State
|
(667
|
)
|
|
(216
|
)
|
|
(195
|
)
|
|
Foreign
|
(1,681
|
)
|
|
(774
|
)
|
|
(623
|
)
|
|
Total deferred (benefit) expense
|
2,052
|
|
|
(1,304
|
)
|
|
(962
|
)
|
|
|
|
|
|
|
|
|
Total income tax expense
|
$
|
7,502
|
|
|
$
|
8,358
|
|
|
$
|
5,265
|
|
The difference between the income tax expense reported and amounts computed by applying the statutory federal rate of
21.0%
to pretax income for the year ended
December 31, 2018
, and
35%
for years ended December 31,
2017
and
2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Computed federal income tax expense at applicable statutory rate
|
$
|
10,399
|
|
|
$
|
12,559
|
|
|
$
|
8,885
|
|
|
State income taxes
|
(59
|
)
|
|
279
|
|
|
193
|
|
|
Tax credits
|
(1,734
|
)
|
|
(1,377
|
)
|
|
(1,164
|
)
|
|
Production activity deduction
|
—
|
|
|
—
|
|
|
(53
|
)
|
|
Foreign tax rate differential
|
(1,361
|
)
|
|
(3,329
|
)
|
|
(3,717
|
)
|
|
Uncertain tax positions
|
267
|
|
|
(19
|
)
|
|
597
|
|
|
Deferred compensation insurance assets
|
186
|
|
|
(479
|
)
|
|
(307
|
)
|
|
Transaction-related expenses
|
223
|
|
|
90
|
|
|
274
|
|
|
U.S. transition tax
|
(3,271
|
)
|
|
10,612
|
|
|
—
|
|
|
TCJA remeasurement of deferred taxes
|
(71
|
)
|
|
(8,383
|
)
|
|
—
|
|
|
Stock-based payments
|
(4,278
|
)
|
|
(2,264
|
)
|
|
—
|
|
|
Bargain purchase gain
|
—
|
|
|
(1,570
|
)
|
|
—
|
|
|
In-process research and development
|
—
|
|
|
1,486
|
|
|
—
|
|
|
Net GILTI
|
347
|
|
|
—
|
|
|
—
|
|
|
Foreign withholding tax
|
5,590
|
|
|
—
|
|
|
—
|
|
|
Other — including the effect of graduated rates
|
1,264
|
|
|
753
|
|
|
557
|
|
|
Total income tax expense
|
$
|
7,502
|
|
|
$
|
8,358
|
|
|
$
|
5,265
|
|
Deferred income tax assets and liabilities at
December 31, 2018
and
2017
, consisted of the following temporary differences and carry-forward items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Deferred income tax assets:
|
|
|
|
|
|
Allowance for uncollectible accounts receivable
|
$
|
606
|
|
|
$
|
467
|
|
|
Accrued compensation expense
|
7,414
|
|
|
5,154
|
|
|
Inventory differences
|
1,269
|
|
|
2,505
|
|
|
Net operating loss carryforwards
|
20,226
|
|
|
15,741
|
|
|
Deferred revenue
|
46
|
|
|
58
|
|
|
Stock-based compensation expense
|
2,833
|
|
|
2,281
|
|
|
Other
|
9,243
|
|
|
8,986
|
|
|
Total deferred income tax assets
|
41,637
|
|
|
35,192
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
Prepaid expenses
|
(1,142
|
)
|
|
(930
|
)
|
|
Property and equipment
|
(20,045
|
)
|
|
(20,352
|
)
|
|
Intangible assets
|
(58,883
|
)
|
|
(28,588
|
)
|
|
Foreign withholding tax
|
(5,590
|
)
|
|
—
|
|
|
Other
|
(4,350
|
)
|
|
(1,830
|
)
|
|
Total deferred income tax liabilities
|
(90,010
|
)
|
|
(51,700
|
)
|
|
Valuation allowance
|
(4,989
|
)
|
|
(4,422
|
)
|
|
Net deferred income tax assets (liabilities)
|
$
|
(53,362
|
)
|
|
$
|
(20,930
|
)
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
Deferred income tax assets - Long-term
|
$
|
3,001
|
|
|
$
|
2,359
|
|
|
Deferred income tax liabilities - Long-term
|
(56,363
|
)
|
|
(23,289
|
)
|
|
Net deferred income tax liabilities
|
$
|
(53,362
|
)
|
|
$
|
(20,930
|
)
|
The long-term deferred income tax balances are not netted as they represent deferred amounts applicable to different taxing jurisdictions. Deferred income tax balances reflect the temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.
The valuation allowance is primarily related to state credit carryforwards, non-US net operating loss carryforwards, and capital loss carryforwards for which we believe it is more likely than not that the deferred tax assets will not be realized. The valuation allowance increased by approximately
$567,000
,
$636,000
and
$1.8 million
during the years ended
December 31, 2018
,
2017
and
2016
, respectively.
As of
December 31, 2018
and
2017
, we had U.S federal net operating loss carryforwards of approximately
$86.3 million
and
$67.9 million
, respectively, which were generated by Cianna Medical, VAT, DFINE and Biosphere Medical, Inc. prior to our acquisition of these companies. Cianna Medical, Inc. was acquired on November 13, 2018. These net operating loss carryforwards, which expire at various dates through 2035, are subject to an annual limitation under Internal Revenue Code Section 382. We anticipate that we will utilize the net operating loss carryforwards over the next
17 years
. We utilized a total of approximately
$11.9 million
and
$9.1 million
in U.S. federal net operating loss carryforwards during the years ended
December 31, 2018
and
2017
, respectively.
