What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-01 · 141 added, 129 removed, 106 unchanged (72% of the section changed)

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peripheral intervention, cardiac intervention, custom procedural solutions, OEM and endoscopy.

For the year ended December 31, 2020, we reported sales of approximately $963.9 million, down approximately ($31.0) million or (3.1)%, compared to 2019 sales of approximately $994.9 million.

For the year ended December 31, 2021, we reported sales of $1.075 billion, up $110.9 million or 11.5%, compared to 2020 sales of $963.9 million.

Gross profit as a percentage of sales was 45.2% for the year ended December 31, 2021 as compared to 41.6% for the year ended December 31, 2020.

Net loss for the year ended December 31, 2020 was approximately ($9.8) million, or ($0.18) per share, as compared to net income of approximately $5.5 million, or $0.10 per share, for the year ended December 31, 2019.

During the year ended December 31, 2020, the global COVID-19 pandemic impacted our business in various ways.

The most significant impact to sales occurred in the second quarter, with sales for the three-month period ended June 30, 2020 down approximately (14.5)% over the comparative quarter of 2019.

In the second half of the year, total sales were approximately equal to the prior year comparative period;

however, sales fluctuated by product category due, in part, to

the extent various products are used in deferrable procedures.

In response to the COVID-19 pandemic, we implemented certain cost reduction and operating efficiency initiatives, including decreasing discretionary spending, delaying product launches, deferring or rationalizing capital spending and reducing the number of research and development projects, among other initiatives.

In April 2020, due to the significant impact of the COVID-19 pandemic on our business, results of operations and financial condition, and uncertainty regarding the scope and duration of that impact, we reduced headcount, implemented targeted furloughs and temporarily reduced salaries for a number of groups, including all executive positions.

These temporary salary reductions were eliminated by December 31, 2020.

Net income for the year ended December 31, 2021 was $48.5 million, or $0.84 per share, as compared to net loss of ($9.8) million, or ($0.18) per share, for the year ended December 31, 2020.

During the years ended December 31, 2021 and 2020, the global COVID-19 pandemic impacted our business in various ways.

In 2021, we observed a generally improving operating environment with fewer restrictions on elective and deferrable procedures leading to record sales of $1.075 billion, an increase of 11.5% from 2020, and 8.0% higher than 2019 sales of $994.9.

Throughout the year we experienced notable variations in the pace of recovery across regions of the world influenced by the incidence and timing of COVID-19 infections and the associated governmental and patient responses.

We continue to focus our efforts to expand our presence in foreign markets, particularly Europe, Middle East and Africa (“EMEA”), China, Southeast Asia, Japan, Australia and Brazil, with the objective of capitalizing on additional market opportunities.

These efforts have increased certain of our selling, general and administrative expenses and lengthened our average collection period as certain geographic markets have customary payment terms which are, on average, longer than payment terms in the United States;

however, we believe over time this expansion will help improve our profitability.

Due in part to restrictions regarding deferrable and elective procedures, our international sales declined for the year ended December 31, 2020.

In 2020, international sales were approximately $413.8 million, or 42.9% of our net sales, down (1.3)% from international sales of $419.1 million in 2019.

On November 10, 2020, we introduced a corporate transformation initiative known as “Foundations for Growth” with multi-year financial targets for growth and improved profitability.

As part of this initiative, we continue review the need to consolidate facilities, strategically reduce operating expenses and incentivize our sales force to focus on products that will improve our financial performance.

During 2020, we moved production of 23 products to our facilities in Mexico or Texas, and we closed manufacturing operations in Temecula, California;

Malvern, Pennsylvania;

West Jordan, Utah;

and Melbourne, Australia.

In 2021, international sales were $465.9 million, or 43.3% of our net sales, up 12.6% from international sales of $413.8 million in 2020.

On November 10, 2020, we introduced a corporate transformation initiative known as “Foundations for Growth” with multi-year financial targets for growth and improved profitability for the three-year period ending December 31, 2023.

As part of this initiative, we continue to review the need to consolidate facilities, strategically reduce operating expenses and incentivize our sales force to focus on products that will improve our financial performance.

We have launched several initiatives to drive value creation for Merit, including SKU optimization, network consolidation, compensation and benefit

programs, product line transfers and manufacturing initiatives.

In the area of SKU rationalization, we have identified more than 2,000 products with revenues or gross margins which are below our targets, and in nearly all cases have moved customers to alternative products.

Results of Operations

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Impairment charges

Contingent consideration (benefit)

Contingent consideration expense (benefit)

Acquired in-process research and development expense

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Net income (loss)

Listed below are the sales by product category within each operating segment for the years ended December 31, 2020, 2019 and 2018 (in thousands):

Listed below are the sales by product category within each operating segment for the years ended December 31, 2021, 2020 and 2019 (in thousands, other than percentage changes):

Cardiovascular

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Cardiovascular Sales.

Our cardiovascular sales for the year ended December 31, 2020 were approximately $934.2 million, down (2.8)%, when compared to the year ended December 31, 2019 of approximately $961.0 million.

Sales for the year ended December 31, 2020 were unfavorably affected by decreased sales of (a) our cardiac intervention products (particularly our intervention, angiography and access products) of $279.7 million, down (8.2%);

(b) our OEM products (particularly our cardiac rhythm management/electrophysiology (“CRM/EP”) products and coatings) of $109.8 million, down (6.9%);

and (c) our peripheral intervention products (particularly our radar localization, vertebral compression fracture, biopsy, angiography and intervention products, offset partially by increased sales of drainage products) of $341.6 million, down (2.7%).

These decreases were partially offset by increased sales of our custom procedural solutions products (particularly our critical care products, which saw increased demand due to the COVID-19 pandemic, including $19.1 million in sales of our new Cultura nasopharyngeal swab and test kits used to collect and transport samples for COVID-19 testing, partially offset by decreased sales of kits) of $203.2 million, up 8.5%.

Our cardiovascular sales for the year ended December 31, 2019 were approximately $961.0 million, up 13.1%, when compared to the corresponding period for 2018 of approximately $849.5 million.

