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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-05 · 88 added, 151 removed, 76 unchanged (76% of the section changed)

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Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties that may adversely impact our operations and financial results.

These risks and uncertainties are discussed in Part I, Item 1A “Risk Factors” in the 2020 Annual Report on Form 10-K.

These risks and uncertainties are discussed in Part I, Item 1A “Risk Factors” in the 2021 Annual Report on Form 10-K and in Part II, Item 1A “Risk Factors” in this report.

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 condensed notes thereto, which are included in Part I of this report.

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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.

For the three-month period ended September 30, 2021, we reported sales of approximately $267.0 million, up approximately $23.0 million or 9.4%, compared to sales for the three-month period ended September 30, 2020 of approximately $244.0 million.

For the nine-month period ended September 30, 2021, we reported sales of approximately $796.3 million, up approximately $90.4 million or 12.8%, compared to sales for the nine-month period ended September 30, 2020 of approximately $705.9 million.

For the three and nine-month periods ended September 30, 2021, our net sales benefitted approximately $1.4 million and $11.4 million, respectively, from foreign currency fluctuations (net of hedging) assuming applicable foreign exchange rates in effect during the comparable prior-year period.

Gross profit as a percentage of sales increased to 45.1% for the three-month period ended September 30, 2021 compared to 41.8% for the three-month period ended September 30, 2020.

Gross profit as a percentage of sales increased to 44.8% for the nine-month period ended September 30, 2021 compared to 41.1% for the nine-month period ended September 30, 2020.

Net income for the three-month period ended September 30, 2021 was approximately $12.0 million, or $0.21 per share, compared to net loss of approximately ($3.0) million, or ($0.05) per share, for the three-month period ended September 30, 2020.

Net income for the nine-month period ended September 30, 2021 was approximately $27.8 million, or $0.49 per share, compared to net loss of approximately ($25.2) million, or ($0.46) per share, for the nine-month period ended September 30, 2020.

For the three-month period ended March 31, 2022, we reported sales of $275.4 million, up $26.5 million or 10.6%, compared to sales for the three-month period ended March 31, 2021 of $248.9 million.

For the three-month period ended March 31, 2022, foreign currency fluctuations (net of hedging) decreased our net sales by $1.7 million, assuming applicable foreign exchange rates in effect during the comparable prior-year period.

Gross profit as a percentage of sales decreased to 43.9% for the three-month period ended March 31, 2022, compared to 45.0% for the three-month period ended March 31, 2021.

Net income for the three-month period ended March 31, 2022 was $10.5 million, or $0.18 per share, compared to net income of $11.0 million, or $0.19 per share, for the three-month period ended March 31, 2021.

Recent Developments and Trends

In addition to the trends identified in the 2020 Annual Report on Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview,” our business in 2021 has been impacted, and we believe will continue to be impacted, by the following recent events and trends:

● We experienced overall improvements in sales trends in the three-month period ended September, with wide variation across regions of the world and within certain geographic regions.

● During the three months ended September 30, 2021, we saw continued progress of our Wrapsody ArterioVenous (AV) Access Efficacy Pivotal Study (the “WAVE Study”) of the Endovascular Stent Graft, and published the

results from a prospective, observational, first-in-human study of the Merit WRAPSODY Endoprosthesis in CardioVascular and Interventional Radiology.

● As part of our Foundations for Growth program we have continued to focus on scrap reduction and manufacturing efficiency across manufacturing sites, which has helped offset inflationary cost pressures in certain raw materials, shipping, and freight expenses.

● As of September 30, 2021, we had cash on hand of approximately $68.9 million and net available borrowing capacity of approximately $456 million.

In addition to the trends identified in the 2021 Annual Report on Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview,” our business in 2022 has been impacted, and we believe will continue to be impacted, by the following recent developments and trends:

● Our revenue results during the three-month period ended March 31, 2022 were driven by stronger-than-anticipated demand during the month of March 2022 and more favorable sales trends in our Asia Pacific (“APAC”) and “Rest of World” (“ROW”) operations.

● Our initiatives in SKU optimization, network consolidation, product line transfers and manufacturing initiatives are helping offset inflationary cost pressures in raw materials and logistics expense.

● Following the retirement of our Chief Operating Officer (“COO”), Ronald A.

Frost, on April 19 th , 2022 we appointed Neil Peterson as COO.

During his 27 years at Merit, Mr.

Peterson has held multiple positions of increasing responsibility within the company, including the past five years as Vice President, Operations.

