MERIT MEDICAL SYSTEMS INC [MMSI] Filings

10-Q 1 mmsi-20220331x10q.htm 10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ 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

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of exchange on which registered
Common Stock, no par	MMSI	NASDAQ Global Select Market

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 filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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 ☒

Accelerated Filer ☐

Non-Accelerated Filer ☐

Smaller Reporting Company ☐

Emerging Growth Company ☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

Title or class		Shares outstanding as of May 3, 2022
Common Stock, no par		56,680,546

Table of Contents

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements (Unaudited)	3

	Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	3

	Consolidated Statements of Income for the three months ended March 31, 2022 and 2021	5

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021	6

	Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021	7

	Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021	8

	Condensed Notes to Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II.	OTHER INFORMATION	32

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 6.	Exhibits	35

SIGNATURES		36

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)


	March 31,		December 31,
ASSETS	2022		2021
		(unaudited)
Current assets:
Cash and cash equivalents	$	53,875	$	67,750
Trade receivables — net of allowance for credit losses — 2022 — $7,568 and 2021 — $6,767		155,859		152,301
Other receivables		11,748		17,763
Inventories		231,451		221,922
Prepaid expenses and other current assets		19,809		16,149
Prepaid income taxes		3,547		3,550
Income tax refund receivables		1,803		2,777
Total current assets		478,092		482,212

Property and equipment:
Land and land improvements		25,380		25,287
Buildings		189,773		190,044
Manufacturing equipment		283,802		277,976
Furniture and fixtures		61,877		61,446
Leasehold improvements		48,060		46,341
Construction-in-progress		50,870		51,182
Total property and equipment		659,762		652,276
Less accumulated depreciation		(287,853)		(280,618)
Property and equipment — net		371,909		371,658

Other assets:
Intangible assets:
Developed technology — net of accumulated amortization — 2022 — $244,017 and 2021 — $234,016		264,839		276,833
Other — net of accumulated amortization — 2022 — $66,924 and 2021 — $65,053		40,899		42,436
Goodwill		361,456		361,741
Deferred income tax assets		6,179		6,080
Right-of-use operating lease assets		64,659		65,913
Other assets		41,707		41,421
Total other assets		779,739		794,424

Total assets	$	1,629,740	$	1,648,294


See condensed notes to consolidated financial statements.	(continued)

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)


	March 31,		December 31,
LIABILITIES AND STOCKHOLDERS’ EQUITY	2022		2021
		(unaudited)
Current liabilities:
Trade payables	$	58,099	$	55,624
Accrued expenses		122,394		159,014
Current portion of long-term debt		9,375		8,438
Short-term operating lease liabilities		10,304		10,668
Income taxes payable		3,659		2,536
Total current liabilities		203,831		236,280

Long-term debt		243,112		234,397
Deferred income tax liabilities		31,491		31,503
Long-term income taxes payable		347		347
Liabilities related to unrecognized tax benefits		932		932
Deferred compensation payable		16,804		18,111
Deferred credits		1,788		1,815
Long-term operating lease liabilities		60,366		61,526
Other long-term obligations		14,550		23,584
Total liabilities		573,221		608,495

Commitments and contingencies

Stockholders' equity:
Preferred stock — 5,000 shares authorized as of March 31, 2022 and December 31, 2021; no shares issued		—		—
Common stock, no par value; shares authorized — 2022 and 2021 - 100,000; issued and outstanding as of March 31, 2022 - 56,655 and December 31, 2021 - 56,570		646,370		641,533
Retained earnings		416,802		406,257
Accumulated other comprehensive loss		(6,653)		(7,991)
Total stockholders’ equity		1,056,519		1,039,799

Total liabilities and stockholders’ equity	$	1,629,740	$	1,648,294


See condensed notes to consolidated financial statements.	(concluded)

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts - unaudited)


	Three Months Ended
	March 31,
	2022		2021
Net sales	$	275,415	$	248,913
Cost of sales		154,508		137,019
Gross profit		120,907		111,894

