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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-06 · 115 added, 66 removed, 98 unchanged (65% of the section changed)

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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 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.

For the three-month period ended June 30, 2022, we reported sales of $295.0 million, up $14.7 million or 5.2%, compared to sales for the three-month period ended June 30, 2021 of $280.3 million.

For the six-month period ended June 30, 2022, we reported sales of $570.4 million, up $41.2 million or 7.8%, compared to sales for the six-month period ended June 30, 2021 of $529.2 million.

For the three and six-month periods ended June 30, 2022, foreign currency fluctuations (net of hedging) decreased our net sales by $6.1 million and $7.8 million, respectively, assuming applicable foreign exchange rates in effect during the comparable prior-year periods.

Gross profit as a percentage of sales increased to 45.8% for the three-month period ended June 30, 2022 compared to 44.3% for the three-month period ended June 30, 2021.

Gross profit as a percentage of sales increased to 44.9% for the six-month period ended June 30, 2022 compared to 44.6% for the six-month period ended June 30, 2021.

Net income for the three-month period ended June 30, 2022 was $15.3 million, or $0.27 per share, compared to net income of $4.9 million, or $0.09 per share, for the three-month period ended June 30, 2021.

Net income for the six-month period ended June 30, 2022 was $25.8 million, or $0.45 per share, compared to net income of $15.9 million, or $0.28 per share, for the six-month period ended June 30, 2021.

Recent Developments and Trends

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.

● Our revenue results during the three-month period ended June 30, 2022 were driven primarily by stronger-than-anticipated demand in the U.S.

and more favorable than anticipated international sales trends, particularly in the EMEA and “Rest of World” (“ROW”) regions.

● Our clinical study, the “WAVE Study”, of the WRAPSODY™ Endovascular Stent Graft, an investigational device being studied for the treatment of stenosis or occlusion within dialysis outflow circuits continues to progress.

We have 40 clinical sites actively enrolling patients in the study.

● We announced first patient enrollment in two new studies in recent months:

(1) the “WRAP” study which, is designed to evaluate the clinical benefits associated with the use of the WRAPSODY Cell-Impermeable Endoprosthesis in patients receiving hemodialysis that experience a narrowing (stenosis) or blockage (occlusion) of blood vessels required for dialysis (vascular access) and (2) the “STREAMLoc” study which is a Canadian registry intended to demonstrate the utility of the SCOUT® Surgical Guidance system to improve workflow and efficiency in Canadian centers diagnosing and treating breast cancer.

● During the first half of 2022, we received “Breakthrough Device Designation” for Embosphere Microspheres for use in genicular artery embolization for symptomatic knee osteoarthritis, we received clearance for the SCOUT Bx™ Delivery System, a notable addition to the Merit Oncology Breast and Soft Tissue Localization portfolio, and we announced the launch of a new SCOUT Mini Reflector.

● As of June 30, 2022, we had cash, cash equivalents, and restricted cash of $65.2 million and net available borrowing capacity of approximately $481 million.

RESULTS OF OPERATIONS

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Three Months Ended

Six Months Ended

Selling, general and administrative expenses

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Contingent consideration expense

Acquired in-process research and development expense

Income from operations

Other expense — net

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):

Sales for the three-month period ended June 30, 2022 increased by 5.2%, or $14.7 million, compared to the corresponding period in 2021.

Sales for the six-month period ended June 30, 2022 increased by 7.8%, or $41.2 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 and six-month periods ended June 30, 2022 and 2021 (in thousands, other than percentage changes):

Three Months Ended

Six Months Ended

Cardiovascular

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Cardiovascular Sales.

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:

Our cardiovascular sales for the three-month period ended June 30, 2022 were $286.7 million, up 5.3% when compared to the corresponding period of 2021 of $272.3 million.

Sales for the three-month period ended June 30, 2022 were favorably affected by increased sales of:

(a) Peripheral intervention products, which increased by $5.4 million, or 5.1%, 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.

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

(b) Cardiac intervention products, which increased by $3.9 million, or 4.6%, 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 intervention and access 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.

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

(d) Custom procedural solutions products, which increased by $0.5 million, or 0.9%, from the corresponding period of 2021.

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

Our cardiovascular sales for the six-month period ended June 30, 2022 were $553.6 million, up 7.9% when compared to the corresponding period of 2021 of $513.3 million.

Sales for the six-month period ended June 30, 2022 were favorably affected by increased sales of:

(e) Peripheral intervention products, which increased by $18.2 million, or 9.2%, 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.

(f) Cardiac intervention products, which increased by $10.7 million, or 6.7%, from the corresponding period of 2021.

