Quarterly Report (10-q)

Date : 08/09/2019 @ 5:40PM
Source : Edgar (US Regulatory)
Stock : Merit Medical Systems Inc (MMSI)
Quote : 37.71  -2.21 (-5.54%) @ 11:00PM
After Hours
Last Trade
Last $ 37.00 ▼ -0.71 (-1.88%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  FORM  10-Q
            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED
June 30, 2019
 
 
 
 
OR
 
 
 
 
             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
         FOR THE TRANSITION PERIOD FROM TO .
 
Commission File Number
0-18592
 
 
A2017MMSILOGOAA20.JPG
MERIT MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Utah
 
87-0447695
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
  1600 West Merit Parkway , South Jordan , Utah 84095
(Address of principal executive offices, including zip code) 
Registrant’s telephone number, including area code:  ( 801 ) 253-1600
Title of each class
Trading Symbol
Name of exchange on which registered
Common Stock, no par
MMSI
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.   Yes   No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Common Stock
 
55,174,922
Title or class
 
Number of Shares
Outstanding at August 7, 2019
 



TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2019 AND DECEMBER 31, 2018
(In thousands)

 
June 30,
 
December 31,
 
2019
 
2018
ASSETS
(unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
35,182

 
$
67,359

Trade receivables — net of allowance for uncollectible accounts — 2019 — $2,656 and 2018 — $2,355
156,444

 
137,174

Other receivables
11,520

 
11,879

Inventories
202,994

 
197,536

Prepaid expenses and current other assets
12,305

 
11,326

Prepaid income taxes
3,625

 
3,627

Income tax refund receivables
4,876

 
933

 
 
 
 
Total current assets
426,946

 
429,834

 
 
 
 
PROPERTY AND EQUIPMENT:
 
 
 
Land and land improvements
27,651

 
26,801

Buildings
153,502

 
151,251

Manufacturing equipment
230,315

 
221,029

Furniture and fixtures
57,565

 
54,765

Leasehold improvements
34,518

 
33,678

Construction-in-progress
69,370

 
53,491

 
 
 
 
Total property and equipment
572,921

 
541,015

 
 
 
 
Less accumulated depreciation
(222,402
)
 
(209,563
)
 
 
 
 
Property and equipment — net
350,519

 
331,452

 
 
 
 
OTHER ASSETS:
 
 
 
Intangible assets:
 
 
 
Developed technology — net of accumulated amortization — 2019 — $125,447 and 2018 — $102,357
391,651

 
383,147

Other — net of accumulated amortization — 2019 — $56,289 and 2018 — $49,136
74,419

 
79,566

Goodwill
352,133

 
335,433

Deferred income tax assets
3,038

 
3,001

Right-of-use operating lease assets
79,309

 

Other assets
58,255

 
57,579

 
 
 
 
Total other assets
958,805

 
858,726

 
 
 
 
TOTAL
$
1,736,270

 
$
1,620,012

See condensed notes to consolidated financial statements.
 
 
(continued)


3


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2019 AND DECEMBER 31, 2018
(In thousands)

 
June 30,
 
December 31,
 
2019
 
2018
LIABILITIES AND STOCKHOLDERS’ EQUITY
(unaudited)
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
Trade payables
$
52,601

 
$
54,024

Accrued expenses
97,176

 
96,173

Current portion of long-term debt
15,000

 
22,000

Short-term operating lease liabilities
11,732

 

Income taxes payable
42

 
3,146

 
 
 
 
Total current liabilities
176,551

 
175,343

 
 
 
 
LONG-TERM DEBT
385,221

 
373,152

 
 
 
 
DEFERRED INCOME TAX LIABILITIES
60,932

 
56,363

 
 
 
 
LONG-TERM INCOME TAXES PAYABLE
392

 
392

 
 
 
 
LIABILITIES RELATED TO UNRECOGNIZED TAX BENEFITS
3,013

 
3,013

 
 
 
 
