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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 June 30, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-18592
MERIT MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Utah |
|
87-0447695 |
(State or other jurisdiction of incorporation or organization) |
|
(IRS Employer Identification No.) |
1600 West Merit Parkway, South Jordan, Utah 84095
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (801) 253-1600
Securities registered pursuant to Section 12(b) of the Act:
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|
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Title of each class |
Trading Symbol |
Name of exchange on which registered |
Common Stock, no par value |
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, no par value |
|
58,208,536 |
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
32 |
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40 |
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
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June 30, |
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December 31, |
||
ASSETS |
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2024 |
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2023 |
||
|
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(unaudited) |
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Current assets: |
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Cash and cash equivalents |
|
$ |
636,658 |
|
$ |
587,036 |
Trade receivables — net of allowance for credit losses — 2024 — $9,276 and 2023 — $9,023 |
|
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182,415 |
|
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177,885 |
Other receivables |
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10,612 |
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10,517 |
Inventories |
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298,224 |
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303,871 |
Prepaid expenses and other current assets |
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26,179 |
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24,286 |
Prepaid income taxes |
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4,123 |
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4,016 |
Income tax refund receivables |
|
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4,335 |
|
|
859 |
Total current assets |
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1,162,546 |
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1,108,470 |
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Property and equipment: |
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Land and land improvements |
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25,952 |
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26,017 |
Buildings |
|
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191,030 |
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191,491 |
Manufacturing equipment |
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330,290 |
|
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316,930 |
Furniture and fixtures |
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64,755 |
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63,044 |
Leasehold improvements |
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58,595 |
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53,638 |
Construction-in-progress |
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61,060 |
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61,439 |
Total property and equipment |
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731,682 |
|
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712,559 |
Less accumulated depreciation |
|
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(345,743) |
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(329,036) |
Property and equipment — net |
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385,939 |
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383,523 |
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Other assets: |
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Intangible assets: |
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Developed technology — net of accumulated amortization — 2024 — $346,763 and 2023 — $321,488 |
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264,195 |
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283,999 |
Other — net of accumulated amortization — 2024 — $80,628 and 2023 — $76,887 |
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39,227 |
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41,884 |
Goodwill |
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381,433 |
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382,240 |
Deferred income tax assets |
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7,013 |
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7,288 |
Right-of-use operating lease assets |
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69,903 |
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63,047 |
Other assets |
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61,583 |
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54,793 |
Total other assets |
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823,354 |
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833,251 |
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Total assets |
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$ |
2,371,839 |
|
$ |
2,325,244 |
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 |
|
2024 |
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2023 |
||
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(unaudited) |
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Current liabilities: |
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Trade payables |
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$ |
55,573 |
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$ |
65,944 |
Accrued expenses |
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117,574 |
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120,447 |
Short-term operating lease liabilities |
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11,743 |
|
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12,087 |
Income taxes payable |
|
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1,325 |
|
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5,086 |
Total current liabilities |
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186,215 |
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203,564 |
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Long-term debt |
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801,321 |
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823,013 |
Deferred income tax liabilities |
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5,510 |
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|
5,547 |
Long-term income taxes payable |
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|
347 |
|
|
347 |
Liabilities related to unrecognized tax benefits |
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1,912 |
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1,912 |
Deferred compensation payable |
|
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18,588 |
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17,167 |
Deferred credits |
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1,553 |
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1,605 |
Long-term operating lease liabilities |
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58,036 |
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56,259 |
Other long-term obligations |
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15,912 |
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13,830 |
Total liabilities |
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1,089,394 |
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1,123,244 |
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Commitments and contingencies |
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Stockholders' equity: |
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Preferred stock — 5,000 shares authorized; no shares issued as of June 30, 2024 and December 31, 2023 |
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— |
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— |
Common stock, no par value — 100,000 shares authorized; issued and outstanding as of June 30, 2024 - 58,192 and December 31, 2023 - 57,858 |
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658,724 |
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638,150 |
Retained earnings |
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639,150 |
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575,184 |
Accumulated other comprehensive loss |
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(15,429) |
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(11,334) |
Total stockholders’ equity |
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1,282,445 |
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1,202,000 |
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Total liabilities and stockholders’ equity |
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$ |
2,371,839 |
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$ |
2,325,244 |
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)
|
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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||||||||
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2024 |
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2023 |
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2024 |
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2023 |
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Net sales |
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$ |
338,003 |
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$ |
320,056 |
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$ |
661,511 |
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$ |
617,621 |
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Cost of sales |
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176,903 |
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167,274 |
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348,696 |
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326,477 |
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Gross profit |
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161,100 |
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152,782 |
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312,815 |
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291,144 |
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Operating expenses: |
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Selling, general and administrative |
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94,585 |
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100,927 |
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189,013 |
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191,071 |
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Research and development |
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20,263 |
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20,129 |
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|
41,745 |
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|
41,443 |
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Impairment charges |
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— |
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270 |
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— |
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270 |
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Contingent consideration expense |
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|
306 |
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|
1,094 |
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189 |
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|
1,615 |
|
Acquired in-process research and development |
|
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— |
|
|
1,550 |
|
|
— |
|
|
1,550 |
|
Total operating expenses |
|
|
115,154 |
|
|
123,970 |
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|
230,947 |
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|
235,949 |
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Income from operations |
|
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45,946 |
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28,812 |
|
|
81,868 |
|
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55,195 |
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|
|
|
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Other income (expense): |
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|
|
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|
|
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|
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Interest income |
|
|
7,561 |
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|
221 |
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|
14,837 |
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|
352 |
|
Interest expense |
|
|
(7,679) |
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|
(3,682) |
|
|
(15,725) |
|
|
(5,693) |
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Other income (expense) — net |
|
|
15 |
|
|
(451) |
|
|
(789) |
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|
546 |
|
Total other expense — net |
|
|
(103) |
|
|
(3,912) |
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|
(1,677) |
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(4,795) |
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Income before income taxes |
|
|
45,843 |
|
|
24,900 |
|
|
80,191 |
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|
50,400 |
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|
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|
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Income tax expense |
|
|
10,117 |
|
|
4,655 |
|
|
16,225 |
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|
9,452 |
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|
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Net income |
|
$ |
35,726 |
|
$ |
20,245 |
|
$ |
63,966 |
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$ |
40,948 |
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Earnings per common share |
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Basic |
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$ |
0.61 |
|
$ |
0.35 |
|
$ |
1.10 |
|
$ |
0.71 |
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Diluted |
|
$ |
0.61 |
|
$ |
0.35 |
|
$ |
1.09 |
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$ |
0.70 |
|
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Weighted average shares outstanding |
|
|
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|
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|
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|
|
|
|
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Basic |
|
|
58,139 |
|
|
57,537 |
|
|
58,049 |
|
|
57,445 |
|
Diluted |
|
|
58,740 |
|
|
58,473 |
|
|
58,653 |
|
|
58,329 |
|
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, |
|
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Net income |
|
$ |
35,726 |
|
$ |
20,245 |
|
$ |
63,966 |
|
$ |
40,948 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flow hedges |
|
|
(1,711) |
|
|
3,422 |
|
|
1,261 |
|
|
1,731 |
|
Income tax benefit (expense) |
|
|
404 |
|
|
(821) |
|
|
(298) |
|
|
(415) |
|
Foreign currency translation adjustment |
|
|
(1,688) |
|
|
(1,201) |
|
|
(5,092) |
|
|
724 |
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Income tax benefit (expense) |
|
|
22 |
|
|
(15) |
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|
34 |
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(34) |
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Total other comprehensive income (loss) |
|
|
(2,973) |
|
|
1,385 |
|
|
(4,095) |
|
|
2,006 |
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Total comprehensive income |
|
$ |
32,753 |
|
$ |
21,630 |
|
$ |
59,871 |
|
$ |
42,954 |
|
See condensed notes to consolidated financial statements.
6
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands - unaudited)
|
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Common Stock |
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Retained |
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Accumulated Other |
|
|
|
|||||
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Shares |
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Amount |
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Earnings |
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Comprehensive Loss |
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Total |
||||
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Balance — January 1, 2024 |
|
57,858 |
|
$ |
638,150 |
|
$ |
575,184 |
|
$ |
(11,334) |
|
$ |
1,202,000 |
Net income |
|
|
|
|
|
|
|
28,240 |
|
|
|
|
|
28,240 |
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
(1,122) |
|
|
(1,122) |
Stock-based compensation expense |
|
|
|
|
4,934 |
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|
|
|
|
|
|
|
4,934 |
Options exercised |
|
213 |
|
|
7,394 |
|
|
|
|
|
|
|
|
7,394 |
Issuance of common stock under Employee Stock Purchase Plan |
|
5 |
|
|
336 |
|
|
|
|
|
|
|
|
336 |
Shares issued from time-vested restricted stock units |
|
47 |
|
|
— |
|
|
|
|
|
|
|
|
— |
Shares surrendered in exchange for payment of payroll tax liabilities |
|
(21) |
|
|
(1,592) |
|
|
|
|
|
|
|
|
(1,592) |
Balance — March 31, 2024 |
|
58,102 |
|
|
649,222 |
|
|
603,424 |
|
|
(12,456) |
|
|
1,240,190 |
Net income |
|
|
|
|
|
|
|
35,726 |
|
|
|
|
|
35,726 |
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
(2,973) |
|
|
(2,973) |
Stock-based compensation expense |
|
|
|
|
6,301 |
|
|
|
|
|
|
|
|
6,301 |
Options exercised |
|
66 |
|
|
2,913 |
|
|
|
|
|
|
|
|
2,913 |
Issuance of common stock under Employee Stock Purchase Plan |
|
4 |
|
|
288 |
|
|
|
|
|
|
|
|
288 |
Shares issued from time-vested restricted stock units |
|
20 |
|
|
— |
|
|
|
|
|
|
|
|
— |
Balance — June 30, 2024 |
|
58,192 |
|
$ |
658,724 |
|
$ |
639,150 |
|
$ |
(15,429) |
|
$ |
1,282,445 |
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 Loss |
|
Total |
||||
Balance — January 1, 2023 |
|
57,306 |
|
$ |
675,174 |
|
$ |
480,773 |
|
$ |
(11,550) |
|
$ |
1,144,397 |
Net income |
|
|
|
|
|
|
|
20,703 |
|
|
|
|
|
20,703 |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
621 |
|
|
621 |
Stock-based compensation expense |
|
|
|
|
3,498 |
|
|
|
|
|
|
|
|
3,498 |
Options exercised |
|
123 |
|
|
3,726 |
|
|
|
|
|
|
|
|
3,726 |
Issuance of common stock under Employee Stock Purchase Plan |
|
4 |
|
|
302 |
|
|
|
|
|
|
|
|
302 |
Shares issued from time-vested restricted stock units |
|
61 |
|
|
— |
|
|
|
|
|
|
|
|
— |
Shares surrendered in exchange for payment of payroll tax liabilities |
|
(22) |
|
|
(1,592) |
|
|
|
|
|
|
|
|
(1,592) |
Balance — March 31, 2023 |
|
57,472 |
|
|
681,108 |
|
|
501,476 |
|
|
(10,929) |
|
|
1,171,655 |
Net income |
|
|
|
|
|
|
|
20,245 |
|
|
|
|
|
20,245 |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
1,385 |
|
|
1,385 |
Stock-based compensation expense |
|
|
|
|
4,980 |
|
|
|
|
|
|
|
|
4,980 |
Options exercised |
|
128 |
|
|
5,154 |
|
|
|
|
|
|
|
|
5,154 |
Issuance of common stock under Employee Stock Purchase Plan |
|
4 |
|
|
281 |
|
|
|
|
|
|
|
|
281 |
Shares issued from time-vested restricted stock units |
|
30 |
|
|
— |
|
|
|
|
|
|
|
|
— |
Balance — June 30, 2023 |
|
57,634 |
|
$ |
691,523 |
|
$ |
521,721 |
|
$ |
(9,544) |
|
$ |
1,203,700 |
|
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, |
||||
|
|
2024 |
|
2023 |
||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
||
Net income |
|
$ |
63,966 |
|
$ |
40,948 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
|
47,690 |
|
|
42,316 |
Loss on sale or abandonment of property and equipment |
|
|
79 |
|
|
4,677 |
Write-off of certain intangible assets and other long-term assets |
|
|
280 |
|
|
328 |
Acquired in-process research and development |
|
|
— |
|
|
1,550 |
Amortization of right-of-use operating lease assets |
|
|
6,063 |
|
|
5,935 |
Fair value adjustments related to contingent consideration liabilities |
|
|
189 |
|
|
1,615 |
Amortization of deferred credits |
|
|
(52) |
|
|
(52) |
Amortization of long-term debt issuance costs |
|
|
2,954 |
|
|
462 |
Stock-based compensation expense |
|
|
12,245 |
|
|
9,549 |
Changes in operating assets and liabilities, net of acquisitions and divestitures: |
|
|
|
|
|
|
Trade receivables |
|
|
(6,901) |
|
|
(5,980) |
Other receivables |
|
|
(499) |
|
|
287 |
Inventories |
|
|
3,119 |
|
|
(35,502) |
Prepaid expenses and other current assets |
|
|
(2,306) |
|
|
78 |
Income tax refund receivables |
|
|
(3,621) |
|
|
(3,577) |
Other assets |
|
|
(2,968) |
|
|
(1,558) |
Trade payables |
|
|
(7,096) |
|
|
(7,253) |
Accrued expenses |
|
|
(2,804) |
|
|
(10,295) |
Income taxes payable |
|
|
(3,869) |
|
|
(4,896) |
Deferred compensation payable |
|
|
1,421 |
|
|
1,154 |
Operating lease liabilities |
|
|
(5,962) |
|
|
(5,711) |
Other long-term obligations |
|
|
2,794 |
|
|
(2,244) |
Total adjustments |
|
|
40,756 |
|
|
(9,117) |
Net cash, cash equivalents, and restricted cash provided by operating activities |
|
|
104,722 |
|
|
31,831 |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
Capital expenditures for: |
|
|
|
|
|
|
Property and equipment |
|
|
(22,309) |
|
|
(18,556) |
Intangible assets |
|
|
(1,576) |
|
|
(1,047) |
Proceeds from the sale of property and equipment |
|
|
2 |
|
|
201 |
Issuance of note receivables |
|
|
(6,162) |
|
|
— |
Cash paid in acquisitions and investments, net of cash acquired |
|
|
(8,493) |
|
|
(138,349) |
Net cash, cash equivalents, and restricted cash used in investing activities |
|
$ |
(38,538) |
|
$ |
(157,751) |
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, |
||||
|
|
2024 |
|
2023 |
||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
||
Proceeds from issuance of common stock |
|
$ |
10,931 |
|
$ |
9,463 |
Proceeds from issuance of long-term debt |
|
|
— |
|
|
460,283 |
Payments on long-term debt |
|
|
(24,063) |
|
|
(318,471) |
Long-term debt issuance costs |
|
|
— |
|
|
(5,240) |
Contingent payments related to acquisitions |
|
|
(142) |
|
|
(3,434) |
Payment of taxes related to an exchange of common stock |
|
|
(1,592) |
|
|
(1,592) |
Net cash, cash equivalents, and restricted cash (used in) provided by financing activities |
|
|
(14,866) |
|
|
141,009 |
Effect of exchange rates on cash, cash equivalents, and restricted cash |
|
|
(1,750) |
|
|
(1,497) |
Net increase in cash, cash equivalents and restricted cash |
|
|
49,568 |
|
|
13,592 |
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH: |
|
|
|
|
|
|
Beginning of period |
|
|
589,144 |
|
|
60,558 |
End of period |
|
$ |
638,712 |
|
$ |
74,150 |
|
|
|
|
|
|
|
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS: |
|
|
|
|
|
|
Cash and cash equivalents |
|
|
636,658 |
|
|
72,084 |
Restricted cash reported in prepaid expenses and other current assets |
|
|
2,054 |
|
|
2,066 |
Total cash, cash equivalents and restricted cash |
|
$ |
638,712 |
|
$ |
74,150 |
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
Interest (net of capitalized interest of $428 and $597, respectively) |
|
$ |
4,404 |
|
$ |
3,681 |
Income taxes |
|
|
22,619 |
|
|
17,787 |
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
Property and equipment purchases in accounts payable |
|
$ |
5,411 |
|
$ |
4,291 |
Acquisition purchases in accrued expenses and other long-term obligations |
|
|
4,553 |
|
|
3,635 |
Right-of-use operating lease assets obtained in exchange for operating lease liabilities |
|
|
8,167 |
|
|
3,399 |
See condensed notes to consolidated financial statements. |
(concluded) |
10
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Other Items. The interim consolidated financial statements of Merit Medical Systems, Inc. ("Merit," "we" or "us") for the three and six-month periods ended June 30, 2024 and 2023 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. In the opinion of our management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of June 30, 2024 and December 31, 2023, and our results of operations and cash flows for the three and six-month periods ended June 30, 2024 and 2023. The results of operations for the three and six-month periods ended June 30, 2024 and 2023 are not necessarily indicative of the results for a full-year period. Amounts presented in this report are rounded, while percentages and earnings per share amounts presented are calculated from the underlying amounts. These interim consolidated financial statements should be read in conjunction with the financial statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report on Form 10-K”).
