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 nine-month periods ended
September 30, 2017
and
2016
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 ("U.S. GAAP"). 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
September 30, 2017
and
December 31, 2016
, and our results of operations and cash flows for the three and nine-month periods ended
September 30, 2017
and
2016
. The results of operations for the three and nine-month periods ended
September 30, 2017
and
2016
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 "2016 Form 10-K") for the year ended
December 31, 2016
, which was filed with the Securities and Exchange Commission (the "SEC") on March 1, 2017.
2. Inventories.
Inventories at
September 30, 2017
and
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2017
|
|
2016
|
Finished goods
|
$
|
80,708
|
|
|
$
|
63,852
|
|
Work-in-process
|
18,162
|
|
|
11,008
|
|
Raw materials
|
46,728
|
|
|
45,835
|
|
|
|
|
|
Total
|
$
|
145,598
|
|
|
$
|
120,695
|
|
3. Stock-Based Compensation
. Stock-based compensation expense before income tax expense for the three and nine-month periods ended
September 30, 2017
and
2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of goods sold
|
$
|
189
|
|
|
$
|
105
|
|
|
$
|
453
|
|
|
$
|
369
|
|
Research and development
|
110
|
|
|
51
|
|
|
262
|
|
|
147
|
|
Selling, general, and administrative
|
893
|
|
|
347
|
|
|
2,168
|
|
|
1,397
|
|
Stock-based compensation expense before taxes
|
$
|
1,192
|
|
|
$
|
503
|
|
|
$
|
2,883
|
|
|
$
|
1,913
|
|
As of
September 30, 2017
, the total remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was approximately
$16.3 million
and is expected to be recognized over a weighted average period of
3.66
years.
During the three and nine-month periods ended
September 30, 2017
, we granted stock-based awards representing
20,000
and approximately
1.3 million
shares of our common stock, respectively. During the three and nine-month periods ended
September 30, 2016
, we granted stock-based awards representing
21,000
and
805,375
shares of our common stock, respectively. We use the Black-Scholes methodology to value the stock-based compensation expense for options. In applying the Black-Scholes methodology to the options granted during the nine-month periods ended
September 30, 2017
and
2016
, the fair value of our stock-based awards granted was estimated using the following assumptions for the periods indicated below:
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
Risk-free interest rate
|
1.77% - 1.83%
|
|
1.15% - 1.40%
|
Expected option life
|
5.0 years
|
|
5.0 years
|
Expected dividend yield
|
—%
|
|
—%
|
Expected price volatility
|
33.81% - 34.07%
|
|
36.30% - 37.06%
|
For the purpose of the foregoing analysis, the average risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock option. 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.
4. Earnings Per Common Share (EPS).
The computation of weighted average shares outstanding and the basic and diluted earnings per common share for the following periods consisted of the following (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
Period ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
(3,569
|
)
|
|
50,150
|
|
|
$
|
(0.07
|
)
|
|
$
|
20,717
|
|
|
48,332
|
|
|
$
|
0.43
|
|
Effect of dilutive stock options and warrants
|
|
|
|
1,449
|
|
|
|
|
|
|
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
$
|
(3,569
|
)
|
|
51,599
|
|
|
$
|
(0.07
|
)
|
|
$
|
20,717
|
|
|
49,555
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive
|
|
|
200
|
|
|
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
973
|
|
|
44,447
|
|
|
$
|
0.02
|
|
|
$
|
12,615
|
|
|
44,346
|
|
|
$
|
0.28
|
|
Effect of dilutive stock options and warrants
|
|
|
|
553
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
$
|
973
|
|
|
45,000
|
|
|
$
|
0.02
|
|
|
$
|
12,615
|
|
|
44,763
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive
|
|
|
408
|
|
|
|
|
|
|
864
|
|
|
|
5. Acquisitions.
On September 1, 2017, we entered into a share purchase agreement with IntelliMedical Technologies Pty Ltd
("IntelliMedical") to acquire the intellectual property rights associated with a steerable guidewire system. We made an initial payment of approximately
$11.9 million
in September 2017, and we are obligated to pay up to an additional
$15 million
Australian dollars if certain milestones set forth in the agreement are reached. 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 three and nine-month periods ended September 30, 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 entered into intellectual property and asset purchase agreements with Laurane Medical S.A.S. ("Laurane") and its shareholders to acquire inventories and the intellectual property rights associated with Laurane's 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 the 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):
|
|
|
|
|
|
|
|
Preliminary Allocation
|
|
Net Assets Acquired
|
|
|
Inventories
|
$
|
579
|
|
|
Intangibles
|
|
|
Developed technology
|
14,920
|
|
|
Customer list
|
120
|
|
|
Goodwill
|
6,381
|
|
|
|
|
|
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 entered into an asset purchase agreement with Osseon LLC (“Osseon”) to acquire 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 business 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 three and nine-month periods ended September 30, 2017, our net sales of Osseon products were approximately
$442,000
. 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 preliminary purchase price allocated to the net assets acquired (in thousands):
|
|
|
|
|
|
|
|
Preliminary Allocation
|
|
Net Assets Acquired
|
|
|
Inventories
|
$
|
1,023
|
|
|
Property and equipment
|
58
|
|
|
Intangibles
|
|
|
Developed technology
|
5,400
|
|
|
Customer list
|
200
|
|
|
Goodwill
|
159
|
|
|
|
|
|
Total net assets acquired
|
$
|
6,840
|
|
With respect to the Osseon assets, we are amortizing developed technology 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 chest tube insertion tool. As of September 30, 2017, 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 intend to amortize over
15 years
.
