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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-24 · 89 added, 100 removed, 155 unchanged (55% of the section changed)

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes thereto set forth in Item 8 of this report.

We design, develop, manufacture and market medical products for interventional and diagnostic procedures.

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 cardiology and radiology devices, which assist in diagnosing and treating coronary arterial disease, peripheral vascular disease and other non-vascular diseases and includes embolotherapeutic, cardiac rhythm management, electrophysiology, critical care, breast cancer localization and guidance, biopsy, interventional oncology and spine devices.

Our 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 nonvascular 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.

Within those two operating segments, we offer products focused in five core product categories:

peripheral intervention, cardiac intervention, custom procedural solutions, OEM and endoscopy.

For the year ended December 31, 2023, we reported sales of $1.257 billion, up $106.4 million or 9.2%, compared to 2022 sales of $1.151 billion.

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Net income for the year ended December 31, 2023 was $94.4 million, or $1.62 per share, as compared to $74.5 million, or $1.29 per share, for the year ended December 31, 2022.

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.

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

In June 2023, we completed the acquisition of a portfolio of dialysis catheter products and the BioSentry Biopsy Tract Sealant System from AngioDynamics and acquisition of the Surfacer Inside-Out Access Catheter System from Bluegrass.

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.

We completed the final year of our Foundations for Growth Program, delivering or exceeding each of the financial targets we outlined for the three-year period ending December 31, 2023.

We are introducing the “Continued Growth Initiatives” Program and new multi-year financial targets for the three-year period ending December 31, 2026.

On December 8, 2023, we closed an offering of $747.5 million aggregate principal amount of its 3.00% Convertible Senior Notes due 2029 (the “Convertible Notes”).

We intend to use the proceeds from the Notes offering for general corporate purposes, which may include repayment or reduction of existing debt, sales and marketing activities, medical affairs and educational efforts, research and development, clinical studies, working capital, capital expenditures and investments in and acquisitions of other companies, products or technologies in the future.

Results of Operations

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Impairment charges

Contingent consideration expense (benefit)

Contingent consideration expense

Acquired in-process research and development expense

Income (loss) from operations

Income (loss) before income taxes

Net income (loss)

Income from operations

Other expense — net

Income before income taxes

Listed below are the sales by product category within each operating segment for the years ended December 31, 2023, 2022 and 2021 (in thousands, other than percentage changes):

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(a) Peripheral intervention products, which increased by $62.4 million, or 14.2%, from the corresponding period of 2022.

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

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

(b) Cardiac intervention products, which increased by $15.3 million, or 4.4%, from the corresponding period of 2022.

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.

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

(c) Custom procedural solutions products, which increased by $5.1 million, or 2.7% from the corresponding period of 2022.

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

(d) OEM products, which increased by $19.5 million, or 13.5% from the corresponding period of 2022.

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

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 radar localization, embolotherapy, drainage, biopsy, angiography, access and intervention products .

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, fluid management (including our Medallion Syringes, which saw increased demand due to COVID-19 vaccination efforts) and angiography products.

This increase was driven primarily by sales of our intervention, 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 CRM/EP, angiography products and kits.

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 (including a $(15.9) million decrease in Cultura® nasopharyngeal swab and test kit sales) and trays, offset partially by sales of kits .

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

Endoscopy Sales.

Our endoscopy sales for the year ended December 31, 2023 were $36.8 million, up 12.4%, when compared to sales for the year ended December 31, 2022 of $32.8 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.

Sales for the year ended December 31, 2023 were favorably affected by increased sales of our EndoMAXX fully covered esophageal stent, Elation Balloon Dilator, and AERO Mini tracheobronchial stent, partially offset by a decrease in sales of our probes.

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

Geographic Sales

Sales trends for the years ended December 31, 2022, 2021, and 2020 were influenced by the incidence and timing of COVID-19 infections and the associated governmental and patient responses, which varied between countries and regions in both the current and prior-year periods.

Listed below are sales by geography for the years ended December 31, 2023, 2022, and 2021 (in thousands, other than percentage changes):

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The increase in our domestic sales in 2023 was driven primarily by our U.S.

direct, sensors and OEM businesses.

direct, OEM and oncology businesses.

sales for the year ended December 31, 2022 were $650.6 million, or 56.5% of net sales, up 6.8% when compared to 2021.

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

direct and OEM businesses.

direct, sensors and OEM businesses.

International Sales .

