Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related condensed notes thereto, which are included in Part I of this report. 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 2022 Annual Report on Form 10-K and in Part II, Item 1A “Risk Factors” in this report.
OVERVIEW
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.
We design, develop, manufacture, market and sell medical products for interventional and diagnostic procedures. For financial reporting purposes, we report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of four product categories: peripheral intervention, cardiac intervention, custom procedural solutions, and OEM. Within these product categories, we sell a variety of products, including cardiology and radiology devices (which assist in diagnosing and treating coronary arterial disease, peripheral vascular disease and other non-vascular diseases), as well as embolotherapeutic, cardiac rhythm management, electrophysiology, critical care, breast cancer localization and guidance, biopsy, and interventional oncology and spine devices. Our endoscopy segment consists of gastroenterology and pulmonology devices which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors.
For the three-month period ended March 31, 2023, we reported sales of $297.6 million, an increase of $22.2 million or 8.0%, compared to sales for the three-month period ended March 31, 2022 of $275.4 million. For the three-month period ended March 31, 2023, foreign currency fluctuations (net of hedging) decreased our net sales by $4.9 million, assuming applicable foreign exchange rates in effect during the comparable prior-year periods.
Gross profit as a percentage of sales increased to 46.5% for the three-month period ended March 31, 2023, compared to 43.9% for the three-month period ended March 31, 2022.
Net income for the three-month period ended March 31, 2023 was $20.7 million, or $0.36 per share, compared to net income of $10.5 million, or $0.18 per share, for the three-month period ended March 31, 2022.
Recent Developments and Trends
In addition to the trends identified in the 2022 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 2023 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, 2023 were driven primarily by stronger than anticipated demand in the U.S. and more favorable than anticipated international sales trends, particularly in the EMEA region.
● Our dedication to the Foundations for Growth program has helped offset inflationary cost pressures in certain raw materials, shipping, and freight expenses.
● As of March 31, 2023, we had cash, cash equivalents, and restricted cash of $60.1 million and net available borrowing capacity of approximately $521 million.
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RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of sales for the periods indicated:
Three Months Ended
March 31,
2023
2022
Net sales
100
%
100
%
Gross profit
46.5
43.9
Selling, general and administrative expenses
30.3
30.5
Research and development expenses
7.2
6.3
Impairment charges
—
0.6
Contingent consideration expense
0.2
0.9
Income from operations
8.9
5.5
Income before income taxes
8.6
5.1
Net income
7.0
3.8
Sales
Sales for the three-month period ended March 31, 2023 increased by 8.0%, or $22.2 million, compared to the corresponding period in 2022. Listed below are the sales by product category within each of our financial reporting segments for the three-month periods ended March 31, 2023 and 2022 (in thousands, other than percentage changes):
Three Months Ended
March 31,
% Change
2023
2022
Cardiovascular
Peripheral Intervention
7.6
%
$
113,783
$
105,773
Cardiac Intervention
4.7
%
85,328
81,487
Custom Procedural Solutions
3.1
%
47,701
46,262
OEM
23.2
%
41,164
33,414
Total
7.9
%
287,976
266,936
Endoscopy
Endoscopy Devices
13.1
%
9,589
8,479
Total
8.0
%
$
297,565
$
275,415
Cardiovascular Sales. Our cardiovascular sales for the three-month period ended March 31, 2023 were $288.0 million, up 7.9% when compared to the corresponding period of 2022 of $266.9 million. Sales for the three-month period ended March 31, 2023 were favorably affected by increased sales of:
(a) Peripheral intervention products, which increased by $8.0 million, or 7.6%, from the corresponding period of 2022. This increase was driven primarily by sales of our access, drainage, and radar localization products, offset partially by decreased sales of our intervention products.
(b) Cardiac intervention products, which increased by $3.8 million, or 4.7%, from the corresponding period of 2022. This increase was driven primarily by sales of our access, angiography and cardiac rhythm management/electrophysiology (“CRM/EP”) products, offset partially by decreased sales of our intervention products.
(c) Custom procedural solutions products, which increased by $1.4 million, or 3.1%, from the corresponding period of 2022. This increase was driven primarily by increased sales of our kits and trays, offset partially by decreased sales of our critical care products.
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(d) OEM products, which increased by $7.8 million, or 23.2%, from the corresponding period of 2022. This increase was driven primarily by sales of our CRM/EP and intervention products, and kits.