As of
December 31, 2018
, we had approximately
$5.9 million
of non-U.S. net operating loss carryforwards, of which approximately
$5.2 million
have no expiration date and approximately
$761,000
expire at various dates through 2027. As of
December 31, 2017
, we had
$5.4 million
of non-U.S. net operating loss carryforwards, of which approximately
$4.9 million
had no expiration date and approximately
$526,000
expire at various dates through 2027. Non-U.S. net operating loss carryforwards utilized during the years ended
December 31, 2018
and
2017
were not material.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. In our opinion, we have made adequate provisions for income taxes for all years subject to audit. We are no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2015. In foreign jurisdictions, we are no longer subject to income tax examinations for years before 2012.
Although we believe our estimates are reasonable, the final outcomes of these matters may be different from those which we have reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and operating results in the period in which we make such determination.
The total liability for unrecognized tax benefits at
December 31, 2018
, including interest and penalties, was approximately
$3.3 million
, of which approximately
$3.0 million
would favorably impact our effective tax rate if recognized. The total liability for unrecognized tax benefits at December 31, 2017, including interest and penalties, was approximately
$3.1 million
, of which approximately
$2.7 million
would favorably impact our effective tax rate if recognized. As of December 31, 2018 and 2017, the total liability for uncertain tax benefits, as presented on our consolidated balance sheets, has been reduced by approximately
$307,000
related to certain liabilities for unrecognized tax benefits, which, if realized, would reduce the transition tax under the TCJA by approximately
$307,000
. As of
December 31, 2018
and
2017
, we had accrued approximately
$373,000
and
$304,000
respectively, in total interest and penalties related to unrecognized tax benefits. We account for interest and penalties for unrecognized tax benefits as part of our income tax provision. During the years ended
December 31, 2018
,
2017
and
2016
, we added interest and penalties of approximately
$69,000
,
$88,000
and
$30,000
, respectively, to our liability for unrecognized tax benefits. It is reasonably possible that within the next 12 months the total liability for unrecognized tax benefits may change, net of potential decreases due to the expiration of statutes of limitation, up to
$400,000
.
A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax benefits for the years ended
December 31, 2018
,
2017
and
2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tabular Roll-forward
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, opening balance
|
|
$
|
2,749
|
|
|
$
|
2,549
|
|
|
$
|
1,982
|
|
|
Gross increases in tax positions taken in a prior year
|
|
35
|
|
|
80
|
|
|
77
|
|
|
Gross increases in tax positions taken in the current year
|
|
586
|
|
|
403
|
|
|
856
|
|
|
Lapse of applicable statute of limitations
|
|
(423
|
)
|
|
(283
|
)
|
|
(366
|
)
|
|
Unrecognized tax benefits, ending balance
|
|
$
|
2,947
|
|
|
$
|
2,749
|
|
|
$
|
2,549
|
|
The tabular roll-forward ending balance does not include interest and penalties related to unrecognized tax benefits.
7. ACCRUED EXPENSES
Accrued expenses at
December 31, 2018
and
2017
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Payroll and related liabilities
|
$
|
37,396
|
|
|
$
|
30,225
|
|
|
Current portion of contingent liabilities
|
23,760
|
|
|
289
|
|
|
Advances from employees
|
540
|
|
|
796
|
|
|
Other accrued expenses
|
34,477
|
|
|
27,622
|
|
|
|
|
|
|
|
Total
|
$
|
96,173
|
|
|
$
|
58,932
|
|
8. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
Principal balances outstanding under our long-term debt obligations as of
December 31, 2018
and
2017
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016 Term loan
|
$
|
72,500
|
|
|
$
|
85,000
|
|
|
2016 Revolving credit loans
|
316,000
|
|
|
187,000
|
|
|
Collateralized debt facility
|
7,000
|
|
|
6,959
|
|
|
Less unamortized debt issuance costs
|
(348
|
)
|
|
(487
|
)
|
|
Total long-term debt
|
395,152
|
|
|
278,472
|
|
|
Less current portion
|
22,000
|
|
|
19,459
|
|
|
Long-term portion
|
$
|
373,152
|
|
|
$
|
259,013
|
|
Collateralized Debt Facility
On September 3, 2018, we renewed our loan agreement with HSBC Bank USA, National Association ("HSBC Bank") whereby HSBC Bank agreed to provide us with a loan in the amount of
$7.0 million
. As of December 31, 2018 the loan was set to mature on January 11, 2019, with an extension available at our option, subject to certain conditions. In January 2019, we entered into an agreement to extend the loan agreement through April 28, 2019. The loan agreement bears interest at the six-month London Inter-Bank Offered Rate (“LIBOR”) plus
1.0%
. The loan is secured by assets equal to the currently outstanding loan balance. The loan contains covenants, representations and warranties and other terms customary for loans of this nature. As of
December 31, 2018
, our interest rate on the loan was a variable rate of
3.39%
.
2016 Term Loan and Revolving Credit Loans
On July 6, 2016, we entered into a Second Amended and Restated Credit Agreement (as amended to date, the “Second Amended Credit Agreement”), with Wells Fargo Bank, National Association, as administrative agent, swingline lender and a lender, and Wells Fargo Securities, LLC, as sole lead arranger and sole bookrunner. In addition to Wells Fargo Bank, National Association, Bank of America, N.A., U.S. Bank, National Association, and HSBC Bank USA, National Association, are parties to the Second Amended Credit Agreement as lenders. The Second Amended Credit Agreement amends and restates in its entirety our previously outstanding Amended and Restated Credit Agreement and all amendments thereto. The Second Amended Credit Agreement was amended on September 28, 2016 to allow for a new revolving credit loan to our wholly-owned subsidiary, on March 20, 2017 to allow flexibility in how we apply net proceeds received from equity issuances to prepay outstanding indebtedness, on December 13, 2017 to increase the revolving credit commitment by
$100 million
up to
$375 million
, and on March 28, 2018 to amend certain debt covenants.
The Second Amended Credit Agreement provides for a term loan of
$150 million
and a revolving credit commitment up to an aggregate amount of
$375 million
, which includes a reserve of
$25 million
to make swingline loans from time to time. The term loan is payable in quarterly installments in the amounts provided in the Second Amended Credit Agreement until the maturity date of July 6, 2021, at which time the term and revolving credit loans, together with accrued interest thereon, will be due and payable. 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.