International sales for the year ended December 31, 2023 were $530.4 million, or 42.2% of net sales, up 6.0% when compared to 2022.

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.

The increase in our international sales during 2023 was primarily a result of higher sales in EMEA, which increased $18.0 million or 8.3%, higher rest of world sales which increased $7.0 million or 16.6%, and higher sales in APAC, which increased $4.9 million or 2.1%, compared to the corresponding period of 2022.

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 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.

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.

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 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.

Foreign currency exchange rate fluctuations, calculated by using the applicable average foreign exchange rates for the prior year decreased sales (0.5)% for the year ended December 31, 2023 compared to 2022 and decreased sales (2.2)% for the year ended December 31, 2022 compared to 2021.

Our gross profit as a percentage of sales was 46.4%, 45.1%, and 45.2% for the years ended December 31, 2023, 2022 and 2021, respectively.

The increase in gross profit as a percentage of sales for 2023, as compared to 2022, was primarily due to increased sales combined with changes in standard costs and product mix, lower freight expenses due to focus on increasing ocean freight and lowering air shipments, partially offset by higher royalty costs associated with sales and higher intangible amortization expense as a percentage of sales associated with acquisitions.

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.

Operating Expenses

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SG&A expenses as a percentage of sales were 29.7%, 29.8% and 31.2% for the years ended December 31, 2023, 2022 and 2021, respectively.

The increase in SG&A expenses for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily related to increased labor-related costs associated with an increase in headcount and higher variable compensation linked to company performance, increase in loss for disposal of equipment associated with restructuring, higher travel related expenses as restrictions from the pandemic continued to decline, and an increase in depreciation and amortization associated with acquisitions .

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;

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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.

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 $7.2 million or 9.6% to $82.7 million for the year ended December 31, 2023, compared to $75.5 million in 2022.

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.

The increase in R&D expenses for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily related to labor-related costs consistent with an increase in headcount and an increase in regulatory expense and costs for clinical trials.

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 for the year ended December 31, 2021.

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 .

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 E.U.

Legal Settlement .

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This expense includes $18.25 million of settlement related costs, net of $8.2 million of insurance proceeds .

For the year ended December 31, 2020, w e recorded $18.7 million of expense in connection with a settlement agreement with the United States Department of Justice (“ DOJ”) to resolve the DOJ’s investigation of certain marketing and promotional practices.

Impairment Charges .

For the year ended December 21, 2023, we recorded impairment charges of $270 thousand due to the acquisition and subsequent write-off of our equity investment in Bluegrass Vascular Technologies, Inc.

(“Bluegrass”).

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.

These impairments included $1.7 million of intangible assets for our divestiture of the 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.

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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, 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) .

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

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

Contingent Consideration Expense .

For the years ended December 31, 2023, 2022 and 2021, we recorded $1.7 million, $4.6 million and $3.2 million, respectively, of net contingent consideration expense from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions.

The expense in each fiscal year relates to changes in the probability and timing of achieving certain revenue and operational milestones, as well as expense for the passage of time.

Acquired In-process Research and Development .

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”).

During the year ended December 31, 2023, we incurred in-process research and development charges of $1.6 million p rimarily associated with the assets we acquired from Advanced Radiation Therapy, LLC (“ART”) on May 1, 2023.

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

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)

Operating Income

Our operating profit by operating segment for the years ended December 31, 2023, 2022 and 2021 was as follows (in thousands):

Operating Income (Loss)

Operating Income

Cardiovascular

Total operating income (loss)

Cardiovascular Operating Income (Loss).

Total operating income

Cardiovascular Operating Income.

Our cardiovascular operating income for the year ended December 31, 2023 was $114.4 million, compared to cardiovascular operating income of $80.9 million for the year ended December 31, 2022.

This increase in cardiovascular operating income was primarily related to higher sales and gross profit, decreased impairment charges ($270 thousand in 2023 compared to $2.2 million in 2022), decreased acquired in-process research and development charges, and decreased contingent consideration expense ($1.7 million in 2023 compared to $4.6 million in 2022), partially offset by higher SG&A and R&D expenses.

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).

Endoscopy Operating Income.

Our endoscopy operating income for the year ended December 31, 2023 was $9.5 million, compared to operating income of $6.6 million for the year ended December 31, 2022.

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.

This increase in endoscopy operating income relative to 2022 was primarily due to higher sales and gross profit, partially offset by higher SG&A expenses.

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 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.

Other Income (Expense)

Our other expense for the years ended December 31, 2023, 2022 and 2021 was $11.9 million, $4.9 million, and $7.0 million, respectively.

The increase in other expense for 2023 compared to 2022 was principally the result of an increase in interest expense associated with increased borrowings under our Credit Agreement, issuance of convertible debt and rising interest rates, partially offset by an increase in interest income associated with an increase in cash and cash equivalents.

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 .

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.

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.

Our provision for income taxes for the years ended December 31, 2023, 2022 and 2021 was a tax expense of $17.7 million, $8.1 million and $5.5 million, respectively, which resulted in an effective income tax rate of 15.8%, 9.8%, and 10.1%, respectively.

The increase in the effective income tax rate for 2023 compared to 2022 was primarily the result of decreased benefit from items such as stock-based compensation, the foreign-derived intangible income (FDII) deduction, as well as the foreign tax credits being utilized.

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 FDII deduction.

Our net income for the years ended December 31, 2023, 2022 and 2021 was $94.4 million, $74.5 million, and $48.5 million, respectively.

The increase in net income for 2023, when compared to 2022, was primarily related to higher sales, higher gross margin as a percentage of sales, decreased impairment charges ($270 thousand in 2023 compared to $2.2 million in 2022), decreased contingent consideration expense ($1.7 million in 2023 compared to $4.6 million in 2022), decreased acquired in-process research and development expense ($1.6 million in 2023 compared to $6.7 million in 2022);

partially offset by higher SG&A and R&D expenses .

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.

Legal settlement costs decreased to $10 million in 2021, compared to $18.7 million in 2020, and impairment charges decreased to $4.3 million in 2021 compared to $36.5 million in 2020.

This was partially offset by higher SG&A expenses due to higher labor-related costs, $6 million of contract termination costs to renegotiate certain terms of an acquisition agreement, increased corporate transformation costs, including consulting charges, in connection with our Foundations for Growth program , as well as contingent consideration expense of $3.2 million in 2021 compared to a benefit of $(8.0) million in 2020 .

Liquidity and Capital Resources

Capital Commitments and Contractual Obligations

Our most significant contractual obligations as of December 31, 2022 included long-term debt of $198.2 million, of which $11.3 million is recorded in current liabilities, interest payments on this debt, operating lease liabilities of $70.7 million, of which $11.0 million is recorded in current liabilities, and contingent consideration liabilities of $18.1 million, of which $15.8 million is recorded in current liabilities.

Our most significant contractual obligations as of December 31, 2023 included total long-term debt obligations of $846.6 million, of which $0.0 million is recorded in current liabilities, interest payments on this debt, contingent consideration liabilities of $3.4 million, of which $0.4 million is recorded in current liabilities, and operating lease liabilities of $68.3 million, of which $12.1 million is recorded in current liabilities.

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

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We generated cash from operating activities of $145.2 million, $114.3 million and $147.2 million during the years ended December 31, 2023, 2022 and 2021, respectively.

Net cash provided by operating activities increased $30.9 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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

● Net income was $94.4 million and $74.5 million for the years ended December 31, 2023 and 2022, respectively.

● Cash used for inventories was $(32.1) million and $(47.9) million for the years ended December 31, 2023 and 2022, respectively.

The increase in inventory was principally 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 provided by (used for) accounts payable was $(7.3) million and $12.7 million for the years ended December 31, 2023 and 2022, respectively, primarily due to an increase in operating expenses and changes in the timing of vendor payments.

● Cash paid for income taxes was $31.5 million and $17.1 million for the years ended December 31, 2023 and 2022, respectively, primarily due to increases in income before tax.

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.

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● 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.

This improvement in net income was offset by a decrease in the non-cash adjustment for the write-off of certain intangible and other long-term assets within the statement of cash flows of $4.4 million and $36.6 million for the years ended December 31, 2021 and 2020, respectively.

● Cash provided by (used for) accounts receivable was $(8.6) million and $10.4 million for the years ended December 31, 2022 and 2021, respectively, due primarily to increases in sales volume,

● Cash provided by (used for) other receivables was $(10.4) million and $1.7 million for the years ended December 31, 2021 and 2020, respectively, due primarily to an increase in an insurance receivable associated with the agreement in principle to settle the Class Action Litigation,

● Cash provided by (used for) inventories was $(25.2) million and $29.4 million for the years ended December 31, 2021 and 2020, respectively, due primarily to efforts to manage inventory levels to support the growth in sales and reduced production in the prior-year period during the economic downturn related to the COVID-19 pandemic, and

● Cash provided by accrued expenses was $36.5 million and $4.6 million for the years ended December 31, 2021 and 2020, respectively, related to increased labor-related cost accruals associated with higher commissions and bonus expense in the current-year period and a legal settlement accrual of $18.25 million in 2021 associated with the agreement in principle to settle the Class Action Litigation, among other items.

Cash flows used in investing activities.

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We anticipate that we will spend approximately $50 to $60 million in 2024 for property and equipment.

Cash outflows invested in acquisitions for the year ended December 31, 2023 were $138.3 million and were primarily related to payments required by our asset purchase agreements with AngioDynamics ($100 million), Bluegrass ($32.7 million), and ART ($1.5 million), and our transaction with Solo Pace ($4.0 million).

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, 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 .

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 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.

Cash outflows invested in acquisitions for the year ended December 31, 2021 were $7.2 million and were primarily related to $4.1 million 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 .

Cash flows provided by (used in) financing activities.

Cash provided by (used in) financing activities for the years ended December 31, 2023, 2022 and 2021 was $559.3 million, $(60.3) million, and $(98.4) million, respectively.

In 2023 we issued convertible debt of $747.5 million, paid $66.5 million for the purchase of capped call options, and decreased our net borrowings under our Fourth Amended Credit Agreement by $99.1 million.

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.

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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.

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.

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, 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.

As of December 31, 2023, we had outstanding borrowings of $846.6 million and issued letter of credit guarantees of $2.7 million, with additional available borrowings of approximately $626 million under the Fourth Amended Credit Agreement, based on the leverage ratio required pursuant to the Fourth Amended Credit Agreement.

Our interest rate as of December 31, 2023 was a fixed rate of 3.0% on our Convertible Notes, a fixed rate of 3.39% on $75 million as a result of an interest rate swap, and a variable floating rate of 7.21% on $24.1 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.

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

See Note 8 and Note 9 to our consolidated financial statements set forth in Item 8 of this report for additional details regarding the Third Amended Credit Agreement, our long-term debt and our interest rate swaps.

We currently believe that our existing cash balances, anticipated future cash flows from operations and borrowings under the Third Amended Credit Agreement will be adequate to fund our current and currently planned future operations for the next twelve months and the foreseeable future.

In the event we pursue and complete significant transactions or acquisitions in the future, additional funds will likely be required to meet our strategic needs, which may require us to raise additional funds in the debt or equity markets.

The foregoing fixed rates are exclusive of potential future changes in the applicable margin associated with our variable rate debt under the Fourth Amended Credit Agreement.

See Note 8 and Note 9 to our consolidated financial statements set forth in Item 8 of this report for additional details regarding the Fourth Amended Credit Agreement, Convertible Notes, and our interest rate swap.

We currently believe that our existing cash balances, anticipated future cash flows from operations and borrowings under our long-term debt agreements 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 may 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

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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.

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.

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During the years ended December 31, 2022 and 2021, we identified indicators of impairment associated with certain acquired intangible assets within the asset groups based on our qualitative assessment.

During the years ended December 31, 2022, 2021 and 2020 we recorded total impairment charges associated with intangible assets in our cardiovascular segment of $1.7 million, $1.6 million, and $28.7 million, respectively.

These expenses are reflected within impairment charges in our consolidated statements of income (loss).

The primary factors driving impairment of certain intangible assets were planned closure and restructuring activities and uncertainty about future product development and commercialization associated with certain acquired technologies, due in part to the economic impacts of the COVID-19 pandemic.

During the years ended December 31, 2022 and 2021, we recorded total impairment charges associated with intangible assets in our cardiovascular segment of $1.7 million and $1.6 million, respectively.

We did not have any impairments for the year ended December 31, 2023.

These expenses are reflected within impairment charges in our consolidated statements of income.

See Note 5 to our consolidated financial statements set forth in Item 8 of this report for additional details regarding impairments of intangible assets.

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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.

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).

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.

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.

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 Medical, Inc.

Our revenue milestones for the acquisition of Brightwater Medical, Inc.

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, 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.

This 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, 2023, 2022 and 2021, we recognized contingent consideration expense of $1.7 million, $4.6 million and $3.2 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.

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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