In that position, Mr.

Peterson was responsible for oversight of all operations at Merit’s headquarters facilities in South Jordan, Utah.

● As of March 31, 2022, we had cash, cash equivalents, and restricted cash of $55.8 million and net available borrowing capacity of approximately $475 million.

RESULTS OF OPERATIONS

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Three Months Ended

Nine Months Ended

September 30,

Selling, general and administrative expenses

Research and development expenses

Legal settlement

Impairment charges

Contingent consideration expense (benefit)

Income (loss) from operations

Other expense — net

Income (loss) before income taxes

Net income (loss)

Sales for the three-month period ended September 30, 2021 increased by 9.4%, or approximately $23.0 million, compared to the corresponding period in 2020.

Sales for the nine-month period ended September 30, 2021 increased by 12.8%, or approximately $90.4 million, compared to the corresponding period in 2020.

Listed below are the sales by product category within each of our financial reporting segments for the three and nine-month periods ended September 30, 2021 and 2020 (in thousands, other than percentage changes):

Contingent consideration expense

Income from operations

Income before income taxes

Sales for the three-month period ended March 31, 2022 increased by 10.6%, or $26.5 million, compared to the corresponding period in 2021.

Listed below are the sales by product category within each of our financial reporting segments for the three-month periods ended March 31, 2022 and 2021 (in thousands, other than percentage changes):

Three Months Ended

Nine Months Ended

September 30,

Cardiovascular

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Cardiovascular Sales.

Our cardiovascular sales for the three-month period ended September 30, 2021 were approximately $259.7 million, up 9.9% when compared to the corresponding period of 2020 of approximately $236.4 million.

Sales for the three-month period ended September 30, 2021 were favorably affected by increased sales of:

(a) Peripheral intervention products, which increased by approximately $14.3 million, or 16.5%, from the corresponding period of 2020.

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

(b) Cardiac intervention products, which increased by approximately $10.7 million, or 15.5%, from the corresponding period of 2020.

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

This increase was driven primarily by sales of our angiography products and kits.

The foregoing increase in sales for the three-month period ended September 30, 2021 was partially offset by decreased sales of:

(d) Custom procedural solutions products, which decreased by approximately ($7.0) million, or (12.4)%, from the corresponding period of 2020.

This decrease was driven primarily by decreased sales of critical care products (including an ($8.7) million decrease in Cultura TM nasopharyngeal swab and test kit sales) and trays, offset partially by sales of kits.

Our cardiovascular sales for the nine-month period ended September 30, 2021 were approximately $773.0 million, up 13.0% when compared to the corresponding period of 2020 of approximately $684.1 million.

Sales for the nine-month period ended September 30, 2021 were favorably affected by increased sales of:

(a) Peripheral intervention products, which increased by approximately $53.1 million, or 21.5%, from the corresponding period of 2020.

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

(b) Cardiac intervention products, which increased by approximately $32.5 million, or 15.7%, from the corresponding period of 2020.

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

The foregoing increase in sales for the nine-month period ended September 30, 2021 was partially offset by decreased sales of:

(d) Custom procedural solutions products, which decreased by approximately ($5.9) million, or (3.9)%, from the corresponding period of 2020.

This decrease was driven primarily by sales of critical care products (including a ($11.9) million decrease in Cultura TM nasopharyngeal swab and test kit sales) and trays, offset partially by increased sales of kits.

Our cardiovascular sales for the three-month period ended March 31, 2022 were $266.9 million, up 10.8% when compared to the corresponding period of 2021 of $241.0 million.

Sales for the three-month period ended March 31, 2022 were favorably affected by increased sales of:

(a) Peripheral intervention products, which increased by $12.9 million, or 13.8%, from the corresponding period of 2021.

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

(b) Cardiac intervention products, which increased by $6.8 million, or 9.0%, from the corresponding period of 2021.

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

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

(d) Custom procedural solutions products, which increased by $0.8 million, or 1.9%, from the corresponding period of 2021.

This increase was driven primarily by sales of our kits and trays, offset partially by decreased sales of our critical care products.

Endoscopy Sales .

Our endoscopy sales for the three-month period ended September 30, 2021 were approximately $7.3 million, down (3.2)%, when compared to sales in the corresponding period of 2020 of approximately $7.6 million.