2. Recently Issued Accounting Standards. In November 2023, the Financial Accounting Standards Board (“FASB’) issued Accounting Standard Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires a public entity to disclose significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about reportable segment’s profit or loss and assets that are currently required annually. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The provisions of this update must be applied retrospectively to all periods presented in the financial statements. We are currently assessing the anticipated impact of this standard on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, to improve annual basis income tax disclosures related to (1) rate reconciliation, (2) income taxes paid, and (3) other disclosures related to pretax income (or loss) and income tax expense (or benefit) from continuing operations. ASU 2023-09 is effective for fiscal years beginning after December 15, 2025, with early adoption permitted. These amendments are to be applied on a prospective basis. Retrospective application is permitted. We are currently evaluating the impact this standard will have on our consolidated financial statement disclosures.
We currently believe there are no other issued and not yet effective accounting standards that are 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 2023 Annual Report on Form 10-K.
Disaggregation of Revenue
Our revenue is disaggregated based on reporting segment, product category and geographic region. We design, develop, manufacture and market medical products for interventional, diagnostic and therapeutic 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.
11
The following table presents revenue from contracts with customers by reporting segment, product category and geographic region for the three and six-month periods ended June 30, 2024 and 2023 (in thousands):
|
|
Three Months Ended |
|
Three Months Ended |
||||||||||||||
|
|
June 30, 2024 |
|
June 30, 2023 |
||||||||||||||
|
|
United States |
|
International |
|
Total |
|
United States |
|
International |
|
Total |
||||||
Cardiovascular |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peripheral Intervention |
|
$ |
82,356 |
|
$ |
56,891 |
|
$ |
139,247 |
|
$ |
71,973 |
|
$ |
53,936 |
|
$ |
125,909 |
Cardiac Intervention |
|
|
36,840 |
|
|
57,023 |
|
|
93,863 |
|
|
35,690 |
|
|
58,085 |
|
|
93,775 |
Custom Procedural Solutions |
|
|
30,496 |
|
|
19,920 |
|
|
50,416 |
|
|
29,155 |
|
|
20,229 |
|
|
49,384 |
OEM |
|
|
35,460 |
|
|
8,829 |
|
|
44,289 |
|
|
34,570 |
|
|
7,637 |
|
|
42,207 |
Total |
|
|
185,152 |
|
|
142,663 |
|
|
327,815 |
|
|
171,388 |
|
|
139,887 |
|
|
311,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy Devices |
|
|
9,512 |
|
|
676 |
|
|
10,188 |
|
|
8,194 |
|
|
587 |
|
|
8,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
194,664 |
|
$ |
143,339 |
|
$ |
338,003 |
|
$ |
179,582 |
|
$ |
140,474 |
|
$ |
320,056 |
|
|
Six Months Ended |
|
Six Months Ended |
||||||||||||||
|
|
June 30, 2024 |
|
June 30, 2023 |
||||||||||||||
|
|
United States |
|
International |
|
Total |
|
United States |
|
International |
|
Total |
||||||
Cardiovascular |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peripheral Intervention |
|
$ |
161,615 |
|
$ |
112,258 |
|
$ |
273,873 |
|
$ |
140,640 |
|
$ |
99,052 |
|
$ |
239,692 |
Cardiac Intervention |
|
|
72,183 |
|
|
112,368 |
|
|
184,551 |
|
|
69,995 |
|
|
109,108 |
|
|
179,103 |
Custom Procedural Solutions |
|
|
59,790 |
|
|
39,420 |
|
|
99,210 |
|
|
55,954 |
|
|
41,131 |
|
|
97,085 |
OEM |
|
|
68,109 |
|
|
15,446 |
|
|
83,555 |
|
|
67,134 |
|
|
16,237 |
|
|
83,371 |
Total |
|
|
361,697 |
|
|
279,492 |
|
|
641,189 |
|
|
333,723 |
|
|
265,528 |
|
|
599,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy Devices |
|
|
19,061 |
|
|
1,261 |
|
|
20,322 |
|
|
17,219 |
|
|
1,151 |
|
|
18,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
380,758 |
|
$ |
280,753 |
|
$ |
661,511 |
|
$ |
350,942 |
|
$ |
266,679 |
|
$ |
617,621 |
12
4. Acquisitions and Investments. On May 17, 2024, Merit Medical Ireland Limited (“MM Ireland”), our indirect wholly-owned subsidiary, entered into a Subscription and Shareholder Agreement (the “CrannMed Agreement”) with CrannMed Limited, a company organized under the laws of Ireland (“CrannMed”). Pursuant to the terms of the CrannMed Agreement, MM Ireland paid €3.0 million to purchase preferred shares of CrannMed. At CrannMed’s election at any time after August 16, 2024, MM Ireland is obligated to pay an additional €3.0 million to acquire additional preferred shares of CrannMed, subject to certain conditions (the “Second Tranche Investment”). Additionally, upon the request of CrannMed and subject to the completion of the Second Tranche Investment and other conditions, MM Ireland may pay to CrannMed up to an additional €2.0 million in the form of equity, debt or other investment for the purpose of funding clinical trial activities of CrannMed. MM Ireland’s investment in CrannMed has been recorded as an equity investment accounted for at cost and reflected within other assets in the accompanying consolidated balance sheets because MM Ireland is not able to exercise significant influence over the operations of CrannMed. MM Ireland’s total current investment in CrannMed represented an ownership interest of approximately 10.8% of the outstanding capital stock of CrannMed at the date of the initial purchase.
On March 8, 2024, we entered into an asset purchase agreement with Scholten Surgical Instruments, Inc. (“SSI”) to acquire the assets associated with the Bioptome, Novatome, and Sensatome devices. The total purchase price of the SSI assets included an up-front payment of $3 million, and three deferred payments, including (i) $1 million payable upon the earlier of (a) the first anniversary of the closing date or (b) the date on which Merit can independently manufacture the purchased devices (“Deferred Payment Date”), (ii) $1 million payable upon the first anniversary of the Deferred Payment Date, and (iii) $1 million payable upon the second anniversary of the Deferred Payment Date. We have accounted for this transaction as an asset purchase, and recorded the amount paid and deferred payments as a developed technology intangible asset, which we are amortizing over eight years.
During March 2024, we paid $0.3 million to acquire additional Series A Preferred Stock of Fluidx Medical Technology, Inc. ("Fluidx"), owner of certain technology proposed to be used in the development of embolic and adhesive agents for use in arterial, venous, vascular graft and cardiovascular applications inside and outside the heart and related appendages. We had previously purchased and continue to hold $4.7 million of participating preferred shares of Fluidx. Our investment has been recorded as an equity investment accounted for at cost and reflected within other assets in the accompanying consolidated balance sheets because we are not able to exercise significant influence over the operations of Fluidx. Our total current investment in Fluidx represented an ownership interest of approximately 19.9% of the outstanding capital stock of Fluidx at the date of this investment.
On June 8, 2023, we entered into an asset purchase agreement with AngioDynamics, Inc. (“AngioDynamics”) to acquire the assets associated with a portfolio of dialysis catheter products and the BioSentry® Biopsy Tract Sealant System for a purchase price of $100 million. We accounted for this transaction under the acquisition method of accounting as a business combination. The sales related to the acquisition have been included in our cardiovascular segment since the acquisition date and were $11.6 million and $0.9 million for the six-month periods ended June 30, 2024 and 2023, respectively. It is not practical to separately report earnings related to the acquisition, as we began to immediately integrate the acquisition into the existing operations, sales distribution networks and management structure of our cardiovascular business segment. Acquisition-related costs associated with the AngioDynamics acquisition, which were included in selling, general and administrative expenses in the consolidated statements of income included in the 2023 Annual Report on Form 10-K, were approximately $4.9 million. The purchase price was allocated as follows (in thousands):
Assets Acquired |
|
|
|
Prepaid expenses |
|
$ |
2,000 |
Inventories |
|
|
5,254 |
Property and equipment |
|
|
108 |
Intangible assets |
|
|
|
Developed technology |
|
|
65,200 |
Trademarks |
|
|
4,000 |
Customer list |
|
|
5,800 |
Goodwill |
|
|
17,638 |
Total net assets acquired |
|
$ |
100,000 |
13
We are amortizing the AngioDynamics developed technology intangible assets over ten years, the trademark intangible assets over 11 years, and the customer list intangible asset on an accelerated basis over ten years. We have estimated the weighted average life of the intangible assets acquired from AngioDynamics to be 10.5 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 effects to our consolidated results of operations of the AngioDynamics acquisition are not material in relation to reported sales and it was deemed impracticable to obtain information to determine earnings associated with the acquired product lines which represent only a small portion of the product lines of a large, consolidated company without standalone financial information.
On May 4, 2023, we entered into an asset purchase agreement to acquire the assets associated with the Surfacer® Inside-Out® Access Catheter System from Bluegrass Vascular Technologies, Inc. (“Bluegrass”), for a purchase price of $32.7 million. Prior to the acquisition, we held an equity investment of 1,251,878 Bluegrass common shares, representing an approximately 19.5% ownership interest in Bluegrass. The fair value of this previously-held equity investment of approximately $245,000 is included in the purchase price allocation. We accounted for this transaction under the acquisition method of accounting 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 Bluegrass acquisition, which were included in selling, general and administrative expenses in the consolidated statements of income included in the 2023 Annual Report on Form 10-K, were not material. The purchase price was allocated as follows (in thousands):
Assets Acquired |
|
|
|
Inventories |
|
$ |
175 |
Intangible assets |
|
|
|
Developed technology |
|
|
28,000 |
Trademarks |
|
|
900 |
Goodwill |
|
|
3,898 |
Total net assets acquired |
|
$ |
32,973 |
We are amortizing the Bluegrass developed technology intangible asset over 15 years and the related trademarks over 13 years. We have estimated the weighted average life of the intangible assets acquired from Bluegrass to be 14.9 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 effects to our consolidated results of operations of the Bluegrass acquisition are not material.
5. Inventories. Inventories at June 30, 2024 and December 31, 2023 consisted of the following (in thousands):
|
|
June 30, 2024 |
|
December 31, 2023 |
||
Finished goods |
|
$ |
152,180 |
|
$ |
158,893 |
Work-in-process |
|
|
38,049 |
|
|
25,420 |
Raw materials |
|
|
107,995 |
|
|
119,558 |
Total inventories |
|
$ |
298,224 |
|
$ |
303,871 |
6. Goodwill and Intangible Assets. The change in the carrying amount of goodwill for the six-month period ended June 30, 2024 is detailed as follows (in thousands):
|
|
2024 |
|
Goodwill balance at January 1 |
|
$ |
382,240 |
Effect of foreign exchange |
|
|
(807) |
Goodwill balance at June 30 |
|
$ |
381,433 |
Total accumulated goodwill impairment losses aggregated to $8.3 million as of June 30, 2024 and December 31, 2023, respectively. We did not have any goodwill impairments for the six-month periods ended June 30, 2024 or 2023. The total goodwill balances as of June 30, 2024 and December 31, 2023 were related to our cardiovascular segment.
