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dengu%911Y2022

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, 2022

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.

Title or class

Shares outstanding as of August 3, 2022

Common Stock, no par

    

56,764,012

TABLE OF CONTENTS

PART I.

   

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

3

Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021

5

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021

6

Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021

7

Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021

9

Condensed Notes to Consolidated Financial Statements

11

Item 2.

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

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

37

PART II.

OTHER INFORMATION

38

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 6.

Exhibits

41

SIGNATURES

42

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

    

June 30, 

    

December 31, 

ASSETS

    

2022

    

2021

(unaudited)

Current assets:

 

  

 

  

Cash and cash equivalents

$

63,003

$

67,750

Trade receivables — net of allowance for credit losses — 2022 — $7,738 and 2021 — $6,767

 

158,801

 

152,301

Other receivables

 

10,627

 

17,763

Inventories

 

233,154

 

221,922

Prepaid expenses and other current assets

 

23,050

 

16,149

Prepaid income taxes

 

3,532

 

3,550

Income tax refund receivables

 

464

 

2,777

Total current assets

 

492,631

 

482,212

Property and equipment:

 

  

 

  

Land and land improvements

 

25,163

 

25,287

Buildings

 

188,550

 

190,044

Manufacturing equipment

 

286,257

 

277,976

Furniture and fixtures

 

62,620

 

61,446

Leasehold improvements

 

48,813

 

46,341

Construction-in-progress

 

54,409

 

51,182

Total property and equipment

 

665,812

 

652,276

Less accumulated depreciation

 

(294,361)

 

(280,618)

Property and equipment — net

 

371,451

371,658

Other assets:

 

  

 

  

Intangible assets:

 

  

 

  

Developed technology — net of accumulated amortization — 2022 — $254,031 and 2021 — $234,016

 

254,557

 

276,833

Other — net of accumulated amortization — 2022 — $66,591 and 2021 — $65,053

 

39,671

 

42,436

Goodwill

 

359,692

 

361,741

Deferred income tax assets

 

5,861

 

6,080

Right-of-use operating lease assets

64,353

65,913

Other assets

 

43,303

 

41,421

Total other assets

 

767,437

 

794,424

Total assets

$

1,631,519

$

1,648,294

See condensed notes to consolidated financial statements.

(continued)

3

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

    

June 30, 

    

December 31, 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

2022

    

2021

(unaudited)

Current liabilities:

 

  

  

Trade payables

$

59,441

$

55,624

Accrued expenses

 

111,955

 

159,014

Current portion of long-term debt

 

10,313

 

8,438

Short-term operating lease liabilities

10,444

10,668

Income taxes payable

 

3,437

 

2,536

Total current liabilities

 

195,590

 

236,280

Long-term debt

 

235,703

 

234,397

Deferred income tax liabilities

 

31,195

 

31,503

Long-term income taxes payable

 

347

 

347

Liabilities related to unrecognized tax benefits

 

932

 

932

Deferred compensation payable

 

15,562

 

18,111

Deferred credits

 

1,762

 

1,815

Long-term operating lease liabilities

59,646

 

61,526

Other long-term obligations

 

17,475

 

23,584

Total liabilities

 

558,212

 

608,495

Commitments and contingencies

 

  

 

  

Stockholders' equity:

 

  

 

  

Preferred stock — 5,000 shares authorized as of June 30, 2022 and December 31, 2021; no shares issued

 

 

Common stock, no par value; shares authorized — 2022 and 2021 - 100,000; issued and outstanding as of June 30, 2022 - 56,745 and December 31, 2021 - 56,570

 

651,926

 

641,533

Retained earnings

 

432,100

 

406,257

Accumulated other comprehensive loss

 

(10,719)

 

(7,991)

Total stockholders’ equity

 

1,073,307

 

1,039,799

Total liabilities and stockholders’ equity

$

1,631,519

$

1,648,294

See condensed notes to consolidated financial statements.