Sales for the three-month period ended September 30, 2021 were unfavorably affected by decreased sales of our EndoMAXX® fully covered esophageal stent, offset partially by increased sales of other stents and our Elation® Balloon Dilator.

Our endoscopy sales for the nine-month period ended September 30, 2021 were approximately $23.3 million, up 7.0%, when compared to sales in the corresponding period of 2020 of approximately $21.7 million.

Sales for the nine-month period ended September 30, 2021 were favorably affected by increased sales of our Elation® Balloon Dilator and other stents.

Our endoscopy sales for the three-month period ended March 31, 2022 were $8.5 million, up 7.2%, when compared to sales in the corresponding period of 2021 of $7.9 million.

Sales for the three-month period ended March 31, 2022 were favorably affected by increased sales of our EndoMAXX® fully covered esophageal stent and other stents.

Geographic Sales

Sales trends for the three and nine-month periods ended September 30, 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 three and nine-month periods ended September 30, 2021 and 2020 (in thousands, other than percentage changes):

Listed below are sales by geography for the three-month periods ended March 31, 2022 and 2021 (in thousands, other than percentage changes):

Three Months Ended

Nine Months Ended

September 30,

United States

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United States Sales.

sales for the three-month period ended September 30, 2021 were approximately $151.5 million, or 56.7% of net sales, up 5.9% when compared to the corresponding period of 2020.

The increase in our domestic sales in the three-month period ended September 30, 2021 compared to the three-month period ended September 30, 2020 was driven primarily by our U.S.

sales for the three-month period ended March 31, 2022 were $153.0 million, or 55.5% of net sales, up 8.2% when compared to the corresponding period of 2021.

The increase in our domestic sales in the three-month period ended March 31, 2022 compared to the three-month period ended March 31, 2021 was driven primarily by our U.S.

Direct and OEM businesses.

sales for the nine-month period ended September 30, 2021 were approximately $451.6 million, or 56.7% of net sales, up 12.3% when compared to the corresponding period of 2020.

The increase in our domestic sales for the nine-month period ended September 30, 2021 compared to the nine-month period ended September 30, 2020 was driven primarily by our U.S.

direct business.

International Sales .

International sales for the three-month period ended September 30, 2021 were approximately $115.5 million, or 43.3% of net sales, up 14.5% when compared to the corresponding period of 2020 of approximately $100.9 million.

The increase in our international sales for the three-month period ended September 30, 2021, compared to the three-month period ended September 30, 2020, included increased sales in our Asia Pacific (“APAC”) operations of $6.6 million or 13.2%, in EMEA of $6.0 million or 13.6% and increased sales in the rest of the world (“ROW”) of $2.1 million of 30.6%.

International sales for the nine-month period ended September 30, 2021 were approximately $344.6 million, or 43.3% of net sales, up 13.5% when compared to the corresponding period of 2020 of approximately $303.6 million.

The increase in our international sales for the nine-month period ended September 30, 2021, compared to the nine-month period ended September 30, 2020, included increased sales in APAC of $21.8 million or 14.7%, in EMEA of $15.9 million or 11.7%, and in ROW of $3.4 million or 17.2%.

Our gross profit as a percentage of sales increased to 45.1% for the three-month period ended September 30, 2021, compared to 41.8% for the three-month period ended September 30, 2020.

The increase in gross profit percentage was primarily due to changes in product mix, lower amortization expense (as certain intangibles from prior acquisitions became fully amortized), and improvements in manufacturing variances from operational efficiencies and increased production volume, partially offset by higher freight costs .

Our gross profit as a percentage of sales increased to 44.8% for the nine-month period ended September 30, 2021, compared to 41.1% for the nine-month period ended September 30, 2020.

The increase in gross profit percentage was primarily due to lower amortization expense (as certain intangibles from prior acquisitions became fully amortized), changes in product mix, decreased obsolescence expense as a percentage of sales, and improvements in manufacturing variances from operational efficiencies and increased production volume .

International sales for the three-month period ended March 31, 2022 were $122.4 million, or 44.5% of net sales, up 13.8% when compared to the corresponding period of 2021 of $107.5 million.

The increase in our international sales for the three-month period ended March 31, 2022, compared to the three-month period ended March 31, 2021, included increased sales in our APAC operations of $9.3 million or 18.1%, in our ROW operations of $3.1 million or 46.1%, and in our EMEA operations of $2.5 million or 5.0%.

Our gross profit as a percentage of sales decreased to 43.9% for the three-month period ended March 31, 2022, compared to 45.0% for the three-month period ended March 31, 2021.

