LEMAITRE VASCULAR, INC. The following discussion should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K and in our otherSecurities and Exchange Commission filings. The following discussion may contain predictions, estimates, and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under "Risk Factors" and elsewhere in this Annual Report on Form 10-K. These risks could cause our actual results to differ materially from any future performance suggested below.
The principal objectives of this Management's Discussion and Analysis of Financial Condition and Results of Operations are to enhance our overall financial disclosures by providing explanation and analysis of the Company's financial results and condition, as viewed by our management.
Overview We are a global provider of medical devices and human tissue cryopreservation services largely used in the treatment of peripheral vascular disease, end-stage renal disease, and to a lesser extent cardiovascular disease. We develop, manufacture, and market vascular devices to address the needs of vascular surgeons and, to a lesser degree, other specialties such as cardiac surgeons, general surgeons and neurosurgeons. Our diversified portfolio of devices consists of brand name products that are used in arteries and veins and are well known to vascular surgeons. Our principal product offerings are sold globally, primarily inthe United States ,Europe , theUnited Kingdom ,Canada andAsia Pacific . We estimate that the annual worldwide market for peripheral vascular devices exceeds$5 billion , within which we estimate that the addressable market for our products is approximately$750 million . We have grown our business using a simple three-pronged strategy: 1) pursuing a focused call point, 2) competing for sales of low-rivalry, niche products, and 3) expanding our worldwide direct sales force while acquiring and, to a lesser extent, developing complementary devices. We have used acquisitions as a primary means of further penetrating the peripheral vascular device market, and we expect to continue to pursue this strategy in the future. We currently manufacture most of our products in ourBurlington, Massachusetts headquarters. Our products and services are used primarily by vascular surgeons who treat peripheral vascular disease through both open surgical methods and endovascular techniques. In contrast to interventional cardiologists and interventional radiologists, vascular surgeons can perform both open surgical and minimally invasive endovascular procedures, and are therefore uniquely positioned to provide a wider range of treatment options to their patients. More recently, however, we have begun to explore adjacent market customers, or non-vascular surgeon customers, who can be served by our vascular device technologies, such as cardiac surgeons and neurosurgeons. SinceMarch 2020 , the COVID-19 pandemic has significantly impacted the markets for our products as well as our business. In response to COVID-19, many hospitals limited elective procedures initially in response to the pandemic and periodically over the last two years when infection rates have increased, and many of our devices are used in elective procedures. Additionally, our sales representatives' access to hospitals and surgeons has been restricted by hospitals or local governments. In some geographies, we have seen restrictions eased, however, the prevalence of COVID-19 variants has resulted in the re-imposition of restrictions in some areas. Moreover, recent hospital staffing issues, particularly inNorth America , may be adversely effecting procedure volumes. During 2020 and into 2021, these dynamics resulted in, and we expect will continue to result in, variable and unpredictable sales. In response to the COVID-19 pandemic, we modified our manufacturing operations in order to adhere to social distancing requirements. In Q2 2020 we also undertook measures to reduce our operating costs, including temporary base salary cuts and a reduction in force of approximately 13% of our full-time employees. However, as sales normalized, we have rehired personnel in many departments, including our sales force, and we expect to continue to add personnel in the first half of 2022. We ended our temporary base salary cuts onAugust 31, 2020 . Our principal product lines include the following: anastomotic clips, angioscopes, biologic vascular and dialysis grafts, biologic vascular and cardiac patches, carotid shunts, embolectomy catheters, occlusion catheters, radiopaque marking tape, synthetic vascular grafts, and valvulotomes. Through our RestoreFlow allografts business, we also provide services related to the processing and cryopreservation of human vascular and cardiac tissue. 35
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Our principal biologic offerings include vascular and cardiac patches, vascular, and cardiac and dialysis grafts. In 2021, biologics represented 48% of our worldwide sales. We view the biologic device segment favorably, as we believe it contains differentiated and in some cases growing product segments. OnJune 22, 2020 , we acquired the Artegraft biologic graft business. The results of operations of this business have been included in our results of operations since the date of acquisition. To assist us in evaluating our business strategies, we regularly monitor long-term technology trends in the peripheral vascular device market. Additionally, we consider the information obtained from discussions with the medical community in connection with the demand for our products, including potential new product launches. We also use this information to help determine our competitive position in the peripheral vascular device market and our manufacturing capacity requirements.
Our business opportunities include the following:
• adding complementary products through acquisitions;
• growing our direct sales force in
and Asia Pacific , including when replacing a distributor with our sales
personnel;
• introducing our products into new territories upon receipt of regulatory
approvals or registrations in these territories;
• consolidating and automating product manufacturing at our Burlington,
Massachusetts facilities, and
• updating existing products and introducing new products through research and
development.
Our ability to execute on these opportunities on a timely basis, or at all, may
be impacted by the COVID-19 pandemic, the duration and severity of which are
uncertain.
We sell our products and services primarily through a direct sales force. As of
December 31, 2021 our sales force was comprised of 103 sales representatives in
North America , Europe and Asia Pacific , including three export managers. Our
worldwide headquarters is located in Burlington, Massachusetts , and we also have
North American sales offices in Chandler, Arizona and Vaughan, Canada . Our
European headquarters is located in Sulzbach, Germany , and we also have sales
offices in Milan, Italy ; Madrid, Spain ; and Hereford, England . Our Asia Pacific
headquarters is located in Singapore , and we have sales offices in Tokyo, Japan ;
Shanghai, China ; and Kensington, Australia . During the years ended December 31,
2021 and 2020, approximately 94% and 95%, respectively, of our net sales were
generated in territories in which we employ direct sales representatives. We
also sell our products in other countries, including South Korea , Russia ,
Thailand and Brazil , through distributors.
Historically we have experienced success in lower-rivalry niche segments, for
example the markets for valvulotomes and carotid shunts. In the valvulotome
market, our highly differentiated devices have historically allowed us to
increase our selling prices while maintaining unit share. In contrast, we have
experienced less success in highly competitive markets such as the polyester
vascular graft market, where we face competition from larger companies with
greater resources. While we believe these challenging market dynamics can be
mitigated by our relationships with vascular surgeons, there can be no assurance
that we will succeed in highly competitive markets.
