MERIT MEDICAL SYSTEMS INC - Quarter Report: 2011 June (Form 10-Q)

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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, 2011.

 

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

 

MERIT MEDICAL SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

 

 

1600 West Merit Parkway, South Jordan, UT, 84095

(Address of Principal Executive Offices, including Zip Code)

 

(801) 253-1600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Sections 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 or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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  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.

 

 

 

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MERIT MEDICAL SYSTEMS, INC.

 

INDEX TO FORM 10-Q

 

			PAGE
PART I.		FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010	1
		Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010	3
		Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010	4
		Condensed Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
	Item 4.	Controls and Procedures	22
PART II.		OTHER INFORMATION
	Item 1. Legal Proceedings		22
	Item 1A. Risk Factors		22
	Item 6. Exhibits		23
	SIGNATURES		24

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2011 AND DECEMBER 31, 2010

(In thousands)

 

		June 30,			December 31,
		2011			2010
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	63,009		$	3,735
Trade receivables - net of allowances of $489 and $593, respectively		41,889			37,362
Employee receivables		154			110
Other receivables		1,407			1,242
Inventories		62,724			60,597
Prepaid expenses and other assets		4,429			2,541
Deferred income tax assets		4,653			4,647
Income tax refunds receivable		302			2,067
Total current assets		178,567			112,301
PROPERTY AND EQUIPMENT:
Land and land improvements		13,036			12,586
Building		50,961			50,274
Manufacturing equipment		97,032			92,839
Furniture and fixtures		20,091			18,313
Leasehold improvements		12,438			12,121
Construction-in-progress		31,371			13,775
Total		224,929			199,908
Less accumulated depreciation		(78,176		)	(71,853		)
Property and equipment—net		146,753			128,055
OTHER ASSETS:
Intangibles - net of accumulated amortization of $12,056 and $8,996, respectively		61,335			57,184
Goodwill		58,659			58,675
Deferred income tax assets		4,296			4,140
Other assets		8,603			9,125
Total other assets		132,893			129,124
TOTAL ASSETS		$	458,213		$	369,480

 

See condensed notes to consolidated financial statements.

(Continued)

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2011 AND DECEMBER 31, 2010

(In thousands)

 

		June 30,			December 31,
		2011			2010
		(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade payables		$	19,120		$	20,092
Accrued expenses		19,642			18,890
Advances from employees		183			307
Income taxes payable		1,019			887
Total current liabilities		39,964			40,176
LONG-TERM DEBT		55,000			81,538
DEFERRED INCOME TAX LIABILITIES		1,530			1,267
LIABILITIES RELATED TO UNRECOGNIZED TAX BENEFITS		3,527			3,527
DEFERRED COMPENSATION PAYABLE		4,668			4,258
DEFERRED CREDITS		1,709			1,763
OTHER LONG-TERM OBLIGATIONS		5,503			1,336
Total liabilities		111,901			133,865
STOCKHOLDERS’ EQUITY:
Preferred stock—5,000 shares authorized as of June 30, 2011 and December 31, 2010; no shares issued
Common stock—no par value; 100,000 shares authorized; 41,908 and 35,496 shares issued at June 30, 2011 and December 31, 2010, respectively		164,443			67,091
Retained earnings		181,175			167,664
Accumulated other comprehensive income		694			860
Total stockholders’ equity		346,312			235,615
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	458,213		$	369,480

 

See condensed notes to consolidated financial statements.

(Concluded)

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(In thousands, except per common share - unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
NET SALES		$	91,249		$	74,948		$	177,880		$	142,380
COST OF SALES		48,765			42,490			95,611			81,487
GROSS PROFIT		42,484			32,458			82,269			60,893
OPERATING EXPENSES:
Selling, general, and administrative		26,175			19,939			50,766			38,971
Research and development		5,462			3,742			10,446			6,799
Total operating expenses		31,637			23,681			61,212			45,770
INCOME FROM OPERATIONS		10,847			8,777			21,057			15,123
OTHER INCOME (EXPENSE):
Interest income		14			12			16			20
Interest expense		(311		)	(15		)	(736		)	(50		)
Other income - net		68			65			79			76
Other income (expense) - net		(229		)	62			(641		)	46
INCOME BEFORE INCOME TAXES		10,618			8,839			20,416			15,169
INCOME TAX EXPENSE		3,746			3,124			6,905			4,946
NET INCOME		$	6,872		$	5,715		$	13,511		$	10,223
EARNINGS PER COMMON SHARE:
Basic		$	.19		$	.16		$	.37		$	.29
Diluted		$	.18		$	.16		$	.37		$	.28
AVERAGE COMMON SHARES:
Basic		36,804			35,243			36,199			35,230
Diluted		37,677			35,911			36,966			35,925

 

See condensed notes to consolidated financial statements.

