de
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 For the quarterly period ended March 31, 2021
2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO 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.
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Common Stock, no par |
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TABLE OF CONTENTS
| | | 3 | ||
| | | | | |
| | | 3 | ||
| | | | | |
| | | | Consolidated Balance Sheets as of March 31, | 3 |
| | | | | |
| | | | Consolidated Statements of Income | 5 |
| | | | | |
| | | | 6 | |
| | | | | |
| | | | 7 | |
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| | | | Consolidated Statements of Cash Flows for the three months ended March 31, | 8 |
| | | | | |
| | | | 10 | |
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| | | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| | | 32 | ||
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| | | 32 | ||
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2021 AND DECEMBER 31, 2020
(In thousands)
| | | | | | | | | | | | |
|
| March 31, |
| December 31, |
| March 31, |
| December 31, | ||||
ASSETS |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | | (unaudited) | | | | | | (unaudited) | | | |
CURRENT ASSETS: |
| |
|
| |
| ||||||
Current assets: |
| |
|
| |
| ||||||
Cash and cash equivalents | | $ | 58,519 | | $ | 56,916 | | $ | 53,875 | | $ | 67,750 |
Trade receivables — net of allowance for credit losses — 2021 — $5,953 and 2020 — $5,313 | |
| 150,314 | |
| 146,641 | ||||||
Trade receivables — net of allowance for credit losses — 2022 — $7,568 and 2021 — $6,767 | |
| 155,859 | |
| 152,301 | ||||||
Other receivables | |
| 8,719 | |
| 7,774 | |
| 11,748 | |
| 17,763 |
Inventories | |
| 200,308 | |
| 198,019 | |
| 231,451 | |
| 221,922 |
Prepaid expenses and other current assets | |
| 13,617 | |
| 13,120 | |
| 19,809 | |
| 16,149 |
Prepaid income taxes | |
| 3,680 | |
| 3,688 | |
| 3,547 | |
| 3,550 |
Income tax refund receivables | |
| 3,331 | |
| 3,549 | |
| 1,803 | |
| 2,777 |
Total current assets | |
| 438,488 | |
| 429,707 | |
| 478,092 | |
| 482,212 |
| | | | | | | | | | | | |
PROPERTY AND EQUIPMENT: | |
|
| |
|
| ||||||
Property and equipment: | |
|
| |
|
| ||||||
Land and land improvements | |
| 28,087 | |
| 28,400 | |
| 25,380 | |
| 25,287 |
Buildings | |
| 187,774 | |
| 188,878 | |
| 189,773 | |
| 190,044 |
Manufacturing equipment | |
| 270,754 | |
| 268,894 | |
| 283,802 | |
| 277,976 |
Furniture and fixtures | |
| 61,422 | |
| 61,586 | |
| 61,877 | |
| 61,446 |
Leasehold improvements | |
| 48,319 | |
| 48,800 | |
| 48,060 | |
| 46,341 |
Construction-in-progress | |
| 47,735 | |
| 46,889 | |
| 50,870 | |
| 51,182 |
Total property and equipment | |
| 644,091 | |
| 643,447 | |
| 659,762 | |
| 652,276 |
Less accumulated depreciation | |
| (265,914) | |
| (260,719) | |
| (287,853) | |
| (280,618) |
Property and equipment — net | |
| 378,177 | | | 382,728 | |
| 371,909 | | | 371,658 |
| | | | | | | | | | | | |
OTHER ASSETS: | |
|
| |
|
| ||||||
Other assets: | |
|
| |
|
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Intangible assets: | |
|
| |
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| |
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|
Developed technology — net of accumulated amortization —2021 — $203,308 and 2020 — $193,164 | |
| 307,713 | |
| 318,059 | ||||||
Other — net of accumulated amortization — 2021 — $59,025 and 2020 — $56,943 | |
| 48,312 | |
| 49,856 | ||||||
Developed technology — net of accumulated amortization — 2022 — $244,017 and 2021 — $234,016 | |
| 264,839 | |
| 276,833 | ||||||
Other — net of accumulated amortization — 2022 — $66,924 and 2021 — $65,053 | |
| 40,899 | |
| 42,436 | ||||||
Goodwill | |
| 362,500 | |
| 363,533 | |
| 361,456 | |
| 361,741 |
Deferred income tax assets | |
| 4,529 | |
| 4,597 | |
| 6,179 | |
| 6,080 |
Right-of-use operating lease assets | | | 74,714 | | | 78,240 | | | 64,659 | | | 65,913 |
Other assets | |
| 37,286 | |
| 37,676 | |
| 41,707 | |
| 41,421 |
Total other assets | |
| 835,054 | |
| 851,961 | |
| 779,739 | |
| 794,424 |
| | | | | | | | | | | | |
TOTAL ASSETS | | $ | 1,651,719 | | $ | 1,664,396 | ||||||
Total assets | | $ | 1,629,740 | | $ | 1,648,294 |
| |
See condensed notes to consolidated financial statements. | (continued) |
3
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2021 AND DECEMBER 31, 2020
(In thousands)
| | | | | | | | | | | | |
|
| March 31, |
| December 31, |
| March 31, |
| December 31, | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | | (unaudited) | | | | | | (unaudited) | | | |
CURRENT LIABILITIES: |
| |
| | |
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Current liabilities: |
| |
| | |
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Trade payables | | $ | 52,986 | | $ | 49,837 | | $ | 58,099 | | $ | 55,624 |
Accrued expenses | |
| 132,173 | |
| 111,944 | |
| 122,394 | |
| 159,014 |
Current portion of long-term debt | |
| 7,500 | |
| 7,500 | |
| 9,375 | |
| 8,438 |
Short-term operating lease liabilities | | | 12,246 | | | 12,903 | | | 10,304 | | | 10,668 |
Income taxes payable | |
| 2,773 | |
| 2,820 | |
| 3,659 | |
| 2,536 |
Total current liabilities | |
| 207,678 | |
| 185,004 | |
| 203,831 | |
| 236,280 |
| | | | | | | | | | | | |
Long-term debt | |
| 312,875 | |
| 343,722 | |
| 243,112 | |
| 234,397 |
Deferred income tax liabilities | |
| 33,252 | |
| 33,312 | |
| 31,491 | |
| 31,503 |
Long-term income taxes payable | |
| 347 | |
| 347 | |
| 347 | |
| 347 |
Liabilities related to unrecognized tax benefits | |
| 1,016 | |
| 1,016 | |
| 932 | |
| 932 |
Deferred compensation payable | |
| 16,227 | |
| 16,808 | |
| 16,804 | |
| 18,111 |
Deferred credits | |
| 1,896 | |
| 1,923 | |
| 1,788 | |
| 1,815 |
Long-term operating lease liabilities | | | 67,980 | |
| 70,941 | | | 60,366 | |
| 61,526 |
Other long-term obligations | |
| 33,756 | |
| 52,748 | |
| 14,550 | |
| 23,584 |
Total liabilities | |
| 675,027 | |
| 705,821 | |
| 573,221 | |
| 608,495 |
| | | | | | | | | | | | |
Commitments and contingencies | |
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STOCKHOLDERS’ EQUITY: | |
|
| |
|
| ||||||
Preferred stock — 5,000 shares authorized as of March 31, 2021 and December 31, 2020; 0 shares issued | |
| 0 | |
| 0 | ||||||
Common stock, 0 par value; shares authorized — 2021 and 2020 - 100,000; issued and outstanding as of March 31, 2021 - 55,933 and December 31, 2020 - 55,623 | |
| 615,113 | |
| 606,224 | ||||||
Stockholders' equity: | |
|
| |
|
| ||||||
Preferred stock — 5,000 shares authorized as of March 31, 2022 and December 31, 2021; 0 shares issued | |
| — | |
| — | ||||||
Common stock, 0 par value; shares authorized — 2022 and 2021 - 100,000; issued and outstanding as of March 31, 2022 - 56,655 and December 31, 2021 - 56,570 | |
| 646,370 | |
| 641,533 | ||||||
Retained earnings | |
| 368,761 | |
| 357,803 | |
| 416,802 | |
| 406,257 |
Accumulated other comprehensive loss | |
| (7,182) | |
| (5,452) | |
| (6,653) | |
| (7,991) |
Total stockholders’ equity | |
| 976,692 | |
| 958,575 | |
| 1,056,519 | |
| 1,039,799 |
| | | | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 1,651,719 | | $ | 1,664,396 | ||||||
Total liabilities and stockholders’ equity | | $ | 1,629,740 | | $ | 1,648,294 |
| |
See condensed notes to consolidated financial statements. | (concluded) |
4
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(In thousands, except per share amounts - unaudited)
| | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
NET SALES | | $ | 248,913 | | $ | 243,525 | ||||||
Net sales | | $ | 275,415 | | $ | 248,913 | ||||||
Cost of sales | |
| 154,508 | |
| 137,019 | ||||||
Gross profit | |
| 120,907 | |
| 111,894 | ||||||
| | | | | | | | | | | | |
COST OF SALES | |
| 137,019 | |
| 139,741 | ||||||
| | | | | | | ||||||
GROSS PROFIT | |
| 111,894 | |
| 103,784 | ||||||
| | | | | | | ||||||
OPERATING EXPENSES: | |
|
| |
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| ||||||
Operating expenses: | |
|
| |
|
| ||||||
Selling, general and administrative | |
| 81,024 | |
| 78,808 | |
| 84,015 | |
| 81,024 |
Research and development | |
| 16,274 | |
| 14,872 | |
| 17,387 | |
| 16,274 |
Impairment charges | |
| 0 | |
| 3,845 | |
| 1,672 | |
| 0 |
Contingent consideration expense | |
| 402 | |
| 4,897 | |
| 2,600 | |
| 402 |
| | | | | | | ||||||
Total operating expenses | |
| 97,700 | |
| 102,422 | |
| 105,674 | |
| 97,700 |
| | | | | | | | | | | | |
INCOME FROM OPERATIONS | |
| 14,194 | |
| 1,362 | ||||||
Income from operations | |
| 15,233 | |
| 14,194 | ||||||
| | | | | | | | | | | | |
OTHER INCOME (EXPENSE): | |
|
| |
|
| ||||||
Other income (expense): | |
|
| |
|
| ||||||
Interest income | |
| 472 | |
| 79 | |
| 104 | |
| 472 |
Interest expense | |
| (1,537) | |
| (3,144) | |
| (1,002) | |
| (1,537) |
Other expense — net | |
| (435) | |
| (289) | |
| (164) | |
| (435) |
| | | | | | | ||||||
Total other expense — net | |
| (1,500) | |
| (3,354) | |
| (1,062) | |
| (1,500) |
| | | | | | | | | | | | |
INCOME (LOSS) BEFORE INCOME TAXES | |
| 12,694 | |
| (1,992) | ||||||
Income before income taxes | |
| 14,171 | |
| 12,694 | ||||||
| | | | | | | | | | | | |
INCOME TAX EXPENSE | |
| 1,736 | |
| 1,162 | ||||||
Income tax expense | |
| 3,626 | |
| 1,736 | ||||||
| | | | | | | | | | | | |
NET INCOME (LOSS) | | $ | 10,958 | | $ | (3,154) | ||||||
Net income | | $ | 10,545 | | $ | 10,958 | ||||||
| | | | | | | | | | | | |
EARNINGS (LOSS) PER COMMON SHARE: | |
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Earnings per common share | |
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Basic | | $ | 0.20 | | $ | (0.06) | | $ | 0.19 | | $ | 0.20 |
| | | | | | | ||||||
Diluted | | $ | 0.19 | | $ | (0.06) | | $ | 0.18 | | $ | 0.19 |
| | | | | | | | | | | | |
WEIGHTED AVERAGE SHARES OUTSTANDING: | |
|
| |
|
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Weighted average shares outstanding | |
|
| |
|
| ||||||
Basic | |
| 55,717 | |
| 55,246 | |
| 56,593 | |
| 55,717 |
| | | | | | | ||||||
Diluted | |
| 56,978 | |
| 55,246 | |
| 57,531 | |
| 56,978 |
See condensed notes to consolidated financial statements.
5
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(In thousands - unaudited)
| | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Net income (loss) | | $ | 10,958 | | $ | (3,154) | ||||||
Net income | | $ | 10,545 | | $ | 10,958 | ||||||
Other comprehensive income (loss): | |
|
| |
|
| |
|
| |
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|
Cash flow hedges | |
| 2,921 | |
| (7,182) | |
| 2,907 | |
| 2,921 |
Income tax benefit (expense) | |
| (724) | |
| 1,849 | |
| (712) | |
| (724) |
Foreign currency translation adjustment | |
| (4,462) | |
| (4,125) | |
| (793) | |
| (4,462) |
Income tax benefit (expense) | |
| 535 | |
| (7) | |
| (64) | |
| 535 |
Total other comprehensive loss | |
| (1,730) | |
| (9,465) | ||||||
Total comprehensive income (loss) | | $ | 9,228 | | $ | (12,619) | ||||||
Total other comprehensive income (loss) | |
| 1,338 | |
| (1,730) | ||||||
Total comprehensive income | | $ | 11,883 | | $ | 9,228 |
See condensed notes to consolidated financial statements.