Endoscopy Sales . Our endoscopy sales for the three-month period ended March 31, 2023 were $9.6 million, up 13.1% when compared to sales in the corresponding period of 2022 of $8.5 million. Sales for the three-month period ended March 31, 2023 compared to the corresponding period in 2022 were favorably affected by increased sales of our Aero Mini fully covered tracheobronchial stent, EndoMAXX® fully covered esophageal stent products and Elation Pulmonary Balloon Dilator, offset partially by decreased sales of our other stents.
Geographic Sales
Listed below are sales by geography for the three-month periods ended March 31, 2023 and 2022 (in thousands, other than percentage changes):
Three Months Ended
March 31,
% Change
2023
2022
United States
12.0
%
$
171,360
$
152,992
International
3.1
%
126,205
122,423
Total
8.0
%
$
297,565
$
275,415
United States Sales. U.S. sales for the three-month period ended March 31, 2023 were $171.4 million, or 57.6% of net sales, up 12.0% when compared to the corresponding period of 2022. 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, 2023 were $126.2 million, or 42.4% of net sales, up 3.1% when compared to the corresponding period of 2022 of $122.4 million. The increase in our international sales for the three-month period ended March 31, 2023, compared to the corresponding period of 2022, included increased sales in our EMEA operations of $6.1 million or 11.7%, increased sales in our rest of the world (“ROW”) operations of $0.7 million or 6.7%, offset partially by decreased sales in our Asia Pacific operations of $(3.0) million or (4.9)%.
Gross Profit
Our gross profit as a percentage of sales increased to 46.5% for the three-month period ended March 31, 2023, compared to 43.9% for the three-month period ended March 31, 2022. The increase in gross profit percentage was primarily due to favorable changes in product mix, efficiencies gained in our Foundations for Growth program, lower freight and distribution costs, lower intangible asset amortization expense as a percentage of sales, and lower obsolescence expense as a percentage of sales.
Operating Expenses
Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses increased $6.1 million, or 7.3%, for the three-month period ended March 31, 2023 compared to the corresponding period of 2022. As a percentage of sales, SG&A expenses were 30.3% for the three-month period ended March 31, 2023, compared to 30.5% for the corresponding period of 2022. For the three-month period ended March 31, 2023, SG&A expenses increased compared to the corresponding period of 2022 primarily due to increased labor-related costs associated with headcount and severance, as well as increased travel and marketing costs to promote sales as restrictions continue to lift post pandemic.
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Research and Development Expenses. Research and development (”R&D”) expenses for the three-month period ended March 31, 2023 were $21.3 million, up 22.6%, when compared to R&D expenses in the corresponding period of 2022 of $17.4 million. The increases in R&D expenses for the three-month period ended March 31, 2023 compared to the corresponding periods in 2022 were largely due to higher regulatory expenses incurred to comply with the E.U. Medical Device Regulation (“MDR”) .
Impairment Charges . For the three-month period ended March 31, 2023, we recorded no 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.
Contingent Consideration Expense . For the three-month period ended March 31, 2023, 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 $0.5 million compared to contingent consideration expense of $2.6 million for the three-month period ended March 31, 2022. 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, 2023 and 2022 (in thousands):
Three Months Ended
March 31,
2023
2022
Operating Income (Loss)
Cardiovascular
$
23,934
$
13,126
Endoscopy
2,449
2,107
Total operating income (loss)
$
26,383
$
15,233
Cardiovascular Operating Income. Our cardiovascular operating income for the three-month period ended March 31, 2023 was $23.9 million, compared to cardiovascular operating income in the corresponding period of 2022 of $13.1 million. The increase in cardiovascular operating income during the three-month period ended March 31, 2023 compared to the corresponding period of 2022 was primarily a result of higher sales ($288.0 million compared to $266.9 million) and higher gross margin, partially offset by higher SG&A and R&D expenses .
Endoscopy Operating Income . Our endoscopy operating income for the three-month period ended March 31, 2023 was $2.4 million, compared to endoscopy operating income of $2.1 million for the corresponding period of 2022. The increase in endoscopy operating income for the three-month period ended March 31, 2023 compared to the corresponding period of 2022 was primarily a result of increased sales and gross margin, offset partially by higher SG&A expenses.
Other Expense – Net
Our other expense for the three-month periods ended March 31, 2023 and 2022 was $0.9 million and $1.1 million, respectively. The change in other expense was primarily related to decreased expense from realized and unrealized foreign currency losses, partially offset by an increase in interest expense associated with rising interest rates.
Effective Tax Rate
Our provision for income taxes for the three-month periods ended March 31, 2023 and 2022 was a tax expense of $4.8 million and $3.6 million, respectively, which resulted in an effective tax rate of 18.8% and 25.6%, respectively. The decrease in the effective income tax rate for the three-month period ended March 31, 2023, when compared to the prior-year period, was primarily due to increased benefit from discrete items such as contingent liabilities and deferred compensation, and the increase in the income tax expense when compared to the prior-year period was primarily due to increased pre-tax book income.
