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dengu%911Y2022
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from to .
Commission File Number
.
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of exchange on which registered |
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.
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).
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.
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
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Common Stock, no par |
|
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
| June 30, |
| December 31, | |||
ASSETS |
| 2022 |
| 2021 | ||
(unaudited) | ||||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Trade receivables — net of allowance for credit losses — 2022 — $ |
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Other receivables |
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Inventories |
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Prepaid expenses and other current assets |
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Prepaid income taxes |
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Income tax refund receivables |
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Total current assets |
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Property and equipment: |
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Land and land improvements |
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Buildings |
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Manufacturing equipment |
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Furniture and fixtures |
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Leasehold improvements |
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Construction-in-progress |
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Total property and equipment |
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Less accumulated depreciation |
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Property and equipment — net |
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Other assets: |
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Intangible assets: |
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Developed technology — net of accumulated amortization — 2022 — $ |
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Other — net of accumulated amortization — 2022 — $ |
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Goodwill |
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Deferred income tax assets |
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Right-of-use operating lease assets | | | ||||
Other assets |
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Total other assets |
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Total assets | $ | | $ | | ||
See condensed notes to consolidated financial statements. | (continued) |
3
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
| June 30, |
| December 31, | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| 2022 |
| 2021 | ||
(unaudited) | ||||||
Current liabilities: |
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Trade payables | $ | | $ | | ||
Accrued expenses |
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Current portion of long-term debt |
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Short-term operating lease liabilities | | | ||||
Income taxes payable |
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Total current liabilities |
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Long-term debt |
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Deferred income tax liabilities |
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Long-term income taxes payable |
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Liabilities related to unrecognized tax benefits |
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Deferred compensation payable |
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Deferred credits |
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Long-term operating lease liabilities | |
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Other long-term obligations |
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Total liabilities |
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Commitments and contingencies |
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Stockholders' equity: |
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Preferred stock — |
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Common stock, |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
See condensed notes to consolidated financial statements. | (concluded) |
4
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts - unaudited)
| Three Months Ended |
| Six Months Ended | |||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net sales | $ | | $ | | $ | | $ | | ||||
Cost of sales |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Research and development |
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Impairment charges |
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Contingent consideration expense |
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Acquired in-process research and development |
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Total operating expenses |
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Income from operations |
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Other income (expense): |
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Interest income |
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Interest expense |
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Other expense — net |
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Total other expense — net |
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Income before income taxes |
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Income tax expense |
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Net income | $ | | $ | | $ | | $ | | ||||
Earnings per common share |
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Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding |
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Basic |
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Diluted |
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See condensed notes to consolidated financial statements.
5
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands - unaudited)
| Three Months Ended |
| Six Months Ended | |||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive income (loss): |
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Cash flow hedges |
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Income tax benefit (expense) |
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Foreign currency translation adjustment |
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Income tax benefit (expense) |
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Total other comprehensive income (loss) |
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Total comprehensive income | $ | | $ | | $ | | $ | | ||||
See condensed notes to consolidated financial statements.
6
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands - unaudited)
Common Stock | Retained | Accumulated Other | ||||||||||||
| Shares |
| Amount |
| Earnings |
| Comprehensive Income (Loss) |
| Total | |||||
Balance — January 1, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
Net income |
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Other comprehensive income |
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Stock-based compensation expense |
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Options exercised |
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Issuance of common stock under Employee Stock Purchase Plan |
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Shares issued from time-vested restricted stock units | | — | — | |||||||||||
Shares surrendered in exchange for payment of payroll tax liabilities |
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Balance — March 31, 2022 |
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Net income |
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Other comprehensive loss |
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Stock-based compensation expense |
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Options exercised |
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Issuance of common stock under Employee Stock Purchase Plan |
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Shares issued from time-vested restricted stock units | | — | — | |||||||||||
Balance — June 30, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
See condensed notes to consolidated financial statements. | (continued) |
7
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands - unaudited)
Common Stock | Retained | Accumulated Other | ||||||||||||
| Shares |
| Amount |
| Earnings |
| Comprehensive Income (Loss) |
| Total | |||||
Balance — January 1, 2021 |
| | $ | | $ | | $ | ( | $ | | ||||
Net income |
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Other comprehensive loss |
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Stock-based compensation expense |
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Options exercised |
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Issuance of common stock under Employee Stock Purchase Plan |
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Shares issued from time-vested restricted stock units | | — | — | |||||||||||
Shares surrendered in exchange for payment of payroll tax liabilities |
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Shares surrendered in exchange for exercise of stock options |
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Balance — March 31, 2021 |
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Net income |
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Other comprehensive income |
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Stock-based compensation expense |
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Options exercised |
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Issuance of common stock under Employee Stock Purchase Plan |
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Shares issued from time-vested restricted stock units | | — | — | |||||||||||
Balance — June 30, 2021 | | $ | | $ | | $ | ( | $ | | |||||
See condensed notes to consolidated financial statements. | (concluded) |
8
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
Six Months Ended | ||||||
June 30, | ||||||
| 2022 |
| 2021 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Loss on disposition of business |
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Loss on sale or abandonment of property and equipment |
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Write-off of certain intangible assets and other long-term assets |
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Acquired in-process research and development |
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Amortization of right-of-use operating lease assets | | | ||||
Adjustments and payments related to contingent consideration liability | | | ||||
Amortization of deferred credits |
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Amortization of long-term debt issuance costs |
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Stock-based compensation expense |
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Changes in operating assets and liabilities, net of acquisitions and divestitures: |
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Trade receivables |
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Other receivables |
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Inventories |
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Prepaid expenses and other current assets |
| ( |
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Income tax refund receivables |
| ( |
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Other assets |
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Trade payables |
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Accrued expenses |
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Income taxes payable |
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Deferred compensation payable |
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Operating lease liabilities | ( | ( | ||||
Other long-term obligations |
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Total adjustments |
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Net cash, cash equivalents, and restricted cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures for: |
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Property and equipment |
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Intangible assets |
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Proceeds from the sale of property and equipment |
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Payments from disposition of business | ( | — | ||||
Cash paid in acquisitions, net of cash acquired |
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Net cash, cash equivalents, and restricted cash used in investing activities | $ | ( | $ | ( | ||
See condensed notes to consolidated financial statements. | (continued) |
9
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
| Six Months Ended | |||||
June 30, | ||||||
2022 | 2021 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of common stock | $ | | $ | | ||
Proceeds from issuance of long-term debt |
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Payments on long-term debt | ( | ( | ||||
Contingent payments related to acquisitions |
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Payment of taxes related to an exchange of common stock |
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Net cash, cash equivalents, and restricted cash used in financing activities |
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Effect of exchange rates on cash, cash equivalents, and restricted cash |
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Net increase (decrease) in cash, cash equivalents and restricted cash |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH: |
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Beginning of period |
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End of period | $ | | $ | | ||
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS: | ||||||
Cash and cash equivalents | | | ||||
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Total cash, cash equivalents and restricted cash | $ | | $ | | ||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
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Cash paid during the period for: |
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Interest (net of capitalized interest of $ | $ | | $ | | ||
Income taxes | | | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
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Property and equipment purchases in accounts payable | $ | | $ | | ||
Acquisition purchases in other long-term obligations | ( | — | ||||
Merit common stock surrendered ( | — | | ||||
Right-of-use operating lease assets obtained in exchange for operating lease liabilities | | | ||||
See condensed notes to consolidated financial statements. | (concluded) |
10
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
2. Recently Issued Financial Accounting Standards. In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions in accounting for modifications of contracts that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which amended the scope of ASU 2020-04. ASU 2020-04 and ASU 2021-01 became effective as of March 12, 2020, and the provisions of these updates may be applied prospectively to transactions through December 31, 2022, when reference rate reform activity is expected to be completed. As of June 30, 2022, we had not modified any contracts as a result of reference rate reform. We are currently assessing the anticipated impact of these standards on our consolidated financial statements.