Revolving credit loans denominated in dollars and term loans made under the Second Amended Credit Agreement bear interest, at our election, at either a Base Rate or Eurocurrency Base Rate (as such terms are defined in the Second Amended Credit Agreement) plus the applicable margin, which increases as our Consolidated Total Leverage Ratio (as defined in the Second Amended Credit Agreement) increases. Revolving credit loans denominated in an Alternative Currency (as defined in the Second Amended Credit Agreement) bear interest at the Eurocurrency rate plus the applicable margin. Swingline loans bear interest at the base rate plus the applicable margin. Upon an event of default, the interest rate may be increased by
2.0%
. The revolving credit commitment will also carry a commitment fee of
0.15%
to
0.40%
per annum on the unused portion.
The Second Amended Credit Agreement is collateralized by substantially all our assets. The Second Amended Credit Agreement contains covenants, representations and warranties and other terms customary for loans of this nature. The Second Amended Credit Agreement requires that we maintain certain financial covenants, as follows:
|
|
|
|
|
|
|
|
|
|
|
Covenant Requirement
|
|
Consolidated Total Leverage Ratio (1)
|
|
|
|
|
January 1, 2018 and thereafter
|
|
3.5 to 1.0
|
|
Consolidated EBITDA (2)
|
|
1.25 to 1.0
|
|
Consolidated Net Income (3)
|
|
$—
|
|
Facility Capital Expenditures (4)
|
|
$30 million
|
|
|
|
|
|
|
(1)
|
Maximum Consolidated Total Leverage Ratio (as defined in the Second Amended Credit Agreement) as of any fiscal quarter end.
|
|
(2)
|
Minimum ratio of Consolidated EBITDA (as defined in the Second Amended Credit Agreement and adjusted for certain expenditures) to Consolidated Fixed Charges (as defined in the Second Amended Credit Agreement) for any period of four consecutive fiscal quarters.
|
|
(3)
|
Minimum level of Consolidated Net Income (as defined in the Second Amended Credit Agreement) for certain periods, and subject to certain adjustments.
|
|
(4)
|
Maximum level of the aggregate amount of all Facility Capital Expenditures (as defined in the Second Amended Credit Agreement) in any fiscal year.
|
Additionally, the Second Amended Credit Agreement contains customary events of default and affirmative and negative covenants for transactions of this type. As of
December 31, 2018
, we believe we were in compliance with all covenants set forth in the Second Amended Credit Agreement.
Future Payments
Future minimum principal payments on our long-term debt as of
December 31, 2018
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Years Ending
|
|
Future Minimum
|
|
December 31
|
|
Principal Payments
|
|
2019
|
|
22,000
|
|
|
2020
|
|
17,500
|
|
|
2021
|
|
356,000
|
|
|
Total future minimum principal payments
|
|
$
|
395,500
|
|
As of
December 31, 2018
, we had outstanding borrowings of approximately
$388.5 million
under the Second Amended Credit Agreement, with available borrowings of approximately
$58.3 million
, based on the leverage ratio required pursuant to the Second Amended Credit Agreement. Our interest rate as of
December 31, 2018
was a fixed rate of
2.12%
on
$175.0 million
as a result an interest rate swap (see Note 9) and a variable floating rate of
3.52%
on
$213.5 million
. Our interest rate as of
December 31, 2017
was a fixed rate of
2.68%
on
$175.0 million
as a result of an interest rate swap and a variable floating rate of
2.82%
on
$97.0 million
.
9. DERIVATIVES
General.
Our earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates, and we seek to mitigate a portion of these risks by entering into derivative contracts. The derivatives we use are interest rate swaps and foreign currency forward contracts. We recognize derivatives as either assets or liabilities at fair value in
the accompanying consolidated balance sheets, regardless of whether or not hedge accounting is applied. We report cash flows arising from our hedging instruments consistent with the classification of cash flows from the underlying hedged items. Accordingly, cash flows associated with our derivative programs are classified as operating activities in the accompanying consolidated statements of cash flows.
We formally document, designate and assess the effectiveness of transactions that receive hedge accounting initially and on an ongoing basis. Changes in the fair value of derivatives that qualify for hedge accounting treatment are recorded, net of applicable taxes, in accumulated other comprehensive income, a component of stockholders’ equity in the accompanying consolidated balance sheets. For the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Changes in the fair value of derivatives not designated as hedging instruments are recorded in earnings throughout the term of the derivative.
Interest Rate Risk.
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 our Second Amended Credit Agreement that is solely due to changes in the benchmark interest rate.
Derivatives Designated as Cash Flow Hedges
On August 5, 2016, we entered into a pay-fixed, receive-variable interest rate swap with a current notional amount of
$175.0 million
with Wells Fargo to fix the one-month LIBOR rate at
1.12%
. 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 interest rate swap is scheduled to expire on July 6, 2021.
At
December 31, 2018
and
2017
, our interest rate swap qualified as a cash flow hedge. The fair value of our interest rate swap at
December 31, 2018
was an asset of approximately
$5.8 million
, which was partially offset by approximately
$1.5 million
in deferred taxes. The fair value of our interest rate swaps at
December 31, 2017
was an asset of approximately
$5.7 million
, which was offset by approximately
$1.5 million
in deferred taxes.
Foreign Currency Risk
. We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. Our policy is to enter into foreign currency derivative contracts with maturities of up to
two years
. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and balances denominated in Euros, British Pounds, Chinese Renminbi, Mexican Pesos, Brazilian Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish Krona, Canadian Dollars, Danish Krone, Japanese Yen, Korea Won, and Singapore Dollars, among others. We do not use derivative financial instruments for trading or speculative purposes. We are not subject to any credit risk contingent features related to our derivative contracts, and counterparty risk is managed by allocating derivative contracts among several major financial institutions.