Sales for the year ended December 31, 2019 were primarily affected by increased sales of (a) our peripheral intervention products (particularly our radar localization, intervention, and drainage products) of approximately $350.9 million, up 27.1%, including a full year of sales of Cianna Medical, Inc.

(“Cianna Medical”) products and product lines acquired from BD;

(b) our cardiac intervention products (particularly our intervention, angiography and CRM/EP products) of approximately $304.8 million, up 9.4%;

(c) our custom procedural solutions product (particularly our kits and critical care products, offset partially by trays) of approximately $187.4 million, up 3.9%.

Sales by our international direct sales forces are subject to foreign currency exchange rate fluctuations between the natural currency of a foreign country and the U.S.

Foreign currency exchange rate fluctuations decreased sales (0.1)% for the year ended December 31, 2020 compared to sales calculated using the applicable average foreign exchange rates for 2019 and decreased sales (1.3)% for the year ended December 31, 2019 compared to sales calculated using the applicable foreign exchange rates for 2018.

Our cardiovascular sales for the year ended December 31, 2021 were $1.043 billion, up 11.7%, when compared to the year ended December 31, 2020 of $934.2 million.

Sales for the year ended December 31, 2021 were favorably affected by increased sales of:

(a) Peripheral intervention products, which increased by $63.5 million, or 18.6%, from the corresponding period of 2020.

This increase was driven primarily by sales of our radar localization, embolotherapy, drainage, biopsy, angiography, access and intervention products.

(b) Cardiac intervention products, which increased by $41.0 million, or 14.6%, from the corresponding period of 2020.

This increase was driven primarily by sales of our intervention, fluid management (including our Medallion® Syringes, which saw increased demand due to COVID-19 vaccination efforts) and angiography products.

This increase was driven primarily by sales of our cardiac rhythm management/electrophysiology (“CRM/EP”), angiography products and kits.

The foregoing increase in sales for the year ended December 31, 2021 was partially offset by decreased sales of:

(d) Custom procedural solutions products, which decreased by ($9.3) million, or (4.6%) from the corresponding period of 2020.

This decrease was driven primarily by decreased sales of our critical care products (including a ($15.9) million decrease in Cultura TM nasopharyngeal swab and test kit sales) and trays, offset partially by sales of kits.

Our cardiovascular sales for the year ended December 31, 2020 were $934.2 million, down (2.8%), when compared to the year ended December 31, 2019 of $961.0 million.

Sales for the year ended December 31, 2020 were unfavorably affected by decreased sales of:

(a) Cardiac intervention products, which decreased by ($25.1) million, or (8.2%) from the corresponding period of 2019.

This decrease was driven primarily by decreased sales of our intervention, angiography and access products.

(b) OEM products, which decreased by ($8.1) million, or (6.9%) from the corresponding period of 2019.

This decrease was driven primarily by decreased sales of our CRM/EP products and coatings.

(c) Peripheral intervention products, which decreased by ($9.4) million, or (2.7%) from the corresponding period of 2019.

This decrease was driven primarily by decreased sales of our radar localization, vertebral compression fracture, biopsy, angiography and intervention products, offset partially by increased sales of drainage products.

The foregoing decrease in sales for the year ended December 31, 2020 was partially offset by increased sales of:

(d) Custom procedural solutions products, which increased by $15.8 million, or 8.5% from the corresponding period of 2019.

This increase was driven primarily by sales of our critical care products (including $19.1 million in sales of our Cultura nasopharyngeal swab and test kits used to collect and transport samples for COVID-19 testing), partially offset by decreased sales of kits.

Endoscopy Sales.

Our endoscopy sales for the year ended December 31, 2020 were approximately $29.7 million, down (12.4)%, when compared to sales for the year ended December 31, 2019 of approximately $33.9 million.

Our endoscopy sales for the year ended December 31, 2021 were $31.5 million, up 6.2%, when compared to sales for the year ended December 31, 2020 of $29.7 million.

Sales for the year ended December 31, 2021 were favorably affected by increased sales of our Elation® Balloon Dilator and our EndoMAXX® fully covered esophageal stent.

Our endoscopy sales for the year ended December 31, 2020 were $29.7 million, down (12.4%), when compared to sales for the corresponding period in 2019 of $33.9 million.

Sales for the year ended December 31, 2020 were unfavorably affected by decreased sales of the NvisionVLE® Imaging System as a result of the suspension of our distribution agreement with NinePoint Medical, Inc.

(“NinePoint”), as well as decreased sales of probes and certain stents .

Our endoscopy sales for the year ended December 31, 2019 were approximately $33.9 million, up 1.8%, when compared to sales for the same period in 2018 of approximately $33.3 million.

Sales for the year ended December 31, 2019 were favorably affected by increased sales of our EndoMAXX™ fully covered esophageal stent, our Elation® balloon dilator, and our AEROmini® fully covered esophageal stent, partially offset by decreased sales of other stents.

Geographic Sales

Sales trends for the years ended December 31, 2021 and 2020 were influenced by the incidence and timing of COVID-19 infections and the associated governmental and patient responses, which varied between countries and regions in both the current and prior-year periods.

Listed below are sales by geography for the years ended December 31, 2021, 2020 and 2019 (in thousands, other than percentage changes):

United States

International

United States Sales:

sales for the year ended December 31, 2021 were $608.9 million, or 56.7% of net sales, up 10.7% when compared to 2020.

The increase in our domestic sales in 2021 was driven primarily by our U.S.

direct and OEM businesses.

sales for the year ended December 31, 2020 were $550.1 million, or 57.1% of net sales, down (4.5%) when compared to 2019.

The decrease in our U.S.

sales in 2020 was driven primarily by our U.S.

direct, OEM and Endoscopy businesses.

International Sales .

International sales for the year ended December 31, 2020 were approximately $413.8 million, or 42.9% of net sales, down (1.3)% from the same period of 2019.

International sales for the year ended December 31, 2019 were approximately $419.1 million, or 42.1% of net sales, up 8.5% from the year ended December 31, 2018.

The decrease in our international sales during 2020 was primarily a result of lower sales in EMEA, which decreased approximately (1.6%) or $(2.9) million and lower rest of world sales which decreased approximately (8.7%) or $(2.6) million, compared to the same period of 2019.

