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:
|
|
|
|
|
|
|
|
|
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
|
|
|
|
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
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):
|
|
|
|
|
|
|
|
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
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.
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
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
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
2016 Term loan
|
$
|
65,000
|
|
|
$
|
72,500
|
|
|
2016 Revolving credit loans
|
335,500
|
|
|
316,000
|
|
|
Collateralized debt facility
|
—
|
|
|
7,000
|
|
|
Less unamortized debt issuance costs
|
(279
|
)
|
|
(348
|
)
|
|
Total long-term debt
|
400,221
|
|
|
395,152
|
|
|
Less current portion
|
15,000
|
|
|
22,000
|
|
|
Long-term portion
|
$
|
385,221
|
|
|
$
|
373,152
|
|
2016 Term Loan and Revolving Credit Loans
On July 6, 2016, we entered into a Second Amended and Restated Credit Agreement (as amended to date, the “Second Amended Credit Agreement”), with Wells Fargo Bank, National Association, as administrative agent, swingline lender and a lender, and Wells Fargo Securities, LLC, as sole lead arranger and sole bookrunner. In addition to Wells Fargo Bank, National Association, Bank of America, N.A., U.S. Bank, National Association, and HSBC Bank USA, National Association, are parties to the Second Amended Credit Agreement as lenders. The Second Amended Credit Agreement amends and restates in its entirety our previously outstanding Amended and Restated Credit Agreement and all amendments thereto. The Second Amended Credit Agreement was amended on September 28, 2016 to allow for a new revolving credit loan to our wholly-owned subsidiary, on March 20, 2017 to allow flexibility in how we apply net proceeds received from equity issuances to prepay outstanding indebtedness, on December 13, 2017 to increase the revolving credit commitment by
$100 million
to
$375 million
, and on March 28, 2018 to amend certain debt covenants.
The Second Amended Credit Agreement provides for a term loan of
$150 million
and a revolving credit commitment up to an aggregate amount of
$375 million
, which includes a reserve of
$25 million
to make swingline loans from time to time. The term loan is payable in quarterly installments in the amounts provided in the Second Amended Credit Agreement until the maturity date of July 6, 2021, at which time the term and revolving credit loans, together with accrued interest thereon, will be due and payable. At any time prior to the maturity date, we may repay any amounts owing under all revolving credit loans, term loans, and all swingline loans in whole or in part, subject to certain minimum thresholds, without premium or penalty, other than breakage costs.
Revolving credit loans denominated in dollars and term loans made under the Second Amended Credit Agreement bear interest, at our election, at either a Base Rate or Eurocurrency Base Rate (as such terms are defined in the Second Amended Credit Agreement) plus the applicable margin, which increases as our Consolidated Total Leverage Ratio (as defined in the Second Amended Credit Agreement) increases. Revolving credit loans denominated in an Alternative Currency (as defined in the Second Amended Credit Agreement) bear interest at the Eurocurrency rate plus the applicable margin. Swingline loans bear interest at the Base Rate plus the applicable margin. Upon an event of default, the interest rate may be increased by
2.0%
. The revolving credit commitment also carries a commitment fee of
0.15%
to
0.40%
per annum on the unused portion.
The Second Amended Credit Agreement is collateralized by substantially all our assets. The Second Amended Credit Agreement contains covenants, representations and warranties, and other terms customary for loans of this nature. The Second Amended Credit Agreement requires that we maintain certain financial covenants, as follows:
|
|
|
|
|
|
|
|
|
|
|
Covenant Requirement
|
|
Consolidated Total Leverage Ratio
(1)
|
|
|
|
|
January 1, 2018 and thereafter
|
|
3.5 to 1.0
|
|
Consolidated EBITDA
(2)
|
|
1.25 to 1.0
|
|
Consolidated Net Income
(3)
|
|
$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 certain periods, and subject to certain adjustments.
|
|
(4)
|
Maximum level of the aggregate amount of all Facility Capital Expenditures (as defined in the Second Amended Credit Agreement) in any fiscal year.
|
Additionally, the Second Amended Credit Agreement contains customary events of default and affirmative and negative covenants for transactions of this type. As of
June 30, 2019
, we believe we were in compliance with all covenants set forth in the Second Amended Credit Agreement.