The decrease in gross profit percentage was primarily due to unfavorable manufacturing variances from the impact of inflationary pressures, higher freight costs and increased obsolescence expense, offset partially by changes in product mix and lower amortization expense as a percentage of sales (primarily due to higher sales compared to the corresponding period of 2021).

Operating Expenses

Selling, General and Administrative Expense.

Selling, general and administrative ("SG&A") expenses increased approximately $14.3 million, or 19.7%, for the three-month period ended September 30, 2021 compared to the corresponding period of 2020.

As a percentage of sales, SG&A expenses were 32.4% for the three-month period ended September 30, 2021, compared to 29.6% for the corresponding period of 2020.

For the three-month period ended September 30, 2021, compared to the corresponding period of 2020, labor-related costs increased due to higher commissions and bonus expense in the current-year period, in contrast to temporary salary cuts and furloughs in the prior-year period.

We incurred $4.3 million of corporate transformation and restructuring costs, including consulting charges, during the three-month period ended September 30, 2021 in connection with our Foundations for Growth program, compared to restructuring costs of $2.8 million for the three-month period ended September 30, 2020.

These increased costs were offset partially by lower idle capacity costs due to increased production compared to the prior-year period.

SG&A expenses increased approximately $41.3 million, or 18.9%, for the nine-month period ended September 30, 2021 compared to the corresponding period of 2020.

As a percentage of sales, SG&A expenses were 32.5% for the nine-month period ended September 30, 2021, compared to 30.9% for the corresponding period of 2020.

For the nine-month period ended September 30, 2021, compared to the corresponding period of 2020, labor-related costs increased due to higher commissions and bonus expense in the current-year period, in contrast to temporary salary cuts and furloughs in the prior-year period.

We incurred $17.0 million of corporate transformation and restructuring costs, including consulting charges, during the nine-month period ended September 30, 2021 in connection with our Foundations for Growth program, compared to restructuring costs of $6.3 million for the nine-month period ended September 30, 2020.

We also recorded approximately $6 million of contract termination costs in SG&A during the nine-month period ended September 30, 2021 to renegotiate certain terms of an acquisition agreement.

These increased costs were offset partially by lower idle capacity costs due to increased production compared to the prior-year period.

Selling, general and administrative ("SG&A") expenses increased $3.0 million, or 3.7%, for the three-month period ended March 31, 2022 compared to the corresponding period of 2021.

As a percentage of sales, SG&A expenses were 30.5% for the three-month period ended March 31, 2022, compared to 32.6% for the corresponding period of 2021.

For the three-month period ended March 31, 2022, SG&A expenses increased compared to the corresponding period of 2021 primarily due to labor related costs, including higher commissions, salaries and wages, partially offset by lower consulting costs.

We incurred $5.1 million of corporate transformation and restructuring costs, including consulting charges, during the three-month period ended March 31, 2022 in connection with our Foundations for Growth program, compared to corporate transformation and restructuring costs of $5.4 million for the three-month period ended March 31, 2021.

Research and Development Expenses.

Research and development ("R&D") expenses for the three-month period ended September 30, 2021 were approximately $17.0 million, up 25.7%, when compared to R&D expenses in the corresponding period of 2020 of approximately $13.5 million.

R&D expenses for the nine-month period ended September 30, 2021 were approximately $50.8 million, up 19.9%, when compared to R&D expenses in the corresponding period of 2020 of approximately $42.4 million.

The increase in R&D expenses for the three and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020 was largely due to increased clinical expenses for certain R&D projects (including our WRAPSODY AV Access Efficacy Study), increased compensation expense due to temporary salary cuts and furloughs in the prior-year periods, and higher expenses related to implementation of the Medical Device Regulation in the European Union.

Legal Settlement.

We recorded a settlement in the nine-month period ended September 30, 2020 of $18.2 million in connection with an agreement in principle with the Department of Justice (“DOJ”) to fully resolve the DOJ’s investigation of certain marketing and promotional practices.

Research and development ("R&D") expenses for the three-month period ended March 31, 2022 were $17.4 million, up 6.8%, when compared to R&D expenses in the corresponding period of 2021 of $16.3 million.

The increase in R&D expenses for the three-month period ended March 31, 2022 compared to the corresponding period in 2021 was largely due to higher labor-related costs, increased clinical expenses for certain R&D projects (including clinical trials for our Embosphere® Microspheres and WRAPSODY TM Endoprosthesis) and higher expenses related to implementation of the Medical Device Regulation in the European Union.

