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

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

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

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

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

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

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

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

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

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