DEFERRED COMPENSATION PAYABLE
12,739

 
11,219

 
 
 
 
DEFERRED CREDITS
2,192

 
2,261

 
 
 
 
LONG-TERM OPERATING LEASE LIABILITIES
71,272

 

 
 
 
 
OTHER LONG-TERM OBLIGATIONS
73,283

 
65,494

 
 
 
 
Total liabilities
785,595

 
687,237

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Notes 5, 10, 11, 14 and 15)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock — 5,000 shares authorized as of June 30, 2019 and December 31, 2018; no shares issued

 

Common stock, no par value; shares authorized — 2019 and 2018 - 100,000; issued and outstanding as of June 30, 2019 - 55,079 and December 31, 2018 - 54,893
579,250

 
571,383

Retained earnings
376,572

 
363,425

Accumulated other comprehensive loss
(5,147
)
 
(2,033
)
 
 
 
 
Total stockholders’ equity
950,675

 
932,775

 
 
 
 
TOTAL
$
1,736,270

 
$
1,620,012

See condensed notes to consolidated financial statements.
 
 
(concluded)


4


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands, except per share amounts - unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
NET SALES
$
255,532

 
$
224,810

 
$
493,881

 
$
427,844

 
 
 
 
 
 
 
 
COST OF SALES
143,568

 
124,801

 
277,281

 
239,779

 
 
 
 
 
 
 
 
GROSS PROFIT
111,964

 
100,009

 
216,600

 
188,065

 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
Selling, general and administrative
79,977

 
69,095

 
158,247

 
134,007

Research and development
16,332

 
15,316

 
32,375

 
29,638

Intangible asset impairment charge
548

 

 
548

 

Contingent consideration expense
2,406

 
178

 
3,181

 
219

Acquired in-process research and development
500

 
306

 
525

 
306

 
 
 
 
 
 
 
 
Total operating expenses
99,763

 
84,895

 
194,876

 
164,170

 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
12,201

 
15,114

 
21,724

 
23,895

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest income
342

 
342

 
698

 
487

Interest expense
(3,115
)
 
(3,338
)
 
(5,879
)
 
(5,736
)
Other expense - net
(429
)
 
(553
)
 
(698
)
 
(721
)
 
 
 
 
 
 
 
 
Total other expense — net
(3,202
)
 
(3,549
)
 
(5,879
)

(5,970
)
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
8,999

 
11,565

 
15,845

 
17,925

 
 
 
 
 
 
 
 
INCOME TAX EXPENSE
2,140

 
624

 
2,791

 
1,715

 
 
 
 
 
 
 
 
NET INCOME
$
6,859

 
$
10,941

 
$
13,054

 
$
16,210

 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE:
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.22

 
$
0.24

 
$
0.32

 
 
 
 
 
 
 
 
Diluted
$
0.12

 
$
0.21

 
$
0.23

 
$
0.31

 
 
 
 
 
 
 
 
AVERAGE COMMON SHARES:
 
 
 
 
 
 
 
Basic
55,017

 
50,473

 
54,967

 
50,376

 
 
 
 
 
 
 
 
Diluted
56,555

 
52,154

 
56,523

 
52,033

 
 
 
 
 
 
 
 
See condensed notes to consolidated financial statements.
 
 
 
 
 
 
 

5


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands - unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
6,859

 
$
10,941

 
$
13,054

 
$
16,210

Other comprehensive income (loss):
 
 
 
 
 
 

Cash flow hedges
(1,154
)
 
881

 
(3,731
)
 
2,873

Income tax benefit (expense)
297

 
(226
)
 
960

 
(738
)
Foreign currency translation adjustment
274

 
(4,195
)
 
(341
)
 
(1,603
)
Income tax benefit (expense)
(16
)
 

 
(2
)
 

Total other comprehensive income (loss)
(599
)
 
(3,540
)
 
(3,114
)
 
532

Total comprehensive income
$
6,260

 
$
7,401

 
$
9,940

 
$
16,742

 
 
 
 
 
 
 
 
See condensed notes to consolidated financial statements.
 