This increase was driven primarily by sales of our intervention, angiography and access 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).

(g) OEM products, which increased by $10.1 million, or 16.8%, from the corresponding period of 2021.

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

(h) Custom procedural solutions products, which increased by $1.3 million, or 1.4%, 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 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.

Our endoscopy sales for the three-month period ended June 30, 2022 were $8.3 million, up 3.4%, when compared to sales in the corresponding period of 2021 of $8.0 million.

Sales for the three-month period ended June 30, 2022 were favorably affected by increased sales of our Elation Pulmonary Balloon Dilator .

Our endoscopy sales for the six-month period ended June 30, 2022 were $16.8 million, up 5.3%, when compared to sales in the corresponding period of 2021 of $15.9 million.

Sales for the six-month period ended June 30, 2022 were favorably affected by increased sales of our Elation Pulmonary Balloon Dilator , EndoMAXX® fully covered esophageal stent and other stents.

Geographic Sales

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

Listed below are sales by geography for the three and six-month periods ended June 30, 2022 and 2021 (in thousands, other than percentage changes):

Three Months Ended

Six Months Ended

United States

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United States Sales.

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.

sales for the three-month period ended June 30, 2022 were $164.7 million, or 55.8% of net sales, up 3.7% when compared to the corresponding period of 2021.

sales for the six-month period ended June 30, 2022 were $317.7 million, or 55.7% of net sales, up 5.8% when compared to the corresponding period of 2021.

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

Direct and OEM businesses.

International Sales .

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).

International sales for the three-month period ended June 30, 2022 were $130.3 million, or 44.2% of net sales, up 7.2% when compared to the corresponding period of 2021 of $121.6 million.

The increase in our international sales for the three-month period ended June 30, 2022, compared to the three-month period ended June 30, 2021, included increased sales in our APAC operations of $0.5 million or 0.9%, in our ROW operations of $4.3 million or 59.5%, and in our EMEA operations of $3.9 million or 7.3%.

International sales for the six-month period ended June 30, 2022 were $252.7 million, or 44.3% of net sales, up 10.3% when compared to the corresponding period of 2021 of $229.1 million.

The increase in our international sales for the six-month period ended June 30, 2022, compared to the six-month period ended June 30, 2021, included increased sales in our APAC operations of $9.8 million or 8.7%, in our ROW operations of $7.5 million or 53.0%, and in our EMEA operations of $6.3 million or 6.2%.

Our gross profit as a percentage of sales increased to 45.8% for the three-month period ended June 30, 2022, compared to 44.3% for the three-month period ended June 30, 2021.

The increase in gross profit percentage was primarily due to changes in product mix, lower standard costs from efficiencies gained in our foundations for growth program and lower obsolescence expense as a percentage of sales, offset partially by unfavorable variances primarily from the impact of inflationary pressures on material costs and higher freight costs.

Our gross profit as a percentage of sales increased to 44.9% for the six-month period ended June 30, 2022, compared to 44.6% for the six-month period ended June 30, 2021.

The increase in gross profit percentage was primarily due to changes in product mix, lower standard costs from efficiencies gained in our foundations for growth program and lower intangible amortization expense as a percentage of sales, offset partially by unfavorable variances primarily from the impact of inflationary pressures on material costs and higher freight costs.

Operating Expenses

Selling, General and Administrative Expense.

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.

Selling, general and administrative ("SG&A") expenses decreased ($6.1) million, or (6.6)%, for the three-month period ended June 30, 2022 compared to the corresponding period of 2021.

As a percentage of sales, SG&A expenses were 29.0% for the three-month period ended June 30, 2022, compared to 32.7% for the corresponding period of 2021.

For the three-month period ended June 30, 2022, SG&A expenses decreased compared to the corresponding period of 2021 primarily due to $6.1 million of contract termination costs recorded in SG&A during the three-month period ended June 30, 2021 to renegotiate certain terms of an acquisition agreement.

SG&A expenses decreased ($3.1) million, or (1.8)%, for the six-month period ended June 30, 2022 compared to the corresponding period of 2021.

As a percentage of sales, SG&A expenses were 29.7% for the six-month period ended June 30, 2022, compared to 32.6% for the corresponding period of 2021.

For the six-month period ended June 30, 2022, SG&A expenses decreased compared to the corresponding period of 2021 primarily due to $6.1 million of contract termination costs recorded in SG&A during the three-month period ended June 30, 2021 to renegotiate certain terms of an acquisition agreement and $4.4 million decrease in acquisition related costs, partially offset by increased labor related costs associated with headcount.

Research and Development Expenses.

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.

Research and development ("R&D") expenses for the three-month period ended June 30, 2022 were $18.5 million, up 5.0%, when compared to R&D expenses in the corresponding period of 2021 of $17.6 million.

R&D expenses for the six-month period ended June 30, 2022 were $35.9 million, up 5.9%, when compared to R&D expenses in the corresponding period of 2021 of $33.9 million.

The increases in R&D expenses for the three and six-month periods ended June 30, 2022 compared to the corresponding periods in 2021 were 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 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 .

For the three-month period ended June 30, 2022, we recorded no impairment charges.

For the three-month period ended June 30, 2021, we recorded impairment charges of $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 right-of-use “ROU” operating lease assets due to site consolidation decisions and changes in our projected cash flows for the underlying assets.

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

For the six-month period ended June 30, 2021 we recorded $4.3 million of impairment charges, as described above.

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.

For the three and six-month periods ended June 30, 2022, we recognized contingent consideration expense from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions of $1.2 million and $3.8 million, respectively, compared to contingent consideration expense of $1.8 million and $2.2 million for the three and six-month periods ended June 30, 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.

Acquired In-process Research and Development.

For the three and six-month periods ended June 30, 2022, we recognized $6.7 million in acquired in-process research and development costs primarily associated with our acquisition of Restore Endosystems.

We did not incur in-process research and development charges during the three and six-month periods ended June 30, 2021.

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):

The following table sets forth our operating income by financial reporting segment for the three and six-month periods ended June 30, 2022 and 2021 (in thousands):

Three Months Ended

Six Months Ended

Operating Income

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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.

Our cardiovascular operating income for the three-month period ended June 30, 2022 was $21.3 million, compared to cardiovascular operating income in the corresponding period of 2021 of $6.8 million.

The increase in cardiovascular operating income during the three-month period ended June 30, 2022 compared to the corresponding period of 2021 was primarily a result of higher sales ($286.7 million compared to $272.3 million) and lower SG&A, partially offset by increased acquired in-process research and development charges in the three-month period ended June 30, 2022 of $6.7 million.

Our cardiovascular operating income for the six-month period ended June 30, 2022 was $34.4 million, compared to cardiovascular operating income in the corresponding period of 2021 of $19.0 million.

The increase in cardiovascular operating income during the six-month period ended June 30, 2022 compared to the corresponding period of 2021 was primarily a result of higher sales ($553.6 million compared to $513.3 million), lower SG&A and lower impairment charges, partially offset by higher contingent consideration expense and acquired in-process research and development charges in the six-month period ended June 30, 2022 of $6.7 million.

Endoscopy Operating Income .

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.

Our endoscopy operating income for the three-month period ended June 30, 2022 was $2.0 million, compared to endoscopy operating income of $2.1 million for the corresponding period of 2021.

Our endoscopy operating income for the six-month period ended June 30, 2022 was $4.1 million, compared to endoscopy operating income of $4.1 million for the corresponding period of 2021.

The decrease in endoscopy operating income for the three and six-month periods ended June 30, 2022 compared to the corresponding periods of 2021 was primarily a result of higher SG&A expenses.

Other Expense

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.

Our other expense for the three-month periods ended June 30, 2022 and 2021 was $2.6 million and $2.0 million, respectively.

The change in other expense was primarily related to a $1.3 million loss on disposition of our STD Pharmaceuticals operation, partially offset by decreased expense associated realized and unrealized foreign currency losses.

Our other expense for the six-month periods ended June 30, 2022 and 2021 was $3.6 million and $3.5 million, respectively.

The change in other expense was primarily related to a $1.3 million loss on the divestiture of the STD Pharmaceutical business, partially offset by decreased interest expense as a result of a lower average debt balance despite a higher effective interest rate and decreased expense associated realized and unrealized foreign currency losses.

Effective Tax Rate

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 provision for income taxes for the three-month periods ended June 30, 2022 and 2021 was a tax expense of $5.4 million and $1.9 million, respectively, which resulted in an effective tax rate of 26.1% and 28.4%, respectively.

Our provision for income taxes for the six-month periods ended June 30, 2022 and 2021 was a tax expense of $9.0 million and $3.7 million, respectively, which resulted in an effective tax rate of 25.9% and 18.8%, respectively.

The increase in the income tax expense and the corresponding change in the effective income tax rate for the three and six-month periods ended June 30, 2022, when compared to the prior-year periods, was primarily due to decreased benefit

from discrete items such as share-based compensation and deferred 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).

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.

Our net income for the three-month periods ended June 30, 2022 and 2021 was $15.3 million and $4.9 million, respectively.