(concluded)

4

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts - unaudited)

    

Three Months Ended

    

Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Net sales

$

294,976

$

280,325

$

570,391

$

529,238

Cost of sales

 

159,909

 

156,186

 

314,417

 

293,205

Gross profit

 

135,067

 

124,139

 

255,974

 

236,033

Operating expenses:

 

  

 

  

 

  

 

  

Selling, general and administrative

 

85,487

 

91,563

 

169,502

 

172,587

Research and development

 

18,466

 

17,593

 

35,853

 

33,867

Impairment charges

 

 

4,283

 

1,672

 

4,283

Contingent consideration expense

 

1,187

 

1,805

 

3,787

 

2,207

Acquired in-process research and development

 

6,671

 

 

6,671

 

Total operating expenses

 

111,811

 

115,244

 

217,485

 

212,944

Income from operations

 

23,256

 

8,895

 

38,489

 

23,089

Other income (expense):

 

  

 

  

 

  

 

  

Interest income

 

96

 

92

 

201

 

564

Interest expense

 

(1,348)

 

(1,386)

 

(2,350)

 

(2,923)

Other expense — net

 

(1,303)

 

(736)

 

(1,468)

 

(1,171)

Total other expense — net

 

(2,555)

 

(2,030)

 

(3,617)

 

(3,530)

Income before income taxes

 

20,701

 

6,865

 

34,872

 

19,559

Income tax expense

 

5,403

 

1,949

 

9,029

 

3,685

Net income

$

15,298

$

4,916

$

25,843

$

15,874

Earnings per common share

 

  

 

  

 

  

 

  

Basic

$

0.27

$

0.09

$

0.46

$

0.28

Diluted

$

0.27

$

0.09

$

0.45

$

0.28

Weighted average shares outstanding

 

  

 

  

 

  

 

  

Basic

 

56,691

 

56,061

 

56,642

 

55,890

Diluted

 

57,600

 

57,277

 

57,565

 

57,128

See condensed notes to consolidated financial statements.

5

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands - unaudited)

    

Three Months Ended

    

Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Net income

$

15,298

$

4,916

$

25,843

$

15,874

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Cash flow hedges

 

6,425

 

999

 

9,332

 

3,920

Income tax benefit (expense)

 

(1,572)

 

(248)

 

(2,284)

 

(972)

Foreign currency translation adjustment

 

(8,979)

 

1,800

 

(9,772)

 

(2,662)

Income tax benefit (expense)

 

60

 

(203)

 

(4)

 

332

Total other comprehensive income (loss)

 

(4,066)

 

2,348

 

(2,728)

 

618

Total comprehensive income

$

11,232

$

7,264

$

23,115

$

16,492

See condensed notes to consolidated financial statements.

6

MERIT MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands - unaudited)

Common Stock

Retained

Accumulated Other

    

Shares

    

Amount

    

Earnings

    

Comprehensive Income (Loss)

    

Total

Balance — January 1, 2022

 

56,570

$

641,533

$

406,257

$

(7,991)

$

1,039,799

Net income

 

  

 

  

 

10,545

 

  

 

10,545

Other comprehensive income

 

  

 

  

 

  

 

1,338

 

1,338

Stock-based compensation expense

 

  

 

4,212

 

  

 

  

 

4,212

Options exercised

 

52

 

1,320

 

  

 

  

 

1,320

Issuance of common stock under Employee Stock Purchase Plan

 

5

 

320

 

  

 

  

 

320

Shares issued from time-vested restricted stock units

44

Shares surrendered in exchange for payment of payroll tax liabilities

 

(16)

 

(1,015)

(1,015)

Balance — March 31, 2022

 

56,655

646,370

416,802

(6,653)

1,056,519

Net income

 

  

 

  

 

15,298

 

  

 

15,298

Other comprehensive loss

 

  

 

  

 

  

 

(4,066)

 

(4,066)

Stock-based compensation expense

 

  

 

3,952

 

  

 

  

 

3,952

Options exercised

 

58

 

1,303

 

  

 

  

 

1,303

Issuance of common stock under Employee Stock Purchase Plan

 

6

 

301

 

  

 

  

 

301

Shares issued from time-vested restricted stock units

26

Balance — June 30, 2022

 

56,745

$

651,926

$

432,100

$

(10,719)

$

1,073,307

See condensed notes to consolidated financial statements.