 
 
 
 
 



6


MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands - unaudited)

 
 
 
 
 
 
 
 
 
Accumulated Other
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
Total
 
Shares
 
Amount
 
Earnings
 
Loss
BALANCE — January 1, 2019
$
932,775

 
54,893

 
$
571,383

 
$
363,425

 
$
(2,033
)
 
 
 
 
 
 
 
 
 
 
Net income
6,195

 
 
 
 
 
6,195

 
 
Reclassify deferred gain on sale-leaseback upon adoption of ASC 842
93

 
 
 
 
 
93

 
 
Other comprehensive loss
(2,515
)
 
 
 
 
 
 
 
(2,515
)
Stock-based compensation expense
1,766

 
 
 
1,766

 
 
 
 
Options exercised
1,365

 
95

 
1,365

 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
432

 
7

 
432

 
 
 
 
BALANCE — March 31, 2019
940,111

 
54,995

 
574,946

 
369,713

 
(4,548
)
Net income
6,859

 

 

 
6,859

 

Other comprehensive loss
(599
)
 

 

 

 
(599
)
Stock-based compensation expense
2,523

 

 
2,523

 

 

Options exercised
1,441

 
78

 
1,441

 

 

Issuance of common stock under Employee Stock Purchase Plan
340

 
6

 
340

 

 

BALANCE — June 30, 2019
$
950,675

 
55,079

 
$
579,250

 
$
376,572

 
$
(5,147
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
Total
 
Shares
 
Amount
 
Earnings
 
Income (Loss)
BALANCE — January 1, 2018
$
676,334

 
50,248

 
$
353,392

 
$
321,408

 
$
1,534

Net income
5,269

 
 
 
 
 
5,269

 
 
Other comprehensive income
4,072

 
 
 
 
 
 
 
4,072

Stock-based compensation expense
1,256

 
 
 
1,256

 
 
 
 
Options exercised
1,286

 
91

 
1,286

 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
294

 
7

 
294

 
 
 
 
BALANCE — March 31, 2018
688,511

 
50,346

 
356,228

 
326,677

 
5,606

Net income
10,941

 

 

 
10,941

 

Other comprehensive loss
(3,540
)
 

 

 

 
(3,540
)
Stock-based compensation expense
1,565

 

 
1,565

 

 

Options exercised
5,307

 
357

 
5,307

 

 

Issuance of common stock under Employee Stock Purchase Plan
220

 
4

 
220

 

 

Shares surrendered in exchange for payment of payroll tax
liabilities
(2,065
)
 
(40
)
 
(2,065
)
 
 
 
 
Shares surrendered in exchange for exercise of stock options
(1,685
)
 
(32
)
 
(1,685
)
 
 
 
 
BALANCE — June 30, 2018
$
699,254

 
50,635

 
$
359,570

 
$
337,618

 
$
2,066

 
 
 
 
 
 
 
 
 
 
See condensed notes to consolidated financial statements.
 
 
 
 
 
 
 
 


7


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands - unaudited)

 
Six Months Ended June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
13,054

 
$
16,210

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
45,010

 
32,779

Loss on sales and/or abandonment of property and equipment
803

 
371

Amortization of right-of-use operating lease assets
5,874

 

Write-off of patents and intangible assets
594

 
86

Acquired in-process research and development
525

 
306

Amortization of deferred credits
(70
)
 
(71
)
Amortization of long-term debt issuance costs
402

 
402

Stock-based compensation expense
4,289

 
2,821

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Trade receivables
(21,206
)
 
(27,947
)
Other receivables
427

 
966

Inventories
(5,138
)
 
(7,189
)
Prepaid expenses and other current assets
(1,052
)
 
(3,105
)
Prepaid income taxes
(45
)
 
(100
)
Income tax refund receivables
(3,980
)
 
(1,146
)
Other assets
(2,845
)
 
(751
)
Trade payables
1,338

 
15,767

Accrued expenses
1,925

 
7,467

Income taxes payable
(2,059
)
 
(2,076
)
Deferred compensation payable
1,518

 
438

Operating lease liabilities
(5,882
)
 

Other long-term obligations
2,208

 
(179
)
 
 
 
 
Total adjustments
22,636

 
18,839

 
 
 
 
Net cash provided by operating activities
35,690

 
35,049

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures for:
 
 
 
Property and equipment
(35,959
)
 
(31,559
)
Intangible assets
(1,607
)
 
(1,755
)
Proceeds from the sale of property and equipment
22

 
4

Issuance of note receivable

 
(10,500
)
Cash paid in acquisitions, net of cash acquired
(37,256
)
 
(118,654
)
 
 
 
 
Net cash used in investing activities
(74,800
)
 
(162,464
)
 
 
 
 
See condensed notes to consolidated financial statements.
 
 
(continued)


8


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands - unaudited)

 
Six Months Ended June 30,
 
2019
 
2018
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock
$
3,374

 
$
3,251

Proceeds from issuance of long-term debt
125,746

 
320,827

Payments on long-term debt
(120,746
)
 
(185,827
)
Contingent payments related to acquisitions
(611
)
 
(130
)
 
 
 
 
Net cash provided by financing activities
7,763

 
138,121

 
 
 
 
EFFECT OF EXCHANGE RATES ON CASH
(830
)
 
470

 
 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(32,177
)
 
11,176

 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
67,359

 
32,336

 
 
 
 
End of period
$
35,182

 
$
43,512

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid during the period for:
 
 
 
Interest (net of capitalized interest of $540 and $314, respectively)
$
5,794

 
$
5,714

 
 
 
 
Income taxes
$
8,856

 
$
5,141

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Property and equipment purchases in accounts payable
$
3,331

 
$
3,943

 
 
 
 
Acquisition purchases in accrued expenses and other long-term obligations
$
8,400

 
$

 
 
 
 
Merit common stock surrendered (0 and 32 shares, respectively) in exchange for exercise of stock options
$

 
$
1,684

 
 
 
 
Right-of-use operating lease assets obtained in exchange for operating lease liabilities
$
2,927

 
$

 
 
 
 
See condensed notes to consolidated financial statements.
 
 
(concluded)



9


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1. Basis of Presentation. The interim consolidated financial statements of Merit Medical Systems, Inc. ("Merit," "we" or "us") for the three and six-month periods ended June 30, 2019 and 2018 are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods and, consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America. In the opinion of our management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of June 30, 2019 and December 31, 2018 , and our results of operations and cash flows for the three and six-month periods ended June 30, 2019 and 2018 . The results of operations for the three and six-month periods ended June 30, 2019 and 2018 are not necessarily indicative of the results for a full-year period. These interim consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K (the "2018 Form 10-K") for the year ended December 31, 2018 , which was filed with the Securities and Exchange Commission (the "SEC") on March 1, 2019 .


2. Inventories. Inventories at June 30, 2019 and December 31, 2018 , consisted of the following (in thousands):

 
June 30,
 
December 31,
 
2019
 
2018
Finished goods
$
116,741

 
$
117,703

Work-in-process
23,419

 
14,380

Raw materials
62,834

 
65,453

 
 
 
 
Total Inventories
$
202,994

 
$
197,536


 

3. Stock-Based Compensation Expense.  The stock-based compensation expense before income tax expense for the three and six months ended June 30, 2019 and 2018 consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Cost of sales
$
355

 
$
232

 
$
607

 
$
416

Research and development
281

 
147

 
473

 
271

Selling, general and administrative
1,887

 
1,186

 
3,209

 
2,134

Stock-based compensation expense before taxes
$
2,523

 
$
1,565

 
$
4,289

 
$
2,821



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 June 30, 2019 , the total remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was approximately $32.4 million and was expected to be recognized over a weighted average period of 3.32 years.

During the three and six-month periods ended June 30, 2019 , we granted stock-based awards representing 190,000 and approximately 1.1 million shares of our common stock, respectively. During the three and six-month periods ended June 30, 2018 , we granted stock-based awards representing 200,000 and 692,002 shares of our common stock, respectively. We use the Black-Scholes methodology to value the stock-based compensation expense for options. In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted was estimated using the following assumptions for the periods indicated below:


10


 
Six Months Ended June 30,
 
2019
 
2018
Risk-free interest rate
1.90% - 2.56%
 
2.63% - 2.77%
Expected option term
3.0 - 5.0 years
 
5.0 years
Expected dividend yield
 
Expected price volatility
28.66% - 33.69%
 
34.06% - 34.32%


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 options. 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 term 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. 


4. Earnings Per Common Share (EPS). The computation of weighted average shares outstanding and the basic and diluted earnings per common share consisted of the following (in thousands, except per share amounts):
 
Three Months
 
Six Months
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
Period ended June 30, 2019:
 

 
 

 
 

 
 
 
 
 
 
Basic EPS
$
6,859

 
55,017

 
$
0.12

 
$
13,054

 
54,967

 
$
0.24

Effect of dilutive stock options
 

 
1,538

 
 

 
 
 
1,556

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
$
6,859

 
56,555

 
$
0.12

 
$
13,054

 
56,523

 
$
0.23

 
 
 
 
 
 
 
 
 
 
 
 
Stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive
 
 
1,185

 
 
 
 
 
1,081

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period ended June 30, 2018:
 

 
 

 
 

 
 
 
 
 
 
Basic EPS
$
10,941

 
50,473

 
$
0.22

 
$
16,210

 
50,376

 
$
0.32

Effect of dilutive stock options
 

 
1,681

 
 

 
 
 
1,657

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
$
10,941

 
52,154

 
$
0.21

 
$
16,210

 
52,033

 
$
0.31

 
 
 
 
 
 
 
 
 
 
 
 
Stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive
 
 
535

 
 
 
 
 
359

 
 




11


5. Acquisitions. On June 14, 2019, we consummated an acquisition transaction contemplated by a merger agreement to acquire Brightwater Medical, Inc. ("Brightwater"). The purchase consideration consisted of an upfront payment of $35 million plus an initial working capital adjustment of approximately $104,000 in cash, with potential earn-out payments of up to an additional $5 million for achievement of CE certification with respect to the Brightwater device and up to an additional $10 million for the achievement of sales milestones specified in the merger agreement. Brightwater developed and commercialized the ConvertX®, a single-use device used to replace a series of devices and procedures used to treat severe obstructions of the ureter. The ConvertX system is designed to be implanted once and converted from a nephroureteral catheter to a nephroureteral stent without requiring sedation or local anesthesia. Brightwater recently received FDA clearance for the ConvertX biliary stent system. We accounted for this acquisition as a business combination. 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 Brightwater acquisition, which were included in selling, general and administrative expenses, were not material. The purchase price was preliminarily allocated as follows (in thousands):
Assets Acquired
 
Trade receivables
$
94

Inventories
349

Property and equipment
409

Other long-term assets
30

Intangibles
 
Developed technology
31,680

Customer lists
83

Trademarks
250

Goodwill
16,950

Total assets acquired
49,845

 
 
Liabilities Assumed
 
Trade payables
(58
)
Accrued expenses
(261
)
Other long-term obligations
(1,522
)
Deferred income tax liabilities
(4,590
)
Total liabilities assumed
(6,431
)
 
 
Total net assets acquired
$
43,414



We are amortizing the developed technology intangible asset acquired from Brightwater over 13 years , the related trademarks over five years and the customer list on an accelerated basis over one year . The total weighted-average amortization period for these acquired intangible assets is approximately 12.9 years .