Our sales in APAC were essentially flat year over year.

The increase in our international sales during 2019 was primarily related to year-over-year increased sales in APAC (particularly China and Southeast Asia), which increased $28.6 million or 16.5% compared to the same period of 2018.

International sales for the year ended December 31, 2021 were $465.9 million, or 43.3% of net sales, up 12.6% when compared to 2020.

The increase in our international sales during 2021 was primarily a result of higher sales in APAC, which increased 12.8% or $25.9 million, higher sales in EMEA, which increased 11.8% or $21.7 million, and higher rest of world sales which increased 16.2% or $4.5 million, compared to the corresponding period of 2020.

International sales for the year ended December 31, 2020 were $413.8 million, or 42.9% of net sales, down (1.3%) from the year ended December 31, 2019.

The decrease in our international sales during 2020 was primarily a result of lower sales in EMEA, which decreased (1.6%) or ($2.9) million and lower rest of world sales which decreased (8.7%) or ($2.6) million, compared to the corresponding period of 2019.

Our sales in the Asia Pacific region were essentially flat year over year.

Our international sales are subject to foreign currency exchange rate fluctuations between the natural currency of a foreign country and the U.S.

Foreign currency exchange rate fluctuations, calculated by using the applicable average foreign exchange rates for the prior year increased sales 1.1% for the year ended December 31, 2021 compared to 2020 and decreased sales (0.1%) for the year ended December 31, 2020 compared to 2019.

Our gross profit as a percentage of sales was 45.2%, 41.6%, and 43.5% for the years ended December 31, 2021, 2020 and 2019, respectively.

The increase in gross profit as a percentage of sales for 2021, as compared to 2020, was primarily due to decreased amortization expense associated with acquisitions ($42.5 million in 2021 compared to $50.7 million in 2020), changes in product mix, improvements in manufacturing variances, and decreased obsolescence expense as a percentage of sales, partially offset by higher shipping and freight costs, among other factors.

The decrease in gross profit as a percentage of sales for 2020, as compared to 2019, was primarily due to changes in product mix and increased obsolescence expense associated with lower forecasted demand for certain of our products as a result of the COVID-19 pandemic, partially offset by improvements in manufacturing variances from operational efficiencies, among other factors.

The decrease in gross profit as a percentage of sales for 2019, as compared to 2018, was primarily related to increased amortization expense associated with acquisitions ($49.7 million in 2019 compared to $31.8 million in 2018), increased costs associated with new distribution sites, and adverse impacts from tariffs and foreign currency fluctuations, which were partially offset by improvements associated with changes in product mix.

Operating Expenses

Selling, General and Administrative Expenses .

Our selling, general and administrative (“SG&A”) expenses decreased approximately ($29.5) million, or (9.0)%, for the year ended December 31, 2020 compared to 2019 and increased $51.3 million, or 18.6%, for the year ended December 31, 2019 compared to 2018.

Our selling, general and administrative (“SG&A”) expenses increased $38.0 million, or 12.8%, for the year ended December 31, 2021 compared to 2020 and decreased ($29.5) million, or (9.0%), for the year ended December 31, 2020 compared to 2019.

SG&A expenses as a percentage of sales were 31.2%, 30.9% and 32.9% for the years ended December 31, 2021, 2020 and 2019, respectively.

The increase in SG&A expenses for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily related to labor-related costs, which increased due primarily to higher commissions and bonus expense in the current-year period, in contrast to temporary salary cuts and furloughs in 2020.

During the year ended December 31, 2021, w e incurred approximately $6 million of contract termination costs in SG&A to renegotiate certain terms of our September 1, 2017 share purchase agreement with IntelliMedical Technologies Pty.

(“IntelliMedical”) and $18.6 million of corporate transformation and restructuring costs, including consulting charges, in connection with our Foundations for Growth program.

The decrease in SG&A expenses for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to lower compensation expenses associated with headcount reductions and temporary salary reductions as a result of our expense reduction initiatives, lower commission expense associated with decreased sales, lower travel, entertainment and promotional expenses due to travel restrictions during the COVID-19 pandemic, and decreased acquisition and integration-related costs ($1.3 million in 2020 compared to $3.5 million in 2019), partially offset by increased idle capacity costs related to lower demand for certain products due to the COVID-19 pandemic and increased bad debt expense.

The increase in SG&A expenses for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily related to higher compensation expenses associated with an increase in headcount during 2019 to support acquisitions and the growth in operations in that period, higher commission expense associated with increased sales, higher severance costs ($5.0 million compared to $0.9 million in 2018) related to restructuring, and legal costs associated with the investigation by the U.S.

Department of Justice ($6.5 million in 2019 compared to $5.6 million in 2018), partially offset by decreased acquisition and integration-related costs ($3.5 million in 2019 compared to $7.6 million in 2018).

Research and Development Expenses .

Research and development (“R&D”) expenses decreased by ($8.1) million or (12.3)% to approximately $57.5 million for the year ended December 31, 2020, compared to approximately $65.6 million in 2019.

Our research and development (“R&D”) expenses as a percentage of sales were 6.6%, 6.0% and 6.6% for the years ended December 31 2021, 2020, and 2019, respectively.

R&D expenses increased by $13.7 million or 23.8% to $71.2 million for the year ended December 31, 2021, compared to $57.5 million in 2020.

The increase in R&D expenses for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily related to labor-related costs, which increased due to higher bonus expense in the current-year period, in contrast to temporary salary cuts and furloughs in the prior year.

We also incurred increased clinical expenses for certain R&D projects (including our Wrapsody AV Access Efficacy Study) and higher expenses related to implementation of the MDR in the European Union .

R&D expenses decreased by ($8.1) million or (12.3%) to $57.5 million for the year ended December 31, 2020, compared to $65.6 million for the year ended December 31, 2019.

The decrease in R&D expenses for the year ended December 31, 2020 was largely due to lower discretionary expenses (such as travel) and lower compensation expenses associated with headcount reductions and temporary salary reductions as a result of our expense reduction initiatives, as well as lower expenses as a result of a reduced number of research and development projects.