6
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(In thousands - unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Common Stock | | Retained | | Accumulated Other | | | | ||||||
| | | | | Common Stock | | Retained | | Accumulated Other |
| Shares |
| Amount |
| Earnings |
| Comprehensive Income (Loss) |
| Total | |||||||||
|
| Total |
| Shares |
| Amount |
| Earnings |
| Comprehensive Loss | ||||||||||||||||||
BALANCE — January 1, 2021 | | $ | 958,575 |
| 55,623 | | $ | 606,224 | | $ | 357,803 | | $ | (5,452) | ||||||||||||||
Balance — January 1, 2022 |
| 56,570 | | $ | 641,533 | | $ | 406,257 | | $ | (7,991) | | $ | 1,039,799 | ||||||||||||||
Net income | |
| 10,958 |
|
| |
|
| |
| 10,958 | |
|
|
|
| |
|
| |
| 10,545 | |
|
| |
| 10,545 |
Other comprehensive loss | |
| (1,730) |
|
| |
|
| |
|
| |
| (1,730) | ||||||||||||||
Other comprehensive income |
|
| |
|
| |
|
| |
| 1,338 | |
| 1,338 | ||||||||||||||
Stock-based compensation expense | |
| 3,310 |
|
| |
| 3,310 | |
|
| |
|
|
|
| |
| 4,212 | |
|
| |
|
| |
| 4,212 |
Options exercised | |
| 5,897 |
| 291 | |
| 5,897 | |
|
| |
|
|
| 52 | |
| 1,320 | |
|
| |
|
| |
| 1,320 |
Issuance of common stock under Employee Stock Purchase Plan | |
| 263 |
| 5 | |
| 263 | |
|
| |
|
|
| 5 | |
| 320 | |
|
| |
|
| |
| 320 |
Shares issued from time-vested restricted stock units | | | — | | 25 | | | — | | | | | | | | 44 | | | — | | | | | | | | | — |
Shares surrendered in exchange for payment of payroll tax liabilities | | | (488) |
| (9) | |
| (488) | | | | | | |
| (16) | |
| (1,015) | | | | | | | | | (1,015) |
Shares surrendered in exchange for exercise of stock options | | | (93) |
| (2) | |
| (93) | | | | | | | ||||||||||||||
BALANCE — March 31, 2021 | | $ | 976,692 |
| 55,933 | | $ | 615,113 | | $ | 368,761 | | $ | (7,182) | ||||||||||||||
Balance — March 31, 2022 |
| 56,655 | | $ | 646,370 | | $ | 416,802 | | $ | (6,653) | | $ | 1,056,519 |
| | | | | | | | | | | | | | |
| | | | | 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) |
| | | | | | | | | | | | | | |
| | 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 |
| |
See condensed notes to consolidated financial statements. | (concluded) |
7
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(In thousands - unaudited)
| | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
| | | |
| | | | ||||
Net income (loss) | | $ | 10,958 | | $ | (3,154) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
|
| |
|
| ||||||
Net income | | $ | 10,545 | | $ | 10,958 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
|
| ||||||
Depreciation and amortization | |
| 21,400 | |
| 23,320 | |
| 20,466 | |
| 21,400 |
Loss on sales and/or abandonment of property and equipment | |
| (28) | |
| 37 | ||||||
Loss (gain) on sales and/or abandonment of property and equipment | |
| 94 | |
| (28) | ||||||
Write-off of certain intangible assets and other long-term assets | |
| — | |
| 3,925 | |
| 1,672 | |
| — |
Amortization of right-of-use operating lease assets | | | 3,070 | | | 3,134 | | | 2,584 | | | 3,070 |
Fair value adjustments to contingent consideration | | | 402 | | | 4,897 | | | 2,600 | | | 402 |
Amortization of deferred credits | |
| (27) | |
| (35) | |
| (27) | |
| (27) |
Amortization of long-term debt issuance costs | |
| 151 | |
| 151 | |
| 151 | |
| 151 |
Stock-based compensation expense | |
| 3,595 | |
| 2,777 | |
| 4,642 | |
| 3,595 |
Changes in operating assets and liabilities, net of acquisitions and divestitures: | |
| | |
| | |
| | |
| |
Trade receivables | |
| (5,284) | |
| 3,445 | |
| (3,851) | |
| (5,284) |
Other receivables | |
| (597) | |
| 613 | |
| 5,854 | |
| (597) |
Inventories | |
| (3,396) | |
| (4,983) | |
| (9,177) | |
| (3,396) |
Prepaid expenses and other current assets | |
| (1,071) | |
| (3,126) | |
| (1,307) | |
| (1,071) |
Income tax refund receivables | |
| 199 | |
| (2,475) | |
| 196 | |
| 199 |
Other assets | |
| 80 | |
| (577) | |
| 833 | |
| 80 |
Trade payables | |
| 4,237 | |
| 4,340 | |
| 2,670 | |
| 4,237 |
Accrued expenses | |
| 5,393 | |
| (1,621) | |
| (23,508) | |
| 5,393 |
Income taxes payable | |
| (174) | |
| 2,109 | |
| 1,147 | |
| (174) |
Deferred compensation payable | |
| (581) | |
| (789) | |
| (1,307) | |
| (581) |
Operating lease liabilities | | | (3,151) | | | (2,945) | | | (2,841) | | | (3,151) |
Other long-term obligations | |
| 56 | |
| (179) | |
| 574 | |
| 56 |
Total adjustments | |
| 24,274 | |
| 32,018 | |
| 1,465 | |
| 24,274 |
Net cash provided by operating activities | |
| 35,232 | |
| 28,864 | ||||||
Net cash, cash equivalents, and restricted cash provided by operating activities | |
| 12,010 | |
| 35,232 | ||||||
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
|
| |
|
| |
|
| |
|
|
Capital expenditures for: | |
|
| |
|
| |
|
| |
|
|
Property and equipment | |
| (6,171) | |
| (13,950) | |
| (9,526) | |
| (6,171) |
Intangible assets | |
| (692) | |
| (1,062) | |
| (342) | |
| (692) |
Proceeds from the sale of property and equipment | |
| 873 | |
| — | |
| — | |
| 873 |
Cash received for settlement of current note receivable | | | — | | | 250 | ||||||
Cash paid in acquisitions, net of cash acquired | |
| (358) | |
| — | |
| — | |
| (358) |
Net cash used in investing activities | | $ | (6,348) | | $ | (14,762) | ||||||
Net cash, cash equivalents, and restricted cash used in investing activities | | $ | (9,868) | | $ | (6,348) |
| |
See condensed notes to consolidated financial statements. | (continued)
|
8
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(In thousands - unaudited)
| | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
| | 2021 | | 2020 | | 2022 | | 2021 | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
| | | |
| | | | ||||
Proceeds from issuance of common stock | | $ | 5,520 | | $ | 1,261 | | $ | 1,641 | | $ | 5,520 |
Proceeds from issuance of long-term debt | |
| 9,694 | |
| 30,665 | |
| 80,524 | |
| 9,694 |
Payments on long-term debt | | | (40,569) | | | (24,540) | | | (70,899) | | | (40,569) |
Contingent payments related to acquisitions | |
| (403) | |
| (12,754) | |
| (24,491) | |
| (403) |
Payment of taxes related to an exchange of common stock | |
| (488) | |
| (866) | |
| (1,015) | |
| (488) |
Net cash used in financing activities | |
| (26,246) | |
| (6,234) | ||||||
Net cash, cash equivalents, and restricted cash used in financing activities | |
| (14,240) | |
| (26,246) | ||||||
Effect of exchange rates on cash, cash equivalents, and restricted cash | |
| 111 | |
| (1,035) | ||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| (11,987) | |
| 1,603 | ||||||
| | | | | | | | | | | | |
EFFECT OF EXCHANGE RATES ON CASH | |
| (1,035) | |
| (2,108) | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | |
|
| |
|
| ||||||
Beginning of period | |
| 67,750 | |
| 56,916 | ||||||
End of period | | $ | 55,763 | | $ | 58,519 | ||||||
| | | | | | | | | | | | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | |
| 1,603 | |
| 5,760 | ||||||
| | | | | | | ||||||
CASH AND CASH EQUIVALENTS: | |
|
| |
|
| ||||||
Beginning of period | |
| 56,916 | |
| 44,320 | ||||||
| | | | | | | ||||||
End of period | | $ | 58,519 | | $ | 50,080 | ||||||
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS: | | | | | | | ||||||
Cash and cash equivalents | | | 53,875 | | | 58,519 | ||||||
Restricted cash reported in prepaid expenses and other current assets | | | 1,888 | | | — | ||||||
Total cash, cash equivalents and restricted cash | | $ | 55,763 | | $ | 58,519 | ||||||
| | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |
|
| |
|
| |
|
| |
|
|
Cash paid during the period for: | |
|
| |
|
| |
|
| |
|
|
Interest (net of capitalized interest of $120 and $392, respectively) | | $ | 1,539 | | $ | 3,198 | ||||||
| | | | | | | ||||||
Interest (net of capitalized interest of $126 and $120, respectively) | | $ | 993 | | $ | 1,539 | ||||||
Income taxes | | $ | 1,660 | | $ | 1,637 | | | 2,411 | | | 1,660 |
| | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES | |
|
| |
|
| |
|
| |
|
|
Property and equipment purchases in accounts payable | | $ | 1,688 | | $ | 5,383 | | $ | 2,442 | | $ | 1,688 |
| | | | | | | ||||||
Current note receivable converted to equity investment | | $ | — | | $ | 899 | ||||||
| | | | | | | ||||||
Merit common stock surrendered (2 and 39 shares, respectively) in exchange for exercise of stock options | | $ | 93 | | $ | 1,467 | ||||||
| | | | | | | ||||||
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 | | $ | 131 | | $ | 2,800 | | | 1,404 | | | 131 |
| |
See condensed notes to consolidated financial statements. | (concluded) |
9
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 monthsthree-month periods ended March 31, 20212022 and 20202021 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 March 31, 20212022 and December 31, 2020,2021, and our results of operations and cash flows for the three-month periods ended March 31, 20212022 and 2020.2021. The results of operations for the three-month periods ended March 31, 20212022 and 20202021 are not necessarily indicative of the results for a full-year period. PercentagesAmounts 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, 20202021 (the “2020“2021 Annual Report on Form 10-K”).
2. Recently Issued Financial Accounting Standards.
Not Yet Adopted
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardStandards 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 amends the scope of ASU 2020-04. ASU 2020-04 and ASU 2021-01 were effective as of March 12, 2020, and the provisions of these updates may be applied prospectively to transactions through December 31, 2022. 2022, when reference rate reform activity is expected to be completed. As of March 31, 2021,2022, 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 20202021 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 2 operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of 4 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.
10
The following tables present revenue from contracts with customers by reporting segment, product category and geographical region for the three-month periods ended March 31, 20212022 and 20202021 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | ||||||||||||||
| | March 31, 2021 | | March 31, 2020 | ||||||||||||||
|
| United States |
| International |
| Total |
| United States |
| International |
| Total | ||||||
Cardiovascular |
| |
|
| | |
| |
|
| |
|
| |
|
| |
|
Peripheral Intervention | | $ | 56,866 | | $ | 36,048 | | $ | 92,914 | | $ | 55,803 | | $ | 31,272 | | $ | 87,075 |
Cardiac Intervention | |
| 29,251 | | | 45,486 | |
| 74,737 | |
| 28,595 | | | 43,996 | |
| 72,591 |
Custom Procedural Solutions | |
| 24,892 | | | 20,529 | |
| 45,421 | |
| 25,414 | | | 22,207 | |
| 47,621 |
OEM | |
| 22,890 | | | 5,044 | |
| 27,934 | |
| 23,666 | | | 4,591 | |
| 28,257 |
Total | |
| 133,899 | | | 107,107 | |
| 241,006 | |
| 133,478 | |
| 102,066 | |
| 235,544 |
| |
| | | | | | | | | | | | | | | | |
Endoscopy | | | | | | | | | | | | | | | | | | |
Endoscopy devices | |
| 7,473 | |
| 434 | |
| 7,907 | |
| 7,578 | |
| 403 | |
| 7,981 |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 141,372 | | $ | 107,541 | | $ | 248,913 | | $ | 141,056 | | $ | 102,469 | | $ | 243,525 |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | ||||||||||||||
| | March 31, 2022 | | March 31, 2021 | ||||||||||||||
|
| United States |
| International |
| Total |
| United States |
| International |
| Total | ||||||
Cardiovascular |
| |
|
| | |
| |
|
| |
|
| |
|
| |
|
Peripheral Intervention | | $ | 62,100 | | $ | 43,673 | | $ | 105,773 | | $ | 56,866 | | $ | 36,048 | | $ | 92,914 |
Cardiac Intervention | |
| 28,549 | | | 52,938 | |
| 81,487 | |
| 29,251 | |
| 45,486 | |
| 74,737 |
Custom Procedural Solutions | |
| 26,555 | | | 19,707 | |
| 46,262 | |
| 24,892 | |
| 20,529 | |
| 45,421 |
OEM | |
| 27,796 | | | 5,618 | |
| 33,414 | |
| 22,890 | |
| 5,044 | |
| 27,934 |
Total | |
| 145,000 | | | 121,936 | |
| 266,936 | |
| 133,899 | |
| 107,107 | |
| 241,006 |
| |
| | | | | | | | | | | | | | | | |
Endoscopy | | | | | | | | | | | | | | | | | | |
Endoscopy devices | |
| 7,992 | |
| 487 | |
| 8,479 | |
| 7,473 | |
| 434 | |
| 7,907 |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 152,992 | | $ | 122,423 | | $ | 275,415 | | $ | 141,372 | | $ | 107,541 | | $ | 248,913 |
4. Acquisitions. On November 6, 2020, we entered into a unit purchase agreement to acquire KA Medical, LLC (“KA Medical”). Subject to the terms and conditions of the unit purchase agreement, we paid $10.4 million in cash at closing, net of cash acquired, subject to adjustments for working capital and other matters, with an additional $4 million payable no later than 12 months following the agreement. KA Medical developed the Micro PlugTM Set, a self-expanding nitinol vascular occlusion device, which is FDA-cleared in the US and CE marked in Europe. We accounted for this acquisition as a business combination. The sales and results of operations related to the acquisition have been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs associated with the KA Medical acquisition, which were included in selling,general and administrative expenses, were not material. The purchase price was preliminarily allocated as follows (in thousands):
| | | |
Assets Acquired |
| |
|
Trade receivables | | $ | 24 |
Other receivables | | | 13 |
Inventories | |
| 216 |
Property and equipment | | | 298 |
Other long-term assets | | | 147 |
Intangible assets | |
| |
Developed technology | | | 6,000 |
Goodwill | | | 8,283 |
Total assets acquired | |
| 14,981 |
| | | |
Liabilities Assumed | |
|
|
Trade payables | |
| (31) |
Accrued expenses | |
| (507) |
Total liabilities assumed | |
| (538) |
| | | |
Total net assets acquired | | $ | 14,443 |
We are amortizing the developed technology intangible asset acquired from KA Medical over 17 years. The goodwill consists largely of the synergies expected from combining operations and is expected to be deductible for income tax purposes. The pro forma impact of the KA Medical acquisition was not significant to our financial results for the three-month period ended March 31, 2020. Operating results attributable to the KA Medical acquisition were included in our consolidated statements of income (loss) for the three-month period ended March 31, 2021.