We have also experienced success in international markets, such as Europe , where
we also have a significant sales force, and sometimes offer comparatively lower
average selling prices. If we continue to seek growth opportunities outside of
North America , we may experience downward pressure on our gross margin.
Our strategy for growing our business includes the acquisition of complementary
product lines and companies and occasionally the discontinuance or divestiture
of products or activities that are no longer complementary:
• In
remaining assets of their Eze-Sit valve cutter business, including U.S.
distribution rights, for $8.0 million .
• In
assets of their CardioCel biologic patch business for
additional payments of up to $7.8 million , depending upon the satisfaction of
certain contingencies.
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• In
assets of their bovine graft business for $72.5 million plus additional
payments of up to $17.5 million , depending upon 2021 - 2023 unit sales.
• During 2021, we made decisions to wind down or discontinue certain product
lines including TRIVEX powered phlebectomy systems, remote endarterectomy
devices and surgical glue. These product lines comprised approximately
million in revenues in 2021 on a combined basis.
Because we believe that direct-to-hospital sales engender closer customer relationships, and allow for higher selling prices and gross margins, we periodically enter into transactions with our distributors to transition their sales of our medical devices into our direct sales organization:
• During 2020, we entered into definitive agreements with, or participated with
Anteris in concluding agreements with, several former Anteris distributors in
recently-acquired bovine cardiac and vascular patch products, and we began
selling direct-to-hospitals in those geographies. The termination fees totaled
approximately $0.1 million .
• During 2020, we participated with Artegraft in concluding agreements with
several of their former
distribution of our bovine graft products. We now sell Artegraft products
direct-to-hospitals throughout the United States .
We also use, to a much lesser extent, internal product development efforts to bring differentiated technologies and next-generation products to market:
• In 2019, we launched DuraSure, a biologic patch indicated for closing or
repairing dural defects during open neurosurgical procedures.
• In 2020, we launched RestoreFlow cardiac allografts for use in cardiac repair
and restoration.
In addition to our sales growth strategies, we have also executed several
operational initiatives designed to consolidate manufacturing into our
• In
from Applied Medical. We immediately initiated a project to transfer the
production to our Burlington facilities. This transfer is now complete.
• In late 2018 and into 2019, we expanded our
order to transfer the production of our Omniflow II vascular graft from our
North Melbourne, Australia facility toBurlington . This transfer is substantially complete, and theNorth Melbourne facility was sold.
• In
In
devices to our
in 2023.
Our execution of these initiatives may affect the comparability of our financial
results and may cause fluctuations from period to period as we incur related
process engineering and other charges.
Fluctuations in the exchange rates between the U.S. dollar and foreign
currencies, primarily the Euro, affect our financial results. For the year ended
December 31, 2021 , approximately 39% of our sales took place outside of the
U.S. , largely in currencies other than the U.S. dollar. We expect foreign
currencies will represent a significant percentage of future sales. Selling,
marketing, and administrative costs related to these sales are also denominated
in foreign currencies, thereby partially mitigating our bottom-line exposure to
exchange rate fluctuations. However, if there is an increase in the rate at
which a foreign currency is exchanged for U.S. dollars, it will require more of
the foreign currency to equal a specified amount of U.S. dollars than before the
rate increase. In such cases we will record less revenue in U.S. dollars than we
did before the exchange rate changed. For 2021, we estimate that the effects of
changes in foreign exchange rates increased our reported sales by approximately
$2.0 million , as compared to rates in effect for 2020.
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The following is a description of the primary components of our net sales and expenses:
Net sales. We derive our net sales from the sale of our products and services, less discounts and returns. Net sales include the shipping and handling fees paid for by our customers. Most of our sales are generated by our direct sales force and are shipped and billed to hospitals or clinics throughout the world. In countries where we do not have a direct sales force, sales are primarily to distributors, who in turn sell to hospitals and clinics. In certain cases our products are held on consignment at a hospital or clinic prior to purchase; in those instances we recognize revenue at the time the product is used in surgery rather than at shipment. Cost of sales. We manufacture the majority of the products that we sell. Our cost of sales consists primarily of manufacturing personnel, raw materials and components, depreciation of property and equipment, and other allocated manufacturing overhead, as well as freight expense we pay to ship products to customers. Sales and marketing. Our sales and marketing expense consists primarily of salaries, commissions, stock-based compensation, travel and entertainment, sales meetings, attendance at vascular congresses, training programs, advertising and product promotions, direct mail and other marketing costs.
General and administrative. General and administrative expense consists primarily of executive, finance and human resource salaries, stock based compensation, legal and accounting fees, information technology expense, intangible asset amortization expense and insurance expense.
Research and development. Research and development expense includes primarily costs associated with obtaining and maintaining regulatory approval of our products, principally salaries, laboratory testing and supply costs. It also includes costs associated with the design and execution of clinical studies, costs to register, maintain, and defend our intellectual property, and costs to transfer the manufacturing of acquired product lines to ourBurlington facility. Also included are costs associated with the design, development, testing and enhancement of new or existing products.
Other income (expense). Other income (expense) primarily includes interest income and expense, foreign currency gains (losses), and other miscellaneous gains (losses).
