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EX-32.2 - EXHIBIT 32.2 - MERIT MEDICAL SYSTEMS INCmmsi-6302018x10qxex322.htm
EX-32.1 - EXHIBIT 32.1 - MERIT MEDICAL SYSTEMS INCmmsi-6302018x10qxex321.htm
EX-31.2 - EXHIBIT 31.2 - MERIT MEDICAL SYSTEMS INCmmsi-6302018x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - MERIT MEDICAL SYSTEMS INCmmsi-6302018x10qxex311.htm
EX-10.3 - EXHIBIT 10.3 - MERIT MEDICAL SYSTEMS INCmmsi-6302018x10qxex103.htm
EX-10.2 - EXHIBIT 10.2 - MERIT MEDICAL SYSTEMS INCmmsi-6302018x10qxex102.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
 
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM TO .
 
Commission File Number 0-18592
 
a2017mmsilogoaa18.jpg
MERIT MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Utah
 
87-0447695
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 1600 West Merit Parkway, South Jordan, Utah 84095
(Address of principal executive offices, including zip code) 
Registrant’s telephone number, including area code: (801) 253-1600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer  o (Do not check if a smaller reporting company)
Smaller Reporting Company o
Emerging Growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Common Stock
 
54,735,486
Title or class
 
Number of Shares
Outstanding at August 6, 2018

 



TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2018 AND DECEMBER 31, 2017
(In thousands)

 
June 30,
 
December 31,
 
2018
 
2017
ASSETS
(unaudited)
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
43,512

 
$
32,336

Trade receivables — net of allowance for uncollectible accounts — 2018 — $1,921 and 2017 — $1,769
131,943

 
105,536

Other receivables
8,490

 
9,429

Inventories
169,254

 
155,288

Prepaid expenses and other assets
12,142

 
9,096

Prepaid income taxes
3,292

 
3,225

Income tax refund receivables
2,331

 
1,211

 
 
 
 
Total current assets
370,964

 
316,121

 
 
 
 
PROPERTY AND EQUIPMENT:
 
 
 
Land and land improvements
26,940

 
19,877

Buildings
150,726

 
147,356

Manufacturing equipment
205,911

 
197,651

Furniture and fixtures
52,649

 
49,528

Leasehold improvements
33,029

 
31,161

Construction-in-progress
40,454

 
32,896

 
 
 
 
Total property and equipment
509,709

 
478,469

 
 
 
 
Less accumulated depreciation
(197,941
)
 
(185,649
)
 
 
 
 
Property and equipment — net
311,768

 
292,820

 
 
 
 
OTHER ASSETS:
 
 
 
Intangible assets:
 
 
 
Developed technology — net of accumulated amortization — 2018 — $86,023 and 2017 — $72,420
232,880

 
167,771

Other — net of accumulated amortization — 2018 — $43,246 and 2017 — $38,127
66,188

 
59,553

Goodwill
248,998

 
238,147

Deferred income tax assets
2,318

 
2,359

Other assets
58,075

 
35,040

 
 
 
 
Total other assets
608,459

 
502,870

 
 
 
 
TOTAL
$
1,291,191

 
$
1,111,811

 
 
 
 
See condensed notes to consolidated financial statements.
 
 
(continued)


3


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2018 AND DECEMBER 31, 2017
(In thousands)

 
June 30,
 
December 31,
 
2018
 
2017
LIABILITIES AND STOCKHOLDERS’ EQUITY
(unaudited)
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
Trade payables
$
50,823

 
$
34,931

Accrued expenses
65,838

 
58,932

Current portion of long-term debt
21,985

 
19,459

Income taxes payable
948

 
2,298

 
 
 
 
Total current liabilities
139,594

 
115,620

 
 
 
 
LONG-TERM DEBT
391,582

 
259,013

 
 
 
 
DEFERRED INCOME TAX LIABILITIES
23,148

 
23,289

 
 
 
 
LONG-TERM INCOME TAXES PAYABLE
4,846

 
4,846

 
 
 
 
LIABILITIES RELATED TO UNRECOGNIZED TAX BENEFITS
2,746

 
2,746

 
 
 
 
DEFERRED COMPENSATION PAYABLE
11,620

 
11,181

 
 
 
 
DEFERRED CREDITS
2,332

 
2,403

 
 
 
 
OTHER LONG-TERM OBLIGATIONS
16,069

 
16,379

 
 
 
 
Total liabilities
591,937

 
435,477

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Notes 5, 10, 11, and 14)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock — 5,000 shares authorized as of June 30, 2018 and December 31, 2017; no shares issued

 

Common stock, no par value; shares authorized — 2018 and 2017 - 100,000; issued and outstanding as of June 30, 2018 - 50,635 and December 31, 2017 - 50,248
359,570

 
353,392

Retained earnings
337,618

 
321,408

Accumulated other comprehensive income
2,066

 
1,534

 
 
 
 
Total stockholders’ equity
699,254

 
676,334

 
 
 
 
TOTAL
$
1,291,191

 
$
1,111,811

 
 
 
 
See condensed notes to consolidated financial statements.
 
 
(concluded)



4


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(In thousands, except per share amounts - unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
NET SALES
$
224,810

 
$
186,549

 
$
427,844

 
$
357,618

 
 
 
 
 
 
 
 
COST OF SALES
124,801

 
102,408

 
239,779

 
197,535

 
 
 
 
 
 
 
 
GROSS PROFIT
100,009

 
84,141

 
188,065

 
160,083

 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
Selling, general and administrative
69,095

 
57,409

 
134,007

 
115,180

Research and development
15,316

 
13,313

 
29,638

 
25,838

Contingent consideration expense (benefit)
178

 
(18
)
 
219

 
19

Acquired in-process research and development
306

 
75

 
306

 
75

 
 
 
 
 
 
 
 
Total operating expenses
84,895

 
70,779

 
164,170

 
141,112

 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
15,114

 
13,362

 
23,895

 
18,971

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest income
342

 
89

 
487

 
172

Interest expense
(3,338
)
 
(1,639
)
 
(5,736
)
 
(4,345
)
Gain on bargain purchase

 
(669
)
 

 
11,574

Other income (expense) - net
(553
)
 
170

 
(721
)
 
434

 
 
 
 
 
 
 
 
Other income (expense) — net
(3,549
)
 
(2,049
)
 
(5,970
)

7,835

 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
11,565

 
11,313

 
17,925

 
26,806

 
 
 
 
 
 
 
 
INCOME TAX EXPENSE
624

 
1,830

 
1,715

 
2,520

 
 
 
 
 
 
 
 
NET INCOME
$
10,941

 
$
9,483

 
$
16,210

 
$
24,286

 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE:
 
 
 
 
 
 
 
Basic
$
0.22

 
$
0.19

 
$
0.32

 
$
0.51

 
 
 
 
 
 
 
 
Diluted
$
0.21

 
$
0.19

 
$
0.31

 
$
0.50

 
 
 
 
 
 
 
 
AVERAGE COMMON SHARES:
 
 
 
 
 
 
 
Basic
50,473

 
49,957

 
50,376

 
47,406

 
 
 
 
 
 
 
 
Diluted
52,154

 
51,188

 
52,033

 
48,516

 
 
 
 
 
 
 
 
See condensed notes to consolidated financial statements.
 
 
 
 
 
 
 

5


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(In thousands - unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
10,941

 
$
9,483

 
$
16,210

 
$
24,286

Other comprehensive income (loss):
 
 
 
 
 
 

Cash flow hedges
881

 
(527
)
 
2,873

 
310

Less income tax benefit (expense)
(226
)
 
205

 
(738
)
 
(121
)
Foreign currency translation adjustment
(4,195
)
 
1,425

 
(1,603
)
 
2,205

Less income tax expense

 

 

 
(252
)
Total other comprehensive income (loss)
(3,540
)
 
1,103

 
532

 
2,142

Total comprehensive income
$
7,401

 
$
10,586

 
$
16,742

 
$
26,428

 
 
 
 
 
 
 
 
See condensed notes to consolidated financial statements.
 
 
 
 
 
 



6


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(In thousands - unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
16,210

 
$
24,286

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
32,779

 
25,709

Gain on bargain purchase

 
(11,574
)
Loss on sales and/or abandonment of property and equipment
371

 
234

Write-off of patents and intangible assets
86

 
19

Acquired in-process research and development
306

 
75

Amortization of deferred credits
(71
)
 
(76
)
Amortization of long-term debt issuance costs
402

 
343

Deferred income taxes

 
(295
)
Stock-based compensation expense
2,821

 
1,691

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Trade receivables
(27,947
)
 
(13,248
)
Other receivables
966

 
(114
)
Inventories
(7,189
)
 
(2,160
)
Prepaid expenses and other current assets
(3,105
)
 
(1,230
)
Prepaid income taxes
(100
)
 
(92
)
Income tax refund receivables
(1,146
)
 
294

Other assets
(751
)
 
(1,500
)
Trade payables
15,767

 
3,664

Accrued expenses
7,467

 
7,421

Income taxes payable
(2,076
)
 
(301
)
Deferred compensation payable
438

 
513

Other long-term obligations
(179
)
 
907

 
 
 
 
Total adjustments
18,839

 
10,280

 
 
 
 
Net cash provided by operating activities
35,049

 
34,566

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures for:
 
 
 
Property and equipment
(31,559
)
 
(17,782
)
Intangible assets
(1,755
)
 
(1,082
)
Proceeds from the sale of property and equipment
4

 
3

Issuance of note receivable
(10,500
)
 

Cash paid in acquisitions, net of cash acquired
(118,654
)
 
(54,809
)
 
 
 
 
Net cash used in investing activities
(162,464
)
 
(73,670
)
 
 
 
 
See condensed notes to consolidated financial statements.
 
 
(continued)


7


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(In thousands - unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock
$
3,251

 
$
140,989

Offering costs

 
(815
)
Proceeds from issuance of long-term debt
320,827

 
96,859

Payments on long-term debt
(185,827
)
 
(179,359
)
Contingent payments related to acquisitions
(130
)
 
(30
)
 
 
 
 
Net cash provided by financing activities
138,121

 
57,644

 
 
 
 
EFFECT OF EXCHANGE RATES ON CASH
470

 
(36
)
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
11,176

 
18,504

 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
32,336

 
19,171

 
 
 
 
End of period
$
43,512

 
$
37,675

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid during the period for:
 
 
 
Interest (net of capitalized interest of $314 and $240, respectively)
$
5,714

 
$
4,386

 
 
 
 
Income taxes
$
5,141

 
$
2,678

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Property and equipment purchases in accounts payable
$
3,943

 
$
1,560

 
 
 
 
Acquisition purchases in accrued expenses and other long-term obligations
$

 
$
6,000

 
 
 
 
Merit common stock surrendered (32 and 0 shares, respectively) in exchange for exercise of stock options
$
1,684

 
$

 
 
 
 
See condensed notes to consolidated financial statements.
 
 
(concluded)



8


MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1. Basis of Presentation. The interim consolidated financial statements of Merit Medical Systems, Inc. ("Merit," "we" or "us") for the three and six-month periods ended June 30, 2018 and 2017 are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods and, consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America. In the opinion of our management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of June 30, 2018 and December 31, 2017, and our results of operations and cash flows for the three and six-month periods ended June 30, 2018 and 2017. The results of operations for the three and six-month periods ended June 30, 2018 and 2017 are not necessarily indicative of the results for a full-year period. These interim consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K (the "2017 Form 10-K") for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission (the "SEC") on March 1, 2018.


2. Inventories. Inventories at June 30, 2018 and December 31, 2017, consisted of the following (in thousands):

 
June 30,
 
December 31,
 
2018
 
2017
Finished goods
$
101,092

 
$
86,555

Work-in-process
20,962

 
12,799

Raw materials
47,200

 
55,934

 
 
 
 
Total Inventories
$
169,254

 
$
155,288

 

3. Stock-Based Compensation Expense. The stock-based compensation expense before income tax expense for the three and six months ended June 30, 2018 and 2017, consisted of the following (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Cost of sales
$
232

 
$
168

 
$
416

 
$
264

Research and development
147

 
100

 
271

 
152

Selling, general and administrative
1,186

 
846

 
2,134

 
1,275

Stock-based compensation expense before taxes
$
1,565

 
$
1,114

 
$
2,821

 
$
1,691


We recognize stock-based compensation expense (net of a forfeiture rate) for those awards which are expected to vest on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on our historical experience and expectations about future forfeitures. As of June 30, 2018, the total remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was approximately $22.4 million and is expected to be recognized over a weighted average period of 3.46 years.

During the three and six-month periods ended June 30, 2018, we granted stock-based awards representing 200,000 and 692,002 shares of our common stock, respectively. During the three and six-month periods ended June 30, 2017, we granted stock-based awards representing approximately 1.28 million shares of our common stock. We use the Black-Scholes methodology to value the stock-based compensation expense for options. In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted was estimated using the following assumptions for the periods indicated below:


9


 
Six Months Ended June 30,
 
2018
 
2017
Risk-free interest rate
2.63% - 2.77%
 
1.77% - 1.79%
Expected option life
5.0 years
 
5.0 years
Expected dividend yield
 
Expected price volatility
34.06% - 34.32%
 
33.81% - 34.03%

The average risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock options. We determine the expected term of the stock options using the historical exercise behavior of employees. The expected price volatility was determined using a weighted average of daily historical volatility of our stock price over the corresponding expected option life and implied volatility based on recent trends of the daily historical volatility. For options with a vesting period, compensation expense is recognized on a straight-line basis over the service period, which corresponds to the vesting period. 


4. Earnings Per Common Share (EPS). The computation of weighted average shares outstanding and the basic and diluted earnings per common share for the following periods consisted of the following (in thousands, except per share amounts):

 
Three Months
 
Six Months
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
Period ended June 30, 2018:
 

 
 

 
 

 
 
 
 
 
 
Basic EPS
$
10,941

 
50,473

 
$
0.22

 
$
16,210

 
50,376

 
$
0.32

Effect of dilutive stock options and warrants
 

 
1,681

 
 

 
 
 
1,657

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
$
10,941

 
52,154

 
$
0.21

 
$
16,210

 
52,033

 
$
0.31

 
 
 
 
 
 
 
 
 
 
 
 
Stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive
 
 
535

 
 
 
 
 
359

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period ended June 30, 2017:
 

 
 

 
 

 
 
 
 
 
 
Basic EPS
$
9,483

 
49,957

 
$
0.19

 
$
24,286

 
47,406

 
$
0.51

Effect of dilutive stock options and warrants
 

 
1,231

 
 

 
 
 
1,110

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
$
9,483

 
51,188

 
$
0.19

 
$
24,286

 
48,516

 
$
0.50

 
 
 
 
 
 
 
 
 
 
 
 
Stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive
 
 
1,007

 
 
 
 
 
552

 
 


5. Acquisitions. On May 23, 2018, we entered into an asset purchase agreement with DirectACCESS Medical, LLC (“DirectACCESS”) to acquire its assets, including, certain product distribution agreements for the FirstChoice™ Ultra High Pressure PTA Balloon Catheter. We accounted for this acquisition as a business combination. The purchase price for the assets was approximately $7.3 million. The sales and results of operations related to the acquisition have been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs associated with the DirectACCESS acquisition, which were included in selling, general and administrative expenses in our consolidated statements of income, were not material. The purchase price was preliminarily allocated a follows (in thousands):

10


 
Net Assets Acquired
 
 
Inventories
$
971

 
Intangibles
 
 
Developed technology
4,840

 
Customer list
120

 
Trademarks
400

 
Goodwill
938

 
 
 
 
Total net assets acquired
$
7,269


We are amortizing the developed technology intangible asset over ten years, the related trademarks over ten years and the customer list on an accelerated basis over five years. The total weighted-average amortization period for these acquired intangible assets is approximately 9.9 years.

On May 18, 2018, we paid $750,000 for a distribution agreement with QXMédical, LLC ("QXMédical") for the Q50® PLUS Stent Graft Balloon Catheter. We accounted for this acquisition as an asset purchase. We are amortizing the distribution agreement intangible asset over a period of ten years.
    
On April 6, 2018, we entered into long-term agreements with NinePoint Medical, Inc. (“NinePoint”), pursuant to which, we (a) became the exclusive worldwide distributor for the NvisionVLE® Imaging System with Real-time Targeting™ using Optical Coherence Tomography (OCT) and (b) acquired an option to purchase up to 100% of the outstanding equity in NinePoint throughout a three-month period commencing 18 months subsequent to the agreement date, both in exchange for total consideration of $10.0 million. We accounted for this transaction as an asset purchase. The results of operations related to the distribution agreement have been included in our endoscopy segment since the acquisition date. During the period from April 6, 2018 to June 30, 2018, our net sales of NinePoint products were approximately $1.1 million. We believe the NinePoint products will enhance the product offerings of our Endotek operating segment and will be another step in our strategy to add therapy and disease-state products to our portfolio. The NinePoint products have 510(k) clearance in the United States, and NinePoint is preparing a CE mark application. We plan to launch the NinePoint products globally on a measured basis.

In addition, we made a loan to NinePoint for $10.5 million with a maturity date of April 6, 2023, at which time the loan, together with accrued interest thereon, will be due and payable. The loan bears interest at a rate of 9% and is collateralized by NinePoint's rights, interest and title to the NvisionVLE® Imaging System and any other product owned or licensed by NinePoint. This loan has been recorded as a note receivable within other long-term assets in our consolidated balance sheets.

On February 14, 2018, we acquired certain divested assets from Becton, Dickinson and Company ("BD"), for an aggregate purchase price of $100.3 million. The assets acquired include the soft tissue core needle biopsy products sold under the tradenames of Achieve® Programmable Automatic Biopsy System, Temno® Biopsy System, Tru-Cut® Biopsy Needles as well as Aspira® Pleural Effusion Drainage Kits, and the Aspira® Peritoneal Drainage System. We accounted for this acquisition as a business combination.

During the three and six-month periods ended June 30, 2018, our net sales of BD products were approximately $12.2 million and $18.5 million, respectively. It is not practical to separately report earnings related to the products acquired from BD, as we cannot split out sales costs related solely to the products we acquired from BD, principally because our sales representatives sell multiple products (including the products we acquired from BD) in our cardiovascular business segment. Acquisition-related costs associated with the BD acquisition, which are included in selling, general and administrative expenses in the accompanying consolidated statements of income, were approximately $41,000 and $1.8 million for the three and six-month periods ended June 30, 2018. The following table summarizes the preliminary purchase price allocated to the assets acquired from BD (in thousands):

11


 
 
Preliminary Allocation
 
Adjustments (1)
 
Revised Allocation
 
Inventories
$
6,039

 
$
(235
)
 
$
5,804

 
Property and equipment
581

 
167

 
748

 
Intangibles
 
 
 
 
 
 
Developed technology
79,900

 
(5,900
)
 
74,000

 
Customer list
3,500

 
700

 
4,200

 
Trademarks
4,700

 
200

 
4,900

 
Goodwill
5,387

 
5,226

 
10,613

 
 
 
 
 
 
 
 
Total net assets acquired
$
100,107

 
$
158

 
$
100,265

 
 
 
 
 
 
 
(1)
Under U.S. GAAP, measurement period adjustments are recognized on a prospective basis in the period of change, instead of restating prior periods. There was no impact to reported earnings in connection with these measurement period adjustments for the periods presented. Amounts represent adjustments to the preliminary purchase price allocation first presented in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 resulting from a final working capital adjustment and our ongoing activities with respect to finalizing asset valuations for this acquisition.

We are amortizing the developed technology intangible assets over eight years, the related trademarks over nine years, and the customer lists on an accelerated basis over seven years. The total weighted-average amortization period for these acquired intangible assets is eight years.

On October 2, 2017, we acquired a custom procedure pack business located in Melbourne, Australia from ITL Healthcare Pty Ltd. ("ITL"), for an aggregate purchase price of $11.3 million. We accounted for this acquisition as a business combination. The following table summarizes the aggregate purchase price allocated to the assets acquired from ITL (in thousands):
Assets Acquired
 
Trade receivables
$
1,287

Other receivables
56

Inventories
1,808

Prepaid expenses and other assets
65

Property and equipment
1,053

Intangibles
 
Customer lists
5,940

Goodwill
3,945

Total assets acquired
14,154

 
 
Liabilities Assumed
 
Trade payables
(216
)
Accrued expenses
(747
)
Deferred tax liabilities
(1,901
)
Total liabilities assumed
(2,864
)
 
 
Total net assets acquired
$
11,290


We are amortizing the customer list on an accelerated basis over seven years. Acquisition-related costs associated with the ITL acquisition, which were included in selling, general and administrative expenses in the consolidated statements of income in the 2017 Form 10-K, were not material. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the three and six months ended June 30, 2018, our net sales of ITL products were approximately $2.0 million and $4.2 million, respectively. It is not practical to separately report the earnings related to the ITL acquisition, as we cannot split out sales costs related solely to the products we acquired from ITL, principally because our sales representatives sell multiple products (including the products we acquired from ITL) in our cardiovascular business segment.

On August 4, 2017, we acquired from Laurane Medical S.A.S. ("Laurane") and its shareholders inventories and the intellectual property rights associated with certain manual bone biopsy devices, manual bone marrow needles and muscle biopsy kits for an aggregate purchase price of $16.5 million. We also recorded a contingent consideration liability of $5.5 million related to royalties potentially payable to Laurane's shareholders pursuant to the terms of an intellectual property purchase agreement.

12


We accounted for this acquisition as a business combination. The following table summarizes the aggregate purchase price (including contingent royalty payment liabilities) allocated to the assets acquired from Laurane (in thousands):
 
Net Assets Acquired
 
 
Inventories
$
594

 
Intangibles
 
 
Developed technology
14,920

 
Customer list
120

 
Goodwill
6,366

 
 
 
 
Total net assets acquired
$
22,000


We are amortizing the developed technology intangible asset over 12 years and the customer list on an accelerated basis over one year. The total weighted-average amortization period for these acquired intangible assets is 11.9 years. The sales and results of operations related to the acquisition have been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs associated with the Laurane acquisition, which were included in selling, general and administrative expenses in the consolidated statements of income of our 2017 Form 10-K, were not material.

On July 3, 2017, we acquired from Osseon LLC (“Osseon”) substantially all the assets related to Osseon’s vertebral augmentation products. We accounted for this acquisition as a business combination. The purchase price for the assets was approximately $6.8 million. Acquisition-related costs associated with the Osseon acquisition, which were included in selling, general and administrative expenses in the consolidated statements of income of our 2017 Form 10-K, were not material. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the three and six months ended June 30, 2018, our net sales of Osseon products were approximately $588,000 and $1.1 million, respectively. It is not practical to separately report the earnings related to the Osseon acquisition, as we cannot split out sales costs related solely to the products we acquired from Osseon, principally because our sales representatives sell multiple products (including the products we acquired from Osseon) in our cardiovascular business segment. The following table summarizes the purchase price allocated to the net assets acquired (in thousands):
 
Net Assets Acquired
 
 
Inventories
$
979

 
Property and equipment
58

 
Intangibles
 
 
Developed technology
5,400

 
Customer list
200

 
Goodwill
203

 
 
 
 
Total net assets acquired
$
6,840


We are amortizing the developed technology intangible asset over nine years and customer lists on an accelerated basis over eight years. The total weighted-average amortization period for these acquired intangible assets is approximately 9.0 years.

On May 1, 2017, we entered into an agreement and plan of merger with Vascular Access Technologies, Inc. ("VAT"), pursuant to which we acquired the SAFECVAD™ device. We accounted for this acquisition as a business combination. The purchase price for the acquisition was $5.0 million. We also recorded $4.9 million of contingent consideration related to royalties potentially payable to VAT pursuant to the merger agreement. The following table summarizes the purchase price allocated to the net assets acquired and liabilities assumed (in thousands):

13


 
Net Assets Acquired
 
 
Intangibles
 
 
Developed technology
$
7,800

 
In-process technology
920

 
Goodwill
4,281

 
Deferred tax liabilities
(3,101
)
 
 
 
 
Total net assets acquired
$
9,900


We are amortizing the developed technology intangible asset over 15 years. The sales and results of operations related to the acquisition have been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs associated with the VAT acquisition, which were included in selling, general and administrative expenses in the consolidated statements of income of our 2017 Form 10-K, were not material.

On January 31, 2017, we acquired the critical care division of Argon Medical Devices, Inc. ("Argon"), including a manufacturing facility in Singapore, the related commercial operations in Europe and Japan, and certain inventories and intellectual property rights within the United States. We made an initial payment of approximately $10.9 million and received a subsequent reduction to the purchase price of approximately $797,000 related to a working capital adjustment according to the terms of the purchase agreement. We accounted for the acquisition as a business combination.

Acquisition-related costs associated with the acquisition of the Argon critical care division during the year ended December 31, 2017, which were included in selling, general and administrative expenses in the consolidated statements of income of our 2017 Form 10-K, were approximately $2.6 million. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the three and six months ended June 30, 2018, our net sales of the Argon critical care products were approximately $11.2 million and $23.7 million, respectively. It is not practical to separately report the earnings related to the Argon critical care acquisition, as we cannot split out sales costs related solely to the products we acquired from Argon, principally because our sales representatives sell multiple products (including the products we acquired from Argon) in our cardiovascular business segment.

The assets and liabilities in the purchase price allocation for the Argon critical care acquisition are stated at fair value based on estimates of fair value using available information and making assumptions our management believes are reasonable. The following table summarizes the purchase price allocated to the net tangible and intangible assets acquired and liabilities assumed (in thousands):

14


 
Assets Acquired
 
 
Cash and cash equivalents
$
1,436

 
Trade receivables
8,351

 
Inventories
11,222

 
Prepaid expenses and other assets
1,275

 
Income tax refund receivables
165

 
Property and equipment
2,319

 
Deferred income tax assets
202

 
Intangibles
 
 
Developed technology
2,200

 
Customer lists
1,500

 
Trademarks
900

 
Total assets acquired
29,570

 
 
 
 
Liabilities Assumed
 
 
Trade payables
(2,414
)
 
Accrued expenses
(5,083
)
 
Deferred income tax liabilities
(934
)
 
Total liabilities assumed
(8,431
)
 
 
 
 
Total net assets acquired
21,139

 
Gain on bargain purchase (1)
(11,039
)
 
Total purchase price
$
10,100

 
 
 
(1) 
The total fair value of the net assets acquired from Argon exceeded the purchase price, resulting in a gain on bargain purchase which was recorded within other income (expense) in our consolidated statements of income. We believe the reason for the gain on bargain purchase was a result of the divestiture of a non-strategic, slow-growth critical care business for Argon. It is our understanding that the divestiture allows Argon to focus on its higher growth interventional portfolio. A reduction of $1.2 million was recorded since the bargain purchase gain was first presented in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, resulting from our ongoing activities, including reassessment of the assets acquired and liabilities assumed. The purchase price allocation for this acquisition is now final.

With respect to the Argon critical care assets, we are amortizing developed technology over seven years and customer lists on an accelerated basis over five years. While U.S. trademarks can be renewed indefinitely, we estimate that we will generate cash flow from the acquired trademarks for a period of five years from the acquisition date. The total weighted-average amortization period for these acquired intangible assets is 6.0 years.

On January 31, 2017, we acquired substantially all the assets, including intellectual property covered by approximately 40 patents and pending applications, and assumed certain liabilities, of Catheter Connections, Inc. (“Catheter Connections”), in exchange for payment of $38.0 million. Catheter Connections, based in Salt Lake City, Utah, developed and marketed the DualCap® System, an innovative family of disinfecting products designed to protect patients from intravenous infections resulting from infusion therapy. We accounted for this acquisition as a business combination.

Acquisition-related costs associated with the Catheter Connections acquisition during the year ended December 31, 2017, which were included in selling, general and administrative expenses were approximately $482,000. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the three and six months ended June 30, 2018, our net sales of the products acquired from Catheter Connections were approximately $3.1 million and $6.3 million, respectively. It is not practical to separately report the earnings related to the products acquired from Catheter Connections, as we cannot split out sales costs related solely to those products, principally because our sales representatives sell multiple products (including the DualCap System) in the cardiovascular business segment. The purchase price was allocated as follows (in thousands):

15


Assets Acquired
 
Trade receivables
$
958

Inventories
2,157

Prepaid expenses and other assets
85

Property and equipment
1,472

Intangibles
 
Developed technology
21,100

Customer lists
700

Trademarks
2,900

Goodwill
8,989

Total assets acquired
38,361

 
 
Liabilities Assumed
 
Trade payables
(338
)
Accrued expenses
(23
)
Total liabilities assumed
(361
)
 
 
Net assets acquired
$
38,000


We are amortizing the Catheter Connections developed technology asset over 12 years, the related trademarks over 10 years, and the associated customer list on an accelerated basis over eight years. We have estimated the weighted average life of the intangible Catheter Connections assets acquired to be approximately 11.7 years.

On July 6, 2016, we acquired all of the issued and outstanding shares of DFINE Inc. ("DFINE"). The DFINE acquisition added a line of vertebral augmentation products for the treatment of vertebral compression fractures, as well as medical devices used to treat metastatic spine tumors. We made an initial payment of $97.5 million to certain DFINE stockholders on July 6, 2016 and paid approximately $578,000 related to a net working capital adjustment subject to review by Merit and the preferred stockholders of DFINE. We accounted for the acquisition as a business combination. Acquisition-related costs during the year ended December 31, 2016, which are included in selling, general, and administrative expenses were approximately $1.6 million. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the three and six months ended June 30, 2018, our net sales of DFINE products were approximately $7.2 million and $14.5 million, respectively. It is not practical to separately report the earnings related to the DFINE acquisition, as we cannot split out sales costs related to DFINE products, principally because our sales representatives are selling multiple products (including DFINE products) in the cardiovascular business segment. The purchase price was allocated to the net tangible and intangible assets acquired and liabilities assumed, based on estimated fair values, as follows (in thousands):

16


Assets Acquired
 
Trade receivables
$
4,054

Other receivables
6

Inventories
8,585

Prepaid expenses and other assets
630

Property and equipment
1,630

Other long-term assets
145

Intangibles
 
Developed technology
67,600

Customer lists
2,400

Trademarks
4,400

Goodwill
24,818

Total assets acquired
114,268

 
 
Liabilities Assumed
 
Trade payables
(1,790
)
Accrued expenses
(5,298
)
Deferred income tax liabilities - current
(701
)
Deferred income tax liabilities - noncurrent
(10,844
)
Total liabilities assumed
(18,633
)
 
 
Net assets acquired, net of cash received of $1,327
$
95,635


The gross amount of trade receivables we acquired in the acquisition was approximately $4.3 million, of which approximately $224,000 was expected to be uncollectible or returned. With respect to the DFINE assets, we are amortizing developed technology over 15 years and customer lists on an accelerated basis over nine years. While U.S. trademarks can be renewed indefinitely, we currently estimate that we will generate cash flow from the acquired trademarks for a period of 15 years from the acquisition date. The total weighted-average amortization period for these acquired intangible assets is 14.8 years.
    
On February 4, 2016, we purchased the HeRO® Graft device and other related assets from CryoLife, Inc., a developer of medical devices based in Kennesaw, Georgia ("CryoLife"). The HeRO Graft is a fully subcutaneous vascular access system intended for use in maintaining long-term vascular access for chronic hemodialysis patients who have failing fistulas, grafts or are catheter dependent due to a central venous blockage. The purchase price was $18.5 million, which was paid in full during 2016. We accounted for this acquisition as a business combination. The purchase price was allocated as follows (in thousands):
Assets Acquired
 
Inventories
$
2,455

Property and equipment
290

Intangibles
 
Developed technology
12,100

Trademarks
700

Customers Lists
400

Goodwill
2,555

 
 
Total assets acquired
$
18,500


We are amortizing the developed HeRO Graft technology asset over 10 years, the related trademarks over 5.5 years, and the associated customer lists over 12 years. We have estimated the weighted average life of the intangible HeRO Graft assets acquired to be approximately 9.8 years. Acquisition-related costs related to the HeRO Graft device and other related assets during the year ended December 31, 2016, which are included in selling, general and administrative expenses, were not material. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the three and six months ended June 30, 2018, our net sales of the products acquired from CryoLife were approximately $2.2 million and $4.2 million, respectively. It is not practical to separately report the earnings related to the products acquired from CryoLife, as

17


we cannot split out sales costs related to those products, principally because our sales representatives are selling multiple products (including the HeRO Graft device) in the cardiovascular business segment.

The following table summarizes our consolidated results of operations for the six-month period ended June 30, 2017, as well as unaudited pro forma consolidated results of operations as though the acquisition of the Argon critical care division had occurred on January 1, 2016 (in thousands, except per common share amounts):

 
Six Months Ended
 
June 30, 2017
 
As Reported
 
Pro Forma
Net sales
$
357,618

 
$
360,378

Net income
24,286

 
12,444

Earnings per common share:
 
 
 
Basic
$
0.51

 
$
0.26

Diluted
$
0.50

 
$
0.26

* The pro forma results for the three-month periods ended June 30, 2018 and 2017 and the six-month period ended June 30, 2018 are not included in the table above because the operating results for the Argon critical care division acquisition were included in our consolidated statements of income for these periods.

The unaudited pro forma information set forth above is for informational purposes only and includes adjustments related to the step-up of acquired inventories, amortization expense of acquired intangible assets, interest expense on long-term debt and changes in the timing of the recognition of the gain on bargain purchase. The pro forma information should not be considered indicative of actual results that would have been achieved if the acquisition of the Argon critical care division had occurred on January 1, 2016, or results that may be obtained in any future period. The pro forma consolidated results of operations do not include the acquisition of assets from BD because it was deemed impracticable to obtain information to determine net income associated with the acquired product lines which represent a small product line of a large, consolidated company without standalone financial information. The pro forma consolidated results of operations do not include the DirectACCESS, ITL, Laurane, Osseon, VAT or Catheter Connections acquisitions as we do not deem the pro forma effect of these transactions to be material.
    
The goodwill arising from the acquisitions discussed above consists largely of the synergies and economies of scale we hope to achieve from combining the acquired assets and operations with our historical operations. The goodwill recognized from certain acquisitions is expected to be deductible for income tax purposes.


6. Revenue from Contracts with Customers.

In accordance with Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"), we recognize revenue when a customer obtains control of promised goods. The amount of revenue recognized reflects the consideration we to receive in exchange for these goods. To achieve this core principle, we apply the following five steps:

1.
Identify the contract with the customer. A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We do not have significant costs to obtain contracts with customers. For commissions on product sales, we have elected the practical expedient to expense the costs as incurred if the amortization period would have been one year or less.

2.
Identify the performance obligations in the contract. Generally, our contracts with customers do not include multiple performance obligations to be completed over a period of time. Our performance obligations relate to delivering single-use medical products to a customer, subject to the shipping terms of the contract. Limited warranties are provided, under which we typically accept returns and provide either replacement parts or refunds. We do not have significant returns. We do not typically offer extended warranty or service plans.

3.
Determine the transaction price. Payment by the customer is due under customary fixed payment terms, and we evaluate if collectability is reasonably assured. None of our contracts as of June 30, 2018 contained a significant financing

18


component. Further, our methodology to estimate and recognize variable consideration is consistent with the requirements of ASC 606. Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns, rebates, discounts, and other adjustments. The estimates of variable consideration are based on historical payment experience, historical and projected sales data, and current contract terms. Variable consideration is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.

4.
Allocate the transaction price to performance obligations in the contract. We typically do not have multiple performance obligations in our contracts with customers. As such, we recognize revenue upon delivery of the product to the customer's control at contractually stated pricing.

5.
Recognize revenue when or as we satisfy a performance obligation. We satisfy performance obligations at a point in time upon either shipment or delivery of goods, in accordance with the terms of each contract with the customer. We do not have significant service revenue.

Disaggregation of Revenue

The disaggregation of revenue is based on type of product and geographical region. For descriptions of our product offerings and segments, see Note 12 in our 2017 Form 10-K.

The following tables present revenue from contracts with customers for the three and six-month periods ended June 30, 2018 and 2017 (in thousands):

 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
United States
 
International
 
Total
 
United States
 
International
 
Total
Cardiovascular
 
 
 
 
 
 
 
 
 
 
 
Stand-alone devices
$
50,941

 
$
41,555

 
$
92,496

 
$
37,202

 
$
33,854

 
$
71,056

Custom kits and procedure trays
23,667

 
10,325

 
33,992

 
24,271

 
7,526

 
31,797

Inflation devices
8,160

 
16,145

 
24,305

 
8,042

 
12,747

 
20,789

Catheters
16,704

 
22,670

 
39,374

 
16,022

 
16,407

 
32,429

Embolization devices
5,094

 
7,630

 
12,724

 
5,593

 
6,565

 
12,158

CRM/EP
11,758

 
1,738

 
13,496

 
10,264

 
1,170

 
11,434

Total
116,324

 
100,063

 
216,387

 
101,394

 
78,269

 
179,663

 
 
 
 
 
 
 
 
 
 
 
 
Endoscopy
 
 
 
 
 
 
 
 
 
 
 
Endoscopy devices
8,121

 
302

 
8,423

 
6,712

 
174

 
6,886

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
124,445

 
$
100,365

 
$
224,810

 
$
108,106

 
$
78,443

 
$
186,549



19


 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
United States
 
International
 
Total
 
United States
 
International
 
Total
Cardiovascular
 
 
 
 
 
 
 
 
 
 
 
Stand-alone devices
$
94,953

 
$
80,789

 
$
175,742

 
$
73,366

 
$
61,343

 
$
134,709

Custom kits and procedure trays
45,984

 
21,280

 
67,264

 
45,737

 
14,935

 
60,672

Inflation devices
15,828

 
30,896

 
46,724

 
16,017

 
23,279

 
39,296

Catheters
31,974

 
41,265

 
73,239

 
31,151

 
31,454

 
62,605

Embolization devices
10,126

 
15,184

 
25,310

 
11,134

 
13,551

 
24,685

CRM/EP
20,596

 
3,366

 
23,962

 
20,011

 
2,440

 
22,451

Total
219,461

 
192,780

 
412,241

 
197,416

 
147,002

 
344,418

 
 
 
 
 
 
 
 
 
 
 
 
Endoscopy
 
 
 
 
 
 
 
 
 
 
 
Endoscopy devices
15,040

 
563

 
15,603

 
12,806

 
394

 
13,200

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
234,501

 
$
193,343

 
$
427,844

 
$
210,222

 
$
147,396

 
$
357,618



7. Segment Reporting. We report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of cardiology and radiology medical device products which assist in diagnosing and treating coronary artery disease, peripheral vascular disease and other non-vascular diseases and includes embolotherapeutic, cardiac rhythm management ("CRM"), electrophysiology ("EP"), critical care, and interventional oncology and spine devices. Our endoscopy segment focuses on the gastroenterology, pulmonary and thoracic surgery specialties, with a portfolio consisting primarily of stents, dilation balloons, certain inflation devices, guidewires, and other disposable products. We evaluate the performance of our operating segments based on operating income. 

Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three and six-month periods ended June 30, 2018 and 2017, are as follows (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net Sales (1)
 

 
 

 
 

 
 

Cardiovascular
$
216,387

 
$
179,663

 
$
412,241

 
$
344,418

Endoscopy
8,423

 
6,886

 
15,603

 
13,200

Total net sales
$
224,810

 
$
186,549

 
$
427,844

 
$
357,618

 
 
 
 
 
 
 
 
Operating Income (1)
 
 
 
 
 
 
 
Cardiovascular
$
12,663

 
$
11,493

 
$
19,060

 
$
15,475

Endoscopy
2,451

 
1,869

 
4,835

 
3,496

Total operating income
$
15,114

 
$
13,362

 
$
23,895

 
$
18,971

(1) Sales and operating income have been adjusted from prior disclosure to reflect changes in product classifications between our operating segments, which were made to be consistent with updates in the management of our product portfolios in 2018.


8. Recently Issued Financial Accounting Standards

Recently Adopted

In October 2016, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 became effective for us as of January 1, 2018. The adoption of ASU 2016-16 did not have a material impact on our consolidated financial statements.


20


In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. We adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance regarding the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, ASU 2016-01 clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. We adopted ASU 2016-01 on January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on our consolidated financial statements.

The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We adopted this ASU (and all subsequent ASUs that modified Topic 606) effective January 1, 2018 on a modified retrospective basis. Adoption of this standard did not result in significant changes to our accounting policies, business processes, systems or controls, or have a material impact on our financial position, results of operations or cash flows. As such, prior period amounts are not adjusted and continue to be reported under accounting standards then in effect, and we did not record a cumulative adjustment to the opening equity balance of retained earnings as of January 1, 2018. However, additional disclosures have been added in accordance with the requirements of Topic 606 and are reflected in Note 6.

Not Yet Adopted

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. While we continue to assess the potential impact of this standard, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act, which was enacted in December 2017 (the "2017 Tax Act"). ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the anticipated impact of adopting ASU 2018-02 on our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the anticipated impact of adopting ASU 2017-12 on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which eliminates the current tests for lease classification under U.S. GAAP and requires lessees to recognize the right-of-use assets and related lease liabilities on the balance sheet for all leases greater than one year in duration. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU 2016-02 is permitted. ASU 2016-02 provides that lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are assessing the impact that ASU 2016-02 is anticipated to have on our consolidated financial statements. We currently expect that most of our operating lease commitments will be subject to the new standard and recognized as lease liabilities and right-of-use assets upon our adoption of ASU 2016-02.


21


We do not believe any other issued and not yet effective accounting standards will be relevant to our consolidated financial statements.


9. Income Taxes. On December 22, 2017, the 2017 Tax Act was signed into law. At December 31, 2017, we recorded a provisional net tax benefit related to the remeasurement of deferred taxes and a one-time tax expense for the transition tax. In accordance with SEC Staff Accounting Bulletin 118 (“SAB 118”), income tax effects of the 2017 Tax Act may be refined upon obtaining, preparing, and/or analyzing additional information during the measurement period and such changes could be material. During the measurement period, provisional amounts may also be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017 by U.S. regulatory and standard-setting bodies. As of June 30, 2018, the amounts recorded for the 2017 Tax Act remain provisional and may be impacted by further analysis and subsequently issued guidance.

For tax years beginning after December 31, 2017, the 2017 Tax Act introduces new provisions of U.S. taxation of certain Global Intangible Low-Taxed Income (“GILTI”). We have not yet determined our policy election with respect to whether to record deferred taxes for temporary basis differences expected to reverse as GILTI in future periods, or account for taxes on GILTI using the period cost method. We have, however, included an estimate of the current GILTI impact in our tax provision for the three and six months ended June 30, 2018.

Our non-U.S. earnings are currently considered as indefinitely reinvested overseas. Previously, any repatriation by way of a dividend may have been subject to both U.S. federal and state income taxes, as adjusted for any non-U.S. tax credits. Under the 2017 Tax Act, such dividends should no longer be subject to U.S. federal tax. We are still analyzing how the 2017 Tax Act impacts our existing accounting position to indefinitely reinvest foreign earnings and have yet to determine whether we plan to change our position. We will record the tax effects of any change to our existing assertion in the period that we complete our analysis. If such earnings were to be distributed, any foreign withholding taxes could be material.

Our provision for income taxes for the three months ended June 30, 2018 and 2017 was a tax expense of approximately $624,000 and $1.8 million, respectively, which resulted in an effective tax rate of 5.4% and 16.2%, respectively. Our provision for income taxes for the six months ended June 30, 2018 and 2017 was a tax expense of approximately $1.7 million and $2.5 million, respectively, which resulted in an effective tax rate of 9.6% and 9.4%, respectively. The decrease in the effective income tax rate for the second quarter of 2018 compared to the second quarter of 2017 was primarily caused by a decrease in the federal statutory tax rate, as well as a discrete tax benefit related to share-based payment awards. Despite the decrease resulting from these items, the effective tax rate for the six months ended June 30, 2018 is relatively unchanged when compared to the corresponding period in 2017 due primarily to the nontaxable gain on the bargain purchase recorded in connection with the 2017 acquisition of the Argon critical care division.


10. Revolving Credit Facility and Long-Term Debt. Principal balances outstanding under our long-term debt obligations as of June 30, 2018 and December 31, 2017, consisted of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
2016 Term loan
$
80,000

 
$
85,000

2016 Revolving credit loans
327,000

 
187,000

Collateralized debt facility
6,985

 
6,959

Less unamortized debt issuance costs
(418
)
 
(487
)
Total long-term debt
413,567

 
278,472

Less current portion
21,985

 
19,459

Long-term portion
$
391,582

 
$
259,013


22



2016 Term Loan and Revolving Credit Loans

On July 6, 2016, we entered into a Second Amended and Restated Credit Agreement (as amended to date, the “Second Amended Credit Agreement”), with Wells Fargo Bank, National Association, as administrative agent, swingline lender and a lender, and Wells Fargo Securities, LLC, as sole lead arranger and sole bookrunner. In addition to Wells Fargo Bank, National Association, Bank of America, N.A., U.S. Bank, National Association, and HSBC Bank USA, National Association, are parties to the Second Amended Credit Agreement as lenders. The Second Amended Credit Agreement amends and restates in its entirety our previously outstanding Amended and Restated Credit Agreement and all amendments thereto. The Second Amended Credit Agreement was amended on September 28, 2016 to allow for a new revolving credit loan to our wholly-owned subsidiary, on March 20, 2017 to allow flexibility in how we apply net proceeds received from equity issuances to prepay outstanding indebtedness, on December 13, 2017 to increase the revolving credit commitment by $100 million up to $375 million, and on March 28, 2018 to amend certain debt covenants.

The Second Amended Credit Agreement provides for a term loan of $150 million and a revolving credit commitment up to an aggregate amount of $375 million, which includes a reserve of $25 million to make swingline loans from time to time. The term loan is payable in quarterly installments in the amounts provided in the Second Amended Credit Agreement until the maturity date of July 6, 2021, at which time the term and revolving credit loans, together with accrued interest thereon, will be due and payable. At any time prior to the maturity date, we may repay any amounts owing under all revolving credit loans, term loans, and all swingline loans in whole or in part, subject to certain minimum thresholds, without premium or penalty, other than breakage costs.

Revolving credit loans denominated in dollars and term loans made under the Second Amended Credit Agreement bear interest, at our election, at either a Base Rate or Eurocurrency Base Rate (as such terms are defined in the Second Amended Credit Agreement) plus the applicable margin, which increases as our Consolidated Total Leverage Ratio (as defined in the Second Amended Credit Agreement) increases. Revolving credit loans denominated in an Alternative Currency (as defined in the Second Amended Credit Agreement) bear interest at the Eurocurrency rate plus the applicable margin. Swingline loans bear interest at the Base Rate plus the applicable margin. Upon an event of default, the interest rate may be increased by 2.0%. The revolving credit commitment also carries a commitment fee of 0.15% to 0.40% per annum on the unused portion.

The Second Amended Credit Agreement is collateralized by substantially all our assets. The Second Amended Credit Agreement contains covenants, representations and warranties, and other terms customary for loans of this nature. The Second Amended Credit Agreement requires that we maintain certain financial covenants, as follows:
 
 
 
Covenant Requirement
Consolidated Total Leverage Ratio (1)
 
 
 
January 1, 2018 and thereafter
 
3.5 to 1.0
Consolidated EBITDA (2)
 
1.25 to 1.0
Consolidated Net Income (3)
 
$0
Facility Capital Expenditures (4)
 
$30 million
 
 
 
 
(1) 
Maximum Consolidated Total Leverage Ratio (as defined in the Second Amended Credit Agreement) as of any fiscal quarter end.
(2) 
Minimum ratio of Consolidated EBITDA (as defined in the Second Amended Credit Agreement and adjusted for certain expenditures) to Consolidated Fixed Charges (as defined in the Second Amended Credit Agreement) for any period of four consecutive fiscal quarters.
(3) 
Minimum level of Consolidated Net Income (as defined in the Second Amended Credit Agreement) for certain periods, and subject to certain adjustments.
(4) 
Maximum level of the aggregate amount of all Facility Capital Expenditures (as defined in the Second Amended Credit Agreement) in any fiscal year.

Additionally, the Second Amended Credit Agreement contains customary events of default and affirmative and negative covenants for transactions of this type. As of June 30, 2018, we believe we were in compliance with all covenants set forth in the Second Amended Credit Agreement.

As of June 30, 2018, we had outstanding borrowings of approximately $407 million under the Second Amended Credit Agreement, with available borrowings of approximately $47.8 million, based on the leverage ratio required pursuant to the Second Amended Credit Agreement. Our interest rate as of June 30, 2018 was a fixed rate of 2.87% on $175 million as a result an interest rate swap

23


(see Note 11) and a variable floating rate of 3.84% on $232 million. Our interest rate as of December 31, 2017 was a fixed rate of 2.68% on $175 million as a result of an interest rate swap and a variable floating rate of 2.82% on $97 million.

Collateralized Debt Facility

On March 14, 2018, we renewed our loan agreement with HSBC Bank USA, National Association ("HSBC Bank") whereby HSBC Bank agreed to provide us with a loan in the amount of approximately $7.0 million. The loan matures on July 10, 2018, with an extension available at our option, subject to certain conditions. The loan agreement bears interest at the three-month London Inter-Bank Offered Rate (“LIBOR”) plus 1.0%, which resets quarterly. The loan is secured by assets having a value not less than the currently outstanding loan balance. The loan contains covenants, representations and warranties and other terms customary for loans of this nature. As of June 30, 2018, our interest rate on the loan was a variable rate of 3.26%.

Future Payments

Future minimum principal payments on our long-term debt as of June 30, 2018, are as follows (in thousands):
Years Ending 
 
Future Minimum
December 31
 
Principal Payments
Remaining 2018
 
$
14,485

2019
 
15,000

2020
 
17,500

2021
 
367,000

Total future minimum principal payments
 
$
413,985



11. Derivatives
 
General. Our earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates, and we seek to mitigate a portion of these risks by entering into derivative contracts. The derivatives we use are interest rate swaps and foreign currency forward contracts. We recognize derivatives as either assets or liabilities at fair value in the accompanying consolidated balance sheets, regardless of whether or not hedge accounting is applied. We report cash flows arising from our hedging instruments consistent with the classification of cash flows from the underlying hedged items. Accordingly, cash flows associated with our derivative programs are classified as operating activities in the accompanying consolidated statements of cash flows.

We formally document, designate and assess the effectiveness of transactions that receive hedge accounting initially and on an ongoing basis. Changes in the fair value of derivatives that qualify for hedge accounting treatment are recorded, net of applicable taxes, in accumulated other comprehensive income (loss), a component of stockholders’ equity in the accompanying consolidated balance sheets. For the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Changes in the fair value of derivatives not designated as hedging instruments are recorded in earnings throughout the term of the derivative.

Interest Rate Risk. A portion of our debt bears interest at variable interest rates and, therefore, we are subject to variability in the cash paid for interest expense. In order to mitigate a portion of this risk, we use a hedging strategy to reduce the variability of cash flows in the interest payments associated with a portion of the variable-rate debt outstanding under our Second Amended Credit Agreement that is solely due to changes in the benchmark interest rate.

Derivatives Designated as Cash Flow Hedges

On August 5, 2016, we entered into a pay-fixed, receive-variable interest rate swap with a current notional amount of $175.0 million with Wells Fargo to fix the one-month LIBOR rate at 1.12%. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). On a monthly basis, the interest rates under both the interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid. The interest rate swap is scheduled to expire on July 6, 2021.

At June 30, 2018 and December 31, 2017, our interest rate swap qualified as a cash flow hedge. The fair value of our interest rate swap at June 30, 2018 was an asset of approximately $8.0 million, which was partially offset by approximately $2.1 million in

24


deferred taxes. The fair value of our interest rate swap at December 31, 2017 was an asset of approximately $5.7 million, which was offset by approximately $1.5 million in deferred taxes.

Foreign Currency Risk. We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. Our policy is to enter into foreign currency derivative contracts with maturities of up to two years. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and balances denominated in Euros, British Pounds, Chinese Renminbi, Mexican Pesos, Brazilian Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish Krona, Canadian Dollars, Danish Krone, Japanese Yen, Korea Won, and Singapore Dollars. We do not use derivative financial instruments for trading or speculative purposes. We are not subject to any credit risk contingent features related to our derivative contracts, and counterparty risk is managed by allocating derivative contracts among several major financial institutions.

Derivatives Designated as Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion) or hedge components excluded from the assessment of effectiveness, are recognized in earnings during the current period. We enter into forward contracts on various foreign currencies to manage the risk associated with forecasted exchange rates which impact revenues, cost of sales, and operating expenses in various international markets. The objective of the hedges is to reduce the variability of cash flows associated with the forecasted purchase or sale of the associated foreign currencies.

We enter into approximately 100 cash flow foreign currency hedges every month. As of June 30, 2018, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with the following notional amounts (in thousands and in local currencies):
Currency
Symbol
Forward Notional Amount

Canadian Dollar
CAD
2,410

Swiss Franc
CHF
1,158

Chinese Renminbi
CNY
66,000

Danish Krone
DKK
11,650

Euro
EUR
12,870

British Pound
GBP
2,975

Mexican Peso
MXN
94,275

Swedish Krona
SEK
13,830


Derivatives Not Designated as Cash Flow Hedges

We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and we enter into foreign currency forward contracts to mitigate that exposure. We enter into approximately 20 foreign currency fair value hedges every month. As of June 30, 2018, we had entered into foreign currency forward contracts related to those balance sheet accounts, with the following notional amounts (in thousands and in local currencies):

25


Currency
Symbol
Forward Notional Amount

Australian Dollar
AUD
8,400

Brazilian Real
BRL
8,500

Canadian Dollar
CAD
3,098

Swiss Franc
CHF
255

Chinese Renminbi
CNY
95,228

Danish Krone
DKK
2,885

Euro
EUR
25,861

British Pound
GBP
1,584

Hong Kong Dollar
HKD
11,000

Japanese Yen
JPY
260,000

Korean Won
KRW
2,700,000

Mexican Peso
MXN
18,700

Swedish Krona
SEK
10,536

Singapore Dollar
SGD
6,900


Balance Sheet Presentation of Derivatives. As of June 30, 2018, and December 31, 2017, all derivatives, both those designated as hedging instruments and those that were not designated as hedging instruments, were recorded gross at fair value on our consolidated balance sheets. We are not subject to any master netting agreements.

The fair value of derivative instruments on a gross basis is as follows (in thousands):
 
 
 
 
Fair Value
 
 
Balance Sheet Location
 
June 30, 2018
 
December 31, 2017
Derivatives designated as hedging instruments
 
 
 
 
Assets
 
 
 
 
 
 
Interest rate swap
 
Other assets (long-term)
 
$
8,047

 
$
5,749

Foreign currency forward contracts
 
Prepaid expenses and other assets
 
700

 
363

Foreign currency forward contracts
 
Other assets (long-term)
 
83

 
35

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses
 
(231
)
 
(468
)
Foreign currency forward contracts
 
Other long-term obligations
 
(38
)
 
(82
)
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
Assets
 
 
 
 
 
 
Foreign currency forward contracts
 
Prepaid expenses and other assets
 
$
1,097

 
$
223

Liabilities
 
 
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses
 
(228
)
 
(841
)

Income Statement Presentation of Derivatives.

Derivatives Designated as Cash Flow Hedges

Derivative instruments designated as cash flow hedges had the following effects, before income taxes, on other comprehensive income and net earnings in our consolidated statements of income, consolidated statements of comprehensive income and consolidated balance sheets (in thousands):

26


 
Amount of Gain/(Loss) recognized in OCI
 
 
Amount of Gain/(Loss) reclassified from AOCI
 
Three Months Ended June 30,
 
 
Three Months Ended June 30,
 
2018
2017
 
 
2018
2017
Derivative instrument
 
 
Location in statements of income
Interest rate swaps
$
748

$
(893
)
 
Interest Expense
$
357

$

Foreign currency forward contracts
394

353

 
Revenue
(234
)
(41
)
 
 
 
 
Cost of sales
138

28

 
 
 
 
 
 
 
 
Amount of Gain/(Loss) recognized in OCI
 
 
Amount of Gain/(Loss) reclassified from AOCI
 
Six Months Ended June 30,
 
 
Six Months Ended June 30,
 
2018
2017
 
 
2018
2017
Derivative instrument
 
 
Location in statements of income
Interest rate swaps
2,868

(507
)
 
Interest Expense
570

(104
)
Foreign currency forward contracts
568

741

 
Revenue
(385
)
(40
)
 
 
 
 
Cost of sales
378

(37
)

The net amount recognized in earnings during the three and six months ended June 30, 2018 and 2017 due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness were not significant.

As of June 30, 2018, approximately $464,000, or $345,000 after taxes, was expected to be reclassified from accumulated other comprehensive income to earnings in revenue and cost of sales over the succeeding twelve months. As of June 30, 2018, approximately $2.2 million, or $1.6 million after taxes, was expected to be reclassified from accumulated other comprehensive income to earnings in interest expense over the succeeding twelve months.

Derivatives Not Designated as Hedging Instruments

The following gains/(losses) from these derivative instruments were recognized in our consolidated statements of income for the periods presented (in thousands):
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2018
2017
 
2018
2017
Derivative Instrument
 
Location in statements of income
 
 
 
 
 
 
Foreign currency forward contracts
 
Other expense
 
$
3,153

$
(1,834
)
 
$
2,038

$
(2,692
)



27


12. Fair Value Measurements. Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of June 30, 2018 and December 31, 2017, consisted of the following (in thousands):