We currently believe that all other issued and not yet effective accounting standards are not materially relevant to our financial statements.
3.
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
11
The following tables present revenue from contracts with customers by reporting segment, product category and geographical region for the three and six-month periods ended June 30, 2022 and 2021 (in thousands):
Three Months Ended | Three Months Ended | |||||||||||||||||
June 30, 2022 | June 30, 2021 | |||||||||||||||||
| United States |
| International |
| Total |
| United States |
| International |
| Total | |||||||
Cardiovascular |
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Peripheral Intervention | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Cardiac Intervention |
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Custom Procedural Solutions |
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OEM |
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Total |
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Endoscopy | ||||||||||||||||||
Endoscopy Devices |
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Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Six Months Ended | Six Months Ended | |||||||||||||||||
June 30, 2022 | June 30, 2021 | |||||||||||||||||
| United States |
| International |
| Total |
| United States |
| International |
| Total | |||||||
Cardiovascular |
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Peripheral Intervention | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Cardiac Intervention |
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Custom Procedural Solutions |
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OEM |
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Total |
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Endoscopy | ||||||||||||||||||
Endoscopy Devices |
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Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
12
4. Acquisitions. On April 30, 2022, we acquired the Restore Endosystems Bifurcated Stent System pursuant to the terms of a unit purchase agreement we executed with all of the members of Restore Endosystems, LLC (“Restore Endosystems”). Subject to the terms and conditions of the unit purchase agreement, we paid $
During April 2022, we paid $
5. Inventories. Inventories at June 30, 2022 and December 31, 2021 consisted of the following (in thousands):
| June 30, 2022 |
| December 31, 2021 | |||
Finished goods | $ | | $ | | ||
Work-in-process |
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Raw materials |
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Total inventories | $ | | $ | | ||
6. Goodwill and Intangible Assets. The change in the carrying amount of goodwill for the six-month period ended June 30, 2022 is detailed as follows (in thousands):
| 2022 | ||
Goodwill balance at January 1 | $ | | |
Effect of foreign exchange |
| ( | |
Goodwill balance at June 30 | $ | | |
Total accumulated goodwill impairment losses aggregated to $
Other intangible assets at June 30, 2022 and December 31, 2021 consisted of the following (in thousands):
June 30, 2022 | |||||||||
Gross Carrying | Accumulated | Net Carrying | |||||||
| Amount |
| Amortization |
| Amount | ||||
Patents | $ | | $ | ( | $ | | |||
Distribution agreements |
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| ( |
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License agreements |
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| ( |
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Trademarks |
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| ( |
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Customer lists |
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| ( |
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Total | $ | | $ | ( | $ | | |||
13
December 31, 2021 | |||||||||
Gross Carrying | Accumulated | Net Carrying | |||||||
| Amount |
| Amortization |
| Amount | ||||
Patents | $ | | $ | ( | $ | | |||
Distribution agreements |
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| ( |
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License agreements |
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| ( |
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Trademarks |
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| ( |
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Customer lists |
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| ( |
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Total | $ | | $ | ( | $ | | |||
Aggregate amortization expense for the three and six-month periods ended June 30, 2022 was $
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 June 30, 2022, we did
During the three-month period ended June 30, 2021, 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. During the three-month period ended June 30, 2021, the primary indicator of impairment was our planned discontinuance of the Advocate™ Peripheral Angioplasty Balloon product line, sold under our license agreements with ArraVasc Limited (“ArraVasc”). We recorded an impairment charge for the remaining carrying value of ArraVasc intangible assets of approximately $
Estimated amortization expense for developed technology and other intangible assets for the next five years consisted of the following as of June 30, 2022 (in thousands):
Year Ending December 31, |
| Estimated Amortization Expense | |
Remaining 2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 | | ||
2026 |
| | |
7. Income Taxes. Our provision for income taxes for the three-month periods ended June 30, 2022 and 2021 was a tax expense of $
14
8. Revolving Credit Facility and Long-Term Debt. Principal balances outstanding under our long-term debt obligations as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):
| June 30, 2022 |
| December 31, 2021 | |||
Term loans | $ | | $ | | ||
Revolving credit loans |
| |
| | ||
Less unamortized debt issuance costs |
| ( |
| ( | ||
Total long-term debt |
| |
| | ||
Less current portion |
| |
| | ||
Long-term portion | $ | | $ | | ||
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 amended and restated 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 $
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.
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) |
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Consolidated Interest Coverage Ratio (2) |
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Facility Capital Expenditures (3) | $ | |||
| (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 Interest Expense (as defined in the Third Amended Credit Agreement) for any period of four consecutive fiscal quarters. |
| (3) | Maximum level of the aggregate amount of all Facility Capital Expenditures (as defined in the Third Amended Credit Agreement) in any fiscal year. |
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We believe we were in compliance with all covenants set forth in the Third Amended Credit Agreement as of June 30, 2022.
As of June 30, 2022, we had outstanding borrowings of $
Future minimum principal payments on our long-term debt, as of June 30, 2022, were as follows (in thousands):
Years Ending | Future Minimum | ||
December 31, |
| Principal Payments | |
Remaining 2022 |
| $ | |
2023 | | ||
2024 | | ||
Total future minimum principal payments | $ | | |
9.
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 derivative instruments we use are interest rate swaps and foreign currency forward contracts. We recognize derivative 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 derivative instruments not designated as hedging instruments are recorded in earnings throughout the term of the derivative.
Interest Rate Risk. Our debt bears interest at variable interest rates. Therefore, we are subject to variability in the cash payable for interest expense. In order to mitigate a portion of the risk attributable to such 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 varies in accordance with changes in the benchmark interest rate.