Income tax expense. We are subject to federal and state income taxes for earnings generated in theU.S. , which include operating losses or profits in certain foreign jurisdictions for certain years depending on tax elections made, and foreign taxes on earnings of our wholly-owned foreign subsidiaries. Our consolidated tax expense is affected by the mix of our taxable income (loss) in theU.S. and foreign subsidiaries, permanent items, discrete items, unrecognized tax benefits, and amortization of goodwill forU.S. tax reporting purposes. Results of Operations SinceMarch 2020 , the COVID-19 pandemic has significantly impacted the markets for our products as well as our business. In response to COVID-19, many hospitals limited elective procedures initially in response to the pandemic and periodically over the last two years when infection rates have increased, and many of our devices are used in elective procedures. Additionally, our sales representatives' access to hospitals and surgeons has been restricted by hospitals or local governments. In some geographies, we have seen restrictions eased, however, the prevalence of COVID-19 variants has resulted in the re-imposition of restrictions in some areas. Moreover, recent hospital staffing issues, particularly inNorth America , may be adversely effecting procedure volumes. During 2020 and into 2021, these dynamics resulted in, and we expect will continue to result in, variable and unpredictable sales. In particular, in Q3 2021 and Q4 2021, the delta and omicron variants of COVID-19 depressed demand for our products in some geographies. In response to the COVID-19 pandemic, we modified our manufacturing operations in order to adhere to social distancing requirements. In Q2 2020 we also undertook measures to reduce our operating costs, including temporary base salary cuts and a reduction in force of approximately 13% of our full-time employees. However, as sales normalized, we have rehired personnel in many departments, including our sales force, and we expect to continue to add personnel in the first half of 2022. We ended our temporary base salary cuts onAugust 31, 2020 . For reasons described above, our results could be materially impacted in the near term. These financial statements and management's discussion and analysis of financial condition and results of operations should be read in that context. 38
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Comparison of the year ended
The following tables set forth, for the periods indicated, our net sales by geography, and the change between the specified periods expressed as a percentage increase or decrease:
Percent
2021 2020 $ Change change
($ in thousands)
Net sales $ 154,424 $ 129,366 $ 25,058 19 %
Net sales by geography:
Americas $ 102,265 $ 81,470 $ 20,795 26 %
Europe, Middle East and Africa 42,132 39,193 2,939 7 %
Asia Pacific 10,027 8,703 1,324 15 %
Total $ 154,424 $ 129,366 $ 25,058 19 %
As a general matter, the COVID-19 pandemic negatively impacted sales in 2020 more acutely than in 2021 in all geographies, though we believe that it continued to negatively impact sales throughout 2021.
Net sales. Net sales increased$25.1 million , or 19%, to$154.4 million for the year endedDecember 31, 2021 , compared to$129.4 million for the year endedDecember 31, 2020 . The increase was driven largely by Artegraft bovine grafts, with increased sales of$14.1 million . We acquired Artegraft onJune 22, 2020 , so we had six additional months of sales of Artegraft in 2021 as compared to 2020 and we also implemented a price increase inJanuary 2021 . We also had higher valvulotome sales of$3.4 million , higher bovine carotid patch sales of$2.4 million , higher carotid shunt sales of$1.9 million , and higher allograft service revenues of$1.8 million . We estimate that the weakerU.S. dollar increased sales by$2.0 million during year endedDecember 31, 2021 as compared to year endedDecember 31, 2020 .
Direct-to-hospital net sales were 94% of our total net sales for the year ended
Net sales by geography. Net sales in theAmericas increased$20.8 million , or 26%, for the year endedDecember 31, 2021 as compared toDecember 31, 2020 . The increase was driven mainly by Artegraft bovine grafts, with increased sales of$14.1 million . We also had higher valvulotome sales of$2.4 million , higher allografts service revenues of$1.8 million , higher bovine carotid patch sales of$1.5 million and higher carotid shunt sales of$1.2 million . Offsetting these increases were lower bovine cardiac patch revenues of$0.4 million . Revenues from all other products increased$0.2 million on a net basis. EMEA net sales increased$2.9 million , or 7%, for the year endedDecember 31, 2021 as compared toDecember 31, 2020 . The increase was driven by higher valvulotome sales of$1.0 million , as well as higher carotid shunt sales of$0.6 million , higher embolectomy catheter sales of$0.5 million , higher bovine cardiac patch sales of$0.4 million and higher ovine graft sales of$0.3 million . These increases were offset in part by a decreases in sales of bovine carotid patches and polyester grafts of$0.3 million each. EMEA revenues from all other products increased$0.8 million on a net basis.Asia Pacific net sales increased$1.3 million , or 15%, for the year endedDecember 31, 2021 as compared toDecember 31, 2020 , with bovine carotid patch sales increasing$1.1 million , and embolectomy catheter sales, bovine cardiac patch sales and carotid shunt sales each increasing$0.1 million . These and other product sales increases were partially offset by lower sales of TRIVEX powered phlebectomy systems of$0.1 million . 39
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The following table sets forth the change in our gross profit and gross margin
for the periods indicated:
Percent
2021 2020 Change change
($ in thousands)
Gross profit $ 101,382 $ 84,618 $ 16,764 20 %
Gross margin 65.7 % 65.4 % 0.3 % *
* Not applicable
Gross Profit. Gross profit increased $16.8 million , or 20%, to $101.4 million
for the year ended December 31, 2021 as compared to December 31, 2020 , while
gross margin increased by 30 basis points to 65.7%. The increase in gross profit
was driven partly by the impact in the prior period of purchase accounting from
the Artegraft bovine graft acquisition. We also had a more favorable product mix
in 2021 as compared to 2020, including higher Artegraft sales at an increased
average selling price in 2021. This favorable impact was partly offset by
manufacturing inefficiencies and higher excess and obsolescence expense by $2.3
million in 2021 due in large part to the discontinuation or winding down of
certain product lines including TRIVEX and remote endarterectomy devices.
In May 2021 , our CE mark certifications required to sell products in many EMEA
countries were reinstated for five products. However, we also simultaneously
received a change in CE mark requirements for certain bovine carotid patches and
polyester grafts. For bovine carotid patches, only bovine pericardium sourced
from certain of our suppliers are permitted to be sold under the new CE mark,
which caused our production costs to increase, and our gross margin to decrease.
Operating Expenses
The following tables set forth changes in our operating expenses for the periods
indicated and the change between the specified periods expressed as a percentage
increase or decrease:
Percent 2021 as a % 2020 as a %
2021 2020 $ change change of Net Sales of Net Sales
($ in thousands)
Sales and
marketing $ 27,655 $ 23,700 $ 3,955 17 % 18 % 18 %
General and
administrative 25,501 22,501 3,000 13 % 17 % 17 %
Research and
development 11,801 10,099 1,702 17 % 8 % 8 %
Gain on sale
of building - (470 ) 470 * 0 % (0 %)
$ 64,957 $ 55,830 $ 9,127 16 % 42 % 43 %
* Not a meaningful percentage.
