Merit Medical Systems Earnings 2019-06-30

MMSI 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

Document

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, 2019

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



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		55,174,922
Title or class		Number of Shares Outstanding at August 7, 2019

Table of Contents

TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3

	Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	3

	Consolidated Statements of Income for the three and six months ended June 30, 2019 and 2018	5

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018	6

	Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2019 and 2018	7

	Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	8

	Condensed Notes to Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	45

PART II.	OTHER INFORMATION	46

Item 1.	Legal Proceedings	46

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, 2019 AND DECEMBER 31, 2018 (In thousands)

	June 30,			December 31,
	2019			2018
ASSETS	(unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	35,182		$	67,359
Trade receivables — net of allowance for uncollectible accounts — 2019 — $2,656 and 2018 — $2,355	156,444			137,174
Other receivables	11,520			11,879
Inventories	202,994			197,536
Prepaid expenses and current other assets	12,305			11,326
Prepaid income taxes	3,625			3,627
Income tax refund receivables	4,876			933

Total current assets	426,946			429,834

PROPERTY AND EQUIPMENT:
Land and land improvements	27,651			26,801
Buildings	153,502			151,251
Manufacturing equipment	230,315			221,029
Furniture and fixtures	57,565			54,765
Leasehold improvements	34,518			33,678
Construction-in-progress	69,370			53,491

Total property and equipment	572,921			541,015

Less accumulated depreciation	(222,402		)	(209,563		)

Property and equipment — net	350,519			331,452

OTHER ASSETS:
Intangible assets:
Developed technology — net of accumulated amortization — 2019 — $125,447 and 2018 — $102,357	391,651			383,147
Other — net of accumulated amortization — 2019 — $56,289 and 2018 — $49,136	74,419			79,566
Goodwill	352,133			335,433
Deferred income tax assets	3,038			3,001
Right-of-use operating lease assets	79,309			—
Other assets	58,255			57,579

Total other assets	958,805			858,726

TOTAL	$	1,736,270		$	1,620,012
See condensed notes to consolidated financial statements.				(continued)

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2019 AND DECEMBER 31, 2018 (In thousands)

	June 30,			December 31,
	2019			2018
LIABILITIES AND STOCKHOLDERS’ EQUITY	(unaudited)

CURRENT LIABILITIES:
Trade payables	$	52,601		$	54,024
Accrued expenses	97,176			96,173
Current portion of long-term debt	15,000			22,000
Short-term operating lease liabilities	11,732			—
Income taxes payable	42			3,146

Total current liabilities	176,551			175,343

LONG-TERM DEBT	385,221			373,152

DEFERRED INCOME TAX LIABILITIES	60,932			56,363

LONG-TERM INCOME TAXES PAYABLE	392			392

LIABILITIES RELATED TO UNRECOGNIZED TAX BENEFITS	3,013			3,013

DEFERRED COMPENSATION PAYABLE	12,739			11,219

DEFERRED CREDITS	2,192			2,261

LONG-TERM OPERATING LEASE LIABILITIES	71,272			—

OTHER LONG-TERM OBLIGATIONS	73,283			65,494

Total liabilities	785,595			687,237

COMMITMENTS AND CONTINGENCIES (Notes 5, 10, 11, 14 and 15)

STOCKHOLDERS’ EQUITY:
Preferred stock — 5,000 shares authorized as of June 30, 2019 and December 31, 2018; no shares issued	—			—
Common stock, no par value; shares authorized — 2019 and 2018 - 100,000; issued and outstanding as of June 30, 2019 - 55,079 and December 31, 2018 - 54,893	579,250			571,383
Retained earnings	376,572			363,425
Accumulated other comprehensive loss	(5,147		)	(2,033		)

Total stockholders’ equity	950,675			932,775

TOTAL	$	1,736,270		$	1,620,012
See condensed notes to consolidated financial statements.				(concluded)

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018 (In thousands, except per share amounts - unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
NET SALES	$	255,532		$	224,810		$	493,881		$	427,844