(continued)

7

MERIT MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands - unaudited)

Common Stock

Retained

Accumulated Other

    

Shares

    

Amount

    

Earnings

    

Comprehensive Income (Loss)

    

Total

Balance — January 1, 2021

 

55,623

$

606,224

$

357,803

$

(5,452)

$

958,575

Net income

 

  

 

  

 

10,958

 

  

 

10,958

Other comprehensive loss

 

 

 

 

(1,730)

 

(1,730)

Stock-based compensation expense

 

 

3,310

 

 

 

3,310

Options exercised

 

291

 

5,897

 

 

 

5,897

Issuance of common stock under Employee Stock Purchase Plan

 

5

 

263

 

 

 

263

Shares issued from time-vested restricted stock units

25

Shares surrendered in exchange for payment of payroll tax liabilities

 

(9)

 

(488)

(488)

Shares surrendered in exchange for exercise of stock options

 

(2)

 

(93)

(93)

Balance — March 31, 2021

 

55,933

615,113

368,761

(7,182)

976,692

Net income

 

  

 

  

 

4,916

 

  

 

4,916

Other comprehensive income

 

  

 

  

 

  

 

2,348

 

2,348

Stock-based compensation expense

 

  

 

2,765

 

  

 

  

 

2,765

Options exercised

 

253

 

5,455

 

  

 

  

 

5,455

Issuance of common stock under Employee Stock Purchase Plan

 

4

 

258

 

  

 

  

 

258

Shares issued from time-vested restricted stock units

34

Balance — June 30, 2021

56,224

$

623,591

$

373,677

$

(4,834)

$

992,434

See condensed notes to consolidated financial statements.

(concluded)

8

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands - unaudited)

Six Months Ended

June 30, 

    

2022

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

 

Net income

$

25,843

$

15,874

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

40,902

 

42,417

Loss on disposition of business

 

1,254

 

Loss on sale or abandonment of property and equipment

 

112

 

242

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

 

1,733

 

4,368

Acquired in-process research and development

 

6,671

 

Amortization of right-of-use operating lease assets

5,121

6,074

Adjustments and payments related to contingent consideration liability

1,999

2,207

Amortization of deferred credits

 

(54)

 

(54)

Amortization of long-term debt issuance costs

 

302

 

302

Stock-based compensation expense

 

9,093

 

6,732

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

 

 

Trade receivables

 

(9,472)

 

(7,833)

Other receivables

 

6,457

 

(793)

Inventories

 

(14,766)

 

3,185

Prepaid expenses and other current assets

 

(2,155)

 

(3,823)

Income tax refund receivables

 

(4)

 

(9)

Other assets

 

1,768

 

(685)

Trade payables

 

3,713

 

5,639

Accrued expenses

 

(20,966)

 

9,206

Income taxes payable

 

1,114

 

(860)

Deferred compensation payable

 

(2,549)

 

247

Operating lease liabilities

(5,609)

(6,259)

Other long-term obligations

 

287

 

263

Total adjustments

 

24,951

 

60,566

Net cash, cash equivalents, and restricted cash provided by operating activities

 

50,794

 

76,440

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Capital expenditures for:

 

  

 

  

Property and equipment

 

(16,763)

 

(12,817)

Intangible assets

 

(912)

 

(1,469)

Proceeds from the sale of property and equipment

 

59

 

884

Payments from disposition of business

(971)

Cash paid in acquisitions, net of cash acquired

 

(4,712)

 

(1,858)

Net cash, cash equivalents, and restricted cash used in investing activities

$

(23,299)

$

(15,260)

See condensed notes to consolidated financial statements.