Sales and marketing. For the year endedDecember 31, 2021 , sales and marketing expense increased 17% to$27.7 million . The increase was driven by more sales personnel, as well as higher salaries and related expenses of$3.5 million , including higher commissions due to increased sales, and higher recruiting costs. We also had higher marketing-related costs, such as product samples and promotional materials, of$0.4 million , and higher travel and related expenses of$0.1 million . As a percentage of net sales, sales and marketing expense was unchanged at 18% in both 2021 and 2020. General and administrative. For the year endedDecember 31, 2021 , general and administrative expenses increased 13% to$25.5 million . The increase was primarily due to higher compensation and related expenses, as salaries were reinstated inSeptember 2020 and personnel were rehired following theApril 2020 reduction in force. We also had higher insurance costs, banking fees and professional fees in 2021. As a percentage of sales, general and administrative expense was unchanged at 17% for both comparative periods. Compensation expense for general and administrative is expected to increase further in 2022, including stock-based compensation due to an increase in the value of awards granted to certain levels of employees and a shortening of the vesting period from five years to four years for most awards. 40
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Research and development. For the year endedDecember 31, 2021 , research and development expense increased$1.7 million , or 17%, to$11.8 million . Product development and process engineering expenses were on a combined basis unchanged, as those groups continue their focus on manufacturing transfer projects. Clinical and regulatory expenses, however, increased$1.7 million , or 29%, driven by higher compensation expenses as well as consulting and other costs incurred in connection with reinstating or maintaining regulatory approvals, especially inEurope . We expect clinical and regulatory expenses to continue to increase as we transition our CE marks from MDD regulations to the new MDR standards. As a percentage of sales, total research and development expense was unchanged at 8% in both years. Product development expenses decreased to 1% of sales for the year endedDecember 31, 2021 , from 2% in the prior period. Gain on sale of building. During the third quarter of 2020, in connection with our planned manufacturing transfer of our Omniflow II ovine biologic graft toBurlington , we sold our land and building located inNorth Melbourne, Australia . We recognized a gain on the sale during the three months endingSeptember 30, 2020 , net of applicable sales taxes and administrative costs, of$0.5 million . Income tax expense. We recorded a tax provision of$7.4 million on pre-tax income of$34.3 million for the twelve months endedDecember 31, 2021 , compared to$6.1 million on pre-tax income of$27.4 million for the twelve months endedDecember 31, 2020 . Our effective income tax rate was 21.9% and 21.5% for the three- and twelve-month periods endedDecember 31, 2021 . Our tax expense for 2021 is based on an estimated annual effective tax rate of 24.7%, adjusted in the applicable quarterly periods for discrete stock option exercises and other discrete items. Our income tax expense for 2021 varies from the statutory rate mainly due to federal and state tax credits, permanent items, different statutory rates from our foreign entities, and a discrete item for stock option exercises. Our effective income tax rate was 21.2% and 22.4% for the three- and twelve-month periods endedDecember 31, 2020 . Our 2020 provision was based on an estimated annual effective tax rate of 25.2%, adjusted in the applicable quarterly period for discrete stock option exercises and other discrete items. Our income tax expense for 2020 varied from the statutory rate mainly due to federal and state tax credits, permanent items, different statutory rates from our foreign entities, and a discrete item for stock option exercises. We monitor the mix of profitability by tax jurisdiction and adjust our annual expected rate on a quarterly basis as needed. While it is often difficult to predict the final outcome or timing of the resolution for any particular tax matter, we believe our tax reserves reflect the probable outcome of known contingencies. We assess the likelihood that our deferred tax assets will be realized through future taxable income and record a valuation allowance to reduce gross deferred tax assets to an amount we believe is more likely than not to be realized. As ofDecember 31, 2021 , we have provided a valuation allowance of$1.7 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards andMassachusetts tax credit carry forwards that are not expected to be realized.
Comparison of the year ended
The following tables set forth, for the periods indicated, our results of operations and the change between the specified periods expressed as a percentage increase or decrease:
Percent
2020 2019 $ Change change
($ in thousands)
Net sales $ 129,366 $ 117,232 $ 12,134 10 %
Net sales by geography:
Americas $ 81,470 $ 69,359 $ 12,111 17 %
Europe, Middle East and Africa 39,193 39,480 (287 ) (1 %)
Asia Pacific 8,703 8,393 310 4 %
Total $ 129,366 $ 117,232 $ 12,134 10 %
Net sales. Net sales increased 10% or $12.1 million to $129.4 million for the
year ended December 31, 2020 , compared to $117.2 million for the year ended
December 31, 2019 . The increase was largely from recently acquired products
including Artegraft bovine grafts of $10.8 million and CardioCel bovine cardiac
patches of $5.3 million . We also had higher valvulotome sales of $3.9 million ,
including sales of Eze-Sit in the U.S. , which we acquired in July 2019 . These
sales increases were partly offset by lower OEM sales of $2.2 million , lower
sales of carotid shunts of $1.8 million , lower bovine carotid patch sales of
$1.1 million , lower TRIVEX sales of $1.0 million and lower AnastoClip sales of
$0.8 million . All other products decreased on a net basis by $2.0 million . We
estimate that changes in foreign exchange rates during the year ended December
31, 2020 increased net sales by $0.8 million .