On March 28, 2019, we paid $2 million to acquire convertible participating preferred shares of Fluidx Medical Technology, LLC ("Fluidx"), owner of certain technology proposed to be used in the development of embolic and adhesive agents for use in arterial, venous, vascular graft and cardiovascular applications inside and outside the heart and related appendages. Our investment in Fluidx has been recorded as an equity investment accounted for at cost and reflected within other assets in our accompanying consolidated balance sheet because we are not able to exercise significant influence over the operations of Fluidx. Our total current investment in Fluidx represents an ownership of approximately 12.7% of the outstanding equity interests of Fluidx.

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. During the three and six-month periods ended June 30, 2019 , net sales of products acquired from Vascular Insights were approximately $1.7 million and $3.2 million , respectively. It is not practical

12


to separately report earnings related to the products acquired from Vascular Insights, as we cannot split out sales costs related solely to the products we acquired from Vascular Insights, principally because our sales representatives sell multiple products (including the products we acquired from Vascular Insights) in our cardiovascular business segment. Acquisition-related costs associated with the Vascular Insights acquisition, which were included in selling, general and administrative expenses during the year ended December 31, 2018, were not material. The purchase price was preliminarily allocated as follows (in thousands):
 
Inventories
$
1,353

 
Intangibles
 
 
Developed technology
32,750

 
Customer list
840

 
Trademarks
1,410

 
Goodwill
21,847

 
 
 
 
Total net assets acquired
$
58,200



We are amortizing the developed technology intangible asset acquired from Vascular Insights 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 a final working capital adjustment of approximately $1.2 million in cash, with potential earn-out payments of up to an additional $15 million for achievement of supply chain and scalability metrics and up to an additional $50 million for the achievement of sales milestones specified in the merger agreement. 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 three and six-month periods ended June 30, 2019 , net sales of Cianna Medical products were approximately $11.2 million and $24.1 million , respectively. 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 were included in selling, general and administrative expenses during the year ended December 31, 2018, were approximately $3.5 million . The following table summarizes the preliminary purchase price allocated to the net assets acquired from Cianna Medical (in thousands):

13


Assets Acquired
 
Trade receivables
$
6,151

Inventories
5,803

Prepaid expenses and other current 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
65,802

Total assets acquired
224,052

 
 
Liabilities Assumed
 
Trade payables
(1,497
)
Accrued expenses
(2,384
)
Other long-term liabilities
(1,527
)
Deferred income tax liabilities
(30,363
)
Total liabilities assumed
(35,771
)
 
 
Total net assets acquired
$
188,281



We are amortizing the developed technology intangible assets of Cianna Medical 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 .

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 during the year ended December 31, 2018, were not material. The purchase price was allocated as follows (in thousands):
Inventories
$
971

Intangibles
 
Developed technology
4,840

Customer list
120

Trademarks
400

Goodwill
938

 
 
Total net assets acquired
$
7,269



We are amortizing the developed technology intangible asset of DirectACCESS 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 February 14, 2018, we acquired certain divested assets from Becton, Dickinson and Company ("BD"), for an aggregate purchase price of $100.3 million . The assets acquired include the soft tissue core needle biopsy products sold under the tradenames of Achieve® Programmable Automatic Biopsy System, Temno® Biopsy System and Tru-Cut® Biopsy Needles, as well as the Aspira® Pleural Effusion Drainage Kits, and the Aspira® Peritoneal Drainage System. We accounted for this acquisition as a

14


business combination. During the three and six-month periods ended June 30, 2019 , our net sales of BD products were approximately $11.8 million and $23.4 million , respectively. 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 were included in selling, general and administrative expenses during the year ended December 31, 2018, were approximately $1.8 million . 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 net assets acquired
$
101,880



We are amortizing the developed technology intangible assets acquired from BD 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 eight years .

The following table summarizes our consolidated results of operations for the three and six-month periods ended June 30, 2018, as well as unaudited pro forma consolidated results of operations as though the acquisition of Cianna Medical and Vascular Insights had occurred on January 1, 2017 (in thousands, except per common share amounts):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2018
 
June 30, 2018
 
 
As Reported
 
Pro Forma
 
As Reported
 
Pro Forma
Net sales
 
$
224,810

 
$
238,272

 
$
427,844

 
$
452,451

Net income
 
10,941

 
6,842

 
16,210

 
5,016

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.22

 
$
0.14

 
$
0.32

 
$
0.10

Diluted
 
$
0.21

 
$
0.13

 
$
0.31

 
$
0.10


* The pro forma results for the three and six-month periods ended June 30, 2019 are not included in the table above because the
operating results for the Cianna Medical and Vascular Insights acquisitions were included in our consolidated statements of income for these periods.

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 and interest expense on long-term debt. 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, 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 Brightwater or DirectACCESS 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. The goodwill recognized from certain acquisitions is expected to be deductible for income tax purposes.



15


6. Revenue from Contracts with Customers.

In accordance with Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"), we recognize revenue when a customer obtains control of promised goods. The amount of revenue recognized reflects the consideration we expect to receive in exchange for these goods.

Disaggregation of Revenue

The disaggregation of revenue is based on type of product and geographical region. For descriptions of our product offerings and segments, see Note 13 in our 2018 Form 10-K.

The following tables present revenue from contracts with customers for the three and six-month periods ended June 30, 2019 and 2018 (in thousands):

 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
United States
 
International
 
Total
 
United States
 
International
 
Total
Cardiovascular
 
 
 
 
 
 
 
 
 
 
 
Stand-alone devices
$
55,906

 
$
47,616

 
$
103,522

 
$
50,941

 
$
41,555

 
$
92,496

Cianna Medical
11,230

 
7

 
11,237

 

 

 

Custom kits and procedure trays
23,124

 
11,219

 
34,343

 
23,667

 
10,325

 
33,992

Inflation devices
8,347

 
15,968

 
24,315

 
8,160

 
16,145

 
24,305

Catheters
20,696

 
24,648

 
45,344

 
16,704

 
22,670

 
39,374

Embolization devices
5,274

 
8,734

 
14,008

 
5,094

 
7,630

 
12,724

CRM/EP
11,536

 
2,361

 
13,897

 
11,758

 
1,738

 
13,496

Total
136,113

 
110,553

 
246,666

 
116,324

 
100,063

 
216,387

 
 
 
 
 
 
 
 
 
 
 
 
Endoscopy
 
 
 
 
 
 
 
 
 
 
 
Endoscopy devices
8,549

 
317

 
8,866

 
8,121

 
302

 
8,423

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
144,662

 
$
110,870

 
$
255,532

 
$
124,445

 
$
100,365

 
$
224,810


 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
United States
 
International
 
Total
 
United States
 
International
 
Total
Cardiovascular
 
 
 
 
 
 
 
 
 
 
 
Stand-alone devices
$
109,305

 
$
89,643

 
$
198,948

 
$
94,953

 
$
80,789

 
$
175,742

Cianna Medical
24,078

 
7

 
24,085

 

 

 

Custom kits and procedure trays
45,179

 
22,107

 
67,286

 
45,984

 
21,280

 
67,264

Inflation devices
16,320

 
30,013

 
46,333

 
15,828

 
30,896

 
46,724

Catheters
40,108

 
48,275

 
88,383

 
31,974

 
41,265

 
73,239

Embolization devices
9,980

 
15,855

 
25,835

 
10,126

 
15,184

 
25,310

CRM/EP
21,635

 
4,641

 
26,276

 
20,596

 
3,366

 
23,962

Total
266,605

 
210,541

 
477,146

 
219,461

 
192,780

 
412,241

 
 
 
 
 
 
 
 
 
 
 
 
Endoscopy
 
 
 
 
 
 
 
 
 
 
 
Endoscopy devices
16,117

 
618

 
16,735

 
15,040

 
563

 
15,603

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
282,722

 
$
211,159

 
$
493,881

 
$
234,501

 
$
193,343

 
$
427,844




7. Segment Reporting. We report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of cardiology and radiology medical device products which assist in diagnosing and treating coronary artery

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disease, peripheral vascular disease and other non-vascular diseases and includes embolotherapeutic, cardiac rhythm management ("CRM"), electrophysiology ("EP"), critical care, interventional oncology and spine devices, and our Cianna Medical product line. Our endoscopy segment focuses on the gastroenterology, pulmonary and thoracic surgery specialties, with a portfolio consisting primarily of stents, dilation balloons, certain inflation devices, guide wires, and other disposable products. We evaluate the performance of our operating segments based on net sales and operating income. 

Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three and six-month periods ended June 30, 2019 and 2018 , are as follows (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net Sales
 

 
 

 
 
 
 
Cardiovascular
$
246,666

 
$
216,387

 
$
477,146

 
$
412,241

Endoscopy
8,866

 
8,423

 
16,735

 
15,603

Total net sales
255,532

 
224,810

 
493,881

 
427,844

 
 
 
 
 
 
 
 
Operating Income
 
 
 
 
 
 
 
Cardiovascular
9,855

 
12,663

 
17,474

 
19,060

Endoscopy
2,346

 
2,451

 
4,250

 
4,835

Total operating income
12,201

 
15,114

 
21,724

 
23,895

 
 
 
 
 
 
 
 
Total other expense - net
(3,202
)
 
(3,549
)
 
(5,879
)
 
(5,970
)
 
 
 
 
 
 
 
 
Income tax expense
2,140

 
624

 
2,791

 
1,715

 
 
 
 
 
 
 
 
Net income
$
6,859

 
$
10,941

 
$
13,054

 
$
16,210




8. Recently Issued Financial Accounting Standards.

Recently Adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"), which requires lessees to recognize right-of-use ("ROU") assets and related lease liabilities on the balance sheet for all leases greater than one year in duration. We adopted ASC 842 on January 1, 2019 using 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 did not require any transition accounting for leases that expired before the earliest comparative period presented. The adoption of this standard resulted in the recording of ROU assets and lease liabilities for all of our lease agreements with original terms of greater than one year. The adoption of ASC 842 did not have a significant impact on our consolidated statements of operations or cash flows. See Note 14 for the required disclosures relating to our lease agreements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which simplifies the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718,  Compensation - Stock Compensation , to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard became effective for us on January 1, 2019. The adoption of this standard did not have a material impact on our consolidated financial statements.

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 U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act, which was enacted in December 2017 (the "2017 Tax Act"). ASU 2018-02

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became effective for us on January 1, 2019. The adoption of this standard did not 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 became effective for us on January 1, 2019. The adoption of this standard did not have a material impact on our consolidated financial statements.

Not Yet Adopted

In August 2018, the FASB issued ASU 2018-15,  Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. We are currently assessing the impact of this standard on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) , which removes, modifies and adds various disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among other changes. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently assessing the impact of this standard on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13,  Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018. We are currently assessing the impact of this standard on our consolidated financial statements.

We do not believe any other issued and not yet effective accounting standards will be relevant to our consolidated financial statements.


9. Income Taxes. Our overall effective tax rate for the three months ended June 30, 2019 and 2018 was 23.8%  and  5.4% , respectively, which resulted in a provision for income taxes of approximately  $2.1 million  and $0.6 million , respectively. Our overall effective tax rate for the six months ended June 30, 2019 and 2018 was 17.6%  and  9.6% , respectively, which resulted in a provision for income taxes of approximately $2.8 million and $1.7 million , respectively. The increase in the effective tax rate for both periods, when compared to the prior-year periods, was primarily due to a lower discrete tax benefit for share-based payment awards and a discrete expense related to the fair value adjustment of the contingent liability of a recent equity acquisition, Cianna Medical.


10. Revolving Credit Facility and Long-Term Debt. Principal balances outstanding under our long-term debt obligations as of June 30, 2019 and December 31, 2018 , consisted of the following (in thousands):

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June 30, 2019