On June 16, 2017, we entered into an asset purchase agreement with Lazarus Medical Technologies, LLC to acquire the patent rights and other intellectual property related to the Repositionable Chest Tube
TM
and related devices. As of September 30, 2017, we had paid
$570,000
in connection with this agreement. We are also obligated to pay an additional
$750,000
if certain milestones set forth in the purchase agreement are reached. We are also required to pay royalties equal to
6.0%
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 intend to amortize 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 entered into a business purchase agreement, termination agreement, distribution agreement and a supply agreement with Sugan Co, Ltd. ("Sugan"), a Japanese medical device distributor. Pursuant to these agreements, we terminated our former distributor agreement with Sugan and acquired the customer list Sugan used in the distribution of our products in Japan. The consideration attributed to the customer list was approximately
$1.1 million
, which is payable on or before December 31, 2017. The purchase price is recorded as a customer list intangible asset and the amount due to Sugan is recorded in accrued expenses within the accompanying consolidated balance sheets. We intend to amortize 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 preliminary purchase price allocated to the net assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary Allocation
|
|
Adjustments
(1)
|
|
Revised Preliminary Allocation
|
|
Net Assets Acquired
|
|
|
|
|
|
|
Intangibles
|
|
|
|
|
|
|
Developed technology
|
$
|
7,800
|
|
|
$
|
—
|
|
|
$
|
7,800
|
|
|
In-process technology
|
850
|
|
|
250
|
|
|
1,100
|
|
|
Goodwill
|
4,323
|
|
|
(153
|
)
|
|
4,170
|
|
|
Deferred tax liabilities
|
(3,073
|
)
|
|
(97
|
)
|
|
(3,170
|
)
|
|
|
|
|
|
|
|
|
Total net assets acquired
|
$
|
9,900
|
|
|
$
|
—
|
|
|
$
|
9,900
|
|
|
|
|
|
|
|
|
(1)
|
Amounts represent adjustments to the preliminary purchase price allocation first presented in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 resulting from our ongoing activities, including reassessment of the assets acquired and liabilities assumed, with respect to finalizing our purchase price allocation for this acquisition.
|
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 signed a purchase agreement with Argon Medical Devices, Inc. ("Argon") to acquire 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 United States. 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 three and nine-month periods ended
September 30, 2017
, which are included in selling, general and administrative expenses in the accompanying consolidated statements of income, were approximately
$90,000
and
$2.5 million
, respectively. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the three and nine-month periods ended
September 30, 2017
, our net sales of Argon products were approximately
$11.0 million
and
$30.0 million
, respectively. It is not practical to separately report the earnings related to the Argon 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 initial purchase price allocation for the Argon 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 preliminary purchase price allocated to the net tangible and intangible assets acquired and liabilities assumed (in thousands), adjusted as of September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary Allocation
|
|
Adjustments
(2)
|
|
Revised Preliminary Allocation
|
|
Assets Acquired
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,436
|
|
|
$
|
—
|
|
|
$
|
1,436
|
|
|
Trade receivables
|
8,351
|
|
|
—
|
|
|
8,351
|
|
|
Inventories
|
12,217
|
|
|
(995
|
)
|
|
11,222
|
|
|
Prepaid expenses and other assets
|
1,275
|
|
|
—
|
|
|
1,275
|
|
|
Property and equipment
|
2,667
|
|
|
(348
|
)
|
|
2,319
|
|
|
Deferred tax assets
|
184
|
|
|
19
|
|
|
203
|
|
|
Intangibles
|
|
|
|
|
|
|
Developed technology
|
2,600
|
|
|
(400
|
)
|
|
2,200
|
|
|
Customer lists
|
1,300
|
|
|
200
|
|
|
1,500
|
|
|
Trademarks
|
1,500
|
|
|
(600
|
)
|
|
900
|
|
|
Total assets acquired
|
31,530
|
|
|
(2,124
|
)
|
|
29,406
|
|
|
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
|
|
Trade payables
|
(2,306
|
)
|
|
(109
|
)
|
|
(2,415
|
)
|
|
Accrued expenses
|
(5,083
|
)
|
|
—
|
|
|
(5,083
|
)
|
|
Income taxes payable
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
Deferred income tax liabilities
|
(999
|
)
|
|
(11
|
)
|
|
(1,010
|
)
|
|
Total liabilities assumed
|
(8,390
|
)
|
|
(120
|
)
|
|
(8,510
|
)
|
|
|
|
|
|
|
|
|
Total net assets acquired
|
23,140
|
|
|
(2,244
|
)
|
|
20,896
|
|
|
Gain on bargain purchase
(1)
|
(12,243
|
)
|
|
1,447
|
|
|
(10,796
|
)
|
|
Total purchase price
|
$
|
10,897
|
|
|
$
|
(797
|
)
|
|
$
|
10,100
|
|
|
|
|
|
|
|
|
(1)
|
The total fair value of the net assets acquired from Argon exceeded the purchase price, resulting in a gain on bargain purchase which was recorded within other income (expense) in our consolidated statements of income, and includes a negative adjustment of $778,000 in the three-month period ended September 30, 2017 (in addition to the negative adjustment of $669,000 in the three-month period ended June 30, 2017). We believe the reason for the provisional gain on bargain purchase was a result of the divestiture of a non-strategic, slow-growth critical care business for Argon. It is our understanding that the divestiture allows Argon to focus on its higher growth interventional portfolio.
|
(2)
|
Amounts represent adjustments to the preliminary purchase price allocation first presented in our March 31, 2017 Form 10-Q resulting from our ongoing activities, including reassessment of the assets acquired and liabilities assumed, with respect to finalizing our purchase price allocation for this acquisition.
|
With respect to the Argon 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
.
