What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-03-01 · 95 added, 87 removed, 160 unchanged (53% of the section changed)

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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.

For the year ended December 31, 2022, we reported sales of $1.151 billion, up $76.2 million or 7.1%, compared to 2021 sales of $1.075 billion.

Our revenue results for the year ended December 31, 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.

Gross profit as a percentage of sales was 45.1% for the year ended December 31, 2022 as compared to 45.2% for the year ended December 31, 2021.

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.

Net income for the year ended December 31, 2022 was $74.5 million, or $1.29 per share, as compared to $48.5 million, or $0.84 per share, for the year ended December 31, 2021.

During 2022 we received “Breakthrough Device Designation” for Embosphere Microspheres for use in genicular artery embolization for symptomatic knee osteoarthritis.

We also received FDA clearance for the SCOUT Bx Delivery System, the first wire-free breast localization solution that can be deployed at the time of stereotactic or MRI-guided biopsy representing a notable addition to the Merit Oncology portfolio.

We have launched eight new products during 2022 including the basixALPHA inflation device, PreludeSYNC EZ™ Radial Compression Device, TEMNO Elite™ Soft Tissue Biopsy System, Prelude Roadster™ Guide Sheath, SafeGuard Focus Cool™ Compression Device, SCOUT® Mini Reflector, ReSolve ® Thoracostomy Tray and the commercial release of the smallest and shortest configuration in the Elation Pulmonary Balloon Dilator portfolio.

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

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

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

programs, product line transfers and manufacturing initiatives.

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

Our dedication to the Foundations for Growth program has helped offset inflationary cost pressures in certain raw materials, shipping, and freight expenses.

Results of Operations

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Cardiovascular Sales.

Our cardiovascular sales for the year ended December 31, 2022 were $1.118 billion, up 7.2%, when compared to the year ended December 31, 2021 of $1.043 billion.

Sales for the year ended December 31, 2022 were favorably affected by increased sales of:

(a) Peripheral intervention products, which increased by $34.7 million, or 8.6%, from the corresponding period of 2021.

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

(b) Cardiac intervention products, which increased by $22.5 million, or 7.0%, from the corresponding period of 2021.

This increase was driven primarily by sales of our intervention, cardiac rhythm management/electrophysiology (“CRM/EP”), and angiography products, partially offset by a decrease in sales of our fluid management products.

This increase was driven primarily by sales of our access, angiography, fluid management, intervention, coating products and kits, partially offset by a decrease in sales of our CRM/EP products.

The foregoing increase in sales for the year ended December 31, 2022 was partially offset by decreased sales of:

(d) Custom procedural solutions products, which decreased by $(3.7) million, or (1.9)% from the corresponding period of 2021.

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

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.

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

This increase was driven primarily by sales of our 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.

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

Endoscopy Sales.

Our endoscopy sales for the year ended December 31, 2022 were $32.8 million, up 3.9%, when compared to sales for the year ended December 31, 2021 of $31.5 million.

Sales for the year ended December 31, 2022 were favorably affected by increased sales of our Elation Balloon Dilator and other stents, partially offset by a decrease in sales of our EndoMAXX fully covered esophageal stent.

Our endoscopy sales for the year ended December 31, 2021 were $31.5 million, up 6.2%, when compared to sales for the corresponding period in 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

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The increase in our domestic sales in 2022 was driven primarily by our U.S.

direct, sensors and OEM businesses.

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

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

direct and OEM businesses.

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

The decrease in our U.S.

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

direct, OEM and Endoscopy businesses.

International Sales .

International sales for the year ended December 31, 2022 were $500.4 million, or 43.5% of net sales, up 7.4% when compared to 2021.

The increase in our international sales during 2022 was primarily a result of higher sales

in APAC, which increased $13.3 million or 5.9%, higher sales in EMEA, which increased $11.4 million or 5.5%, and higher rest of world sales which increased $9.9 million or 30.8%, compared to the corresponding period of 2021.

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

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

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

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

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

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

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

Foreign currency exchange rate fluctuations, calculated by using the applicable average foreign exchange rates for the prior year decreased sales (2.2)% for the year ended December 31, 2022 compared to 2021 and increased sales 1.1% for the year ended December 31, 2021 compared to 2020.

Our gross profit as a percentage of sales was 45.1%, 45.2%, and 41.6% for the years ended December 31, 2022, 2021 and 2020, respectively.

The decrease in gross profit as a percentage of sales for 2022, as compared to 2021, was primarily due to less favorable manufacturing variances and higher freight costs as a percentage of sales, partially offset by more favorable changes in standard cost and product mix, decreased intangible amortization expense as a percentage of sales, and lower obsolescence expense, among other factors.

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.