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(In thousands - unaudited)

 

		Six Months Ended
		June 30,
		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	13,511		$	10,223
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,472			6,673
Losses on sales and/or abandonment of property and equipment		4			280
Write-off of certain patents and trademarks		17			24
Amortization of deferred credits		(54		)	(57		)
Purchase of trading investments					(291		)
Net unrealized losses on trading investments					76
Deferred income taxes		106			(17		)
Stock-based compensation		646			606
Tax benefit attributable to appreciation of common stock options exercised		(2,854		)	(49		)
Changes in operating assets and liabilities, net of effects from acquisitions:
Trade receivables		(4,138		)	(6,618		)
Employee receivables		(39		)	(11		)
Other receivables		(115		)	344
Inventories		(2,126		)	(49		)
Prepaid expenses and other assets		(1,844		)	(1,282		)
Income tax refunds receivable		(178		)	119
Trade payables		(4,726		)	345
Accrued expenses		318			1,968
Advances from employees		(125		)	454
Income taxes payable		5,297			2,190
Deferred compensation payable		410			36
Other long-term assets		(391		)	(25		)
Other long-term obligations		416			(78		)
Total adjustments		96			4,638
Net cash provided by operating activities		13,607			14,861
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment		(21,642		)	(8,764		)
Patents and trademarks		(1,351		)	(545		)
Proceeds from the sale of property and equipment					10
Cash paid in acquisitions		(1,500		)	(500		)
Net cash used in investing activities		(24,493		)	(9,799		)

 

See condensed notes to consolidated financial statements.

(Continued)

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(In thousands - unaudited)

 

		Six Months Ended
		June 30,
		2011			2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		$	94,798		$	379
Borrowings on line of credit					1,500
Payments on line of credit					(8,500		)
Proceeds from issuance of long-term debt		18,598
Payments on long-term debt		(45,135		)
Payment of taxes related to an exchange of common stock		(819		)
Excess tax benefits from stock-based compensation		2,854			49
Net cash provided by (used in) financing activities		70,296			(6,572		)
EFFECT OF EXCHANGE RATES ON CASH		(136		)	(369		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		59,274			(1,879		)
CASH AND CASH EQUIVALENTS:
Beginning of period		3,735			6,133
End of period		$	63,009		$	4,254
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION—Cash paid during the period (net capitalized interest of $240 and $0, respectively):
Interest		$	665		$	47
Income taxes		$	2,060		$	2,848
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchases in accounts payable		$	5,432		$	1,869
Acquisition of developed technology in accrued expenses		$	4,000		$
Equity offering costs in accrued expenses		$	127		$

 

During the six months ended June 30, 2011, 50,142 shares of Merit’s common stock were surrendered in exchange for Merit’s recording of payroll tax liabilities in the amount of approximately $819,000, related to the exercise of stock options.  The shares were valued based upon the closing price of Merit’s common stock on the surrender date.

 

During the six months ended June 30, 2011, 53,000 shares of Merit’s common stock, with a value of approximately $913,000 were surrendered in exchange for the exercise of stock options.

 

See condensed notes to consolidated financial statements.

(Concluded)

 

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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, 2011 and 2010 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 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, 2011, and our results of operations and cash flows for the three and six-month periods ended June 30, 2011 and 2010. The results of operations for the three and six-month periods ended June 30, 2011 are not necessarily indicative of the results for a full year.  These interim consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (the “SEC”).