As of
June 30, 2019
, we had outstanding borrowings of approximately
$400.5 million
under the Second Amended Credit Agreement, with additional available borrowings of approximately
$38.7 million
, based on the leverage ratio required pursuant to the Second Amended Credit Agreement. Our interest rate as of
June 30, 2019
was a fixed rate of
2.37%
on
$175 million
as a result an interest rate swap (see Note 11) and a variable floating rate of
3.65%
on
$225.5 million
. Our interest rate as of
December 31, 2018
was a fixed rate of
2.12%
on
$175 million
as a result of an interest rate swap and a variable floating rate of
3.52%
on
$213.5 million
.
Future Payments
Future minimum principal payments on our long-term debt as of
June 30, 2019
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Years Ending
|
|
Future Minimum
|
|
December 31
|
|
Principal Payments
|
|
Remaining 2019
|
|
$
|
7,500
|
|
|
2020
|
|
17,500
|
|
|
2021
|
|
375,500
|
|
|
Total future minimum principal payments
|
|
$
|
400,500
|
|
Subsequent to June 30, 2019, the Second Amended and Restated Credit Agreement was amended and restated in its entirety. See Note 16 below.
11. 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 instruments 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. When the hedged transaction occurs, gains or losses are 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. 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.
Derivative Instruments Designated as Cash Flow Hedges
On August 5, 2016, we entered into a pay-fixed, receive-variable interest rate swap with a current notional amount of
$175 million
with Wells Fargo to fix the one-month LIBOR rate at
1.12%
. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). On a monthly basis, the interest rates under both the interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid. The interest rate swap is scheduled to expire on July 6, 2021.
At
June 30, 2019
and December 31,
2018
, our interest rate swap qualified as a cash flow hedge. The fair value of our interest rate swap at
June 30, 2019
was an asset of approximately
$1.9 million
, which was partially offset by approximately
$0.5 million
in
deferred taxes. The fair value of our interest rate swap at
December 31, 2018
was an asset of approximately
$5.8 million
, which was offset by approximately
$1.5 million
in deferred taxes.
Foreign Currency Risk.
We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. Our policy is to enter into foreign currency derivative contracts with maturities of up to
two
years. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and balances denominated in Euros, British Pounds, Chinese Renminbi, Mexican Pesos, Brazilian Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish Krona, Canadian Dollars, Danish Krone, Japanese Yen, Korean Won, and Singapore Dollars. 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.
Derivative Instruments Designated as Cash Flow Hedges
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
150
cash flow foreign currency hedges every month. As of
June 30, 2019
, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with the following notional amounts (in thousands and in local currencies):
|
|
|
|
|
|
|
|
Currency
|
Symbol
|
Forward Notional Amount
|
|
|
Australian Dollar
|
AUD
|
3,430
|
|
|
Brazilian Real
|
BRL
|
1,080
|
|
|
Canadian Dollar
|
CAD
|
4,330
|
|
|
Swiss Franc
|
CHF
|
1,970
|
|
|
Chinese Renminbi
|
CNY
|
166,500
|
|
|
Danish Krone
|
DKK
|
18,175
|
|
|
Euro
|
EUR
|
22,600
|
|
|
British Pound
|
GBP
|
4,820
|
|
|
Japanese Yen
|
JPY
|
1,335,000
|
|
|
Korean Won
|
KRW
|
4,475,000
|
|
|
Mexican Peso
|
MXN
|
296,500
|
|
|
Norwegian Krone
|
NOK
|
6,000
|
|
|
Swedish Krona
|
SEK
|
29,210
|
|
Derivative Instruments 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
June 30, 2019
, we had entered into foreign currency forward contracts related to those balance sheet accounts, with the following notional amounts (in thousands and in local currencies):
|
|
|
|
|
|
|
|
Currency
|
Symbol
|
Forward Notional Amount
|
|
|
Australian Dollar
|
AUD
|
13,788
|
|
|
Brazilian Real
|
BRL
|
9,000
|
|
|
Canadian Dollar
|
CAD
|
2,652
|
|
|
Swiss Franc
|
CHF
|
643
|
|
|
Chinese Renminbi
|
CNY
|
85,226
|
|
|
Danish Krone
|
DKK
|
2,544
|
|
|
Euro
|
EUR
|
11,717
|
|
|
British Pound
|
GBP
|
5,653
|
|
|
Hong Kong Dollar
|
HKD
|
11,000
|
|
|
Japanese Yen
|
JPY
|
1,445,574
|
|
|
Korean Won
|
KRW
|
6,000,000
|
|
|
Mexican Peso
|
MXN
|
25,000
|
|
|
Norwegian Krone
|
NOK
|
3,180
|
|
|
Swedish Krona
|
SEK
|
17,154
|
|
|
Singapore Dollar
|
SGD
|
1,676
|
|
|
South African Rand
|
ZAR
|
37,800
|
|
Balance Sheet Presentation of Derivative Instruments.