Given the timing of this acquisition, which closed during the first quarter of 2017, as well as the complexity of the acquisition, the entire purchase price allocation disclosed herein (as well as the gain on bargain purchase) is considered provisional at this time and is subject to adjustment to reflect information obtained about factors and circumstances that existed as of the acquisition date that if known would have affected the measurement of the amounts recognized as of that date. We continue to assess whether we have fully identified all the assets acquired and the liabilities assumed. Consequently, the measurement period remains open.
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 three and nine-month periods ended
September 30, 2017
, which are included in selling, general and administrative expenses in the accompanying consolidated statements of income, were approximately
$31,000
and
$482,000
, respectively. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the three and nine-month periods ended
September 30, 2017
, our net sales of the products acquired from Catheter Connections were approximately
$2.7 million
and
$7.0 million
, respectively. It is not practical to separately report the earnings related to the products acquired from Catheter Connections, as we cannot split out sales costs related solely to those products, principally because our sales representatives sell multiple products (including the DualCap System) in the cardiovascular business segment. The purchase price was preliminarily allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary Allocation
|
|
Adjustments
(1)
|
|
Revised Preliminary Allocation
|
|
Assets Acquired
|
|
|
|
|
|
|
Trade receivables
|
$
|
952
|
|
|
$
|
7
|
|
|
$
|
959
|
|
|
Inventories
|
2,244
|
|
|
(87
|
)
|
|
2,157
|
|
|
Prepaid expenses and other assets
|
181
|
|
|
(96
|
)
|
|
85
|
|
|
Property and equipment
|
1,472
|
|
|
—
|
|
|
1,472
|
|
|
Intangibles
|
|
|
|
|
|
|
Developed technology
|
22,900
|
|
|
(1,800
|
)
|
|
21,100
|
|
|
Customer lists
|
100
|
|
|
600
|
|
|
700
|
|
|
Trademarks
|
2,900
|
|
|
—
|
|
|
2,900
|
|
|
Goodwill
|
7,612
|
|
|
1,376
|
|
|
8,988
|
|
|
Total assets acquired
|
38,361
|
|
|
—
|
|
|
38,361
|
|
|
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
|
|
Trade payables
|
(338
|
)
|
|
—
|
|
|
(338
|
)
|
|
Accrued expenses
|
(23
|
)
|
|
—
|
|
|
(23
|
)
|
|
Total liabilities assumed
|
(361
|
)
|
|
—
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
Net assets acquired
|
$
|
38,000
|
|
|
$
|
—
|
|
|
$
|
38,000
|
|
|
|
|
|
|
|
|
(1)
|
Amounts represent adjustments to the preliminary purchase price first presented in our Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2017, resulting from our ongoing activities with respect to finalizing our purchase price allocation for this acquisition. The larger adjustments primarily relate to the valuation of the acquired intangible assets.
|
We are amortizing the Catheter Connections developed technology asset over
12
years, the related trademarks over
10
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 July 6, 2016, we acquired all 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 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
. The measurement period for this acquisition is closed. 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 material impact to reported earnings in connection with these measurement period adjustments.
Acquisition-related costs associated with the DFINE acquisition during the year ended December 31, 2016, which were included in selling, general and administrative expenses in the consolidated statements of income included in the 2016 Form 10-K, 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 year ended December 31, 2016, our net sales of DFINE products were approximately
$13.5 million
. It is not practical to separately report the earnings related to the DFINE acquisition, as we cannot split out sales costs related solely to the DFINE products, principally because our sales representatives sell 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
|
|
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 were included in selling, general and administrative expenses in the consolidated statements of income included in the 2016 Form 10-K, were not material. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the year ended December 31, 2016, our net sales of the products acquired from CryoLife were approximately
$7.1 million
. It is not practical to separately report the earnings related to the products acquired from CryoLife, as we cannot split out sales costs related solely to those products, principally because our sales representatives sell multiple products (including the HeRO Graft device) in the cardiovascular business segment.
The following table summarizes our consolidated results of operations for the three-month period ended September 30, 2016 and the nine-month periods ended
September 30, 2017
and 2016, as well as unaudited pro forma consolidated results of operations as though the DFINE acquisition had occurred on January 1, 2015 and the acquisition of the Argon critical care division had occurred on January 1, 2016 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
|
As Reported
|
|
Pro Forma
|
|
As Reported
|
|
Pro Forma
|
|
As Reported
|
|
Pro Forma
|
Net Sales
|
$
|
156,975
|
|
|
$
|
167,321
|
|
|
$
|
536,955
|
|
|
$
|
539,715
|
|
|
$
|
446,123
|
|
|
$
|
494,589
|
|
Net Income
|
973
|
|
|
1,174
|
|
|
20,717
|
|
|
10,047
|
|
|
12,615
|
|
|
16,454
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.43
|
|
|
$
|
0.21
|
|
|
$
|
0.28
|
|
|
$
|
0.37
|
|
Diluted
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.42
|
|
|
$
|
0.20
|
|
|
$
|
0.28
|
|
|
$
|
0.37
|
|
* The pro forma results for the three-month period ended September 30, 2017 are not included in the table above because the
operating and financial results for the DFINE and Argon critical care division acquisitions were included in our consolidated statements of income for this period.