COST OF SALES	143,568			124,801			277,281			239,779

GROSS PROFIT	111,964			100,009			216,600			188,065

OPERATING EXPENSES:
Selling, general and administrative	79,977			69,095			158,247			134,007
Research and development	16,332			15,316			32,375			29,638
Intangible asset impairment charge	548			—			548			—
Contingent consideration expense	2,406			178			3,181			219
Acquired in-process research and development	500			306			525			306

Total operating expenses	99,763			84,895			194,876			164,170

INCOME FROM OPERATIONS	12,201			15,114			21,724			23,895

OTHER INCOME (EXPENSE):
Interest income	342			342			698			487
Interest expense	(3,115		)	(3,338		)	(5,879		)	(5,736		)
Other expense - net	(429		)	(553		)	(698		)	(721		)

Total other expense — net	(3,202		)	(3,549		)	(5,879		)	(5,970		)

INCOME BEFORE INCOME TAXES	8,999			11,565			15,845			17,925

INCOME TAX EXPENSE	2,140			624			2,791			1,715

NET INCOME	$	6,859		$	10,941		$	13,054		$	16,210

EARNINGS PER COMMON SHARE:
Basic	$	0.12		$	0.22		$	0.24		$	0.32

Diluted	$	0.12		$	0.21		$	0.23		$	0.31

AVERAGE COMMON SHARES:
Basic	55,017			50,473			54,967			50,376

Diluted	56,555			52,154			56,523			52,033

See condensed notes to consolidated financial statements.

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018 (In thousands - unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income	$	6,859		$	10,941		$	13,054		$	16,210
Other comprehensive income (loss):
Cash flow hedges	(1,154		)	881			(3,731		)	2,873
Income tax benefit (expense)	297			(226		)	960			(738		)
Foreign currency translation adjustment	274			(4,195		)	(341		)	(1,603		)
Income tax benefit (expense)	(16		)	—			(2		)	—
Total other comprehensive income (loss)	(599		)	(3,540		)	(3,114		)	532
Total comprehensive income	$	6,260		$	7,401		$	9,940		$	16,742

See condensed notes to consolidated financial statements.

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MERIT MEDICAL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018 (In thousands - unaudited)

											Accumulated Other
				Common Stock					Retained		Comprehensive
	Total			Shares		Amount			Earnings		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	)

											Accumulated Other
				Common Stock					Retained		Comprehensive
	Total			Shares		Amount			Earnings		Income (Loss)
BALANCE — January 1, 2018	$	676,334		50,248		$	353,392		$	321,408	$	1,534
Net income	5,269								5,269
Other comprehensive income	4,072										4,072
Stock-based compensation expense	1,256					1,256
Options exercised	1,286			91		1,286
Issuance of common stock under Employee Stock Purchase Plan	294			7		294
BALANCE — March 31, 2018	688,511			50,346		356,228			326,677		5,606
Net income	10,941								10,941
Other comprehensive loss	(3,540		)								(3,540		)
Stock-based compensation expense	1,565					1,565
Options exercised	5,307			357		5,307
Issuance of common stock under Employee Stock Purchase Plan	220			4		220
Shares surrendered in exchange for payment of payroll tax liabilities	(2,065		)	(40	)	(2,065		)
Shares surrendered in exchange for exercise of stock options	(1,685		)	(32	)	(1,685		)
BALANCE — June 30, 2018	$	699,254		50,635		$	359,570		$	337,618	$	2,066

See condensed notes to consolidated financial statements.