Derivatives Designated as Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion) or hedge components excluded from the assessment of effectiveness, are recognized in earnings during the current period. We entered into forward contracts on various foreign currencies to manage the risk associated with forecasted exchange rates which impact revenues, cost of sales, and operating expenses in various international markets. The objective of the hedges is to reduce the variability of cash flows associated with the forecasted purchase or sale of the associated foreign currencies.
We enter into approximately
150
cash flow foreign currency hedges every month. As of
December 31, 2018
, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with the following notional amounts (in thousands and in local currencies):
|
|
|
|
|
|
|
|
Currency
|
Symbol
|
Forward Notional Amount
|
|
|
Australian Dollar
|
AUD
|
3,000
|
|
|
Canadian Dollar
|
CAD
|
4,410
|
|
|
Swiss Franc
|
CHF
|
2,145
|
|
|
Chinese Renminbi
|
CNY
|
160,000
|
|
|
Danish Krone
|
DKK
|
17,225
|
|
|
Euro
|
EUR
|
20,310
|
|
|
British Pound
|
GBP
|
5,280
|
|
|
Japanese Yen
|
JPY
|
1,145,000
|
|
|
Korean Won
|
KRW
|
3,050,000
|
|
|
Mexican Peso
|
MXN
|
230,000
|
|
|
Swedish Krona
|
SEK
|
30,210
|
|
Derivatives Not Designated as Cash Flow Hedges
We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and we enter into foreign currency forward contracts to mitigate that exposure. We enter into approximately
20
foreign currency fair value hedges every month. As of
December 31, 2018
, we had entered into foreign currency forward contracts related to those balance sheet accounts with the following notional amounts (in thousands and in local currencies):
|
|
|
|
|
|
|
|
Currency
|
Symbol
|
Forward Notional Amount
|
|
|
Australian Dollar
|
AUD
|
11,400
|
|
|
Brazilian Real
|
BRL
|
9,000
|
|
|
Canadian Dollar
|
CAD
|
2,300
|
|
|
Swiss Franc
|
CHF
|
269
|
|
|
Chinese Renminbi
|
CNY
|
63,200
|
|
|
Danish Krone
|
DKK
|
3,237
|
|
|
Euro
|
EUR
|
5,927
|
|
|
British Pound
|
GBP
|
2,358
|
|
|
Hong Kong Dollar
|
HKD
|
11,000
|
|
|
Japanese Yen
|
JPY
|
265,000
|
|
|
Korean Won
|
KRW
|
5,500,000
|
|
|
Mexican Peso
|
MXN
|
23,000
|
|
|
Swedish Krona
|
SEK
|
9,627
|
|
|
Singapore Dollar
|
SGD
|
8,500
|
|
Balance Sheet Presentation of Derivatives.
As of
December 31, 2018
and
2017
, all derivatives, both those designated as hedging instruments and those that were not designated as hedging instruments, were recorded gross at fair value on our consolidated balance sheets. We are not subject to any master netting agreements.
The fair value of derivative instruments on a gross basis is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet Location
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Interest rates swaps
|
|
Other assets (long-term)
|
|
$
|
5,772
|
|
|
$
|
5,749
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other assets
|
|
613
|
|
|
363
|
|
|
Foreign currency forward contracts
|
|
Other assets (long-term)
|
|
151
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Accrued expenses
|
|
(711
|
)
|
|
(468
|
)
|
|
Foreign currency forward contracts
|
|
Other long-term obligations
|
|
(101
|
)
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other assets
|
|
$
|
814
|
|
|
$
|
223
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Accrued expenses
|
|
(796
|
)
|
|
(841
|
)
|
Income Statement Presentation of Derivatives
Derivatives Designated as Cash Flow Hedges
Derivative instruments designated as cash flow hedges had the following effects, before income taxes, on other comprehensive income ("OCI"), accumulated other comprehensive income ("AOCI") and net earnings in our consolidated statements of income, consolidated statements of comprehensive income and consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) recognized in OCI
|
|
|
Amount of Gain/(Loss) reclassified from AOCI
|
|
|
Year ended December 31,
|
|
|
Year ended December 31,
|
|
|
2018
|
2017
|
2016
|
|
|
2018
|
2017
|
2016
|
|
Derivative instrument
|
|
|
|
Location in statements of income
|
|
|
Interest rate swaps
|
$1,559
|
$
|
853
|
|
$
|
4,989
|
|
|
Interest Expense
|
$1,537
|
95
|
|
(718
|
)
|
|
Foreign currency forward contracts
|
539
|
|
491
|
|
(205
|
)
|
|
Revenue
|
136
|
|
(277
|
)
|
21
|
|
|
|
|
|
|
|
Cost of goods sold
|
361
|
|
625
|
|
(26
|
)
|
The net amount recognized in earnings during the years ended December 31, 2018, 2017 and 2016 due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness were not significant.
As of December 31, 2018, approximately
$27,000
, or
$20,000
after taxes, was expected to be reclassified from accumulated other comprehensive income to earnings in revenue and cost of sales over the succeeding twelve months. As of December 31, 2018, approximately $
2.5 million
, or
$1.9 million
after taxes, was expected to be reclassified from accumulated other comprehensive income to earnings in interest expense over the succeeding twelve months.
Derivatives Not Designated as Hedging Instruments
The following gains/(losses) from these derivative instruments were recognized in our consolidated statements of income for the years presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
2017
|
2016
|
|
Derivative Instrument
|
Location in statements of income
|
|
|
|
|
|
Foreign currency forward contracts
|
Other expense
|
|
$
|
4,147
|
|
$
|
(4,746
|
)
|
$
|
69
|
|
See Note 16 for more information about our derivatives.
10. COMMITMENTS AND CONTINGENCIES
We are obligated under non-terminable operating leases for manufacturing facilities, finished good distribution centers, office space, equipment and certain vehicles. Total rental expense on these operating leases for the years ended
December 31, 2018
,
2017
and
2016
, approximated
$14.5 million
,
$13.6 million
and
$11.4 million
, respectively.