Operating expenses:
Selling, general and administrative		84,015		81,024
Research and development		17,387		16,274
Impairment charges		1,672		—
Contingent consideration expense		2,600		402
Total operating expenses		105,674		97,700

Income from operations		15,233		14,194

Other income (expense):
Interest income		104		472
Interest expense		(1,002)		(1,537)
Other expense — net		(164)		(435)
Total other expense — net		(1,062)		(1,500)

Income before income taxes		14,171		12,694

Income tax expense		3,626		1,736

Net income	$	10,545	$	10,958

Earnings per common share
Basic	$	0.19	$	0.20
Diluted	$	0.18	$	0.19

Weighted average shares outstanding
Basic		56,593		55,717
Diluted		57,531		56,978

See condensed notes to consolidated financial statements.

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands - unaudited)


	Three Months Ended
	March 31,
	2022		2021
Net income	$	10,545	$	10,958
Other comprehensive income (loss):
Cash flow hedges		2,907		2,921
Income tax benefit (expense)		(712)		(724)
Foreign currency translation adjustment		(793)		(4,462)
Income tax benefit (expense)		(64)		535
Total other comprehensive income (loss)		1,338		(1,730)
Total comprehensive income	$	11,883	$	9,228

See condensed notes to consolidated financial statements.

Table of Contents

MERIT MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands - unaudited)


	Common Stock			Retained		Accumulated Other
	Shares	Amount		Earnings		Comprehensive Income (Loss)		Total
Balance — January 1, 2022	56,570	$	641,533	$	406,257	$	(7,991)	$	1,039,799
Net income					10,545				10,545
Other comprehensive income							1,338		1,338
Stock-based compensation expense			4,212						4,212
Options exercised	52		1,320						1,320
Issuance of common stock under Employee Stock Purchase Plan	5		320						320
Shares issued from time-vested restricted stock units	44		—						—
Shares surrendered in exchange for payment of payroll tax liabilities	(16)		(1,015)						(1,015)
Balance — March 31, 2022	56,655	$	646,370	$	416,802	$	(6,653)	$	1,056,519


	Common Stock			Retained		Accumulated Other
	Shares	Amount		Earnings		Comprehensive Income (Loss)		Total
Balance — January 1, 2021	55,623	$	606,224	$	357,803	$	(5,452)	$	958,575
Net income					10,958				10,958
Other comprehensive loss							(1,730)		(1,730)
Stock-based compensation expense			3,310						3,310
Options exercised	291		5,897						5,897
Issuance of common stock under Employee Stock Purchase Plan	5		263						263
Shares issued from time-vested restricted stock units	25		—						—
Shares surrendered in exchange for payment of payroll tax liabilities	(9)		(488)						(488)
Shares surrendered in exchange for exercise of stock options	(2)		(93)						(93)
Balance — March 31, 2021	55,933	$	615,113	$	368,761	$	(7,182)	$	976,692


See condensed notes to consolidated financial statements.	(concluded)

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands - unaudited)


	Three Months Ended
	March 31,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	10,545	$	10,958
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		20,466		21,400
Loss (gain) on sales and/or abandonment of property and equipment		94		(28)
Write-off of certain intangible assets and other long-term assets		1,672		—
Amortization of right-of-use operating lease assets		2,584		3,070
Fair value adjustments to contingent consideration		2,600		402
Amortization of deferred credits		(27)		(27)
Amortization of long-term debt issuance costs		151		151
Stock-based compensation expense		4,642		3,595
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Trade receivables		(3,851)		(5,284)
Other receivables		5,854		(597)
Inventories		(9,177)		(3,396)
Prepaid expenses and other current assets		(1,307)		(1,071)
Income tax refund receivables		196		199
Other assets		833		80
Trade payables		2,670		4,237
Accrued expenses		(23,508)		5,393
Income taxes payable		1,147		(174)
Deferred compensation payable		(1,307)		(581)
Operating lease liabilities		(2,841)		(3,151)
Other long-term obligations		574		56
Total adjustments		1,465		24,274
Net cash, cash equivalents, and restricted cash provided by operating activities		12,010		35,232