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Direct-to-hospital net sales were 95% of total sales for the year ended
Net sales by geography. Net sales in theAmericas increased$12.1 million or 17% for the year endedDecember 31, 2020 . The increase was driven mainly by recently acquired products including Artegraft of$10.8 million and CardioCel of$3.5 million . We also had higher valvulotome sales of$2.8 million . These increases were partly offset by decreases across most product lines which, with the exception of OEM sales, we believe were due primarily to the impact of the COVID-19 pandemic. Product lines with the largest decreases included carotid shunts and OEM sales, each decreasing by$1.5 million , bovine carotid patches which decreased$0.7 million and vessel closure systems which decreased by$0.9 million . All other products combined decreased by$0.4 million .Europe ,Middle East andAfrica net sales were relatively unchanged year-over-year, at$39.2 million for the year endedDecember 31, 2020 as compared to$39.5 million for the year endedDecember 31, 2019 . Sales of CardioCel cardiac patches increased by$1.4 million and valvulotomes increased by$1.0 million , offset by declines in most other product lines. Products with larger decreases included Omniflow II grafts and OEM sales, which each decreased by$0.7 million , and bovine carotid patches, which decreased by$0.6 million . As discussed under Item 1A. Risk Factors, we experienced a lapse in CE mark certifications for some products due to one of our Notified Bodies abandoning CE mark certifications services. This caused certain of our products to go on backorder starting in the quarter endedJune 30, 2020 , including bovine carotid patches and polyester grafts. We received temporary approvals in most European countries, which allowed us to resume sales of those products for a limited time period, pending recertification.Asia Pacific net sales increased$0.4 million or 4% for the year endedDecember 31, 2020 . Increased sales of CardioCel cardiac patches of$0.5 million , bovine carotid patches of$0.2 million and embolectomy catheters of$0.2 million were offset in part by declines in sales of TRIVEX of$0.6 million . Percent 2020 2019 Change change ($ in thousands) Gross profit$ 84,618 $ 79,853 $ 4,765 6 % Gross margin 65.4 % 68.1 % (2.7 %) * * Not applicable Gross Profit. Gross profit increased$4.8 million to$84.6 million for the year endedDecember 31, 2020 , while gross margin decreased by 270 basis points to 65.4% in the period. The decrease in the gross margin was driven primarily by the impact of purchase accounting from the Artegraft acquisition and to a lesser extent by manufacturing inefficiencies, as well as a slightly less favorable product mix, including higher sales of CardioCel cardiac patches and embolectomy catheters. Operating Expenses. Percent 2020 as a % 2019 as a % 2020 2019 $ change change of Net Sales of Net Sales ($ in thousands) Sales and marketing$ 23,700 $ 30,339 $ (6,639 ) (22 %) 18 % 26 % General and administrative 22,501 19,055 3,446 18 % 17 % 16 % Research and development 10,099 9,276 823 9 % 8 % 8 % Gain on divestures and acquisitions (470 ) - (470 ) * (0 %) *$ 55,830 $ 58,670 $ (2,840 ) (5 %) 43 % 50 %
* Not a meaningful percentage.
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Sales and marketing. For the year endedDecember 31, 2020 , sales and marketing expense decreased$6.6 million , or 22%, to$23.7 million . The decrease was driven mainly by expense reduction programs implemented in response to the COVID-19 global pandemic, including a reduction in force and temporary base salary cuts in place untilAugust 31 . The major components of the sales and marketing expense reduction were salaries and related expenses of$2.3 million , travel and related expenses of$1.9 million , and commission expense of$1.6 million . As a percentage of net sales, sales and marketing expense decreased to 22% for the year endedDecember 31, 2020 from 26% in the prior period. General and administrative. For the year endedDecember 31, 2020 , general and administrative expense increased$3.5 million , or 18%, to$22.5 million . Higher acquisition-related costs including consulting and other transaction costs of approximately$1.2 million and increased amortization expense of$2.6 million were partly offset by lower compensation-related costs from our reduction in force and temporary wage cuts of$0.6 million . Other expense categories increased by an additional$0.3 million on a net basis. As a percentage of net sales, general and administrative expense was 17% for 2020 and 16% for 2019. Research and development. For the year endedDecember 31, 2020 , research and development expense increased$0.8 million , or 9%, to$10.1 million . Product development and process engineering expenses decreased$1.2 million or 22% on a combined basis, in large part due to completion of the manufacturing transfer of certain acquired products to ourBurlington facilities. Clinical and regulatory expenses increased$2.3 million or 67%, as a result of consulting and other costs incurred in connection with reinstating or maintaining regulatory approvals, especially inEurope , as well as regulatory submissions for our products in geographies such asChina andJapan , and testing related to our biologic products. Royalty expense decreased$0.3 million due to the expiration of underlying royalty agreements. As a percentage of sales, research and development expense were 8% for both 2020 and 2019. Gain on sale of building. During the first quarter of 2020, in connection with our planned manufacturing transfer of Omniflow II toBurlington , we executed an agreement to sell our land and building inNorth Melbourne, Australia forA$2.9 million ($2.0 million ). The sale closed inSeptember 2020 . The building had a net book value ofA$1.9 million ($1.4 million ). We recognized a$0.5 million gain on the sale, net of applicable sales taxes and administrative costs. Other income (expense). Other income (expense) primarily includes interest income and expense, foreign currency gains (losses), and other miscellaneous gains (losses). Interest income was$0.2 million and$0.7 million , respectively for 2020 and 2019. The decrease was due to the sale of most of our interest-bearing investments to acquire Artegraft. We also incurred debt of$65.0 million in order to complete the acquisition, which generated$1.3 million of interest expense in 2020. Foreign exchange losses on settlements or remeasurement of receivables and payables denominated in foreign currencies were$0.3 million and$0.2 million in 2020 and 2019, respectively. Income tax expense. We recorded a provision for taxes of$6.1 million on pre-tax income of$27.4 million in 2020 as compared to$3.7 million on pre-tax income of$21.7 million in 2019. The 2020 provision was comprised of aU.S. federal tax provision of$4.2 million , a state tax provision of$0.7 million , and a foreign tax provision of$1.2 million . The 2019 provision was comprised of aU.S. federal tax provision of$2.0 million , a state tax provision of$0.4 million , and a foreign tax provision of$1.3 million . Our effective tax rate differed from theU.S. statutory tax rate in 2020 principally because of stock option exercises, taxes on foreign earnings, valuation allowances, and certain permanent differences. While it is often difficult to predict the final outcome or timing of the resolution of any particular tax matter, we believe that our tax reserves reflect the probable outcome of known contingencies. We assess the likelihood that our deferred tax assets will be realized through future taxable income and record a valuation allowance to reduce gross deferred tax assets to an amount we believe is more likely than not to be realized. As ofDecember 31, 2020 , we have provided a valuation allowance of$1.8 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards andMassachusetts tax credit carry forwards that are not expected to be realized.