The future minimum lease payments for operating leases as of
December 31, 2018
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
Years Ending
|
|
Operating
|
|
December 31
|
|
Leases
|
|
|
|
|
|
|
2019
|
|
$
|
13,421
|
|
|
2020
|
|
11,319
|
|
|
2021
|
|
9,995
|
|
|
2022
|
|
8,053
|
|
|
2023
|
|
6,953
|
|
|
Thereafter
|
|
52,754
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
102,495
|
|
Irish Government Development Agency Grants
. As of
December 31, 2018
, we had entered into several grant agreements with the Irish Government Development Agency. Grants related to the acquisition of property and equipment purchased in Ireland are amortized as a reduction to depreciation expense over lives corresponding to the depreciable lives of such property and equipment. The balance of deferred credits related to such grants as of
December 31, 2018
and
2017
, was approximately
$2.3 million
and
$2.4 million
, respectively. During the years ended
December 31, 2018
,
2017
and
2016
, approximately
$142,000
,
$147,000
and
$170,000
, respectively, of the deferred credit was amortized as a reduction of operating expenses.
We had committed to repay the Irish government for grants received if we cease production in Ireland prior to the expiration of the grant liability period. The grant liability period is usually between
five
and
eight years
from the last claim made on a grant. As of
December 31, 2018
, the grant liability period had expired and there was no remaining amount which the Irish government could reclaim if we were to cease production in Ireland. We have no plans to cease production in Ireland.
Royalties
. As of December 31, 2018, we had entered into a number of agreements to license or acquire rights to certain intellectual property which require us to make royalty payments during the term of the agreements generally based on a percentage of sales. Total royalty expense during the years ended
December 31, 2018
,
2017
and
2016
, approximated
$5.3 million
,
$4.4 million
and
$3.2 million
, respectively. Minimum contractual commitments under royalty agreements to be paid within twelve months of December 31, 2018 were not significant. See Note 3 for discussion of future royalty commitments related to acquisitions.
Litigation
. 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, contract disputes, and employment or other matters that are significant to our business. Based upon our review of currently available information, we do not believe that any such actions are likely to be, individually or in the aggregate, materially adverse to our business, financial condition, results of operations or liquidity.
In addition to the foregoing matters, in October 2016, we received a subpoena from the U.S. Department of Justice seeking information on certain of our marketing and promotional practices. We are in the process of responding to the subpoena, which we anticipate will continue during 2019. We have incurred, and anticipate that we will continue to incur, substantial costs in connection with the matter. The investigation is ongoing and at this stage we are unable to predict its scope, duration or outcome. Investigations such as this may result in the imposition of, among other things, significant damages, injunctions, fines or civil or criminal claims or penalties against our company or individuals.
In the event of unexpected further developments, it is possible that the ultimate resolution of any of the foregoing matters, or other similar matters, if resolved in a manner unfavorable to us, may be materially adverse to our business, financial condition, results of operations or liquidity. Legal costs for these matters, such as outside counsel fees and expenses, are charged to expense in the period incurred.
11. EARNINGS PER COMMON SHARE (EPS)
The computation of weighted average shares outstanding and the basic and diluted earnings per common share for the following periods consisted of the following (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
42,017
|
|
|
52,268
|
|
|
$
|
0.80
|
|
|
Effect of dilutive stock options and warrants
|
|
|
|
1,663
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
$
|
42,017
|
|
|
53,931
|
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
27,523
|
|
|
48,805
|
|
|
$
|
0.56
|
|
|
Effect of dilutive stock options and warrants
|
|
|
|
1,296
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
$
|
27,523
|
|
|
50,101
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
20,121
|
|
|
44,408
|
|
|
$
|
0.45
|
|
|
Effect of dilutive stock options and warrants
|
|
|
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
$
|
20,121
|
|
|
44,862
|
|
|
$
|
0.45
|
|
For the years ended
December 31, 2018
,
2017
and
2016
, approximately
396,000
,
381,000
and
727,000
, respectively, of stock options were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.
12. EMPLOYEE STOCK PURCHASE PLAN, STOCK OPTIONS AND WARRANTS.
Our stock-based compensation primarily consists of the following plans:
2018 Long-Term Incentive Plan
. In June 2018, our Board of Directors adopted and our shareholders approved, the Merit Medical Systems, Inc. 2018 Long-Term Incentive Plan, which was subsequently amended effective December 14, 2018 (the “2018 Incentive Plan”) to supplement the Merit Medical Systems, Inc. 2006 Long-Term Incentive plan (the "2006 Incentive Plan"). The 2018 Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock, stock units (including restricted stock units) and performance awards. Options may be granted to directors, officers, outside consultants and key employees and may be granted upon such terms and such conditions as the Compensation Committee of our Board of Directors determines. Options will typically vest on an annual basis over a
three
to
five
-year life with a contractual life of
7 years
. As of
December 31, 2018
, a total of
2,900,000
shares remained available to be issued under the 2018 Incentive Plan.
2006 Long-Term Incentive Plan
. In May 2006, our Board of Directors adopted and our shareholders approved, the 2006 Incentive Plan. As of December 31, 2018, the 2006 Incentive Plan was no longer being used for the granting of equity awards. However, as of December 31, 2018, options granted under this plan were still outstanding, vesting, and being exercised and will continue to be outstanding until the vesting periods end and the terms of the equity awards expire.
Employee Stock Purchase Plan
. We have a non-qualified Employee Stock Purchase Plan (“ESPP”), which has an expiration date of June 30, 2026. As of
December 31, 2018
, the total number of shares of common stock that remained available to be issued under our non-qualified plan was
105,207
shares. ESPP participants purchase shares on a quarterly basis at a price equal to
95%
of the market price of the common stock at the end of the applicable offering period.