14
Other intangible assets at June 30, 2024 and December 31, 2023 consisted of the following (in thousands):
|
|
June 30, 2024 |
|||||||
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|||
|
|
Amount |
|
Amortization |
|
Amount |
|||
Patents |
|
$ |
30,163 |
|
$ |
(11,876) |
|
$ |
18,287 |
Distribution agreements |
|
|
3,250 |
|
|
(2,956) |
|
|
294 |
License agreements |
|
|
11,094 |
|
|
(8,759) |
|
|
2,335 |
Trademarks |
|
|
35,123 |
|
|
(22,343) |
|
|
12,780 |
Customer lists |
|
|
40,225 |
|
|
(34,694) |
|
|
5,531 |
Total |
|
$ |
119,855 |
|
$ |
(80,628) |
|
$ |
39,227 |
|
|
December 31, 2023 |
|||||||
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|||
|
|
Amount |
|
Amortization |
|
Amount |
|||
Patents |
|
$ |
28,877 |
|
$ |
(10,916) |
|
$ |
17,961 |
Distribution agreements |
|
|
3,250 |
|
|
(2,919) |
|
|
331 |
License agreements |
|
|
11,142 |
|
|
(8,327) |
|
|
2,815 |
Trademarks |
|
|
35,135 |
|
|
(20,804) |
|
|
14,331 |
Customer lists |
|
|
40,367 |
|
|
(33,921) |
|
|
6,446 |
Total |
|
$ |
118,771 |
|
$ |
(76,887) |
|
$ |
41,884 |
Aggregate amortization expense for the three and six-month periods ended June 30, 2024 was $14.8 million and $29.4 million, respectively. Aggregate amortization expense for the three and six-month periods ended June 30, 2023 was $13.4 million and $25.7 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 for our intangible assets based on our consideration of triggering events for the six-month periods ended June 30, 2024 and 2023, respectively.
Estimated amortization expense for developed technology and other intangible assets for the next five years consisted of the following as of June 30, 2024 (in thousands):
|
|
Estimated Amortization Expense |
|
Remaining 2024 |
|
$ |
31,367 |
2025 |
|
|
60,826 |
2026 |
|
|
49,776 |
2027 |
|
|
46,440 |
2028 |
|
|
45,024 |
7. Income Taxes. Our provision for income taxes for the three-month periods ended June 30, 2024 and 2023 was a tax expense of $10.1 million and $4.7 million, respectively, which resulted in an effective tax rate of 22.1% and 18.7%, respectively. Our provision for income taxes for the six-month periods ended June 30, 2024 and 2023 was a tax expense of $16.2 million and $9.5 million, respectively, which resulted in an effective tax rate of 20.2% and 18.8%, respectively. The increase in the effective income tax rate for the three and six-month periods ended June 30, 2024, when compared to the prior-year periods, was primarily due to decreased benefit from discrete items such as share-based compensation and deferred compensation and decreased foreign tax credit utilization. The increase in the income tax expense for the six-month period ended June 30, 2024, when compared to the prior-year period, was primarily due to increased pre-tax book income. 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 nondeductible permanent items and discrete items (such as share-based compensation).
15
The Organization for Economic Cooperation and Development (“OECD”) Pillar Two global minimum tax rules, which generally provide for a minimum effective tax rate of 15%, are intended to apply for tax years beginning in 2024. On February 2, 2023, the OECD issued administrative guidance providing transition and safe harbor rules around the implementation of the Pillar Two global minimum tax. Under a transitional safe harbor released July 17, 2023, the undertaxed profits rule top-up tax in the jurisdiction of a company's ultimate parent entity will be zero for each fiscal year of the transition period, if that jurisdiction has a corporate tax rate of at least 20%. The safe harbor transition period will apply to fiscal years beginning on or before December 31, 2025 and ending before December 31, 2026. While we expect our effective income tax rate and cash income tax payments could increase in future years as a result of the global minimum tax, we do not anticipate a material impact to our fiscal 2024 consolidated results of operations. Our assessment could be affected by legislative guidance and future enactment of additional provisions within the Pillar Two framework. We are closely monitoring developments and evaluating the impact these new rules are anticipated to have on our tax rate, including eligibility to qualify for these safe harbor rules.
8. Debt. Principal balances outstanding under our long-term debt obligations as of June 30, 2024 and December 31, 2023 consisted of the following (in thousands):
|
|
June 30, 2024 |
|
December 31, 2023 |
||
Term loans |
|
$ |
75,000 |
|
$ |
99,063 |
Convertible notes |
|
|
747,500 |
|
|
747,500 |
Less unamortized debt issuance costs |
|
|
(21,179) |
|
|
(23,550) |
Total long-term debt |
|
|
801,321 |
|
|
823,013 |
Less current portion |
|
|
— |
|
|
— |
Long-term portion |
|
$ |
801,321 |
|
$ |
823,013 |
Future minimum principal payments on our long-term debt, as of June 30, 2024, were as follows (in thousands):
Years Ending |
|
Future Minimum |
|
December 31, |
|
Principal Payments |
|
Remaining 2024 |
|
$ |
— |
2025 |
|
|
— |
2026 |
|
|
— |
2027 |
|
|
— |
2028 |
|
|
75,000 |
Thereafter |
|
|
747,500 |
Total future minimum principal payments |
|
$ |
822,500 |
Fourth Amended and Restated Credit Agreement
On June 6, 2023, we entered into a Fourth Amended and Restated Credit Agreement (the "Fourth A&R Credit Agreement"). The Fourth A&R Credit Agreement is a syndicated loan agreement with Wells Fargo Bank, National Association and other parties. The Fourth A&R Credit Agreement amended and restated in its entirety our previously outstanding Third Amended and Restated Credit Agreement and all amendments thereto. The Fourth A&R Credit Agreement provides for a term loan of $150 million and a revolving credit commitment of up to an aggregate amount of $700 million, inclusive of sub-facilities for multicurrency borrowings, standby letters of credit and swingline loans. On June 6, 2028, all principal, interest and other amounts outstanding under the Fourth 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.
On December 5, 2023, we executed an amendment to the Fourth Amended Credit Agreement (as amended, the "Amended Fourth A&R Credit Agreement") to facilitate the issuance of our Convertible Notes described below. Among other things, the amendment also updated the definition of the “Applicable Margin” as used in the Amended Fourth A&R Credit Agreement to determine the interest rates and amended the financial covenants, all as described below.
16
Term loans made under the Amended Fourth A&R Credit Agreement bear interest, at our election, at either (i) the Base Rate plus the Applicable Margin (as defined in the Amended Fourth A&R Credit Agreement) or, (ii) Adjusted Term SOFR plus the Applicable Margin (as defined in the Amended Fourth A&R Credit Agreement). Revolving credit loans bear interest, at our election, at either (a) the Base Rate plus the Applicable Margin, (b) Adjusted Term SOFR plus the Applicable Margin, (c) Adjusted Eurocurrency Rate plus the Applicable Margin (as defined in the Amended Fourth A&R Credit Agreement), or (d) Adjusted Daily Simple SONIA plus the Applicable Margin (as defined in the Amended Fourth A&R Credit Agreement). Swingline loans bear interest at the Base Rate plus the Applicable Margin. Interest on each loan featuring the Base Rate and each Daily Simple SONIA Loan is due and payable on the last business day of each calendar month; interest on each loan featuring the Eurocurrency Rate and each Term SOFR 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 Amended Fourth A&R Credit Agreement is collateralized by substantially all of our assets. The Amended Fourth A&R 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 Amended Fourth A&R Credit Agreement requires that we maintain certain financial covenants, as follows:
|
|
Covenant Requirement |
|
|
Consolidated Total Net Leverage Ratio (1) |
|
|
5.0 to 1.0 |
|
Consolidated Senior Secured Net Leverage Ratio (2) |
|
|
3.0 to 1.0 |
|
Consolidated Interest Coverage Ratio (3) |
|
|
3.0 to 1.0 |
|
| (1) | Maximum Consolidated Total Net Leverage Ratio (as defined in the Amended Fourth A&R Credit Agreement) as of any fiscal quarter end. |
| (2) | Maximum Consolidated Senior Secured Net Leverage Ratio (as defined in the Amended Fourth A&R Credit Agreement) as of any fiscal quarter end. |
| (3) | Minimum ratio of Consolidated EBITDA (as defined in the Amended Fourth A&R Credit Agreement and adjusted for certain expenditures) to Consolidated Interest Expense (as defined in the Amended Fourth A&R Credit Agreement) for any period of four consecutive fiscal quarters. |
We believe we were in compliance with all covenants set forth in the Amended Fourth A&R Credit Agreement as of June 30, 2024.
As of June 30, 2024, we had outstanding borrowings of $75.0 million and issued letter of credit guarantees of $2.4 million under the Amended Fourth A&R Credit Agreement, with additional available borrowings of approximately $680 million, based on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Amended Fourth A&R Credit Agreement. Our interest rate as of June 30, 2024 was a fixed rate of 3.39% with respect to the outstanding principal amount as a result of an interest rate swap (see Note 9). Our interest rate as of December 31, 2023 was a fixed rate of 3.39% on $75 million as a result of an interest rate swap and a variable floating rate of 7.21% on $24.1 million. The foregoing fixed rates do not reflect potential future changes in the Applicable Margin.
Convertible Notes
In December 2023, we issued convertible notes which bear interest at 3.00% per year, payable semi-annually in arrears on February 1 and August 1 of each year, beginning on August 1, 2024 (the “Convertible Notes”). The Convertible Notes are senior unsecured obligations (as defined in the indenture governing the Convertible Notes (the “Indenture”)) of Merit and will mature on February 1, 2029, unless repurchased, redeemed or converted in accordance with their terms prior to such date. The net proceeds from the sale of the Convertible Notes were approximately $724.8 million after deducting offering and issuance costs and before the costs of the Capped Call Transactions, as described below.
17
The initial conversion rate of the notes will be 11.5171 shares of our common stock (the “Common Stock”) per $1,000 principal amount of notes, which equates to an initial conversion price of approximately $86.83 per share of Common Stock, subject to adjustments as provided in the Indenture upon the occurrence of certain specified events. In addition, holders of the Convertible Notes (“Holders”) will have the right to require Merit to repurchase all or a part of their notes upon the occurrence of a “fundamental change” (as defined in the Indenture) in cash at a fundamental change repurchase price of 100% of their principal amount plus accrued and unpaid interest up to, but excluding, the fundamental change repurchase date.
Conversion can occur at the option of the Holders at any time on or after October 1, 2028. Prior to October 1, 2028, Holders may only elect to convert the Convertible Notes under the following circumstances: (1) During the five business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of the Convertible Notes for such trading day was less than 98% of the product of the last reported sale price of the Common Stock and the applicable conversion rate on such trading day; (2) Merit issues to common stockholders any rights, options, or warrants, entitling them, for a period of not more than 60 days, to purchase shares of Common Stock at a price per share less than the average closing sale price of 10 consecutive trading days, or Merit’s election to make a distribution to common stockholders exceeding 10% of the previous day’s closing sale price; (3) Upon the occurrence of a Fundamental Change, as set forth in the Indenture; (4) During any calendar quarter (and only during such calendar quarter) beginning after March 31, 2024, if, the last reported sale price per share of the Common Stock exceeds 130% of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter; or (5) Prior to the related redemption date if Merit calls any Convertible Notes for redemption. As of June 30, 2024, none of the conditions permitting the Holders to convert their Convertible Notes early had been met. Therefore, the Convertible Notes are classified as long-term debt obligations.
On or after February 7, 2027, we may redeem for cash all or part of the Convertible Notes, at our option, if the last reported sales price of Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related notice of the redemption.
Upon conversion, Merit will (1) pay cash up to the aggregate principal amount of the Convertible Notes to be converted and (2) pay or deliver, as the case may be, cash, shares of Common Stock, or a combination of cash and shares of Common Stock, at Merit’s election, in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted.
Capped Call Transactions
In December 2023, in connection with the pricing of the Convertible Notes, Merit entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain of the initial purchasers and/or their respective affiliates and certain other financial institutions. The Capped Call Transactions cover, subject to customary anti-dilution adjustments, the number of shares of Common Stock initially underlying the Convertible Notes and are generally expected to reduce potential dilution to the Common Stock upon any conversion of Convertible Notes and/or offset any cash payments Merit is required to make in excess of the principal amount of converted Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap, based on a cap price initially equal to approximately $114.68 per share of Common Stock, subject to certain adjustments under the terms of the Capped Call Transactions. The cost of the Capped Call Transactions was approximately $66.5 million. The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the Common Stock. The premiums paid for the Capped Call Transactions have been included as a net reduction to Common Stock within stockholders' equity.
18
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 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 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 Amended Fourth A&R Credit Agreement that varies in accordance with changes in the benchmark interest rate.
Derivatives 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 $75 million with Wells Fargo. In June 2023, certain terms under the swap agreement were amended to reflect the transition from LIBOR to SOFR, an alternative reference rate. Under the interest rate swap agreement, we fixed the one-month SOFR rate on that portion of our borrowings under the Amended Fourth A&R Credit Agreement at 1.64% for the period from June 1, 2023 to July 31, 2024. The variable portion of the interest rate swap is tied to the one-month SOFR 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.
On June 30, 2024 and December 31, 2023, our interest rate swap qualified as a cash flow hedge. The fair value of our interest rate swap as of June 30, 2024 was an asset of $0.3 million, which was partially offset by $0.1 million in deferred taxes. The fair value of our interest rate swap as of December 31, 2023 was an asset of $1.5 million, partially offset by $0.4 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 exposed to foreign currency exchange rate risk with respect to transactions and balances denominated in various currencies, with our most significant exposure related to transactions and balances denominated in Chinese Renminbi and Euros, among others. We do not use derivative financial instruments for trading or speculative purposes. We do not believe we are subject to any credit risk contingent features related to our derivative contracts, and we seek to manage counterparty risk by allocating derivative contracts among several major financial institutions.
19
Derivatives 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 forward contracts is to reduce the variability of cash flows associated with the forecasted purchase or sale of the foreign currencies. As of June 30, 2024 and December 31, 2023, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with aggregate notional amounts of $134.0 million and $141.1 million, respectively.
Derivatives 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. As of June 30, 2024 and December 31, 2023, we had entered into foreign currency forward contracts related to those balance sheet accounts with aggregate notional amounts of $110.8 million and $108.4 million, respectively.
Balance Sheet Presentation of Derivative Instruments. As of June 30, 2024 and December 31, 2023, 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 |
|
June 30, 2024 |
|
December 31, 2023 |
||
Assets |
|
|
|
|
|
|
|
|
Interest rate swap |
|
Prepaid expenses and other assets |
|
$ |
254 |
|
$ |
1,503 |
Foreign currency forward contracts |
|
Prepaid expenses and other assets |
|
|
2,877 |
|
|
2,061 |
Foreign currency forward contracts |
|
Other assets (long-term) |
|
|
497 |
|
|
216 |
|
|
|
|
|
|
|
|
|
(Liabilities) |
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
Accrued expenses |
|
|
(954) |
|
|
(1,898) |
Foreign currency forward contracts |
|
Other long-term obligations |
|
|
(343) |
|
|
(499) |
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments Not Designated as Hedging Instruments |
|
Balance Sheet Location |
|
June 30, 2024 |
|
December 31, 2023 |
||
Assets |
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
Prepaid expenses and other assets |
|
$ |
1,572 |
|
$ |
828 |
|
|
|
|
|
|
|
|
|
(Liabilities) |
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
Accrued expenses |
|
|
(953) |
|
|
(1,463) |
20
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, |
|
|
|
Three Months Ended June 30, |
|
Three Months Ended June 30, |
||||||||||||
Derivative instrument |
|
2024 |
|
2023 |
|
Location in statements of income |
|
2024 |
|
|
2023 |
|
2024 |
|
|
2023 |
||||
Interest rate swap |
|
$ |
(197) |
|
$ |
719 |
|
Interest expense |
|
$ |
(7,679) |
|
$ |
(3,682) |
|
$ |
699 |
|
$ |
631 |
Foreign currency forward contracts |
|
|
(31) |
|
|
4,325 |
|
Revenue |
|
|
338,003 |
|
|
320,056 |
|
|
427 |
|
|
658 |
|
|
|
|
|
|
|
|
Cost of sales |
|
|
(176,903) |
|
|
(167,274) |
|
|
357 |
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
2024 |
|
2023 |
|
Location in statements of income |
|
2024 |
|
|
2023 |
|
2024 |
|
|
2023 |
|
||||
Interest rate swap |
|
$ |
151 |
|
$ |
600 |
|
Interest expense |
|
$ |
(15,725) |
|
$ |
(5,693) |
|
$ |
1,401 |
|
$ |
1,165 |
|
Foreign currency forward contracts |
|
|
4,135 |
|
|
4,564 |
|
Revenue |
|
|
661,511 |
|
|
617,621 |
|
|
840 |
|
|
1,985 |
|
|
|
|
|
Cost of sales |
|
|
(348,696) |
|
|
(326,477) |
|
|
784 |
|
|
283 |
|
||||
As of June 30, 2024, $2.9 million, or $2.2 million after taxes, was expected to be reclassified from AOCI to earnings in revenue and cost of sales over the succeeding twelve months. As of June 30, 2024, $0.3 million, or $0.2 million after taxes, was expected to be reclassified from AOCI 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 for the periods presented (in thousands):
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
Derivative Instrument |
|
Location in statements of income |
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Foreign currency forward contracts |
|
Other income (expense) — net |
|
$ |
645 |
|
$ |
2,141 |
|
$ |
1,528 |
|
$ |
3,200 |
|
21
10. Commitments and Contingencies.
Litigation. In the ordinary course of business, we are involved in various claims and litigation matters. These proceedings, actions and claims may involve product liability, intellectual property, contract disputes, employment, governmental inquiries or other matters, including the matter described below. These matters generally involve inherent uncertainties and often require prolonged periods of time to resolve. 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 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 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. Unless included in our legal accrual, we are unable to estimate a reasonably possible loss or range of loss associated with any individual material legal proceeding. Legal costs for these matters, such as outside counsel fees and expenses, are charged to expense in the period incurred.
SEC Inquiry
We have received requests 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 (the “SEC Inquiry”). We are cooperating with the requests and investigating the matter. Currently, we are unable to predict the scope, timing, significance or outcome of the SEC Inquiry or estimate a reasonably possible loss or range of loss associated with the matter. It is possible that the ultimate resolution of the SEC Inquiry, if resolved in a manner unfavorable to us, may be materially adverse to our business, financial position, results of operations or liquidity.
In management's opinion, based on its examination of these matters, its experience to date and discussions with counsel, other than the SEC Inquiry, we are not currently involved in any legal proceedings which, individually or in the aggregate, could have a material adverse effect on our financial position, results of operations or cash flows. Our management regularly assesses the risks of legal proceedings in which we are involved, and management’s view of these matters may change in the future.
22
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, 2024 and 2023 consisted of the following (in thousands, except per share amounts):
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Net income |
|
$ |
35,726 |
|
$ |
20,245 |
|
$ |
63,966 |
|
$ |
40,948 |
|
Average common shares outstanding |
|
|
58,139 |
|
|
57,537 |
|
|
58,049 |
|
|
57,445 |
|
Basic EPS |
|
$ |
0.61 |
|
$ |
0.35 |
|
$ |
1.10 |
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
58,139 |
|
|
57,537 |
|
|
58,049 |
|
|
57,445 |
|
Effect of dilutive stock awards |
|
|
601 |
|
|
936 |
|
|
604 |
|
|
884 |
|
Total potential shares outstanding |
|
|
58,740 |
|
|
58,473 |
|
|
58,653 |
|
|
58,329 |
|
Diluted EPS |
|
$ |
0.61 |
|
$ |
0.35 |
|
$ |
1.09 |
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity awards excluded as the impact was anti-dilutive (1) |
|
|
802 |
|
|
1,114 |
|
|
1,009 |
|
|
1,014 |
|
| (1) | Does not reflect the impact of incremental repurchases under the treasury stock method. |
Convertible Notes
For our Convertible Notes, the dilutive effect is calculated using the if-converted method. Upon surrender of the Convertible Notes for conversion, Merit will pay cash up to the aggregate principal amount of the Notes to be converted and pay or deliver, as the case may be, cash, shares of Common Stock or a combination of cash and shares of Common Stock, at Merit’s election, in respect of the remainder, if any, of Merit’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. Under the if-converted method, we include the number of shares required to satisfy the remaining conversion obligation, assuming all the Convertible Notes were converted. The average closing price of the Common Stock for the period ended June 30, 2024 was used as the basis for determining the dilutive effect on EPS. The average closing price for the Common Stock on June 30, 2024 did not exceed the conversion price of $86.83, and therefore all associated shares were deemed anti-dilutive.
12. Stock-Based Compensation Expense. Stock-based compensation expense before income tax expense for the three and six-month periods ended June 30, 2024 and 2023 consisted of the following (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified stock options |
|
$ |
363 |
|
$ |
432 |
|
$ |
725 |
|
$ |
873 |
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified stock options |
|
|
345 |
|
|
413 |
|
|
781 |
|
|
841 |
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified stock options |
|
|
1,565 |
|
|
1,851 |
|
|
3,247 |
|
|
3,221 |
Performance-based restricted stock units |
|
|
2,897 |
|
|
1,817 |
|
|
4,764 |
|
|
2,632 |
Restricted stock units |
|
|
1,131 |
|
|
467 |
|
|
1,718 |
|
|
911 |
Cash-settled performance-based awards |
|
|
710 |
|
|
600 |
|
|
1,010 |
|
|
1,071 |
Total selling, general and administrative |
|
|
6,303 |
|
|
4,735 |
|
|
10,739 |
|
|
7,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense before taxes |
|
$ |
7,011 |
|
$ |
5,580 |
|
$ |
12,245 |
|
$ |
9,549 |
23
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 period ended June 30, 2023, we granted stock options representing 327,294 shares of our Common Stock. We did not grant any stock options during the six-month period ended June 30, 2024. 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:
|
Six Months Ended |
|
June 30, |
|
2023 |
Risk-free interest rate |
3.6% - 4.5% |
Expected option term |
4.0 years |
Expected dividend yield |
— |
Expected price volatility |
46.7% - 47.1% |
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, 2024, the total remaining unrecognized compensation cost related to non-vested stock options was $15.4 million, which was expected to be recognized over a weighted average period of 2.0 years.
Stock-Settled Performance-Based Restricted Stock Units (“Performance Stock Units”)
During the six-month periods ended June 30, 2024 and 2023, we granted performance stock units which represented up to 364,810 and 286,863 shares of 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 number of shares delivered upon vesting at the end of the performance periods are based upon performance against specified financial performance metrics and relative total shareholder return as compared to the Russell 2000 Index (“rTSR”), as defined in the award agreements.
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, |
||
|
|
2024 |
|
2023 |
Risk-free interest rate |
|
4.4% |
|
3.9% - 4.6% |
Performance period |
|
2.8 years |
|
2.8 years |
Expected dividend yield |
|
— |
|
— |
Expected price volatility |
|
31.1% |
|
31.4% - 32.6% |
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 the weighted average volatility of our stock price and the average volatility of our compensation peer group's stock price. The expected dividend yield was assumed to be zero because, at the time of the grant, we had no plans to declare a dividend.
24
Compensation expense is recognized using the grant-date fair value for the number of shares that are likely to be awarded based on the performance metrics. Each reporting period, this probability assessment is updated, and cumulative adjustments are recorded based on the financial performance metrics expected to be achieved. At the end of the performance period, cumulative expense is calculated based on the actual performance metrics achieved. As of June 30, 2024, the total remaining unrecognized compensation cost related to stock-settled performance stock units was $20.3 million, which is expected to be recognized over a weighted average period of 2.1 years.
Cash-Settled Performance-Based Awards
During the six-month periods ended June 30, 2024 and 2023, we granted performance stock units to our Chief Executive Officer that provide for settlement in cash upon achievement of specific metrics (“Liability Awards”), with total target cash incentives in the amount of $1.6 million and $1.3 million, respectively. The Liability Awards entitle him to a target cash payment based upon our level of rTSR performance and achievement of other performance metrics, as defined in the award agreements.
During the six-month periods ended June 30, 2024 and 2023, we granted additional performance stock units to certain employees that provide for settlement in cash upon our achievement of specified financial metrics. The cash payable upon vesting at the end of the service period is based upon performance against specified financial performance metrics and relative total shareholder return as compared to the rTSR, as defined in the award agreements. Compensation expense is recognized for the cash payment likely to be awarded based on the performance metrics.
The potential maximum payout of these Liability Awards is 250% of the target cash incentive, resulting in a total potential maximum payout of $4.4 million and $4.4 million for Liability Awards granted during the six-month periods ended June 30, 2024 and 2023, respectively. The settlement generally occurs at the end of three-year performance periods based upon the same performance metrics and vesting period as our performance stock units.
The fair value of these Liability Awards is measured at each reporting period until the awards are settled. As of June 30, 2024 and December 31, 2023, the recorded balance associated with these Liability Awards is $3.4 million and $3.4 million, respectively, which are classified as liabilities and reported in accrued expenses and other long-term obligations within our consolidated balance sheets. As of June 30, 2024, the total remaining unrecognized compensation cost related to Liability Awards was $4.4 million, which is expected to be recognized over a weighted average period of 2.0 years.
Restricted Stock Units
During the six-month periods ended June 30, 2024 and 2023, we granted restricted stock units to certain employees and and non-employee directors representing 158,719 and 20,358 shares of Common Stock, respectively. The expense recognized for restricted stock units is equal to the closing stock price on the date of grant, which is recognized over the vesting period. Restricted stock units granted to each employee are subject to such employee’s continued employment through the vesting date, which is four years from the date of grant. Restricted stock units granted to each non-employee director are subject to such director’s continued service through the vesting date, which is one year from the grant date. As of June 30, 2024, the total remaining unrecognized compensation cost related to restricted stock units was $10.2 million, which will be recognized over a weighted average period of 3.3 years.
13. Segment Reporting. 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. Our chief operating decision maker is our Chief Executive Officer. We evaluate the performance of our operating segments based on net sales and income from operations.
25
Financial information relating to our reportable operating segments and reconciliations to the consolidated totals for the three and six-month periods ended June 30, 2024 and 2023, were as follows (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular |
|
$ |
327,815 |
|
$ |
311,275 |
|
$ |
641,189 |
|
$ |
599,251 |
Endoscopy |
|
|
10,188 |
|
|
8,781 |
|
|
20,322 |
|
|
18,370 |
Total net sales |
|
|
338,003 |
|
|
320,056 |
|
|
661,511 |
|
|
617,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular |
|
|
42,912 |
|
|
26,464 |
|
|
75,819 |
|
|
50,398 |
Endoscopy |
|
|
3,034 |
|
|
2,348 |
|
|
6,049 |
|
|
4,797 |
Total income from operations |
|
|
45,946 |
|
|
28,812 |
|
|
81,868 |
|
|
55,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense — net |
|
|
(103) |
|
|
(3,912) |
|
|
(1,677) |
|
|
(4,795) |
Income tax expense |
|
|
10,117 |
|
|
4,655 |
|
|
16,225 |
|
|
9,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
35,726 |
|
$ |
20,245 |
|
$ |
63,966 |
|
$ |
40,948 |
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, 2024 and December 31, 2023 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, 2024 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
||||
Marketable securities (1) |
|
$ |
61 |
|
$ |
61 |
|
$ |
— |
|
$ |
— |
Interest rate contract asset, current (2) |
|
$ |
254 |
|
$ |
— |
|
$ |
254 |
|
$ |
— |
Foreign currency contract assets, current and long-term (3) |
|
$ |
4,946 |
|
$ |
— |
|
$ |
4,946 |
|
$ |
— |
Foreign currency contract liabilities, current and long-term (4) |
|
$ |
(2,250) |
|
$ |
— |
|
$ |
(2,250) |
|
$ |
— |
Contingent consideration liabilities |
|
$ |
(3,435) |
|
$ |
— |
|
$ |
— |
|
$ |
(3,435) |
|
|
|
|
|
Fair Value Measurements Using |
|||||||
|
|
Total Fair |
|
Quoted prices in |
|
Significant other |
|
Significant |
||||
|
|
Value at |
|
active markets |
|
observable inputs |
|
unobservable inputs |
||||
|
|
December 31, 2023 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
||||
Marketable securities (1) |
|
$ |
78 |
|
$ |
78 |
|
$ |
— |
|
|
— |
Interest rate contract asset, current (2) |
|
$ |
1,503 |
|
$ |
— |
|
$ |
1,503 |
|
$ |
— |
Foreign currency contract assets, current and long-term (3) |
|
$ |
3,105 |
|
$ |
— |
|
$ |
3,105 |
|
$ |
— |
Foreign currency contract liabilities, current and long-term (4) |
|
$ |
(3,860) |
|
$ |
— |
|
$ |
(3,860) |
|
$ |
— |
Contingent consideration liabilities |
|
$ |
(3,447) |
|
$ |
— |
|
$ |
— |
|
$ |
(3,447) |
26
| (1) | Our marketable securities, which consist entirely of available-for-sale equity securities, are valued using market prices in active markets. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
| (2) | The fair value of the interest rate contract is determined using Level 2 fair value inputs and is recorded as prepaid and other current assets in the consolidated balance sheets. |
| (3) | 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 a prepaid expense and other current asset or other long-term asset in the consolidated balance sheets. |
| (4) | 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 expense or other long-term obligation in the consolidated balance sheets. |
Certain of our past 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. Changes in the fair value of our contingent consideration liabilities during the three and six-month periods ended June 30, 2024 and 2023 consisted of the following (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Beginning balance |
|
$ |
3,225 |
|
$ |
16,000 |
|
$ |
3,447 |
|
$ |
18,073 |
Contingent consideration expense |
|
|
305 |
|
|
1,094 |
|
|
188 |
|
|
1,615 |
Contingent payments made |
|
|
(95) |
|
|
(13,513) |
|
|
(200) |
|
|
(16,107) |
Ending balance |
|
$ |
3,435 |
|
$ |
3,581 |
|
$ |
3,435 |
|
$ |
3,581 |
As of June 30, 2024, $3.0 million in contingent consideration liability was included in other long-term obligations and $0.4 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet. As of December 31, 2023, $3.0 million in contingent consideration liability was included in other long-term obligations and $0.4 million in contingent consideration liability was included in accrued expenses in our consolidated balance sheet.
Payments related to the settlement of the contingent consideration liability recognized at fair value as of the applicable acquisition date of $0.1 million and $3.4 million for the six-month periods ended June 30, 2024 and 2023, respectively, have been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows. Payments related to increases in the contingent consideration liability subsequent to the date of acquisition of $0.1 million and $12.7 million for the six-month periods ended June 30, 2024 and 2023, respectively, are reflected as operating cash flows.
27
The recurring Level 3 measurement of our contingent consideration liabilities included the following significant unobservable inputs at June 30, 2024 and December 31, 2023 (amounts in thousands):
|
|
Fair value at |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
Valuation |
|
|
|
|
|
Weighted |
|
Contingent consideration liability |
|
2024 |
|
technique |
|
Unobservable inputs |
|
Range |
|
Average(1) |
|
Revenue-based royalty payments contingent liability |
|
$ |
2,937 |
|
Discounted cash flow |
|
Discount rate |
|
12% - 16% |
|
14.6% |
|
|
|
|
|
|
|
Projected year of payments |
|
2024-2034 |
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue milestones contingent liability |
|
$ |
91 |
|
Monte Carlo simulation |
|
Discount rate |
|
13.0% |
|
|
|
|
|
|
|
|
|
Projected year of payments |
|
2024-2040 |
|
2040 |
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory approval contingent liability |
|
$ |
407 |
|
Scenario-based method |
|
Discount rate |
|
6.1% |
|
|
|
|
|
|
|
|
|
Probability of milestone payment |
|
50.0% |
|
|
|
|
|
|
|
|
|
Projected year of payment |
|
2024-2030 |
|
2030 |
|
|
Fair value at |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
Valuation |
|
|
|
|
|
Weighted |
|
Contingent consideration liability |
|
2023 |
|
technique |
|
Unobservable inputs |
|
Range |
|
Average(1) |
|
Revenue-based royalty payments contingent liability |
|
$ |
2,945 |
|
Discounted cash flow |
|
Discount rate |
|
12.0% - 16.0% |
|
14.6% |
|
|
|
|
|
|
|
Projected year of payments |
|
2024-2034 |
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue milestones contingent liability |
|
$ |
93 |
|
Monte Carlo simulation |
|
Discount rate |
|
13.0% |
|
|
|
|
|
|
|
|
|
Projected year of payments |
|
2024-2039 |
|
2039 |
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory approval contingent liability |
|
$ |
409 |
|
Scenario-based method |
|
Discount rate |
|
5.5% |
|
|
|
|
|
|
|
|
|
Probability of milestone payment |
|
50.0% |
|
|
|
|
|
|
|
|
|
Projected year of payment |
|
2024-2030 |
|
2030 |
| (1) | Unobservable inputs were weighted by the relative fair value of the instruments. No weighted average is reported for contingent consideration liabilities without a range of unobservable inputs. |
The contingent consideration liability is re-measured to fair value each reporting period. Significant increases or decreases in projected revenues, based on our most recent internal operational budgets and long-range strategic plans, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement. Our determination of the fair value of the contingent consideration liability could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We intend to record any such change in fair value to operating expenses in our consolidated statements of income.
28
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 under our Amended Fourth A&R Credit Agreement 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. We believe the fair value our long-term debt under our Convertible Notes approximates carrying value as the notes were issued in December 2023. 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 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.
Our equity investments in privately-held companies were $22.6 million and $19.1 million at June 30, 2024 and December 31, 2023, respectively, which are included within other long-term assets in our consolidated balance sheets. We analyze our investments in privately-held companies to determine if they should be accounted for using the equity method based on our ability to exercise significant influence over operating and financial policies of the investment. 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. During the six-month period ended June 30, 2023, we recorded impairment charges of $0.3 million associated with our previously-held equity investment in Bluegrass in connection with the asset acquisition completed on May 4, 2023 (see Note 4). During the six-month period ended June 30, 2024, we recorded no impairment charges related to our equity investments.
Current Expected Credit Losses
Our outstanding long-term notes receivable, including accrued interest and an allowance for current expected credit losses, were $8.7 million and $3.2 million as of June 30, 2024 and December 31, 2023, respectively. Long-term notes receivable issued were $6.2 million for the six-month period ended June 30, 2024 and were related to loans issued to Selio Medical Limited (“Selio”) of $1.7 million, Solo Pace Inc. (“Solo Pace”) of $1.5 million and Fluidx of $3.0 million. As of June 30, 2024 and December 31, 2023, we had an allowance for current expected credit losses of $1.4 million and $0.6 million, respectively, associated with these notes receivable. We assess the allowance for current expected credit losses on an individual security basis, due to the limited number of securities, using a probability of default model, which is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the expected collectability of securities, and other security specific factors.
The table below presents a roll-forward of the allowance for current expected credit losses on our notes receivable for the three and six-month periods ended June 30, 2024 and 2023 (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Beginning balance |
|
$ |
1,388 |
|
$ |
290 |
|
$ |
568 |
|
$ |
281 |
Provision for credit loss expense |
|
|
18 |
|
|
6 |
|
|
838 |
|
|
15 |
Ending balance |
|
$ |
1,406 |
|
$ |
296 |
|
$ |
1,406 |
|
$ |
296 |
29
15. Accumulated Other Comprehensive Income (Loss). The changes in each component of accumulated other comprehensive income (loss) for the three and six-month periods ended June 30, 2024 and 2023 were as follows:
|
Cash Flow Hedges |
|
Foreign Currency Translation |
|
Total |
|||
Balance as of April 1, 2024 |
$ |
3,932 |
|
$ |
(16,388) |
|
$ |
(12,456) |
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
(228) |
|
|
(1,688) |
|
|
(1,916) |
Income taxes |
|
404 |
|
|
22 |
|
|
426 |
Reclassifications to: |
|
|
|
|
|
|
|
|
Revenue |
|
(427) |
|
|
|
|
|
(427) |
Cost of sales |
|
(357) |
|
|
|
|
|
(357) |
Interest expense |
|
(699) |
|
|
|
|
|
(699) |
Net other comprehensive loss |
|
(1,307) |
|
|
(1,666) |
|
|
(2,973) |
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2024 |
$ |
2,625 |
|
$ |
(18,054) |
|
$ |
(15,429) |
|
Cash Flow Hedges |
|
Foreign Currency Translation |
|
Total |
|||
Balance as of April 1, 2023 |
$ |
3,081 |
|
$ |
(14,010) |
|
$ |
(10,929) |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
5,044 |
|
|
(1,201) |
|
|
3,843 |
Income taxes |
|
(821) |
|
|
(15) |
|
|
(836) |
Reclassifications to: |
|
|
|
|
|
|
|
|
Revenue |
|
(658) |
|
|
|
|
|
(658) |
Cost of sales |
|
(333) |
|
|
|
|
|
(333) |
Interest expense |
|
(631) |
|
|
|
|
|
(631) |
Net other comprehensive income (loss) |
|
2,601 |
|
|
(1,216) |
|
|
1,385 |
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2023 |
$ |
5,682 |
|
$ |
(15,226) |
|
$ |
(9,544) |
30
|
Cash Flow Hedges |
|
Foreign Currency Translation |
|
Total |
|||
Balance as of January 1, 2024 |
$ |
1,662 |
|
$ |
(12,996) |
|
$ |
(11,334) |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
4,286 |
|
|
(5,092) |
|
|
(806) |
Income taxes |
|
(298) |
|
|
34 |
|
|
(264) |
Reclassifications to: |
|
|
|
|
|
|
|
|
Revenue |
|
(840) |
|
|
|
|
|
(840) |
Cost of sales |
|
(784) |
|
|
|
|
|
(784) |
Interest expense |
|
(1,401) |
|
|
|
|
|
(1,401) |
Net other comprehensive income (loss) |
|
963 |
|
|
(5,058) |
|
|
(4,095) |
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2024 |
$ |
2,625 |
|
$ |
(18,054) |
|
$ |
(15,429) |
|
Cash Flow Hedges |
|
Foreign Currency Translation |
|
Total |
|||
Balance as of January 1, 2023 |
$ |
4,366 |
|
$ |
(15,916) |
|
$ |
(11,550) |
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
5,164 |
|
|
724 |
|
|
5,888 |
Income taxes |
|
(415) |
|
|
(34) |
|
|
(449) |
Reclassifications to: |
|
|
|
|
|
|
|
|
Revenue |
|
(1,985) |
|
|
|
|
|
(1,985) |
Cost of sales |
|
(283) |
|
|
|
|
|
(283) |
Interest expense |
|
(1,165) |
|
|
|
|
|
(1,165) |
Net other comprehensive income |
|
1,316 |
|
|
690 |
|
|
2,006 |
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2023 |
$ |
5,682 |
|
$ |
(15,226) |
|
$ |
(9,544) |
16. Subsequent Events. On July 1, 2024, we entered into an Asset Purchase Agreement (the “EGS Purchase Agreement”) with EndoGastric Solutions, Inc., a Delaware corporation (“EGS”), pursuant to which we acquired the EsophyX® Z+ device and various assets related thereto (collectively, the “EGS Acquisition”), which are designed to deliver a durable, minimally invasive non-pharmacological treatment option for patients suffering from gastroesophageal reflux disease. We acquired the purchased assets identified under the EGS Purchase Agreement for a purchase price of $105 million, which amount we financed at closing through current borrowings under our long-term debt obligations, plus the assumption or reimbursement of certain liabilities of EGS. We are currently evaluating the accounting treatment of the EGS Acquisition, as well as performing the valuation of the assets acquired and the related purchase price allocation.
31
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 2023 Annual Report on Form 10-K and in Part II, Item 1A “Risk Factors” in this report.
OVERVIEW
We are a leading manufacturer and marketer of proprietary medical devices used in interventional, diagnostic and therapeutic procedures, particularly in cardiology, radiology, oncology, critical care 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.
For the three-month period ended June 30, 2024, we reported sales of $338.0 million, an increase of $17.9 million or 5.6% compared to sales for the three-month period ended June 30, 2023 of $320.1 million. For the six-month period ended June 30, 2024, we reported sales of $661.5 million, an increase of $43.9 million or 7.1% compared to sales for the six-month period ended June 30, 2023 of $617.6 million. Foreign currency fluctuations (net of hedging) decreased our net sales by ($3.0) million and ($4.7) million, respectively, for the three and six-month periods ended June 30, 2024, assuming applicable foreign exchange rates in effect during the comparable prior-year periods.
Gross profit as a percentage of sales was 47.7% for the three-month periods ending June 30, 2023 and 2024. Gross profit as a percentage of sales increased to 47.3% for the six-month period ended June 30, 2024 compared to 47.1% for the six-month period ended June 30, 2023.
Net income for the three-month period ended June 30, 2024 was $35.7 million, or $0.61 per share, compared to net income of $20.2 million, or $0.35 per share, for the three-month period ended June 30, 2023. Net income for the six-month period ended June 30, 2024 was $64.0 million, or $1.09 per share, compared to net income of $40.9 million, or $0.70 per share, for the six-month period ended June 30, 2023.
Recent Developments and Trends
In addition to the trends identified in the 2023 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 2024 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, 2024 were driven primarily by demand in the U.S. and favorable international sales trends, particularly in our Europe, Middle East and Africa (“EMEA”) and Rest of World (“ROW”) regions. |
| ● | On February 28, 2024, we introduced our “Continued Growth Initiatives” Program and related financial targets for the three-year period ending December 31, 2026, which reflects our commitment to better-position Merit for long-term, sustainable growth and enhanced profitability. |
| ● | As of June 30, 2024, we had cash, cash equivalents, and restricted cash of $638.7 million and net available borrowing capacity of approximately $680 million. |
32
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, |
|
||||
|
|
2024 |
|
2023 |
|
|
2024 |
|
2023 |
|
Net sales |
|
100 |
% |
100 |
% |
|
100 |
% |
100 |
% |
Gross profit |
|
47.7 |
|
47.7 |
|
|
47.3 |
|
47.1 |
|
Selling, general and administrative expenses |
|
28.0 |
|
31.5 |
|
|
28.6 |
|
30.9 |
|
Research and development expenses |
|
6.0 |
|
6.3 |
|
|
6.3 |
|
6.7 |
|
Impairment charges |
|
— |
|
0.1 |
|
|
— |
|
0.0 |
|
Contingent consideration expense |
|
0.1 |
|
0.3 |
|
|
0.0 |
|
0.3 |
|
Acquired in-process research and development expense |
|
— |
|
0.5 |
|
|
— |
|
0.3 |
|
Income from operations |
|
13.6 |
|
9.0 |
|
|
12.4 |
|
8.9 |
|
Other expense — net |
|
(0.0) |
|
(1.2) |
|
|
(0.3) |
|
(0.8) |
|
Income before income taxes |
|
13.6 |
|
7.8 |
|
|
12.1 |
|
8.2 |
|
Net income |
|
10.6 |
|
6.3 |
|
|
9.7 |
|
6.6 |
|
Sales
Sales for the three-month period ended June 30, 2024 increased by 5.6%, or $17.9 million, compared to the corresponding period in 2023. Sales for the six-month period ended June 30, 2024 increased by 7.1%, or $43.9 million, compared to the corresponding period in 2023. 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, 2024 and 2023 (in thousands, other than percentage changes):
|
|
|
|
|
Three Months Ended |
|
|
|
|
Six Months Ended |
|
||||||||
|
|
|
|
|
June 30, |
|
|
|
|
June 30, |
|
||||||||
|
|
% Change |
|
|
2024 |
|
2023 |
|
% Change |
|
|
2024 |
|
2023 |
|
||||
Cardiovascular |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peripheral Intervention |
|
10.6 |
% |
|
$ |
139,247 |
|
$ |
125,909 |
|
14.3 |
% |
|
$ |
273,873 |
|
$ |
239,692 |
|
Cardiac Intervention |
|
0.1 |
% |
|
|
93,863 |
|
|
93,775 |
|
3.0 |
% |
|
|
184,551 |
|
|
179,103 |
|
Custom Procedural Solutions |
|
2.1 |
% |
|
|
50,416 |
|
|
49,384 |
|
2.2 |
% |
|
|
99,210 |
|
|
97,085 |
|
OEM |
|
4.9 |
% |
|
|
44,289 |
|
|
42,207 |
|
0.2 |
% |
|
|
83,555 |
|
|
83,371 |
|
Total |
|
5.3 |
% |
|
|
327,815 |
|
|
311,275 |
|
7.0 |
% |
|
|
641,189 |
|
|
599,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy Devices |
|
16.0 |
% |
|
|
10,188 |
|
|
8,781 |
|
10.6 |
% |
|
|
20,322 |
|
|
18,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
5.6 |
% |
|
$ |
338,003 |
|
$ |
320,056 |
|
7.1 |
% |
|
$ |
661,511 |
|
$ |
617,621 |
|
Cardiovascular Sales. Our cardiovascular sales for the three-month period ended June 30, 2024 were $327.8 million, up 5.3% when compared to the corresponding period of 2023 of $311.3 million. Sales for the three-month period ended June 30, 2024 were favorably affected by increased sales of:
| (a) | Peripheral intervention products, which increased by $13.3 million, or 10.6%, from the corresponding period of 2023. This increase was driven primarily by increased sales of our access, biopsy, radar localization, delivery systems, and drainage products. |
| (b) | Cardiac intervention products, which increased by $0.1 million, or 0.1%, from the corresponding period of 2023. This increase was driven primarily by increased sales of our cardiac rhythm management/electrophysiology (“CRM/EP”) and fluid management products, offset partially by decreased sales of our angiography and hemostasis products. |
33
| (c) | Custom procedural solutions products, which increased by $1.0 million, or 2.1%, from the corresponding period of 2023. This increase was driven primarily by increased sales of our kits, offset partially by decreased sales of our critical care products and procedure trays. |
| (d) | OEM products, which increased by $2.1 million, or 4.9%, from the corresponding period of 2023. This increase was driven primarily by increased sales of our kits and access, fluid management, intervention, and angiography products, offset partially by decreased sales of our CRM/EP products. |
Our cardiovascular sales for the six-month period ended June 30, 2024 were $641.2 million, up 7.0% when compared to the corresponding period of 2023 of $599.3 million. Sales for the six-month period ended June 30, 2024 were favorably affected by increased sales of:
(a) |
Peripheral intervention products, which increased by $34.2 million, or 14.3%, from the corresponding period of 2023. This increase was driven primarily by increased sales of our access, biopsy, delivery systems, radar localization, drainage, embolotherapy, and angiography products. |
(b) |
Cardiac intervention products, which increased by $5.4 million, or 3.0%, from the corresponding period of 2023. This increase was driven primarily by increased sales of our CRM/EP, intervention, and access products, offset partially by decreased sales of our angiography products. |
(c) |
Custom procedural solutions products, which increased by $2.1 million, or 2.2%, from the corresponding period of 2023. This increase was driven primarily by increased sales of our kits, offset partially by decreased sales of our procedure trays. |
(d) |
OEM products, which increased by $0.2 million, or 0.2%, from the corresponding period of 2023. This increase was driven primarily by increased sales of our kits and access products, offset partially by decreased sales of our CRM/EP products. |
Endoscopy Sales. Our endoscopy sales for the three-month period ended June 30, 2024 were $10.2 million, up 16.0% when compared to sales in the corresponding period of 2023 of $8.8 million. Sales for the three-month period ended June 30, 2024 compared to the corresponding period in 2023 were favorably affected by increased sales of our EndoMAXX fully covered esophageal stent, other stents, Elation Pulmonary Balloon Dilators, and ReSolve Thoracostomy Trays.
Our endoscopy sales for the six-month period ended June 30, 2024 were $20.3 million, up 10.6%, when compared to sales in the corresponding period of 2023 of $18.4 million. Sales for the six-month period ended June 30, 2024 compared to the corresponding period in 2023 were favorably affected by increased sales of our other stents, ReSolve Thoracostomy Trays, and Elation Pulmonary Balloon Dilators, offset partially by decreased sales of our AERO Tracheobronchial Stent and probes.
Geographic Sales
Listed below are sales by geography for the three and six-month periods ended June 30, 2024 and 2023 (in thousands, other than percentage changes):
|
|
|
|
|
Three Months Ended |
|
|
|
|
Six Months Ended |
||||||||
|
|
|
|
|
June 30, |
|
|
|
|
June 30, |
||||||||
|
|
% Change |
|
|
2024 |
|
2023 |
|
% Change |
|
|
2024 |
|
2023 |
||||
United States |
|
8.4 |
% |
|
$ |
194,664 |
|
$ |
179,582 |
|
8.5 |
% |
|
$ |
380,758 |
|
$ |
350,942 |
International |
|
2.0 |
% |
|
|
143,339 |
|
|
140,474 |
|
5.3 |
% |
|
|
280,753 |
|
|
266,679 |
Total |
|
5.6 |
% |
|
$ |
338,003 |
|
$ |
320,056 |
|
7.1 |
% |
|
$ |
661,511 |
|
$ |
617,621 |
34
United States Sales. U.S. sales for the three-month period ended June 30, 2024 were $194.7 million, or 57.6% of net sales, up 8.4% when compared to the corresponding period of 2023. The increase in our domestic sales for the three-month period ended June 30, 2024, compared to the corresponding period of 2023 was driven primarily by our U.S. Direct and Endoscopy businesses.
U.S. sales for the six-month period ended June 30, 2024 were $380.8 million, or 57.6% of net sales, up 8.5% when compared to the corresponding period of 2023. The increase in our domestic sales for the six-month period ended June 30, 2024, compared to the corresponding period of 2023 was driven primarily by our U.S. Direct, Oncology and Endoscopy businesses.
International Sales. International sales for the three-month period ended June 30, 2024 were $143.3 million, or 42.4% of net sales, up 2.0% when compared to the corresponding period of 2023 of $140.5 million. The increase in our international sales for the three-month period ended June 30, 2024, compared to the corresponding period of 2023 included increased sales in our EMEA operations of $2.7 million or 4.5% and in our ROW operations of $2.1 million or 17.1%, offset partially by decreased sales in our Asia Pacific (“APAC”) operations of ($1.9) million or (2.8%).
International sales for the six-month period ended June 30, 2024 were $280.8 million, or 42.4% of net sales, up 5.3% when compared to the corresponding period of 2023 of $266.7 million. The increase in our international sales for the six-month period ended June 30, 2024, compared to the six-month period ended June 30, 2023, included increased sales in our EMEA operations of $5.7 million or 4.8%, in our ROW operations of $5.0 million or 22.0%, and in our APAC operations of $3.4 million or 2.7%.
Gross Profit
Our gross profit as a percentage of sales was 47.7% for both the three-month periods ended June 30, 2024 and 2023. The consistency in gross profit percentage was primarily due to increased sales combined with favorable changes in standard cost and product mix and lower obsolescence expense, offset by higher intangible amortization expense as a percentage of sales associated with acquisitions.
Our gross profit as a percentage of sales increased to 47.3% for the six-month period ended June 30, 2024, compared to 47.1% for the six-month period ended June 30, 2023. The increase in gross profit percentage was primarily due to an increase in sales combined with favorable changes in standard cost and product mix, partially offset by unfavorable manufacturing variances and higher intangible amortization expense as a percentage of sales associated with acquisitions.
Operating Expenses
Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses decreased ($6.3) million, or (6.3)%, for the three-month period ended June 30, 2024 compared to the corresponding period of 2023. As a percentage of sales, SG&A expenses were 28.0% for the three-month period ended June 30, 2024, compared to 31.5% for the corresponding period of 2023. For the three-month period ended June 30, 2024, SG&A expenses decreased compared to the corresponding period of 2023, primarily due to a decrease in loss on abandonment of property and equipment expense associated with the 2023 write-off of equipment related to our Spine business, a decrease in consulting costs in connection with the Foundations for Growth Program which was completed in 2023, a decrease in acquisition-related expenses associated with due diligence projects, and a decrease in costs associated with idle facilities during line transfers, offset partially by increased labor costs in our sales and marketing operations due to increased headcount to support growth and increased advertising and promotional expenses.
35
SG&A expenses decreased ($2.1) million, or (1.1)%, for the six-month period ended June 30, 2024 compared to the corresponding period of 2023. As a percentage of sales, SG&A expenses were 28.6% for the six-month period ended June 30, 2024, compared to 30.9% for the corresponding period of 2023. For the six-month period ended June 30, 2024, SG&A expenses decreased compared to the corresponding period of 2023 primarily due to a decrease in loss on abandonment of property and equipment expense associated with the 2023 write-off of equipment related to our Spine business, a decrease in consulting costs in connection with the Foundations for Growth Program which was completed in 2023, and a decrease in acquisition-related expenses associated with due diligence projects, offset partially by an increase in labor-related costs in our sales and marketing operations due to increased headcount to support growth, an increase of variable compensation linked to company performance, an increase of stock-based compensation expense associated with new equity grants, and an increased investment in advertising and promotional expenses.
Research and Development Expenses. Research and development (”R&D”) expenses for the three-month period ended June 30, 2024 were $20.3 million, up 0.7%, when compared to R&D expenses in the corresponding period of 2023 of $20.1 million. For the three-month period ended June 30, 2024, R&D expenses increased compared to the corresponding period of 2023 primarily due to increased facility and support costs and increased materials for projects, offset partially by decreased regulatory costs related to implementation of the Medical Device Regulation in the E.U. and decreased costs related to clinical studies.
R&D expenses for the six-month period ended June 30, 2024 were $41.7 million, up 0.7%, when compared to R&D expenses in the corresponding period of 2023 of $41.4 million. For the six-month period ended June 30, 2024, R&D expenses increased compared to the corresponding period of 2023 primarily due to increased labor costs due to increased headcount, increased materials for projects, and increased costs related to clinical studies, offset partially by lower regulatory costs related to implementation of the Medical Device Regulation in the E.U.
Impairment Charges. For the three and six-month periods ended June 30, 2024, we recognized no impairment charges. For the three and six-month periods ended June 30, 2023, we recorded impairment charges of $270 thousand due to the acquisition and subsequent write-off of our equity investment in Bluegrass.
Contingent Consideration Expense. For the three and six-month periods ended June 30, 2024, 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 $0.3 million and $0.2 million compared to contingent consideration expense of $1.1 million and $1.6 million for the three and six-month periods ended June 30, 2023, respectively. 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, 2024, we recognized no acquired in-process research and development costs. For the three and six-month periods ended June 30, 2023 we recognized $1.6 million in acquired in-process research and development costs primarily associated with the assets we acquired from Advanced Radiation Therapy, LLC (“ART”) on May 1, 2023.
Operating Income
The following table sets forth our operating income by financial reporting segment for the three and six-month periods ended June 30, 2024 and 2023 (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular |
|
$ |
42,912 |
|
$ |
26,464 |
|
$ |
75,819 |
|
$ |
50,398 |
Endoscopy |
|
|
3,034 |
|
|
2,348 |
|
|
6,049 |
|
|
4,797 |
Total operating income |
|
$ |
45,946 |
|
$ |
28,812 |
|
$ |
81,868 |
|
$ |
55,195 |
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Cardiovascular Operating Income. Our cardiovascular operating income for the three-month period ended June 30, 2024 was $42.9 million, compared to cardiovascular operating income in the corresponding period of 2023 of $26.5 million. The increase in cardiovascular operating income during the three-month period ended June 30, 2024 compared to the corresponding period of 2023 was primarily a result of higher sales ($327.8 million compared to $311,3 million), lower SG&A expenses, lower acquired in-process research and development charges, lower impairment charges, and lower contingent consideration expense, partially offset by higher R&D expenses.
Our cardiovascular operating income for the six-month period ended June 30, 2024 was $75.8 million, compared to cardiovascular operating income in the corresponding period of 2023 of $50.4 million. The increase in cardiovascular operating income during the six-month period ended June 30, 2024 compared to the corresponding period of 2023 was primarily a result of higher sales ($641.2 million compared to $599.3 million), higher gross margin, lower SG&A, lower acquired in-process research and development charges, lower impairment charges, and lower contingent consideration expense, partially offset by higher R&D expenses.
Endoscopy Operating Income. Our endoscopy operating income for the three-month period ended June 30, 2024 was $3.0 million, compared to endoscopy operating income of $2.3 million for the corresponding period of 2023. Our endoscopy operating income for the six-month period ended June 30, 2024 was $6.0 million, compared to endoscopy operating income of $4.8 million for the corresponding period of 2023. The increase in endoscopy operating income for the three and six-month periods ended June 30, 2024 compared to the corresponding periods of 2023 was primarily a result of increased sales and lower SG&A expenses as a percentage of sales.
Other Expense – Net
Our other expense for the three-month periods ended June 30, 2024 and 2023 was $0.1 million and $3.9 million, respectively. Our other expense for the six-month periods ended June 30, 2024 and 2023 was $1.7 million and $4.8 million, respectively. The changes in other expense for the three and six-month periods ended June 30, 2024 compared to the corresponding periods of 2023 were primarily related to increased interest expense associated with the Convertible Note offering completed in December 2023, partially offset by an increase in interest income associated with higher cash and cash equivalents balances.
Effective Tax Rate
Our provision for income taxes for the three-month periods ended June 30, 2024 and 2023 was a tax expense of $10.1 million and $4.7 million, respectively, which resulted in an effective tax rate of 22.1% and 18.7%, respectively. Our provision for income taxes for the six-month periods ended June 30, 2024 and 2023 was a tax expense of $16.2 million and $9.5 million, respectively, which resulted in an effective tax rate of 20.2% and 18.8%, respectively. The increase in the effective income tax rate for the three and six-month periods ended June 30, 2024, when compared to the prior-year periods, was primarily due to decreased benefit from discrete items such as share-based compensation and deferred compensation and decreased foreign tax credit utilization. The increase in the income tax expense for the three and six-month periods ended June 30, 2024, when compared to the prior-year period, was primarily due to increased pre-tax book income.
Net Income
Our net income for the three-month periods ended June 30, 2024 and 2023 was $35.7 million and $20.2 million, respectively. The increase in our net income for the three-month period ended June 30, 2024 was primarily the result of higher sales, lower SG&A expenses, lower impairment charges, lower acquired in-process research and development charges, and lower contingent consideration expense, partially offset by higher R&D expenses and higher income tax expense.
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Our net income for the six-month periods ended June 30, 2024 and 2023 was $64.0 million and $40.9 million, respectively. The increase in our net income for the six-month period ended June 30, 2024 was the result of several principal factors, including higher sales and gross margin, lower SG&A expenses, lower impairment charges, lower acquired in-process research and development charges, and lower contingent consideration expense, partially offset by higher R&D expenses and higher income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments, Contractual Obligations and Cash Flows
As of June 30, 2024 and December 31, 2023, our current assets exceeded current liabilities by $976.3 million and $904.9 million, respectively, and we had cash, cash equivalents and restricted cash of $638.7 million and $589.1 million, respectively, of which $54.0 million and $48.7 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, 2024, and December 31, 2023, we had cash, cash equivalents and restricted cash of $22.0 million and $17.6 million, respectively, within our subsidiary in China.
Cash flows provided by operating activities. We generated cash from operating activities of $104.7 million and $31.8 million during the six-month periods ended June 30, 2024 and 2023, respectively. Significant factors affecting operating cash flows during these periods included:
| ● | Net income was $64.0 million and $40.9 million for the six-month periods ended June 30, 2024 and 2023, respectively. |
| ● | Cash provided by (used for) inventories was approximately $3.1 million and ($35.5) million for the six-month periods ended June 30, 2024 and 2023, respectively. The increase in inventories during 2023 was principally associated with our strategy to proactively invest in our inventory balances to encourage high customer service levels, as well as to build bridge inventory for production line transfers and increases in safety stock due to vendor supply delays. |
| ● | Cash used for accrued expenses was ($2.8) million and ($10.3) million for the six-month periods ended June 30, 2024 and 2023, respectively, due primarily to the timing and payment of compensation-related accruals, partially offset by an increase in accrued interest associated with the convertible debt. |
| ● | Cash paid for income taxes was $(22.6) million and $(17.8) million for the six-month periods ended June 30, 2024 and 2023, respectively, due primarily due to an increase in the income tax expense related to increased pre-tax book income. |
Cash flows used in investing activities. We used cash in investing activities of $38.5 million and $157.8 million for the six-month periods ended June 30, 2024 and 2023, respectively. We used cash for capital expenditures of property and equipment of $22.3 million and $18.6 million in the six-month periods ended June 30, 2024 and 2023, respectively. Capital expenditures in each period were primarily related to investments 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 $50 to $60 million in 2024 for property and equipment.
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Cash outflows for the issuance of notes receivable were $6.2 million for the six-month period ended June 30, 2024 and were related to loans issued to Selio of $1.7 million, Solo Pace of $1.5 million and Fluidx of $3.0 million. Cash outflows invested in acquisitions for the six-month period ended June 30, 2024 were $8.5 million and were related to assets acquired from SSI ($3.0 million), our investments in Fluidx ($0.3 million) and CrannMed ($3.2 million), and payment of the first deferred payment from our asset purchase agreement with Restore Endosystems, LLC ($2.0 million). Cash outflows invested in acquisitions for the six-month period ended June 30, 2023 were $138.3 million and were primarily related to payments in our asset purchase agreements with AngioDynamics ($100 million), Bluegrass ($32.7 million) and ART ($1.5 million), and our investment in Solo Pace ($4.0 million).
Cash flows used in financing activities. Cash (used in) provided by financing activities for the six-month periods ended June 30, 2024 and 2023 was ($14.9) million and $141.0 million, respectively. For the six-month period ended June 30, 2024, we decreased our net borrowings under our Amended Fourth A&R Credit Agreement by ($24.1) million. During the six-month period ended June 30, 2023 we increased our net borrowings by approximately $141.8 million to finance the acquisitions of AngioDynamics and Bluegrass. We had cash proceeds from the issuance of common stock of $10.9 million and $9.5 million for the six-month periods ended June 30, 2024 and 2023, respectively, related to the exercise of non-qualified stock options. We completed payment of contingent consideration of ($0.1) million and ($3.4) million for the six-month periods ended June 30, 2024 and 2023, respectively, principally related to sales milestone payments connected to our acquisition of Brightwater Medical, Inc. in 2019.
As of June 30, 2024, we had outstanding borrowings of $822.5 million and had issued letter of credit guarantees of $2.4 million, with additional available borrowings of approximately $680 million under the Amended Fourth A&R Credit Agreement, based on the maximum net leverage ratio and the aggregate revolving credit commitment pursuant to the Amended Fourth A&R Credit Agreement. Our interest rate as of June 30, 2024 was a fixed rate of 3.0% on our Convertible Notes and a fixed rate of 3.39% with respect to the principal amount outstanding under the Amended Fourth A&R Credit Agreement as a result of an interest rate swap. Our interest rate as of December 31, 2023 was a fixed rate of 3.0% on our Convertible Notes, a fixed rate of 3.39% on $75 million as a result of an interest rate swap, and a variable floating rate of 7.21% on $24.1 million.
We currently believe that our existing cash balances, anticipated future cash flows from operations and borrowings under our long-term debt agreements 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 may 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, 2024 there were no changes to the application of critical accounting policies previously disclosed in Part II, Item 7 of the 2023 Annual Report on Form 10-K.
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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 any projections of earnings, revenues or other financial items, any statements of the plans and objectives of our management for future operations, any statements concerning proposed new products or services, any statements regarding the integration, development or commercialization of the business or any assets acquired from other parties, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “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, and actual results will likely differ, and could differ materially, from those projected or assumed in the forward-looking statements. Investors are cautioned not to unduly rely on any such forward-looking statements.
All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results. 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. 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 currency exchange rate risk and interest rate risk are included in Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in the 2023 Annual Report on Form 10-K. In the six-month period ended June 30, 2024, there were no material changes from the information provided therein.
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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, 2024. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the six-month period ended June 30, 2024, there were no changes in our internal control over financial reporting that materially affected, or were 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 our 2023 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 2023 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 2023 Annual Report on Form 10-K and may contain material changes to the corresponding risk factor discussion in our 2023 Annual Report on Form 10-K.
We may be unable to compete in our markets, particularly if there is a significant change in practices or technology.
The markets in which our products compete are highly competitive. We face competition from many companies which are larger, better established, have greater financial, technical and other resources and possess a greater market presence than we do. Such resources and market presence may enable our competitors to more effectively market competing products or to market competing products at reduced prices in order to gain market share.
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In addition, our ability to compete successfully is dependent, in part, upon our response to changes in technology and upon our efforts to develop and market new products which achieve significant market acceptance. Companies with substantially greater resources than us are actively engaged in research and development of new methods, treatments, drugs, and procedures to treat or prevent cardiovascular disease that could limit the market for our products and eventually make some of our products obsolete. Furthermore, our existing competitors and new market entrants may respond more quickly to or integrate new or emerging technologies such as artificial intelligence and machine learning in their product offerings, which could also limit the market for our products. A reduction in demand for our products could have a material adverse effect on our business, operations or financial condition.
We rely on the proper function, availability and security of information technology systems to operate our business, and a material disruption of critical information systems or a material breach in the security of our systems may adversely affect our business and customer relationships.
We rely on information technology systems (including technology from third-party providers) to process, transmit, and store electronic information in our day-to-day operations, including sensitive personal information and proprietary or confidential information. We also rely on our technology infrastructure, among other functions, to interact with customers and suppliers, fulfill orders and bill, collect and make payments, ship products, provide support to customers, fulfill contractual obligations and otherwise conduct business. Our internal information technology systems, as well as those systems maintained by third-party providers, may be subjected to inadvertent leaks, computer viruses or other malicious code, unauthorized access attempts, and ransom or other cyber-attacks (including through phishing emails, attempts to fraudulently induce employees or others to disclose information, and the exploitation of software and operating vulnerabilities), any of which could result in data leaks or otherwise compromise our confidential or proprietary information and disrupt our operations. Cyber-attacks continue to increase in frequency, sophistication and intensity, and are becoming increasingly difficult to detect, especially as they relate to attacks on third-party providers or their vendors. Such attacks are often carried out by motivated and highly skilled actors, who are increasingly well-resourced. Geopolitical events have also increased cybersecurity risks on a global basis. Additionally, the continuing evolution of technology used by us and the third-party providers we rely upon, including cloud-based computing, data hosting and artificial intelligence, create additional exposure to security breaches and loss of access to our confidential or proprietary information. There can be no assurance that our protective measures have prevented or will prevent security breaches, any of which could have a significant impact on our business, reputation and financial condition, particularly attacks that result in our intellectual property and other confidential information being accessed or stolen.
We rely on third-party vendors to supply and support certain aspects of our information technology systems. These vendors could become vulnerable to cyber-attacks, malicious intrusions, breakdowns, interference or other significant disruptions, and their systems may contain defects in design or manufacture or other problems that could result in system disruption or compromise the information security of our own systems. In addition, we continue to grow in part through business and product acquisitions and may face risks associated with defects and vulnerabilities in the systems operated by the other parties to those transactions, or difficulties or other breakdowns or disruptions in connection with the integration of the acquired businesses and products into our information technology systems.
Cyber-attacks could also result in unauthorized access to our systems and products, including personal information of individuals, which could trigger notification requirements, encourage actions by regulatory bodies, result in adverse publicity, prompt us to offer credit support products or services to affected individuals and lead to class action or other civil litigation. If we fail to monitor, maintain or protect our information technology systems and data integrity effectively or fail to anticipate, plan for or manage significant disruptions to these systems, we could (i) lose customers, (ii) be subject to fraud, (iii) breach our agreements with or duties toward customers, physicians, other health care professionals and employees, (iv) be subject to regulatory sanctions or penalties, (v) incur expenses or lose revenues, (vi) sustain damage to our reputation, or (vii) suffer other adverse consequences. Unauthorized tampering, adulteration or interference with our products may also create issues with product functionality that could result in a loss of data, risk to patient safety, and product recalls or field actions. Any of these events could have a material adverse effect on our business, operations or financial condition.
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The SEC has adopted new rules that require us to provide greater disclosure regarding cybersecurity risk management, strategy and governance, as well as disclosure of material cybersecurity incidents. We cannot predict or estimate the amount of additional costs we will incur in order to comply with these rules or the timing of such costs. These rules may also require us to report a cybersecurity incident before we have been able to fully assess its impact or remediate the underlying issue. Efforts to comply with such reporting requirements could divert management's attention from our incident response and could potentially reveal system vulnerabilities to threat actors. Failure to timely report incidents under these or other similar rules could also result in monetary fines, sanctions or subject us to other forms of liability.
ITEM 5. OTHER INFORMATION
During the fiscal quarter ended June 30, 2024, none of our directors or officers informed us of the adoption or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408.