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment		(9,526)		(6,171)
Intangible assets		(342)		(692)
Proceeds from the sale of property and equipment		—		873
Cash paid in acquisitions, net of cash acquired		—		(358)
Net cash, cash equivalents, and restricted cash used in investing activities	$	(9,868)	$	(6,348)


See condensed notes to consolidated financial statements.	(continued)

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands - unaudited)


	Three Months Ended
	March 31,
	2022		2021
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	$	1,641	$	5,520
Proceeds from issuance of long-term debt		80,524		9,694
Payments on long-term debt		(70,899)		(40,569)
Contingent payments related to acquisitions		(24,491)		(403)
Payment of taxes related to an exchange of common stock		(1,015)		(488)
Net cash, cash equivalents, and restricted cash used in financing activities		(14,240)		(26,246)
Effect of exchange rates on cash, cash equivalents, and restricted cash		111		(1,035)
Net increase (decrease) in cash, cash equivalents and restricted cash		(11,987)		1,603

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Beginning of period		67,750		56,916
End of period	$	55,763	$	58,519

RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents		53,875		58,519
Restricted cash reported in prepaid expenses and other current assets		1,888		—
Total cash, cash equivalents and restricted cash	$	55,763	$	58,519

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized interest of $126 and $120, respectively)	$	993	$	1,539
Income taxes		2,411		1,660

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchases in accounts payable	$	2,442	$	1,688
Merit common stock surrendered (0 and 2 shares, respectively) in exchange for exercise of stock options		—		93
Right-of-use operating lease assets obtained in exchange for operating lease liabilities		1,404		131


See condensed notes to consolidated financial statements.	(concluded)

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Other Items. The interim consolidated financial statements of Merit Medical Systems, Inc. ("Merit," "we" or "us") for the three-month periods ended March 31, 2022 and 2021 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 (“U.S. GAAP”). 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 March 31, 2022 and December 31, 2021, and our results of operations and cash flows for the three-month periods ended March 31, 2022 and 2021. The results of operations for the three-month periods ended March 31, 2022 and 2021 are not necessarily indicative of the results for a full-year period. Amounts presented in this report are rounded, while percentages and earnings per share amounts presented are calculated from the underlying amounts. These interim consolidated financial statements should be read in conjunction with the financial statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”).

2. Recently Issued Financial Accounting Standards. In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions in accounting for modifications of contracts that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which amends the scope of ASU 2020-04. ASU 2020-04 and ASU 2021-01 were effective as of March 12, 2020, and the provisions of these updates may be applied prospectively to transactions through December 31, 2022, when reference rate reform activity is expected to be completed. As of March 31, 2022, we had not modified any contracts as a result of reference rate reform. We are currently assessing the anticipated impact of these standards on our consolidated financial statements.

We currently believe that all other issued and not yet effective accounting standards are not materially relevant to our financial statements.

3. Revenue from Contracts with Customers. We recognize revenue when a customer obtains control of promised goods. The amount of revenue recognized reflects the consideration we expect to receive in exchange for these goods. Our revenue recognition policies have not changed from those disclosed in Note 1 to our consolidated financial statements in Item 8 of the 2021 Annual Report on Form 10-K.

Disaggregation of Revenue

Our revenue is disaggregated based on reporting segment, product category and geographical region. We design, develop, manufacture and market medical products for interventional and diagnostic procedures. For financial reporting purposes, we report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of four product categories: peripheral intervention, cardiac intervention, custom procedural solutions, and original equipment manufacturer (“OEM”). Within these product categories, we sell a variety of products, including cardiology and radiology devices (which assist in diagnosing and treating coronary arterial disease, peripheral vascular disease and other non-vascular diseases), as well as embolotherapeutic, cardiac rhythm management, electrophysiology, critical care, breast cancer localization and guidance, biopsy, and interventional oncology and spine devices. Our endoscopy segment consists of gastroenterology and pulmonology devices which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors.