11
5.4. Inventories. Inventories at March 31, 20212022 and December 31, 20202021 consisted of the following (in thousands):
| | | | | | | | | | | | |
|
| March 31, 2021 |
| December 31, 2020 |
| March 31, 2022 |
| December 31, 2021 | ||||
Finished goods | | $ | 120,969 | | $ | 110,933 | | $ | 130,500 | | $ | 132,403 |
Work-in-process | |
| 24,750 | |
| 19,308 | |
| 32,512 | |
| 22,160 |
Raw materials | |
| 54,589 | |
| 67,778 | |
| 68,439 | |
| 67,359 |
Total inventories | | $ | 200,308 | | $ | 198,019 | | $ | 231,451 | | $ | 221,922 |
5. Goodwill and Intangible Assets. The change in the carrying amount of goodwill for the three-month period ended March 31, 2022 is detailed as follows (in thousands):
| | | |
|
| 2022 | |
Goodwill balance at January 1 | | $ | 361,741 |
Effect of foreign exchange | |
| (285) |
Goodwill balance at March 31 | | $ | 361,456 |
Total accumulated goodwill impairment losses aggregated to $8.3 million as of March 31, 2022 and December 31, 2021. We did 0t have any goodwill impairments for the three-month periods ended March 31, 2022 and 2021. The total goodwill balance as of March 31, 2022 and December 31, 2021 was related to our cardiovascular segment.
Other intangible assets at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
| | | | | | | | | |
| | March 31, 2022 | |||||||
| | Gross Carrying | | Accumulated | | Net Carrying | |||
|
| Amount |
| Amortization |
| Amount | |||
Patents | | $ | 26,691 | | $ | (8,788) | | $ | 17,903 |
Distribution agreements | |
| 3,250 | |
| (2,569) | |
| 681 |
License agreements | |
| 12,725 | |
| (8,098) | |
| 4,627 |
Trademarks | |
| 30,238 | |
| (15,920) | |
| 14,318 |
Customer lists | |
| 34,919 | |
| (31,549) | |
| 3,370 |
Total | | $ | 107,823 | | $ | (66,924) | | $ | 40,899 |
11
6. Goodwill and Intangible Assets. The change in the carrying amount of goodwill for the three-month period ended March 31, 2021 is detailed as follows (in thousands):
| | | |
|
| March 31, 2021 | |
Goodwill balance at January 1 | | $ | 363,533 |
Effect of foreign exchange | |
| (1,033) |
Goodwill balance at March 31 | | $ | 362,500 |
| | | | | | | | | |
| | December 31, 2021 | |||||||
| | Gross Carrying | | Accumulated | | Net Carrying | |||
|
| Amount |
| Amortization |
| Amount | |||
Patents | | $ | 26,349 | | $ | (8,315) | | $ | 18,034 |
Distribution agreements | |
| 3,250 | |
| (2,519) | |
| 731 |
License agreements | |
| 12,663 | |
| (7,768) | |
| 4,895 |
Trademarks | |
| 30,242 | |
| (15,256) | |
| 14,986 |
Customer lists | |
| 34,985 | |
| (31,195) | |
| 3,790 |
Total | | $ | 107,489 | | $ | (65,053) | | $ | 42,436 |
Total accumulated goodwill impairment losses aggregated to approximately $8.3 million as of March 31, 2021 and December 31, 2020. We did 0t have any goodwill impairmentsAggregate amortization expense for the three-month periods ended March 31, 2022 and 2021 and 2020. The total goodwill balance as of March 31, 2021 and December 31, 2020 was related to our cardiovascular segment.
Other intangible assets at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):
| | | | | | | | | |
| | March 31, 2021 | |||||||
| | Gross Carrying | | Accumulated | | Net Carrying | |||
|
| Amount |
| Amortization |
| Amount | |||
Patents | | $ | 24,362 | | $ | (6,929) | | $ | 17,433 |
Distribution agreements | |
| 3,250 | |
| (2,369) | |
| 881 |
License agreements | |
| 14,418 | |
| (7,010) | |
| 7,408 |
Trademarks | |
| 30,255 | |
| (13,131) | |
| 17,124 |
Customer lists | |
| 35,052 | |
| (29,586) | |
| 5,466 |
Total | | $ | 107,337 | | $ | (59,025) | | $ | 48,312 |
| | | | | | | | | |
| | December 31, 2020 | |||||||
| | Gross Carrying | | Accumulated | | Net Carrying | |||
|
| Amount |
| Amortization |
| Amount | |||
Patents | | $ | 23,669 | | $ | (6,460) | | $ | 17,209 |
Distribution agreements | |
| 3,250 | |
| (2,319) | |
| 931 |
License agreements | |
| 14,453 | |
| (6,647) | |
| 7,806 |
Trademarks | |
| 30,273 | |
| (12,414) | |
| 17,859 |
Customer lists | |
| 35,154 | |
| (29,103) | |
| 6,051 |
Total | | $ | 106,799 | | $ | (56,943) | | $ | 49,856 |
Aggregate amortization expense the three-month periods ended March 31, 2021 and 2020 was approximately $12.5$12.2 million and $15.0$12.5 million, respectively.
We evaluate long-lived assets, including amortizing intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We perform the impairment analysis at the asset group for which the lowest level of identifiable cash flows is largely independent of the cash flows of other assets and liabilities. We determine the fair value of our amortizing assets based on estimated future cash flows discounted back to their present value using a discount rate that reflects the risk profiles of the underlying activities. During the three-month period ended March 31, 2022, we identified indicators of impairment associated with certain acquired intangible assets based on our qualitative assessment, which led us to complete an interim quantitative impairment assessment. The primary indicator of impairment was our planned divestiture of the STD Pharmaceutical Products Limited (“STD Pharmaceutical”) business acquired in our August 2019 acquisition of Fibrovein Holdings Limited. On April 30, 2022, we completed the divestiture of Fibrovein Holdings Limited, in exchange for the termination of our obligations arising from the acquisition transaction in August 2019 and the purchaser’s agreement to make potential future payments upon a qualifying disposition of the STD Pharmaceutical business. We recorded an impairment charge for the carrying value of $1.7 million of intangible assets during the three months ended March 31, 2022, all of which pertained to our cardiovascular segment.
We did 0t identify indicators of impairment in any intangible assets based on our qualitative assessment for the three-month periodsperiod ended March 31, 2021 and 2020.2021.
12
Estimated amortization expense for the developed technology and other intangible assets for the next five years consisted of the following as of March 31, 20212022 (in thousands):
| | | | | | |
Year Ending December 31, |
| Estimated Amortization Expense |
| Estimated Amortization Expense | ||
Remaining 2021 | | $ | 37,320 | |||
2022 | |
| 48,634 | |||
Remaining 2022 | | $ | 35,932 | |||
2023 | |
| 47,454 | |
| 46,894 |
2024 | | | 44,404 | |
| 43,959 |
2025 | |
| 42,548 | | | 42,185 |
2026 | |
| 31,634 |
7.6. Income Taxes. Our provision for income taxes for the three-month periods ended March 31, 20212022 and 20202021 was a tax expense of approximately $1.7$3.6 million and $1.2$1.7 million, respectively, which resulted in an effective tax rate of 13.7%25.6% and (58.3)%13.7%, respectively. The increase in the income tax expense and the corresponding change in the effective income tax rate for the three-month period ended March 31, 2021,2022, when compared to the prior-year period, was primarily due to a pre-tax loss during the 2020 period,decreased benefit from discrete items such as well as a change in the jurisdictional mix of earnings.share-based compensation. Our effective tax rate differs from the U.S. statutory rate primarily due to the impact of global intangible low-taxed income (“GILTI”) inclusions, state income taxes, foreign taxes, other non-deductible permanent items and discrete items (such as share-based compensation).
8.
7. Revolving Credit Facility and Long-Term Debt. Principal balances outstanding under our long-term debt obligations as of March 31, 20212022 and December 31, 20202021 consisted of the following (in thousands):
| | | | | | |
|
| March 31, 2021 |
| December 31, 2020 | ||
Term loans | | $ | 138,750 | | $ | 140,625 |
Revolving credit loans | |
| 182,000 | |
| 211,000 |
Less unamortized debt issuance costs | |
| (375) | |
| (403) |
Total long-term debt | |
| 320,375 | |
| 351,222 |
Less current portion | |
| 7,500 | |
| 7,500 |
Long-term portion | | $ | 312,875 | | $ | 343,722 |
12
| | | | | | |
|
| March 31, 2022 |
| December 31, 2021 | ||
Term loans | | $ | 131,250 | | $ | 133,125 |
Revolving credit loans | |
| 121,500 | |
| 110,000 |
Less unamortized debt issuance costs | |
| (263) | |
| (290) |
Total long-term debt | |
| 252,487 | |
| 242,835 |
Less current portion | |
| 9,375 | |
| 8,438 |
Long-term portion | | $ | 243,112 | | $ | 234,397 |
Third Amended and Restated Credit Agreement
On July 31, 2019, we entered into a Third Amended and Restated Credit Agreement (the "Third Amended Credit Agreement"). The Third Amended Credit Agreement is a syndicated loan agreement with Wells Fargo Bank, National Association and other parties. The Third Amended Credit Agreement amends and restates in its entirety our previously outstanding Second Amended and Restated Credit Agreement and all amendments thereto. The Third Amended Credit Agreement provides for a term loan of $150 million and a revolving credit commitment up to an aggregate amount of $600 million, inclusive of sub-facilities for multicurrency borrowings, standby letters of credit and swingline loans. On July 31, 2024, all principal, interest and other amounts outstanding under the Third Amended Credit Agreement are payable in full. At any time prior to the maturity date, we may repay any amounts owing under all term loans and revolving credit loans in whole or in part, without premium or penalty, other than breakage fees (as defined in the Third Amended Credit Agreement).
Revolving credit loans denominated in dollars and term loans made under the Third Amended Credit Agreement bear interest, at our election, at either the Base Rate or the Eurocurrency Rate (as such terms are defined in the Third Amended Credit Agreement) plus the Applicable Margin (as defined in the Third Amended Credit Agreement). Revolving credit loans denominated in an Alternative Currency (as defined in the Third Amended Credit Agreement) bear interest at the Eurocurrency Rate plus the Applicable Margin. Swingline loans bear interest at the Base Rate plus the Applicable Margin (as defined in the Third Amended Credit Agreement). Interest on each Base Rate loan is due and payable on the last business day of each calendar quarter; interest on each Eurocurrency Rate loan is due and payable on the last day of each interest period applicable thereto, and if such interest period extends over three months, at the end of each three-month interval during such interest period.
13
The Third Amended Credit Agreement is collateralized by substantially all our assets. The Third Amended Credit Agreement contains affirmative and negative covenants, representations and warranties, events of default and other terms customary for loans of this nature. In particular, the Third Amended Credit Agreement requires that we maintain certain financial covenants, as follows:
| | | | |
|
| Covenant Requirement | | |
Consolidated Total Leverage Ratio (1) |
| | 4.0 to 1.0 | |
Consolidated Interest Coverage Ratio (2) |
| | 3.0 to 1.0 | |
Facility Capital Expenditures (3) | | | $50 million | |
(1) | Maximum Consolidated Total Net Leverage Ratio (as defined in the Third Amended Credit Agreement) as of any fiscal quarter end. |
(2) | Minimum ratio of Consolidated EBITDA (as defined in the Third Amended Credit Agreement and adjusted for certain expenditures) to Consolidated |
(3) | Maximum level of the aggregate amount of all Facility Capital Expenditures (as defined in the Third Amended Credit Agreement) in any fiscal year. |
We believe we were in compliance with all covenants set forth in the Third Amended Credit Agreement as of March 31, 2021.2022.
As of March 31, 2021,2022, we had outstanding borrowings of approximately $320.8$253 million and issued letter of credit guarantees of $3.4 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $418$475 million, based
13
on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Third Amended Credit Agreement. Our interest rate as of March 31, 20212022 was a fixed rate of 2.12%2.71% on $175$75 million as a result of an interest rate swap (see Note 9)8) and a variable floating rate of 1.11%1.46% on $145.8$177.8 million. Our interest rate as of December 31, 20202021 was a fixed rate of 2.37%2.71% on $175$75 million as a result of an interest rate swap and a variable floating rate of 1.40%1.10% on $176.6$168.1 million. The foregoing fixed rates are exclusive of changes in the notional amount and fixed rate associated with our interest rate swaps beginning July 6, 2021 as described in Note 9 anddo not reflect potential future changes in the applicable margin.
Future minimum principal payments on our long-term debt, as of March 31, 2021,2022, were as follows (in thousands):
| | | | | | |
Years Ending | | Future Minimum | | Future Minimum | ||
December 31, |
| Principal Payments |
| Principal Payments | ||
Remaining 2021 |
| $ | 5,625 | |||
2022 | | | 8,438 | |||
Remaining 2022 |
| $ | 6,562 | |||
2023 | | | 11,250 | | | 11,250 |
2024 | | | 295,437 | | | 234,938 |
Total future minimum principal payments | | $ | 320,750 | | $ | 252,750 |
9.8. Derivatives.
General. Our earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates, and we seek to mitigate a portion of the risks attributable to those fluctuations by entering into derivative contracts. The derivativesderivative instruments we use are interest rate swaps and foreign currency forward contracts. We recognize derivativesderivative instruments as either assets or liabilities at fair value in the accompanying consolidated balance sheets, regardless of whether or not hedge accounting is applied. We report cash flows arising from our hedging instruments consistent with the classification of cash flows from the underlying hedged items. Accordingly, cash flows associated with our derivative contracts are classified as operating activities in the accompanying consolidated statements of cash flows.
We formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment initially and on an ongoing basis. For qualifying hedges, the change in fair value is deferred in accumulated other comprehensive income, a component of stockholders’ equity in the accompanying consolidated balance sheets, and recognized in earnings at the same time the hedged item affects earnings. Changes in the fair value of derivativesderivative instruments not designated as hedging instruments are recorded in earnings throughout the term of the derivative.
14
Interest Rate Risk. Our debt bears interest at variable interest rates. Therefore, we are subject to variability in the cash paidpayable for interest expense. In order to mitigate a portion of the risk attributable to thatsuch variability, we use a hedging strategy to reduce the variability of cash flows in the interest payments associated with a portion of the variable-rate debt outstanding under our Third Amended Credit Agreement that is solely due tovaries in accordance with changes in the benchmark interest rate.
Derivative Instruments Designated as Cash Flow Hedges
On August 5, 2016, we entered into a pay-fixed, receive-variable interest rate swap with a current notional amount of $175 million with Wells Fargo to fix the one-month LIBOR rate at 1.12%. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). On a monthly basis, the interest rates under both the interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid. The interest rate swap is scheduled to expire on July 6, 2021.
On December 23, 2019, we entered into a pay-fixed, receive-variable interest rate swap with a notional amount of $75 million with Wells Fargo to fix the one-month LIBOR rate at 1.71% for the period from July 6, 2021 to July 31, 2024. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). On a monthly basis, the interest rates under both the interest rate swap and the underlying debt will reset, the swap will beis settled with the counterparty, and interest will beis paid.
AtOn March 31, 20212022 and December 31, 2020,2021, our interest rate swapsswap qualified as a cash flow hedges.hedge. The fair value of our interest rate swaps atswap on March 31, 20212022 was a liabilityan asset of approximately $3.2$1.2 million, which was partially offset by approximately $0.8$0.3 million in deferred taxes. The fair value of our interest rate swaps atswap on December 31, 20202021 was a liability of $4.4($1.4) million, partially offset by approximately $1.1($0.4) million in deferred taxes.
14
Foreign Currency Risk. We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. Our policy is to enter into foreign currency derivative contracts with maturities of up to two years. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and balances denominated in various currencies, with our most significant exposure related to transactions and balances denominated in Chinese Renminbi Euros, British Pounds, Mexican Pesos, Brazilian Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish Krona, Canadian Dollars, Danish Krone, Japanese Yen, and South Korean Won,Euros, among others. We do not use derivative financial instruments for trading or speculative purposes. We do not believe we are subject to any credit risk contingent features related to our derivative contracts, and we seek to manage counterparty risk by allocating derivative contracts among several major financial institutions.
Derivative Instruments Designated as Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is temporarily reported as a component of other comprehensive income (loss) and then reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. We entered into forward contracts on various foreign currencies to manage the risk associated with forecasted exchange rates which impact revenues, cost of sales, and operating expenses in various international markets. The objective of the hedges is to reduce the variability of cash flows associated with the forecasted purchase or sale of the associated foreign currencies.
We enter into approximately 150100 cash flow foreign currency hedges every month. As of March 31, 20212022 and December 31, 2020,2021, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with aggregate notional amounts of approximately $128.6$141.0 million and $168.2$123.0 million, respectively.
15
Derivative Instruments Not Designated as Cash Flow Hedges
We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and we enter into foreign currency forward contracts to mitigate that exposure. We enter into approximately 2050 foreign currency fair value hedges every month. As of March 31, 20212022 and December 31, 2020,2021, we had entered into foreign currency forward contracts related to those balance sheet accounts with aggregate notional amounts of approximately $93.7$87.9 million and $74.8$86.0 million, respectively.
Balance Sheet Presentation of Derivative Instruments. As of March 31, 20212022 and December 31, 2020,2021, all derivative instruments, both those designated as hedging instruments and those that were not designated as hedging instruments, were recorded at fair value on a gross basis on our consolidated balance sheets. We are not subject to any master netting agreements.
The fair value of derivative instruments on a gross basis was as follows on the dates indicated (in thousands):
| | | | | | | | |
| | | | | ||||
Fair Value of Derivative Instruments Designated as Hedging Instruments |
| Balance Sheet Location |
| March 31, 2021 |
| December 31, 2020 | ||
Assets |
|
|
| |
|
| |
|
Foreign currency forward contracts |
| Prepaid expenses and other assets | |
| 1,247 | |
| 1,777 |
Foreign currency forward contracts |
| Other assets (long-term) | |
| 314 | |
| 424 |
| | | | | | | | |
(Liabilities) |
|
| |
|
| |
|
|
Interest rate swaps | | Accrued expenses | | | (471) | | | (896) |
Interest rate swaps | | Other long-term obligations | | | (2,733) | | | (3,462) |
Foreign currency forward contracts |
| Accrued expenses | |
| (3,302) | |
| (5,281) |
Foreign currency forward contracts |
| Other long-term obligations | |
| (432) | |
| (866) |
| | | | | | | | |
Fair Value of Derivative Instruments Not Designated as Hedging Instruments |
| Balance Sheet Location |
| March 31, 2021 |
| December 31, 2020 | ||
Assets |
|
| |
|
| |
|
|
Foreign currency forward contracts |
| Prepaid expenses and other assets | | $ | 2,183 | | $ | 877 |
| | | | | | | | |
(Liabilities) |
|
| |
|
| |
|
|
Foreign currency forward contracts |
| Accrued expenses | |
| (2,073) | |
| (2,120) |
1615
The fair value of derivative instruments on a gross basis was as follows on the dates indicated (in thousands):
| | | | | | | | |
Fair Value of Derivative Instruments Designated as Hedging Instruments |
| Balance Sheet Location |
| March 31, 2022 |
| December 31, 2021 | ||
Assets |
|
|
| |
|
| |
|
Interest rate swaps |
| Other assets (long-term) | | $ | 1,161 | | $ | — |
Foreign currency forward contracts |
| Prepaid expenses and other assets | | | 1,778 | | | 1,326 |
Foreign currency forward contracts |
| Other assets (long-term) | |
| 293 | |
| 179 |
| | | | | | | | |
(Liabilities) |
|
| |
|
| |
|
|
Interest rate swaps | | Other long-term obligations | | | — | | | (1,447) |
Foreign currency forward contracts |
| Accrued expenses | |
| (2,569) | |
| (2,288) |
Foreign currency forward contracts |
| Other long-term obligations | |
| (644) | |
| (502) |
| | | | | | | | |
Fair Value of Derivative Instruments Not Designated as Hedging Instruments |
| Balance Sheet Location |
| March 31, 2022 |
| December 31, 2021 | ||
Assets |
|
| |
|
| |
|
|
Foreign currency forward contracts |
| Prepaid expenses and other assets | | $ | 1,327 | | $ | 736 |
| | | | | | | | |
(Liabilities) |
|
| |
|
| |
|
|
Foreign currency forward contracts |
| Accrued expenses | |
| (1,505) | |
| (856) |
Income Statement Presentation of Derivative Instruments.
Derivative Instruments Designated as Cash Flow Hedges
Derivative instruments designated as cash flow hedges had the following effects, before income taxes, on other comprehensive income (“OCI”), accumulated other comprehensive income (“AOCI”), and net earnings in our consolidated statements of income, (loss), consolidated statements of comprehensive income (loss) and consolidated balance sheets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain/(Loss) | | | | | | | Consolidated Statements | | Amount of Gain/(Loss) | ||||||||||||
| | Recognized in OCI | | | | | | | of Income (Loss) | | Reclassified from AOCI | ||||||||||||
| | Three Months Ended March 31, |
| | |
| |
| Three Months Ended March 31, | | Three Months Ended March 31, | ||||||||||||
Derivative instrument |
| 2021 |
| 2020 |
| | |
| Location in statements of income |
| 2021 |
|
| 2020 |
| 2021 |
|
| 2020 | ||||
Interest rate swaps | | $ | 721 | | $ | (5,463) | | | |
| Interest expense | | $ | (1,537) | | $ | (3,144) | | $ | (432) | | $ | 251 |
Foreign currency forward contracts | |
| 516 | |
| (1,494) | | | |
| Revenue | |
| 248,913 | |
| 243,525 | |
| (1,602) | |
| 78 |
| | | | | | | | | |
| Cost of sales | |
| (137,019) | |
| (139,741) | |
| 350 | |
| (104) |
| | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain/(Loss) | | | Consolidated Statements | | Amount of Gain/(Loss) | |||||||||||||
| | Recognized in OCI | | | of Income | | Reclassified from AOCI | |||||||||||||
| | Three Months Ended March 31, | | | Three Months Ended March 31, | | Three Months Ended March 31, | |||||||||||||
Derivative instrument |
| 2022 |
| 2021 |
| Location in statements of income |
| 2022 |
| | 2021 |
| 2022 |
|
| 2021 | ||||
Interest rate swaps | | $ | 2,314 | | $ | 721 | | Interest expense | | $ | (1,002) | | $ | (1,537) | | $ | (294) | | $ | (432) |
Foreign currency forward contracts | |
| (270) | |
| 516 | | Revenue | |
| 275,415 | |
| 248,913 | |
| (386) | |
| (1,602) |
| | | | Cost of sales | |
| (154,508) | |
| (137,019) | |
| (183) | |
| 350 |
As of March 31, 2021, approximately $(2.9)2022, ($1.0) million, or $(2.2)($0.8) million after taxes, was expected to be reclassified from accumulated other comprehensive income (loss) to earnings in revenue and cost of sales over the succeeding twelve months. As of March 31, 2021, approximately $(1.3) million,2022, $34,000, or $(1.0) million$26,000 after taxes, was expected to be reclassified from accumulated other comprehensive income (loss) to earnings in interest expense over the succeeding twelve months.
Derivative Instruments Not Designated as Hedging Instruments
The following gains/(losses) from these derivative instruments were recognized in our consolidated statements of income (loss) for the periods presented (in thousands):
| | | | | | | | | | | | | | | | |
|
| |
| Three Months Ended March 31, |
| |
| Three Months Ended March 31, | ||||||||
Derivative Instrument |
| Location in statements of income (loss) |
| 2021 |
| 2020 |
| Location in statements of income |
| 2022 |
| 2021 | ||||
Foreign currency forward contracts |
| Other income (expense) | | $ | 229 | | $ | 3,418 |
| Other income (expense) | | $ | (1,112) | | $ | 229 |
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10.9. Commitments and Contingencies.
Loan Commitment. On October 11, 2019, we acquired shares of stock in Selio Medical Limited (“Selio”) representing an ownership interest of approximately 19.5%, as well as an option to purchase all ordinary shares of Selio throughout a 45-day period commencing from the date Selio receives FDA 510(k) approval of a medical device it is currently developing,and an option to purchase all remaining shares of Selio on the third anniversary date of the agreement if we elect to purchase all ordinary shares. We have also made a loan of $250,000 to Selio and committed to provide additional loans of up to €2 million at a rate of 5% per annum until one year and 45 days have passed from the date Selio receives FDA Section 510(k) approval of a medical device it is currently developing. Additional loans made to Selio pursuant to our loan agreement, together with the initial advance and all other amounts owed to us by Selio, would be securitized by Selio’s assets.
Litigation. In the ordinary course of business, we are involved in various proceedings, legal actions and claims. These proceedings, actions and claims may involve product liability, intellectual property, contract disputes, employment, governmental inquiries or other matters, including those more fully described below. The outcomes of these matters will generally not be known for prolonged periods of time. In certain proceedings, the claimants may seek damages as well as other compensatory and equitable relief that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which our management had sufficient information
17
to reasonably estimate our future obligations, a liability representing management’s best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, is recorded. The estimates are based on consultation with legal counsel, previous settlement experience, settlement strategies and settlement strategies.the potential availability of insurance coverage. If actual outcomes are less favorable than those estimated by management, additional expense may be incurred, which could unfavorably affect our financial position, results of operations and cash flows. The ultimate cost to us with respect to such proceedings, actions and claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.
Securities Litigation
On December 5, 2019, the Bucks County Employees Retirement Fund filed a complaint against Merit, our Chief Executive Officer and our Chief Financial Officer in the United States District Court for the Central District of California (the “California Central District Court”), individually and on behalf of all purchasers of our common stock between February 26, 2019 and October 30, 2019. On February 24, 2020, the court appointed the City of Atlanta Police Pension Fund, the Atlanta Firefighters’ Pension Fund, and the Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge as Lead Plaintiffs. This action is now captioned In re Merit Medical Systems, Inc. Securities Litigation (Master File No. 8:19-cv-02326-DOC-ADS). On June 30, 2020, Lead Plaintiffs filed a consolidated class action complaint for violations of federal securities laws against Merit, our Chief Executive Officer and our Chief Financial Officer in the United StatesCalifornia Central District Court, for the Central District of California, individually and on behalf of all purchasers of our common stock between February 26, 2019 and October 30, 2019. The consolidated class action complaint allegesalleged that defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seekssought unspecified damages, costs and attorneys’ fees, and equitable relief. We
As of December 31, 2021, we had accrued approximately $10 million of net expense in connection with an agreement in principle to settle the consolidated class action complaint. The parties executed a settlement agreement, settling all claims asserted in the class action complaint, and the settlement agreement was approved by the Central California District Court on April 13, 2022.
Shareholder Derivative Action
On June 3, 2021, Steffen Maute filed a motioncomplaint, derivatively on behalf of Merit, against Merit (as a nominal defendant), our Chief Executive Officer, our Chief Financial Officer, our former President of Europe, Middle East and Africa (“EMEA,”) and certain of our directors in the United States District Court for the District of Utah (Case No. 2:21-cv-00346-DBP). The derivative complaint alleges that the individual defendants violated their fiduciary duties owed to dismissMerit and were unjustly enriched at the action, whichexpense of and to the Court denied.detriment of Merit between February 2019 and October 2019, and seeks unspecified damages, costs, and professional fees. We intend to vigorously defend against the lawsuit. The proceeding was stayed until February 19, 2022, subject to the right of either party to seek to lift or extend the stay. The stay has expired, however the parties have been engaged in mediation in an attempt to resolve the dispute. We have not recorded an expense related to this matter because any potential loss is not currently probable or reasonably estimable. Additionally, we cannot presently estimate the range of loss, if any, that may result from the matter. It is possible that the ultimate resolution of the foregoing matter, or other similar matters, if resolved in a manner unfavorable to us, may be materially adverse to our business, financial condition, results of operations or liquidity.
Legal costs for proceedings, legal actions and claims discussed, above, such as outside counsel fees and expenses, are charged to expense in the periodperiod(s) incurred.
17
11.10. Earnings (Loss) Per Common Share (EPS). The computation of weighted average shares outstanding and the basic and diluted earnings (loss) per common share for the three-month periods ended March 31, 2022 and 2021 consisted of the following (in thousands, except per share amounts):
| | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
| | 2021 | | 2020 | | 2022 | | 2021 | ||||
Net income (loss) | | $ | 10,958 | | $ | (3,154) | ||||||
Net income | | $ | 10,545 | | $ | 10,958 | ||||||
Average common shares outstanding | |
| 55,717 | |
| 55,246 | |
| 56,593 | |
| 55,717 |
Basic EPS | | $ | 0.20 | | $ | (0.06) | | $ | 0.19 | | $ | 0.20 |
| | | | | | | | | | | | |
Average common shares outstanding | | | 55,717 | | | 55,246 | | | 56,593 | | | 55,717 |
Effect of dilutive stock awards | | | 1,261 | | | — | | | 938 | | | 1,261 |
Total potential shares outstanding | | | 56,978 | | | 55,246 | | | 57,531 | | | 56,978 |
Diluted EPS | | $ | 0.19 | | $ | (0.06) | | $ | 0.18 | | $ | 0.19 |
| | | | | | | | | | | | |
Equity awards excluded as the impact was anti-dilutive (1) | | | 1,042 | | | 4,340 | | | 1,553 | | | 1,042 |
(1) | Does not reflect the impact of incremental repurchases under the treasury stock method. |
11. Stock-Based Compensation Expense. Stock-based compensation expense before income tax expense (benefit) for the three-month periods ended March 31, 2022 and 2021 consisted of the following (in thousands):
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2022 |
| 2021 | ||
Cost of sales | | | | | | |
Nonqualified stock options | | $ | 588 | | $ | 318 |
Research and development | |
| | | | |
Nonqualified stock options | | | 486 | |
| 279 |
Selling, general and administrative | |
| | | | |
Nonqualified stock options | | | 1,924 | |
| 1,627 |
Performance-based restricted stock units | | | 815 | | | 731 |
Restricted stock units | | | 399 | | | 355 |
Cash-settled performance-based share-based awards ("Liability Awards") | | | 430 | | | 285 |
Total selling, general and administrative | | | 3,568 | | | 2,998 |
| | | | | | |
Stock-based compensation expense before taxes | | $ | 4,642 | | $ | 3,595 |
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.
Nonqualified Stock Options
During the three-month periods ended March 31, 2022 and 2021, we granted stock options representing 123,606 and 125,850 shares of our common stock, respectively. We use the Black-Scholes methodology to value the stock-based
18
12. Stock-Based Compensation Expense. Stock-based compensation expense before income tax expense for the three-month periods ended March 31, 2021 and 2020 consisted of the following (in thousands):
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
Cost of sales | | | | | | |
Nonqualified stock options | | $ | 318 | | $ | 339 |
Research and development | |
| | | | |
Nonqualified stock options | | | 279 | |
| 285 |
Selling, general and administrative | |
| | | | |
Nonqualified stock options | | | 1,627 | |
| 1,706 |
Performance-based restricted stock units | | | 731 | | | 312 |
Restricted stock units | | | 355 | | | — |
Cash-settled share-based awards ("Liability Awards") | | | 285 | | | 135 |
Total selling, general and administrative | | | 2,998 | | | 2,153 |
| | | | | | |
Stock-based compensation expense before taxes | | $ | 3,595 | | $ | 2,777 |
Nonqualified Stock Options
During the three-month periods ended March 31, 2021 and 2020, we granted stock options representing 125,850 and 216,494 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:
| | | | | | | | | |
| | Three Months Ended | | Three Months Ended |
| ||||
| | March 31, | | March 31, | | ||||
| | 2021 | | 2020 | | 2022 | | 2021 |
|
Risk-free interest rate |
| 0.6% |
| 0.5% - 1.7% |
| 1.4% - 1.8% |
| 0.6% | |
Expected option term |
| 4.0 years |
| 4.0 - 5.0 years |
| 4 years |
| 4 years | |
Expected dividend yield |
| — |
| — |
| — |
| — | |
Expected price volatility |
| 46.7% |
| 38.7% - 43.2% |
| 46.2% - 46.6% |
| 46.7% | |
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 award. 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 awards with a vesting period, compensation expense is recognized on a straight-line basis over the service period, which corresponds to the vesting period.
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 March 31, 2021,2022, the total remaining unrecognized compensation cost related to non-vested stock options was approximately $22.4$25.9 million, which was expected to be recognized over a weighted average period of 2.52.4 years.
Stock-Settled Performance-Based Restricted Stock Units (“Performance Stock Units”)
During the three-month periods ended March 31, 20212022 and 20202021, we granted performance stock units to certain of our executive officers which as amended, represent up to 128,883109,178 and 127,060128,883 shares of our common stock, respectively. Conversion of the performance stock units occurs at the end of the relevant performance periods, or one year after the agreement date, whichever is later. The conversion ratio is based upon attaining targeted levels of free cash flow (“FCF”) and relative shareholder return as compared to the Russell 2000 Index (“rTSR”), as defined in the award agreements.
19
We use Monte-Carlo simulations to estimate the grant-date fair value of the performance stock units linked to total shareholder return. The fair value of each performance stock unit was estimated as of the grant date using the following assumptions for awards granted in the periods indicated below:
| | | | | | | | | | |
| | Three Months Ended |
| | Three Months Ended |
| ||||
| | March 31, | | | March 31, | | ||||
| | 2021 | | 2020 |
| | 2022 | | 2021 |
|
Risk-free interest rate |
| 0.1% - 0.3% |
| 1.1% - 1.3% | |
| 1.6% |
| 0.1% - 0.3% | |
Remaining performance period |
| 1.8 - 2.8 years |
| 0.8 - 2.8 years | | |||||
Performance period |
| 2.8 years |
| 1.8 - 2.8 years | | |||||
Expected dividend yield |
| — |
| — | |
| — |
| — | |
Expected price volatility |
| 43.7% - 49.3% |
| 40.2% - 56.1% | |
| 42.6% |
| 43.7% - 49.3% | |
The risk-free interest rate of return was determined using the U.S. Treasury rate at the time of grant with a remaining term equal to the expected term of the award. The expected volatility was based on a weighted average volatility of our stock price and the average volatility of our compensation peer group's volatilities. The expected dividend yield was assumed to be zero because, at the time of the grant, we had no plans to declare a dividend.
Compensation expense is recognized using the grant-date fair value for the number of shares that are probable of being awarded based on the performance conditions. Each reporting period, this probability assessment is updated, and cumulative catchupsadjustments are recorded based on the level of FCF that is expected to be achieved. At the end of the performance period, cumulative expense is calculated based on the actual level of FCF achieved. As of March 31, 2021,2022, the total remaining unrecognized compensation cost related to stock-settled performance stock units was approximately $6.5$9.3 million, which is expected to be recognized over a weighted average period of 2.12.2 years.
19
Cash-Settled Performance-Based Share-BasedLiability Awards (“Liability Awards”)
During the three-month periods ended March 31, 20212022 and 2020,2021, we granted liability awards to our Chief Executive Officer with total target cash incentives, each in the amount of $1.0 million and $1.0 million, respectively.million. These awards entitle him to a target cash payment multiplied bybased upon attaining targeted levels of FCF and rTSR, and FCF multipliers, as defined in the award agreements. Settlement generally occurs based upon the same performance metrics, vesting period, and performance period as our performance stock units.
The fair value of these awards is remeasured at each reporting period until the awards are settled. These awards are classified as liabilities and reported in accrued expenses and other long-term liabilitiesobligations within our consolidated balance sheet. As of March 31, 2021,2022, the total remaining unrecognized compensation cost related to cash-settled performance-based share-based awards was approximately $2.4$3.7 million, which is expected to be recognized over a weighted average period of 2.12.2 years.
Restricted Stock Units
On June 22, 2020,17, 2021, we granted restricted stock units to our non-employee directors representing 33,50426,226 shares of our common stock. The expense recognized for restricted stock units is equal to the closing stock price on the date of grant, which is recognized over the vesting period. Restricted stock units granted to each director are subject to such director’s continued service through the vesting date, which is one year from the date of grant. As of March 31, 2021,2022, the total remaining unrecognized compensation cost related to restricted stock units was approximately $0.3 million, which will be recognized over the remaining vesting period.
20
13.12. Segment Reporting. We report our operations in 2 operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of four4 product categories: peripheral intervention, cardiac intervention, custom procedural solutions, and 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. We evaluate the performance of our operating segments based on net sales and operating income.
Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three-month periods ended March 31, 20212022 and 2020,2021, were as follows (in thousands):
| | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended | ||||||||
|
| March 31, |
| March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Net Sales |
| |
|
| |
|
| |
|
| |
|
Cardiovascular | | $ | 241,006 | | $ | 235,544 | | $ | 266,936 | | $ | 241,006 |
Endoscopy | |
| 7,907 | |
| 7,981 | |
| 8,479 | |
| 7,907 |
Total net sales | |
| 248,913 | |
| 243,525 | |
| 275,415 | |
| 248,913 |
| | | | | | | | | | | | |
Operating Income (Loss) | |
|
| |
|
| ||||||
Operating Income | |
|
| |
|
| ||||||
Cardiovascular | |
| 12,201 | |
| 1,502 | |
| 13,126 | |
| 12,201 |
Endoscopy | |
| 1,993 | |
| (140) | |
| 2,107 | |
| 1,993 |
Total operating income | |
| 14,194 | |
| 1,362 | |
| 15,233 | |
| 14,194 |
| | | | | | | | | | | | |
Total other expense - net | |
| (1,500) | |
| (3,354) | |
| (1,062) | |
| (1,500) |
Income tax expense | |
| 1,736 | |
| 1,162 | |
| 3,626 | |
| 1,736 |
| | | | | | | | | | | | |
Net income (loss) | | $ | 10,958 | | $ | (3,154) | ||||||
Net income | | $ | 10,545 | | $ | 10,958 |
14. Fair Value Measurements.
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
Our financial assets and (liabilities) carried at fair value and measured on a recurring basis as of March 31, 2021 and December 31, 2020 consisted of the following (in thousands):
| | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | |||||||
| | Total Fair | | Quoted prices in | | Significant other | | Significant | ||||
| | Value at | | active markets | | observable inputs | | unobservable inputs | ||||
|
| March 31, 2021 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Interest rate contract liabilities, current and long-term (1) | | $ | (3,204) | | $ | — | | $ | (3,204) | | $ | — |
Foreign currency contract assets, current and long-term (2) | | $ | 3,744 | | $ | — | | $ | 3,744 | | $ | — |
Foreign currency contract liabilities, current and long-term (3) | | $ | (5,807) | | $ | — | | $ | (5,807) | | $ | — |
Contingent consideration liabilities | | $ | (55,754) | | $ | — | | $ | — | | $ | (55,754) |
2120
| | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | |||||||
| | Total Fair | | Quoted prices in | | Significant other | | Significant | ||||
| | Value at | | active markets | | observable inputs | | unobservable inputs | ||||
|
| December 31, 2020 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Interest rate contract liabilities, current and long-term (1) | | $ | (4,358) | | $ | — | | $ | (4,358) | | $ | — |
Foreign currency contract assets, current and long-term (2) | | $ | 3,078 | | $ | — | | $ | 3,078 | | $ | — |
Foreign currency contract liabilities, current and long-term (3) | | $ | (8,267) | | $ | — | | $ | (8,267) | | $ | — |
Contingent consideration liabilities | | $ | (55,750) | | $ | — | | $ | — | | $ | (55,750) |
13. Fair Value Measurements.
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
Our financial assets and (liabilities) carried at fair value and measured on a recurring basis as of March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
| | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | |||||||
| | Total Fair | | Quoted prices in | | Significant other | | Significant | ||||
| | Value at | | active markets | | observable inputs | | unobservable inputs | ||||
|
| March 31, 2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Interest rate contract asset, long-term (1) | | $ | 1,161 | | $ | — | | $ | 1,161 | | $ | — |
Foreign currency contract assets, current and long-term (2) | | $ | 3,398 | | $ | — | | $ | 3,398 | | $ | — |
Foreign currency contract liabilities, current and long-term (3) | | $ | (4,718) | | $ | — | | $ | (4,718) | | $ | — |
Contingent consideration liabilities | | $ | (26,333) | | $ | — | | $ | — | | $ | (26,333) |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | |||||||
| | Total Fair | | Quoted prices in | | Significant other | | Significant | ||||
| | Value at | | active markets | | observable inputs | | unobservable inputs | ||||
|
| December 31, 2021 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Interest rate contract liability, long-term (1) | | $ | (1,447) | | $ | — | | $ | (1,447) | | $ | — |
Foreign currency contract assets, current and long-term (2) | | $ | 2,241 | | $ | — | | $ | 2,241 | | $ | — |
Foreign currency contract liabilities, current and long-term (3) | | $ | (3,646) | | $ | — | | $ | (3,646) | | $ | — |
Contingent consideration liabilities | | $ | (48,234) | | $ | — | | $ | — | | $ | (48,234) |
(1) | The fair value of the interest rate |
(2) | The fair value of the foreign currency contract assets (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as prepaid expenses and other current assets or other long-term assets in the consolidated balance sheets. |
(3) | The fair value of the foreign currency contract liabilities (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as accrued expenses or other long-term obligations in the consolidated balance sheets. |
Certain of our business combinations involve the potential for the payment of future contingent consideration, generally based on a percentage of future product sales or upon attaining specified future revenue or other milestones. The contingent consideration liability is re-measured at the estimated fair value at the end of each reporting period with the change in fair value recognized within operating expenses in the accompanying consolidated statements of income (loss) for such period. We measure the initial liability and re-measure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. Changes in the fair value of our contingent consideration liabilities during the three-month periods ended March 31, 20212022 and 20202021 consisted of the following (in thousands):
| | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended | ||||||||
|
| March 31, |
| March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Beginning balance | | $ | 55,750 | | $ | 76,709 | | $ | 48,234 | | $ | 55,750 |
Contingent consideration expense | |
| 402 | |
| 4,897 | |
| 2,600 | |
| 402 |
Contingent payments made | |
| (403) | |
| (12,754) | |
| (24,491) | |
| (403) |
Effect of foreign exchange | | | 5 | | | 17 | | | (10) | | | 5 |
Ending balance | | $ | 55,754 | | $ | 68,869 | | $ | 26,333 | | $ | 55,754 |
As of March 31, 2021, approximately $19.5 million in contingent consideration liability was included in other long-term obligations and approximately $36.2 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet. As of December 31, 2020, approximately $36.9 million in contingent consideration liability was included in other long-term obligations and approximately $18.8 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet. Cash paid to settle the contingent consideration liability recognized at fair value as of the applicable acquisition date (including measurement-period adjustments) has been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows.