Research and development expenses increased by approximately $6.1 million or 10.2% to approximately $65.6 million for the year ended December 31, 2019, compared to approximately $59.5 million in 2018.

The increase in R&D expenses for the year ended December 31, 2019 was largely due to hiring additional research and development personnel to support various core and acquired product developments, as well as higher clinical and regulatory costs.

Our research and development expenses as a percentage of sales were 6.0%, 6.6% and 6.7% for 2020, 2019, and 2018, respectively.

We have a pipeline of new products, and we believe that we have an effective level of capabilities and expertise to continue the flow of new, internally developed products into the foreseeable future.

Legal Settlement .

We recorded $18.7 million of expense during the year ended December 31, 2020 in connection with a settlement agreement with the DOJ to fully resolve the DOJ’s investigation of certain marketing and promotional practices.

For the year ended December 31, 2021, we recorded approximately $10 million of net expense in connection with an agreement in principle to settle the securities class action lawsuit in December 2019 against Merit, our Chief Executive Officer and our Chief Financial Officer in the United States District Court for the Central District of California (the “Class Action Litigation”).

See Note 10 to our consolidated financial statements set forth in Item 8 of this report for additional detail regarding the Class Action Litigation and pending settlement.

This expense includes $18.25 million of settlement related costs, net of $8.2 million of insurance proceeds.

For the year ended December 31, 2020, w e recorded $18.7 million of expense in connection with a settlement agreement with the United States Department of Justice (“ DOJ”) to resolve the DOJ’s investigation of certain marketing and promotional practices.

Impairment Charges .

For the year ended December 31, 2020 we recorded impairment charges of $36.5 million, which included approximately $1.8 million related to certain right-of-use operating lease assets and property and equipment, $6.0 million related to equity investments and purchase options, and $28.7 million related to certain acquired intangible assets, which included a partial impairment charge of $8.2 million of intangible assets from our acquisition of STD Pharmaceutical Products Limited (“STD Pharmaceutical”), a partial impairment charge of $8.0 million of intangible assets from our acquisition of certain assets from Laurane Medical S.A.S, a partial impairment charge of $4.8 million related to our license agreements with ArraVasc Limited, and other intangible asset impairments charges of $7.7 million related to intangible assets from our acquisition of certain assets from DirectACCESS Medical, LLC, in-process technology intangible assets of Sontina Medical LLC acquired in connection with our acquisition of certain divested assets from BD, and a customer list intangible asset from our acquisition of ITL Healthcare Pty Ltd (“ITL”).

For the year ended December 31, 2021 we recorded impairment charges of $4.3 million.

These impairments included $1.6 million of intangible asset and $1.3 million of property and equipment due to the planned discontinuance of the Advocate™ Peripheral Angioplasty Balloon product line, sold under our license agreements with ArraVasc Limited (“ArraVasc”) and $1.4 million of impairments of certain right-of-use (“ROU”) operating lease assets due to site consolidation decisions and changes in our projected cash flows for the underlying lease assets.

For the year ended December 31, 2020 we recorded impairment charges of $36.5 million, which included $1.8 million related to certain ROU operating lease assets and property and equipment, $6.0 million related to equity investments and purchase options, and $28.7 million related to certain acquired intangible assets, which included a partial impairment charge of $8.2 million of intangible assets from our acquisition of STD Pharmaceutical Products Limited (“STD Pharmaceutical”), a partial impairment charge of $8.0 million of intangible assets from our acquisition of certain assets from Laurane Medical S.A.S, a partial impairment charge of $4.8 million related to our license agreements with ArraVasc, and other intangible asset impairments charges of $7.7 million related to intangible assets from our acquisition of certain assets from DirectACCESS Medical, LLC, in-process technology intangible assets of Sontina Medical LLC acquired in connection with our acquisition of certain divested assets from BD, and a customer list intangible asset from our acquisition of ITL Healthcare Pty Ltd (“ITL”).

For the year ended December 31, 2019 we recorded impairment charges of $23.8 million, including a $20.5 million write-off of our NinePoint note receivable and purchase option due to our assessment of the collectability of the note receivable and management’s decision not to exercise our option to purchase the business and $3.3 million of impairment charges of certain intangible assets based on changes in revenue expectations and restructuring.

For the year ended December 31, 2018 we recorded impairment charges of certain intangible assets of $0.7 million.

Contingent Consideration (Benefit) .

For the years ended December 31, 2020, 2019 and 2018, we recorded ($8.0) million, ($0.2) million and ($0.7) million, respectively, of net contingent consideration (benefit) from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions.

The (benefit) in each fiscal year relates to changes in revenue estimates, changes in the probability of achieving relevant milestones and changes in the discount rate or expected period of payment, partially offset by expense for the passage of time.

Contingent Consideration Expense (Benefit) .

For the years ended December 31, 2021, 2020 and 2019, we recorded $3.2 million, ($8.0) million and ($0.2) million, respectively, of net contingent consideration expense (benefit) from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions.

The expense (benefit) in each fiscal year relates to changes in the probability and timing of achieving certain revenue and operational milestones, as well as expense for the passage of time.

Acquired In-process Research and Development .

During the years ended December 31, 2020, 2019 and 2018, we incurred in-process research and development charges of approximately $0.3 million, $0.5 million and $0.6 million, respectively associated with various asset acquisitions.

During the years ended 2020 and 2019, we incurred in-process research and development charges of $0.3 million and $0.5 million, respectively associated with various asset acquisitions.

We did not incur in-process research and development charges during the year ended December 31, 2021.

Operating Income (Loss)

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Cardiovascular Operating Income (Loss).

Our cardiovascular operating loss for the year ended December 31, 2020 was approximately ($7.0) million, compared to cardiovascular operating income of approximately $25.8 million for the year ended December 31, 2019.

Our cardiovascular operating income for the year ended December 31, 2021 was $53.4 million, compared to cardiovascular operating loss of ($7.0) million for the year ended December 31, 2020.