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, 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 DFINE acquisition had occurred on January 1, 2015 and the acquisition of the Argon critical care division had occurred on January 1, 2016, or results that may be obtained in any future period. The pro forma consolidated results of operations do not include the Laurane, Osseon, VAT, Catheter Connections or HeRO Graft acquisitions as we do not deem the pro forma effect of these transactions to be material.
6. Segment Reporting.
We report our operations in
two
operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of cardiology and radiology medical device products which assist in diagnosing and treating coronary artery disease, peripheral vascular disease and other non-vascular diseases and includes embolotherapeutic, cardiac rhythm management ("CRM"), electrophysiology ("EP"), and interventional oncology and spine devices. Our endoscopy segment consists of gastroenterology and pulmonology medical device products which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors. We evaluate the performance of our operating segments based on operating income.
Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three and nine-month periods ended
September 30, 2017
and
2016
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net Sales
(1)
|
|
|
|
|
|
|
|
|
|
Cardiovascular
|
$
|
172,723
|
|
|
$
|
150,503
|
|
|
$
|
517,140
|
|
|
$
|
428,571
|
|
Endoscopy
|
6,614
|
|
|
6,472
|
|
|
19,815
|
|
|
17,552
|
|
Total net sales
|
179,337
|
|
|
156,975
|
|
|
536,955
|
|
|
446,123
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
(1)
|
|
|
|
|
|
|
|
|
|
Cardiovascular
|
(1,207
|
)
|
|
1,858
|
|
|
14,239
|
|
|
19,385
|
|
Endoscopy
|
2,086
|
|
|
1,129
|
|
|
5,611
|
|
|
2,889
|
|
Total operating income
|
879
|
|
|
2,987
|
|
|
19,850
|
|
|
22,274
|
|
(1) Net sales and operating income have been adjusted from earlier reported year-to-date amounts for 2017 and 2016 to reflect changes in product classifications between our operating segments, which were made to be consistent with updates in the management of our product portfolios in the third quarter of 2017.
7. New Financial Accounting Standards
.
Recently Adopted
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under these amendments, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. We adopted ASU 2017-04 effective January 1, 2017 on a prospective basis, and it did not have a material impact on our consolidated financial statements for the nine months ended September 30, 2017.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which provides guidance to entities to assist with evaluating when a set of transferred assets and activities is a business and provides a screen to determine when a set is not a business. Under the new guidance, when substantially all the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or group of similar assets, the assets acquired would not represent a business. Also, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. We adopted ASU 2017-01 effective January 1, 2017 on a prospective basis. The implementation of ASU 2017-01 did not have a material impact on our consolidated financial statements for the nine months ended September 30, 2017.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which requires companies to record excess tax benefits and deficiencies in income rather than the current requirement to record them through equity. ASU 2016-09 also allows companies the option to recognize forfeitures of share-based awards when they occur rather than the previous requirement to make an estimate upon the grant of the awards. We adopted ASU 2016-09 effective January 1, 2017 on a prospective basis and, as such, no prior periods were adjusted. In accordance with the new standard and prospectively since the date we adopted ASU 2016-09, excess tax benefits from stock-based compensation are reported as an income tax benefit in our consolidated statements of income (see Note 8).
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, which requires all deferred tax assets and deferred tax liabilities to be presented as noncurrent within a classified balance sheet. We adopted ASU 2015-17 effective January 1, 2017 on a prospective basis and did not reclassify presentation of prior year balances. The adoption of this standard did not have a material impact on our consolidated financial statements for the nine months ended September 30, 2017.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
. ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory measured using last-in, first-out or the retail inventory method are excluded from the scope of ASU 2015-11, which is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The implementation of ASU 2015-11 did not have a material impact on our consolidated financial statements for the nine months ended September 30, 2017.
Not Yet Adopted
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 are currently evaluating the anticipated impact of adopting ASU 2017-12 on our consolidated financial statements.
In October 2016, the FASB issued 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 will be effective for us on January 1, 2018. We do not presently anticipate that the adoption of ASU 2016-16 will have a material impact on our consolidated financial statements.
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 will be effective for us on January 1, 2018 with early adoption permitted. We do not presently anticipate that the adoption of ASU 2016-15 will have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which eliminates the current tests for lease classification under U.S. GAAP and requires lessees to recognize the right-of-use assets and related lease liabilities on the balance sheet for all leases greater than one year in duration. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU 2016-02 is permitted. ASU 2016-02 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. Lessees and lessors may not apply a full retrospective transition approach. We are assessing the impact that ASU 2016-02 is anticipated to have on our consolidated financial statements. We currently expect that most of our operating lease commitments will be subject to the new standard and recognized as lease liabilities and right-of-use assets upon our adoption of ASU 2016-02.
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. ASU 2016-01 will be effective for us on January 1, 2018. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. Upon adoption of ASU 2016-01, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. We do not presently anticipate that the adoption of ASU 2016-01 will have a material impact on our financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, to update the financial reporting requirements for revenue recognition. Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. This guidance is effective for us beginning on January 1, 2018, and entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. We expect to adopt this standard using the modified retrospective approach beginning in 2018.