2221
As of March 31, 2022, $5.8 million in contingent consideration liability was included in other long-term obligations and $20.5 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet. As of December 31, 2021, $13.5 million in contingent consideration liability was included in other long-term obligations and $34.7 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet. Cash paid to settle the contingent consideration liability recognized at fair value as of the applicable acquisition date has been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows.
The recurring Level 3 measurement of our contingent consideration liabilities included the following significant unobservable inputs at March 31, 20212022 and December 31, 20202021 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | Fair value at | | | | | | | | | | Fair value at | | | | | | |
| | ||
| | March 31, | | Valuation | | | | | | Weighted | | March 31, | | Valuation | | | | | | Weighted | ||
Contingent consideration liability |
| 2021 |
| technique |
| Unobservable inputs |
| Range |
| Average(1) |
| 2022 |
| technique |
| Unobservable inputs |
| Range | | Average(1) | ||
Revenue-based royalty payments contingent liability | | $ | 4,047 |
| Discounted cash flow |
| Discount rate | | 12% - 16% |
| 15.4% | | $ | 2,405 |
| Discounted cash flow |
| Discount rate | | 13% - 16% | | 15.5% |
| |
|
|
| |
| Projected year of payments | | 2021-2034 |
| 2026 | |
|
|
| |
| Projected year of payments | | 2022-2034 | | 2026 |
| | | | | | | | | | | | | | | | | | | | | | |
Revenue milestones contingent liability | | $ | 46,807 |
| Monte Carlo simulation |
| Discount rate | | 10% - 14% |
| 10.4% | | $ | 20,269 |
| Monte Carlo simulation |
| Discount rate | | 0% - 13% | | 3.8% |
| |
|
|
| |
| Projected year of payments | | 2021-2030 |
| 2022 | |
|
|
| |
| Projected year of payments | | 2022-2031 | | 2022 |
| | | | | | | | | | | | | | | | | | | | | | |
Regulatory approval contingent liability | | $ | 4,900 | | Scenario-based method | | Discount rate | | 1% | | | | $ | 3,659 | | Scenario-based method | | Discount rate | | 3.1% | | |
| | | | | | | Probability of milestone payment | | 100% | | | | | | | | | Probability of milestone payment | | 80% | | |
| | | | | | | Projected year of payment | | 2021-2024 | | 2022 | | | | | | | Projected year of payment | | 2024-2025 | | 2025 |
| | | | | | | | | | | | | | | | | | | | | | |
| | Fair value at | | | | | | |
| | | Fair value at | | | | | | |
| | ||
| | December 31, | | Valuation | | | | | | Weighted | | December 31, | | Valuation | | | | | | Weighted | ||
Contingent consideration liability |
| 2020 |
| technique |
| Unobservable inputs |
| Range | | Average(1) |
| 2021 |
| technique |
| Unobservable inputs |
| Range | | Average(1) | ||
Revenue-based royalty payments contingent liability | | $ | 4,545 |
| Discounted cash flow |
| Discount rate | | 12% - 15% | | 13.5% | | $ | 2,870 |
| Discounted cash flow |
| Discount rate | | 13% - 16% | | 14.7% |
| |
|
|
| |
| Projected year of payments | | 2021-2034 | | 2026 | |
|
|
| |
| Projected year of payments | | 2022-2034 | | 2026 |
| | | | | | | | | | | | | | | | | | | | | | |
Revenue milestones contingent liability | | $ | 46,305 |
| Monte Carlo simulation |
| Discount rate | | 7.5% - 12% | | 9.0% | | $ | 41,671 |
| Monte Carlo simulation |
| Discount rate | | 7.5% - 12.5% | | 8.2% |
| |
|
|
| |
| Projected year of payments | | 2021-2030 | | 2022 | |
|
|
| |
| Projected year of payments | | 2022-2031 | | 2022 |
| | | | | | | | | | | | | | | | | | | | | | |
Regulatory approval contingent liability | | $ | 4,900 | | Scenario-based method | | Discount rate | | 1% | | | | $ | 3,693 | | Scenario-based method | | Discount rate | | 2.6% | | |
| | | | | | | Probability of milestone payment | | 100% | | | | | | | | | Probability of milestone payment | | 80% | | |
| | | | | | | Projected year of payment | | 2021-2024 | | 2022 | | | | | | | Projected year of payment | | 2024-2025 | | 2025 |
(1) | Unobservable inputs were weighted by the relative fair value of the instruments. No weighted average is reported for contingent consideration liabilities without a range of unobservable inputs. |
The contingent consideration liability is re-measured to fair value each reporting period. Significant increases or decreases in projected revenues, based on our most recent internal operational budgets and long-range strategic plans, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement. Our determination of the fair value of the contingent consideration liability could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We intend to record any such change in fair value to operating expenses in our consolidated statements of income (loss).income.
22
Contingent Payments to Related Parties
During the three-month period ended March 31, 2020,2022, we made contingent payments of approximately $800,000$1.6 million to a current director of Merit and former shareholder of Cianna Medical, Inc. (“Cianna Medical”), which we acquired in 2018. We made 0 such payments duringduring the three-month period ended March 31, 2021. The terms of the acquisition, including contingent consideration payments, were determined prior to the appointment of the former Cianna Medical shareholder as a Merit director. As a former shareholder of Cianna Medical, the Merit director may be eligible for additional payments for the achievement of sales milestones specified in our merger agreement with Cianna Medical.
23
Fair Value of Other Financial InstrumentsAssets (Liabilities)
The carrying amount of cash and cash equivalents, receivables, and trade payables approximate fair value because of the immediate, short-term maturity of these financial instruments. Our long-term debt re-prices frequently due to variable rates and entails no significant changes in credit risk and, as a result, we believe the fair value of long-term debt approximates carrying value. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents, which use Level 1 inputs.
Impairment Charges
We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property and equipment, right-of-use operating lease assets, equity investments, intangible assets and goodwill in connection with impairment evaluations. All our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.
Intangible Assets. During the three-month periods ended March 31, 2021 and 2020, we had 0 losses related to acquired intangible assets (see Note 6).
Equity Investments and Purchase Options. During the three-month period ended March 31, 2021, we had 0 losses related to equity investments and purchase options. During the three-month period ended March 31, 2020 we recorded a charge of $3.5 million due to our write-off of our purchase option to acquire Bluegrass Vascular Technologies, Inc. (“Bluegrass Vascular”) due to our decision not to exercise the option. Our equity investments in privately held companies, including options to acquire these companies, were approximately $12.0 million and $12.0 million as of March 31, 2021 and December 31, 2020, respectively, which are included within other long-term assets in our consolidated balance sheets. We analyze our investments in privately-held companies to determine if they should be accounted for using the equity method based on our ability to exercise significant influence over operating and financial policies of the company in which we have invested. Investments not accounted for under the equity method of accounting are accounted for at cost minus impairment, if applicable, plus or minus changes in valuation resulting from observable transactions for identical or similar investments.
PropertyImpairment Charges
We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property and Equipment.equipment, right-of-use operating lease assets, equity investments, intangible assets and goodwill in connection with impairment evaluations. Such assets are reported at carrying value and are not subject to recurring fair value measurements. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Fair value is generally determined based on discounted future cash flow. All our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.
During the three-month period ended March 31, 2022, we recorded an impairment charge of $1.7 million related to the acquired intangible assets from our August 2019 acquisition of STD Pharmaceutical. As of March 31, 2022, the net assets associated with the STD Pharmaceutical business were not material. On April 30, 2022, we divested our ownership of the STD Pharmaceutical business. We do not anticipate the recognition of a material loss upon the divestiture of this business. During the three-month period ended March 31, 2021, we had 0 losses related to the measurement of property and equipment at fair value, compared to losses of $359,000 for the three-month period ended March 31, 2020 based on restructuring activities associated with changes to our distribution agreement with NinePoint Medical, Inc. (“NinePoint”)acquired intangible assets (see Note 5).
Notes Receivable
Our outstanding long-term notes receivable, including accrued interest and our allowance for current expected credit losses, were approximately $2.0$2.4 million and $2.2$2.3 million as of March 31, 20212022 and December 31, 2020,2021, respectively. As of March 31, 2022 and December 31, 2021, we had an allowance for current expected credit losses of $932,000$0.2 million and $0.2 million, respectively, associated with these notes receivable and our contractual obligation to extend credit to Selio.receivable. We assess the allowance for current expected credit losses on an individual security basis, due to the limited number of securities, using a probability of default model, which is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the expected collectability of securities, and other security specific factors. During the three-month periods ended March 31, 2021 and 2020, respectively, we adjusted the probability of default for all notes receivable for certain periods during the loan term due to changes in current macroeconomic conditions and our expectations of collectability as a result of the COVID-19 pandemic. The table below presents a rollforward of the
2423
below presents a rollforward of the allowance for current expected credit losses on our notes receivable for the three monththree-month periods ended March 31, 20212022 and 2020, respectively2021 (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
| | 2021 |
| 2020 | | 2022 |
| 2021 | ||||
Beginning balance | | $ | 730 | | $ | — | | $ | 199 | | $ | 730 |
Cumulative effect adjustment upon adoption of ASU 2016-13, Credit Losses | | | — | | | 575 | ||||||
Provision for credit loss expense | | | 202 | | | 95 | | | — | | | 202 |
Ending balance | | $ | 932 | | $ | 670 | | $ | 199 | | $ | 932 |
15.14. Accumulated Other Comprehensive Income (Loss). The changes in each component of accumulated other comprehensive income (loss) for the three-month periods ended March 31, 20212022 and 20202021 were as follows:
| | | | | | | | | | | | | | | | |
| Cash Flow Hedges |
| Foreign Currency Translation |
| Total | Cash Flow Hedges |
| Foreign Currency Translation |
| Total | ||||||
Balance as of December 31, 2020 | $ | (6,940) | | $ | 1,488 | | $ | (5,452) | ||||||||
Balance as of January 1, 2022 | $ | (2,464) | | $ | (5,527) | | $ | (7,991) | ||||||||
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss) |
| 1,237 | | | (4,462) | | | (3,225) |
| 2,044 | | | (793) | | | 1,251 |
Income taxes |
| (724) | | | 535 | | | (189) |
| (712) | | | (64) | | | (776) |
Reclassifications to: | | | | | | | | | | | | | | | | |
Revenue | | 1,602 | | | | | | 1,602 | | 386 | | | | | | 386 |
Cost of sales | | (350) | | | | | | (350) | | 183 | | | | | | 183 |
Interest expense | | 432 | | | | | | 432 | | 294 | | | | | | 294 |
Net other comprehensive income (loss) | | 2,197 | | | (3,927) | | | (1,730) | | 2,195 | | | (857) | | | 1,338 |
| | | | | | | | | | | | | | | | |
Balance as of March 31, 2021 | $ | (4,743) | | $ | (2,439) | | $ | (7,182) | ||||||||
Balance as of March 31, 2022 | $ | (269) | | $ | (6,384) | | $ | (6,653) |
| | | | | | | | | | | | | | | | |
| Cash Flow Hedges |
| Foreign Currency Translation |
| Total | Cash Flow Hedges |
| Foreign Currency Translation |
| Total | ||||||
Balance as of December 31, 2019 | $ | 218 | | $ | (5,512) | | $ | (5,294) | ||||||||
Balance as of January 1, 2021 | $ | (6,940) | | $ | 1,488 | | $ | (5,452) | ||||||||
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss) |
| (6,957) | | | (4,125) | | | (11,082) |
| 1,237 | | | (4,462) | | | (3,225) |
Income taxes |
| 1,849 | | | (7) | | | 1,842 |
| (724) | | | 535 | | | (189) |
Reclassifications to: | | | | | | | | | | | | | | | | |
Revenue | | (78) | | | | | | (78) | | 1,602 | | | | | | 1,602 |
Cost of sales | | 104 | | | | | | 104 | | (350) | | | | | | (350) |
Interest expense | | (251) | | | | | | (251) | | 432 | | | | | | 432 |
Net other comprehensive loss | | (5,333) | | | (4,132) | | | (9,465) | ||||||||
Net other comprehensive income (loss) | | 2,197 | | | (3,927) | | | (1,730) | ||||||||
| | | | | | | | | | | | | | | | |
Balance as of March 31, 2020 | $ | (5,115) | | $ | (9,644) | | $ | (14,759) | ||||||||
Balance as of March 31, 2021 | $ | (4,743) | | $ | (2,439) | | $ | (7,182) |
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15. Subsequent Events. OnApril 30, 2022, we entered into a unit purchase agreement to acquire Restore Endosystems, LLC (“Restore Endosystems”), developer of the Restore Endosystems Bifurcated Stent System. Subject to the terms and conditions of the unit purchase agreement, we paid $3 million in cash at closing, with additional payments totaling $4 million payable in separate $2 million payments no later than two and four years following the closing of the acquisition, respectively, or earlier upon the achievement of specified milestones. We intend to account for this transaction as an asset purchase and include the purchase price in our consolidated statements of income as acquired in-process research and development expense, because the technological feasibility of the underlying research and development project has not yet been reached and such technology had no identified future alternative use as of the date of acquisition.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related condensed notes thereto, which are included in Part I of this report. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties that may adversely impact our operations and financial results. These risks and uncertainties are discussed in Part I, Item 1A “Risk Factors” in the 2021 Annual Report on Form 10-K filed on March 1, 2021 (the “2020 Annual Report on Form 10-K”).and in Part II, Item 1A “Risk Factors” in this report.
OVERVIEW
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related condensed notes thereto, which are included in Part I of this report.
We design, develop, manufacture, market and sell 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 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.
For the three-month period ended March 31, 2021,2022, we reported sales of approximately $248.9$275.4 million, up approximately $5.4$26.5 million or 2.2%10.6%, compared to sales for the three-month period ended March 31, 20202021 of approximately $243.5$248.9 million. Our net sales benefitted approximately $3.8 million fromFor the three-month period ended March 31, 2022, foreign currency fluctuations (net of hedging) in the first quarter of 2021decreased our net sales by $1.7 million, assuming applicable foreign exchange rates in effect during the comparable prior-year period.