As of
June 30, 2019
, and
December 31, 2018
, all derivative instruments, 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 was as follows on the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet Location
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Derivative instruments designated as hedging instruments
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Interest rate swap
|
|
Other assets (long-term)
|
|
$
|
1,907
|
|
|
$
|
5,772
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other assets
|
|
960
|
|
|
613
|
|
|
Foreign currency forward contracts
|
|
Other assets (long-term)
|
|
244
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Accrued expenses
|
|
(778
|
)
|
|
(711
|
)
|
|
Foreign currency forward contracts
|
|
Other long-term obligations
|
|
(101
|
)
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as hedging instruments
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other assets
|
|
$
|
229
|
|
|
$
|
814
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Accrued expenses
|
|
(1,539
|
)
|
|
(796
|
)
|
Income Statement Presentation of Derivative Instruments.
Derivative Instruments 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
|
|
|
Consolidated Statements of Income
|
|
Amount of Gain/(Loss) reclassified from AOCI
|
|
|
Three Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Derivative instrument
|
|
|
|
Location in statements of income
|
|
|
|
|
|
Interest rate swaps
|
$
|
(1,812
|
)
|
|
$
|
748
|
|
|
Interest expense
|
$
|
(3,115
|
)
|
|
$
|
(3,338
|
)
|
|
$
|
602
|
|
|
$
|
357
|
|
|
Foreign currency forward contracts
|
1,064
|
|
|
394
|
|
|
Revenue
|
255,532
|
|
|
224,810
|
|
|
(92
|
)
|
|
(234
|
)
|
|
|
|
|
|
|
Cost of sales
|
(143,568
|
)
|
|
(124,801
|
)
|
|
(104
|
)
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) recognized in OCI
|
|
|
Consolidated Statements of Income
|
|
Amount of Gain/(Loss) reclassified from AOCI
|
|
|
Six Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Derivative instrument
|
|
|
|
Location in statements of income
|
|
|
|
|
|
Interest rate swaps
|
(2,669
|
)
|
|
$
|
2,868
|
|
|
Interest expense
|
(5,879
|
)
|
|
(5,736
|
)
|
|
$
|
1,196
|
|
|
$
|
570
|
|
|
Foreign currency forward contracts
|
51
|
|
|
568
|
|
|
Revenue
|
493,881
|
|
|
427,844
|
|
|
102
|
|
|
(385
|
)
|
|
|
|
|
|
|
Cost of sales
|
(277,281
|
)
|
|
(239,779
|
)
|
|
(185
|
)
|
|
378
|
|
As of
June 30, 2019
, approximately
$6,200
, or
$4,600
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
June 30, 2019
, approximately
$1.3 million
, or
$1.0 million
after taxes, was expected to be reclassified from accumulated other comprehensive income to earnings in interest expense over the succeeding twelve months.
Derivative Instruments 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 June 30,
|
|
Six Months Ended June 30,
|
|
Derivative Instrument
|
|
Location in statements of income
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Foreign currency forward contracts
|
|
Other expense
|
|
$
|
(489
|
)
|
|
$
|
3,153
|
|
|
$
|
(755
|
)