Impairment Charges .

For the nine-month period ended September 30, 2021 we recorded impairment charges of approximately $4.3 million.

These impairments included $1.6 million of intangible assets 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, and $1.4 million of impairments of certain ROU operating lease assets due to site consolidation decisions and changes in our projected cash flows for the underlying lease assets.

For the three and nine-month periods ended September 30, 2020, we recorded impairment charges of approximately $20.6 million and $28.3 million, respectively.

These impairments included a $3.5 million write-off in the first quarter of 2020 of our purchase option to acquire Bluegrass Vascular due to our decision not to exercise our option to purchase this company, $0.4 million impairment in the first quarter of property and equipment related to our distribution agreement with NinePoint, $2.4 million impairment in the second quarter of the customer list intangible asset from our ITL acquisition, $1.5 million impairment in the second quarter of our right-of-use operating lease asset associated with closure of a facility in California, $2.5 million impairment in the third quarter related to our equity investment in the preferred shares of Fusion due to uncertainty about future product development and commercialization associated with the technologies, and $18.1 in the third quarter for intangible impairment charges based on planned closure and restructuring activities and uncertainty about

future product development and commercialization associated with the acquired technologies due in part to the economic impacts of the COVID-19 pandemic.

Contingent Consideration Expense (Benefit) .

For the three and nine-month periods ended September 30, 2021, we recognized c ontingent consideration expense from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions of approximately $1.1 million and $3.3 million, respectively, compared to contingent consideration expense (benefit) of ($4.4) million and $0.9 million for the three and nine-month periods ended September 30, 2020.

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

Operating Income (Loss)

The following table sets forth our operating income (loss) by financial reporting segment for the three and nine-month periods ended September 30, 2021 and 2020 (in thousands):

For the three-month period ended March 31, 2022, we recorded impairment charges of $1.7 million of intangible assets due to the planned divestiture of the STD Pharmaceutical business, which we completed on April 30, 2022.

We recorded no impairment charges during the three-month period ended March 31, 2021 .

Contingent Consideration Expense .

For the three-month period ended March 31, 2022, we recognized c ontingent consideration expense from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions of $2.6 million compared to contingent consideration expense of $0.4 million for the three-month period ended March 31, 2021.

Expense in each period related to changes in the probability and timing of achieving certain revenue and operational milestones, as well as expense for the passage of time.

Operating Income

The following table sets forth our operating income by financial reporting segment for the three-month periods ended March 31, 2022 and 2021 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Operating Income (Loss)

Operating Income

Cardiovascular

Total operating income (loss)

Cardiovascular Operating Income (Loss).

Our cardiovascular operating income for the three-month period ended September 30, 2021 was approximately $14.4 million, compared to cardiovascular operating loss in the corresponding period of 2020 of approximately ($1.7) million.

The increase in cardiovascular operating income during the three-month period ended September 30, 2021 compared to the corresponding period of 2020 was primarily a result of higher sales ($259.7 million compared to $236.4 million), higher gross margin and decreased impairment expense (none in the three-month period ended September 30, 2021 compared to $20.6 million in the three-month period ended September 30, 2020), partially offset by increased SG&A and R&D expenses and higher contingent consideration expense.

Our cardiovascular operating income for the nine-month period ended September 30, 2021 was approximately $33.4 million, compared to cardiovascular operating loss in the corresponding period of 2020 of approximately ($20.7) million.

The increase in cardiovascular operating income during the nine-month period ended September 30, 2021 compared to the corresponding period of 2020 was primarily a result of higher sales ($773.0 million compared to $684.1 million), higher gross margin, lower impairment expense ($4.3 million for the nine-month period ended September 30, 2021 compared to $27.9 million for the nine-month period ended September 30, 2020) and t he $18.2 million legal settlement expense related to the DOJ inquiry recorded in the prior-year period, partially offset by increased SG&A and R&D expenses and higher contingent consideration expense.

Total operating income

Cardiovascular Operating Income.

Our cardiovascular operating income for the three-month period ended March 31, 2022 was $13.1 million, compared to cardiovascular operating income in the corresponding period of 2021 of $12.2 million.

The increase in cardiovascular operating income during the three-month period ended March 31, 2022 compared to the corresponding period of 2021 was primarily a result of higher sales ($266.9 million compared to $241.0 million), partially offset by increased SG&A and R&D expenses, higher contingent consideration expense, and impairment charges in the three-month period ended March 31, 2022 of $1.7 million.

