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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED                           June 30, 2020

OR

    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

Graphic

MERIT MEDICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Utah

    

87-0447695

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

1600 West Merit Parkway, South Jordan, Utah 84095

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (801) 253-1600

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

Title of each class

Trading Symbol

Name of exchange on which registered

Common Stock, no par

MMSI

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer 

Accelerated Filer 

Non-Accelerated Filer 

Smaller Reporting Company 

Emerging Growth Company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

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

Common Stock

    

55,484,186

Title or class

Number of Shares
Outstanding at August 3, 2020

Table of Contents

TABLE OF CONTENTS

PART I.

   

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

3

Consolidated Statements of Income (Loss) for the three and six months ended June 30, 2020 and 2019

5

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019

6

Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019

7

Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

8

Condensed Notes to Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

45

PART II.

OTHER INFORMATION

45

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

46

Item 6.

Exhibits

47

SIGNATURES

48

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2020 AND DECEMBER 31, 2019

(In thousands)

    

June 30, 

    

December 31, 

    

2020

    

2019

ASSETS

 

(unaudited)

 

  

CURRENT ASSETS:

 

  

 

  

Cash and cash equivalents

$

49,702

$

44,320

Trade receivables — net of allowance for uncollectible accounts — 2020 — $3,866 and 2019 — $3,108

 

138,792

 

155,365

Other receivables

 

8,214

 

10,016

Inventories

 

221,417

 

225,698

Prepaid expenses and other current assets

 

13,860

 

12,497

Prepaid income taxes

 

3,493

 

3,491

Income tax refund receivables

 

10,467

 

3,151

Total current assets

 

445,945

 

454,538

PROPERTY AND EQUIPMENT:

 

  

 

  

Land and land improvements

 

27,815

 

27,554

Buildings

 

181,749

 

153,863

Manufacturing equipment

 

257,493

 

244,368

Furniture and fixtures

 

60,358

 

57,623

Leasehold improvements

 

44,952

 

43,311

Construction-in-progress

 

59,523

 

83,685

Total property and equipment

 

631,890

 

610,404

Less accumulated depreciation

 

(248,261)

 

(231,619)

Property and equipment — net

 

383,629

378,785

OTHER ASSETS:

 

  

 

  

Intangible assets:

 

  

 

  

Developed technology — net of accumulated amortization —2020 — $174,495 and 2019 — $149,947

 

354,273

 

379,529

Other — net of accumulated amortization — 2020 — $59,926 and 2019 — $65,607

 

59,717

 

65,783

Goodwill

 

353,093

 

353,193

Deferred income tax assets

 

3,748

 

3,788

Right-of-use operating lease assets

79,051

80,244

Other assets

 

36,413

 

41,461

Total other assets

 

886,295

 

923,998

TOTAL ASSETS

$

1,715,869

$

1,757,321

See condensed notes to consolidated financial statements.

(continued)

3

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2020 AND DECEMBER 31, 2019

(In thousands)

    

June 30, 

    

December 31, 

    

2020

    

2019

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

(unaudited)

    

  

CURRENT LIABILITIES:

 

  

  

Trade payables

$

44,444

$

54,623

Accrued expenses

 

106,934

 

105,184

Current portion of long-term debt

 

7,500

 

7,500

Short-term operating lease liabilities

12,886

11,550

Income taxes payable

 

2,460

 

2,799

Total current liabilities

 

174,224

 

181,656

LONG-TERM DEBT

 

402,915

 

431,984

DEFERRED INCOME TAX LIABILITIES

 

45,236

 

45,236

LONG-TERM INCOME TAXES PAYABLE

 

347

 

347

LIABILITIES RELATED TO UNRECOGNIZED TAX BENEFITS

 

1,990

 

1,990

DEFERRED COMPENSATION PAYABLE

 

14,194

 

14,855

DEFERRED CREDITS

 

2,053

 

2,122

LONG-TERM OPERATING LEASE LIABILITIES

71,785

 

72,714

OTHER LONG-TERM OBLIGATIONS

 

74,278

 

56,473

Total liabilities

 

787,022

 

807,377

COMMITMENTS AND CONTINGENCIES (Notes 4, 8, 9 and 10)

 

  

 

  

STOCKHOLDERS’ EQUITY:

 

  

 

  

Preferred stock — 5,000 shares authorized as of June 30, 2020 and December 31, 2019; no shares issued

 

 

Common stock, no par value; shares authorized — 2020 and 2019 - 100,000; issued and outstanding as of June 30, 2020 - 55,481 and December 31, 2019 - 55,213

 

595,726

 

587,017

Retained earnings

 

345,434

 

368,221

Accumulated other comprehensive loss

 

(12,313)

 

(5,294)

Total stockholders’ equity

 

928,847

 

949,944

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

1,715,869

$

1,757,321

See condensed notes to consolidated financial statements.

(concluded)

4

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(In thousands, except per share amounts - unaudited)

    

Three Months Ended

    

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

NET SALES

$

218,371

$

255,532

$

461,896

$

493,881

COST OF SALES

 

134,155

 

143,568

 

273,896

 

277,281

GROSS PROFIT

 

84,216

 

111,964

 

188,000

 

216,600

OPERATING EXPENSES:

 

  

 

  

 

  

 

  

Selling, general and administrative

 

66,767

 

79,977

 

145,575

 

158,247

Research and development

 

14,026

 

16,332

 

28,898

 

32,375

Legal settlement

18,200

18,200

Impairment and other charges

 

3,875

 

548

 

7,720

 

548

Contingent consideration expense

 

343

 

2,406

 

5,240

 

3,181

Acquired in-process research and development

 

 

500

 

 

525

Total operating expenses

 

103,211

 

99,763

 

205,633

 

194,876

INCOME (LOSS) FROM OPERATIONS

 

(18,995)

 

12,201

 

(17,633)

 

21,724

OTHER INCOME (EXPENSE):

 

  

 

  

 

  

 

  

Interest income

 

88

 

342

 

167

 

698

Interest expense

 

(2,715)

 

(3,115)

 

(5,859)

 

(5,879)

Other expense - net

 

(678)

 

(429)

 

(967)

 

(698)

Total other expense — net

 

(3,305)

 

(3,202)

 

(6,659)

 

(5,879)

INCOME (LOSS) BEFORE INCOME TAXES

 

(22,300)

 

8,999

 

(24,292)

 

15,845

INCOME TAX (BENEFIT) EXPENSE

 

(3,242)

 

2,140

 

(2,080)

 

2,791

NET INCOME (LOSS)

$

(19,058)

$

6,859

$

(22,212)

$

13,054

EARNINGS (LOSS) PER COMMON SHARE:

 

  

 

  

 

  

 

  

Basic

$

(0.34)

$

0.12

$

(0.40)

$

0.24

Diluted

$

(0.34)

$

0.12

$

(0.40)

$

0.23

AVERAGE COMMON SHARES:

 

  

 

  

 

  

 

  

Basic

 

55,406

 

55,017

 

55,326

 

54,967

Diluted

 

55,406

 

56,555

 

55,326

 

56,523

See condensed notes to consolidated financial statements.

5

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(In thousands - unaudited)

    

Three Months Ended

    

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Net income (loss)

$

(19,058)

$

6,859

$

(22,212)

$

13,054

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Cash flow hedges

 

(101)

 

(1,154)

 

(7,283)

 

(3,731)

Income tax benefit (expense)

 

26

 

297

 

1,875

 

960

Foreign currency translation adjustment

 

2,524

 

274

 

(1,601)

 

(341)

Income tax benefit (expense)

 

(3)

 

(16)

 

(10)

 

(2)

Total other comprehensive income (loss)

 

2,446

 

(599)

 

(7,019)

 

(3,114)

Total comprehensive income (loss)

$

(16,612)

$

6,260

$

(29,231)

$

9,940

See condensed notes to consolidated financial statements.

6

Table of Contents

MERIT MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(In thousands - unaudited)

Accumulated Other

Common Stock

Retained

Comprehensive

    

Total

    

Shares

    

Amount

    

Earnings

    

Income (Loss)

BALANCE — January 1, 2020

$

949,944

 

55,213

$

587,017

$

368,221

$

(5,294)

Net loss

 

(3,154)

 

  

 

  

 

(3,154)

 

  

Cumulative effect adjustment upon adoption of ASU 2016-13, Credit Losses

(575)

(575)

Other comprehensive loss

 

(9,465)

 

  

 

  

 

  

 

(9,465)

Stock-based compensation expense

 

2,641

 

  

 

2,641

 

  

 

  

Options exercised

 

2,369

 

174

 

2,369

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

371

 

13

 

371

 

  

 

  

Shares surrendered in exchange for payment of payroll tax liabilities

(866)

 

(23)

 

(866)

Shares surrendered in exchange for exercise of stock options

(1,467)

 

(39)

 

(1,467)

BALANCE — March 31, 2020

939,798

 

55,338

590,065

364,492

(14,759)

Net loss

 

(19,058)

 

  

 

  

 

(19,058)

 

  

Other comprehensive income

 

2,446

 

  

 

  

 

  

 

2,446

Stock-based compensation expense

 

3,197

 

  

 

3,197

 

  

 

  

Options exercised

 

2,229

 

138

 

2,229

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

235

 

5

 

235

 

  

 

  

BALANCE — June 30, 2020

$

928,847

 

55,481

$

595,726

$

345,434

$

(12,313)

Accumulated Other

Common Stock

Retained

Comprehensive

    

Total

    

Shares

    

Amount

    

Earnings

    

Income (Loss)

BALANCE — January 1, 2019

$

932,775

54,893

$

571,383

$

363,425

$

(2,033)

Net income

 

6,195

 

  

 

  

 

6,195

 

  

Reclassify deferred gain on sale-leaseback upon adoption of ASC 842

93

93

Other comprehensive loss

 

(2,515)

 

  

 

  

 

  

 

(2,515)

Stock-based compensation expense

 

1,766

 

  

 

1,766

 

  

 

  

Options exercised

 

1,365

 

95

 

1,365

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

432

 

7

 

432

 

  

 

  

BALANCE — March 31, 2019

940,111

 

54,995

574,946

369,713

(4,548)

Net income

 

6,859

 

  

 

  

 

6,859

 

  

Other comprehensive loss

 

(599)

 

  

 

  

 

  

 

(599)

Stock-based compensation expense

 

2,523

 

  

 

2,523

 

  

 

  

Options exercised

 

1,441

 

78

 

1,441

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

340

 

6

 

340

 

  

 

  

BALANCE — June 30, 2019

$

950,675

55,079

$

579,250

$

376,572

$

(5,147)

See condensed notes to consolidated financial statements.

7

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(In thousands - unaudited)

Six Months Ended

June 30, 

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income (loss)

$

(22,212)

$

13,054

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

47,040

 

45,010

Loss on sales and/or abandonment of property and equipment

 

370

 

803

Write-off of certain intangible assets and other long-term assets

 

7,820

 

594

Acquired in-process research and development

 

 

525

Amortization of right-of-use operating lease assets

6,339

5,874

Fair value adjustments to contingent consideration

5,240

3,181

Amortization of deferred credits

 

(69)

 

(70)

Amortization of long-term debt issuance costs

 

302

 

402

Stock-based compensation expense

 

6,205

 

4,289

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

  

Trade receivables

 

15,292

 

(21,206)

Other receivables

 

643

 

445

Inventories

 

2,255

 

(5,138)

Prepaid expenses and other current assets

 

(1,349)

 

(1,052)

Prepaid income taxes

 

 

(45)

Income tax refund receivables

 

(7,329)

 

(3,980)

Other assets

 

128

 

(2,845)

Trade payables

 

(3,872)

 

1,338

Accrued expenses

 

19,664

 

1,079

Income taxes payable

 

1,572

 

(2,059)

Deferred compensation payable

 

(661)

 

1,518

Operating lease liabilities

(6,177)

(5,882)

Other long-term obligations

 

2,015

 

(145)

Total adjustments

 

95,428

 

22,636

Net cash provided by operating activities

 

73,216

 

35,690

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Capital expenditures for:

 

  

 

  

Property and equipment

 

(25,803)

 

(35,959)

Intangible assets

 

(1,790)

 

(1,607)

Proceeds from the sale of property and equipment

 

27

 

22

Cash received for settlement of current note receivable

 

250

 

Cash paid in acquisitions, net of cash acquired

 

(100)

 

(37,256)

Net cash used in investing activities

$

(27,416)

$

(74,800)

See condensed notes to consolidated financial statements.

(continued)

8

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(In thousands - unaudited)

    

Six Months Ended

June 30, 

2020

2019

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Proceeds from issuance of common stock

$

3,670

$

3,374

Proceeds from issuance of long-term debt

 

38,567

 

125,746

Payments on long-term debt

(67,692)

(120,746)

Contingent payments related to acquisitions

 

(12,861)

 

(611)

Payment of taxes related to an exchange of common stock

 

(866)

 

Net cash provided by (used in) financing activities

 

(39,182)

 

7,763

EFFECT OF EXCHANGE RATES ON CASH

 

(1,236)

 

(830)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

5,382

 

(32,177)

CASH AND CASH EQUIVALENTS:

 

  

 

  

Beginning of period

 

44,320

 

67,359

End of period

$

49,702

$

35,182

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

  

 

  

Cash paid during the period for:

 

  

 

  

Interest (net of capitalized interest of $551 and $540, respectively)

$

5,937

$

5,794

Income taxes

$

3,808

$

8,856

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

  

 

  

Property and equipment purchases in accounts payable

$

1,970

$

3,331

Current note receivable converted to equity investment

$

899

$

Acquisition purchases in accrued expenses and other long-term obligations

$

$