(continued)

9

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands - unaudited)

    

Six Months Ended

June 30, 

2022

2021

CASH FLOWS FROM FINANCING ACTIVITIES:

 

Proceeds from issuance of common stock

$

3,244

$

11,780

Proceeds from issuance of long-term debt

 

127,688

 

32,657

Payments on long-term debt

(124,563)

(91,535)

Contingent payments related to acquisitions

 

(32,798)

 

(489)

Payment of taxes related to an exchange of common stock

 

(1,015)

 

(488)

Net cash, cash equivalents, and restricted cash used in financing activities

 

(27,444)

 

(48,075)

Effect of exchange rates on cash, cash equivalents, and restricted cash

 

(2,564)

 

(349)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

(2,513)

 

12,756

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

 

  

 

  

Beginning of period

 

67,750

 

56,916

End of period

$

65,237

$

69,672

RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:

Cash and cash equivalents

63,003

69,672

Restricted cash reported in prepaid expenses and other current assets

2,234

Total cash, cash equivalents and restricted cash

$

65,237

$

69,672

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

  

 

  

Cash paid during the period for:

 

  

 

  

Interest (net of capitalized interest of $302 and $234, respectively)

$

2,317

$

2,923

Income taxes

7,863

4,611

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

  

 

  

Property and equipment purchases in accounts payable

$

3,555

$

1,014

Acquisition purchases in other long-term obligations

(3,526)

Merit common stock surrendered (0 and 2 shares, respectively) in exchange for exercise of stock options

93

Right-of-use operating lease assets obtained in exchange for operating lease liabilities

4,746

361

See condensed notes to consolidated financial statements.

(concluded)

10

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   Basis of Presentation and Other Items. The interim consolidated financial statements of Merit Medical Systems, Inc. ("Merit," "we" or "us") for the three and six-month periods ended June 30, 2022 and 2021 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 (“U.S. GAAP”). 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, 2022 and December 31, 2021, and our results of operations and cash flows for the three and six-month periods ended June 30, 2022 and 2021. The results of operations for the three and six-month periods ended June 30, 2022 and 2021 are not necessarily indicative of the results for a full-year period. Amounts presented in this report are rounded, while percentages and earnings per share amounts presented are calculated from the underlying amounts. These interim consolidated financial statements should be read in conjunction with the financial statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”).

2.   Recently Issued Financial Accounting Standards. In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions in accounting for modifications of contracts that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which amended the scope of ASU 2020-04. ASU 2020-04 and ASU 2021-01 became effective as of March 12, 2020, and the provisions of these updates may be applied prospectively to transactions through December 31, 2022, when reference rate reform activity is expected to be completed. As of June 30, 2022, we had not modified any contracts as a result of reference rate reform. We are currently assessing the anticipated impact of these standards on our consolidated financial statements.

We currently believe that all other issued and not yet effective accounting standards are not materially relevant to our financial statements.

3.   Revenue from Contracts with Customers. We recognize revenue when a customer obtains control of promised goods. The amount of revenue recognized reflects the consideration we expect to receive in exchange for these goods. Our revenue recognition policies have not changed from those disclosed in Note 1 to our consolidated financial statements in Item 8 of the 2021 Annual Report on Form 10-K.

Disaggregation of Revenue

Our revenue is disaggregated based on reporting segment, product category and geographical region. We design, develop, manufacture and market medical products for interventional and diagnostic procedures. For financial reporting purposes, we report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of four product categories: peripheral intervention, cardiac intervention, custom procedural solutions, and original equipment manufacturer (“OEM”). Within these product categories, we sell a variety of products, including cardiology and radiology devices (which assist in diagnosing and treating coronary arterial disease, peripheral vascular disease and other non-vascular diseases), as well as embolotherapeutic, cardiac rhythm management, electrophysiology, critical care, breast cancer localization and guidance, biopsy, and interventional oncology and spine devices. Our endoscopy segment consists of gastroenterology and pulmonology devices which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors.

11

The following tables present revenue from contracts with customers by reporting segment, product category and geographical region for the three and six-month periods ended June 30, 2022 and 2021 (in thousands):

Three Months Ended

Three Months Ended

June 30, 2022

June 30, 2021

    

United States

    

International

    

Total

    

United States

    

International

    

Total

Cardiovascular

 

  

 

 

  

 

  

 

  

 

  

Peripheral Intervention

$

65,795

$

45,160

$

110,955

$

63,235

$

42,365

$

105,600

Cardiac Intervention

 

33,909

55,665

 

89,574

 

33,217

 

52,436

 

85,653

Custom Procedural Solutions

 

27,318

21,775

 

49,093

 

27,392

 

21,244

 

48,636

OEM