This increase in cardiovascular operating income was primarily related to higher sales and increased gross margin percentage, decreased legal settlement costs ($10 million in 2021, compared to $18.7 million in 2020) and decreased impairment charges within our cardiovascular operating segment ($4.3 million in 2021 compared to $36.5 million in 2020), partially offset by increased labor-related costs, approximately $6 million of contract termination costs to renegotiate certain terms of our share purchase agreement with IntelliMedical, increased corporate transformation costs, including consulting charges, in connection with our Foundations for Growth program and increased contingent consideration ($3.2 million of expense in 2021, compared to a benefit of ($8.0) million in 2020).

Our cardiovascular operating loss for the year ended December 31, 2020 was ($7.0) million, compared to operating income of $25.8 million for the year ended December 31, 2019.

This decrease in cardiovascular operating income was primarily related to lower sales and decreased gross margin percentage during the COVID-19 pandemic, expenses of $18.7 million associated with our settlement with the DOJ, impairment charges within our cardiovascular operating segment ($36.5 million in 2020 compared to $3.3 million in 2019), partially offset by lower compensation and discretionary expenses resulting from cost cutting initiatives and our response to the COVID-19 pandemic and an increase in contingent consideration benefit from changes in the estimated fair value of contingent consideration liabilities associated with prior acquisitions.

Our cardiovascular operating income for the year ended December 31, 2019 was approximately $25.8 million, compared to operating income of approximately $49.3 million for the year ended December 31, 2018.

This decrease in cardiovascular operating income was primarily related to decreased gross margin percentage, higher compensation expenses, higher severance costs ($5.0 million compared to $0.9 million in 2018), and legal costs associated with the investigation by the DOJ ($6.5 million in 2019 compared to $5.6 million in 2018), partially offset by decreased acquisition and integration-related costs ($3.5 million in 2019 compared to $7.6 million in 2018) and increased sales.

Endoscopy Operating Income (Loss).

Our endoscopy operating income for the year ended December 31, 2020 was approximately $5.5 million, compared to an operating loss of approximately ($10.3) million for the year ended December 31, 2019.

Our endoscopy operating income for the year ended December 31, 2021 was $7.5 million, compared to operating income of $5.5 million for the year ended December 31, 2020.

This increase in endoscopy operating income relative to 2020 was primarily due to higher sales and increased gross margin percentage, partially offset by increased labor-related costs.

Our endoscopy operating income for the year ended December 31, 2020 was $5.5 million, compared to an operating loss of ($10.3) million for the year ended December 31, 2019.

This increase in endoscopy operating income relative to 2019 was primarily due to lower impairment expense in our endoscopy operating segment (none in 2020 compared to $20.5 million in 2019) and lower compensation and discretionary expenses related to cost-cutting initiatives from our response to the COVID-19 pandemic, offset partially by lower sales and lower gross margins, due in part to changes in product demand during the COVID-19 pandemic.

Our endoscopy operating income for the year ended December 31, 2019 was a loss of approximately ($10.3) million, compared to operating income of approximately $9.3 million for the year ended December 31, 2018.

This decrease was primarily the result of the impairment of a note receivable and a purchase option for NinePoint of approximately $20.5 million.

Other Income (Expense)

Our other expense for the years ended December 31, 2020, 2019 and 2018 was approximately ($11.7) million, ($13.2) million, and ($9.1) million, respectively.

The decrease in other expense for 2020 compared to 2019 was principally the result of decreased interest expense due to lower average debt balances and a lower average interest rate during 2020, a gain on the sale of our Hypotube product line in 2020, and increased interest income from notes receivable, partially offset by increased expense related to foreign currency remeasurement.

The change in other expense for 2019 over 2018 was principally the result of increased interest expense due to higher average debt balances during 2019, the write-off of $1.6 million of accrued interest related to the NinePoint note receivable, and increased expense related to foreign currency remeasurement.

Our other expense for the years ended December 31, 2021, 2020 and 2019 was ($7.0) million, ($11.7) million, and ($13.2) million, respectively.

The decrease in other expense for 2021 compared to 2020 was principally the result of decreased interest expense due to lower average debt balances and a lower average interest rate during 2021 partially offset by a gain of $0.5 million on the sale of the assets associated with our Hypotube™ product line in 2020 .

in 2020, and increased interest income from notes receivable, partially offset by increased expense related to foreign currency remeasurement.

Effective Tax Rate

Our provision for income taxes for the years ended December 31, 2021, 2020 and 2019 was a tax expense (benefit) of $5.5 million, ($3.4) million and ($3.3) million, respectively, which resulted in an effective income tax rate of 10.1%, 25.6%, and (148.6%), respectively.

The decrease in the effective income tax rate for 2021 compared to 2020 was primarily the result of a change in the jurisdictional mix of earnings, additional benefit from stock-based compensation awards, as well as more foreign tax credits being utilized.

The increase in the effective income tax rate for 2020 compared to 2019 was primarily the result of a pre-tax loss during the 2020 period, as well as a change in the jurisdictional mix of earnings.

The decrease in the effective income tax rate for 2019 compared to 2018 was primarily the result of book to tax differences related to stock options and deferred compensation as well as uncertain tax positions lapsing that generated a greater benefit due to lower pre-tax book income.

Net Income (Loss)

Our net income (loss) for the years ended December 31, 2020, 2019 and 2018 was approximately ($9.8) million, $5.5 million, and $42.0 million, respectively.

Our net income (loss) for the years ended December 31, 2021, 2020 and 2019 was $48.5 million, ($9.8) million, and $5.5 million, respectively.

The increase in net income for 2021, when compared to 2020, was primarily related to higher sales and increased gross margin percentage, as we observed an operating environment with fewer COVID-19 related restrictions throughout the year.

Legal settlement costs decreased to $10 million in 2021, compared to $18.7 million in 2020, and impairment charges decreased to $4.3 million in 2021 compared to $36.5 million in 2020.

This was partially offset by higher SG&A expenses due to higher labor-related costs, $6 million of contract termination costs to renegotiate certain terms of an acquisition agreement, increased corporate transformation costs, including consulting charges, in connection with our Foundations for Growth program , as well as contingent consideration expense of $3.2 million in 2021 compared to a benefit of ($8.0) million in 2020.