Refer to Note 9 to our consolidated financial statements for additional
information about income tax expense (benefit) including information related to
Liquidity and Capital Resources
AtDecember 31, 2021 , we held$13.9 million in cash and cash equivalents and$56.1 million in short-term marketable securities, as compared to$26.8 million in cash and cash equivalents and$0.2 million in short-term marketable securities atDecember 31, 2020 . Our cash and cash equivalents are highly liquid investments with maturities of 90 days or less at the date of purchase, and consist primarily of operating bank accounts. Our short-term marketable securities consist of a managed income mutual fund investing mainly in short-term investment grade,U.S. -dollar denominated fixed and floating-rate debt, and a short-duration bond fund. All of our cash held outside of theU.S. is available for corporate use, with the exception of$2.5 million held by subsidiaries in jurisdictions for which earnings are planned to be permanently reinvested. 43
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OnJuly 16, 2021 , we closed an offering of 1,000,0000 shares of our common stock,$0.01 par value per share, at a price to the public of$54.50 per share less underwriting discounts. The net proceeds, after deducting the underwriting discounts and other offering expenses, were approximately$51.0 million . We used a portion of the proceeds from the offering to repay our outstanding debt. We plan to use the remaining proceeds for general corporate purposes, including working capital needs and capital expenditures, dividend payments, deferred payments related to prior acquisitions, and the funding of future acquisitions. OnAugust 4, 2021 , the underwriters purchased an additional 150,000 shares pursuant to an option granted to them in connection with the offering described above. The net proceeds to the Company, after deducting underwriting discounts and other offering expenses, were approximately$7.6 million . We plan to use the proceeds for general corporate purposes. OnFebruary 22, 2022 , our Board of Directors authorized the repurchase of up to$20.0 million of the Company's common stock through transactions on the open market, in privately negotiated purchases or otherwise untilFebruary 22, 2023 . The repurchase program may be suspended or discontinued at any time. To date we have not made any repurchases under this program. InJune 2020 , in connection with the Artegraft acquisition, we incurred debt of$65 million including a five-year revolving line of credit of$25 million and a five-year term loan of$40 million . The loans bore interest at either the Base Rate as defined in the agreement plus an applicable margin of 1.25% to 1.75% depending on our consolidated leverage ratio, or the Eurodollar Rate plus an applicable margin of 2.25% to 2.75% depending on our consolidated leverage ratio. InDecember 2020 , we repaid the outstanding balance under the revolving line of credit, plus accrued interest, in full. InJuly 2021 , we repaid the balance under the term loan, plus accrued interest, in full. InNovember 2021 , we terminated the credit agreement, including the revolving line of credit, as allowed for in the original agreement.
Operating and Capital Expenditure Requirements
We require cash to pay our operating expenses, make capital expenditures, and pay our long-term liabilities. Since our inception, we have funded our operations through public offerings and private placements of equity securities, short-term and long-term borrowings, and funds generated from our operations. We recognized operating income of$36.4 million for the year endedDecember 31, 2021 ,$28.8 million for the year endedDecember 31, 2020 , and$21.2 million for the year endedDecember 3, 2019 . We expect to fund any increased costs and expenditures from our existing cash and cash equivalents, though our future capital requirements depend on numerous factors. These factors include, but are not limited to, the following: • the revenues generated by product sales;
• payments associated with potential future quarterly cash dividends to our
common stockholders;
• payments associated with our stock repurchase program;
• future acquisition-related payments;
• payments associated with U.S income and other taxes;
• payments associated with our leased facilities worldwide;
• the costs associated with expanding our manufacturing, marketing, sales, and
distribution efforts;
• the costs associated with our initiatives to sell direct-to-hospital in new
countries;
• the costs of obtaining and maintaining FDA, CE mark and other regulatory
clearances of our existing and future products; and
• the number, timing, and nature of acquisitions and other strategic
transactions.
Our cash balances may decrease as we continue to use cash to fund our
operations, make acquisitions, pay dividends, repurchase shares of our common
stock and make deferred payments related to prior acquisitions. We believe that
our cash, cash equivalents, investments and the interest we earn on these
balances will be sufficient to meet our anticipated cash requirements for at
least the next twelve months, and to meet our known long-term cash requirements.
If these sources of cash are insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or debt securities, or incur debt under a
new credit facility. The sale of additional equity and debt securities may
result in dilution to our stockholders. If we raise additional funds through the
issuance of debt securities, such securities could have rights senior to those
of our common stock and could contain covenants that would restrict our
operations and possibly our ability to pay dividends. We may require additional
capital beyond our currently forecasted amounts. Any such required additional
capital may not be available on reasonable terms, if at all.
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Cash Flows
Year ended December 31,
2021 2020 2019
($ in thousands)
Cash and cash equivalents $ 13,855 $ 26,764 $ 11,786
Cash flows provided by (used in):
Operating activities $ 35,102 $ 34,800 $ 14,179
Investing activities (61,076 ) (52,891 ) (24,100 )
Financing activities 13,702 32,155 (4,622 )
Net cash provided by operating activities. Net cash provided by operating
activities was $35.1 million for the year ended December 31, 2021 , and consisted
of $26.9 million net income, adjusted for non-cash items of $18.1 million
(including primarily depreciation and amortization of $11.1 million , stock-based
compensation of $3.5 million , provisions for inventory write-offs and doubtful
accounts of $4.0 million , offset by fair value adjustments on contingent
consideration for acquisitions of $0.7 million ), as well as cash used for
working capital of $9.9 million . The net cash used for working capital was
driven by increases in inventory and other deferred costs of $5.5 million ,
increases in prepaid and other assets of $1.9 million , a decrease in accounts
payable and accrued expenses of $1.7 million and an increase in accounts
receivable of $0.8 million .
