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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED                           March 31, 2021

OR

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                TO                     .

Commission File Number   0-18592

GRAPHIC

MERIT MEDICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Utah

    

87-0447695

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

1600 West Merit Parkway, South Jordan, Utah 84095

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (801) 253-1600

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of exchange on which registered

Common Stock, no par

MMSI

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer 

Accelerated Filer 

Non-Accelerated Filer 

Smaller Reporting Company 

Emerging Growth Company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

Common Stock

    

55,997,284

Title or class

Number of Shares
Outstanding at May 5, 2021

TABLE OF CONTENTS

PART I.

   

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

3

Consolidated Statements of Income (Loss) for the three months ended March 31, 2021 and 2020

5

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020

6

Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2020

7

Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020

8

Condensed Notes to Consolidated Financial Statements

10

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

PART II.

OTHER INFORMATION

33

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 6.

Exhibits

34

SIGNATURES

35

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2021 AND DECEMBER 31, 2020

(In thousands)

    

March 31, 

    

December 31, 

ASSETS

    

2021

    

2020

(unaudited)

CURRENT ASSETS:

 

  

 

  

Cash and cash equivalents

$

58,519

$

56,916

Trade receivables — net of allowance for credit losses — 2021 — $5,953 and 2020 — $5,313

 

150,314

 

146,641

Other receivables

 

8,719

 

7,774

Inventories

 

200,308

 

198,019

Prepaid expenses and other current assets

 

13,617

 

13,120

Prepaid income taxes

 

3,680

 

3,688

Income tax refund receivables

 

3,331

 

3,549

Total current assets

 

438,488

 

429,707

PROPERTY AND EQUIPMENT:

 

  

 

  

Land and land improvements

 

28,087

 

28,400

Buildings

 

187,774

 

188,878

Manufacturing equipment

 

270,754

 

268,894

Furniture and fixtures

 

61,422

 

61,586

Leasehold improvements

 

48,319

 

48,800

Construction-in-progress

 

47,735

 

46,889

Total property and equipment

 

644,091

 

643,447

Less accumulated depreciation

 

(265,914)

 

(260,719)

Property and equipment — net

 

378,177

382,728

OTHER ASSETS:

 

  

 

  

Intangible assets:

 

  

 

  

Developed technology — net of accumulated amortization —2021 — $203,308 and 2020 — $193,164

 

307,713

 

318,059

Other — net of accumulated amortization — 2021 — $59,025 and 2020 — $56,943

 

48,312

 

49,856

Goodwill

 

362,500

 

363,533

Deferred income tax assets

 

4,529

 

4,597

Right-of-use operating lease assets

74,714

78,240

Other assets

 

37,286

 

37,676

Total other assets

 

835,054

 

851,961

TOTAL ASSETS

$

1,651,719

$

1,664,396

See condensed notes to consolidated financial statements.

(continued)

3

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2021 AND DECEMBER 31, 2020

(In thousands)

    

March 31, 

    

December 31, 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

2021

    

2020

(unaudited)

CURRENT LIABILITIES:

 

  

  

Trade payables

$

52,986

$

49,837

Accrued expenses

 

132,173

 

111,944

Current portion of long-term debt

 

7,500

 

7,500

Short-term operating lease liabilities

12,246

12,903

Income taxes payable

 

2,773

 

2,820

Total current liabilities

 

207,678

 

185,004

Long-term debt

 

312,875

 

343,722

Deferred income tax liabilities

 

33,252

 

33,312

Long-term income taxes payable

 

347

 

347

Liabilities related to unrecognized tax benefits

 

1,016

 

1,016

Deferred compensation payable

 

16,227

 

16,808

Deferred credits

 

1,896

 

1,923

Long-term operating lease liabilities

67,980

 

70,941

Other long-term obligations

 

33,756

 

52,748

Total liabilities

 

675,027

 

705,821

Commitments and contingencies

 

  

 

  

STOCKHOLDERS’ EQUITY:

 

  

 

  

Preferred stock — 5,000 shares authorized as of March 31, 2021 and December 31, 2020; no shares issued

 

 

Common stock, no par value; shares authorized — 2021 and 2020 - 100,000; issued and outstanding as of March 31, 2021 - 55,933 and December 31, 2020 - 55,623

 

615,113

 

606,224

Retained earnings

 

368,761

 

357,803

Accumulated other comprehensive loss

 

(7,182)

 

(5,452)

Total stockholders’ equity

 

976,692

 

958,575

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

1,651,719

$

1,664,396

See condensed notes to consolidated financial statements.