The increase in our net income for the three-month period ended June 30, 2022 was the result of several principal factors, including higher sales, improved gross margins as a percentage of sales, lower SG&A expenses, and lower impairment charges (no impairment in the three-month period ended June 30, 2022 compared to $4.3 million during the corresponding period of 2021), partially offset by increased acquired in-process research and development charges and higher income tax expense.

Our net income for the six-month periods ended June 30, 2022 and 2021 was $25.8 million and $15.9 million, respectively.

The increase in our net income for the six-month period ended June 30, 2022 was the result of several principal factors, including higher sales, improved gross margins as a percentage of sales, lower SG&A expenses, and lower impairment charges ($1.7 million during the six-month period ended June 30, 2022 compared to $4.3 million for the corresponding period of 2021), partially offset by higher contingent consideration expense ($3.8 million for the six-month period ended June 30, 2022 compared to $2.2 million for the corresponding period of 2021), increased acquired in-process research and development charges , and higher income tax expense.

LIQUIDITY AND CAPITAL RESOURCES

Capital Commitments, Contractual Obligations and Cash Flows

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.

At June 30, 2022 and December 31, 2021, our current assets exceeded current liabilities by $297.0 million and $245.9 million, respectively, and we had cash, cash equivalents and restricted cash of $65.2 million and $67.8 million, respectively, of which $58.0 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.

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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 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.

As of June 30, 2022, and December 31, 2021, we had cash, cash equivalents and restricted cash of $37.6 million and $28.5 million, respectively, within our subsidiary in China.

Cash flows provided by operating activities .

We generated cash from operating activities of $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.

We generated cash from operating activities of $50.8 million and $76.4 million during the six-month periods ended June 30, 2022 and 2021, respectively.

Net cash provided by operating activities decreased $25.6 million for the six-month period ended June 30, 2022 compared to the six-month period ended June 30, 2021.

Significant factors affecting operating cash flows during these periods included:

● 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.

● Net income was approximately $25.8 million and $15.9 million for the six-month periods ended June 30, 2022 and 2021, respectively.

● Cash provided by (used for) accrued expenses was ($21.0) million and $9.2 million for the six-month periods ended June 30, 2022 and 2021, respectively, due primarily to the payment of approximately $18.25 million into escrow in connection with the settlement of a securities class action lawsuit and the timing of payment of bonuses and other accrued liabilities in each period.

● Cash provided by (used for) other receivables was $6.5 million and ($0.8) million for the six-month periods ended June 30, 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 we settled in April 2022.

● Cash provided by (used for) inventories was ($14.8) million and $3.2 million for the six-month periods ended June 30, 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 $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.

We used cash in investing activities of $23.3 million and $15.3 million for the six-month periods ended June 30, 2022 and 2021, respectively.

We used cash for capital expenditures of property and equipment of $16.8 million and $12.8 million in the six-month periods ended June 30, 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.

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

Cash outflows invested in acquisitions for the six-month period ended June 30, 2022 were approximately $4.7 million and were primarily related to our $3.0 million upfront payment in our purchase of Restore Endosystems and our additional equity investment in Fluidx of $1.4 million.

Cash outflows invested in acquisitions for the six-month period ended June 30, 2021 were approximately $1.8 million and were primarily related to our settlement of the first deferred payment for our acquisition of KA Medical, LLC completed in November 2020.

Cash flows used in financing activities.

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.

Cash used in financing activities for the six-month periods ended June 30, 2022 and 2021 was $27.4 million and $48.1 million, respectively.

During the six-month period ended June 30, 2022 we increased our net borrowings by approximately $3.1 million to partially finance the payment of contingent consideration of $34.6 million, principally related to our acquisition of Cianna Medical and payment of the final sales milestone to Vascular Insights, LLC.

During the six-month period ended June 30, 2021 we decreased our net borrowings by approximately $58.9 million.

As of June 30, 2022, we had outstanding borrowings of $246.3 million and issued letter of credit guarantees of $1.9 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $481 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 June 30, 2022 was a fixed rate of 2.71% with respect to $75 million of the principal amount as a result of an interest rate swap and a variable floating rate of 2.67% with respect to $171.3 million of the principal amount.

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

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.

In the six-month period ended June 30, 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

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

All statements in this report, other than statements of historical fact, are “forward-looking statements” for purposes of these provisions, including, without limitation, any projections of earnings, revenues or other financial items, any statements of the plans and objectives of our management for future operations, any statements concerning proposed new products or services, any statements regarding the integration, development or commercialization of the business or any assets acquired from other parties, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing.

other parties, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing.

All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date.

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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.

In the six-month period ended June 30, 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