|
|
$
|
2,038
|
|
12. Fair Value Measurements.
Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of
June 30, 2019
and
December 31, 2018
, 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
|
|
June 30, 2019
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Interest rate contracts
(1)
|
|
$
|
1,907
|
|
|
$
|
—
|
|
|
$
|
1,907
|
|
|
$
|
—
|
|
|
Foreign currency contract assets, current and long-term
(2)
|
|
$
|
1,433
|
|
|
$
|
—
|
|
|
$
|
1,433
|
|
|
$
|
—
|
|
|
Foreign currency contract liabilities, current and long-term
(3)
|
|
$
|
(2,418
|
)
|
|
$
|
—
|
|
|
$
|
(2,418
|
)
|
|
$
|
—
|
|
|
Contingent receivable asset
|
|
$
|
625
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
625
|
|
|
Contingent consideration liabilities
|
|
$
|
(93,204
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(93,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Total Fair
|
|
Quoted prices in
|
|
Significant other
|
|
Significant
|
|
|
|
Value at
|
|
active markets
|
|
observable inputs
|
|
unobservable inputs
|
|
Description
|
|
December 31, 2018
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Interest rate contracts
(1)
|
|
$
|
5,772
|
|
|
$
|
—
|
|
|
$
|
5,772
|
|
|
$
|
—
|
|
|
Foreign currency contract assets, current and long-term
(2)
|
|
$
|
1,578
|
|
|
$
|
—
|
|
|
$
|
1,578
|
|
|
$
|
—
|
|
|
Foreign currency contract liabilities, current and long-term
(3)
|
|
$
|
(1,608
|
)
|
|
$
|
—
|
|
|
$
|
(1,608
|
)
|
|
$
|
—
|
|
|
Contingent receivable asset
|
|
$
|
607
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
607
|
|
|
Contingent consideration liabilities
|
|
$
|
(82,236
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(82,236
|
)
|
(1) The fair value of the interest rate contracts is determined using Level 2 fair value inputs and is recorded as other assets or other long-term obligations in the consolidated balance sheets.
(2) The fair value of the foreign currency contract assets (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as prepaid expenses and other assets or other long-term assets in the consolidated balance sheets.
(3) The fair value of the foreign currency contract liabilities (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as accrued expenses or other long-term obligations in the consolidated balance sheets.
Certain of our business combinations involve the potential for the payment of future contingent consideration, generally based on a percentage of future product sales or upon attaining specified future revenue milestones. See Note 5 for further information regarding these acquisitions. The contingent consideration liability is re-measured at the estimated fair value at the end of each reporting period with the change in fair value recognized within operating expenses in the accompanying consolidated statements of income for such period. 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 liabilities during the three and six-month periods 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
|
|
Beginning balance
|
$
|
82,457
|
|
|
$
|
10,928
|
|
|
$
|
82,236
|
|
|
$
|
10,956
|
|
|
Contingent consideration liability recorded as the result of acquisitions (see Note 5)
|
8,400
|
|
|
—
|
|
|
8,380
|
|
|
—
|
|
|
Fair value adjustments recorded to income
|
2,404
|
|
|
99
|
|
|
3,199
|
|
|
86
|
|
|
Contingent payments made
|
(57
|
)
|
|
(115
|
)
|
|
(611
|
)
|
|
(130
|
)
|
|
Ending balance
|
$
|
93,204
|
|
|
$
|
10,912
|
|
|
$
|
93,204
|
|
|
$
|
10,912
|
|
As of
June 30, 2019
, approximately
$68.6 million
in contingent consideration liability was included in other long-term obligations and approximately
$24.6 million
was included in accrued expenses in our consolidated balance sheet. As of
December 31, 2018
, approximately
$58.5 million
in contingent consideration liability was included in other long-term obligations and
$23.8 million
was included in accrued expenses in our consolidated balance sheet. Cash paid to settle the contingent consideration liability recognized at fair value as of the acquisition date (including measurement-period adjustments) has been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows.
During the year ended December 31, 2016, we sold a cost method investment for cash and for the right to receive additional payments based on various contingent milestones. We determined the fair value of the contingent payments using Level 3 inputs defined under authoritative guidance for fair value measurements, and we recorded a contingent receivable asset, which as of
June 30, 2019
and December 31,
2018
had a value of approximately
$625,000
and
$607,000
, respectively, recorded as a current asset in other receivables in our consolidated balance sheets. We record any changes in fair value to operating expenses as part of our cardiovascular segment in our consolidated statements of income. During the three and six-month periods ended
June 30, 2019
, we recorded a gain (loss) on the contingent receivable of approximately
$(2,000)
and
$18,000
, respectively. During the three and six-month periods ended
June 30, 2018
, we recorded a loss of approximately
$79,000
and
$132,000
, respectively and received payments of approximately
$0
and
$153,000
, respectively related to the contingent receivable.