 

2.   Inventories. Inventories are stated at the lower of cost or market.  Inventories at June 30, 2011 and December 31, 2010 consisted of the following (in thousands):

 

		June 30,			December 31,
		2011			2010
Finished goods		$	30,853		$	30,780
Work-in-process		10,502			7,012
Raw materials		21,369			22,805
Total		$	62,724		$	60,597

 

3.   Reporting Comprehensive Income.  The following table presents comprehensive income for the three and six-month periods ended June 30, 2011 and 2010 (in thousands):

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
Net income		$	6,872		$	5,715		$	13,511		$	10,223
Interest rate swap, net of tax		(749		)	—			(557		)	—
Foreign currency translation		70			8			391			(20		)
Comprehensive income		$	6,193		$	5,723		$	13,345		$	10,203

 

As of June 30, 2011, accumulated other comprehensive income included approximately $151,000 (net of tax of $96,000) related to an interest rate swap and $543,000 related to foreign currency translation. As of December 31, 2010, accumulated other comprehensive income included approximately $708,000 (net of tax of $451,000) related to an interest rate swap and $152,000 related to foreign currency translation.

 

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4. Stock-based Compensation.  Stock-based compensation expense for the three and six-month periods ended June 30, 2011 and 2010 has been categorized as follows (in thousands):

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
Cost of sales		$	38		$	45		$	89		$	96
Research and development		16			15			29			29
Selling, general and administrative		257			242			528			481
Stock-based compensation		$	311		$	302		$	646		$	606

 

The excess income tax benefit created from the exercises of stock options was $1.8 million and $2.9 million for the three and six-month periods ended June 30, 2011, respectively, as compared to $49,000 for both the three and six-month periods ended June 30, 2010.  As of June 30, 2011, the total remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was approximately $2.6 million and is expected to be recognized over a weighted average period of 2.40 years. During the three and six-month periods ended June 30, 2011, there were no stock awards. During the three and six-month periods ended June 30, 2010, we granted 100,000 stock awards.  We use the Black-Scholes methodology to value the stock-based compensation expense for options.  In applying the Black-Scholes methodology to our outstanding option grants, we used the following assumptions:

 

		Six Months
		Ended June 30,
		2011		2010
Risk-free interest rate		N/A		2.24	%
Expected option life		N/A		6.0
Expected price volatility		N/A		41.40	%

 

For the purpose of determining stock compensation for options, we estimate the average risk-free interest rate using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock option.  We estimate the expected term of the stock options using the historical exercise behavior of our employees.  We estimate the expected price volatility 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.

 

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5.   Earnings Per Common Share. The following table sets forth the computation of the number of shares used in calculating basic and diluted net income  per share  (in thousands, except per share amounts):

 

		Three Months								Six Months
		Net					Per Share			Net					Per Share
		Income			Shares		Amount			Income			Shares		Amount
Period ended June 30, 2011:
Basic EPS		$	6,872		36,804		$	0.19		$	13,511		36,199		$	0.37
Effect of dilutive stock options and warrants					873								767
Diluted EPS		$	6,872		37,677		$	0.18		$	13,511		36,966		$	0.37
Stock options excluded from the calculation of common stock equivalents as the impact was antidilutive					—								722
Period ended June 30, 2010:
Basic EPS		$	5,715		35,243		$	0.16		$	10,223		35,230		$	0.29
Effect of dilutive stock options and warrants					668								695
Diluted EPS		$	5,715		35,911		$	0.16		$	10,223		35,925		$	0.28
Stock options excluded from the calculation of common stock equivalents as the impact was antidilutive					1,329								1,320

 

6. Acquisitions.   On June 20, 2011, we entered into an Asset Purchase Agreement to purchase intellectual property rights to a medical device product.  We made an initial payment of $1.0 million in June 2011.  We are obligated to pay an additional $3.5 million upon reaching certain milestones set forth in the agreement.  We have accrued the additional contingent payments of $3.5 million as a cost of the acquisition in other long-term obligations at June 30, 2011.

 

On April 6, 2011, we supplemented and amended our Exclusive License, Development and Supply Agreement with Vysera Biomedical Limited (“Vysera”) to include the manufacturing rights for their valve technology.  We made an initial payment of $500,000 in April 2011.  We are obligated to pay an additional $500,000 upon reaching certain milestones set forth in the agreement. We accrued the additional contingent payments as a cost of the acquisition, with $250,000 included in accrued expenses and $250,000 in other long-term obligations at June 30, 2011.