The decrease in net income for 2020, when compared to 2019, was primarily related to lower sales and decreased gross margin percentage during the COVID-19 pandemic, expenses of $18.7 million associated with our settlement with the DOJ, impairment charges ($36.5 million in 2020 compared to $23.8 million in 2019), partially offset by lower compensation and discretionary expenses resulting from cost cutting initiatives and our response to the COVID-19 pandemic and an increase in the benefit from changes in contingent consideration liabilities associated with prior acquisitions.

The decrease in net income for the year ended December 31, 2019, when compared to 2018, was primarily due to total charges of $22.1 million related to NinePoint (including the entire carrying value of the purchase option and note

receivable, along with $1.6 million of accrued interest), increased selling, general, and administrative expenses as a percentage of sales, lower gross profit as a percentage of sales, and increased interest expense compared to 2018.

Total assets utilized in our cardiovascular operating segment were approximately $1.7 billion as of December 31, 2020, compared to approximately $1.7 billion as of December 31, 2019 and approximately $1.6 billion as of December 31, 2018.

Total assets utilized in our endoscopy operating segment were approximately $9.5 million as of December 31, 2020, compared to approximately $12.3 million as of December 31, 2019 and approximately $31.0 million as of December 31, 2018.

The decrease in endoscopy total assets from December 31, 2019 to December 31, 2020 was primarily related to lower inventory levels and lower intangible asset balances (due to amortization).

The decrease in endoscopy segment total assets from December 31, 2018 to December 31, 2019 was primarily related to the impairment of the purchase option and note receivable with NinePoint.

Off-Balance Sheet Arrangements.

We have committed to provide loans of up to an additional €2 million at the discretion of Selio Medical Limited at a rate of 5% per annum until one year and 45 days have passed from the date Selio receives FDA Section 510(k) approval of a medical device it is currently developing.

The current note receivable balance from Selio is $250,000.

If exercised these loans would be securitized by all the present and future assets and property of the borrower.

Aside from this arrangement, we do not have any off-balance sheet arrangements that have had, or are reasonably likely in the future to have, an effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Liquidity and Capital Resources

Capital Commitments and Contractual Obligations

The following table summarizes our capital commitments and contractual obligations as of December 31, 2020, as well as the future periods in which such payments are currently anticipated to become due:

Payment due by period (in thousands)

Contractual Obligations

Less than 1 Year

After 5 Years

Long-term debt

Interest on long-term debt (1)

Operating leases

Royalty obligations

Total contractual cash

(1) Interest payments on our variable long-term debt were forecasted using the LIBOR forward curves plus a base of 1.25% based on the terms of our Third Amended Credit Agreement.

Interest payments on a portion of our long-term debt were forecasted using a fixed rate of 2.37% through July 2021 and a fixed rate of 2.96% from July 2021 through July 2024, as a result of our interest rate swaps (see Note 9 to our consolidated financial statements set forth in Item 8 of this report).

As of December 31, 2020, we had approximately $55.7 million of contingent consideration liabilities, $1.7 million of unrecognized tax positions, and $16.8 million of deferred compensation payable that have been recognized as liabilities that have not been included in the contractual obligations table due to uncertainty as to when such amounts may be settled.

Additional information regarding our capital commitments and contractual obligations, including royalty payments and operating leases, is contained in Notes 8, 10, and 18 to our consolidated financial statements set forth in Item 8 of this report.

At December 31, 2020 and 2019, we had cash and cash equivalents of approximately $56.9 million and $44.3 million respectively, of which approximately $42.3 million and $31.7 million, respectively, were held by foreign subsidiaries.

Our most significant contractual obligations as of December 31, 2021 included long-term debt of $243.1 million, of which $8.4 million is recorded in current liabilities, interest payments on this debt, operating lease liabilities of $72.2 million, of which $10.7 million is recorded in current liabilities, and contingent consideration liabilities of $48.2 million, of which $34.7 million is recorded in current liabilities.

Additional information about these obligations is contained in Notes 8, 15 and 17 to our consolidated financial statements set forth in Item 8 of this report.

At December 31, 2021 and 2020, we had cash and cash equivalents of $67.8 million and $56.9 million respectively, of which $55.7 million and $42.3 million, respectively, were held by foreign subsidiaries.

We do not consider our foreign earnings to be permanently reinvested.

As of December 31, 2021, approximately $1.9 million of our cash and cash equivalents represents restricted cash for the payment of certain import and other taxes for our subsidiary in China.

There was no restricted cash for the year ended December 31, 2020.

Cash held by our subsidiary in China is subject to local laws and regulations that require government approval for the transfer of such funds to entities located outside of China.

As of December 31, 2020 and 2019, we had cash and cash equivalents of approximately $15.5 million and $11.3 million, respectively, held by our subsidiary in China.

As of December 31, 2021 and 2020, we had cash and cash equivalents, including restricted cash, of $28.5 million and $15.5 million, respectively, held by our subsidiary in China.

Cash flows provided by operating activities.

We generated cash from operating activities of approximately $165.3 million, $77.8 million and $86.5 million during the years ended December 31, 2020, 2019 and 2018, respectively.

Net cash provided by operating activities increased approximately $87.5 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

We generated cash from operating activities of $147.2 million, $165.3 million and $77.8 million during the years ended December 31, 2021, 2020 and 2019, respectively.

Net cash provided by operating

activities decreased $18.0 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Significant changes in operating assets and liabilities affecting cash flows during these years included:

● Cash provided by (used for) accounts receivable was approximately $10.4 million and $(17.9) million for the years ended December 31, 2020 and 2019, respectively, due primarily to decreases in sales volume and increased allowance due to economic uncertainty, and

● Cash provided by (used for) inventories was $29.4 million and $(27.0) million for the years ended December 31, 2020 and 2019, respectively, due primarily to reduced production during the economic downturns related to the pandemic and efforts to manage inventory levels.

Net cash provided by operating activities decreased $8.7 million for the year ended December 31, 2019 compared to the year ended December 31, 2018.

● Net income (loss) was $48.5 million and ($9.8) million for the years ended December 31, 2021 and 2020, respectively.

This improvement in net income was offset by a decrease in the non-cash adjustment for the write-off of certain intangible and other long-term assets within the statement of cash flows of $4.4 million and $36.6 million for the years ended December 31, 2021 and 2020, respectively.