The recurring Level 3 measurement of our contingent consideration liability and contingent receivable included the following significant unobservable inputs at
June 30, 2019
and December 31,
2018
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration asset or liability
|
|
Fair value at June 30, 2019
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Revenue-based royalty
|
|
$
|
9,843
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
14% - 25%
|
|
payments contingent liability
|
|
|
|
|
Projected year of payments
|
|
2019-2034
|
|
|
|
|
|
|
|
|
|
|
|
Supply chain milestone
|
|
$
|
15,000
|
|
|
Scenario-based method
|
|
Discount rate
|
|
3.9%
|
|
contingent liability
|
|
|
|
|
Probability of milestone payment
|
|
100%
|
|
|
|
|
|
|
Projected year of payments
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Revenue milestones
|
|
$
|
65,661
|
|
|
Monte Carlo simulation
|
|
Discount rate
|
|
3.1% - 19.5%
|
|
contingent liability
|
|
|
|
|
Projected year of payments
|
|
2019-2022
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory approval
|
|
$
|
2,700
|
|
|
Scenario-based method
|
|
Discount rate
|
|
5.3%
|
|
contingent liability
|
|
|
|
|
Probability of milestone payment
|
|
65%
|
|
|
|
|
|
|
Projected year of payment
|
|
2022
|
|
|
|
|
|
|
|
|
|
|
|
Contingent receivable
|
|
$
|
625
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
10%
|
|
asset
|
|
|
|
|
Probability of milestone payment
|
|
54%
|
|
|
|
|
|
|
|
Projected year of payments
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration asset or liability
|
|
Fair value at December 31, 2018
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Revenue-based royalty
|
|
$
|
10,661
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
9.9% - 25%
|
|
payments contingent liability
|
|
|
|
|
Projected year of payments
|
|
2018-2037
|
|
|
|
|
|
|
|
|
|
|
|
Supply chain milestone
|
|
$
|
13,593
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
5.3%
|
|
contingent liability
|
|
|
|
|
Probability of milestone payment
|
|
95%
|
|
|
|
|
|
|
|
Projected year of payments
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Revenue milestones
|
|
$
|
57,982
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
3.3% - 13%
|
|
contingent liability
|
|
|
|
|
Projected year of payments
|
|
2019-2023
|
|
|
|
|
|
|
|
|
|
|
|
Contingent receivable
|
|
$
|
607
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
10%
|
|
asset
|
|
|
|
|
Probability of milestone payment
|
|
67%
|
|
|
|
|
|
|
|
Projected year of payments
|
|
2019
|
The contingent consideration liability and contingent receivable are re-measured to fair value each reporting period using projected revenues, discount rates, probabilities of payment, and projected payment dates. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. An increase (decrease) in either the discount rate or the time to payment, in isolation, may result in a significantly lower (higher) fair value measurement. A decrease in the probability of any milestone payment may result in lower fair value measurements. Our determination of the fair value of the contingent consideration liability and contingent receivable could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We intend to record any such change in fair value to operating expenses in our consolidated statements of income.
During the three and six-month periods ended
June 30, 2019
, we had losses of approximately
$594,000
and
$805,000
, compared to losses of approximately
$29,000
and
$86,000
, respectively for the three and six-month periods ended
June 30, 2018
, related to the measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.
We believe the carrying amount of cash and cash equivalents, receivables, and trade payables approximate fair value because of the immediate, short-term maturity of these financial instruments. Our long-term debt re-prices frequently due to variable rates and entails no significant changes in credit risk and, as a result, we believe the fair value of long-term debt approximates carrying value. 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.
13. Goodwill and Intangible Assets.
The changes in the carrying amount of goodwill for the six-month period ended
June 30, 2019
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
2019
|
|
Goodwill balance at January 1
|
$
|
335,433
|
|
|
Effect of foreign exchange
|
(181
|
)
|
|
Additions and adjustments as the result of acquisitions
|
16,881
|
|
|
Goodwill balance at June 30
|
$
|
352,133
|
|
Total accumulated goodwill impairment losses aggregated to approximately
$8.3 million
as of
June 30, 2019
and
December 31, 2018
. We did not have any goodwill impairments for the six-month periods ended
June 30, 2019
and 2018. The total goodwill balance as of
June 30, 2019
and
December 31, 2018
, was related to our cardiovascular segment.