Our selling, general and administrative (“SG&A”) expenses increased $6.8 million, or 2.0%, for the year ended December 31, 2022 compared to 2021 and increased $38.0 million, or 12.8%, for the year ended December 31, 2021 compared to 2020.

SG&A expenses as a percentage of sales were 29.8%, 31.2% and 30.9% for the years ended December 31, 2022, 2021 and 2020, respectively.

The increase in SG&A expenses for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily related to an increase in labor-related costs, including a $6.6 million increase for severance associated with restructuring and site closures, and higher travel related expenses as restrictions from the pandemic continued to decline;

partially offset by a decrease of approximately $6 million for contract termination costs incurred in 2021 to renegotiate certain terms of our September 1, 2017 share purchase agreement with IntelliMedical Technologies Pty.

(“IntelliMedical”).

In addition, f or the year ended December 31, 2022, we recorded $1.0 million of expense in connection with the negotiated settlement of a shareholder derivative lawsuit filed in the United States District Court for the District of Utah against Merit, our Chief Executive Officer, our Chief Financial Officer and certain of our directors.

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.

(“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.

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

Research and Development Expenses .

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R&D expenses increased by $4.3 million or 6.0% to $75.5 million for the year ended December 31, 2022, compared to $71.2 million in 2021.

The increase in R&D expenses for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily related to labor-related costs consistent with an increase in headcount.

We also incurred increased outside service and consulting costs due to higher costs from clinical trials and the implementation of the MDR in the European Union.

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 for the year ended December 31, 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 .

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For the year ended December 31, 2022, we recorded impairment charges of $2.2 million.

These impairments included $1.7 million of intangible assets for our divestiture of STD Pharmaceutical Products Limited (“STD Pharmaceutical”) business acquired in our August 2019 acquisition of Fibrovein Holdings and $0.5 million impairment of our equity investment in XableCath, Inc.

as this business ceased operations.

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

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

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

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

For the year ended December 31, 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, 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”).

Contingent Consideration Expense (Benefit) .

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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.

During the year ended December 31, 2022, we incurred in-process research and development charges of $6.7 million p rimarily associated with our acquisition of Restore Endosystems, LLC (“Restore Endosystems”).

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

We incurred $0.3 million for in-process research and development associated with various asset acquisitions during the year ended December 31, 2020.

Operating Income (Loss)

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Cardiovascular Operating Income (Loss).

Our cardiovascular operating income for the year ended December 31, 2022 was $80.9 million, compared to cardiovascular operating income of $53.4 million for the year ended December 31, 2021.

This increase in cardiovascular operating income was primarily related to higher sales, decreased legal settlement costs, including $10 million in 2021 in connection with an agreement in principle to settle a securities class action lawsuit, and decreased impairment charges within our cardiovascular operating segment ($2.2 million in 2022 compared to $4.3 million in 2021), partially offset by increased labor-related and travel costs, and increased contingent consideration expense ($4.6 million in 2022, compared to $3.2 million in 2021).

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).

Endoscopy Operating Income.

Our endoscopy operating income for the year ended December 31, 2022 was $6.6 million, compared to operating income of $7.5 million for the year ended December 31, 2021.

This decrease in endoscopy operating income relative to 2021 was primarily due to decreased gross margin percentage as a result of changes in product mix and higher shipping costs and higher labor-related costs, partially offset by higher sales.

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, 2022, 2021 and 2020 was $4.9 million, $7.0 million, and $11.7 million, respectively.

The decrease in other expense for 2022 compared to 2021 was principally the result of an increase in other income associated with realized and unrealized foreign currency gain (loss), partially offset by an increase in interest expense associated with rising interest rates and an increase in other expense related to the divestiture of the STD Pharmaceutical business.

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

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, 2022, 2021 and 2020 was a tax expense (benefit) of $8.1 million, $5.5 million and $(3.4) million, respectively, which resulted in an effective income tax rate of 9.8%, 10.1%, and 25.6%, respectively.

The decrease in the effective income tax rate for 2022 compared to 2021 was primarily the result of

a benefit from the change in foreign withholding taxes on unremitted foreign earnings due to the restructuring of our foreign entities, more foreign tax credits being utilized, as well as additional benefit from the foreign-derived intangible income (FDII) deduction.

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, 2022, 2021 and 2020 was $74.5 million, $48.5 million, and $(9.8) million, respectively.

The increase in net income for 2022, when compared to 2021, was primarily related to higher sales, decreased legal settlement costs primarily due to the $10.0 million settlement in 2021 in connection with an agreement in principle to settle a securities class action lawsuit, and decreased impairment charges ($2.2 million in 2022 compared to $4.3 million in 2021);

partially offset by higher SG&A expenses due to higher labor-related and travel costs , as well as increased contingent consideration expense of $4.6 million in 2022 compared to $3.2 million in 2021.

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.

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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

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

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

At December 31, 2022 and 2021, we had cash, cash equivalents and restricted cash of $60.6 million and $67.8 million respectively, of which $49.6 million and $55.7 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.

As of December 31, 2022 and 2021, approximately $2.1 million and $1.9 million respectively, of our cash and cash equivalents represents restricted cash for the payment of certain import and other taxes for our subsidiary in China.

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.

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We generated cash from operating activities of $114.3 million, $147.2 million and $165.3 million during the years ended December 31, 2022, 2021 and 2020, respectively.

Net cash provided by operating

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

Net cash provided by operating activities decreased $32.9 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

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

● Net income was $74.5 million and $48.5 million for the years ended December 31, 2022 and 2021, respectively.

This improvement in net income was partially offset by an increase in the non-cash adjustment for deferred income taxes within the statement of cash flows of $(14.9) million and $(4.6) million for the years ended December 31, 2022 and 2021, respectively.

● Cash (used for) accounts receivable was $(15.1) million and $(8.6) million for the years ended December 31, 2022 and 2021, respectively, due primarily to increases in sales volume,

● Cash provided by (used for) other receivables was $4.2 million and $(10.4) million for the years ended December 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 we settled in April 2022,

● Cash (used for) inventories was $(47.9) million and $(25.2) million for the years ended December 31, 2022 and 2021, respectively, due primarily to efforts to normalize inventory levels as well as build bridge inventory for production line transfers and increases in safety stock due to vendor supply delays, and

● Cash provided by (used for) accrued expenses was $(16.4) million and $36.5 million for the years ended December 31, 2022 and 2021, respectively, primarily related to payment of a legal settlement accrual of $18.25 million in 2022 associated with the agreement in principle to settle the Class Action Litigation and increased labor-related cost accruals associated with higher commissions and bonus expense in the prior-year period, among other items.

Net cash provided by operating activities decreased $18.0 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

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

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

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● 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.

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We invested in capital expenditures for property and equipment of $45.0 million, $27.9 million, and $46.0 million for the years ended December 31, 2022, 2021 and 2020, 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.

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 $50-60 million in 2022 for buildings, property and equipment.

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

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

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

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

(“Brightwater”) and STD Pharmaceutical.

We anticipate that we will spend approximately $55 to $60 million in 2023 for property and equipment.

Cash outflows invested in acquisitions for the year ended December 31, 2022 were $8.3 million and were primarily related to our $3.0 million upfront payment in our purchase of Restore Endosystems, our $2.5 million payment in our purchase of BioTrace Medical, Inc., and our additional equity investment in FluidX Medical Technology, Inc.

(“Fluidx”) of $1.4 million.

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

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.

Cash flows used in financing activities.

Cash used in financing activities for the years ended December 31, 2022, 2021 and 2020 was $60.3 million, $98.4 million, and $95.7 million, respectively.

In 2022 we decreased our net borrowings under our Third Amended Credit Agreement by $44.9 million and paid contingent consideration of $32.9 million, which is classified as a financing activity, principally related to our acquisitions of Cianna Medical Inc.

(“Cianna Medical”) and Vascular Insights LLC (“Vascular Insights”).

As of December 31, 2022, we had outstanding borrowings of $198.2 million and issued letter of credit guarantees of $3.2 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $523 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, 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 5.38% on $123.2 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.

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

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The following paragraphs identify our most critical accounting policies:

Inventory Obsolescence.

Our management reviews inventory quantities on hand and records provisions for estimated excess, slow moving and obsolete inventory.

Based on this review, we provide adjustments for any slow-moving finished good products or raw materials that we believe will expire prior to being sold or used to produce a finished good and any

products that are unmarketable.

This review of inventory quantities for unmarketable and/or slow moving products is based on forecasted product demand derived from our historical experience of product sales and production raw material usage.

If market conditions become less favorable than those projected by our management, additional inventory write-downs may be required.

During the years ended December 31, 2022, 2021 and 2020, we recorded obsolescence expense of approximately $9.8 million, $10.9 million, and $14.1 million, respectively, and wrote off approximately $10.2 million, $11.6 million, and $8.9 million, respectively.

Based on this historical trend, we believe that our inventory balances as of December 31, 2022 have been accurately adjusted for any unmarketable and/or slow moving products that may expire prior to being sold.

Valuation of Goodwill and Intangible Assets.

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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

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.

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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.

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.

Significant increases or decreases in our estimates 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.

includes 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

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

For the years ended December 31, 2022, 2021 and 2020, we recognized contingent consideration expense (benefit) of $4.6 million, $3.2 million and $(8.0) million, respectively, from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions.

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis