Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes thereto set forth in Item 8 of this report.
Overview
We design, develop, manufacture and market medical products for interventional and diagnostic procedures. For financial reporting purposes, we report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of cardiology and radiology devices, which assist in diagnosing and treating coronary arterial disease, peripheral vascular disease and other non-vascular diseases and includes embolotherapeutic, cardiac rhythm management, electrophysiology, critical care, breast cancer localization and guidance, biopsy, interventional oncology and spine devices. Our endoscopy segment consists of gastroenterology and pulmonology devices which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors. Within those two operating segments, we offer products focused in five core product categories: peripheral intervention, cardiac intervention, custom procedural solutions, OEM and endoscopy.
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 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. 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
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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
The following table sets forth certain operational data as a percentage of sales for the years indicated:
2021
2020
2019
Net sales
100
%
100
%
100
%
Gross profit
45.2
41.6
43.5
Selling, general and administrative expenses
31.2
30.9
32.9
Research and development expenses
6.6
6.0
6.6
Legal settlement
0.9
1.9
—
Impairment charges
0.4
3.8
2.4
Contingent consideration expense (benefit)
0.3
(0.8)
(0.0)
Acquired in-process research and development expense
—
0.0
0.1
Income (loss) from operations
5.7
(0.2)
1.6
Income (loss) before income taxes
5.0
(1.4)
0.2
Net income (loss)
4.5
(1.0)
0.5
Sales
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):
% Change
2021
% Change
2020
% Change
2019
Cardiovascular
Peripheral Intervention
18.6
%
$
405,116
(2.7)
%
$
341,568
27.1
%
$
350,936
Cardiac Intervention
14.6
%
320,641
(8.2)
%
279,671
9.4
%
304,797
Custom Procedural Solutions
(4.6)
%
193,942
8.5
%
203,196
3.9
%
187,359
OEM
12.5
%
123,528
(6.9)
%
109,767
2.9
%
117,889
Total
11.7
%
1,043,227
(2.8)
%
934,202
13.1
%
960,981
Endoscopy
Endoscopy devices
6.2
%
31,524
(12.4)
%
29,673
1.8
%
33,871
Total
11.5
%
$
1,074,751
(3.1)
%
$
963,875
12.7
%
$
994,852
Cardiovascular Sales. 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.
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(c) OEM products, which increased by $13.8 million, or 12.5% from the corresponding period of 2020. 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, 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 .
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):
% Change
2021
% Change
2020
% Change
2019
United States
10.7
%
608,878
(4.5)
%
550,061
16.0
%
575,711
International
12.6
%
465,873
(1.3)
%
413,814
8.5
%
419,141
Total
11.5
%
$
1,074,751
(3.1)
%
$
963,875
12.7
%
$
994,852
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United States Sales: U.S. 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. U.S. 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, 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. Dollar. 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.
Gross Profit
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.
Operating Expenses
Selling, General and Administrative Expenses . 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. Ltd. (“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.
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Research and Development Expenses . 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.
Legal Settlement . 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, 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.
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.
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Acquired In-process Research and Development . 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)
Our operating profit by operating segment for the years ended December 31, 2021, 2020 and 2019 was as follows (in thousands):
Operating Income (Loss)
2021
2020
2019
Cardiovascular
$
53,415
$
(7,042)
$
25,780
Endoscopy
7,501
5,480
(10,346)
Total operating income (loss)
$
60,916
$
(1,562)
$
15,434
Cardiovascular Operating Income (Loss). 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.
Endoscopy Operating Income (Loss). 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.
Other Income (Expense)
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 .
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
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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.
Net Income (Loss)
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.
Liquidity and Capital Resources
Capital Commitments and Contractual Obligations
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.
Cash Flows
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, 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 $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
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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:
● 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 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 $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. These investments include construction of a new manufacturing and research and development facility in South Jordan, Utah completed in early 2020 and expansion of our manufacturing facility in Tijuana, Mexico to incorporate production of our biopsy and drainage products acquired from BD and other products. 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 $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. (“Fluidx”) . Cash outflows invested in acquisitions for the year ended December 31, 2020 were $11.0
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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. 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, 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 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.
We currently believe that our existing cash balances, anticipated future cash flows from operations and borrowings under the Third Amended Credit Agreement will be adequate to fund our current and currently planned future operations for the next twelve months and the foreseeable future. In the event we pursue and complete significant transactions or acquisitions in the future, additional funds will likely be required to meet our strategic needs, which may require us to raise additional funds in the debt or equity markets.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 1 to our consolidated financial statements set forth in Item 8 of this report. 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. We base our estimates on past experience and on various other assumptions our management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ and may differ materially from these estimates under different assumptions or conditions. Additionally, changes in accounting estimates could occur in the future from period to period. The following paragraphs identify our most critical accounting policies:
Valuation of Goodwill and Intangible Assets. We allocate any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination to goodwill. We base the fair value of identifiable intangible assets acquired in a business combination on valuations that use information and assumptions that a market participant would use, including assumptions for estimated revenue projections, growth rates, cash flows, discount rates, useful life, and other relevant assumptions.
We test our goodwill balances for impairment annually as of July 1, or whenever impairment indicators arise. When impairment indicators are identified, we may elect to perform an optional qualitative assessment to determine whether it is more likely than not that the fair value of our reporting units has fallen below their carrying value. This assessment involves significant judgment, especially in the current environment due to uncertainties about the duration and impact of
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the COVID-19 pandemic. During our annual impairment test performed as of July 1, we utilized four reporting units in evaluating goodwill for impairment using a quantitative assessment, which uses a combination of a guideline public company market-based approach and a discounted cash flow income-based approach. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair value. This analysis requires significant judgment, including estimation of the amount, timing and duration of future cash flows, which is based on internal forecasts, and a determination of a discount rate based on our weighted average cost of capital. 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 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, 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 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.
Contingent Consideration. Contingent consideration is an obligation by the buyer to transfer additional assets or equity interests to the former owner upon reaching certain performance targets. 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 or other relevant milestones. In connection with a business combination, any contingent consideration is recorded at fair value on the acquisition date based upon the consideration expected to be transferred in the future. We base the fair value of contingent consideration obligations acquired in a business combination on valuations that use information and assumptions that a market participant would use, including assumptions for estimated revenue growth rates, discount rates, probabilities of achieving regulatory approval, performance, or revenue-based milestones and other relevant factors. 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 (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, 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
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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.