Net cash provided by operating activities was $34.8 million for the year ended
December 31, 2020 , and consisted of $21.2 million net income, adjusted for
non-cash items of $12.7 million (including primarily depreciation and
amortization of $8.4 million , stock-based compensation of $3.0 million ,
provisions for inventory write-offs and doubtful accounts of $1.8 million , and
fair value adjustments on contingent consideration for acquisitions of $0.2
million , offset by a benefit from deferred taxes of $0.3 million , and a gain on
the sale of a building of $0.5 million ) as well as cash from working capital of
$0.9 million . The net cash generated from working capital was driven by
increases in accounts payable and other liabilities of $4.3 million , offset by
increases in inventory and other deferred costs of $2.6 million and accounts
receivable of $0.9 million .
Net cash provided by operating activities was $14.2 million for the year ended
December 31, 2019 , and consisted of $17.9 million net income, adjusted for
non-cash items of $10.1 million (including primarily depreciation and
amortization of $5.4 million , stock-based compensation of $2.6 million ,
provisions for inventory write-offs and doubtful accounts of $1.1 million , a
provision for deferred taxes of $0.8 million and fair value adjustments on
contingent consideration for acquisitions of $0.2 million ), as well as working
capital uses of $13.6 million . The net cash used for working capital was driven
by increases in inventory of $11.3 million , accounts receivable of $1.3 million ,
and other current assets of $0.7 million , as well as a decrease in accounts
payable and other liabilities of $0.3 million .
Net cash used in investing activities. Net cash used in investing activities was
$61.1 million for the year ended December 31, 2021 , including net sales of
marketable securities of $56.2 million and purchases of property and equipment
of $4.9 million .
Net cash used in investing activities was
Net cash used in investing activities was$24.1 million for the year endedDecember 31, 2019 , driven by cash paid for acquisitions of$21.0 million , as well as purchases of property and equipment of$3.8 million primarily associated with biologic clean room build-outs inBurlington . These investments were in part offset by net sales of short-term investments of$0.9 million . Net cash provided by (used in) financing activities. Net cash provided by financing activities was$13.7 million for the year endedDecember 31, 2021 . Sources of cash included primarily net proceeds from an equity offering of$58.7 million and proceeds from stock option exercises of$3.7 million , net of shares repurchased to cover employee payroll taxes on RSU vestings. These sources of cash were offset by payments made on our long-term debt of$39.0 million , dividend payments of$9.3 million and deferred payments for acquisitions of$0.4 million . 45
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Net cash provided by financing activities was$32.2 million for the year endedDecember 31, 2020 , consisting primarily of borrowings of$63.2 million net of debt issuance costs and stock option exercises proceeds of$5.4 million , net of shares repurchased to cover employee payroll taxes. These increases to cash were partly offset by dividend payments of$7.7 million , debt payments of$26.0 million and deferred payments for acquisitions of$2.8 million . Net cash used in financing activities was$4.9 million for the year endedDecember 31, 2019 , driven primarily by dividend payments of$6.7 million and payments related to prior acquisitions of$2.3 million . We had proceeds from stock option exercises of$4.9 million , offset by the acquisition of$0.7 million of treasury shares to cover minimum withholding taxes on restricted stock unit vestings. Dividends. InFebruary 2011 , our Board of Directors approved a policy for the payment of quarterly cash dividends on our common stock. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by our Board of Directors on a quarterly basis. The dividend activity for the periods presented is as follows: Record Date Payment Date Per Share Amount Dividend Payment (in thousands) Fiscal Year 2021 March 9, 2021 March 25, 2021 $ 0.110 $ 2,262 May 19, 2021 June 3, 2021 $ 0.110 $ 2,267 August 26, 2021 September 9, 2021 $ 0.110 $ 2,401 November 19, 2021 December 2, 2021 $ 0.110 $ 2,405 Fiscal Year 2020 March 3, 2020 March 19, 2020 $ 0.095 $ 1,917 May 20, 2020 June 4, 2020 $ 0.095 $ 1,917 August 27, 2020 September 10, 2020 $ 0.095 $ 1,925 November 19, 2020 December 3, 2020 $ 0.095 $ 1,936 OnFebruary 22, 2022 , our Board of Directors approved a quarterly cash dividend on our common stock of$0.125 per share payable onMarch 24, 2022 , to stockholders of record at the close of business onMarch 8, 2022 , which will total approximately$2.7 million .