Other intangible assets at
June 30, 2019
and
December 31, 2018
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Patents
|
$
|
20,985
|
|
|
$
|
(5,850
|
)
|
|
$
|
15,135
|
|
|
Distribution agreements
|
8,012
|
|
|
(6,280
|
)
|
|
1,732
|
|
|
License agreements
|
27,008
|
|
|
(9,016
|
)
|
|
17,992
|
|
|
Trademarks
|
30,246
|
|
|
(8,035
|
)
|
|
22,211
|
|
|
Covenants not to compete
|
1,028
|
|
|
(1,016
|
)
|
|
12
|
|
|
Customer lists
|
40,009
|
|
|
(26,092
|
)
|
|
13,917
|
|
|
In-process technology
|
3,420
|
|
|
—
|
|
|
3,420
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
130,708
|
|
|
$
|
(56,289
|
)
|
|
$
|
74,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Patents
|
$
|
19,378
|
|
|
$
|
(5,012
|
)
|
|
$
|
14,366
|
|
|
Distribution agreements
|
8,012
|
|
|
(5,766
|
)
|
|
2,246
|
|
|
License agreements
|
26,930
|
|
|
(7,411
|
)
|
|
19,519
|
|
|
Trademarks
|
29,998
|
|
|
(6,586
|
)
|
|
23,412
|
|
|
Covenants not to compete
|
1,028
|
|
|
(1,000
|
)
|
|
28
|
|
|
Customer lists
|
39,936
|
|
|
(23,361
|
)
|
|
16,575
|
|
|
In-process technology
|
3,420
|
|
|
—
|
|
|
3,420
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
128,702
|
|
|
$
|
(49,136
|
)
|
|
$
|
79,566
|
|
Aggregate amortization expense for the three and six-month periods ended
June 30, 2019
was approximately
$14.9 million
and
$29.7 million
, respectively. Aggregate amortization expense for the three and six-month periods ended
June 30, 2018
was approximately
$10.4 million
and
$18.9 million
, respectively.
During the three months ended
June 30, 2019
we recorded an impairment charge of
$548,000
for the discontinuation of our product associated with the assets acquired in our June 2017 acquisition of patent rights and other intellectual property related to the Repositionable Chest Tube and related devices from Lazarus Medical Technologies, LLC. We did not record any impairment charges during the three and six months ended
June 30, 2018
.
Estimated amortization expense for the developed technology and other intangible assets for the next five years consists of the following as of
June 30, 2019
(in thousands):
|
|
|
|
|
|
|
|
Year Ending December 31
|
|
|
Remaining 2019
|
$
|
30,817
|
|
|
2020
|
58,907
|
|
|
2021
|
51,550
|
|
|
2022
|
50,129
|
|
|
2023
|
48,830
|
|
14. Leases.
We adopted ASC 842 using the modified retrospective approach, electing the practical expedient that allows us not to restate our comparative periods prior to the adoption of the standard on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before the date of adoption. For the comparative periods prior to adoption, we present the disclosures which were required under ASC 840.
We have operating leases for facilities used for manufacturing, research and development, sales and distribution, and office space, as well as leases for manufacturing and office equipment, vehicles, and land. Our leases have remaining terms of less than
one year
to approximately
19 years
. A number of our lease agreements contain options to renew at our discretion for periods of up to
30 years
and options to terminate the leases within
one year
. The lease term used to calculate right-of-use ("ROU") assets and lease liabilities includes renewal and termination options that are deemed reasonably certain to be exercised. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. We do not have any bargain purchase options in our leases. For leases with an initial term of one year or less, we do not record a ROU asset or lease liability on our consolidated balance sheet. Substantially all of the ROU assets and lease liabilities as of June 30, 2019 recorded on our consolidated balance sheet are related to our cardiovascular segment.
We sublease a portion of one of our facilities to a third party. We also lease certain hardware consoles to customers and record rental revenue as a component of net sales. Rental revenue under such console leasing arrangements for the three and six months ended
June 30, 2019
and
2018
was not significant.
