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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                           September 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

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

    

55,547,463

Title or class

Number of Shares
Outstanding at November 2, 2020

Table of Contents

TABLE OF CONTENTS

PART I.

   

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

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

3

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

5

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

6

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

7

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

9

Condensed Notes to Consolidated Financial Statements

11

Item 2.

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

32

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

43

PART II.

OTHER INFORMATION

44

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 6.

Exhibits

46

SIGNATURES

47

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

(In thousands)

    

September 30, 

    

December 31, 

    

2020

    

2019

ASSETS

 

(unaudited)

 

  

CURRENT ASSETS:

 

  

 

  

Cash and cash equivalents

$

44,551

$

44,320

Trade receivables — net of allowance for uncollectible accounts — 2020 — $4,687 and 2019 — $3,108

 

141,957

 

155,365

Other receivables

 

8,073

 

10,016

Inventories

 

209,109

 

225,698

Prepaid expenses and other current assets

 

15,579

 

12,497

Prepaid income taxes

 

3,545

 

3,491

Income tax refund receivables

 

11,812

 

3,151

Total current assets

 

434,626

 

454,538

PROPERTY AND EQUIPMENT:

 

  

 

  

Land and land improvements

 

28,090

 

27,554

Buildings

 

182,914

 

153,863

Manufacturing equipment

 

266,755

 

244,368

Furniture and fixtures

 

61,830

 

57,623

Leasehold improvements

 

48,549

 

43,311

Construction-in-progress

 

50,251

 

83,685

Total property and equipment

 

638,389

 

610,404

Less accumulated depreciation

 

(254,585)

 

(231,619)

Property and equipment — net

 

383,804

378,785

OTHER ASSETS:

 

  

 

  

Intangible assets:

 

  

 

  

Developed technology — net of accumulated amortization —2020 — $182,148 and 2019 — $149,947

 

331,851

 

379,529

Other — net of accumulated amortization — 2020 — $56,913 and 2019 — $65,607

 

50,964

 

65,783

Goodwill

 

353,622

 

353,193

Deferred income tax assets

 

3,857

 

3,788

Right-of-use operating lease assets

76,775

80,244

Other assets

 

35,011

 

41,461

Total other assets

 

852,080

 

923,998

TOTAL ASSETS

$

1,670,510

$

1,757,321

See condensed notes to consolidated financial statements.

(continued)

3

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

(In thousands)

    

September 30, 

    

December 31, 

    

2020

    

2019

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

(unaudited)

    

  

CURRENT LIABILITIES:

 

  

  

Trade payables

$

46,634

$

54,623

Accrued expenses

 

116,927

 

105,184

Current portion of long-term debt

 

7,500

 

7,500

Short-term operating lease liabilities

12,981

11,550

Income taxes payable

 

2,005

 

2,799

Total current liabilities

 

186,047

 

181,656

Long-term debt

 

349,813

 

431,984

Deferred income tax liabilities

 

45,439

 

45,236

Long-term income taxes payable

 

347

 

347

Liabilities related to unrecognized tax benefits

 

1,990

 

1,990

Deferred compensation payable

 

15,396

 

14,855

Deferred credits

 

1,948

 

2,122

Long-term operating lease liabilities

69,407

 

72,714

Other long-term obligations

 

66,286

 

56,473

Total liabilities

 

736,673

 

807,377

Commitments and contingencies (Notes 4, 8, 9 and 10)

 

  

 

  

STOCKHOLDERS’ EQUITY:

 

  

 

  

Preferred stock — 5,000 shares authorized as of September 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 September 30, 2020 - 55,538 and December 31, 2019 - 55,213

 

600,737

 

587,017

Retained earnings

 

342,425

 

368,221

Accumulated other comprehensive loss

 

(9,325)

 

(5,294)

Total stockholders’ equity

 

933,837

 

949,944

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

1,670,510

$

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 NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In thousands, except per share amounts - unaudited)

    

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

NET SALES

$

243,975

$

243,049

$

705,871

$

736,930

COST OF SALES

 

141,961

 

138,913

 

415,857

 

416,194

GROSS PROFIT

 

102,014

 

104,136

 

290,014

 

320,736

OPERATING EXPENSES:

 

  

 

  

 

  

 

  

Selling, general and administrative

 

72,215

 

86,936

 

217,790

 

245,183

Research and development

 

13,506

 

16,987

 

42,404

 

49,361

Legal settlement

18,200

Impairment charges

 

20,585

 

2,702

 

28,305

 

3,250

Contingent consideration expense (benefit)

 

(4,356)

 

392

 

884

 

3,573

Acquired in-process research and development

 

 

 

 

525

Total operating expenses

 

101,950

 

107,017

 

307,583

 

301,892

INCOME (LOSS) FROM OPERATIONS

 

64

 

(2,881)

 

(17,569)

 

18,844

OTHER INCOME (EXPENSE):

 

  

 

  

 

  

 

  

Interest income

 

67

 

328

 

234

 

1,027

Interest expense

 

(2,197)

 

(3,415)

 

(8,056)

 

(9,295)

Other income (expense) - net

 

(118)

 

278

 

(1,085)

 

(421)

Total other expense — net

 

(2,248)

 

(2,809)

 

(8,907)

 

(8,689)

INCOME (LOSS) BEFORE INCOME TAXES

 

(2,184)

 

(5,690)

 

(26,476)

 

10,155

INCOME TAX (BENEFIT) EXPENSE

 

825

 

(2,292)

 

(1,255)

 

499

NET INCOME (LOSS)

$

(3,009)

$

(3,398)

$

(25,221)

$

9,656

EARNINGS (LOSS) PER COMMON SHARE:

 

  

 

  

 

  

 

  

Basic

$

(0.05)

$

(0.06)

$

(0.46)

$

0.18

Diluted

$

(0.05)

$

(0.06)

$

(0.46)

$

0.17

AVERAGE COMMON SHARES:

 

  

 

  

 

  

 

  

Basic

 

55,505

 

55,152

 

55,386

 

55,029

Diluted

 

55,505

 

55,152

 

55,386

 

56,393

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 NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In thousands - unaudited)

    

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

Net income (loss)

$

(3,009)

$

(3,398)

$

(25,221)

$

9,656

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Cash flow hedges

 

(592)

 

(207)

 

(7,875)

 

(3,938)

Income tax benefit (expense)

 

152

 

53

 

2,027

 

1,014

Foreign currency translation adjustment

 

3,545

 

(2,779)

 

1,944

 

(3,120)

Income tax benefit (expense)

 

(117)

 

(14)

 

(127)

 

(17)

Total other comprehensive income (loss)

 

2,988

 

(2,947)

 

(4,031)

 

(6,061)

Total comprehensive income (loss)

$

(21)

$

(6,345)

$

(29,252)

$

3,595

See condensed notes to consolidated financial statements.

6

Table of Contents

MERIT MEDICAL SYSTEMS, INC.

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

(In thousands - unaudited)

Common Stock

Retained

Accumulated Other

    

Total

    

Shares

    

Amount

    

Earnings

    

Comprehensive 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)

Net loss

 

(3,009)

 

  

 

  

 

(3,009)

 

  

Other comprehensive income

 

2,988

 

  

 

  

 

  

 

2,988

Stock-based compensation expense

 

3,794

 

  

 

3,794

 

  

 

  

Options exercised

 

950

 

50

 

950

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

267

 

7

 

267

 

  

 

  

BALANCE — September 30, 2020

$

933,837

 

55,538

$

600,737

$

342,425

$

(9,325)

See condensed notes to consolidated financial statements.

(continued)

7

Table of Contents

MERIT MEDICAL SYSTEMS, INC.

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

(In thousands - unaudited)

Common Stock

Retained

Accumulated Other

    

Total

    

Shares

    

Amount

    

Earnings

    

Comprehensive 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)

Net loss

 

(3,398)

 

  

 

  

 

(3,398)

 

  

Other comprehensive loss

 

(2,947)

 

  

 

  

 

  

 

(2,947)

Stock-based compensation expense

 

2,626

 

  

 

2,626

 

  

 

  

Options exercised

 

2,037

 

120

 

2,037

 

  

 

Issuance of common stock under Employee Stock Purchase Plan

 

341

 

12

 

341

 

  

 

  

Shares surrendered in exchange for exercise of stock options

 

(93)

(3)

 

(93)

 

  

 

  

BALANCE — September 30, 2019

$

949,241

55,208

$

584,161

$

373,174

$

(8,094)

See condensed notes to consolidated financial statements.

(concluded)

8

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In thousands - unaudited)

Nine Months Ended

September 30, 

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income (loss)

$

(25,221)

$

9,656

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

 

  

 

  

Depreciation and amortization

 

70,458

 

68,507

Gain on sale of business

 

(508)

 

Loss on sales and/or abandonment of property and equipment

 

1,303

 

637

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

 

28,409

 

3,492

Acquired in-process research and development

 

 

525

Amortization of right-of-use operating lease assets

9,522

9,226

Fair value adjustments to contingent consideration

884

3,573

Amortization of deferred credits

 

(103)

 

(104)

Amortization of long-term debt issuance costs

 

453

 

570

Stock-based compensation expense

 

10,268

 

6,915

Changes in operating assets and liabilities, net of acquisitions and divestitures:

 

 

  

Trade receivables

 

13,049

 

(6,786)

Other receivables

 

1,170

 

(29)

Inventories

 

15,668

 

(19,302)

Prepaid expenses and other current assets

 

(3,929)

 

(3,859)

Prepaid income taxes

 

(35)

 

Income tax refund receivables

 

(8,666)

 

(8,680)

Other assets

 

(1,088)

 

(3,832)

Trade payables

 

(2,682)

 

(3,775)

Accrued expenses

 

22,591

 

1,678

Income taxes payable

 

1,079

 

(928)

Deferred compensation payable

 

541

 

2,276

Operating lease liabilities

(9,398)

(8,956)

Other long-term obligations

 

4,590

 

100

Total adjustments

 

153,576

 

41,248

Net cash provided by operating activities

 

128,355

 

50,904

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Capital expenditures for:

 

  

 

  

Property and equipment

 

(35,590)

 

(58,104)

Intangible assets

 

(2,499)

 

(2,560)

Proceeds from the sale of property and equipment

 

33

 

262

Proceeds from sale of business

1,285

Cash received for settlement of current note receivable

 

250

 

Cash paid in acquisitions, net of cash acquired

 

(260)

 

(53,512)

Net cash used in investing activities

$

(36,781)

$

(113,914)

See condensed notes to consolidated financial statements.

(continued)

9

Table of Contents

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In thousands - unaudited)