 

On September 10, 2010, we completed our acquisition of BioSphere Medical, Inc. (“BioSphere”) in an all cash merger transaction valued at approximately $96 million, inclusive of all common equity and Series A Preferred preferences.  BioSphere develops and markets embolotherapeutic products for the treatment of uterine fibroids, hypervascularized tumors and arteriovenous malformations.  We believe the acquisition of BioSphere gives us a platform technology applicable to multiple therapeutic areas with significant market potential while leveraging existing interventional radiology call points.  Two immediate applications for the embolotherapy are uterine fibroids and primary liver cancer.  The gross amount of trade receivables we acquired from BioSphere was approximately $4.6 million, of which $51,000 is expected to be uncollectible.  Our consolidated financial statements for the three and six-month periods ended June 30, 2011 reflect sales subsequent to the acquisition date of approximately $7.0 million and $14.6 million, respectively, related to our BioSphere acquisition. We report sales and operating expenses related to this acquisition in our cardiovascular segment.  It is not practical to separately report the earnings related to this acquisition as we cannot split out sales costs related to Biosphere’s products, principally because our sales representatives are selling multiple products (including Biosphere products) in the cardiovascular business segment.  As of December 31, 2010, the purchase price was allocated as follows (in thousands):

 

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Assets Acquired
Marketable securities		$	9,673
Trade receivables		4,529
Inventories		5,694
Other assets		1,340
Property and equipment		546
Deferred income tax assets		16,012
Intangibles
Developed technology		19,000
Customer list		7,900
License agreement		380
Trademark		3,200
Goodwill		34,016
Total assets acquired		102,290
Liabilities Assumed
Accounts payable		322
Accrued expenses		3,617
Deferred income tax liabilities		729
Liabilities related to unrecognized tax benefits		961
Other liabilities		936
Total liabilities assumed		6,565
Net assets acquired, net of cash acquired of $274		$	95,725

 

No significant changes have been made to the assets acquired and liabilities assumed during the six-month period ended June 30, 2011.

 

With respect to the BioSphere assets, we are amortizing developed technology over 15 years and a license agreement over 10 years and customer lists on an accelerated basis over 10 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 13.6 years.

 

In connection with our BioSphere acquisition, we paid approximately $522,000 in long-term debt issuance costs to Wells Fargo Bank (“Wells Fargo”) for our long-term debt (see Note 10).  These costs consist primarily of loan origination fees and legal costs that we intend to amortize over five years, which is the contract term of an unsecured Credit Agreement, dated September 10, 2010 (the “Credit Agreement”) with lenders who are or may become party thereto (collectively, the “Lenders”) and Wells Fargo, as administrative agent for the Lenders.  We also incurred approximately $24,000 and $86,000 of acquisition-related costs during the three and six-months ended June 30, 2011, respectively, which are included in selling, general and administrative expense in the accompanying consolidated statements of operations.

 

During the fourth quarter of 2010, we terminated several exclusive BioSphere sales distributor agreements in European countries where we already had previously established direct sales relationships.  In connection with the termination of these agreements, we agreed to purchase customer lists from the terminated distributors.  The total purchase price of the customer lists was approximately $1.3 million and was allocated to customer lists.  We are amortizing the customer lists on an accelerated basis over 10 years.

 

On February 19, 2010, we entered into a manufacturing and technology license agreement with a medical device manufacturer for certain medical products.  We made an initial payment of $250,000 in February 2010, a second payment of $250,000 in May 2010, a third payment of $250,000 in November 2010 and accrued an additional $250,000 in accrued expenses at December 31, 2010.  The final payment is due upon reaching certain milestones set forth in the agreement.  We have included the $1.0 million intangible asset in license agreements and are amortizing the asset over an estimated life of 10 years.

 

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The following table summarizes our unaudited consolidated results of operations for the three and six-month periods ended June 30, 2010, as well as the unaudited pro forma consolidated results of operations as though the BioSphere acquisition had occurred on January 1, 2010 (in thousands, except per common share amounts):

 

		Three Months Ended						Six Months Ended
		June 30, 2010						June 30, 2010
		As Reported			Pro Forma			As Reported			Pro Forma
Sales		$	74,948		$	82,744		$	142,380		$	157,296
Net income		5,715			4,625			10,223			7,372
Earnings per common share:
Basic		$	.16		$	.13		$	.29		$	.21
Diluted		$	.16		$	.13		$	.29		$	.21

 

The unaudited pro forma information set forth above is for informational purposes only and should not be considered indicative of actual results that would have been achieved if BioSphere had been acquired at the beginning of 2010, or results that may be obtained in any future period.