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018 (In thousands - unaudited)

	Six Months Ended June 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	13,054		$	16,210

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	45,010			32,779
Loss on sales and/or abandonment of property and equipment	803			371
Amortization of right-of-use operating lease assets	5,874			—
Write-off of patents and intangible assets	594			86
Acquired in-process research and development	525			306
Amortization of deferred credits	(70		)	(71		)
Amortization of long-term debt issuance costs	402			402
Stock-based compensation expense	4,289			2,821
Changes in operating assets and liabilities, net of effects from acquisitions:
Trade receivables	(21,206		)	(27,947		)
Other receivables	427			966
Inventories	(5,138		)	(7,189		)
Prepaid expenses and other current assets	(1,052		)	(3,105		)
Prepaid income taxes	(45		)	(100		)
Income tax refund receivables	(3,980		)	(1,146		)
Other assets	(2,845		)	(751		)
Trade payables	1,338			15,767
Accrued expenses	1,925			7,467
Income taxes payable	(2,059		)	(2,076		)
Deferred compensation payable	1,518			438
Operating lease liabilities	(5,882		)	—
Other long-term obligations	2,208			(179		)

Total adjustments	22,636			18,839

Net cash provided by operating activities	35,690			35,049

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment	(35,959		)	(31,559		)
Intangible assets	(1,607		)	(1,755		)
Proceeds from the sale of property and equipment	22			4
Issuance of note receivable	—			(10,500		)
Cash paid in acquisitions, net of cash acquired	(37,256		)	(118,654		)

Net cash used in investing activities	(74,800		)	(162,464		)

See condensed notes to consolidated financial statements.				(continued)

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018 (In thousands - unaudited)

	Six Months Ended June 30,
	2019			2018
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	$	3,374		$	3,251
Proceeds from issuance of long-term debt	125,746			320,827
Payments on long-term debt	(120,746		)	(185,827		)
Contingent payments related to acquisitions	(611		)	(130		)

Net cash provided by financing activities	7,763			138,121

EFFECT OF EXCHANGE RATES ON CASH	(830		)	470

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(32,177		)	11,176

CASH AND CASH EQUIVALENTS:
Beginning of period	67,359			32,336

End of period	$	35,182		$	43,512

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized interest of $540 and $314, respectively)	$	5,794		$	5,714

Income taxes	$	8,856		$	5,141

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchases in accounts payable	$	3,331		$	3,943

Acquisition purchases in accrued expenses and other long-term obligations	$	8,400		$	—

Merit common stock surrendered (0 and 32 shares, respectively) in exchange for exercise of stock options	$	—		$	1,684

Right-of-use operating lease assets obtained in exchange for operating lease liabilities	$	2,927		$	—

See condensed notes to consolidated financial statements.				(concluded)

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation. The interim consolidated financial statements of Merit Medical Systems, Inc. ("Merit," "we" or "us") for the three and six-month periods ended June 30, 2019 and 2018 are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods and, consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America. In the opinion of our management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of June 30, 2019 and December 31, 2018, and our results of operations and cash flows for the three and six-month periods ended June 30, 2019 and 2018. The results of operations for the three and six-month periods ended June 30, 2019 and 2018 are not necessarily indicative of the results for a full-year period. These interim consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K (the "2018 Form 10-K") for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission (the "SEC") on March 1, 2019.

2. Inventories. Inventories at June 30, 2019 and December 31, 2018, consisted of the following (in thousands):



	June 30,		December 31,
	2019		2018
Finished goods	$	116,741	$	117,703
Work-in-process	23,419		14,380
Raw materials	62,834		65,453

Total Inventories	$	202,994	$	197,536

3. Stock-Based Compensation Expense. The stock-based compensation expense before income tax expense for the three and six months ended June 30, 2019 and 2018 consisted of the following (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cost of sales	$	355	$	232	$	607	$	416
Research and development	281		147		473		271
Selling, general and administrative	1,887		1,186		3,209		2,134
Stock-based compensation expense before taxes	$	2,523	$	1,565	$	4,289	$	2,821

We recognize stock-based compensation expense (net of a forfeiture rate) for those awards which are expected to vest on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on our historical experience and expectations about future forfeitures. As of June 30, 2019, the total remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was approximately $32.4 million and was expected to be recognized over a weighted average period of 3.32 years.

During the three and six-month periods ended June 30, 2019, we granted stock-based awards representing 190,000 and approximately 1.1 million shares of our common stock, respectively. During the three and six-month periods ended June 30, 2018, we granted stock-based awards representing 200,000 and 692,002 shares of our common stock, respectively. We use the Black-Scholes methodology to value the stock-based compensation expense for options. In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted was estimated using the following assumptions for the periods indicated below:

Table of Contents



	Six Months Ended June 30,
	2019	2018
Risk-free interest rate	1.90% - 2.56%	2.63% - 2.77%
Expected option term	3.0 - 5.0 years	5.0 years
Expected dividend yield	—	—
Expected price volatility	28.66% - 33.69%	34.06% - 34.32%

The average risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock options. We determine the expected term of the stock options using the historical exercise behavior of employees. The expected price volatility was determined using a weighted average of daily historical volatility of our stock price over the corresponding expected option term and implied volatility based on recent trends of the daily historical volatility. For options with a vesting period, compensation expense is recognized on a straight-line basis over the service period, which corresponds to the vesting period.

4. Earnings Per Common Share (EPS). The computation of weighted average shares outstanding and the basic and diluted earnings per common share consisted of the following (in thousands, except per share amounts):



	Three Months					Six Months
	Net Income		Shares	Per Share Amount		Net Income		Shares	Per Share Amount
Period ended June 30, 2019:
Basic EPS	$	6,859	55,017	$	0.12	$	13,054	54,967	$	0.24
Effect of dilutive stock options			1,538					1,556

Diluted EPS	$	6,859	56,555	$	0.12	$	13,054	56,523

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$57.48	55	$3,160

10-Q	2019-06-30	Quarter: 2019-06-30
10-Q	2019-03-31	Quarter: 2019-03-31
10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-08-05	Enter Agreement, Off-BS Arrangement
8-K	2019-07-25	Earnings, Regulation FD, Exhibits
8-K	2019-06-20	Regulation FD, Exhibits
8-K	2019-05-23	Officers, Shareholder Vote
8-K	2019-04-23	Earnings, Regulation FD, Exhibits
8-K	2019-03-11	Officers
8-K	2018-12-20	Officers
8-K	2018-12-14	M&A, Regulation FD, Exhibits
8-K	2018-11-14	M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K	2018-10-25	Earnings, Regulation FD, Exhibits
8-K	2018-10-01	Enter Agreement, Regulation FD, Exhibits
8-K	2018-07-25	Enter Agreement, Other Events, Exhibits
8-K	2018-07-24	Regulation FD, Exhibits
8-K	2018-07-23	Earnings, Officers, Regulation FD, Exhibits
8-K	2018-06-06	Regulation FD, Exhibits
8-K	2018-05-31	Officers, Amend Bylaw, Shareholder Vote, Regulation FD, Exhibits
8-K	2018-04-25	Earnings, Regulation FD, Exhibits
8-K	2018-02-28	Earnings, Regulation FD, Exhibits
8-K	2018-02-21	M&A, Off-BS Arrangement, Regulation FD, Exhibits

MELI	MercadoLibre	26,760
BHGE	Baker Hughes	23,450
RL	Ralph Lauren	9,880
SABR	Sabre	5,650
MTDR	Matador Resources	2,320
AMSF	Amerisafe	1,140
APTX	Aptinyx	133
CVR	Chicago Rivet & Machine	27
MYOS	MYOS RENS	11
GPT	Gramercy Property Trust	0

EX-10.1	ninthamendment-ex101.htm
EX-10.2	tenthamendment-ex102.htm
EX-10.3	eleventhamendment-ex103.htm
EX-10.4	twelfthamendment-ex104.htm
EX-31.1	mmsi-6302019x10qxex311.htm
EX-31.2	mmsi-6302019x10qxex312.htm
EX-32.1	mmsi-6302019x10qxex321.htm
EX-32.2	mmsi-6302019x10qxex322.htm