Derivative Instruments Designated as Cash Flow Hedges
On December 23, 2019, we entered into a pay-fixed, receive-variable interest rate swap with a notional amount of $
On June 30, 2022 and December 31, 2021, our interest rate swap qualified as a cash flow hedge. The fair value of our interest rate swap on June 30, 2022 was an asset of $
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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
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 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
Derivative Instruments Not Designated as Cash Flow Hedges
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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 |
| June 30, 2022 |
| December 31, 2021 | ||
Assets |
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Interest rate swaps |
| Other assets (long-term) | $ | | $ | — | ||
Foreign currency forward contracts |
| Prepaid expenses and other assets | | | ||||
Foreign currency forward contracts |
| Other assets (long-term) | |
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(Liabilities) |
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Interest rate swaps | Other long-term obligations | — | ( | |||||
Foreign currency forward contracts |
| Accrued expenses |
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Foreign currency forward contracts |
| Other long-term obligations |
| ( |
| ( | ||
Fair Value of Derivative Instruments Not Designated as Hedging Instruments |
| Balance Sheet Location |
| June 30, 2022 |
| December 31, 2021 | ||
Assets |
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Foreign currency forward contracts |
| Prepaid expenses and other assets | $ | | $ | | ||
(Liabilities) |
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Foreign currency forward contracts |
| Accrued expenses |
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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, consolidated statements of comprehensive income and consolidated balance sheets (in thousands):
Amount of Gain/(Loss) | Consolidated Statements | Amount of Gain/(Loss) | ||||||||||||||||||
Recognized in OCI | of Income | Reclassified from AOCI | ||||||||||||||||||
Three Months Ended June 30, |
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| Three Months Ended June 30, | Three Months Ended June 30, | ||||||||||||||||
Derivative instrument |
| 2022 |
| 2021 |
| Location in statements of income |
| 2022 |
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| 2021 |
| 2022 |
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| 2021 | ||||
Interest rate swaps | $ | | $ | ( | Interest expense | $ | ( | $ | ( | $ | ( | $ | ( | |||||||
Foreign currency forward contracts |
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| ( | Revenue |
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Cost of sales |
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| ( |
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Amount of Gain/(Loss) | Consolidated Statements | Amount of Gain/(Loss) | ||||||||||||||||||
Recognized in OCI | of Income | Reclassified from AOCI | ||||||||||||||||||
Six Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||
Derivative instrument |
| 2022 |
| 2021 |
| Location in statements of income |
| 2022 |
| 2021 |
| 2022 |
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| 2021 | |||||
Interest rate swaps | $ | | $ | | Interest expense | $ | ( | $ | ( | $ | ( | $ | ( | |||||||
Foreign currency forward contracts |
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Cost of sales |
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As of June 30, 2022, $
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Derivative Instruments Not Designated as Hedging Instruments
The following gains/(losses) from these derivative instruments were recognized in our consolidated statements of income for the periods presented (in thousands):
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| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||
Derivative Instrument |
| Location in statements of income |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Foreign currency forward contracts |
| Other expense — net | $ | | $ | ( | $ | | $ | ( | ||||
10. Commitments and Contingencies.
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, audits or proceedings, 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 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 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.
Shareholder Derivative Action
On June 3, 2021, Steffen Maute filed a complaint, 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 Merit and were unjustly enriched at the expense of and to the 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. The parties have negotiated a tentative agreement to settle the dispute; however, that agreement is not final and remains subject to court approval. As currently proposed, the settlement would result in an expense to Merit of $
SEC Inquiry
We have received a request from the Division of Enforcement of the U.S, Securities and Exchange Commission (“SEC”) seeking the voluntary production of information relating to the business activities of Merit’s subsidiary in China, including interactions with hospitals and health care officials in China. We are cooperating with this request and investigating the matter and, at this time, are unable to predict the scope, timing, significance or outcome of this matter.
Legal costs for proceedings, legal actions and claims discussed, such as outside counsel fees and expenses, are charged to expense in the period(s) incurred.
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11. Earnings Per Common Share (EPS). The computation of weighted average shares outstanding and the basic and diluted earnings per common share for the three and six-month periods ended June 30, 2022 and 2021 consisted of the following (in thousands, except per share amounts):
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Average common shares outstanding |
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Basic EPS | $ | | $ | | $ | | $ | | ||||
Average common shares outstanding | | | | | ||||||||
Effect of dilutive stock awards | | | | | ||||||||
Total potential shares outstanding | | | | | ||||||||
Diluted EPS | $ | | $ | | $ | | $ | | ||||
Equity awards excluded as the impact was anti-dilutive (1) | | | | | ||||||||
| (1) | Does not reflect the impact of incremental repurchases under the treasury stock method. |
12. Stock-Based Compensation Expense. Stock-based compensation expense before income tax expense for the three and six-month periods ended June 30, 2022 and 2021 consisted of the following (in thousands):
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Cost of sales | ||||||||||||
Nonqualified stock options | $ | | $ | | $ | | $ | | ||||
Research and development |
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Nonqualified stock options | |
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Selling, general and administrative |
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Nonqualified stock options | |
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Performance-based restricted stock units | | | | | ||||||||
Restricted stock units | | | | | ||||||||
Cash-settled performance-based share-based awards (Liability Awards) | | | | | ||||||||
Total selling, general and administrative | | | | | ||||||||
Stock-based compensation expense before taxes | $ | | $ | | $ | | $ | | ||||
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 six-month periods ended June 30, 2022 and 2021, we granted stock options representing
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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:
Six Months Ended | ||||
June 30, | ||||
2022 | 2021 | |||
Risk-free interest rate |
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Expected option term |
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Expected dividend yield |
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Expected price volatility |
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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 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.