Gross profit as a percentage of sales increaseddecreased to 43.9% for the three-month period ended March 31, 2022, compared to 45.0% for the three-month period ended March 31, 2021 compared to 42.6% for the three-month period ended March 31, 2020.2021.
Net income for the three-month period ended March 31, 20212022 was approximately $11.0$10.5 million, or $0.19$0.18 per share, compared to net lossincome of approximately ($3.2)$11.0 million, or ($0.06)$0.19 per share, for the three-month period ended March 31, 2020.2021.
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Recent Developments and Trends and Impact of the COVID-19 Pandemic
In addition to the trends identified in the 20202021 Annual Report on Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview,” our business during the three months ended March 31, 2021 wasin 2022 has been impacted, and we believe it will continue to be impacted, by the following recent eventsdevelopments and trends:
● |
● |
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● | Following the retirement of our Chief Operating Officer (“COO”), Ronald A. Frost, on April 19th, 2022 we appointed Neil Peterson as COO. During his 27 years at Merit, Mr. Peterson has held multiple positions of increasing responsibility within the |
● | As of March 31, |
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of sales for the periods indicated:
| | | | | | | | | | | |
|
| | Three Months Ended | | | Three Months Ended | | ||||
| | | March 31, | | | March 31, | | ||||
|
|
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
|
Net sales |
|
| 100 | % | 100 | % |
| 100 | % | 100 | % |
Gross profit |
|
| 45.0 | | 42.6 |
|
| 43.9 | | 45.0 |
|
Selling, general and administrative expenses |
|
| 32.6 | | 32.4 |
|
| 30.5 | | 32.6 |
|
Research and development expenses |
|
| 6.5 | | 6.1 |
|
| 6.3 | | 6.5 |
|
Impairment charges |
|
| — | | 1.6 |
|
| 0.6 | | — |
|
Contingent consideration expense |
|
| 0.2 | | 2.0 |
|
| 0.9 | | 0.2 |
|
Income from operations |
|
| 5.7 | | 0.6 |
|
| 5.5 | | 5.7 |
|
Other expense — net |
|
| (0.6) | | (1.4) |
| |||||
Income (loss) before income taxes |
|
| 5.1 | | (0.8) |
| |||||
Net income (loss) |
|
| 4.4 | | (1.3) |
| |||||
Income before income taxes |
| 5.1 | | 5.1 |
| ||||||
Net income |
| 3.8 | | 4.4 |
|
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Sales
Sales for the three-month period ended March 31, 20212022 increased by 2.2%10.6%, or approximately $5.4$26.5 million, compared to the corresponding period in 2020.2021. Listed below are the sales by product category within each of our financial reporting segments for the three-month periods ended March 31, 20212022 and 20202021 (in thousands, other than percentage changes):
| | | | | | | | | | | | | | | | | ||
|
| | | Three Months Ended |
| | | Three Months Ended | ||||||||||
|
| | | March 31, |
| | | March 31, | ||||||||||
|
| % Change |
| | 2021 |
| 2020 |
| % Change |
| | 2022 |
| 2021 | ||||
Cardiovascular | | | | | | | | | | | | | | | | | ||
Peripheral Intervention |
| 6.7 | % | | $ | 92,914 | | $ | 87,075 |
| 13.8 | % | | $ | 105,773 | | $ | 92,914 |
Cardiac Intervention |
| 3.0 | % | |
| 74,737 | |
| 72,591 |
| 9.0 | % | | | 81,487 | |
| 74,737 |
Custom Procedural Solutions |
| (4.6) | % | |
| 45,421 | |
| 47,621 |
| 1.9 | % | | | 46,262 | |
| 45,421 |
OEM |
| (1.1) | % | |
| 27,934 | |
| 28,257 |
| 19.6 | % | | | 33,414 | |
| 27,934 |
Total |
| 2.3 | % | |
| 241,006 | |
| 235,544 |
| 10.8 | % | | | 266,936 | |
| 241,006 |
| | | | | | | | | | | | | | | | | ||
Endoscopy | | | | | | | | | | | | | | | | | ||
Endoscopy devices |
| (0.9) | % | |
| 7,907 | |
| 7,981 |
| 7.2 | % | | | 8,479 | |
| 7,907 |
| | | | | | | | | | | | | | | | | ||
Total |
| 2.2 | % | | $ | 248,913 | | $ | 243,525 |
| 10.6 | % | | $ | 275,415 | | $ | 248,913 |
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Cardiovascular Sales. Our cardiovascular sales for the three-month period ended March 31, 20212022 were approximately $241.0$266.9 million, up 2.3%10.8% when compared to the corresponding period of 20202021 of approximately $235.5$241.0 million. Sales for the three-month period ended March 31, 20212022 were favorably affected by increased sales of:
(a) | Peripheral intervention products, |
(b) | Cardiac intervention products, |
(c) | OEM products, which increased by $5.5 million, or 19.6%, from the corresponding period of 2021. This increase was driven primarily by sales of our angiography products, kits and coatings, offset partially by decreased sales of our cardiac rhythm management/electrophysiology (“CRM/EP”) |
(d) | Custom procedural solutions products, which increased by |
The foregoing increase in sales for the three-month period ended March 31, 2021 was partially offset by decreased sales of:
Endoscopy Sales. Our endoscopy sales for the three-month period ended March 31, 20212022 were approximately $7.9$8.5 million, down (0.9)%up 7.2%, when compared to sales in the corresponding period of 20202021 of approximately $8.0$7.9 million. Sales for the three-month period ended March 31, 2022 were favorably affected by increased sales of our EndoMAXX® fully covered esophageal stent and other stents.
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Geographic Sales
Listed below are sales by geography for the three-month periods ended March 31, 2022 and 2021 (in thousands, other than percentage changes):
| | | | | | | | | |
|
| | | | Three Months Ended | ||||
|
| | | | March 31, | ||||
|
| % Change |
| | 2022 |
| 2021 | ||
United States | | 8.2 | % | | $ | 152,992 | | $ | 141,372 |
International | | 13.8 | % | | | 122,423 | | | 107,541 |
Total |
| 10.6 | % | | $ | 275,415 | | $ | 248,913 |
United States Sales.U.S. sales for the three-month period ended March 31, 2022 were unfavorably affected$153.0 million, or 55.5% of net sales, up 8.2% when compared to the corresponding period of 2021. The increase in our domestic sales in the three-month period ended March 31, 2022 compared to the three-month period ended March 31, 2021 was driven primarily by deceased sales of the NinePoint NvisionVLE® Imaging System as a result of the suspension of our distribution agreement with NinePoint, offset partially by increased sales of probesU.S. Direct and our EndoMAXX® fully covered esophageal stents.OEM businesses.
International Sales. International sales for the three-month period ended March 31, 20212022 were approximately $107.5$122.4 million, or 43.2%44.5% of net sales, up 4.9%13.8% when compared to the corresponding period of 20202021 of approximately $102.5$107.5 million. The increase in our international sales for the first quarter of 2021three-month period ended March 31, 2022, compared to the first quarter of 2020three-month period ended March 31, 2021, included increased sales in our APAC operations of $8.7$9.3 million or 20.5%18.1%, partially offset by decreased sales in EMEAour ROW operations of $(2.8)$3.1 million or (5.4)%46.1%, and decreased sales in the restour EMEA operations of the world of $(0.8)$2.5 million or (10.6)%5.0%.
Gross Profit
Our gross profit as a percentage of sales increaseddecreased to 43.9% for the three-month period ended March 31, 2022, compared to 45.0% for the three-month period ended March 31, 2021, compared to 42.6% for the three-month period ended March 31, 2020.2021. The increasedecrease in gross profit percentage was primarily due to unfavorable manufacturing variances from the impact of inflationary pressures, higher freight costs and increased obsolescence expense, offset partially by changes in product mix decreased obsolescence expense, and lower amortization expense (as certain intangibles from prior acquisitions became fully amortized)as a percentage of sales (primarily due to higher sales compared to the corresponding period of 2021).
Operating Expenses
Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses increased approximately $2.2$3.0 million, or 2.8%3.7%, for the three-month period ended March 31, 20212022 compared to the corresponding period of 2020.2021. As a percentage of sales, SG&A expenses were 32.6%30.5% for the three-month period ended March 31, 2021,2022, compared to 32.4%32.6% for the corresponding period of 2020.2021. For the three-month period ended March 31, 20212022, SG&A expenses increased compared to the corresponding period of 2020, outside consulting and other expenses were up in large part2021 primarily due to our implementationlabor related costs, including higher commissions, salaries and wages, partially offset by lower consulting costs. We incurred $5.1 million of corporate transformation and restructuring costs, including consulting charges, during the three-month period ended March 31, 2022 in connection with our Foundations for Growth program, partially offset by lower compensation expenses as a resultcompared to corporate transformation and restructuring costs of reduced headcount from cost cutting initiatives in 2020 and lower discretionary spending as a result of reduced travel, training, and shows and conventions during$5.4 million for the COVID-19 pandemic, among other items.three-month period ended March 31, 2021.
Research and Development Expenses. Research and development ("R&D") expenses for the three-month period ended March 31, 20212022 were approximately $16.3$17.4 million, up 9.4%6.8%, when compared to R&D expenses in the corresponding period of 20202021 of approximately $14.9$16.3 million. The increase in R&D expenses for the three-month period ended March 31, 20212022 compared to the corresponding period in 20202021 was largely due to higher labor-related costs, increased outsideclinical expenses for certain R&D projects (including clinical trials for our Embosphere® Microspheres and WRAPSODYTM Endoprosthesis) and higher expenses related to implementation of the WAVE study) and increased compensation expense, as new headcount were added sinceMedical Device Regulation in the layoffsEuropean Union.
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in 2020 to meet the demands of new projects and preparation for the implementation of the Medical Device Regulation (“MDR”) in the European Union.
Impairment Charges. For the three-month period ended March 31, 2021,2022, we did not record anyrecorded impairment charges. Forcharges of $1.7 million of intangible assets due to the planned divestiture of the STD Pharmaceutical business, which we completed on April 30, 2022. We recorded no impairment charges during the three-month period ended March 31, 2020, we recorded impairment charges of approximately $3.8 million, which included a $3.5 million write-off of our purchase option to acquire Bluegrass Vascular due to our decision not to exercise our option to purchase this company and a $0.4 million impairment of property and equipment related to the suspension of our distribution agreement with NinePoint.2021.
Contingent Consideration Expense. For the three-month periodsperiod ended March 31, 2021 and 2020,2022, we recognized contingent consideration expense of approximately $0.4 million and $4.9 million, respectively, from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions.acquisitions of $2.6 million compared to contingent consideration expense of $0.4 million for the three-month period ended March 31, 2021. Expense in each period relatesrelated to changes in the probability and timing of achieving certain revenue and operational milestones, as well as expense for the passage of time.
Operating Income (Loss)
The following table sets forth our operating income (loss) by financial reporting segment for the three-month periods ended March 31, 20212022 and 20202021 (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Operating Income (Loss) | | | | | | | ||||||
Operating Income | | | | | | | ||||||
Cardiovascular | | $ | 12,201 | | $ | 1,502 | | $ | 13,126 | | $ | 12,201 |
Endoscopy | |
| 1,993 | |
| (140) | |
| 2,107 | |
| 1,993 |
Total operating income | | $ | 14,194 | | $ | 1,362 | | $ | 15,233 | | $ | 14,194 |
Cardiovascular Operating Income. Our cardiovascular operating income for the three-month period ended March 31, 20212022 was approximately $12.2$13.1 million, compared to cardiovascular operating income in the corresponding period of 20202021 of approximately $1.5$12.2 million. The increase in cardiovascular operating income during the three-month period ended March 31, 20212022 compared to the corresponding period of 20202021 was primarily a result of increasedhigher sales and gross margins, no impairment expense in the first quarter of 2021($266.9 million compared to $3.8 million in the first quarter of 2020, and lower contingent consideration expense,$241.0 million), partially offset by increased SG&A and R&D expenses.expenses, higher contingent consideration expense, and impairment charges in the three-month period ended March 31, 2022 of $1.7 million.
Endoscopy Operating Income (Loss). Our endoscopy operating income for the three-month period ended March 31, 20212022 was $2.1 million, approximately $2.0 million,flat compared to endoscopy operating lossincome of approximately ($0.1)$2.0 million for the corresponding period of 2020. This increase in endoscopy operating income was primarily a result of improved gross margins (largely a result of the write-off of inventory related to the suspension of our distribution agreement with NinePoint in the first quarter of 2020, which did not repeat in the first quarter of 2021) and decreased operating expenses (including compensation, travel, and sales meeting expenses).2021.
Other Expense
Our other expense for the three-month periods ended March 31, 2022 and 2021 and 2020 was approximately ($1.5)1.1) million and ($3.4)1.5) million, respectively. The change in other expense for the three-month period ended March 31, 2021 was primarily related to decreased interest expense as a result of a lower effective interest rate and a lower average debt balance as well as an increase indespite a higher effective interest income due to partial recoveries of loan interest from NinePoint which had previously been written off.rate.
Effective Tax Rate
Our provision for income taxes for the three-month periods ended March 31, 20212022 and 20202021 was a tax expense of approximately $1.7$3.6 million and $1.2$1.7 million, respectively, which resulted in an effective tax rate of 13.7%25.6% and (58.3)%13.7%,
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respectively. The increase in the income tax expense and the corresponding change in the effective income tax rate for the three-month period ended March 31, 2021,2022, when compared to the prior-year period, was primarily due to a pre-tax loss during the 2020 period,decreased benefit from discrete items such as well as a change in the jurisdictional mix of earnings.share-based compensation. Our effective tax rate differs from the U.S. statutory rate primarily due to the impact of global intangible low-taxed income (“GILTI”)GILTI inclusions, state income taxes, foreign taxes, other non-deductible permanent items and discrete items (such as share-based compensation).
Net Income (Loss)
Our net income (loss) for the three-month periods ended March 31, 2022 and 2021 and 2020 was approximately$10.5 million and $11.0 million, and ($3.2) million, respectively. This increaseThe decrease in our net income for the three-month period ended March 31, 20212022 was primarily the result of several
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factors, including increased sales and improvedlower gross margins no impairment expense in the first quarteras a percentage of 2021 compared to impairment expense of $3.8 million in the first quarter of 2020, lowersales, higher SG&A and R&D expenses, higher contingent consideration expense ($2.6 million for the three-month period ended March 31, 2022 compared to $0.4 million for the corresponding period of 2021), impairment charges of $1.7 million during the three-month period ended March 31, 2022, and lower interesthigher income tax expense, partially offset by increased SG&A and R&D expenses.higher sales.
LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments, Contractual Obligations and Cash Flows
At March 31, 20212022 and December 31, 2020,2021, our current assets exceeded current liabilities by $230.8$274.3 million and $244.7$245.9 million, respectively, and we had cash, and cash equivalents and restricted cash of approximately $58.5$55.8 million and $56.9$67.8 million, respectively, of which approximately $49.4$49.8 million and $42.3$55.7 million, respectively, were held by foreign subsidiaries. We currently believe future repatriation of cash and other property held by our foreign subsidiaries will generally not be subject to U.S. federal income tax. As a result, we are not permanently reinvested with respect to our historic unremitted foreign earnings. In addition, cash held by our subsidiary in China is subject to local laws and regulations that require government approval for the transfer of such funds to entities located outside of China. As of March 31, 2021,2022, and December 31, 2020,2021, we had cash, and cash equivalents and restricted cash of approximately $21.9$26.6 million and $15.5$28.5 million, respectively, within our subsidiary in China.
Cash flows provided by operating activities. We generated cash from operating activities of approximately $35.2$12.0 million and $28.9$35.2 million during the three-month periods ended March 31, 20212022 and 2020,2021, respectively. Net cash provided by operating activities increased approximately $6.4decreased $23.2 million for the three-month period ended March 31, 20212022 compared to the three-month period ended March 31, 2020.2021. Significant factors affecting operating cash flows during these yearsperiods included:
● | Cash provided by (used for) accrued expenses was |
● | Cash |
● | Cash (used for) inventories was ($9.2) million and |
Cash flows used in investing activities. We used cash in investing activities of approximately $6.3$9.9 million and $14.8$6.3 million for the three-month periods ended March 31, 20212022 and 2020,2021, respectively. We used cash for capital expenditures of property and equipment of approximately $6.2$9.5 million and $14.0$6.2 million in the three-month periods ended March 31,
30
2021 2022 and 2020,2021, respectively. Capital expenditures in each period were primarily related to investment in buildings, property and equipment to support development and production of new and expanded product lines and to facilitate growth in our distribution markets.products. Historically, we have incurred significant expenses in connection with facility construction, production automation, product development and the introduction of new products. We anticipate that we will spend approximately $45$55 to $50$60 million in 20212022 for buildings, property and equipment.
Cash flows used in financing activities. Cash used in financing activities for the three-month periods ended March 31, 2022 and 2021 and 2020 was approximately$14.2 million and $26.2 million, and $6.2 million, respectively. InDuring the first quarter of 2021, we decreased our net borrowings by approximately $30.9 million by paying down our debt. In the first quarter of 2020,three-month period ended March 31, 2022 we increased our net borrowings by approximately $6.1$9.6 million to partially finance the payment of contingent consideration of $12.8$24.5 million, which is classified as a financing activity, principally related to our acquisition of Cianna Medical.Medical, Inc. During the three-month period ended March 31, 2021 we decreased our net borrowings by approximately $30.9 million.
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As of March 31, 2021,2022, we had outstanding borrowings of approximately $321$253 million and issued letter of credit guarantees of $3.4 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $418$475 million, based on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Third Amended Credit Agreement. Our interest rate as of March 31, 20212022 was a fixed rate of 2.12%2.71% on $175 million as a result of an interest rate swap (see Note 9 to our Condensed Notes to Consolidated Financial Statements set forth in Part I, Item 1 of this report) and a variable floating rate of 1.11% on $145.8 million. Our interest rate as of December 31, 2020 was a fixed rate of 2.37% on $175$75 million as a result of an interest rate swap and a variable floating rate of 1.40%1.46% on $176.6$177.8 million. The foregoing fixed rates are exclusiveOur interest rate as of changes in the notional amount andDecember 31, 2021 was a fixed rate associated with ourof 2.71% on $75 million as a result of an interest rate swaps beginning July 6, 2021 as described in Note 9 to our Condensed Notes to Consolidated Financial Statements set forth in Part I, Item 1swap and a variable floating rate of this report and potential future changes in the applicable margin.1.10% on $168.1 million.
We currently believe that our existing cash balances, anticipated future cash flows from operations and borrowings under the Third Amended Credit Agreement will be adequate to fund our current and currently planned future operations for the next twelve months and the foreseeable future.
Off-Balance Sheet Arrangements
We have committed to provide loans of up to an additional €2 million at the discretion of Selio Medical Limited at a rate of 5% per annum until one year and 45 days have passed from the date Selio receives FDA Section 510(k) approval of a medical device it is currently developing. The current note receivable balance from Selio is $250,000. If exercised, these loans would be securitized by all the present and future assets and property of the borrower. Aside from this arrangement, we do not have any off-balance sheet arrangements that have had, or are reasonably likely in the future to have, an effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial results are affected by the selection and application of accounting policies and methods. In the three months ended March 31, 2021, there were no changes to the application of critical accounting policies previously disclosed in Part II, Item 7 of the 2020 Annual Report on Form 10-K. In the event we pursue and complete significant transactions or acquisitions in the future, additional funds will likely be required to meet our strategic needs, which may require us to raise additional funds in the debt or equity markets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial results are affected by the selection and application of accounting policies and methods. In the three-month period ended March 31, 2022 there were no changes to the application of critical accounting policies previously disclosed in Part II, Item 7 of the 2021 Annual Report on Form 10-K.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this report, other than statements of historical fact, are “forward-looking statements” for purposes of these provisions, including, without limitation, any projections of earnings, revenues or other financial items, any statements of the plans and objectives of our management for future operations, any statements concerning proposed new products or services, any statements regarding the integration, development or commercialization of the business or any assets acquired from other parties, any statements regarding future economic conditions or performance, and any statements of assumptions
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underlying any of the foregoing. All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “should,” “anticipates,” “intends,” “seeks,” “believes,” “estimates,” “potential,” “forecasts,” “continue,” or other forms of these words or similar words or expressions, or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct. Actual results will likely differ, and could differ materially, from those projected or assumed in the forward-looking statements. Prospective investors are cautioned not to unduly rely on any such forward-looking statements.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Our actual results will likely differ, and may differ materially, from anticipated results. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results, and we assume no obligation to update or disclose revisions to those estimates. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections.
NOTICE REGARDING TRADEMARKS
This report includes trademarks, tradenames and service marks that are our property or the property of others. Solely for convenience, such trademarks and tradenames sometimes appear without any “™” or “®” symbol. However, failure to include such symbols is not intended to suggest, in any way, that we will not assert our rights or the rights of any applicable licensor, to these trademarks and tradenames.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about exchange rate risk are included in ParPart II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of the 20202021 Annual Report on Form 10-K. There have beenIn the three-month period ended March 31, 2022, there were no material changes from the information provided therein.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate disclosure controls and procedures for our company. Consequently, our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of March 31, 2021.2022. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarterthree-month period ended March 31, 2021,2022, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 109 “Commitments and Contingencies” set forth in the notes to our consolidated financial statements included in Part I, Item 1 of this report.
ITEM 1A. RISK FACTORS
In addition to other information set forth in this report, readers should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" of the 20202021 Annual Report on Form 10-K, as updated and supplemented below. Any of the risk factors disclosed in our reports could materially affect our business, financial condition or future results. The risks described here and in our 20202021 Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results, particularlyresults. The discussion of the risk factors below updates the corresponding disclosure under the same headings in the 2021 Annual Report on Form 10-K and may contain material changes to the corresponding risk factor discussion in our 2021 Annual Report on Form 10-K.
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Business, Economic, Industry and Operational Risks
Changes in general economic conditions, geopolitical conditions, domestic and foreign trade policies, monetary policies and other factors beyond our control may adversely impact our business and operating results.
Our operations and performance depend significantly on global, regional and U.S. economic and geopolitical conditions. Russia’s invasion and military attacks on Ukraine have triggered significant sanctions from U.S. and European leaders. These events continue to cause increasingly volatile global economic conditions. Resulting changes in U.S. trade policy could trigger retaliatory actions by Russia, its allies and other affected countries, including China, resulting in a “trade war.” On March 8, 2022, President Biden issued an executive order that bans the importation of Russian oil, liquefied natural gas and coal. On April 8, 2022, the President signed into law two bills suspending trade relations with Russia and Belarus and banning the import of Russian energy. These events have resulted in increased costs for raw materials we use in our manufacturing and could result in Russia and other foreign governments imposing tariffs on products that we export outside the U.S. or otherwise limiting our ability to sell our products abroad. These increased costs in our business generally are not a direct result of the conflict in Ukraine or government action, but rather we are affected by the adverse impact this conflict has on global inflationary pressures, energy prices and supply chain operations. Also, in light of these events, we have substantially suspended our operations in Russia. Although, our operations in Russia do not constitute a material portion of our business, the precarious and unpredictable natureclosure of our operations in Russia, combined with the general economic impact of the COVID-19 pandemic, containment measures,conflict, could have a material, adverse effect on our revenues and costs for materials and services. Furthermore, if the potentialconflict between Russia and Ukraine continues for a long period of time, or if other countries, including the U.S., become further involved in the conflict, we could face significant adverse effects to our overall business and financial condition.
The United Kingdom’s (“UK”) departure from the European Union (“EU”) (commonly known as “Brexit”) has created uncertainties affecting business operations in the UK, the EU and a number of other countries, including with respect to compliance with the regulatory regimes regarding the labeling and registration of the products we sell in these markets. While we have taken proactive steps to mitigate possible disruption to our operations, we still could face increased costs, volatility in exchange rates, market instability and other risks, depending on the effects of existing and future waves of outbreaksagreements between the UK and EU regarding Brexit and the related impacts tofuture EU/UK trading relationship.
The above factors, including a number of other economic and operating conditions.geopolitical factors both in the U.S. and abroad, could ultimately have material adverse effects on our business, financial condition, results of operations or cash flows, including the following:
● | effects of significant changes in economic, monetary and fiscal policies in the U.S. and abroad including currency fluctuations, inflationary pressures and significant income tax changes; |
● | a global or regional economic slowdown in any of our market segments; |
● | changes in government policies and regulations affecting the Company or its significant customers; |
● | industrial policies in various countries that favor domestic industries over multinationals or that restrict foreign companies altogether; |
● | new or stricter trade policies and tariffs enacted by countries, such as China, in response to changes in U.S. trade policies and tariffs; |
● | postponement of spending, in response to tighter credit, financial market volatility and other factors; |
● | rapid material escalation of the cost of regulatory compliance and litigation; |
● | difficulties protecting intellectual property; |
● | longer payment cycles; |
● | credit risks and other challenges in collecting accounts receivable; and |
● | the impact of each of the foregoing on outsourcing and procurement arrangements. |
Termination or interruption of our supply relationships and increases in labor costs and the prices of our component parts, finished products, third-party services and raw materials, particularly petroleum-based products, is negatively impacting our business and could have a further adverse effect on our business, operations or financial condition.
We rely on raw materials, component parts, finished products and third-party services in connection with our business. For example, substantially all of our products are sterilized by only a few different entities. If any of these sterilizers goes
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out of business or fails to comply with quality or regulatory requirements, we may be unable to find a suitable supplier to replace them. This could significantly delay or stop production and cause sales of such products to materially decline. Additionally, many of our products have components that are manufactured using resins, plastics and other petroleum-based materials which are available from a limited number of suppliers. We are experiencing a growing trend among suppliers of polymer resins to refuse to supply resin to medical device manufacturers or to require such manufacturers to assume additional risks due to the potential for product liability claims. Additionally, there is no assurance that crude oil supplies will be uninterrupted or that petroleum-based manufacturing materials will be available for purchase in the future. The actions by the U.S. government in response to the conflict between Russia and Ukraine, among other factors, has had an adverse impact on the cost of the petroleum-based manufacturing materials that we purchase. The military conflict in Ukraine has also had a general, adverse impact on supply interruptions and further hinders our ability to find the materials we need to make our products. Supply disruptions such as these are making it harder for us to find favorable pricing and reliable sources for the materials we need, putting upward pressure on our costs and increasing the risk that we may be unable to acquire the materials and services we need to continue to make certain products.
The availability and price of these materials, parts, products and services are affected by a variety of factors beyond our control, including the willingness of suppliers to sell into the medical device industry, changes in supply and demand, general economic conditions, labor costs, fuel-related transportation costs, liability concerns, climate change (including new and existing laws and regulations to address climate change), competition, import duties, tariffs, currency exchange rates and political uncertainty around the world. Our suppliers often pass some of their cost increases on to us, and if such increased costs are sustained or increase further, our suppliers may pass further cost increases on to us. In addition to the effect on resin prices, transportation costs have generally increased and may further increase if crude oil prices increase. Our transportation and service providers are typically able to pass any significant increases in oil prices on to us. Our costs may also be impacted by laws to increase minimum wages, including the potential increase to the federal minimum wage in the United States that has been recently proposed by the current administration.
Our ability to recover such increased costs may depend upon our ability to raise prices on our products. Due to the highly competitive nature of the healthcare industry and the cost-containment efforts of our customers and third-party payers, we may be unable to pass along cost increases through higher prices. If we are unable to fully recover these costs through price increases or offset these increases through cost reductions, or we experience terminations or interruption of our relationships with our suppliers, we could experience lower margins and profitability, and our results of operations, financial condition and cash flows could be materially harmed.
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ITEM 6. EXHIBITS
Exhibit No. |
| Description |
3.1 | | |
3.2 | | |
10.1 | |
|
|
| |
| | |
|
| |
| | |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | | The following financial information from the quarterly report on Form 10-Q for the quarter ended March 31, |
104 |
| Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document). |
* These exhibits are incorporated herein by reference.
† Indicates management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MERIT MEDICAL SYSTEMS, INC. Date: May By: /s/ FRED P. LAMPROPOULOS Fred P. Lampropoulos, President and Chief Executive Officer Date: May By: /s/ RAUL PARRA Raul Parra Chief Financial Officer and Treasurer MERIT MEDICAL SYSTEMS, INC.REGISTRANT7, 20216, 20227, 20216, 20223536