We have substantially completed our impact assessment of implementing this guidance. We have evaluated each of the five steps in Topic 606, which are as follows: 1) Identify the contract with the customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue when (or as) performance obligations are satisfied. Our preliminary conclusion is that we expect to identify similar performance obligations under ASC Topic 606 as compared with deliverables and separate units of account previously identified.
The Company does not expect revenue to be affected materially in any period due to the adoption of ASC Topic 606 because the Company believes it would have sufficient information to conclude that the transaction price was fixed or determinable under current GAAP and would have recorded revenue upon shipment or delivery under either ASC Topic 605 or ASC Topic 606. Additionally, the Company does not expect cost of sales (product) to be affected materially in any period due to the adoption of Topic 606.
We continue to evaluate the impact that this new standard will have on our Original Equipment Manufacturing arrangements. There are also certain considerations related to accounting policies, business processes and internal control over financial reporting that are associated with implementing Topic 606. We are currently evaluating our policies, processes, and control framework for revenue recognition and identifying any changes that may need to be made in response to the new guidance. Disclosure requirements under the new guidance in Topic 606 have been significantly expanded in comparison to the disclosure requirements under the current guidance, including disclosures related to disaggregation of revenue into appropriate categories, performance obligations, the judgments made in revenue recognition determinations, adjustments to revenue which relate to activities from previous quarters or years, any significant reversals of revenue, and costs to obtain or fulfill contracts. Designing and implementing the appropriate controls over gathering and reporting the information required under Topic 606 is currently in process, and we anticipate it will be completed prior to January 1, 2018.
8. Income Taxes.
Our provision for income taxes for the three months ended September 30, 2017 was a tax expense of approximately
$1.4 million
compared to a tax benefit of
$978,000
for the corresponding period of 2016. The increase in the income tax expense for the third quarter of 2017 compared to the third quarter of 2016 was primarily due to the discrete tax impact of the in-process research and development charge attributable to the IntelliMedical acquisition completed in the third quarter of 2017, which was not deductible for tax purposes.
Our provision for income taxes for the nine months ended September 30, 2017 and 2016 was a tax expense of approximately
$3.9 million
and approximately
$3.1 million
, respectively, which resulted in an effective tax rate of
15.8%
and
20.0%
, respectively. The decrease in the effective income tax rate for the nine-month period ended September 30, 2017, when compared to the corresponding period of 2016, was primarily related to a discrete tax benefit related to share-based payment awards due to application of ASC Update 2016-09 and a nontaxable gain on the bargain purchase relating to our acquisition of the critical care division of Argon.
9. Revolving Credit Facility and Long-term Debt.
Our outstanding debt obligations as of
September 30, 2017
and
December 31, 2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
2016 Term loan
|
$
|
87,500
|
|
|
$
|
145,000
|
|
2016 Revolving credit loans
|
184,000
|
|
|
180,000
|
|
2017 Debt facility
|
6,962
|
|
|
—
|
|
Less debt issuance costs
|
(522
|
)
|
|
(627
|
)
|
Total debt
|
277,940
|
|
|
324,373
|
|
Less current portion
|
16,962
|
|
|
10,000
|
|
Long-term portion
|
$
|
260,978
|
|
|
$
|
314,373
|
|
2017 Debt Facility
On February 23, 2017, we entered into a loan agreement with HSBC Bank USA, National Association ("HSBC Bank") whereby HSBC Bank agreed to provide us with a loan in the amount of approximately
$7.0 million
. The loan matures on February 1, 2018, with an extension available at our option, subject to certain conditions. The loan agreement bears interest at the three-month London Inter-Bank Offered Rate (“LIBOR”) plus
1.0%
, which resets quarterly. The loan is secured by assets equal to the currently outstanding loan balance. The loan contains covenants, representations and warranties and other terms customary for loans of this nature. As of
September 30, 2017
, our interest rate on the loan was a variable rate of
2.32%
.
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, 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 and on March 20, 2017 to allow flexibility in how we apply net proceeds received from equity issuances to prepay outstanding indebtedness.
The Second Amended Credit Agreement provides for a term loan of
$150 million
and a revolving credit commitment up to an aggregate amount of
$275 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)
|
|
|
|
July 1, 2017 through December 31, 2017
|
|
3.75 to 1.0
|
|
January 1, 2018 through March 31, 2018
|
|
3.5 to 1.0
|
|
April 1, 2018 and thereafter
|
|
3.25 to 1.0
|
Consolidated EBITDA (2)
|
|
1.25 to 1.0
|
Consolidated Net Income (3)
|
|
$0
|
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 consecutive 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
September 30, 2017
, we believe we were in compliance with all covenants set forth in the Second Amended Credit Agreement.
As of
September 30, 2017
, we had outstanding borrowings of approximately
$271.5 million
under the Second Amended Credit Agreement, with available borrowings of approximately
$91.0 million
, based on the leverage ratio required pursuant to the Second Amended Credit Agreement. Our interest rate as of
September 30, 2017
was a fixed rate of
2.23%
on
$126.3 million
and a fixed rate of
2.37%
on
$48.8 million
as a result of interest rate swaps (see Note 10), a variable floating rate of
2.49%
on
$84.5 million
and a variable floating rate of
2.49%
on
$12.0 million
. Our interest rate as of
December 31, 2016
was a fixed rate of
2.98%
on
$130.0 million
and
3.12%
on
$45.0 million
as a result of interest rate swaps and a variable floating rate of
2.77%
on
$150.0 million
.