As of June 30, 2022, the total remaining unrecognized compensation cost related to non-vested stock options was $
Stock-Settled Performance-Based Restricted Stock Units (“Performance Stock Units”)
During the six-month periods ended June 30, 2022 and 2021, we granted performance stock units to certain of our executive officers which represent up to
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:
Six Months Ended | ||||
June 30, | ||||
2022 | 2021 | |||
Risk-free interest rate |
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Performance period |
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Expected dividend yield |
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Expected price volatility |
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The risk-free interest rate of return was determined using the U.S. Treasury rate at the time of grant with a 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 adjustments 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 June 30, 2022, the total remaining unrecognized compensation cost related to stock-settled performance stock units was $
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Liability Awards
During the six-month periods ended June 30, 2022 and 2021, we granted liability awards to our Chief Executive Officer with total target cash incentives, each in the amount of $
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 obligations within our consolidated balance sheet. As of June 30, 2022, the total remaining unrecognized compensation cost related to cash-settled performance-based share-based awards was $
Restricted Stock Units
During the three-month periods ended June 30, 2022 and 2021, we granted restricted stock units to our non-employee directors representing
13. Segment Reporting. We report our operations in
Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three and six-month periods ended June 30, 2022 and 2021, were as follows (in thousands):
| Three Months Ended |
| Six Months Ended | |||||||||
| June 30, |
| June 30, | |||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net sales |
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Cardiovascular | $ | | $ | | $ | | $ | | ||||
Endoscopy |
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Total net sales |
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Income from operations |
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Cardiovascular |
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Endoscopy |
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Total income from operations |
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Total other expense — net |
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Income tax expense |
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Net income | $ | | $ | | $ | | $ | | ||||
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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 June 30, 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 | |||||||||
| June 30, 2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
Interest rate contract asset, long-term (1) | $ | | $ | — | $ | | $ | — | ||||
Foreign currency contract assets, current and long-term (2) | $ | | $ | — | $ | | $ | — | ||||
Foreign currency contract liabilities, current and long-term (3) | $ | ( | $ | — | $ | ( | $ | — | ||||
Contingent consideration liabilities | $ | ( | $ | — | $ | — | $ | ( | ||||
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) | $ | ( | $ | — | $ | ( | $ | — | ||||
Foreign currency contract assets, current and long-term (2) | $ | | $ | — | $ | | $ | — | ||||
Foreign currency contract liabilities, current and long-term (3) | $ | ( | $ | — | $ | ( | $ | — | ||||
Contingent consideration liabilities | $ | ( | $ | — | $ | — | $ | ( | ||||
| (1) | The fair value of the interest rate contract is determined using Level 2 fair value inputs and is reported with other long-term assets or other long-term obligations in the consolidated balance sheets. |
| (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 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.
| Three Months Ended |
| Six Months Ended | |||||||||
| June 30, |
| June 30, | |||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Beginning balance | $ | | $ | | $ | | $ | | ||||
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Contingent payments made |
| ( |
| ( |
| ( |
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Effect of foreign exchange | — | | ( | | ||||||||
Ending balance | $ | | $ | | $ | | $ | | ||||
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As of June 30, 2022, $
Payments related to the settlement of the contingent consideration liability recognized at fair value as of the applicable acquisition date of $
The recurring Level 3 measurement of our contingent consideration liabilities included the following significant unobservable inputs at June 30, 2022 and December 31, 2021 (amounts in thousands):
Fair value at |
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June 30, | Valuation | Weighted | |||||||||
Contingent consideration liability |
| 2022 |
| technique |
| Unobservable inputs |
| Range | Average(1) | ||
Revenue-based royalty payments contingent liability | $ | |
| Discounted cash flow |
| Discount rate | |||||
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| Projected year of payments | 2022-2034 | 2026 | |||||
Revenue milestones contingent liability | $ | |
| Monte Carlo simulation |
| Discount rate | |||||
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| Projected year of payments | 2022-2032 | 2023 | |||||
Regulatory approval contingent liability | $ | | Scenario-based method | Discount rate | |||||||
Probability of milestone payment | |||||||||||
Projected year of payment | 2024-2025 | 2025 | |||||||||
Fair value at |
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December 31, | Valuation | Weighted | |||||||||
Contingent consideration liability |
| 2021 |
| technique |
| Unobservable inputs |
| Range | Average(1) | ||
Revenue-based royalty payments contingent liability | $ | |
| Discounted cash flow |
| Discount rate | |||||
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| Projected year of payments | 2022-2034 | 2026 | |||||
Revenue milestones contingent liability | $ | |
| Monte Carlo simulation |
| Discount rate | |||||
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| Projected year of payments | 2022-2031 | 2022 | |||||
Regulatory approval contingent liability | $ | | Scenario-based method | Discount rate | |||||||
Probability of milestone payment | |||||||||||
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. |
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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.
Contingent Payments to Related Parties
During the six-month period ended June 30, 2022, we made contingent payments of $
Fair Value of Other Assets (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.
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.
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. 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.
Intangible Assets. 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. During the six-month period ended June 30, 2022, we had impairment losses related to acquired intangible assets of $
During the six-month period ended June 30, 2021 we had losses related to acquired intangible assets of $
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Right of Use Operating Lease Assets. During the three-month period ended June 30, 2021, we identified changes in events and circumstances relating to certain right-of-use (“ROU”) operating lease assets. We compared the anticipated undiscounted cash flows generated by a sublease to the carrying value of the ROU operating lease and related long-lived assets and determined that the carrying values were not recoverable. Consequently, we recorded impairment losses in the three-month period ended June 30, 2021 of approximately $
Property and Equipment. During the three and six-month periods ended June 30, 2021, we had losses of $
Notes Receivable
Our outstanding long-term notes receivable, including accrued interest and our allowance for current expected credit losses, were $
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 |
| 2021 | 2022 |
| 2021 | |||||||
Beginning balance | $ | | $ | | $ | | $ | | ||||
Provision for credit loss expense | ( | | ( | | ||||||||
Ending balance | $ | | $ | | $ | | $ | | ||||
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15. Accumulated Other Comprehensive Income (Loss).
Cash Flow Hedges |
| Foreign Currency Translation |
| Total | ||||
Balance as of April 1, 2022 | $ | ( | $ | ( | $ | ( | ||
Other comprehensive income (loss) |
| | ( | ( | ||||
Income taxes |
| ( | | ( | ||||
Reclassifications to: | ||||||||
Revenue | ( | ( | ||||||
Cost of sales | | | ||||||
Interest expense | | | ||||||
Other expense — net | ( | ( | ||||||
Net other comprehensive income (loss) | | ( | ( | |||||
Balance as of June 30, 2022 | $ | | $ | ( | $ | ( | ||
Cash Flow Hedges |
| Foreign Currency Translation |
| Total | ||||
Balance as of April 1, 2021 | $ | ( | $ | ( | $ | ( | ||
Other comprehensive income (loss) |
| ( | | | ||||
Income taxes |
| ( | ( | ( | ||||
Reclassifications to: | ||||||||
Revenue | | | ||||||
Cost of sales | ( | ( | ||||||
Interest expense | | | ||||||
Net other comprehensive income (loss) | | | | |||||
Balance as of June 30, 2021 | $ | ( | $ | ( | $ | ( | ||
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Cash Flow Hedges |
| Foreign Currency Translation |
| Total | ||||
Balance as of January 1, 2022 | $ | ( | $ | ( | $ | ( | ||
Other comprehensive income (loss) |
| | ( | ( | ||||
Income taxes |
| ( | ( | ( | ||||
Reclassifications to: | ||||||||
Revenue | | | ||||||
Cost of sales | | | ||||||
Interest expense | | | ||||||
Other expense — net | ( | ( | ||||||
Net other comprehensive income (loss) | | ( | ( | |||||
Balance as of June 30, 2022 | $ | | $ | ( | $ | ( | ||
Cash Flow Hedges |
| Foreign Currency Translation |
| Total | ||||
Balance as of January 1, 2021 | $ | ( | $ | | $ | ( | ||
Other comprehensive income (loss) |
| | ( | ( | ||||
Income taxes |
| ( | | ( | ||||
Reclassifications to: | ||||||||
Revenue | | | ||||||
Cost of sales | ( | ( | ||||||
Interest expense | | | ||||||
Net other comprehensive income (loss) | | ( | | |||||
Balance as of June 30, 2021 | $ | ( | $ | ( | $ | ( | ||
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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 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 June 30, 2022, we reported sales of $295.0 million, up $14.7 million or 5.2%, compared to sales for the three-month period ended June 30, 2021 of $280.3 million. For the six-month period ended June 30, 2022, we reported sales of $570.4 million, up $41.2 million or 7.8%, compared to sales for the six-month period ended June 30, 2021 of $529.2 million. For the three and six-month periods ended June 30, 2022, foreign currency fluctuations (net of hedging) decreased our net sales by $6.1 million and $7.8 million, respectively, assuming applicable foreign exchange rates in effect during the comparable prior-year periods.