(concluded)

4

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(In thousands, except per share amounts - unaudited)

    

Three Months Ended

March 31, 

    

2021

    

2020

NET SALES

$

248,913

$

243,525

COST OF SALES

 

137,019

 

139,741

GROSS PROFIT

 

111,894

 

103,784

OPERATING EXPENSES:

 

  

 

  

Selling, general and administrative

 

81,024

 

78,808

Research and development

 

16,274

 

14,872

Impairment charges

 

 

3,845

Contingent consideration expense

 

402

 

4,897

Total operating expenses

 

97,700

 

102,422

INCOME FROM OPERATIONS

 

14,194

 

1,362

OTHER INCOME (EXPENSE):

 

  

 

  

Interest income

 

472

 

79

Interest expense

 

(1,537)

 

(3,144)

Other expense — net

 

(435)

 

(289)

Total other expense — net

 

(1,500)

 

(3,354)

INCOME (LOSS) BEFORE INCOME TAXES

 

12,694

 

(1,992)

INCOME TAX EXPENSE

 

1,736

 

1,162

NET INCOME (LOSS)

$

10,958

$

(3,154)

EARNINGS (LOSS) PER COMMON SHARE:

 

  

 

  

Basic

$

0.20

$

(0.06)

Diluted

$

0.19

$

(0.06)

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

  

 

  

Basic

 

55,717

 

55,246

Diluted

 

56,978

 

55,246

See condensed notes to consolidated financial statements.

5

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(In thousands - unaudited)

    

Three Months Ended

March 31, 

    

2021

    

2020

Net income (loss)

$

10,958

$

(3,154)

Other comprehensive income (loss):

 

  

 

  

Cash flow hedges

 

2,921

 

(7,182)

Income tax benefit (expense)

 

(724)

 

1,849

Foreign currency translation adjustment

 

(4,462)

 

(4,125)

Income tax benefit (expense)

 

535

 

(7)

Total other comprehensive loss

 

(1,730)

 

(9,465)

Total comprehensive income (loss)

$

9,228

$

(12,619)

See condensed notes to consolidated financial statements.

6

MERIT MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(In thousands - unaudited)

Common Stock

Retained

Accumulated Other

    

Total

    

Shares

    

Amount

    

Earnings

    

Comprehensive Loss

BALANCE — January 1, 2021

$

958,575

 

55,623

$

606,224

$

357,803

$

(5,452)

Net income

 

10,958

 

  

 

  

 

10,958

 

  

Other comprehensive loss

 

(1,730)

 

  

 

  

 

  

 

(1,730)

Stock-based compensation expense

 

3,310

 

  

 

3,310

 

  

 

  

Options exercised

 

5,897

 

291

 

5,897

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

263

 

5

 

263

 

  

 

  

Shares issued from time-vested restricted stock units

25

Shares surrendered in exchange for payment of payroll tax liabilities

(488)

 

(9)

 

(488)

Shares surrendered in exchange for exercise of stock options

(93)

 

(2)

 

(93)

BALANCE — March 31, 2021

$

976,692

 

55,933

$

615,113

$

368,761

$

(7,182)

Common Stock

Retained

Accumulated Other

    

Total

    

Shares

    

Amount

    

Earnings

    

Comprehensive Loss

BALANCE — January 1, 2020

$

949,944

55,213

$

587,017

$

368,221

$

(5,294)

Net loss

 

(3,154)

 

  

 

  

 

(3,154)

 

  

Cumulative effect adjustment upon adoption of ASU 2016-13, Credit Losses

(575)

(575)

Other comprehensive loss

(9,465)

(9,465)

Stock-based compensation expense

2,641

2,641

Options exercised

2,369

174

2,369

Issuance of common stock under Employee Stock Purchase Plan

371

13

371

Shares surrendered in exchange for payment of payroll tax liabilities

(866)

(23)

(866)

Shares surrendered in exchange for exercise of stock options

(1,467)

(39)

(1,467)

BALANCE — March 31, 2020

$

939,798

 

55,338

$

590,065

$

364,492

$

(14,759)

See condensed notes to consolidated financial statements.

(concluded)

7

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(In thousands - unaudited)

Three Months Ended

March 31, 

    

2021

    

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

 

Net income (loss)

$

10,958

$

(3,154)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

21,400

 

23,320

Loss on sales and/or abandonment of property and equipment

 

(28)

 

37

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

 

 

3,925

Amortization of right-of-use operating lease assets

3,070

3,134

Fair value adjustments to contingent consideration

402

4,897

Amortization of deferred credits

 

(27)

 

(35)

Amortization of long-term debt issuance costs

 

151

 

151

Stock-based compensation expense

 

3,595

 

2,777

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

 

 

Trade receivables

 

(5,284)

 

3,445

Other receivables

 

(597)

 

613

Inventories

 

(3,396)

 

(4,983)

Prepaid expenses and other current assets

 

(1,071)

 

(3,126)

Income tax refund receivables

 

199

 

(2,475)

Other assets

 

80

 

(577)

Trade payables

 

4,237

 

4,340

Accrued expenses

 

5,393

 

(1,621)

Income taxes payable

 

(174)

 

2,109

Deferred compensation payable

 

(581)

 

(789)

Operating lease liabilities

(3,151)

(2,945)

Other long-term obligations

 

56

 

(179)

Total adjustments

 

24,274

 

32,018

Net cash provided by operating activities

 

35,232

 

28,864

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Capital expenditures for:

 

  

 

  

Property and equipment

 

(6,171)

 

(13,950)

Intangible assets

 

(692)

 

(1,062)

Proceeds from the sale of property and equipment

 

873

 

Cash received for settlement of current note receivable

250

Cash paid in acquisitions, net of cash acquired

 

(358)

 

Net cash used in investing activities

$

(6,348)

$

(14,762)

See condensed notes to consolidated financial statements.

(continued)

8

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(In thousands - unaudited)

    

Three Months Ended

March 31, 

2021

2020

CASH FLOWS FROM FINANCING ACTIVITIES:

 

Proceeds from issuance of common stock

$

5,520

$

1,261

Proceeds from issuance of long-term debt

 

9,694

 

30,665

Payments on long-term debt

(40,569)

(24,540)

Contingent payments related to acquisitions

 

(403)

 

(12,754)

Payment of taxes related to an exchange of common stock

 

(488)

 

(866)

Net cash used in financing activities

 

(26,246)

 

(6,234)

EFFECT OF EXCHANGE RATES ON CASH

 

(1,035)

 

(2,108)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

1,603

 

5,760

CASH AND CASH EQUIVALENTS:

 

  

 

  

Beginning of period

 

56,916

 

44,320

End of period

$

58,519

$

50,080

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

  

 

  

Cash paid during the period for:

 

  

 

  

Interest (net of capitalized interest of $120 and $392, respectively)

$

1,539

$

3,198

Income taxes

$

1,660

$

1,637

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

  

 

  

Property and equipment purchases in accounts payable

$

1,688

$

5,383

Current note receivable converted to equity investment

$

$

899

Merit common stock surrendered (2 and 39 shares, respectively) in exchange for exercise of stock options

$

93

$

1,467

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

$

131

$

2,800

See condensed notes to consolidated financial statements.

(concluded)

9

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   Basis of Presentation and Other Items. The interim consolidated financial statements of Merit Medical Systems, Inc. ("Merit," "we" or "us") for the three months ended March 31, 2021 and 2020 are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods and, consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of our management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of March 31, 2021 and December 31, 2020, and our results of operations and cash flows for the three-month periods ended March 31, 2021 and 2020. The results of operations for the three-month periods ended March 31, 2021 and 2020 are not necessarily indicative of the results for a full-year period. Percentages and earnings per share amounts presented are calculated from the underlying amounts. These interim consolidated financial statements should be read in conjunction with the financial statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”).

2.   Recently Issued Financial Accounting Standards.

Not Yet Adopted

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

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

3.   Revenue from Contracts with Customers. We recognize revenue when a customer obtains control of promised goods. The amount of revenue recognized reflects the consideration we expect to receive in exchange for these goods. Our revenue recognition policies have not changed from those disclosed in Note 1 to our consolidated financial statements in Item 8 of the 2020 Annual Report on Form 10-K.

Disaggregation of Revenue

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

10

The following tables present revenue from contracts with customers by reporting segment, product category and geographical region for the three-month periods ended March 31, 2021 and 2020 (in thousands):

Three Months Ended

Three Months Ended

March 31, 2021

March 31, 2020

    

United States

    

International

    

Total

    

United States

    

International

    

Total

Cardiovascular

 

  

 

 

  

 

  

 

  

 

  

Peripheral Intervention

$

56,866

$

36,048

$

92,914

$

55,803

$

31,272

$

87,075

Cardiac Intervention

 

29,251

45,486

 

74,737

 

28,595

43,996

 

72,591

Custom Procedural Solutions

 

24,892

20,529

 

45,421

 

25,414

22,207

 

47,621

OEM

 

22,890

5,044

 

27,934

 

23,666

4,591

 

28,257

Total

 

133,899

107,107

 

241,006

 

133,478

 

102,066

 

235,544

 

Endoscopy

Endoscopy devices

 

7,473

 

434

 

7,907

 

7,578

 

403

 

7,981

Total

$

141,372

$

107,541

$

248,913

$

141,056

$

102,469

$

243,525

4.   Acquisitions. On November 6, 2020, we entered into a unit purchase agreement to acquire KA Medical, LLC (“KA Medical”). Subject to the terms and conditions of the unit purchase agreement, we paid $10.4 million in cash at closing, net of cash acquired, subject to adjustments for working capital and other matters, with an additional $4 million payable no later than 12 months following the agreement. KA Medical developed the Micro PlugTM Set, a self-expanding nitinol vascular occlusion device, which is FDA-cleared in the US and CE marked in Europe. We accounted for this acquisition as a business combination. The sales and results of operations related to the acquisition have been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs associated with the KA Medical acquisition, which were included in selling, general and administrative expenses, were not material. The purchase price was preliminarily allocated as follows (in thousands):

Assets Acquired

    

  

Trade receivables

$

24

Other receivables

13

Inventories

 

216

Property and equipment

298

Other long-term assets

147

Intangible assets

 

Developed technology

6,000

Goodwill

8,283

Total assets acquired

 

14,981

Liabilities Assumed

 

  

Trade payables

 

(31)

Accrued expenses

 

(507)

Total liabilities assumed

 

(538)

Total net assets acquired

$

14,443

We are amortizing the developed technology intangible asset acquired from KA Medical over 17 years. The goodwill consists largely of the synergies expected from combining operations and is expected to be deductible for income tax purposes. The pro forma impact of the KA Medical acquisition was not significant to our financial results for the three-month period ended March 31, 2020. Operating results attributable to the KA Medical acquisition were included in our consolidated statements of income (loss) for the three-month period ended March 31, 2021.

11

5. Inventories. Inventories at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):

    

March 31, 2021

    

December 31, 2020

Finished goods

$

120,969

$

110,933

Work-in-process

 

24,750

 

19,308

Raw materials

 

54,589

 

67,778

Total inventories

$

200,308

$

198,019

6.   Goodwill and Intangible Assets. The change in the carrying amount of goodwill for the three-month period ended March 31, 2021 is detailed as follows (in thousands):

    

March 31, 2021

Goodwill balance at January 1

$

363,533

Effect of foreign exchange

 

(1,033)

Goodwill balance at March 31

$

362,500

Total accumulated goodwill impairment losses aggregated to approximately $8.3 million as of March 31, 2021 and December 31, 2020. We did not have any goodwill impairments for the three-month periods ended March 31, 2021 and 2020. The total goodwill balance as of March 31, 2021 and December 31, 2020 was related to our cardiovascular segment.

Other intangible assets at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):

March 31, 2021

Gross Carrying

Accumulated

Net Carrying

    

Amount

    

Amortization

    

Amount

Patents

$

24,362

$

(6,929)

$

17,433

Distribution agreements

 

3,250

 

(2,369)

 

881

License agreements

 

14,418

 

(7,010)

 

7,408

Trademarks

 

30,255

 

(13,131)

 

17,124

Customer lists

 

35,052

 

(29,586)

 

5,466

Total

$

107,337

$

(59,025)

$

48,312

December 31, 2020

Gross Carrying

Accumulated

Net Carrying

    

Amount

    

Amortization

    

Amount

Patents

$

23,669

$

(6,460)

$

17,209

Distribution agreements

 

3,250

 

(2,319)

 

931

License agreements

 

14,453

 

(6,647)

 

7,806

Trademarks

 

30,273

 

(12,414)

 

17,859

Customer lists

 

35,154

 

(29,103)

 

6,051

Total

$

106,799

$

(56,943)

$

49,856

Aggregate amortization expense the three-month periods ended March 31, 2021 and 2020 was approximately $12.5 million and $15.0 million, respectively.

We evaluate long-lived assets, including amortizing intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We perform the impairment analysis at the asset group for which the lowest level of identifiable cash flows is largely independent of the cash flows of other assets and liabilities. We determine the fair value of our amortizing assets based on estimated future cash flows discounted back to their present value using a discount rate that reflects the risk profiles of the underlying activities. We did not identify indicators of impairment in any intangible assets based on our qualitative assessment for the three-month periods ended March 31, 2021 and 2020.

12

Estimated amortization expense for the developed technology and other intangible assets for the next five years consisted of the following as of March 31, 2021 (in thousands):

Year Ending December 31,

    

Estimated Amortization Expense

Remaining 2021

$

37,320

2022

 

48,634

2023

 

47,454

2024

44,404

2025

 

42,548

7.   Income Taxes. Our provision for income taxes for the three-month periods ended March 31, 2021 and 2020 was a tax expense of approximately $1.7 million and $1.2 million, respectively, which resulted in an effective tax rate of 13.7% and (58.3)%, respectively. The increase in the income tax expense and the corresponding change in the effective tax rate for the three-month period ended March 31, 2021, when compared to the prior-year period, was primarily due to a pre-tax loss during the 2020 period, as well as a change in the jurisdictional mix of earnings. Our effective tax rate differs from the U.S. statutory rate primarily due to the impact of global intangible low-taxed income (“GILTI”) inclusions, state income taxes, foreign taxes, other non-deductible permanent items and discrete items (such as share-based compensation).

8.   Revolving Credit Facility and Long-Term Debt. Principal balances outstanding under our long-term debt obligations as of March 31, 2021 and December 31, 2020 consisted of the following (in thousands):

    

March 31, 2021

    

December 31, 2020

Term loans

$

138,750

$

140,625

Revolving credit loans

 

182,000

 

211,000

Less unamortized debt issuance costs

 

(375)

 

(403)

Total long-term debt

 

320,375

 

351,222

Less current portion

 

7,500

 

7,500

Long-term portion

$

312,875

$

343,722

Third Amended and Restated Credit Agreement

On July 31, 2019, we entered into a Third Amended and Restated Credit Agreement (the "Third Amended Credit Agreement"). The Third Amended Credit Agreement is a syndicated loan agreement with Wells Fargo Bank, National Association and other parties. The Third Amended Credit Agreement amends and restates in its entirety our previously outstanding Second Amended and Restated Credit Agreement and all amendments thereto. The Third Amended Credit Agreement provides for a term loan of $150 million and a revolving credit commitment up to an aggregate amount of $600 million, inclusive of sub-facilities for multicurrency borrowings, standby letters of credit and swingline loans. On July 31, 2024, all principal, interest and other amounts outstanding under the Third Amended Credit Agreement are payable in full. At any time prior to the maturity date, we may repay any amounts owing under all term loans and revolving credit loans in whole or in part, without premium or penalty, other than breakage fees (as defined in the Third Amended Credit Agreement).

Revolving credit loans denominated in dollars and term loans made under the Third Amended Credit Agreement bear interest, at our election, at either the Base Rate or the Eurocurrency Rate (as such terms are defined in the Third Amended Credit Agreement) plus the Applicable Margin (as defined in the Third Amended Credit Agreement). Revolving credit loans denominated in an Alternative Currency (as defined in the Third Amended Credit Agreement) bear interest at the Eurocurrency Rate plus the Applicable Margin. Swingline loans bear interest at the Base Rate plus the Applicable Margin (as defined in the Third Amended Credit Agreement). Interest on each Base Rate loan is due and payable on the last business day of each calendar quarter; interest on each Eurocurrency Rate loan is due and payable on the last day of each interest period applicable thereto, and if such interest period extends over three months, at the end of each three-month interval during such interest period.

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The Third Amended Credit Agreement is collateralized by substantially all our assets. The Third Amended Credit Agreement contains affirmative and negative covenants, representations and warranties, events of default and other terms customary for loans of this nature. In particular, the Third Amended Credit Agreement requires that we maintain certain financial covenants, as follows:

 

Covenant Requirement

Consolidated Total Leverage Ratio (1)

 

4.0 to 1.0

Consolidated Interest Coverage Ratio (2)

 

3.0 to 1.0

Facility Capital Expenditures (3)

$50 million

(1) Maximum Consolidated Total Net Leverage Ratio (as defined in the Third Amended Credit Agreement) as of any fiscal quarter end.
(2) Minimum ratio of Consolidated EBITDA (as defined in the Third Amended Credit Agreement and adjusted for certain expenditures) to Consolidated 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.

We believe we were in compliance with all covenants set forth in the Third Amended Credit Agreement as of March 31, 2021.

As of March 31, 2021, we had outstanding borrowings of approximately $320.8 million under the Third Amended Credit Agreement, with additional available borrowings of approximately $418 million, based on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Third Amended Credit Agreement. Our interest rate as of March 31, 2021 was a fixed rate of 2.12% on $175 million as a result of an interest rate swap (see Note 9) and a variable floating rate of 1.11% on $145.8 million. Our interest rate as of December 31, 2020 was a fixed rate of 2.37% on $175 million as a result of an interest rate swap and a variable floating rate of 1.40% on $176.6 million. The foregoing fixed rates are exclusive of changes in the notional amount and fixed rate associated with our interest rate swaps beginning July 6, 2021 as described in Note 9 and potential future changes in the applicable margin.

Future minimum principal payments on our long-term debt, as of March 31, 2021, were as follows (in thousands):

Years Ending

Future Minimum

December 31,

    

Principal Payments

Remaining 2021

 

$

5,625

2022

8,438

2023

11,250

2024

295,437

Total future minimum principal payments

$

320,750

9.   Derivatives.

General. Our earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates, and we seek to mitigate a portion of the risks attributable to those fluctuations by entering into derivative contracts. The derivatives we use are interest rate swaps and foreign currency forward contracts. We recognize derivatives 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 derivatives not designated as hedging instruments are recorded in earnings throughout the term of the derivative.

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Interest Rate Risk. Our debt bears interest at variable interest rates. Therefore, we are subject to variability in the cash paid for interest expense. In order to mitigate a portion of the risk attributable to that variability, we use a hedging strategy to reduce the variability of cash flows in the interest payments associated with a portion of the variable-rate debt outstanding under our Third Amended Credit Agreement that is solely due to changes in the benchmark interest rate.

Derivative Instruments Designated as Cash Flow Hedges

On August 5, 2016, we entered into a pay-fixed, receive-variable interest rate swap with a current notional amount of $175 million with Wells Fargo to fix the one-month LIBOR rate at 1.12%. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). On a monthly basis, the interest rates under both the interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid. The interest rate swap is scheduled to expire on July 6, 2021.

On December 23, 2019, we entered into a pay-fixed, receive-variable interest rate swap with a notional amount of $75 million with Wells Fargo to fix the one-month LIBOR rate at 1.71% for the period from July 6, 2021 to July 31, 2024. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). On a monthly basis, the interest rates under both the interest rate swap and the underlying debt will reset, the swap will be settled with the counterparty, and interest will be paid.

At March 31, 2021 and December 31, 2020, our interest rate swaps qualified as cash flow hedges. The fair value of our interest rate swaps at March 31, 2021 was a liability of approximately $3.2 million, which was partially offset by approximately $0.8 million in deferred taxes. The fair value of our interest rate swaps at December 31, 2020 was a liability of $4.4 million, partially offset by approximately $1.1 million in deferred taxes.

Foreign Currency Risk. We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. Our policy is to enter into foreign currency derivative contracts with maturities of up to two years. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and balances denominated in Chinese Renminbi, Euros, British Pounds, Mexican Pesos, Brazilian Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish Krona, Canadian Dollars, Danish Krone, Japanese Yen, and South Korean Won, among others. We do not use derivative financial instruments for trading or speculative purposes. We do not believe we are subject to any credit risk contingent features related to our derivative contracts, and we seek to manage counterparty risk by allocating derivative contracts among several major financial institutions.

Derivative Instruments Designated as Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is temporarily reported as a component of other comprehensive income (loss) and then reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. We entered into forward contracts on various foreign currencies to manage the risk associated with forecasted exchange rates which impact revenues, cost of sales, and operating expenses in various international markets. The objective of the hedges is to reduce the variability of cash flows associated with the forecasted purchase or sale of the associated foreign currencies.

We enter into approximately 150 cash flow foreign currency hedges every month. As of March 31, 2021 and December 31, 2020, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with aggregate notional amounts of approximately $128.6 million and $168.2 million, respectively.

15

Derivative Instruments Not Designated as Cash Flow Hedges

We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and we enter into foreign currency forward contracts to mitigate that exposure. We enter into approximately 20 foreign currency fair value hedges every month. As of March 31, 2021 and December 31, 2020, we had entered into foreign currency forward contracts related to those balance sheet accounts with aggregate notional amounts of approximately $93.7 million and $74.8 million, respectively.

Balance Sheet Presentation of Derivative Instruments. As of March 31, 2021 and December 31, 2020, all derivative instruments, both those designated as hedging instruments and those that were not designated as hedging instruments, were recorded at fair value on a gross basis on our consolidated balance sheets. We are not subject to any master netting agreements.

The fair value of derivative instruments on a gross basis was as follows on the dates indicated (in thousands):

Fair Value of Derivative Instruments Designated as Hedging Instruments

 

Balance Sheet Location

    

March 31, 2021

    

December 31, 2020

Assets

 

  

 

  

 

  

Foreign currency forward contracts

 

Prepaid expenses and other assets

 

1,247

 

1,777

Foreign currency forward contracts

 

Other assets (long-term)

 

314

 

424

(Liabilities)

 

  

 

  

 

  

Interest rate swaps

Accrued expenses

(471)

(896)

Interest rate swaps

Other long-term obligations

(2,733)

(3,462)

Foreign currency forward contracts

 

Accrued expenses

 

(3,302)

 

(5,281)

Foreign currency forward contracts

 

Other long-term obligations

 

(432)

 

(866)

Fair Value of Derivative Instruments Not Designated as Hedging Instruments

 

Balance Sheet Location

    

March 31, 2021

    

December 31, 2020

Assets

 

  

 

  

 

  

Foreign currency forward contracts

 

Prepaid expenses and other assets

$

2,183

$

877

(Liabilities)

 

  

 

  

 

  

Foreign currency forward contracts

 

Accrued expenses

 

(2,073)

 

(2,120)

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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 (loss), consolidated statements of comprehensive income (loss) and consolidated balance sheets (in thousands):

Amount of Gain/(Loss)

Consolidated Statements

Amount of Gain/(Loss)

Recognized in OCI

of Income (Loss)

Reclassified from AOCI

Three Months Ended March 31, 

 

    

  

Three Months Ended March 31, 

Three Months Ended March 31, 

Derivative instrument

    

2021

 

2020

    

 

Location in statements of income

    

2021

  

  

2020

  

2021

  

  

2020

Interest rate swaps

$

721

$

(5,463)

 

Interest expense

$

(1,537)

$

(3,144)

$

(432)

$

251

Foreign currency forward contracts

 

516

 

(1,494)

 

Revenue

 

248,913

 

243,525

 

(1,602)

 

78

 

Cost of sales

 

(137,019)

 

(139,741)

 

350

 

(104)

As of March 31, 2021, approximately $(2.9) million, or $(2.2) million after taxes, was expected to be reclassified from accumulated other comprehensive income (loss) to earnings in revenue and cost of sales over the succeeding twelve months. As of March 31, 2021, approximately $(1.3) million, or $(1.0) million after taxes, was expected to be reclassified from accumulated other comprehensive income (loss) to earnings in interest expense over the succeeding twelve months.

Derivative Instruments Not Designated as Hedging Instruments

The following gains/(losses) from these derivative instruments were recognized in our consolidated statements of income (loss) for the periods presented (in thousands):

    

    

Three Months Ended March 31, 

Derivative Instrument

 

Location in statements of income (loss)

 

2021

 

2020

Foreign currency forward contracts

 

Other income (expense)

$

229

$

3,418

10.   Commitments and Contingencies.

Loan Commitment. On October 11, 2019, we acquired shares of stock in Selio Medical Limited (“Selio”) representing an ownership interest of approximately 19.5%, as well as an option to purchase all ordinary shares of Selio throughout a 45-day period commencing from the date Selio receives FDA 510(k) approval of a medical device it is currently developing, and an option to purchase all remaining shares of Selio on the third anniversary date of the agreement if we elect to purchase all ordinary shares. We have also made a loan of $250,000 to Selio and committed to provide additional loans of up to €2 million at a rate of 5% per annum until one year and 45 days have passed from the date Selio receives FDA Section 510(k) approval of a medical device it is currently developing. Additional loans made to Selio pursuant to our loan agreement, together with the initial advance and all other amounts owed to us by Selio, would be securitized by Selio’s assets.

Litigation. In the ordinary course of business, we are involved in various proceedings, legal actions and claims. These proceedings, actions and claims may involve product liability, intellectual property, contract disputes, employment, governmental inquiries or other matters, including those more fully described below. The outcomes of these matters will generally not be known for prolonged periods of time. In certain proceedings, the claimants may seek damages as well as other compensatory and equitable relief that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which our management had sufficient information

17

to reasonably estimate our future obligations, a liability representing management’s best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. If actual outcomes are less favorable than those estimated by management, additional expense may be incurred, which could unfavorably affect our financial position, results of operations and cash flows. The ultimate cost to us with respect to such proceedings, actions and claims could be materially different than the amount of the current estimates and accruals and could have a material adverse effect on our financial position, results of operations and cash flows.

Securities Litigation

On December 5, 2019, the Bucks County Employees Retirement Fund filed a complaint against Merit, our Chief Executive Officer and our Chief Financial Officer in the United States District Court for the Central District of California, individually and on behalf of all purchasers of our common stock between February 26, 2019 and October 30, 2019. On February 24, 2020, the court appointed the City of Atlanta Police Pension Fund, the Atlanta Firefighters’ Pension Fund, and the Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge as Lead Plaintiffs. This action is now captioned In re Merit Medical Systems, Inc. Securities Litigation (Master File No. 8:19-cv-02326-DOC-ADS). On June 30, 2020, Lead Plaintiffs filed a consolidated class action complaint for violations of federal securities laws against Merit, our Chief Executive Officer and our Chief Financial Officer in the United States District Court for the Central District of California, individually and on behalf of all purchasers of our common stock between February 26, 2019 and October 30, 2019. The consolidated class action complaint alleges that defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seeks unspecified damages, costs and attorneys’ fees, and equitable relief. We filed a motion to dismiss the action, which the Court denied. We intend to vigorously defend against the lawsuit. We have not recorded an expense related to this matter because any potential loss is not currently probable or reasonably estimable. Additionally, we cannot presently estimate the range of loss, if any, that may result from the matter. It is possible that the ultimate resolution of the foregoing matter, or other similar matters, if resolved in a manner unfavorable to us, may be materially adverse to our business, financial condition, results of operations or liquidity.

Legal costs for proceedings, legal actions and claims discussed above, such as outside counsel fees and expenses, are charged to expense in the period incurred.

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

Three Months Ended

March 31, 

2021

2020

Net income (loss)

$

10,958

$

(3,154)

Average common shares outstanding

 

55,717

 

55,246

Basic EPS

$

0.20

$

(0.06)

Average common shares outstanding

55,717

55,246

Effect of dilutive stock awards

1,261

Total potential shares outstanding

56,978

55,246

Diluted EPS

$

0.19

$

(0.06)

Equity awards excluded as the impact was anti-dilutive (1)

1,042

4,340

(1) Does not reflect the impact of incremental repurchases under the treasury stock method.

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12.   Stock-Based Compensation Expense. Stock-based compensation expense before income tax expense for the three-month periods ended March 31, 2021 and 2020 consisted of the following (in thousands):

Three Months Ended

March 31, 

    

2021

    

2020

Cost of sales

Nonqualified stock options

$

318

$

339

Research and development

 

Nonqualified stock options

279

 

285

Selling, general and administrative

 

Nonqualified stock options

1,627

 

1,706

Performance-based restricted stock units

731

312

Restricted stock units

355

Cash-settled share-based awards ("Liability Awards")

285

135

Total selling, general and administrative

2,998

2,153

Stock-based compensation expense before taxes

$

3,595

$

2,777

Nonqualified Stock Options

During the three-month periods ended March 31, 2021 and 2020, we granted stock options representing 125,850 and 216,494 shares of our common stock, respectively. We use the Black-Scholes methodology to value the stock-based compensation expense for options. In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted was estimated using the following assumptions for the periods indicated below:

Three Months Ended

March 31, 

2021

2020

Risk-free interest rate

    

0.6%

  

0.5% - 1.7%

Expected option term

 

4.0 years

 

4.0 - 5.0 years

Expected dividend yield

 

 

Expected price volatility

 

46.7%

  

38.7% - 43.2%

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

We recognize stock-based compensation expense (net of a forfeiture rate) for those awards which are expected to vest on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on our historical experience and expectations about future forfeitures. As of March 31, 2021, the total remaining unrecognized compensation cost related to non-vested stock options was approximately $22.4 million, which was expected to be recognized over a weighted average period of 2.5 years.

Stock-Settled Performance-Based Restricted Stock Units (“Performance Stock Units”)

During the three-month periods ended March 31, 2021 and 2020 we granted performance stock units to certain of our executive officers which, as amended, represent up to 128,883 and 127,060 shares of our common stock, respectively. Conversion of the performance stock units occurs at the end of the relevant performance periods, or one year after the agreement date, whichever is later. The conversion ratio is based upon attaining targeted levels of free cash flow (“FCF”) and relative shareholder return as compared to the Russell 2000 Index (“rTSR”), as defined in the award agreements.

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We use Monte-Carlo simulations to estimate the grant-date fair value of the performance stock units linked to total shareholder return. The fair value of each performance stock unit was estimated as of the grant date using the following assumptions for awards granted in the periods indicated below:

</

Three Months Ended

 

March 31, 

2021

2020