 

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.  Our cardiovascular segment also includes the embolotherapeutic products acquired from Biosphere. Our endoscopy segment consists of gastroenterology and pulmonary medical device products which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors. We evaluate the performance of our operating segments based on operating income (loss).  Financial information relating to our reportable operating segments and reconciliations to the consolidated totals is as follows (in thousands):

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
Revenues
Cardiovascular		$	87,940		$	72,538		$	171,867		$	137,498
Endoscopy		3,309			2,410			6,013			4,882
Total revenues		$	91,249		$	74,948		$	177,880		$	142,380
Operating Income (Loss)
Cardiovascular		$	11,763		$	10,198		$	22,951		$	17,178
Endoscopy		(916		)	(1,421		)	(1,894		)	(2,055		)
Total operating income		$	10,847		$	8,777		$	21,057		$	15,123

 

8. Recent Accounting Pronouncements. In June 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on the presentation of comprehensive income. This guidance specifies that an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. It also does not change the presentation of related tax effects, before related tax effects, or the portrayal or calculation of earnings per share. This guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.

 

In December 2010, the FASB issued authoritative guidance to address diversity in practice about pro forma

 

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revenue and earnings disclosure requirements.  This guidance specifies that if a public entity presents comparative financial statements, the entity shall disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  We intend to apply these required disclosures to any future business combinations.

 

In December 2010, the FASB issued authoritative guidance which modifies the requirements of step one of the goodwill impairment test for reporting units with zero or negative carrying amounts.  This guidance modifies step one so that for those reporting units, an entity is required to perform step two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.  In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist.  This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010.  The adoption of this guidance did not have a material effect on our consolidated financial statements.

 

In January 2010, the FASB issued additional authoritative guidance on fair value disclosures.  The new guidance clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a “gross” presentation of activities (purchases, sales, and settlements) within the Level 3 rollforward reconciliation, which will replace the “net” presentation format; and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements.  This guidance is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years.  We adopted the fair value disclosure guidance on January 1, 2010, except for the gross presentation of the Level 3 rollforward information which we adopted on January 1, 2011.  The adoption of this guidance did not have a material effect on our consolidated financial statements.

 

9.  Income Taxes.  Our effective tax rate for the three months ended June 30, 2011 was 35.3%, unchanged compared to 35.3% for the corresponding period of 2010.  For the six months ended June 30, 2011, our effective tax rate was 33.8%, compared to 32.6% for the comparable period of 2010.  The increase in the effective tax rate for the six-month period ended June 30, 2011, when compared to the comparable period of 2010, was primarily related to the increased profit of our U.S. operations which are taxed at a higher rate than our foreign operations income (primarily our Irish operations).

 

10.  Long-Term Debt. In connection with our acquisition of BioSphere, we entered into the Credit Agreement with the Lenders and Wells Fargo.  Pursuant to the terms of the Credit Agreement, the Lenders have agreed to make revolving credit loans up to an aggregate amount of $125 million.  Wells Fargo has also agreed to make swing line loans from time to time through the maturity date of September 10, 2015 in amounts equal to the difference between the amounts actually loaned by the Lenders and the aggregate credit commitment.

 

On September 10, 2015, all principal, interest and other amounts outstanding under the Credit Agreement are payable in full.  At any time prior to the maturity date, we may repay any amounts owing under all revolving credit loans and all swing line loans in whole or in part, without premium or penalty.

 

Revolving credit loans made under the Credit Agreement bear interest, at our election, at either (i) the base rate (described below) plus 0.25%, (ii) the London Inter-Bank Offered Rate (“LIBOR”) Market Index Rate (as defined in the Credit Agreement)  plus 1.25%, or (iii) the LIBOR Rate (as defined in the Credit Agreement) plus 1.25%.  Swing line loans bear interest at the LIBOR Market Index Rate plus 1.25%.  Interest on each loan featuring the base rate or the LIBOR Market Index Rate is due and payable on the last business day of each calendar month; interest on each loan featuring the LIBOR Rate is due and payable on the last day of each interest period selected by us when selecting the LIBOR Rate as the benchmark for interest calculation.  For purposes of the Credit Agreement, the base rate means the highest of (i) the prime rate (as announced by Wells Fargo), (ii) the federal funds rate plus 0.50%, and (iii) LIBOR for an interest period of one month plus 1.0%.

 

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