● Cash provided by (used for) accounts receivable was ($8.6) million and $10.4 million for the years ended December 31, 2021 and 2020, respectively, due primarily to increases in sales volume,

● Cash provided by (used for) other receivables was ($10.4) million and $1.7 million for the years ended December 31, 2021 and 2020, respectively, due primarily to an increase in an insurance receivable associated with the agreement in principle to settle the Class Action Litigation,

● Cash provided by (used for) inventories was ($25.2) million and $29.4 million for the years ended December 31, 2021 and 2020, respectively, due primarily to efforts to manage inventory levels to support the growth in sales and reduced production in the prior-year period during the economic downturn related to the COVID-19 pandemic, and

● Cash provided by accrued expenses was $36.5 million and $4.6 million for the years ended December 31, 2021 and 2020, respectively, related to increased labor-related cost accruals associated with higher commissions and bonus expense in the current-year period and a legal settlement accrual of $18.25 million in 2021 associated with the agreement in principle to settle the Class Action Litigation, among other items.

Net cash provided by operating activities increased $87.5 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

Significant changes in operating assets and liabilities affecting cash flows during these years included:

● Cash (used for) accounts receivable was approximately $(17.9) million and $(27.5) million for the years ended December 31, 2019 and 2018, respectively, due primarily to increases in sales volume, and

● Cash (used for) provided by accounts payable was $(2.3) million and $15.7 million for the years ended December 31, 2019 and 2018, respectively, due primarily to growth in operations and timing of payments.

● Cash provided by (used for) accounts receivable was $10.4 million and ($17.9) million for the years ended December 31, 2020 and 2019, respectively, due primarily to decreases in sales volume and increased allowance due to economic uncertainty, and

● Cash provided by (used for) inventories was $29.4 million and ($27.0) million for the years ended December 31, 2020 and 2019, respectively, due primarily to reduced production during the economic downturns related to the pandemic and efforts to manage inventory levels.

Cash flows used in investing activities.

We used cash in investing activities of approximately $58.6 million, $134.5 million, and $378.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.

We invested in capital expenditures for property and equipment of approximately $46.0 million, $78.2 million, and $63.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

We used cash in investing activities of $37.2 million, $58.7 million, and $134.5 million for the years ended December 31, 2021, 2020 and 2019, respectively.

We invested in capital expenditures for property and equipment of $27.9 million, $46.0 million, and $78.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Capital expenditures in each fiscal year were primarily related to investment in buildings, property and equipment to support development and production of new and expanded product lines and to facilitate growth in our distribution markets.

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Historically, we have incurred significant expenses in connection with facility construction, production automation, product development and the introduction of new products.

We anticipate that we will spend approximately $45 to $50 million in 2021 for buildings, property and equipment.

Cash outflows invested in acquisitions for the year ended December 31, 2020 were approximately $11.0 million and were primarily related to our acquisition of KA Medical.

Cash outflows for acquisitions in 2019 were approximately $53.9 million and were primarily related to our acquisition of Brightwater Medical, Inc.

We anticipate that we will spend approximately $50-60 million in 2022 for buildings, property and equipment.

Cash outflows invested in acquisitions for the year ended December 31, 2021 were $7.2 million and were primarily related to $4.1 for the settlement of deferred payments and the working capital adjustment associated with our acquisition of KA Medical, LLC (“KA Medical”) completed in November 2020 and $2.7 million for an equity investment in FluidX Medical Technology, Inc.

Cash outflows invested in acquisitions for the year ended December 31, 2020 were $11.0

million and were primarily related to our acquisition of KA Medical.

Cash outflows for acquisitions in 2019 were $53.9 million and were primarily related to our acquisition of Brightwater Medical, Inc.

(“Brightwater”) and STD Pharmaceutical.

Cash outflows for acquisitions in 2018 were approximately $301.8 million and primarily related to our acquisition of BD product lines and Cianna Medical.

For further discussion, refer to Note 3 to our consolidated financial statements set forth in Item 8 of this report.

Cash flows provided by (used in) financing activities.

Cash provided by (used in) financing activities for the years ended December 31, 2020, 2019 and 2018 was approximately ($95.7) million, $33.5 million, and $328.3 million, respectively.

In 2020 we decreased our net borrowings by approximately $88.4 million and paid contingent consideration of approximately $13.1 million, which is classified as a financing activity, principally related to our Cianna Medical acquisition.

In 2019 we increased our net borrowings by approximately $44.5 million to partially finance our current period acquisitions and pay contingent consideration of $15.7 million, principally related to our Cianna Medical acquisition.

In 2018, our primary financing activities included a public equity offering of 4,025,000 shares of common stock (from which we received net proceeds of approximately $205.0 million, which is net of approximately $12.0 million in underwriting discounts and commissions incurred and paid by us in connection with this equity offering) and additional net borrowings under our credit agreement of approximately $116.5 million to fund our acquisition activity.

This was partially offset by approximately $2.6 million used to purchase common stock to pay employee taxes resulting from the exercise of stock options.

As of December 31, 2020, we had outstanding borrowings of approximately $351.6 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $389 million, based on the leverage ratio required pursuant to the Third Amended Credit Agreement.

Our interest rate as of December 31, 2020 was a fixed rate of 2.37% on $175 million as a result of an interest rate swap (see Note 9) and a variable floating rate of 1.40% on approximately $176.6 million.

Cash provided by (used in) financing activities for the years ended December 31, 2021, 2020 and 2019 was ($98.4) million, ($95.7) million, and $33.5 million, respectively.

In 2021 we decreased our net borrowings under our Third Amended Credit Agreement by $108.5 million and paid contingent consideration of $10.7 million, which is classified as a financing activity, principally related to our acquisition of Vascular Insights LLC (“Vascular Insights”).

In 2020 we decreased our net borrowings by $88.4 million and paid contingent consideration of $13.1 million, which is classified as a financing activity, principally related to our acquisition of Cianna Medical Inc.

(“Cianna Medical”).

In 2019 we increased our net borrowings by $44.5 million to partially finance acquisitions and pay contingent consideration of $15.7 million, principally related to our Cianna Medical acquisition.