Endoscopy Operating Income .

Our endoscopy operating income for the three-month period ended September 30, 2021 was approximately $1.5 million, compared to endoscopy operating income of approximately $1.8 million for the corresponding period of 2020.

This decrease in endoscopy operating income was primarily a result of increased operating expenses (due in part to temporary salary reductions and furloughs during the three-month period ended September 30, 2020).

Our endoscopy operating income for the nine-month period ended September 30, 2021 was approximately $5.6 million, compared to endoscopy operating income of approximately $3.1 million for the corresponding period of 2020.

This increase in endoscopy operating income was primarily a result of higher sales, improved gross margins (largely a result of the write-off of inventory related to the suspension of our distribution agreement with NinePoint in the first quarter of 2020, which did not repeat in 2021) and decreased impairment expense (none in the nine-month period ended September 30, 2021 compared to approximately $0.4 million in the nine-month period ended September 30, 2020).

Our endoscopy operating income for the three-month period ended March 31, 2022 was $2.1 million, approximately flat compared to endoscopy operating income of $2.0 million for the corresponding period of 2021.

Other Expense

Our other expense for the three-month periods ended September 30, 2021 and 2020 was approximately ($1.8) million and ($2.2) million, respectively.

The change in other expense was primarily related to decreased interest expense as a result of a lower effective interest rate and a lower average debt balance and a gain of approximately $0.5 million on the sale of the assets associated with our Hypotube product line in the third quarter of 2020 .

Our other expense for the nine-month periods ended September 30, 2021 and 2020 was approximately ($5.3) million and ($8.9) million, respectively.

The change in other expense was primarily related to decreased interest expense as a result of a lower effective interest rate and a lower average debt balance, an increase in interest income due to partial recoveries of loan interest from NinePoint which had previously been written off, and a gain of approximately $0.5 million on the sale of the assets associated with our Hypotube product line in the third quarter of 2020 .

Our other expense for the three-month periods ended March 31, 2022 and 2021 was ($1.1) million and ($1.5) million, respectively.

The change in other expense was primarily related to decreased interest expense as a result of a lower average debt balance despite a higher effective interest rate.

Effective Tax Rate

Our provision for income taxes for the three-month periods ended September 30, 2021 and 2020 was a tax expense of approximately $2.2 million and $0.8 million, respectively, which resulted in an effective tax rate of 15.6% and (37.7)%, respectively.

Our provision for income taxes for the nine-month periods ended September 30, 2021 and 2020 was a tax expense (benefit) of approximately $5.9 million and ($1.3) million, respectively, which resulted in an effective tax rate of 17.5% and 4.7%, respectively.

The increase in the income tax expense and the corresponding change in the effective income tax rate for the three and nine-month periods ended September 30, 2021, when compared to the prior-year periods, was primarily due to a pre-tax loss during the 2020 periods, as well as a change in the jurisdictional mix of earnings.

Our provision for income taxes for the three-month periods ended March 31, 2022 and 2021 was a tax expense of $3.6 million and $1.7 million, respectively, which resulted in an effective tax rate of 25.6% and 13.7%, respectively.

The increase in the income tax expense and the corresponding change in the effective income tax rate for the three-month period ended March 31, 2022, when compared to the prior-year period, was primarily due to decreased benefit from discrete items such as share-based compensation.

Our effective tax rate differs from the U.S.

statutory rate primarily due to the impact of GILTI inclusions, state income taxes, foreign taxes, other non-deductible permanent items and discrete items (such as share-based compensation).

Net Income (Loss)

Our net income (loss) for the three-month periods ended September 30, 2021 and 2020 was approximately $12.0 million and ($3.0) million, respectively.

The increase in our net income for the three-month period ended September 30, 2021 was the result of several factors, including increased sales and improved gross margins, lower impairment expense (none in the three-month period ended September 30, 2021 compared to $20.6 million in the three-month period ended September 30, 2020), and lower interest expense, partially offset by increased SG&A expenses, increased R&D expenses and higher contingent consideration expense ($1.1 million expense in the three-month period ended September 30, 2021 compared to ($4.4) million benefit in the three-month period ended September 30, 2020).

Our net income (loss) for the nine-month periods ended September 30, 2021 and 2020 was approximately $27.8 million and ($25.2) million, respectively.