Table of Contents

The following tables present revenue from contracts with customers by reporting segment, product category and geographical region for the three-month periods ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended						Three Months Ended
	March 31, 2022						March 31, 2021
	United States		International		Total		United States		International		Total
Cardiovascular
Peripheral Intervention	$	62,100	$	43,673	$	105,773	$	56,866	$	36,048	$	92,914
Cardiac Intervention		28,549		52,938		81,487		29,251		45,486		74,737
Custom Procedural Solutions		26,555		19,707		46,262		24,892		20,529		45,421
OEM		27,796		5,618		33,414		22,890		5,044		27,934
Total		145,000		121,936		266,936		133,899		107,107		241,006

Endoscopy
Endoscopy devices		7,992		487		8,479		7,473		434		7,907

Total	$	152,992	$	122,423	$	275,415	$	141,372	$	107,541	$	248,913

4. Inventories. Inventories at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):


	March 31, 2022		December 31, 2021
Finished goods	$	130,500	$	132,403
Work-in-process		32,512		22,160
Raw materials		68,439		67,359
Total inventories	$	231,451	$	221,922

5. Goodwill and Intangible Assets. The change in the carrying amount of goodwill for the three-month period ended March 31, 2022 is detailed as follows (in thousands):


	2022
Goodwill balance at January 1	$	361,741
Effect of foreign exchange		(285)
Goodwill balance at March 31	$	361,456

Total accumulated goodwill impairment losses aggregated to $8.3 million as of March 31, 2022 and December 31, 2021. We did not have any goodwill impairments for the three-month periods ended March 31, 2022 and 2021. The total goodwill balance as of March 31, 2022 and December 31, 2021 was related to our cardiovascular segment.

Other intangible assets at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):


	March 31, 2022
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
Patents	$	26,691	$	(8,788)	$	17,903
Distribution agreements		3,250		(2,569)		681
License agreements		12,725		(8,098)		4,627
Trademarks		30,238		(15,920)		14,318
Customer lists		34,919		(31,549)		3,370
Total	$	107,823	$	(66,924)	$	40,899

Table of Contents


	December 31, 2021
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
Patents	$	26,349	$	(8,315)	$	18,034
Distribution agreements		3,250		(2,519)		731
License agreements		12,663		(7,768)		4,895
Trademarks		30,242		(15,256)		14,986
Customer lists		34,985		(31,195)		3,790
Total	$	107,489	$	(65,053)	$	42,436

Aggregate amortization expense for the three-month periods ended March 31, 2022 and 2021 was $12.2 million and $12.5 million, respectively.

We evaluate long-lived assets, including amortizing intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We perform the impairment analysis at the asset group for which the lowest level of identifiable cash flows is largely independent of the cash flows of other assets and liabilities. We determine the fair value of our amortizing assets based on estimated future cash flows discounted back to their present value using a discount rate that reflects the risk profiles of the underlying activities. During the three-month period ended March 31, 2022, we identified indicators of impairment associated with certain acquired intangible assets based on our qualitative assessment, which led us to complete an interim quantitative impairment assessment. The primary indicator of impairment was our planned divestiture of the STD Pharmaceutical Products Limited (“STD Pharmaceutical”) business acquired in our August 2019 acquisition of Fibrovein Holdings Limited. On April 30, 2022, we completed the divestiture of Fibrovein Holdings Limited, in exchange for the termination of our obligations arising from the acquisition transaction in August 2019 and the purchaser’s agreement to make potential future payments upon a qualifying disposition of the STD Pharmaceutical business. We recorded an impairment charge for the carrying value of $1.7 million of intangible assets during the three months ended March 31, 2022, all of which pertained to our cardiovascular segment.

We did not identify indicators of impairment in any intangible assets based on our qualitative assessment for the three-month period ended March 31, 2021.