Critical Accounting Policies and Estimates
We have adopted various accounting policies to prepare our consolidated financial statements in accordance withU.S. generally accepted accounting principles (GAAP). Our most significant accounting policies are described in Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to revenue recognition, inventories, intangible assets, and income taxes are reviewed on an ongoing basis and updated as appropriate. Actual results could differ from those estimates. Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, and observance of trends in the industry, as appropriate. Different, reasonable estimates could have been used in the current period. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. Both of these factors could have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. We believe that the following financial estimates and related accounting policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments. Further, we believe that the items discussed below are properly recorded in our consolidated financial statements for all periods presented. Management has discussed the development, selection and disclosure of our most critical financial estimates with the audit committee of our board of directors and our independent registered public accounting firm. The judgments about those financial estimates are based on information available as of the date of our consolidated financial statements. Those financial estimates and related policies include: 46
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Table of Contents Revenue Recognition Our revenue is derived primarily from the sale of disposable or implantable devices used during vascular surgery. We sell primarily directly to hospitals, and to a lesser extent to distributors. We also occasionally enter into consigned inventory arrangements with either hospitals or distributors on a limited basis. Following our acquisition of the RestoreFlow allograft business, we also derive revenues from human tissue cryopreservation services. These service revenues are recognized when services have been provided and the tissue has been shipped to the customer, provided all other revenue recognition criteria discussed below have been met. We recognize revenue under the provisions of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard explains that to achieve the core principle, an entity should take the following actions:
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price
Step 5: Recognize revenue when or as the entity satisfies a performance obligation
Revenue is recognized when or as a company satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). In instances in which shipping and handling activities are performed after a customer takes control of the goods (such as when title passes upon shipment from our dock), we have made the policy election allowed under Topic 606 to account for these activities as fulfillment costs and not as performance obligations. We generally reference customer purchase orders to determine the existence of a contract. Orders that are not accompanied by a purchase order are confirmed with the customer in writing or verbally. The purchase orders or similar correspondence, once accepted, identify the performance obligations as well as the transaction price, and otherwise outline the rights and obligations of each party. We allocate the transaction price of each contract among the performance obligations in accordance with the pricing of each item specified on the purchase order, which is in turn based on standalone selling prices per our published price lists. In cases where we discount products or provide certain items free of charge, we allocate the discount proportionately to all performance obligations, unless it can be demonstrated that the discount should be allocated entirely to one or more, but not all, of the performance obligations. We record revenue, net of allowances for returns and discounts, fees paid to group purchasing organizations, and any sales and value added taxes required to be invoiced, which we have elected to exclude from the measurement of the transaction price as allowed by the standard, at the time of shipment (taking into consideration contractual shipping terms), or in the case of consigned inventory, when it is consumed. Shipment is the point at which control of the product and title passes to our customers, and at which LeMaitre has a present right to receive payment for the goods. We do not carry any contract assets or contract liabilities, as there are generally no unbilled amounts due from customers under contracts for which we have partially satisfied performance obligations, or amounts received from customers for which we have not satisfied performance obligations. We satisfy our performance obligations under revenue contracts within a short time period from receipt of the orders, and payments from customers are typically received within 30 to 60 days of fulfillment of the orders, except in certain geographies such asSpain andItaly where the payment cycle is customarily longer. Accordingly, there is no significant financing component to our revenue contracts. Additionally, we have elected as a policy that incremental costs (such as commissions) incurred to obtain contracts are expensed as incurred, due to the short-term nature of the contracts. Customers returning products may be entitled to full or partial credit based on the condition and timing of the return. To be accepted, a returned product must be unopened (if sterile), unadulterated, and undamaged, must have at least 18 months remaining prior to its expiration date, or twelve months for our hospital customers inEurope , and generally be returned within 30 days of shipment. These return policies apply to sales to both hospitals and distributors. The amount of products returned to us, either for exchange or credit, has not been material. Nevertheless, we provide for an allowance for future sales returns based on historical return experience, which requires judgment. Our cost of replacing defective products has not been material and is accounted for at the time of replacement. 47
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Inventory and Other Deferred Costs
Inventory consists of finished products, work-in-process, and raw materials. We value inventory at the lower of cost or market value. Cost includes materials, labor, and manufacturing overhead and is determined using the first-in, first-out (FIFO) method. On a quarterly basis, we review inventory quantities on hand and analyze the provision for excess and obsolete inventory based primarily on product expiration dating and our estimated sales forecast, which is based on sales history and anticipated future demand. Our estimates of future product demand may not be accurate, and we may understate or overstate the provision required for excess and obsolete inventory. Accordingly, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and results of operations. In connection with our RestoreFlow allograft business, other deferred costs include costs incurred for the preservation of human vascular tissues available for shipment, tissues currently in active processing, and tissues held in quarantine pending release to implantable status. ByU.S. federal law, human tissues cannot be bought or sold. Therefore, the tissues we preserve are not held as inventory, and the costs we incur to procure and process human vascular tissues are instead accumulated and deferred.
Valuation of Intangible Assets and
Intangible assets consist primarily of purchased developed technology, patents, customer relationships and trademarks, and are amortized over their estimated useful lives, ranging from 2 to 16 years.Goodwill represents the amount of consideration paid in connection with business acquisitions in excess of the fair value of assets acquired and liabilities assumed. We generally calculate the fair value of our intangible assets as the present value of estimated future cash flows we expect to generate from the asset using a risk-adjusted discount rate. In determining our estimated future cash flows associated with our intangible assets, we use estimates and assumptions about future revenue contributions, cost structures, and remaining useful lives of the asset. These estimates and assumptions require significant judgment and actual results may differ from assumed or estimated amounts. Other intangible assets, net of accumulated amortization, were$52.7 million as ofDecember 31, 2021 and$58.9 million as ofDecember 31, 2020 .Goodwill was$65.9 million as of bothDecember 31, 2021 andDecember 31, 2020 . Contingencies In the normal course of business, we are subject to proceedings, lawsuits, and other claims and assessments for matters related to, among other things, business acquisitions, employment, commercial matters, intellectual property matters, product liability and product recalls. We assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. We record charges for the costs we anticipate incurring in connection with litigation and claims against us when we determine a loss is probable and we can reasonably estimate these costs. During the years endedDecember 31, 2021 , 2020, and 2019, we were not subject to any material litigation, claims or assessments. In connection with certain of our acquisitions, we may enter into agreements to pay additional future consideration upon the satisfaction of certain agreed-upon criteria. We record liabilities for these arrangements at estimated fair value reflecting management's assumptions of the likelihood of achieving the specified criteria at the time of the closing, which may require significant judgment. These amount are remeasured each reporting period, with any adjustments recorded in income from operations. Income Taxes We account for income taxes under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The provision for income taxes includes taxes currently payable and deferred taxes resulting from the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities. We maintain valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in the valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. 48
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We recognize, measure, present and disclose in our financial statements, uncertain tax positions that we have taken or expect to take on a tax return. We recognize in our financial statements the impact of tax positions that meet a "more likely than not" threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Our policy is to classify interest and penalties related to unrecognized tax benefits as income tax expense.
Recent Accounting Pronouncements
InDecember 2019 , the FASB issued ASU 2019-12 Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 as well as clarifying and amending other areas of existing GAAP under Topic 740. The new standard was effective for us beginningJanuary 1, 2021 . The adoption of this standard did not have a material impact on our financial statements.
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