This increase in our net income for the nine-month period ended September 30, 2021 was the result of several factors, including increased sales and improved gross margins, the $18.2 million legal settlement related to the DOJ inquiry recorded in the prior-year period, lower impairment expense ($4.3 million in the nine-month period ended September 30, 2021 compared to $28.3 million in the nine-month period ended September 30, 2020), and lower interest expense, partially offset by increased SG&A expenses, which included approximately $6 million of contract termination costs, higher contingent consideration expense ($3.3 million in the nine-month period ended September 30, 2021 compared to $0.9 million in the nine-month period ended September 30, 2020) and increased R&D expenses.

Our net income for the three-month periods ended March 31, 2022 and 2021 was $10.5 million and $11.0 million, respectively.

The decrease in our net income for the three-month period ended March 31, 2022 was the result of several

factors, including lower gross margins as a percentage of sales, higher SG&A and R&D expenses, higher contingent consideration expense ($2.6 million for the three-month period ended March 31, 2022 compared to $0.4 million for the corresponding period of 2021), impairment charges of $1.7 million during the three-month period ended March 31, 2022, and higher income tax expense, partially offset by higher sales.

LIQUIDITY AND CAPITAL RESOURCES

Capital Commitments, Contractual Obligations and Cash Flows

At September 30, 2021 and December 31, 2020, our current assets exceeded current liabilities by $250.0 million and $244.7 million, respectively, and we had cash and cash equivalents of approximately $68.9 million and $56.9 million, respectively, of which approximately $63.7 million and $42.3 million, respectively, were held by foreign subsidiaries.

At March 31, 2022 and December 31, 2021, our current assets exceeded current liabilities by $274.3 million and $245.9 million, respectively, and we had cash, cash equivalents and restricted cash of $55.8 million and $67.8 million, respectively, of which $49.8 million and $55.7 million, respectively, were held by foreign subsidiaries.

We currently believe f uture repatriation of cash and other property held by our foreign subsidiaries will generally not be subject to U.S.

federal income tax .

As a result, we are not permanently reinvested with respect to our historic unremitted foreign

As a result, we are not permanently reinvested with respect to our historic unremitted foreign earnings.

In addition, 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 September 30, 2021, and December 31, 2020, we had cash and cash equivalents of approximately $33.6 million and $15.5 million, respectively, within our subsidiary in China.

As of March 31, 2022, and December 31, 2021, we had cash, cash equivalents and restricted cash of $26.6 million and $28.5 million, respectively, within our subsidiary in China.

Cash flows provided by operating activities .

We generated cash from operating activities of approximately $101.4 million and $128.4 million during the nine-month periods ended September 30, 2021 and 2020, respectively.

Net cash provided by operating activities decreased approximately $26.9 million for the nine-month period ended September 30, 2021 compared to the nine-month period ended September 30, 2020.

We generated cash from operating activities of $12.0 million and $35.2 million during the three-month periods ended March 31, 2022 and 2021, respectively.

Net cash provided by operating activities decreased $23.2 million for the three-month period ended March 31, 2022 compared to the three-month period ended March 31, 2021.

Significant factors affecting operating cash flows during these periods included:

● Net income (loss) was approximately $27.8 million and ($25.2) million for the nine-month periods ended September 30, 2021 and 2020, respectively.

This improvement in earnings 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 $28.4 million for the nine-month periods ended September 30, 2021 and 2020, respectively.

● Cash provided by (used for) accounts receivable was approximately ($6.2) million and $13.0 million for the nine-month periods ended September 30, 2021 and 2020, respectively, due primarily to increased sales volume during the nine-month period ended September 30, 2021 compared to the corresponding period of 2020.

● Cash provided by (used for) inventories was approximately ($11.2) million and $15.7 million for the nine-month periods ended September 30, 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.

● Cash provided by (used for) accrued expenses was ($23.5) million and $5.4 million for the three-month periods ended March 31, 2022 and 2021, respectively, due primarily to the payment of approximately $18.25 million into escrow in connection with the settlement of the consolidated securities class action lawsuit (see Note 9 to our consolidated financial statements set forth in Item 1 of this report) and the timing of payment of bonuses and other accrued liabilities in each period.

● Cash provided by (used for) other receivables was $5.8 million and ($0.6) million for the three-month periods ended March 31, 2022 and 2021, respectively, due primarily to the collection of approximately $8.2 million of insurance proceeds in connection with the consolidated securities class action lawsuit (see Note 9 to our consolidated financial statements set forth in Item 1 of this report).