Gross profit as a percentage of sales increased to 45.8% for the three-month period ended June 30, 2022 compared to 44.3% for the three-month period ended June 30, 2021. Gross profit as a percentage of sales increased to 44.9% for the six-month period ended June 30, 2022 compared to 44.6% for the six-month period ended June 30, 2021.
Net income for the three-month period ended June 30, 2022 was $15.3 million, or $0.27 per share, compared to net income of $4.9 million, or $0.09 per share, for the three-month period ended June 30, 2021. Net income for the six-month period ended June 30, 2022 was $25.8 million, or $0.45 per share, compared to net income of $15.9 million, or $0.28 per share, for the six-month period ended June 30, 2021.
Recent Developments and Trends
In addition to the trends identified in the 2021 Annual Report on Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview,” our business in 2022 has been impacted, and we believe will continue to be impacted, by the following recent developments and trends:
| ● | Our revenue results during the three-month period ended June 30, 2022 were driven primarily by stronger-than-anticipated demand in the U.S. and more favorable than anticipated international sales trends, particularly in the EMEA and “Rest of World” (“ROW”) regions. |
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| ● | Our clinical study, the “WAVE Study”, of the WRAPSODY™ Endovascular Stent Graft, an investigational device being studied for the treatment of stenosis or occlusion within dialysis outflow circuits continues to progress. We have 40 clinical sites actively enrolling patients in the study. |
| ● | We announced first patient enrollment in two new studies in recent months: (1) the “WRAP” study which, is designed to evaluate the clinical benefits associated with the use of the WRAPSODY Cell-Impermeable Endoprosthesis in patients receiving hemodialysis that experience a narrowing (stenosis) or blockage (occlusion) of blood vessels required for dialysis (vascular access) and (2) the “STREAMLoc” study which is a Canadian registry intended to demonstrate the utility of the SCOUT® Surgical Guidance system to improve workflow and efficiency in Canadian centers diagnosing and treating breast cancer. |
| ● | During the first half of 2022, we received “Breakthrough Device Designation” for Embosphere Microspheres for use in genicular artery embolization for symptomatic knee osteoarthritis, we received clearance for the SCOUT Bx™ Delivery System, a notable addition to the Merit Oncology Breast and Soft Tissue Localization portfolio, and we announced the launch of a new SCOUT Mini Reflector. |
| ● | As of June 30, 2022, we had cash, cash equivalents, and restricted cash of $65.2 million and net available borrowing capacity of approximately $481 million. |
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of sales for the periods indicated:
| Three Months Ended | Six Months Ended | ||||||||
June 30, | June 30, | |||||||||
| 2022 |
| 2021 |
|
| 2022 |
| 2021 |
| |
Net sales |
| 100 | % | 100 | % |
| 100 | % | 100 | % |
Gross profit |
| 45.8 |
| 44.3 |
|
| 44.9 | 44.6 |
| |
Selling, general and administrative expenses |
| 29.0 |
| 32.7 |
|
| 29.7 | 32.6 |
| |
Research and development expenses |
| 6.3 |
| 6.3 |
|
| 6.3 | 6.4 |
| |
Impairment charges |
| — |
| 1.5 |
|
| 0.3 | 0.8 |
| |
Contingent consideration expense |
| 0.4 |
| 0.6 |
|
| 0.7 | 0.4 |
| |
Acquired in-process research and development expense |
| 2.3 |
| — |
| 1.2 | — |
| ||
Income from operations |
| 7.9 |
| 3.2 |
|
| 6.7 | 4.4 |
| |
Other expense — net |
| (0.9) |
| (0.7) |
|
| (0.6) | (0.7) |
| |
Income before income taxes |
| 7.0 |
| 2.4 |
|
| 6.1 | 3.7 |
| |
Net income |
| 5.2 |
| 1.8 |
|
| 4.5 | 3.0 |
| |
Sales
Sales for the three-month period ended June 30, 2022 increased by 5.2%, or $14.7 million, compared to the corresponding period in 2021. Sales for the six-month period ended June 30, 2022 increased by 7.8%, or $41.2 million, compared to the
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corresponding period in 2021. Listed below are the sales by product category within each of our financial reporting segments for the three and six-month periods ended June 30, 2022 and 2021 (in thousands, other than percentage changes):
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| % Change |
| 2022 |
| 2021 |
| % Change |
| 2022 |
| 2021 | |||||||
Cardiovascular | ||||||||||||||||||
Peripheral Intervention |
| 5.1 | % | $ | 110,955 | $ | 105,600 | 9.2 | % | $ | 216,728 | $ | 198,514 | |||||
Cardiac Intervention |
| 4.6 | % |
| 89,574 |
| 85,653 |
| 6.7 | % | 171,061 |
| 160,390 | |||||
Custom Procedural Solutions |
| 0.9 | % |
| 49,093 |
| 48,636 |
| 1.4 | % | 95,355 |
| 94,057 | |||||
OEM |
| 14.3 | % |
| 37,048 |
| 32,403 |
| 16.8 | % | 70,462 |
| 60,337 | |||||
Total |
| 5.3 | % |
| 286,670 |
| 272,292 |
| 7.9 | % | 553,606 |
| 513,298 | |||||
Endoscopy | ||||||||||||||||||
Endoscopy Devices |
| 3.4 | % |
| 8,306 |
| 8,033 |
| 5.3 | % | 16,785 |
| 15,940 | |||||
Total |
| 5.2 | % | $ | 294,976 | $ | 280,325 | 7.8 | % | $ | 570,391 | $ | 529,238 | |||||
Cardiovascular Sales. Our cardiovascular sales for the three-month period ended June 30, 2022 were $286.7 million, up 5.3% when compared to the corresponding period of 2021 of $272.3 million. Sales for the three-month period ended June 30, 2022 were favorably affected by increased sales of:
| (a) | Peripheral intervention products, which increased by $5.4 million, or 5.1%, from the corresponding period of 2021. This increase was driven primarily by sales of our angiography, access, drainage, embolotherapy and radar localization products, offset partially by decreased sales of our intervention products. |
| (b) | Cardiac intervention products, which increased by $3.9 million, or 4.6%, from the corresponding period of 2021. This increase was driven primarily by sales of our intervention and access products, offset partially by decreased sales of our fluid management products (including our Medallion® Syringes, which saw increased demand in the prior period due to COVID-19 vaccination efforts). |
| (c) | OEM products, which increased by $4.6 million, or 14.3%, from the corresponding period of 2021. This increase was driven primarily by sales of our access, fluid management and interventions products, and kits, offset partially by decreased sales of our cardiac rhythm management/electrophysiology (“CRM/EP”) products. |
| (d) | Custom procedural solutions products, which increased by $0.5 million, or 0.9%, from the corresponding period of 2021. This increase was driven primarily by sales of our trays, offset partially by decreased sales of our critical care products. |
Our cardiovascular sales for the six-month period ended June 30, 2022 were $553.6 million, up 7.9% when compared to the corresponding period of 2021 of $513.3 million. Sales for the six-month period ended June 30, 2022 were favorably affected by increased sales of:
| (e) | Peripheral intervention products, which increased by $18.2 million, or 9.2%, from the corresponding period of 2021. This increase was driven primarily by sales of our radar localization, drainage, angiography, access, biopsy, delivery systems, and embolotherapy products. |
| (f) | Cardiac intervention products, which increased by $10.7 million, or 6.7%, from the corresponding period of 2021. This increase was driven primarily by sales of our intervention, angiography and access products, offset partially by decreased sales of our fluid management products (including our Medallion® Syringes, which saw increased demand in the prior period due to COVID-19 vaccination efforts). |
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| (g) | OEM products, which increased by $10.1 million, or 16.8%, from the corresponding period of 2021. This increase was driven primarily by sales of our access, intervention and angiography products, kits and coatings, offset partially by decreased sales of our cardiac rhythm management/electrophysiology (“CRM/EP”) products. |
| (h) | Custom procedural solutions products, which increased by $1.3 million, or 1.4%, from the corresponding period of 2021. This increase was driven primarily by sales of our kits and trays, offset partially by decreased sales of our critical care products. |
Endoscopy Sales. Our endoscopy sales for the three-month period ended June 30, 2022 were $8.3 million, up 3.4%, when compared to sales in the corresponding period of 2021 of $8.0 million. Sales for the three-month period ended June 30, 2022 were favorably affected by increased sales of our Elation Pulmonary Balloon Dilator. Our endoscopy sales for the six-month period ended June 30, 2022 were $16.8 million, up 5.3%, when compared to sales in the corresponding period of 2021 of $15.9 million. Sales for the six-month period ended June 30, 2022 were favorably affected by increased sales of our Elation Pulmonary Balloon Dilator, EndoMAXX® fully covered esophageal stent and other stents.
Geographic Sales
Listed below are sales by geography for the three and six-month periods ended June 30, 2022 and 2021 (in thousands, other than percentage changes):
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| % Change |
| 2022 |
| 2021 |
| % Change |
| 2022 |
| 2021 | |||||||
United States | 3.7 | % | $ | 164,674 | $ | 158,771 | 5.8 | % | $ | 317,666 | $ | 300,143 | ||||||
International | 7.2 | % | 130,302 | 121,554 | 10.3 | % | 252,725 | 229,095 | ||||||||||
Total |
| 5.2 | % | $ | 294,976 | $ | 280,325 | 7.8 | % | $ | 570,391 | $ | 529,238 | |||||
United States Sales. U.S. sales for the three-month period ended June 30, 2022 were $164.7 million, or 55.8% of net sales, up 3.7% when compared to the corresponding period of 2021. U.S. sales for the six-month period ended June 30, 2022 were $317.7 million, or 55.7% of net sales, up 5.8% when compared to the corresponding period of 2021. The increase in our domestic sales was driven primarily by our U.S. Direct and OEM businesses.
International Sales. International sales for the three-month period ended June 30, 2022 were $130.3 million, or 44.2% of net sales, up 7.2% when compared to the corresponding period of 2021 of $121.6 million. The increase in our international sales for the three-month period ended June 30, 2022, compared to the three-month period ended June 30, 2021, included increased sales in our APAC operations of $0.5 million or 0.9%, in our ROW operations of $4.3 million or 59.5%, and in our EMEA operations of $3.9 million or 7.3%.
International sales for the six-month period ended June 30, 2022 were $252.7 million, or 44.3% of net sales, up 10.3% when compared to the corresponding period of 2021 of $229.1 million. The increase in our international sales for the six-month period ended June 30, 2022, compared to the six-month period ended June 30, 2021, included increased sales in our APAC operations of $9.8 million or 8.7%, in our ROW operations of $7.5 million or 53.0%, and in our EMEA operations of $6.3 million or 6.2%.
Gross Profit
Our gross profit as a percentage of sales increased to 45.8% for the three-month period ended June 30, 2022, compared to 44.3% for the three-month period ended June 30, 2021. The increase in gross profit percentage was primarily due to changes in product mix, lower standard costs from efficiencies gained in our foundations for growth program and lower obsolescence expense as a percentage of sales, offset partially by unfavorable variances primarily from the impact of inflationary pressures on material costs and higher freight costs.
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Our gross profit as a percentage of sales increased to 44.9% for the six-month period ended June 30, 2022, compared to 44.6% for the six-month period ended June 30, 2021. The increase in gross profit percentage was primarily due to changes in product mix, lower standard costs from efficiencies gained in our foundations for growth program and lower intangible amortization expense as a percentage of sales, offset partially by unfavorable variances primarily from the impact of inflationary pressures on material costs and higher freight costs.
Operating Expenses
Selling, General and Administrative Expense. Selling, general and administrative (SGA) expenses decreased ($6.1) million, or (6.6)%, for the three-month period ended June 30, 2022 compared to the corresponding period of 2021. As a percentage of sales, SGA expenses were 29.0% for the three-month period ended June 30, 2022, compared to 32.7% for the corresponding period of 2021. For the three-month period ended June 30, 2022, SGA expenses decreased compared to the corresponding period of 2021 primarily due to $6.1 million of contract termination costs recorded in SGA during the three-month period ended June 30, 2021 to renegotiate certain terms of an acquisition agreement.