Future Payments
Future minimum principal payments on our long-term debt as of
September 30, 2017
, are as follows (in thousands):
|
|
|
|
|
|
Years Ending
|
|
Future Minimum
|
December 31
|
|
Principal Payments
|
Remaining 2017
|
|
2,500
|
|
2018
|
|
19,462
|
|
2019
|
|
15,000
|
|
2020
|
|
17,500
|
|
2021
|
|
224,000
|
|
Total future minimum principal payments
|
|
$
|
278,462
|
|
10. 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 (loss), 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 December 19, 2012, we entered into a pay-fixed, receive-variable interest rate swap having an initial notional amount of
$150 million
with Wells Fargo to fix the one-month LIBOR rate at
0.98%
. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). The interest rates under both the interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid on a monthly basis. The notional amount of the interest rate swap is reduced quarterly by
50%
of the minimum principal payment due under the terms of our Second Amended Credit Agreement. The interest rate swap is scheduled to expire on December 19, 2017.
On August 5, 2016, we entered into a pay-fixed, receive-variable interest rate swap having an initial notional amount of
$42.5 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 notional amount of the interest rate swap increases quarterly by an amount equal to the decrease of the hedge entered into on December 19, 2012, up to the amount of
$175.0 million
. The interest rate swap is scheduled to expire on July 6, 2021.
At
September 30, 2017
and
December 31, 2016
, our interest rate swaps qualified as cash flow hedges. The fair value of our interest rate swaps at
September 30, 2017
was an asset of approximately
$4.4 million
, which was partially offset by approximately
$1.7 million
in deferred taxes. The fair value of our interest rate swaps at
December 31, 2016
was an asset of approximately
$5.0 million
, which was partially offset by approximately
$1.9 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 Yuan Renminbi, Mexican Pesos, Brazilian Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish Krona, Canadian Dollars, Singapore Dollars, Japanese Yen, Korean Won, and Danish Krone. Our consolidated financial statements are denominated in, and our principal currency is, the U.S. Dollar. 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 enter into forward contracts on various foreign currencies to manage the risk associated with forecasted exchange rates which impact revenues, cost of sales, and operating expenses in various international markets. The objective of the hedges is to reduce the variability of cash flows associated with the forecasted purchase or sale of the associated foreign currencies.
We enter into approximately
100
foreign currency cash flow hedges every month. As of September 30, 2017, 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
|
|
Euro
|
EUR
|
5,555
|
|
Swiss Franc
|
CHF
|
1,088
|
|
Danish Krone
|
DKK
|
7,775
|
|
British Pound
|
GBP
|
2,550
|
|
Mexican Peso
|
MXN
|
64,425
|
|
Swedish Krona
|
SEK
|
10,805
|
|
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
September 30, 2017
, 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
|
|
Euro
|
EUR
|
21,801
|
|
British Pound
|
GBP
|
1,128
|
|
Chinese Yuan Renminbi
|
CNY
|
39,954
|
|
Mexican Peso
|
MXN
|
17,537
|
|
Brazilian Real
|
BRL
|
8,500
|
|
Australian Dollar
|
AUD
|
4,599
|
|
Hong Kong Dollar
|
HKD
|
11,000
|
|
Swiss Franc
|
CHF
|
278
|
|
Swedish Krona
|
SEK
|
6,007
|
|
Canadian Dollar
|
CAD
|
1,968
|
|
Singapore Dollar
|
SGD
|
3,585
|
|
Japanese Yen
|
JPY
|
178,500
|
|
South Korean Won
|
KRW
|
1,800,000
|
|
Balance Sheet Presentation of Derivatives.
As of September 30, 2017 and December 31, 2016, 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
|
September 30, 2017
|
|
December 31, 2016
|
Derivatives designated as hedging instruments
|
|
|
|
Assets
|
|
|
|
|
|
Interest rate swaps
|
|
Prepaid expenses and other assets (current)
|
$
|
79
|
|
|
$
|
—
|
|
Interest rate swaps
|
|
Other assets (long-term)
|
4,309
|
|
|
4,991
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other assets (current)
|
646
|
|
|
116
|
|
Foreign currency forward contracts
|
|
Other assets (long-term)
|
158
|
|
|
18
|
|
|
|
|
|
|
|
(Liabilities)
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Accrued expenses (current)
|
$
|
(286
|
)
|
|
$
|
(275
|
)
|
Foreign currency forward contracts
|
|
Other long-term obligations
|
(96
|
)
|
|
(18
|
)
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
Assets
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other assets (current)
|
$
|
485
|
|
|
$
|
220
|
|
(Liabilities)
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Accrued expenses (current)
|
(210
|
)
|
|
(171
|
)
|
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 and net earnings in our consolidated statements of income, consolidated statements of comprehensive income and consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) recognized in OCI
|
|
|
Amount of Gain/(Loss) reclassified from AOCI
|
|
Three Months Ended September 30,
|
|
|
Three Months Ended September 30,
|
|
2017
|
2016
|
|
|
2017
|
2016
|
Derivative instrument
|
|
|
Location in Statements of Income
|
Interest rate swaps
|
$
|
1
|
|
$
|
(256
|
)
|
|
Interest expense
|
$
|
96
|
|
$
|
(153
|
)
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
100
|
|
—
|
|
|
Revenue
|
(101
|
)
|
—
|
|
|
|
|
|
Cost of goods sold
|
250
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) recognized in OCI
|
|
|
Amount of Gain/(Loss) reclassified from AOCI
|
|
Nine Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
2017
|
2016
|
|
|
2017
|
2016
|
Derivative instrument
|
|
|
Location in Statements of Income
|
Interest rate swaps
|
$
|
(611
|
)
|
$
|
(1,503
|
)
|
|
Interest expense
|
$
|
(8
|
)
|
$
|
(519
|
)
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
841
|
|
—
|
|
|
Revenue
|
(141
|
)
|
—
|
|
|
|
|
|
Cost of goods sold
|
213
|
|
—
|
|
The net amount recognized in earnings during the three and nine-month periods ended September 30, 2017 and 2016 due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness were not significant.