Stock-Based Compensation Expense
. The stock-based compensation expense before income tax expense for the years ended
December 31, 2018
,
2017
and
2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cost of goods sold
|
$
|
870
|
|
|
$
|
632
|
|
|
$
|
472
|
|
|
Research and development
|
553
|
|
|
376
|
|
|
184
|
|
|
Selling, general, and administrative
|
4,694
|
|
|
3,067
|
|
|
1,850
|
|
|
Stock-based compensation expense before taxes
|
$
|
6,117
|
|
|
$
|
4,075
|
|
|
$
|
2,506
|
|
We recognize stock-based compensation expense (net of a forfeiture rate) for those awards which are expected to vest on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on our historical experience and expectations about future forfeitures. As of
December 31, 2018
, the total remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was approximately
$19.0 million
and is expected to be recognized over a weighted average period of
3.09
years.
In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted were estimated using the following assumptions for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Risk-free interest rate
|
2.63%
|
-
|
2.77%
|
|
1.77%
|
-
|
1.83%
|
|
1.15%
|
-
|
1.40%
|
|
Expected option life
|
5.0 years
|
|
5.0 years
|
|
5.0 years
|
|
Expected dividend yield
|
—%
|
|
—%
|
|
—%
|
|
Expected price volatility
|
34.06%
|
-
|
34.32%
|
|
33.81%
|
-
|
34.07%
|
|
34.28%
|
-
|
37.06%
|
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. We determine the expected term of the stock options using the historical exercise behavior of employees. The expected price volatility was determined using a weighted average of daily historical volatility of our stock price over the corresponding expected option life and implied volatility based on recent trends of the daily historical volatility. For options with a vesting period, compensation expense is recognized on a straight-line basis over the service period, which corresponds to the vesting period. During the years ended
December 31, 2018
,
2017
and
2016
, approximately
692,000
,
1.3 million
and
880,000
stock-based compensation grants were made, respectively, for a total fair value of approximately
$11.1 million
,
$12.4 million
and
$5.2 million
, net of estimated forfeitures, respectively.
The table below presents information related to stock option activity for the years ended
December 31, 2018
,
2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Total intrinsic value of stock options exercised
|
$
|
25,692
|
|
|
$
|
9,264
|
|
|
$
|
3,648
|
|
|
Cash received from stock option exercises
|
8,510
|
|
|
5,552
|
|
|
4,577
|
|
|
Excess tax benefit from the exercise of stock options
|
4,278
|
|
|
2,264
|
|
|
669
|
|
Changes in stock options for the year ended
December 31, 2018
, consisted of the following (shares and intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted Average
Exercise Price
|
|
Remaining Contractual
Term (in years)
|
|
Intrinsic
Value
|
|
Beginning balance
|
3,623
|
|
|
$
|
20.40
|
|
|
|
|
|
|
|
Granted
|
692
|
|
|
46.45
|
|
|
|
|
|
|
|
Exercised
|
(690
|
)
|
|
15.41
|
|
|
|
|
|
|
|
Forfeited/expired
|
(118
|
)
|
|
26.90
|
|
|
|
|
|
|
Outstanding at December 31
|
3,507
|
|
|
26.30
|
|
|
4.54
|
|
$
|
103,483
|
|
|
Exercisable
|
1,101
|
|
|
17.71
|
|
|
3.33
|
|
41,963
|
|
|
Ending vested and expected to vest
|
3,388
|
|
|
26.05
|
|
|
4.51
|
|
100,820
|
|
The weighted average grant-date fair value of options granted during the years ended
December 31, 2018
,
2017
and
2016
was
$16.05
,
$9.57
and
$5.94
, respectively.
The following table summarizes information about stock options outstanding at
December 31, 2018
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise
|
|
Number Outstanding
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Weighted Average Exercise Price
|
|
Number Exercisable
|
|
Weighted Average Exercise Price
|
|
$9.95
|
-
|
$16.05
|
|
982
|
|
3.02
|
|
$
|
13.99
|
|
|
585
|
|
$
|
13.16
|
|
|
$16.41
|
-
|
$22.00
|
|
683
|
|
3.73
|
|
$
|
18.93
|
|
|
319
|
|
$
|
18.76
|
|
|
$28.20
|
-
|
$28.20
|
|
961
|
|
5.27
|
|
$
|
28.20
|
|
|
159
|
|
$
|
28.20
|
|
|
$34.40
|
-
|
$50.50
|
|
881
|
|
6.04
|
|
$
|
43.65
|
|
|
38
|
|
$
|
34.74
|
|
|
$9.95
|
-
|
$50.50
|
|
3,507
|
|
|
|
|
|
|
1,101
|
|
|
|
13. SEGMENT REPORTING AND FOREIGN OPERATIONS
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 embolotherapeutic, cardiac rhythm management ("CRM"), electrophysiology ("EP"), critical care, Cianna Medical, interventional oncology and spine devices, and breast cancer localization and guidance. 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). See Note 2 for a detailed breakout of our sales by operating segment and product group, disaggregated between domestic and international sales.
During the years ended
December 31, 2018
,
2017
and
2016
, we had international sales of approximately
$386.3 million
,
$307.1 million
and
$233.5 million
, respectively, or approximately
44%
,
42%
and
39%
, respectively, of net sales, primarily in China, Japan, Germany, France, the United Kingdom and Russia. China represents our most significant international sales market with sales of approximately
$92.7 million
,
$73.4 million
, and
$59.9 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. International sales are attributed based on location of the customer receiving the product.