The following was included in our consolidated balance sheet as of
June 30, 2019
(in thousands):
|
|
|
|
|
|
|
|
Leases
|
As of June 30, 2019
|
|
Assets
|
|
|
ROU operating lease assets
|
$
|
79,309
|
|
|
|
|
|
Liabilities
|
|
|
Short-term operating lease liabilities
|
$
|
11,732
|
|
|
Long-term operating lease liabilities
|
71,272
|
|
|
Total operating lease liabilities
|
$
|
83,004
|
|
During the year ended December 31, 2015, we entered into sale and leaseback transactions to finance certain production equipment for approximately
$2.0 million
. At that time, we deferred the gain from the sale and leaseback transaction, of which approximately
$93,000
remained as of December 31, 2018. As part of the adoption of ASC 842, we wrote-off the deferred gain as an adjustment to equity through retained earnings during the three months ended March 31, 2019.
We recognize lease expense on a straight-line basis over the term of the lease. The components of lease costs for the three and six months ended
June 30, 2019
are as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
Lease Cost
|
Classification
|
June 30, 2019
|
|
June 30, 2019
|
|
Operating lease cost (a)
|
Selling, general and administrative expenses
|
$
|
4,172
|
|
|
$
|
8,398
|
|
|
Sublease (income) (b)
|
Selling, general and administrative expenses
|
(146
|
)
|
|
(292
|
)
|
|
Net lease cost
|
|
$
|
4,026
|
|
|
$
|
8,106
|
|
(a) Includes expense related to short-term leases and variable payments, which were not significant.
(b) Does not include rental revenue from leases of hardware consoles to customers, which was not significant.
Supplemental cash flow information for the six months ended
June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
June 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
7,267
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
2,927
|
|
Generally, our lease agreements do not specify an implicit rate. Therefore, we estimate our incremental borrowing rate, which is defined as the interest rate we would pay to borrow on a collateralized basis, considering such factors as length of lease term and the risks of the economic environment in which the leased asset operates. As of
June 30, 2019
, the following disclosures for remaining lease term and incremental borrowing rates were applicable:
|
|
|
|
|
|
|
Supplemental disclosure
|
|
June 30, 2019
|
|
Weighted average remaining lease term
|
|
12 years
|
|
Weighted average discount rate
|
|
3.3%
|
As of
June 30, 2019
, maturities of operating lease liabilities were as follows, in thousands:
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Amounts due under Operating Leases
|
|
Remaining 2019
|
|
$
|
7,064
|
|
|
2020
|
|
12,789
|
|
|
2021
|
|
11,762
|
|
|
2022
|
|
9,361
|
|
|
2023
|
|
7,381
|
|
|
Thereafter
|
|
53,588
|
|
|
Total lease payments
|
|
101,945
|
|
|
Less: Imputed interest
|
|
(18,941
|
)
|
|
Total
|
|
$
|
83,004
|
|
As previously disclosed in our 2018 Form 10-K under the prior guidance of ASC 840, minimum payments under operating lease agreements as of
December 31, 2018
were as follows, in thousands:
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Operating Leases
|
|
2019
|
|
$
|
13,421
|
|
|
2020
|
|
11,319
|
|
|
2021
|
|
9,995
|
|
|
2022
|
|
8,053
|
|
|
2023
|
|
6,953
|
|
|
Thereafter
|
|
52,754
|
|
|
Total minimum lease payments
|
|
$
|
102,495
|
|
As of June 30, 2019, we had additional operating leases for office space that had not yet commenced. These leases will commence during 2019 and are not deemed material.
15. 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, contract disputes, and employment or other matters that are significant to our business. Based upon our review of currently available information, we do not believe any such actions are likely to be, individually or in the aggregate, materially adverse to our business, financial condition, results of operations or liquidity.