As of September 30, 2017, approximately
$461,000
, or
$282,000
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 September 30, 2017, approximately $
624,000
, or
$381,000
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 periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
|
2017
|
2016
|
|
2017
|
2016
|
Derivative Instrument
|
|
Location in Statements of Income
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Other income (expense)
|
|
$
|
(1,459
|
)
|
$
|
(76
|
)
|
|
$
|
(4,150
|
)
|
$
|
(222
|
)
|
See Note 11 for more information about our derivatives.
11. Fair Value Measurements.
Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of
September 30, 2017
and December 31,
2016
, 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
|
|
September 30, 2017
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
$
|
4,388
|
|
|
$
|
—
|
|
|
$
|
4,388
|
|
|
$
|
—
|
|
Foreign currency contract assets, current and long-term (2)
|
|
$
|
1,289
|
|
|
$
|
—
|
|
|
$
|
1,289
|
|
|
$
|
—
|
|
Foreign currency contract liabilities, current and long-term (3)
|
|
$
|
(592
|
)
|
|
$
|
—
|
|
|
$
|
(592
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Fair
|
|
Quoted prices in
|
|
Significant other
|
|
Significant
|
|
|
Value at
|
|
active markets
|
|
observable inputs
|
|
unobservable inputs
|
Description
|
|
December 31, 2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
$
|
4,991
|
|
|
$
|
—
|
|
|
$
|
4,991
|
|
|
$
|
—
|
|
Foreign currency contract assets, current and long-term (2)
|
|
$
|
354
|
|
|
$
|
—
|
|
|
$
|
354
|
|
|
$
|
—
|
|
Foreign currency contract liabilities, current and long-term (3)
|
|
$
|
(464
|
)
|
|
$
|
—
|
|
|
$
|
(464
|
)
|
|
$
|
—
|
|
(1) The fair value of the interest rate contracts is determined using Level 2 fair value inputs and is recorded as prepaid expenses and other assets (current) and other assets (long-term) 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 expenses and other assets (current) and other assets (long-term) 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 (current) and 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 5 for further information regarding these acquisitions. The contingent consideration liability is re-measured at the estimated fair value each reporting period with the change in fair value recognized within operating expenses in the accompanying consolidated statements of income. We measure the initial liability and re-measure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. Changes in the fair value of our contingent consideration liability during the three and nine-month periods ended
September 30, 2017
and
2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
5,572
|
|
|
$
|
898
|
|
|
$
|
683
|
|
|
$
|
1,024
|
|
Contingent consideration liability recorded as the result of acquisitions (see Note 5)
|
5,500
|
|
|
—
|
|
|
10,400
|
|
|
—
|
|
Fair value adjustments recorded to income during the period
|
20
|
|
|
(193
|
)
|
|
39
|
|
|
(136
|
)
|
Contingent payments made
|
(15
|
)
|
|
(16
|
)
|
|
(45
|
)
|
|
(199
|
)
|
Ending balance
|
$
|
11,077
|
|
|
$
|
689
|
|
|
$
|
11,077
|
|
|
$
|
689
|
|
The recurring Level 3 measurement of our contingent consideration liabilities and contingent receivable includes the following significant unobservable inputs at
September 30, 2017
and December 31,
2016
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration asset or liability
|
|
Fair value at September 30, 2017
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
Revenue-based payments
|
|
$
|
11,077
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
9.9% - 15%
|
contingent liability
|
|
|
|
|
Probability of milestone payment
|
|
100%
|
|
|
|
|
|
|
Projected year of payments
|
|
2017-2037
|
|
|
|
|
|
|
|
|
|
Contingent receivable
|
|
$
|
528
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
10%
|
asset
|
|
|
|
|
Probability of milestone payment
|
|
57%
|
|
|
|
|
|
|
Projected year of payments
|
|
2017-2019
|
|
|
|
|
|
|
|
|
|
Contingent consideration asset or liability
|
|
Fair value at December 31, 2016
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
Revenue-based payments
|
|
$
|
683
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
9.9% - 15%
|
contingent liability
|
|
|
|
|
Probability of milestone payment
|
|
100%
|
|
|
|
|
|
|
Projected year of payments
|
|
2017-2028
|
|
|
|
|
|
|
|
|
|
Contingent receivable
|
|
$
|
528
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
10%
|
asset
|
|
|
|
|
Probability of milestone payment
|
|
57%
|
|
|
|
|
|
|
Projected year of payments
|
|
2017-2019
|
The contingent consideration liabilities 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 liabilities and contingent receivable could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We record any such change in fair value to operating expenses in our consolidated statements of income. As of September 30, 2017, approximately
$10.8 million
was included in other long-term obligations and
$243,000
was included in accrued expenses in our consolidated balance sheet. As of December 31, 2016, approximately
$595,000
was included in other long-term obligations and
$88,000
was included in accrued expenses in our consolidated balance sheet. The cash paid to settle the contingent consideration liability recognized at fair value as of the acquisition date (including measurement-period adjustments) has been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows.