Our long-lived assets (which are comprised of our net property, plant and equipment) by geographic area at
December 31, 2018
,
2017
and
2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
United States
|
$
|
231,864
|
|
|
$
|
202,504
|
|
|
$
|
194,715
|
|
|
Ireland
|
45,283
|
|
|
45,671
|
|
|
47,337
|
|
|
Other foreign countries
|
54,305
|
|
|
44,645
|
|
|
34,521
|
|
|
Total
|
$
|
331,452
|
|
|
$
|
292,820
|
|
|
$
|
276,573
|
|
Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the years ended
December 31, 2018
,
2017
and
2016
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
Cardiovascular
|
$
|
849,477
|
|
|
$
|
700,613
|
|
|
$
|
580,151
|
|
|
Endoscopy
|
33,276
|
|
|
27,239
|
|
|
23,687
|
|
|
Total net sales
|
882,753
|
|
|
727,852
|
|
|
603,838
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Cardiovascular
|
321,461
|
|
|
281,095
|
|
|
218,659
|
|
|
Endoscopy
|
14,692
|
|
|
12,089
|
|
|
11,490
|
|
|
Total operating expenses
|
336,153
|
|
|
293,184
|
|
|
230,149
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
Cardiovascular
|
49,289
|
|
|
24,819
|
|
|
30,053
|
|
|
Endoscopy
|
9,328
|
|
|
8,250
|
|
|
4,823
|
|
|
Total operating income
|
58,617
|
|
|
33,069
|
|
|
34,876
|
|
|
|
|
|
|
|
|
|
Total other income (expense) - net
|
(9,098
|
)
|
|
2,812
|
|
|
(9,490
|
)
|
|
Income tax expense
|
7,502
|
|
|
8,358
|
|
|
5,265
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
42,017
|
|
|
$
|
27,523
|
|
|
$
|
20,121
|
|
Total assets by business segment at
December 31, 2018
,
2017
and
2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cardiovascular
|
$
|
1,588,970
|
|
|
$
|
1,103,806
|
|
|
$
|
932,927
|
|
|
Endoscopy
|
31,042
|
|
|
8,005
|
|
|
9,876
|
|
|
Total
|
$
|
1,620,012
|
|
|
$
|
1,111,811
|
|
|
$
|
942,803
|
|
Total depreciation and amortization by business segment for the years ended
December 31, 2018
,
2017
, and
2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cardiovascular
|
$
|
68,722
|
|
|
$
|
52,700
|
|
|
$
|
42,806
|
|
|
Endoscopy
|
824
|
|
|
882
|
|
|
949
|
|
|
Total
|
$
|
69,546
|
|
|
$
|
53,582
|
|
|
$
|
43,755
|
|
Total capital expenditures for property and equipment by business segment for the years ended
December 31, 2018
,
2017
and
2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cardiovascular
|
$
|
63,032
|
|
|
$
|
38,437
|
|
|
$
|
32,613
|
|
|
Endoscopy
|
292
|
|
|
186
|
|
|
224
|
|
|
Total
|
$
|
63,324
|
|
|
$
|
38,623
|
|
|
$
|
32,837
|
|
14. EMPLOYEE BENEFIT PLANS
We have a contributory 401(k) savings and profit sharing plan (the “Plan”) covering all U.S. full-time employees who are at least
18
years of age. The Plan has a
90
-day minimum service requirement. We may contribute, at our discretion, matching contributions based on the employees’ compensation. Contributions we made to the Plan for the years ended
December 31, 2018
,
2017
and
2016
, totaled approximately
$3.5 million
,
$2.4 million
and
$2.3 million
, respectively.
We also have defined contribution plans covering some of our foreign employees. We contribute between
2%
and
32%
of the employee’s compensation for certain foreign non-management employees, and between
2%
and
32%
of the employee’s compensation for certain foreign management employees. Contributions made to these plans for the years ended
December 31, 2018
,
2017
and
2016
, totaled approximately
$3.0 million
,
$2.3 million
and
$1.1 million
, respectively.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly data for the years ended
December 31, 2018
and
2017
consisted of the following (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
203,035
|
|
|
$
|
224,810
|
|
|
$
|
221,659
|
|
|
$
|
233,249
|
|
|
Gross profit
|
88,056
|
|
|
100,009
|
|
|
102,039
|
|
|
104,666
|
|
|
Income from operations
|
8,781
|
|
|
15,114
|
|
|
21,061
|
|
|
13,661
|
|
|
Income tax expense
|
1,090
|
|
|
624
|
|
|
2,766
|
|
|
3,022
|
|
|
Net income
|
5,269
|
|
|
10,941
|
|
|
16,619
|
|
|
9,188
|
|
|
Basic earnings per common share
|
0.10
|
|
|
0.22
|
|
|
0.31
|
|
|
0.17
|
|
|
Diluted earnings per common share
|
0.10
|
|
|
0.21
|
|
|
0.30
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
171,069
|
|
|
$
|
186,549
|
|
|
$
|
179,337
|
|
|
$
|
190,897
|
|
|
Gross profit
|
75,942
|
|
|
84,141
|
|
|
80,514
|
|
|
85,656
|
|
|
Income from operations
|
5,609
|
|
|
13,362
|
|
|
879
|
|
|
13,219
|
|
|
Income tax expense
|
690
|
|
|
1,830
|
|
|
1,364
|
|
|
4,474
|
|
|
Net income (loss)
|
14,803
|
|
|
9,483
|
|
|
(3,569
|
)
|
|
6,806
|
|
|
Basic earnings per common share
|
0.33
|
|
|
0.19
|
|
|
(0.07
|
)
|
|
0.14
|
|
|
Diluted earnings per common share
|
0.32
|
|
|
0.19
|
|
|
(0.07
|
)
|
|
0.13
|
|
Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly amounts may not equal the total computed for the year.
16. FAIR VALUE MEASUREMENTS
Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of
December 31, 2018
and
2017
, 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
|
|
December 31, 2018
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
$
|
5,772
|
|
|
$
|
—
|
|
|
$
|
5,772
|
|
|
$
|
—
|
|
|
Foreign currency contract assets, current and long-term (2)
|
|
$
|
1,578
|
|
|
$
|
—
|
|
|
$
|
1,578
|
|
|
$
|
—
|
|
|
Foreign currency contract liabilities, current and long-term (3)
|
|
$
|
(1,608
|
)
|
|
$
|
—
|
|
|
$
|
(1,608
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Total Fair
|
|
Quoted prices in
|
|
Significant other
|
|
Significant
|
|
|
|
Value at
|
|
active markets
|
|
observable inputs
|
|
unobservable inputs
|
|
Description
|
|
December 31, 2017
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
$
|
5,749
|
|
|
$
|
—
|
|
|
$
|
5,749
|
|
|
$
|
—
|
|
|
Foreign currency contract assets, current and long-term (2)
|
|
$
|
621
|
|
|
$
|
—
|
|
|
$
|
621
|
|
|
$
|
—
|
|
|
Foreign currency contract liabilities, current and long-term (3)
|
|
$
|
(1,391
|
)
|
|
$
|
—
|
|
|
$
|
(1,391
|
)
|
|
$
|
—
|
|
(1) The fair value of the interest rate contracts is determined using Level 2 fair value inputs and is recorded as other long-term assets or other long-term obligations in the consolidated balance sheets.
(2) The fair value of the foreign currency contract assets (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as prepaid and other assets or other long-term assets in the consolidated balance sheets.
(3) The fair value of the foreign currency contract liabilities (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as accrued expenses or other long-term obligations in the consolidated balance sheets.
Certain of our 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 3 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 years ended
December 31, 2018
and
2017
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Beginning balance
|
$
|
10,956
|
|
|
$
|
683
|
|
|
Contingent consideration liability recorded as the result of acquisitions (see Note 3)
|
72,209
|
|
|
10,400
|
|
|
Fair value adjustments recorded to income during the period
|
(698
|
)
|
|
(66
|
)
|
|
Contingent payments made
|
(231
|
)
|
|
(61
|
)
|
|
Ending balance
|
$
|
82,236
|
|
|
$
|
10,956
|
|
As of
December 31, 2018
, approximately
$58.5 million
was included in other long-term obligations and approximately
$23.8 million
was included in accrued expenses in our consolidated balance sheet. As of
December 31, 2017
, approximately
$10.7 million
was included in other long-term obligations and
$289,000
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 year ended December 31, 2016, we sold an equity 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 Level 3 inputs defined under authoritative guidance for fair value measurements, and we recorded a contingent receivable asset, which as of
December 31, 2018
and
2017
had a value of approximately
$607,000
and
$760,000
, respectively. We record any changes in fair value to operating expenses as part of our cardiovascular segment in our consolidated statements of income. For the year ended
December 31, 2018
, there were no significant changes to the fair value of the contingent receivable which impacted net income and we collected payments of approximately
$153,000
. During the year ended December 31, 2017, we recorded a gain on the contingent receivable of approximately
$232,000
. As of
December 31, 2018
, the receivable of approximately
$607,000
was included in other receivables as a current asset in our consolidated balance sheet. As of December 31,
2017
, approximately
$319,000
was included in other long-term assets and approximately
$441,000
was included in other receivables as a current asset in our consolidated balance sheet.
The recurring Level 3 measurement of our contingent consideration liability and contingent receivable includes the following significant unobservable inputs at
December 31, 2018
and
2017
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration asset or liability
|
|
Fair value at December 31, 2018
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Revenue-based royalty
|
|
$
|
10,661
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
9.9% - 25%
|
|
payments contingent liability
|
|
|
|
|
Projected year of payments
|
|
2018-2037
|
|
|
|
|
|
|
|
|
|
|
|
Supply chain milestone
|
|
$
|
13,593
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
5.3%
|
|
contingent liability
|
|
|
|
|
Probability of milestone payment
|
|
95%
|
|
|
|
|
|
|
|
Projected year of payments
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Revenue milestones
|
|
$
|
57,982
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
3.3% - 13%
|
|
contingent liability
|
|
|
|
|
|
Projected year of payments
|
|
2019-2023
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent receivable
|
|
$
|
607
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
10%
|
|
asset
|
|
|
|
|
|
Probability of milestone payment
|
|
67%
|
|
|
|
|
|
|
|
|
Projected year of payments
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration asset or liability
|
|
Fair value at December 31, 2017
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Revenue-based royalty
|
|
$
|
10,956
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
9.9% - 15%
|
|
payments contingent liability
|
|
|
|
|
Projected year of payments
|
|
2017-2037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent receivable
|
|
$
|
760
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
10%
|
|
asset
|
|
|
|
|
Probability of milestone payment
|
|
75%
|
|
|
|
|
|
|
|
Projected year of payments
|
|
2018-2019
|
The contingent consideration liability and contingent receivable are 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. 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. A decrease in the probability of any milestone payment may result in lower fair value measurements. Our determination of the fair value of the contingent consideration liability and contingent receivable could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We intend to record any such change in fair value to operating expenses in our consolidated statements of income.
During the years ended
December 31, 2018
,
2017
and
2016
, we had losses of approximately
$814,000
,
$988,000
and
$101,000
, respectively, related to the measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition (see Note 5).
The carrying amount of cash and cash equivalents, receivables, and trade payables approximate fair value because of the immediate, short-term maturity of these financial instruments. 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.
17. ISSUANCE OF COMMON STOCK
On July 30, 2018, we closed a public offering of
4,025,000
shares of common stock and received proceeds of approximately
$205.0 million
, which is net of approximately
$12.0 million
in underwriting discounts and commissions and approximately
$366,000
in other direct cost incurred in connection with this equity offering. The net proceeds from the offering were used primarily to repay outstanding borrowings (principally revolving credit loans) under our Second Amended Credit Agreement.
On March 28, 2017, we closed a public offering of
5,175,000
shares of common stock and received proceeds of approximately $
136.6 million
, which is net of approximately $
8.8 million
in underwriting discounts and commissions and approximately $
816,000
in other direct costs incurred in connection with this equity offering. The net proceeds from the offering were used primarily to repay outstanding borrowings (including our term loan and revolving credit loans) under our Second Amended Credit Agreement.
Supplementary Financial Data
The supplementary financial information required by Item 302 of Regulation S-K is contained in Note 15 to our consolidated financial statements set forth above.