● Cash (used for) inventories was ($9.2) million and ($3.4) million for the three-month periods ended March 31, 2022 and 2021, respectively.

The increase in inventory was associated with our strategy to proactively invest in our inventory balances to build the requisite safety stock and encourage high customer service levels.

Cash flows used in investing activities.

We used cash in investing activities of approximately $22.6 million and $36.8 million for the nine-month periods ended September 30, 2021 and 2020, respectively.

We used cash for capital expenditures of property and equipment of approximately $19.6 million and $35.6 million in the nine-month periods ended September 30, 2021 and 2020, respectively.

Capital expenditures in each period were primarily related to investment in facilities and property and equipment to support development and production of our products, and in 2020, these investments included construction of a new manufacturing and research and development facility in South Jordan, Utah, completed in early 2020.

We used cash in investing activities of $9.9 million and $6.3 million for the three-month periods ended March 31, 2022 and 2021, respectively.

We used cash for capital expenditures of property and equipment of $9.5 million and $6.2 million in the three-month periods ended March 31, 2022 and 2021, respectively.

Capital expenditures in each period were primarily related to investment in property and equipment to support development and production of our 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 $30 to $40 million in 2021 for buildings, property and equipment.

Cash outflows invested in acquisitions for the nine-month periods ended September 30, 2021 and 2020 were approximately $1.9 million and $0.3 million, respectively.

Cash paid for acquisitions for the nine-month period ended September 30, 2021 were primarily related to our settlement of the first deferred payment for our acquisition of KA Medical completed in November 2020.

We anticipate that we will spend approximately $55 to $60 million in 2022 for property and equipment.

Cash flows used in financing activities.

Cash used in financing activities for the nine-month periods ended September 30, 2021 and 2020 was approximately $66.0 million and $91.2 million, respectively.

We decreased our net borrowings by approximately $72.6 and $82.3 million for the nine-month periods ended September 30, 2021 and 2020, respectively, by paying down our debt.

We completed payment of contingent consideration of $10.6 million and $13.0 million for the nine-month periods ended September 30, 2021 and 2020, respectively, which is classified as a financing activity, principally related to our acquisitions of Vascular Insights and Cianna Medical, Inc, respectively.

As of September 30, 2021, we had outstanding borrowings of approximately $279 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $456 million, based on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Third Amended Credit Agreement.

Our interest rate as of September 30, 2021 was a fixed rate of 2.71% on $75 million as a result of an interest rate swap and a variable floating rate of 1.08% on $204.0 million.

Cash used in financing activities for the three-month periods ended March 31, 2022 and 2021 was $14.2 million and $26.2 million, respectively.

During the three-month period ended March 31, 2022 we increased our net borrowings by approximately $9.6 million to partially finance the payment of contingent consideration of $24.5 million, principally related to our acquisition of Cianna Medical, Inc.

During the three-month period ended March 31, 2021 we decreased our net borrowings by approximately $30.9 million.

As of March 31, 2022, we had outstanding borrowings of $253 million and issued letter of credit guarantees of $3.4 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $475 million, based on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Third Amended Credit Agreement.

Our interest rate as of March 31, 2022 was a fixed rate of 2.71% on $75 million as a result of an interest rate swap and a variable floating rate of 1.46% on $177.8 million.

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 and a variable floating rate of 1.10% on $168.1 million.

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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.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements are reported in Part II, Item 7 "

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

of the 2020 Annual Report on Form 10-K.

In the three and nine-month periods ended September 30, 2021, there were no material changes from the information provided therein.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial results are affected by the selection and application of accounting policies and methods.

In the three and nine-month periods ended September 30, 2021, there were no changes to the application of critical accounting policies previously disclosed in Part II, Item 7 of the 2020 Annual Report on Form 10-K.

In the three-month period ended March 31, 2022 there were no changes to the application of critical accounting policies previously disclosed in Part II, Item 7 of the 2021 Annual Report on Form 10-K.

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

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However, failure to include such symbols is not intended to suggest, in any way, that we will not assert our rights or the rights of any applicable licensor, to these trademarks and tradenames.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about exchange rate risk are included in Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk"

of the 2021 Annual Report on Form 10-K.

In the three-month period ended March 31, 2022, there were no material changes from the information provided therein.

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-Q

Item 2. Management’s Discussion and Analysis