During the three and nine-month periods ended September 30, 2017, we had losses of approximately
$67,000
, and
$86,000
, respectively, compared to losses of approximately
$0
and
$90,000
for the three and nine-month periods ended September 30, 2016, respectively, related to the measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.
The carrying amount of cash and cash equivalents, trade 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.
12. Goodwill and Intangible Assets.
The changes in the carrying amount of goodwill for the nine-month period ended
September 30, 2017
were as follows (in thousands):
|
|
|
|
|
|
2017
|
Goodwill balance at January 1
|
$
|
211,927
|
|
Effect of foreign exchange
|
2,418
|
|
Additions as the result of acquisitions
|
19,698
|
|
Goodwill balance at September 30
|
$
|
234,043
|
|
As of
September 30, 2017
, we had recorded approximately
$8.3 million
of accumulated goodwill impairment charges. The goodwill balances as of
September 30, 2017
and
December 31, 2016
, were related to our cardiovascular segment.
Other intangible assets at
September 30, 2017
and December 31,
2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Patents
|
$
|
15,972
|
|
|
$
|
(3,586
|
)
|
|
$
|
12,386
|
|
Distribution agreements
|
6,626
|
|
|
(4,248
|
)
|
|
2,378
|
|
License agreements
|
23,804
|
|
|
(4,387
|
)
|
|
19,417
|
|
Trademarks
|
16,220
|
|
|
(4,342
|
)
|
|
11,878
|
|
Covenants not to compete
|
1,028
|
|
|
(961
|
)
|
|
67
|
|
Customer lists
|
25,942
|
|
|
(17,461
|
)
|
|
8,481
|
|
In-process technology
|
1,100
|
|
|
—
|
|
|
1,100
|
|
|
|
|
|
|
|
Total
|
$
|
90,692
|
|
|
$
|
(34,985
|
)
|
|
$
|
55,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Patents
|
$
|
14,130
|
|
|
$
|
(3,165
|
)
|
|
$
|
10,965
|
|
Distribution agreements
|
6,626
|
|
|
(3,527
|
)
|
|
3,099
|
|
License agreements
|
20,695
|
|
|
(3,422
|
)
|
|
17,273
|
|
Trademarks
|
12,380
|
|
|
(3,330
|
)
|
|
9,050
|
|
Covenants not to compete
|
1,028
|
|
|
(936
|
)
|
|
92
|
|
Customer lists
|
22,261
|
|
|
(15,401
|
)
|
|
6,860
|
|
Royalty agreements
|
267
|
|
|
(267
|
)
|
|
—
|
|
|
|
|
|
|
|
Total
|
$
|
77,387
|
|
|
$
|
(30,048
|
)
|
|
$
|
47,339
|
|
Aggregate amortization expense for the three and nine-month periods ended
September 30, 2017
was approximately
$7.0 million
and
$19.4 million
, respectively. For the three and nine-month periods ended September 30, 2016, aggregate amortization expense was approximately
$5.7 million
and
$13.6 million
, respectively.
Estimated amortization expense for the developed technology and other intangible assets for the next five years consists of the following as of
September 30, 2017
(in thousands):
|
|
|
|
|
Year Ending December 31
|
|
Remaining 2017
|
$
|
6,745
|
|
2018
|
26,152
|
|
2019
|
25,678
|
|
2020
|
24,524
|
|
2021
|
18,013
|
|
13. Commitments and Contingencies.
In the ordinary course of business, we are involved in various claims and litigation matters. These claims and litigation matters may include actions involving product liability, intellectual property, contractual, and employment matters. We do not believe that any such actions are likely to be, individually or in the aggregate, material to our
business, financial condition, results of operations or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to our business, financial condition, results of operations or liquidity. Legal costs for these matters such as outside counsel fees and expenses are charged to expense in the period incurred.
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 2017. We have incurred, and anticipate that we will continue to incur, substantial costs in connection with the matter. We incurred approximately
$2.1 million
and
$10.6 million
of expenses for the three and nine-month periods ended
September 30, 2017
, respectively, responding to the pending subpoena from the U.S. Department of Justice. We expect that these expenses will be in a similar range in subsequent periods and may potentially be higher, depending on the progress of the investigation and other factors beyond our control. 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.
14. Issuance of Common Stock
. 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 cost incurred and paid by us in connection with this equity offering. The net proceeds from the offering were used primarily to repay outstanding indebtedness under our Second Amended Credit Agreement (including our term loan and revolving credit loans).
15. Subsequent Events
. We have evaluated whether any subsequent events have occurred from September 30, 2017 to the time of filing of this report that would require disclosure in the consolidated financial statements. We note the following event below:
On October 2, 2017, we entered into a share purchase agreement with ITL Healthcare Pty Ltd, a custom procedure pack business located in Melbourne, Australia. The transaction was financed with a combination of cash and existing credit facilities, which totaled approximately
$11.3 million
. We are currently evaluating the accounting treatment of this purchase, as well as performing the valuation of the assets acquired and the related purchase price allocation.