Estimated amortization expense for the developed technology and other intangible assets for the next five years consisted of the following as of March 31, 2022 (in thousands):


Year Ending December 31,	Estimated Amortization Expense
Remaining 2022	$	35,932
2023		46,894
2024		43,959
2025		42,185
2026		31,634

6. Income Taxes. Our provision for income taxes for the three-month periods ended March 31, 2022 and 2021 was a tax expense of $3.6 million and $1.7 million, respectively, which resulted in an effective tax rate of 25.6% and 13.7%, respectively. The increase in the income tax expense and the corresponding change in the effective income tax rate for the three-month period ended March 31, 2022, when compared to the prior-year period, was primarily due to decreased benefit from discrete items such as share-based compensation. Our effective tax rate differs from the U.S. statutory rate primarily due to the impact of global intangible low-taxed income (“GILTI”) inclusions, state income taxes, foreign taxes, other non-deductible permanent items and discrete items (such as share-based compensation).

7. Revolving Credit Facility and Long-Term Debt. Principal balances outstanding under our long-term debt obligations as of March 31, 2022 and December 31, 2021 consisted of the following (in thousands):

Table of Contents


	March 31, 2022		December 31, 2021
Term loans	$	131,250	$	133,125
Revolving credit loans		121,500		110,000
Less unamortized debt issuance costs		(263)		(290)
Total long-term debt		252,487		242,835
Less current portion		9,375		8,438
Long-term portion	$	243,112	$	234,397

Third Amended and Restated Credit Agreement

On July 31, 2019, we entered into a Third Amended and Restated Credit Agreement (the "Third Amended Credit Agreement"). The Third Amended Credit Agreement is a syndicated loan agreement with Wells Fargo Bank, National Association and other parties. The Third Amended Credit Agreement amends and restates in its entirety our previously outstanding Second Amended and Restated Credit Agreement and all amendments thereto. The Third Amended Credit Agreement provides for a term loan of $150 million and a revolving credit commitment up to an aggregate amount of $600 million, inclusive of sub-facilities for multicurrency borrowings, standby letters of credit and swingline loans. On July 31, 2024, all principal, interest and other amounts outstanding under the Third Amended Credit Agreement are payable in full. At any time prior to the maturity date, we may repay any amounts owing under all term loans and revolving credit loans in whole or in part, without premium or penalty, other than breakage fees (as defined in the Third Amended Credit Agreement).

Revolving credit loans denominated in dollars and term loans made under the Third Amended Credit Agreement bear interest, at our election, at either the Base Rate or the Eurocurrency Rate (as such terms are defined in the Third Amended Credit Agreement) plus the Applicable Margin (as defined in the Third Amended Credit Agreement). Revolving credit loans denominated in an Alternative Currency (as defined in the Third 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 (as defined in the Third Amended Credit Agreement). Interest on each Base Rate loan is due and payable on the last business day of each calendar quarter; interest on each Eurocurrency Rate loan is due and payable on the last day of each interest period applicable thereto, and if such interest period extends over three months, at the end of each three-month interval during such interest period.

The Third Amended Credit Agreement is collateralized by substantially all our assets. The Third Amended Credit Agreement contains affirmative and negative covenants, representations and warranties, events of default and other terms customary for loans of this nature. In particular, the Third Amended Credit Agreement requires that we maintain certain financial covenants, as follows:


	Covenant Requirement
Consolidated Total Leverage Ratio ⁽¹⁾		4.0 to 1.0
Consolidated Interest Coverage Ratio ⁽²⁾		3.0 to 1.0
Facility Capital Expenditures ⁽³⁾		$50 million

(1)	Maximum Consolidated Total Net Leverage Ratio (as defined in the Third Amended Credit Agreement) as of any fiscal quarter end.

(2)	Minimum ratio of Consolidated EBITDA (as defined in the Third Amended Credit Agreement and adjusted for certain expenditures) to Consolidated Interest Expense (as defined in the Third Amended Credit Agreement) for any period of four consecutive fiscal quarters.

(3)	Maximum level of the aggregate amount of all Facility Capital Expenditures (as defined in the Third Amended Credit Agreement) in any fiscal year.

We believe we were in compliance with all covenants set forth in the Third Amended Credit Agreement as of March 31, 2022.