In addition to the foregoing matters, in October 2016, we received a subpoena from the U.S. Department of Justice seeking information on certain of our marketing and promotional practices. We are in the process of responding to the subpoena, which we anticipate will continue during 2019. We have incurred, and anticipate that we will continue to incur, substantial costs in connection with the matter. The investigation is ongoing and at this stage we are unable to predict its scope, duration or outcome. Investigations such as this may result in the imposition of, among other things, significant damages, injunctions, fines or civil or criminal claims or penalties against our company or individuals. Legal expenses we incurred in responding to the U.S. Department of Justice subpoena for the three and six-month periods ended
June 30, 2019
were approximately
$1.0 million
and
$2.7 million
, respectively.
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.
16. Subsequent Events.
We have evaluated whether any subsequent events have occurred from June 30, 2019 to the time of filing of this report that would require disclosure in the consolidated financial statements. We note the following events below.
Third Amended and Restated Credit Agreement
On July 31, 2019, we entered into a Third Amended and Restated Credit Agreement (as amended to date, the "Third Amended Credit Agreement"), with Wells Fargo Bank, National Association, as administrative agent, swingline lender and a lender, and Wells Fargo Securities, LLC, BOFA Securities, Inc. and HSBC Bank USA, National Association, as joint lead arrangers and joint bookrunners. In addition, Bank of America, N.A., U.S. Bank, National Association, and HSBC Bank USA, National Association, are parties to the Third Amended Credit Agreement as lenders. The Third Amended Credit Agreement amends and restates in its entirety our previously outstanding Second Amended and Restated Credit Agreement and all amendments thereto.
The Third Amended Credit Agreement provides for a term loan of
$150 million
and a revolving credit commitment up to an aggregate amount of
$600 million
, inclusive of sub-facilities of
$40 million
for multicurrency borrowings,
$40 million
for standby letters of credit and
$30 million
for swingline loans from time to time. On July 31, 2024, all principal, interest and other amounts outstanding under the Third Amended Credit Agreement are payable in full. At any time prior to the maturity date, we may repay any amounts owing under all revolving credit loans and all swingline loans in whole or in part, without premium or penalty, other than breakage fees payable of Eurocurrency Rate Loans (as defined in the Third Amended Credit Agreement).
Revolving credit loans denominated in dollars and term loans made under the Third Amended Credit Agreement bear interest, at our election, at either the Base Rate or the Eurocurrency Rate (as such terms are defined in the Third Amended Credit Agreement) plus the Applicable Margin (as defined in the Third Amended Credit Agreement). Revolving credit loans denominated in an Alternative Currency (as defined in the Third 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. Interest on each loan featuring the Base Rate is due and payable on the last business day of each calendar quarter commencing September 30, 2019; interest on each loan featuring the Eurocurrency Rate is due and payable on the last day of each interest period applicable thereto, and if such interest period extends over three months, at the end of each three-month interval during such interest period.
The Third Amended Credit Agreement is collateralized by substantially all our assets. The Third Amended Credit Agreement contains affirmative and negative covenants, representations and warranties, events of default and other terms customary for loans of this nature. In particular, the Third Amended Credit Agreement requires that we maintain certain financial covenants, as follows:
|
|
|
|
|
|
|
|
|
|
|
Covenant Requirement
|
|
Consolidated Total Net Leverage Ratio
(1)
|
|
4.0 to 1.0
|
|
Consolidated Interest Coverage Ratio
(2)
|
|
3.0 to 1.0
|
|
Facility Capital Expenditures
(3)
|
|
$50,000,000
|
|
|
|
|
|
|
(1)
|
Maximum Consolidated Net Total Leverage Ratio (as defined in the Third Amended Credit Agreement) as of any fiscal quarter end.
|
|
(2)
|
Minimum ratio of Consolidated EBITDA (as defined in the Third Amended Credit Agreement and adjusted for certain expenditures) to Consolidated interest expense (as defined in the Third Amended Credit Agreement) for any period of four consecutive fiscal quarters.
|
|
(3)
|
Maximum level of the aggregate amount of all Facility Capital Expenditures (as defined in the Third Amended Credit Agreement) in any fiscal year.
|
Acquisition
On August 1, 2019, we entered into a share purchase agreement to acquire Fibrovein Holdings Limited, which is the owner of 100% of the capital stock of STD Pharmaceutical Products Limited, a UK-based company engaged in the manufacture, distribution and sale of pharmaceutical sclerotherapy products. The total purchase price was approximately
£11.2 million
. As of the date of this report, we are currently evaluating the accounting treatment of this acquisition.