SGA expenses decreased ($3.1) million, or (1.8)%, for the six-month period ended June 30, 2022 compared to the corresponding period of 2021. As a percentage of sales, SGA expenses were 29.7% for the six-month period ended June 30, 2022, compared to 32.6% for the corresponding period of 2021. For the six-month period ended June 30, 2022, SGA expenses decreased compared to the corresponding period of 2021 primarily due to $6.1 million of contract termination costs recorded in SGA during the three-month period ended June 30, 2021 to renegotiate certain terms of an acquisition agreement and $4.4 million decrease in acquisition related costs, partially offset by increased labor related costs associated with headcount.
Research and Development Expenses. Research and development (RD) expenses for the three-month period ended June 30, 2022 were $18.5 million, up 5.0%, when compared to RD expenses in the corresponding period of 2021 of $17.6 million. RD expenses for the six-month period ended June 30, 2022 were $35.9 million, up 5.9%, when compared to RD expenses in the corresponding period of 2021 of $33.9 million. The increases in RD expenses for the three and six-month periods ended June 30, 2022 compared to the corresponding periods in 2021 were largely due to higher labor-related costs, increased clinical expenses for certain RD projects (including clinical trials for our Embosphere® Microspheres and WRAPSODYTM Endoprosthesis) and higher expenses related to implementation of the Medical Device Regulation in the European Union.
Impairment Charges. For the three-month period ended June 30, 2022, we recorded no impairment charges. For the three-month period ended June 30, 2021, we recorded impairment charges of $4.3 million. These impairments included $1.6 million of intangible assets and $1.3 million of property and equipment due to the planned discontinuance of the Advocate™ Peripheral Angioplasty Balloon product line, sold under our license agreements with ArraVasc, and $1.4 million of impairments of certain right-of-use “ROU” operating lease assets due to site consolidation decisions and changes in our projected cash flows for the underlying assets.
For the six-month period ended June 30, 2022, we recorded impairment charges of $1.7 million of intangible assets due to the divestiture of the STD Pharmaceutical business, which we completed on April 30, 2022. For the six-month period ended June 30, 2021 we recorded $4.3 million of impairment charges, as described above.
Contingent Consideration Expense. For the three and six-month periods ended June 30, 2022, we recognized contingent consideration expense from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions of $1.2 million and $3.8 million, respectively, compared to contingent consideration expense of $1.8 million and $2.2 million for the three and six-month periods ended June 30, 2021. Expense in each period related to changes in the probability and timing of achieving certain revenue and operational milestones, as well as expense for the passage of time.
Acquired In-process Research and Development. For the three and six-month periods ended June 30, 2022, we recognized $6.7 million in acquired in-process research and development costs primarily associated with our acquisition of Restore Endosystems. We did not incur in-process research and development charges during the three and six-month periods ended June 30, 2021.
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Operating Income
The following table sets forth our operating income by financial reporting segment for the three and six-month periods ended June 30, 2022 and 2021 (in thousands):
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Operating Income | ||||||||||||
Cardiovascular | $ | 21,275 | $ | 6,777 | $ | 34,401 | $ | 18,978 | ||||
Endoscopy |
| 1,981 |
| 2,118 |
| 4,088 |
| 4,111 | ||||
Total operating income | $ | 23,256 | $ | 8,895 | $ | 38,489 | $ | 23,089 | ||||
Cardiovascular Operating Income. Our cardiovascular operating income for the three-month period ended June 30, 2022 was $21.3 million, compared to cardiovascular operating income in the corresponding period of 2021 of $6.8 million. The increase in cardiovascular operating income during the three-month period ended June 30, 2022 compared to the corresponding period of 2021 was primarily a result of higher sales ($286.7 million compared to $272.3 million) and lower SGA, partially offset by increased acquired in-process research and development charges in the three-month period ended June 30, 2022 of $6.7 million.
Our cardiovascular operating income for the six-month period ended June 30, 2022 was $34.4 million, compared to cardiovascular operating income in the corresponding period of 2021 of $19.0 million. The increase in cardiovascular operating income during the six-month period ended June 30, 2022 compared to the corresponding period of 2021 was primarily a result of higher sales ($553.6 million compared to $513.3 million), lower SGA and lower impairment charges, partially offset by higher contingent consideration expense and acquired in-process research and development charges in the six-month period ended June 30, 2022 of $6.7 million.
Endoscopy Operating Income. Our endoscopy operating income for the three-month period ended June 30, 2022 was $2.0 million, compared to endoscopy operating income of $2.1 million for the corresponding period of 2021. Our endoscopy operating income for the six-month period ended June 30, 2022 was $4.1 million, compared to endoscopy operating income of $4.1 million for the corresponding period of 2021. The decrease in endoscopy operating income for the three and six-month periods ended June 30, 2022 compared to the corresponding periods of 2021 was primarily a result of higher SGA expenses.
Other Expense
Our other expense for the three-month periods ended June 30, 2022 and 2021 was $2.6 million and $2.0 million, respectively. The change in other expense was primarily related to a $1.3 million loss on disposition of our STD Pharmaceuticals operation, partially offset by decreased expense associated realized and unrealized foreign currency losses.
Our other expense for the six-month periods ended June 30, 2022 and 2021 was $3.6 million and $3.5 million, respectively. The change in other expense was primarily related to a $1.3 million loss on the divestiture of the STD Pharmaceutical business, partially offset by decreased interest expense as a result of a lower average debt balance despite a higher effective interest rate and decreased expense associated realized and unrealized foreign currency losses.
Effective Tax Rate
Our provision for income taxes for the three-month periods ended June 30, 2022 and 2021 was a tax expense of $5.4 million and $1.9 million, respectively, which resulted in an effective tax rate of 26.1% and 28.4%, respectively. Our provision for income taxes for the six-month periods ended June 30, 2022 and 2021 was a tax expense of $9.0 million and $3.7 million, respectively, which resulted in an effective tax rate of 25.9% and 18.8%, respectively. The increase in the income tax expense and the corresponding change in the effective income tax rate for the three and six-month periods ended June 30, 2022, when compared to the prior-year periods, was primarily due to decreased benefit
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from discrete items such as share-based compensation and deferred compensation. Our effective tax rate differs from the U.S. statutory rate primarily due to the impact of GILTI inclusions, state income taxes, foreign taxes, other non-deductible permanent items and discrete items (such as share-based compensation).
Net Income
Our net income for the three-month periods ended June 30, 2022 and 2021 was $15.3 million and $4.9 million, respectively. The increase in our net income for the three-month period ended June 30, 2022 was the result of several principal factors, including higher sales, improved gross margins as a percentage of sales, lower SGA expenses, and lower impairment charges (no impairment in the three-month period ended June 30, 2022 compared to $4.3 million during the corresponding period of 2021), partially offset by increased acquired in-process research and development charges and higher income tax expense.