As of March 31, 2022, we had outstanding borrowings of $253 million and issued letter of credit guarantees of $3.4 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $475 million, based

Table of Contents

on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Third Amended Credit Agreement. Our interest rate as of March 31, 2022 was a fixed rate of 2.71% on $75 million as a result of an interest rate swap (see Note 8) and a variable floating rate of 1.46% on $177.8 million. Our interest rate as of December 31, 2021 was a fixed rate of 2.71% on $75 million as a result of an interest rate swap and a variable floating rate of 1.10% on $168.1 million. The foregoing fixed rates do not reflect potential future changes in the applicable margin.

Future minimum principal payments on our long-term debt, as of March 31, 2022, were as follows (in thousands):


Years Ending	Future Minimum
December 31,	Principal Payments
Remaining 2022	$	6,562
2023		11,250
2024		234,938
Total future minimum principal payments	$	252,750

8. 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 the risks attributable to those fluctuations by entering into derivative contracts. The derivative instruments we use are interest rate swaps and foreign currency forward contracts. We recognize derivative instruments 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 contracts 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 treatment initially and on an ongoing basis. For qualifying hedges, the change in fair value is deferred in accumulated other comprehensive income, a component of stockholders’ equity in the accompanying consolidated balance sheets, and recognized in earnings at the same time the hedged item affects earnings. Changes in the fair value of derivative instruments not designated as hedging instruments are recorded in earnings throughout the term of the derivative.

Interest Rate Risk. Our debt bears interest at variable interest rates. Therefore, we are subject to variability in the cash payable for interest expense. In order to mitigate a portion of the risk attributable to such variability, 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 Third Amended Credit Agreement that varies in accordance with changes in the benchmark interest rate.

Derivative Instruments Designated as Cash Flow Hedges

On December 23, 2019, we entered into a pay-fixed, receive-variable interest rate swap with a notional amount of $75 million with Wells Fargo to fix the one-month LIBOR rate at 1.71% for the period from July 6, 2021 to July 31, 2024. 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.

On March 31, 2022 and December 31, 2021, our interest rate swap qualified as a cash flow hedge. The fair value of our interest rate swap on March 31, 2022 was an asset of $1.2 million, which was partially offset by $0.3 million in deferred taxes. The fair value of our interest rate swap on December 31, 2021 was a liability of ($1.4) million, partially offset by ($0.4) million in deferred taxes.

Table of Contents

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 exposed to foreign currency exchange rate risk with respect to transactions and balances denominated in various currencies, with our most significant exposure related to transactions and balances denominated in Chinese Renminbi and Euros, among others. We do not use derivative financial instruments for trading or speculative purposes. We do not believe we are subject to any credit risk contingent features related to our derivative contracts, and we seek to manage counterparty risk by allocating derivative contracts among several major financial institutions.

Derivative Instruments Designated as Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is temporarily reported as a component of other comprehensive income (loss) and then 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. We entered 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 March 31, 2022 and December 31, 2021, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with aggregate notional amounts of $141.0 million and $123.0 million, respectively.

Derivative Instruments 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 50 foreign currency fair value hedges every month. As of March 31, 2022 and December 31, 2021, we had entered into foreign currency forward contracts related to those balance sheet accounts with aggregate notional amounts of $87.9 million and $86.0 million, respectively.

Balance Sheet Presentation of Derivative Instruments. As of March 31, 2022 and December 31, 2021, all derivative instruments, both those designated as hedging instruments and those that were not designated as hedging instruments, were recorded at fair value on a gross basis on our consolidated balance sheets. We are not subject to any master netting agreements.

Table of Contents

The fair value of derivative instruments on a gross basis was as follows on the dates indicated (in thousands):


Fair Value of Derivative Instruments Designated as Hedging Instruments	Balance Sheet Location	March 31, 2022		December 31, 2021
Assets
Interest rate swaps	Other assets (long-term)	$	1,161	$	—
Foreign currency forward contracts	Prepaid expenses and other assets		1,778		1,326
Foreign currency forward contracts	Other assets (long-term)		293		179

(Liabilities)
Interest rate swaps	Other long-term obligations		—		(1,447)
Foreign currency forward contracts	Accrued expenses