As of December 31, 2021, we had outstanding borrowings of $243.1 million and issued letter of credit guarantees of $3.5 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $490 million, based on the leverage ratio required pursuant to the Third Amended Credit Agreement.

Our interest rate as of December 31, 2021 was a fixed rate of 2.71% on $75 million as a result of an interest rate swap (see Note 9 to our consolidated financial statements set forth in Item 8 of this report) and a variable floating rate of 1.10% on $168.1 million.

Our interest rate as of December 31, 2020 was a fixed rate of 2.37% on $175 million as a result of an interest rate swap and a variable floating rate of 1.40% on $176.6 million.

The foregoing fixed rates are exclusive of changes in the notional amount and fixed rate associated with our interest rate swaps beginning July 6, 2021 and potential future changes in the applicable margin.

The foregoing fixed rates are exclusive of potential future changes in the applicable margin.

See Note 8 and Note 9 to our consolidated financial statements set forth in Item 8 of this report for additional details regarding the Third Amended Credit Agreement, our long-term debt and our interest rate swaps.

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Our significant accounting policies are summarized in Note 1 to our consolidated financial statements set forth in Item 8 of this report.

While all of these significant accounting policies affect the reporting of our financial condition and results of operations, the SEC has requested that all registrants address their most critical accounting policies.

While these significant accounting policies affect the reporting of our financial condition and results of operations, the SEC has requested that all registrants address their most critical accounting policies.

The SEC has indicated that a “critical accounting policy” is one which is both important to the representation of the registrant’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

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During our annual test of goodwill balances in 2021, which was completed during the third quarter of 2021, we determined that the fair value of each reporting unit with goodwill exceeded the carrying amount by a significant amount.

We evaluate the recoverability of intangible assets subject to amortization whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable.

This analysis requires similar significant judgments as those discussed above regarding goodwill, except that undiscounted cash flows are compared to the carrying amount of intangible assets to determine if impairment exists.

We evaluate long-lived assets, including amortizing intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

We perform the impairment analysis at the asset group for which the lowest level of identifiable cash flows is largely independent of the cash flows of other assets and liabilities.

We first compare undiscounted cash flows to the carrying amount of the asset group to determine if impairment exists, and then determine the fair value of our amortizing assets based on estimated future cash flows discounted back to their present value using a discount rate that reflects the risk profiles of the underlying activities.

This analysis requires similar significant judgments as those discussed above regarding goodwill.

In-process technology intangible assets, which are not subject to amortization until projects reach commercialization, are assessed for impairment at least annually and more frequently if events occur that would indicate a potential reduction in the fair value of the assets below their carrying value.

During the years ended December 31, 2020, 2019 and 2018, we compared the carrying value of the amortizing intangible assets acquired in acquisitions of certain assets to the undiscounted cash flows expected to result from these asset groups and determined that the carrying amounts were not recoverable.

We then determined the fair value of the amortizing assets based on estimated future cash flows discounted back to their present value using discount rates that reflect the risk profile of the underlying activities.

During the years ended December 31, 2020, 2019 and 2018 we recorded total impairment charges associated with intangible assets in our cardiovascular segment of approximately $28.7 million, $3.3 million, and $0.7 million, respectively.

During the years ended December 31, 2021, 2020 and 2019, we identified indicators of impairment associated with certain acquired intangible assets within the asset groups based on our qualitative assessment.

During the years ended December 31, 2021, 2020 and 2019 we recorded total impairment charges associated with intangible assets in our cardiovascular segment of $1.6 million, $28.7 million, and $3.3 million, respectively.

These expenses are reflected within impairment charges in our consolidated statements of income (loss).

The primary factors driving impairment of certain intangible assets were slower-than-anticipated sales growth in the acquired products, planned closure and restructuring activities, uncertainty about future product development and commercialization associated with the acquired technologies, and in 2020 economic uncertainties associated with the COVID-19 pandemic.

The primary factors driving impairment of certain intangible assets were planned closure and restructuring activities and uncertainty about future product development and commercialization associated with certain acquired technologies, due in part to the economic impacts of the COVID-19 pandemic.

See Note 5 to our consolidated financial statements set forth in Item 8 of this report for additional details regarding impairments of intangible assets.

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These assumptions are impacted by our best estimates of the timing and duration of the current COVID-19 pandemic.

We re-measure the estimated liability each quarter and record changes in the estimated fair value through operating expense in our consolidated statements of income.

Significant increases or decreases in our estimates and developments related to the COVID-19 pandemic could result in changes to the estimated fair value of our contingent consideration liability, as the result of changes in the timing and amount of revenue estimates, as well as changes in the discount rate or periods.

We re-measure the estimated liability each quarter and record changes in the estimated fair value through operating expense in our consolidated statements of income (loss).

Significant increases or decreases in our estimates and developments related to the COVID-19 pandemic could result in changes to the estimated fair value of our contingent consideration liability, as well as the result of changes in the timing and amount of revenue estimates and changes in the discount rate or periods.

Our revenue milestone contingent liability associated with the November 2018 acquisition of Cianna Medical includes a sales growth multiplier, and our revenue milestones for the acquisition of Brightwater and Vascular Insights, LLC include payment thresholds.

These and other similar contract features of our contingent consideration liabilities create sensitivity regarding the occurrence, timing, and amount of future payments.

For the years ended December 31, 2020, 2019 and 2018, we recognized c ontingent consideration benefit of approximately $8.0 million, $0.2 million and $0.7 million, respectively, from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions.

Changes in the fair value of our contingent consideration liabilities were primarily attributable to slower-than-anticipated sales growth in the acquired

products, the anticipated timing of milestone payments, and in 2020 economic uncertainties associated with the COVID-19 pandemic.

For the years ended December 31, 2021, 2020 and 2019, we recognized c ontingent consideration expense (benefit) of $3.2 million, ($8.0) million and ($0.2) million, respectively, from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions.

Changes in the fair value of our

contingent consideration liabilities were primarily attributable to changes in anticipated sales growth in the acquired products and the anticipated timing of milestone payments.

See Note 15 to our consolidated financial statements set forth in Item 8 of this report for additional details regarding our contingent liabilities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis