Merit Medical(MMSI) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for Merit Medical Systems, Inc. for the periods ended June 30, 2023 and 2022 Item 1. Financial Statements (Unaudited) This section presents Merit Medical Systems' unaudited consolidated financial statements and condensed notes for Q2 2023 and 2022 Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of June 30, 2023, and December 31, 2022 | Metric | June 30, 2023 (unaudited, in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------- | :------------------ | | Total current assets | $594,907 | $529,084 | | Total assets | $1,837,568 | $1,663,966 | | Total current liabilities | $190,003 | $220,645 | | Total liabilities | $633,868 | $519,569 | | Total stockholders' equity | $1,203,700 | $1,144,397 | - Total assets increased by $173.6 million (10.4%) from December 31, 2022, to June 30, 2023, primarily driven by increases in inventories, developed technology, and goodwill[8] - Total liabilities increased by $114.3 million (22.0%) over the same period, largely due to a significant increase in long-term debt[9] Consolidated Statements of Income This section details the company's financial performance, including net sales, gross profit, operating income, and net income for the three and six-month periods ended June 30, 2023 and 2022 | Metric (in thousands, except per share) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $320,056 | $294,976 | $617,621 | $570,391 | | Gross profit | $152,782 | $135,067 | $291,144 | $255,974 | | Income from operations | $28,812 | $23,256 | $55,195 | $38,489 | | Net income | $20,245 | $15,298 | $40,948 | $25,843 | | Basic EPS | $0.35 | $0.27 | $0.71 | $0.46 | | Diluted EPS | $0.35 | $0.27 | $0.70 | $0.45 | - Net sales increased by 8.5% for the three months ended June 30, 2023, and 8.3% for the six months ended June 30, 2023, compared to the prior year periods[10] - Net income saw a significant increase of 32.3% for the three-month period and 58.4% for the six-month period year-over-year[10] Consolidated Statements of Comprehensive Income This section presents the total comprehensive income, including net income and other comprehensive income (loss) components, for the periods ended June 30, 2023 and 2022 | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $20,245 | $15,298 | $40,948 | $25,843 | | Total other comprehensive income (loss) | $1,385 | $(4,066) | $2,006 | $(2,728) | | Total comprehensive income | $21,630 | $11,232 | $42,954 | $23,115 | - Total comprehensive income increased significantly, driven by higher net income and a positive shift in other comprehensive income (loss) from a loss in 2022 to a gain in 2023, primarily due to changes in cash flow hedges and foreign currency translation adjustments[12] Consolidated Statements of Stockholders' Equity This section outlines changes in stockholders' equity, including common stock, retained earnings, and accumulated other comprehensive loss, from January 1 to June 30, 2023 | Metric (in thousands) | January 1, 2023 | June 30, 2023 | | :-------------------- | :-------------- | :------------ | | Common Stock Amount | $675,174 | $691,523 | | Retained Earnings | $480,773 | $521,721 | | Accumulated Other Comprehensive Loss | $(11,550) | $(9,544) | | Total Stockholders' Equity | $1,144,397 | $1,203,700 | - Total stockholders' equity increased by $59.3 million from January 1, 2023, to June 30, 2023, primarily due to net income, stock-based compensation expense, and options exercised[14] - Accumulated Other Comprehensive Loss improved from $(11,550) thousand to $(9,544) thousand, reflecting positive other comprehensive income during the period[14] Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities for the six-month periods ended June 30, 2023 and 2022 | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $31,831 | $50,794 | | Net cash used in investing activities | $(157,751) | $(23,299) | | Net cash provided by (used in) financing activities | $141,009 | $(27,444) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $13,592 | $(2,513) | | Cash, cash equivalents and restricted cash, End of period | $74,150 | $65,237 | - Operating cash flows decreased by $18.9 million YoY, primarily due to increased investment in inventories and higher income tax payments[16][130] - Investing activities saw a significant increase in cash usage, primarily due to $138.3 million in cash paid for acquisitions in 2023, compared to $4.7 million in 2022[16][131] - Financing activities shifted from a net cash outflow of $27.4 million in 2022 to a net cash inflow of $141.0 million in 2023, driven by increased long-term debt proceeds to fund acquisitions[17][132] Condensed Notes to Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies, significant transactions, and financial instrument disclosures 1. Basis of Presentation and Other Items This note clarifies the unaudited nature of the interim financial statements and their preparation in accordance with U.S. GAAP - The interim consolidated financial statements are unaudited and prepared in accordance with U.S. GAAP for interim periods, including normal recurring accruals; results are not necessarily indicative of full-year performance[18] 2. Recently Adopted Financial Accounting Standards This note discusses the adoption of new accounting standards related to Reference Rate Reform and their immaterial impact on the financial statements - The company adopted ASU 2020-04 and ASU 2022-06 related to Reference Rate Reform (LIBOR to SOFR transition) during Q2 2023, with no material financial statement impact[19] - No other recently issued and not yet effective accounting standards are believed to be materially relevant to the financial statements[20] 3. Revenue from Contracts with Customers This note details the company's revenue recognition policies and disaggregates revenue by segment, product category, and geographical region - Revenue is recognized when customers obtain control of promised goods, reflecting expected consideration, consistent with 2022 Annual Report policies[21] - Revenue is disaggregated by reporting segment (cardiovascular, endoscopy), product category (peripheral intervention, cardiac intervention, custom procedural solutions, OEM; gastroenterology and pulmonology devices), and geographical region (United States, International)[22][23] Revenue by Segment and Product Category (in thousands) | Segment/Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cardiovascular | $311,275 | $286,670 | $599,251 | $553,606 | | Peripheral Intervention | $125,909 | $110,955 | $239,692 | $216,728 | | Cardiac Intervention | $93,775 | $89,574 | $179,103 | $171,061 | | Custom Procedural Solutions | $49,384 | $49,093 | $97,085 | $95,355 | | OEM | $42,207 | $37,048 | $83,371 | $70,462 | | Endoscopy | $8,781 | $8,306 | $18,370 | $16,785 | | Total | $320,056 | $294,976 | $617,621 | $570,391 | Revenue by Geographical Region (in thousands) | Region | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $179,582 | $164,674 | $350,942 | $317,666 | | International | $140,474 | $130,302 | $266,679 | $252,725 | | Total | $320,056 | $294,976 | $617,621 | $570,391 | 4. Acquisitions This note outlines recent acquisitions, including dialysis catheter products from AngioDynamics and the Surfacer® system from Bluegrass, and their financial impact - On June 8, 2023, Merit acquired dialysis catheter products and the BioSentry® Biopsy Tract Sealant System from AngioDynamics for $100 million, with sales of approximately $0.9 million included in Q2 2023[25] AngioDynamics Acquisition Purchase Price Allocation (in thousands) | Assets Acquired | Amount | | :------------------ | :---------- | | Prepaid expenses | $2,000 | | Inventories | $5,254 | | Property and equipment | $108 | | Developed technology | $65,200 | | Trademarks | $4,000 | | Customer list | $5,800 | | Goodwill | $17,638 | | Total net assets acquired | $100,000 | - On May 4, 2023, Merit acquired the Surfacer® Inside-Out® Access Catheter System from Bluegrass Vascular Technologies, Inc. for $32.7 million, including a previously held 19.5% equity investment[26] - On May 1, 2023, Merit acquired intellectual property rights for soft tissue markers from Advanced Radiation Therapy, LLC (ART) for $1.5 million, recognized as acquired in-process research and development expense[28] - On January 11, 2023, Merit invested $4.0 million in Solo Pace Inc. for Series Seed-1 Preferred Stock, an option to purchase outstanding equity, and exclusive distribution rights[29] 5. Inventories This note provides a breakdown of inventory components and highlights the increase in total inventories from December 2022 to June 2023 Inventories (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :-------------- | :------------ | :---------------- | | Finished goods | $155,934 | $147,051 | | Work-in-process | $33,780 | $29,534 | | Raw materials | $116,229 | $89,406 | | Total inventories | $305,943 | $265,991 | - Total inventories increased by $39.95 million (15.0%) from December 31, 2022, to June 30, 2023, with significant increases in raw materials and finished goods[30] 6. Goodwill and Intangible Assets This note details changes in goodwill and other intangible assets, including additions from acquisitions and amortization expense Goodwill Carrying Amount (in thousands) | Metric | 2023 | | :---------------------- | :-------- | | Goodwill balance at January 1 | $359,821 | | Effect of foreign exchange | $410 | | Additions and adjustments as the result of acquisitions | $21,536 | | Goodwill balance at June 30 | $381,767 | - Goodwill increased by $21.9 million in the first six months of 2023, primarily due to additions from AngioDynamics and Bluegrass acquisitions, all related to the cardiovascular segment[25][26][30] Other Intangible Assets (Net Carrying Amount in thousands) | Category | June 30, 2023 | December 31, 2022 | | :------------------ | :------------ | :---------------- | | Patents | $18,719 | $19,242 | | Distribution agreements | $433 | $535 | | License agreements | $3,307 | $3,859 | | Trademarks | $15,914 | $12,358 | | Customer lists | $7,511 | $2,356 | | Total | $45,884 | $38,350 | - Aggregate amortization expense for intangible assets was $25.7 million for the six months ended June 30, 2023, up from $24.2 million in the prior year[32] - No impairment indicators were identified for intangible assets in the first six months of 2023, contrasting with a $1.7 million impairment charge in 2022 due to a divestiture[33][34] 7. Income Taxes This note presents income tax expense and effective tax rates, explaining the decrease in 2023 and the company's monitoring of OECD Pillar 2 rules Income Tax Expense and Effective Tax Rate | Period | Income Tax Expense (in thousands) | Effective Tax Rate | | :---------------------- | :-------------------------------- | :----------------- | | Three Months Ended June 30, 2023 | $4,655 | 18.7% | | Three Months Ended June 30, 2022 | $5,403 | 26.1% | | Six Months Ended June 30, 2023 | $9,452 | 18.8% | | Six Months Ended June 30, 2022 | $9,029 | 25.9% | - The effective income tax rate decreased in 2023 compared to 2022, primarily due to increased benefits from discrete items like share-based compensation and foreign tax credit utilization[36] - The company is monitoring OECD Pillar 2 global minimum tax rules, expected to apply from 2024, and evaluating eligibility for transitional safe harbor rules[37] 8. Revolving Credit Facility and Long-Term Debt This note details the company's long-term debt obligations, including the new credit agreement, outstanding borrowings, and future principal payments Long-Term Debt Obligations (in thousands) | Debt Type | June 30, 2023 | December 31, 2022 | | :------------------------ | :------------ | :---------------- | | Term loans | $150,000 | $124,688 | | Revolving credit loans | $190,000 | $73,500 | | Less unamortized debt issuance costs | $(1,018) | $(179) | | Total long-term debt | $338,982 | $198,009 | | Less current portion | $3,750 | $11,250 | | Long-term portion | $335,232 | $186,759 | - On June 6, 2023, Merit entered into a Fourth Amended and Restated Credit Agreement, providing a $150 million term loan and a $700 million revolving credit commitment, maturing on June 6, 2028[38] - As of June 30, 2023, outstanding borrowings were $340.0 million, with approximately $507 million in additional available borrowings; interest rates were 2.64% fixed on $75 million and 6.15% variable on $265.0 million[42] Future Minimum Principal Payments on Long-Term Debt (in thousands) | Years Ending December 31, | Future Minimum Principal Payments | | :------------------------ | :-------------------------------- | | Remaining 2023 | $1,875 | | 2024 | $3,750 | | 2025 | $5,625 | | 2026 | $7,500 | | 2027 | $9,375 | | 2028 | $311,875 | | Total | $340,000 | 9. Derivatives This note describes the company's use of interest rate swaps and foreign currency forward contracts to manage market risks, recognized at fair value - Merit uses interest rate swaps and foreign currency forward contracts to mitigate risks from interest rate and foreign currency exchange rate fluctuations, recognizing them at fair value on the balance sheet[45][46] - An interest rate swap with a notional amount of $75 million fixes the one-month SOFR rate at 1.64% until July 31, 2024, with a fair value asset of $2.9 million as of June 30, 2023[48][49] - As of June 30, 2023, the company had $122.5 million in notional foreign currency forward contracts designated as cash flow hedges and $116.9 million in contracts not designated as hedges, primarily for Chinese Renminbi and Euros[50][52][53] Fair Value of Derivative Instruments (in thousands) | Derivative Type | Balance Sheet Location | June 30, 2023 | December 31, 2022 | | :-------------- | :--------------------- | :------------ | :---------------- | | Interest rate swaps (Asset) | Other assets (long-term) | $2,879 | $3,444 | | Foreign currency forward contracts (Assets) | Prepaid expenses and other assets / Other assets (long-term) | $4,617 | $3,271 | | Foreign currency forward contracts (Liabilities) | Accrued expenses / Other long-term obligations | $(2,717) | $(3,986) | 10. Commitments and Contingencies This note outlines the company's involvement in legal proceedings, including an SEC inquiry related to China business activities, and potential adverse financial impacts - The company is involved in various legal proceedings, actions, and claims in the ordinary course of business, including product liability, intellectual property, and governmental inquiries[60] - Merit has received an SEC inquiry regarding business activities in China, specifically interactions with hospitals and healthcare officials, with an unpredictable scope, timing, or outcome[61] - The ultimate resolution of legal matters could be materially adverse to the business, financial condition, results of operations, or liquidity[62] 11. Earnings Per Common Share (EPS) This note provides a detailed calculation of basic and diluted earnings per common share for the three and six-month periods ended June 30, 2023 and 2022 Earnings Per Common Share (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $20,245 | $15,298 | $40,948 | $25,843 | | Basic EPS | $0.35 | $0.27 | $0.71 | $0.46 | | Diluted EPS | $0.35 | $0.27 | $0.70 | $0.45 | | Weighted average shares outstanding (Basic) | 57,537 | 56,691 | 57,445 | 56,642 | | Weighted average shares outstanding (Diluted) | 58,473 | 57,600 | 58,329 | 57,565 | - Diluted EPS increased from $0.27 to $0.35 for the three-month period and from $0.45 to $0.70 for the six-month period year-over-year[64] 12. Stock-Based Compensation Expense This note details stock-based compensation expense by category and provides information on granted options, performance stock units, and unrecognized compensation costs Stock-Based Compensation Expense Before Taxes (in thousands) | Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of sales | $432 | $509 | $873 | $1,097 | | Research and development | $413 | $450 | $841 | $936 | | Selling, general and administrative | $4,735 | $3,492 | $7,835 | $7,060 | | Total | $5,580 | $4,451 | $9,549 | $9,093 | - Total stock-based compensation expense increased by $1.1 million (25.4%) for the three-month period and $0.46 million (5.0%) for the six-month period year-over-year[65] - The company granted 327,294 nonqualified stock options in the first six months of 2023 (vs. 168,606 in 2022) and 286,863 performance stock units (vs. 120,710 in 2022)[66][68] - Remaining unrecognized compensation cost for non-vested stock options was $23.6 million (weighted average period of 2.4 years), for performance stock units was $14.1 million (2.2 years), and for cash-settled liability awards was $4.3 million (2.1 years) as of June 30, 2023[67][70][73] 13. Segment Reporting This note provides financial information disaggregated by the company's two operating segments: cardiovascular and endoscopy, based on net sales and income from operations - Merit operates in two segments: cardiovascular (peripheral intervention, cardiac intervention, custom procedural solutions, OEM) and endoscopy (gastroenterology and pulmonology devices), with performance evaluated based on net sales and income from operations[75] Net Sales by Segment (in thousands) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cardiovascular | $311,275 | $286,670 | $599,251 | $553,606 | | Endoscopy | $8,781 | $8,306 | $18,370 | $16,785 | | Total | $320,056 | $294,976 | $617,621 | $570,391 | Income from Operations by Segment (in thousands) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cardiovascular | $26,464 | $21,275 | $50,398 | $34,401 | | Endoscopy | $2,348 | $1,981 | $4,797 | $4,088 | | Total | $28,812 | $23,256 | $55,195 | $38,489 | 14. Fair Value Measurements This note details the fair value of financial assets and liabilities, including marketable securities, derivatives, and contingent consideration liabilities Fair Value of Financial Assets and Liabilities (in thousands) | Item | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Marketable securities (Level 1) | $104 | $138 | | Interest rate contract asset (Level 2) | $2,879 | $3,444 | | Foreign currency contract assets (Level 2) | $7,353 | $4,783 | | Foreign currency contract liabilities (Level 2) | $(2,717) | $(3,986) | | Contingent consideration liabilities (Level 3) | $(3,581) | $(18,073) | - Contingent consideration liabilities, measured using Level 3 inputs, decreased significantly from $18.1 million at December 31, 2022, to $3.6 million at June 30, 2023, primarily due to $16.1 million in contingent payments made[81][82] - Impairment charges of $270 thousand were recorded for an equity investment in Bluegrass in Q2 2023; no intangible asset impairments were recorded in 2023, compared to $1.7 million in 2022[90][91] 15. Accumulated Other Comprehensive Income (Loss) This note outlines changes in accumulated other comprehensive income (loss), driven by cash flow hedges and foreign currency translation adjustments Changes in Accumulated Other Comprehensive Income (Loss) (in thousands) | Component | Balance as of January 1, 2023 | Net other comprehensive income (loss) for Six Months Ended June 30, 2023 | Balance as of June 30, 2023 | | :------------------------- | :---------------------------- | :----------------------------------------------------------------------- | :-------------------------- | | Cash Flow Hedges | $4,366 | $1,316 | $5,682 | | Foreign Currency Translation | $(15,916) | $690 | $(15,226) | | Total | $(11,550) | $2,006 | $(9,544) | - Accumulated other comprehensive loss improved by $2.0 million during the first six months of 2023, primarily driven by positive contributions from cash flow hedges and foreign currency translation adjustments[95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, condition, and outlook for Q2 2023, covering revenue, profitability, acquisitions, and liquidity Overview This overview introduces Merit Medical's business, key financial highlights for Q2 2023, and strategic initiatives like 'Foundations for Growth' and recent acquisitions - Merit designs, develops, manufactures, markets, and sells medical products for interventional and diagnostic procedures, operating in cardiovascular and endoscopy segments[97] Key Financial Highlights (in millions, except EPS) | Metric | Q2 2023 | Q2 2022 | 6M 2023 | 6M 2022 | | :---------- | :-------- | :-------- | :-------- | :-------- | | Net Sales | $320.1 | $295.0 | $617.6 | $570.4 | | Gross Profit % | 47.7% | 45.8% | 47.1% | 44.9% | | Net Income | $20.2 | $15.3 | $40.9 | $25.8 | | Diluted EPS | $0.35 | $0.27 | $0.70 | $0.45 | - Revenue growth was primarily driven by stronger than anticipated demand in the U.S. and favorable international sales trends, particularly in APAC and EMEA[101] - The 'Foundations for Growth' corporate transformation initiative helped offset inflationary cost pressures[101] - Recent acquisitions include AngioDynamics' dialysis catheter products and BioSentry® Biopsy Tract Sealant System, and Bluegrass' Surfacer® Inside-Out® Access Catheter System[103] Results of Operations This section analyzes the company's financial results, including sales performance by product category and geography, gross profit, and operating expenses Sales This subsection details sales performance by product category, highlighting growth drivers within cardiovascular and endoscopy segments Sales by Product Category (in thousands, with % Change) | Product Category | Q2 2023 Sales | Q2 2022 Sales | Q2 % Change | 6M 2023 Sales | 6M 2022 Sales | 6M % Change | | :--------------- | :------------ | :------------ | :---------- | :------------ | :------------ | :---------- | | Cardiovascular | $311,275 | $286,670 | 8.6% | $599,251 | $553,606 | 8.2% | | Peripheral Intervention | $125,909 | $110,955 | 13.5% | $239,692 | $216,728 | 10.6% | | Cardiac Intervention | $93,775 | $89,574 | 4.7% | $179,103 | $171,061 | 4.7% | | Custom Procedural Solutions | $49,384 | $49,093 | 0.6% | $97,085 | $95,355 | 1.8% | | OEM | $42,207 | $37,048 | 13.9% | $83,371 | $70,462 | 18.3% | | Endoscopy | $8,781 | $8,306 | 5.7% | $18,370 | $16,785 | 9.4% | | Total | $320,056 | $294,976 | 8.5% | $617,621 | $570,391 | 8.3% | - Cardiovascular sales increased by 8.6% in Q2 2023, driven by strong growth in Peripheral Intervention (13.5%) and OEM (13.9%) products[105] - Endoscopy sales grew by 5.7% in Q2 2023, primarily due to increased sales of EndoMAXX® esophageal stents and Elation® Pulmonary Balloon Dilators[108] Geographic Sales This subsection analyzes sales performance across different geographical regions, including the United States and international markets Sales by Geography (in thousands, with % Change) | Geography | Q2 2023 Sales | Q2 2022 Sales | Q2 % Change | 6M 2023 Sales | 6M 2022 Sales | 6M % Change | | :------------ | :------------ | :------------ | :---------- | :------------ | :------------ | :---------- | | United States | $179,582 | $164,674 | 9.1% | $350,942 | $317,666 | 10.5% | | International | $140,474 | $130,302 | 7.8% | $266,679 | $252,725 | 5.5% | | Total | $320,056 | $294,976 | 8.5% | $617,621 | $570,391 | 8.3% | - U.S. sales increased by 9.1% in Q2 2023, driven by domestic direct and OEM businesses[110] - International sales grew by 7.8% in Q2 2023, with strong performance in Asia Pacific (10.8%) and EMEA (5.2%) operations[111] Gross Profit This subsection examines the gross profit percentage and the factors contributing to its improvement in Q2 2023 - Gross profit as a percentage of sales increased to 47.7% in Q2 2023 (from 45.8% in Q2 2022) and to 47.1% for the six-month period (from 44.9% in 6M 2022)[113][114] - The improvement in gross profit percentage was primarily due to favorable changes in product mix, efficiencies from the 'Foundations for Growth' program, and lower freight costs[113][114] Operating Expenses This subsection analyzes trends in selling, general and administrative (SG&A), research and development (R&D), and other operating expenses Operating Expenses as a Percentage of Sales | Expense Category | Q2 2023 | Q2 2022 | 6M 2023 | 6M 2022 | | :--------------- | :------ | :------ | :------ | :------ | | SG&A | 31.5% | 29.0% | 30.9% | 29.7% | | R&D | 6.3% | 6.3% | 6.7% | 6.3% | | Impairment charges | 0.1% | — | 0.0% | 0.3% | | Contingent consideration expense | 0.3% | 0.4% | 0.3% | 0.7% | | Acquired in-process R&D | 0.5% | 2.3% | 0.3% | 1.2% | - SG&A expenses increased by 18.1% in Q2 2023, primarily due to acquisition-related costs, increased labor, equipment disposal losses, and higher travel/marketing costs[115] - R&D expenses increased by 9.0% in Q2 2023, mainly due to higher labor-related and regulatory costs[117] - Acquired in-process R&D costs decreased significantly in 2023 ($1.6 million vs. $6.7 million in 2022), primarily due to the ART acquisition in 2023 compared to Restore Endosystems in 2022[120] Operating Income This subsection presents operating income by segment, highlighting the drivers of performance for cardiovascular and endoscopy Operating Income by Segment (in thousands) | Segment | Q2 2023 Operating Income | Q2 2022 Operating Income | 6M 2023 Operating Income | 6M 2022 Operating Income | | :----------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Cardiovascular | $26,464 | $21,275 | $50,398 | $34,401 | | Endoscopy | $2,348 | $1,981 | $4,797 | $4,088 | | Total | $28,812 | $23,256 | $55,195 | $38,489 | - Cardiovascular operating income increased by 24.4% in Q2 2023, driven by higher sales and gross margin, partially offset by increased SG&A and R&D expenses[121] - Endoscopy operating income increased by 18.5% in Q2 2023, due to increased sales and gross margin, partially offset by higher SG&A expenses[123] Other Expense – Net This subsection explains the increase in other expense – net, primarily due to higher interest expense and foreign currency losses - Other expense – net increased to $3.9 million in Q2 2023 (from $2.6 million in Q2 2022), primarily due to higher interest expense from increased borrowings and rising interest rates, and increased foreign currency losses[124] Effective Tax Rate This subsection discusses the decrease in the effective tax rate, mainly attributed to benefits from discrete items like share-based compensation - The effective tax rate decreased to 18.7% in Q2 2023 (from 26.1% in Q2 2022) and to 18.8% for the six-month period (from 25.9% in 6M 2022), mainly due to increased benefits from discrete items like share-based compensation and foreign tax credit utilization[126] Net Income This subsection highlights the increase in net income, driven by higher sales, improved gross margins, and lower acquired in-process R&D charges - Net income increased to $20.2 million in Q2 2023 (from $15.3 million in Q2 2022) and to $40.9 million for the six-month period (from $25.8 million in 6M 2022)[127][128] - The increase in net income was driven by higher sales, improved gross margins, and lower acquired in-process R&D charges, partially offset by higher SG&A and R&D expenses[127][128] Liquidity and Capital Resources This section assesses the company's liquidity position, cash flow trends from operating, investing, and financing activities, and future capital expenditure plans - As of June 30, 2023, current assets exceeded current liabilities by $404.9 million, and cash, cash equivalents, and restricted cash totaled $74.2 million[129] - Cash provided by operating activities decreased to $31.8 million for the six months ended June 30, 2023 (from $50.8 million in 2022), primarily due to increased inventory investment and higher income tax payments[130][132] - Cash used in investing activities significantly increased to $157.8 million (from $23.3 million in 2022), mainly due to $138.3 million in cash paid for acquisitions[130][131] - Cash provided by financing activities was $141.0 million (vs. $(27.4) million used in 2022), driven by a $141.8 million increase in net borrowings to finance acquisitions[132][133] - The company anticipates spending $55 million to $60 million on property and equipment in 2023[130] Critical Accounting Policies and Estimates This section confirms no changes to critical accounting policies previously disclosed in the 2022 Annual Report on Form 10-K - There were no changes to the application of critical accounting policies previously disclosed in the 2022 Annual Report on Form 10-K during the six-month period ended June 30, 2023[135] Cautionary Notice Regarding Forward-Looking Statements This section advises caution regarding forward-looking statements, noting that actual results may differ due to inherent risks and uncertainties - The report includes forward-looking statements subject to inherent risks and uncertainties, and actual results may differ materially from projections; investors are cautioned not to unduly rely on these statements[136] - The company assumes no obligation to update any forward-looking statement[137] Notice Regarding Trademarks This section clarifies that the report includes trademarks, tradenames, and service marks that are the company's property or the property of others - The report includes trademarks, tradenames, and service marks that are the company's property or the property of others, and their inclusion without symbols does not waive rights[138] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section confirms no material changes in market risk disclosures, including currency exchange rate and interest rate risks, compared to the prior annual report - No material changes occurred in currency exchange rate risk and interest rate risk disclosures during the six-month period ended June 30, 2023[140] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures, concluding their effectiveness, and reported no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This subsection confirms management's conclusion that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2023 - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2023[141] Changes in Internal Control Over Financial Reporting This subsection reports no material changes in internal control over financial reporting during the six-month period ended June 30, 2023 - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the six-month period ended June 30, 2023[142] PART II. OTHER INFORMATION This section provides additional information beyond the financial statements, including legal proceedings, risk factors, and other disclosures Item 1. Legal Proceedings This section refers to Note 10 for details on legal proceedings, including ongoing litigation and an SEC inquiry related to China business activities - Legal proceedings information is detailed in Note 10 'Commitments and Contingencies' of the financial statements[144] Item 1A. Risk Factors This section updates and supplements risk factors, specifically addressing international operations, anti-bribery compliance, and challenges in integrating acquired businesses International Operations and Anti-Bribery Laws This subsection highlights risks associated with international operations, compliance with anti-bribery laws, and an ongoing SEC inquiry into China business activities - International operations expose the company to the U.S. Foreign Corrupt Practices Act (FCPA) and similar anti-corruption laws, with potential for civil and criminal penalties for non-compliance[146][148][149] - An ongoing SEC inquiry into business activities in China, including interactions with hospitals and healthcare officials, could materially adversely affect reputation, business, results of operations, financial condition, or cash flows[150] Acquisition Integration Risks This subsection discusses the substantial costs and challenges associated with identifying, evaluating, and integrating acquired businesses, and the potential adverse impacts of integration failures - The company incurs significant expenses in evaluating, negotiating, and consummating acquisitions, and faces challenges in integrating acquired operations, cultures, and systems[151] - Recent acquisitions (AngioDynamics and Bluegrass) are in early integration stages, posing risks related to achieving projected operating and financial results, transferring manufacturing, and expanding sales/marketing capabilities[151] - Failure to effectively integrate acquisitions or realize anticipated benefits could adversely affect the business, operations, or financial condition, and may lead to future disposition expenses[153] Item 5. Other information This section reports that no directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2023 - No directors or officers reported adopting or terminating Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2023[155] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, asset purchase agreements, certifications, and iXBRL financial information - Exhibits include the Fourth Amended and Restated Credit Agreement, Asset Purchase Agreement with AngioDynamics, and certifications from the CEO and CFO[157] - Financial information for the quarter ended June 30, 2023, is provided in Inline Extensible Business Reporting Language (iXBRL) format[157] SIGNATURES This section contains the official signatures of the company's President, Chief Executive Officer, Chief Financial Officer, and Treasurer, certifying the report - The report was signed on July 28, 2023, by Fred P. Lampropoulos, President and Chief Executive Officer, and Raul Parra, Chief Financial Officer and Treasurer[162]