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Net Income
Our net income for the three-month periods ended March 31, 2023 and 2022 was $20.7 million and $10.5 million, respectively. The increase in our net income for the three-month period ended March 31, 2023 was primarily the result higher sales and higher gross margins as a percentage of sales, partially offset by higher SG&A and R&D expenses.
LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments, Contractual Obligations and Cash Flows
At March 31, 2023 and December 31, 2022, our current assets exceeded current liabilities by $341.3 million and $308.4 million, respectively, and we had cash, cash equivalents and restricted cash of $60.1 million and $60.6 million, respectively, of which $57.6 million and $49.6 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 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 March 31, 2023, and December 31, 2022, we had cash, cash equivalents and restricted cash of $32.2 million and $26.1 million, respectively, within our subsidiary in China.
Cash flows provided by operating activities . We generated cash from operating activities of $14.5 million and $12.0 million during the three-month periods ended March 31, 2023 and 2022, respectively. Significant factors affecting operating cash flows during these periods included:
● Net income was $20.7 million and $10.5 million for the three-month periods ended March 31, 2023 and 2022, respectively.
● Cash (used for) provided by other receivables was ($1.5) million and $5.8 million for the three-month periods ended March 31, 2023 and 2022, respectively, due primarily to the collection of approximately $8.2 million during 2022 for insurance proceeds in connection with the consolidated securities class action lawsuit we settled.
● Cash used for inventories was ($23.0) million and ($9.2) million for the three-month periods ended March 31, 2023 and 2022, respectively. The increase in inventory was associated with our strategy to proactively invest in our inventory balances to encourage high customer service levels as well as to build bridge inventory for production line transfers and increases in safety stock due to vendor supply delays.
● Cash used for accrued expenses was ($3.6) million and ($23.5) million for the three-month periods ended March 31, 2023 and 2022, respectively, due primarily to the timing and payment of compensation-related accruals, and during 2022, payment of approximately $18.25 million into escrow in connection with the settlement of a securities class action lawsuit.
Cash flows used in investing activities. We used cash in investing activities of $14.9 million and $9.9 million for the three-month periods ended March 31, 2023 and 2022, respectively. We used cash for capital expenditures of property and equipment of $12.8 million and $9.5 million in the three-month periods ended March 31, 2023 and 2022, 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 $55 to $60 million in 2023 for property and equipment.
Cash outflows invested in acquisitions for the three-month period ended March 31, 2023 were $2.0 million and were related to our investment in Solo Pace. There were no cash outflows invested in acquisitions for the three-month period ended March 31, 2022.
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Cash flows used in financing activities. Cash used in financing activities for the three-month periods ended March 31, 2023 and 2022 was $0.5 million and $14.2 million, respectively. We completed payment of contingent consideration of $2.6 million and $24.5 million for the three-month periods ended March 31, 2023 and 2022, respectively, principally related to sales milestone payments connected to our acquisitions completed in prior years of Brightwater Medical, Inc. and Cianna Medical, respectively.
As of March 31, 2023, we had outstanding borrowings of $197.8 million and issued letter of credit guarantees of $3.2 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $521 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, 2023 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 5.84% with respect to $122.8 million of the principal amount. 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.
We currently believe that our existing cash balances, anticipated future cash flows from operations and borrowings under the Third Amended Credit Agreement will be adequate to fund our current and currently planned future operations for the next twelve months and the foreseeable future. In the event we pursue and complete significant transactions or acquisitions in the future, additional funds will likely be required to meet our strategic needs, which may require us to raise additional funds in the debt or equity markets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial results are affected by the selection and application of accounting policies and methods. In the three-month period ended March 31, 2023 there were no changes to the application of critical accounting policies previously disclosed in Part II, Item 7 of the 2022 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 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. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “seeks,” “believes,” “estimates,” “potential,” “forecasts,” “continue,” or other forms of these words or similar words or expressions, or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results will likely differ, and could differ materially, from those projected or assumed in the forward-looking statements. Investors are cautioned not to unduly rely on any such forward-looking statements.
All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Our actual results will likely differ, and may differ materially, from anticipated results. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results. 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. We assume no obligation to update any forward-looking statement. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections.
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NOTICE REGARDING TRADEMARKS
This report includes trademarks, tradenames and service marks that are our property or the property of others. Solely for convenience, such trademarks and tradenames sometimes appear without any “™” or “®” symbol. 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.
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