Our net income for the six-month periods ended June 30, 2022 and 2021 was $25.8 million and $15.9 million, respectively. The increase in our net income for the six-month period ended June 30, 2022 was the result of several principal factors, including higher sales, improved gross margins as a percentage of sales, lower SGA expenses, and lower impairment charges ($1.7 million during the six-month period ended June 30, 2022 compared to $4.3 million for the corresponding period of 2021), partially offset by higher contingent consideration expense ($3.8 million for the six-month period ended June 30, 2022 compared to $2.2 million for the corresponding period of 2021), increased acquired in-process research and development charges, and higher income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments, Contractual Obligations and Cash Flows
At June 30, 2022 and December 31, 2021, our current assets exceeded current liabilities by $297.0 million and $245.9 million, respectively, and we had cash, cash equivalents and restricted cash of $65.2 million and $67.8 million, respectively, of which $58.0 million and $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 June 30, 2022, and December 31, 2021, we had cash, cash equivalents and restricted cash of $37.6 million and $28.5 million, respectively, within our subsidiary in China.
Cash flows provided by operating activities. We generated cash from operating activities of $50.8 million and $76.4 million during the six-month periods ended June 30, 2022 and 2021, respectively. Net cash provided by operating activities decreased $25.6 million for the six-month period ended June 30, 2022 compared to the six-month period ended June 30, 2021. Significant factors affecting operating cash flows during these periods included:
| ● | Net income was approximately $25.8 million and $15.9 million for the six-month periods ended June 30, 2022 and 2021, respectively. |
| ● | Cash provided by (used for) accrued expenses was ($21.0) million and $9.2 million for the six-month periods ended June 30, 2022 and 2021, respectively, due primarily to the payment of approximately $18.25 million into escrow in connection with the settlement of a securities class action lawsuit and the timing of payment of bonuses and other accrued liabilities in each period. |
| ● | Cash provided by (used for) other receivables was $6.5 million and ($0.8) million for the six-month periods ended June 30, 2022 and 2021, respectively, due primarily to the collection of approximately $8.2 million of insurance proceeds in connection with the consolidated securities class action lawsuit we settled in April 2022. |
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| ● | Cash provided by (used for) inventories was ($14.8) million and $3.2 million for the six-month periods ended June 30, 2022 and 2021, respectively. The increase in inventory was associated with our strategy to proactively invest in our inventory balances to build the requisite safety stock and encourage high customer service levels. |
Cash flows used in investing activities. We used cash in investing activities of $23.3 million and $15.3 million for the six-month periods ended June 30, 2022 and 2021, respectively. We used cash for capital expenditures of property and equipment of $16.8 million and $12.8 million in the six-month periods ended June 30, 2022 and 2021, respectively. Capital expenditures in each period were primarily related to investment in property and equipment to support development and production of our 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 $55 to $60 million in 2022 for property and equipment.
Cash outflows invested in acquisitions for the six-month period ended June 30, 2022 were approximately $4.7 million and were primarily related to our $3.0 million upfront payment in our purchase of Restore Endosystems and our additional equity investment in Fluidx of $1.4 million. Cash outflows invested in acquisitions for the six-month period ended June 30, 2021 were approximately $1.8 million and were primarily related to our settlement of the first deferred payment for our acquisition of KA Medical, LLC completed in November 2020.
Cash flows used in financing activities. Cash used in financing activities for the six-month periods ended June 30, 2022 and 2021 was $27.4 million and $48.1 million, respectively. During the six-month period ended June 30, 2022 we increased our net borrowings by approximately $3.1 million to partially finance the payment of contingent consideration of $34.6 million, principally related to our acquisition of Cianna Medical and payment of the final sales milestone to Vascular Insights, LLC. During the six-month period ended June 30, 2021 we decreased our net borrowings by approximately $58.9 million.
As of June 30, 2022, we had outstanding borrowings of $246.3 million and issued letter of credit guarantees of $1.9 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $481 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 June 30, 2022 was a fixed rate of 2.71% with respect to $75 million of the principal amount as a result of an interest rate swap and a variable floating rate of 2.67% with respect to $171.3 million of the principal amount. Our interest rate as of December 31, 2021 was a fixed rate of 2.71% on $75 million as a result of an interest rate swap and a variable floating rate of 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. 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 six-month period ended June 30, 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
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other parties, any statements regarding future economic conditions or performance, and any statements of assumptions 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about exchange rate risk are included in Part II, Item 7A Quantitative and Qualitative Disclosures About Market Risk of the 2021 Annual Report on Form 10-K. In the six-month period ended June 30, 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 June 30, 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.
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Changes in Internal Control Over Financial Reporting
During the six-month period ended June 30, 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).
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10 “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 2021 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 2021 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. 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.
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 closure of our operations in Russia, combined with the general economic impact of the conflict, could have a material, adverse effect on our revenues and costs for materials and services. Furthermore, if the conflict 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 agreements between the UK and EU regarding Brexit and the future EU/UK trading relationship.
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The above factors, including a number of other economic and 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 Merit 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 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.
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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.
Our international operations make us subject to the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in non-U.S. jurisdictions, and our failure, or the failure of our distributors and agents, to comply with these laws could subject us to civil and criminal penalties and adversely affect our business.
We currently conduct our business in various foreign countries, and we expect to continue to expand our foreign operations. As a result, we are subject to the FCPA, the U.K. Bribery Act, and similar anti-corruption laws in non-U.S. jurisdictions. These laws generally prohibit companies and their intermediaries from illegally offering things of value to any individual for the purpose of obtaining or retaining business.
Compliance with the FCPA and other anti-bribery laws presents challenges to our operations. Our policies mandate compliance with the FCPA and all other applicable anti-bribery laws. Further, we expect our employees, distributors, agents and others who work for us or on our behalf to comply with these anti-bribery laws. Despite our training and compliance programs, our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees, distributors or agents. If our employees, distributors or agents violate the provisions of the FCPA or other anti-bribery laws, or even if there are allegations of such violations, we could be subject to investigations or civil and criminal penalties or other sanctions, which could have a material, adverse effect on our reputation, business, results of operations, financial condition or cash flows.
As disclosed in Note 10 “Commitments and Contingencies” to our consolidated financial statements, although we are unable to predict the scope, timing, significance or outcome of the SEC inquiry referenced in that note, the inquiry may cause a diversion of our management’s time and attention and could have a material adverse effect on our reputation, business, results of operations, financial condition or cash flows.
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ITEM 6. EXHIBITS
Exhibit No. |
| Description |
3.1 | ||
3.2 | ||
10.1 | ||
10.2 | ||
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 June 30, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) related Condensed Notes to the Unaudited Consolidated Financial Statements, tagged in detail. | |
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: August 5, 2022 | By: | /s/ FRED P. LAMPROPOULOS | |
Fred P. Lampropoulos, President and | |||
Chief Executive Officer | |||
Date: August 5, 2022 | By: | /s/ RAUL PARRA | |
Raul Parra | |||
Chief Financial Officer and Treasurer | |||
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