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ITEM 6. EXHIBITS
Exhibit No. |
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Description |
2.1 |
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3.1 |
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3.2 |
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10.1 |
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10.2 |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 |
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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The following financial information from the quarterly report on Form 10-Q for the quarter ended June 30, 2024, 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 |
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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.
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MERIT MEDICAL SYSTEMS, INC. |
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Date: August 1, 2024 |
By: |
/s/ FRED P. LAMPROPOULOS |
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Fred P. Lampropoulos, President and |
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Chief Executive Officer |
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Date: August 1, 2024 |
By: |
/s/ RAUL PARRA |
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Raul Parra |
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Chief Financial Officer and Treasurer |
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EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
MERIT MEDICAL SYSTEMS, INC.
AND
ENDOGASTRIC SOLUTIONS, INC.
Dated as of July 1, 2024
TABLE OF CONTENTS
ARTICLE 1 THE TRANSACTIONS
ARTICLE 2 CONSIDERATION FOR TRANSFER
ARTICLE 3 CLOSING AND CLOSING DELIVERIES
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER
ARTICLE 6 POST-CLOSING COVENANTS
ARTICLE 7 TAX MATTERS
ii
ARTICLE 8 INDEMNIFICATION
ARTICLE 9 MISCELLANEOUS PROVISIONS
EXHIBITS
Exhibit ACertain Definitions
Exhibit BProducts
Exhibit CGeneral Assignment and Bill of Sale THIS ASSET PURCHASE AGREEMENT (this “Agreement”) is dated as of July 1, 2024, by and between MERIT MEDICAL SYSTEMS, INC., a Utah corporation (“Purchaser”), and ENDOGASTRIC SOLUTIONS, INC., a Delaware corporation (“Seller”).
Exhibit DPatent Assignment
Exhibit ETrademark Assignment
Exhibit FTransition Services Agreement
Exhibit GContract Manufacturing Agreement
Exhibit HTransition Distribution Agreement
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ASSET PURCHASE AGREEMENT
The capitalized terms used in this Agreement are defined in Exhibit A hereto, unless otherwise defined herein.
RECITALS
WHEREAS, Seller is engaged in the business of developing, manufacturing and commercializing products associated with the transoral incisionless fundoplication procedure (the “Business”), as identified on Exhibit B hereto (together, the “Products”); and
WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, substantially all of Seller’s assets, including, but not limited to, all assets related to the Products, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual representations, warranties, covenants and promises contained herein, the adequacy and legal sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
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Except as set forth in the disclosure schedule delivered by Seller to Purchaser on the date hereof (the “Disclosure Schedule”), Seller hereby represents and warrants to Purchaser as follows as of the date hereof and as of the Closing (except for those representations and warranties made as of a particular date, in which case Seller represents to Purchaser as follows as of such date):
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Purchaser hereby represents and warrants to Seller as follows:
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6.1Cooperation. For a period of nine months following the Closing, upon the request of Purchaser, Seller shall use commercially reasonable efforts to (i) execute and deliver any and all further materials, documents and instruments of conveyance, transfer or assignment as may reasonably be requested by Purchaser to effect, record or verify the transfer to, and vesting in Purchaser of, Seller’s right, title and interest in and to the Purchased Assets, free and clear of all Encumbrances, in accordance with the terms of this Agreement, (ii) cooperate with Purchaser, at Purchaser’s expense, to enforce the terms of any Assigned Contracts, including terms relating to confidentiality and Intellectual Property Rights, and to transfer all Governmental Approvals (to the extent transferable) to Purchaser, and (iii) cooperate with reasonable requests from Purchaser to ensure an orderly transfer of customer relationships involving the Products to Purchaser. For a period of nine months following the Closing, Seller shall promptly deliver to Purchaser (w) any mail, packages, orders, inquiries and other communications addressed to Seller and relating to the Products and (x) any property that Seller receives and that properly belongs to Purchaser or any of its Affiliates. For a period of nine months following the Closing, Purchaser shall promptly deliver to Seller (y) any mail, packages, orders, inquiries and other communications addressed to a Seller or any of its Affiliates and relating to a business of Seller or its Affiliates other than the Products and (z) any property that Purchaser receives and that properly belongs to Seller or any of its Affiliates. The provisions of this Section 6.1 are not intended to, and shall not be deemed to, constitute an authorization by a party to permit another party to accept service of process on its behalf, and no party is or shall be deemed to be the agent of another party for service of process purposes. Promptly upon the Closing, Seller shall update its FDA registration and medical device listing to de-list the Seller as the manufacturer or distributor of any of the Products, and shall cooperate with Purchaser to facilitate Purchaser updating its FDA registration and listing to list Purchaser as the manufacturer or distributor of each of the Products.
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6.3Records and Documents. For a period of nine months after the Closing, at the other party’s request, each party shall provide the other party and its Representatives with access to and the right to make copies of those records and documents related to the Business, the Products, or the Purchased Assets (possession of which is retained by Seller or transferred to Purchaser, as applicable), as may be necessary in connection with any third-party litigation, the preparation of financial statements, any accounting or Tax purposes, or the conduct of any audit or investigation by a Governmental Authority (excluding claims under this Agreement in which case the parties shall comply with Article 9 and Article 11, as applicable, instead of this Section 6.3); provided, however, that no party shall be required to violate any obligation of confidentiality to which such party or any of its Affiliates is subject or to waive any privilege which any of them may possess in discharging its obligations pursuant to this Section 6.3; provided, further, however, that in any such case, each party shall, and shall cause its Affiliates and Representatives to, reasonably cooperate with the requesting party to implement alternative arrangements to permit the access contemplated hereby. The foregoing will not require any party to permit any inspection, or to disclose any information, that in its reasonable judgment, upon the advice of outside counsel, is commercially sensitive or reasonably likely to result in the waiver of any attorney-client privilege. If within nine months following the Closing, Seller becomes aware that it or any of its Affiliates has in its or their possession any business records, financial books and records, sales order files, purchase order files, engineering order files, warranty and repair files, supplier lists, customer lists, dealer, representative and distributor lists, studies, surveys, analyses, strategies, plans, forms, designs, diagrams, drawings, specifications, technical data, information relating to any Governmental Approvals, or production and quality control records and formulations, in each case that are Purchased Assets (collectively “Business Records”), Seller shall promptly forward such Business Records to Purchaser. If, within nine months following the Closing, Purchaser contacts Seller to inquire as to whether any specific Business Records are in the possession of Seller or any of its Affiliates, Seller will use its good faith efforts to determine whether such Business Records are in its possession or the possession of any of its Affiliates and, to the extent Seller locates any such Business Records, Seller will promptly forward such Business Records to Purchaser.
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6.6Product Recalls. Subject to the terms of the Transaction Agreements, from and after the Closing Date, Purchaser shall have the sole right to conduct all voluntary and involuntary recalls, corrections, market withdrawals, market refunds or replacements, “dear doctor” letters, investigator notices, stock recoveries and other field actions or notices relating to an alleged lack of safety, efficacy or regulatory compliance (“Recalls”) of Products (whether Products were made before or after Closing), including Recalls required by any Governmental Authority and voluntary Recalls of Products. To the extent that one or more units of Product made by Seller or any of its Affiliates prior to the Closing Date are subject to a Recall, any Damages or other Liabilities arising with respect to or related to any Recall with respect to such units of Product made by Seller or its Affiliates prior to the Closing Date shall be Excluded Liabilities. Without limitation of, and subject to, Purchaser’s rights under the Contract Manufacturing Agreement, any Damages or other Liabilities arising with respect to or related to any Recall of any units of Product made on or after the Closing Date (including Products purchased under the Contract Manufacturing Agreement) shall be Assumed Liabilities. Upon the reasonable request of Purchaser, Seller shall cooperate and assist, and shall cause its Affiliates to cooperate and assist, Purchaser in implementing and effecting a Recall with respect to all such affected Products.
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To Purchaser at:
Merit Medical Systems, Inc.
1600 West Merit Parkway
South Jordan, UT 84095
Email: Brian.Lloyd@merit.com
Attention: Brian Lloyd, Chief Legal Officer
With copies to: (which shall not constitute notice to Purchaser):
Parr Brown Gee & Loveless
101 South 200 East, Suite 700
Salt Lake City, Utah 84111
Email: mschefer@parrbrown.com
Attention: Michael J. Schefer
To Seller at:
EndoGastric Solutions, Inc.
18109 Northeast 76th Street
Suite 100
Redmond, WA 98052
Email: dhammers@endogastricsolutions.com
Attention: Darin Hammers
With copies to: (which shall not constitute notice to Seller):
Cooley LLP
1700 Seventh Avenue, Suite 1900
Seattle, WA 98101
Email: serickson@cooley.com
Attention: Sonya Erickson
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[Signatures Follow On a Separate Page]
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IN WITNESS WHEREOF, the Parties hereto have executed this Asset Purchase Agreement on as of the date first above written.
PURCHASER:
MERIT MEDICAL SYSTEMS, INC.
By: /s/ Fred P. Lampropoulos_______________
Name: Fred P. Lampropoulos
Title: Chairman and Chief Executive Officer
SELLER:
ENDOGASTRIC SOLUTIONS, INC.
By: /s/ Darin Hammers_____________________
Name: Darin Hammers
Title: President and Chief Executive Officer
Solely for purposes of Section 6.5:
/s/ Darin Hammers___________________
Darin Hammers, an individual
/s/ Brett Reynolds___________________
Brett Reynolds, an individual
/s/ Darren Crow____________________
Darren Crow, an individual
[Signature Page to Asset Purchase Agreement]
EXHIBIT A
CERTAIN DEFINITIONS
“Accounting Mediator” shall mean the Salt Lake City office of Grant Thornton LLP.
“Accounting Principles” shall mean GAAP applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, conventions, categorizations, definitions, elections, assumptions, inclusions, exclusions, judgments and valuation and estimation methodologies that were used in the preparation of the Financial Statements for the most recent fiscal year end.
“Accounts Receivable” shall mean all accounts or notes receivable held by Seller, and any security, claim, remedy or other right related to any of the foregoing.
“Actual Closing Working Capital” shall have the meaning specified in Section 2.2(a).
“Adjusted Purchase Price” shall have the meaning specified in Section 2.2(f).
“Affiliate” of any Person shall mean any Person directly or indirectly controlling, controlled by, or under common control with, such Person; provided, however, that, for the purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by Contract, or otherwise.
“Agreement” shall have the meaning specified in the Preamble.
“Anti-Corruption Laws” shall mean all applicable federal, state and foreign Laws relating to the prevention or prohibition of corruption, bribery, kickbacks, conflicts of interest and off-label, false or misleading promotion, advertising or marketing of medical devices, including the United States Foreign Corrupt Practices Act of 1977, the UK Bribery Act of 2010, the United States Anti-Kickback Statute, the United States Stark Law, the United States Physician Payments Sunshine Act, and implementing regulations of these acts, statutes and similar laws.
“Assigned Contracts” shall have the meaning specified in Section 1.1(c).
“Assignment Consent” shall have the meaning specified in Section 1.5(a).
“Assumed Liabilities” shall mean only the (i) Liabilities of Seller or its Affiliates, as applicable, under the Assigned Contracts arising after the Closing; (ii) Liabilities related to Product warranty claims with respect to Purchased Inventory or Products arising after the Closing (regardless of whether the applicable warranty is express or implied); (iii) obligations of Purchaser under this Agreement or any other Transaction Agreement; (iv) Liabilities for any returns with respect to Products; (v) Liabilities for Taxes related to the Purchased Assets or the Assumed Liabilities that are attributable to a Post-Closing Tax Period; (vi) Purchaser’s share of Transfer Taxes pursuant to Section 7.2, and Taxes allocated to Purchaser pursuant to Section 7.3; (vii) Damages and other Liabilities arising with respect to or related to any Recall of any units of Product manufactured on or after the Closing, without limitation of and subject to Purchaser’s rights under the Contract Manufacturing Agreement; (viii) the Liabilities set forth on Schedule 1.3; and (viii) all other Liabilities arising from or relating to the Purchased Assets or the Products after the Closing; provided that Assumed Liabilities shall not include any Liabilities of Seller for Taxes (other than Transfer Taxes and Property Taxes, the allocation of which is addressed by Section 7.2 and 7.3, respectively).
B-1
“Benefit Plan” shall mean any “employee benefit plan” (as defined in section 3(3) of ERISA, regardless of whether subject to ERISA or tax qualified), and each other material agreement, plan, program, fund, policy, contract or arrangement (whether written or unwritten) providing employment, consulting, compensation, benefits, pension, retirement, profit sharing, stock bonus, stock option, stock ownership, stock appreciation right, stock purchase, phantom or stock equivalent or other equity or equity-based compensation, performance, bonus, retention, incentive, change in control, transition, “stay,” tax gross-up, deferred compensation, paid time off, vacation, life insurance, medical, vision, dental, disability, Code Section 125 cafeteria, death benefit, sick pay, thrift, perquisite, educational, employee assistance, savings, employee loan, disability, severance, termination indemnity, seniority pay, holiday pay, fringe benefit or similar employee benefits maintained, sponsored or contributed to or required to be maintained or contributed to by Seller or any ERISA Affiliate of Seller covering any employee, former employee, or other service provider or former service provider of Seller or any ERISA Affiliate of Seller, or the beneficiaries and dependents of any employee or former employee or other service provider or former service provider of Seller any ERISA Affiliate of Seller.
“Books and Records” shall have the meaning specified in Section 1.1(f).
“Business Day” shall mean any day other than (i) a Saturday or a Sunday or (ii) a day on which banking institutions are generally closed in Salt Lake City, Utah.
“Business Records” shall have the meaning specified in Section 6.3.
“CARES Act” shall have the meaning specified in Section 4.28.
“CARES Act Matters” shall have the meaning specified in Section 4.28.
“Cash” shall mean, calculated on a consolidated basis, as of the Reference Time, the amount of all cash, petty cash, cash equivalents, marketable securities, marketing deposits, certificates of deposit, security deposits, deposits with banks and financial institutions, liquid instruments, and including any (i) cash deposited with third parties to secure surety bonds, performance bonds, letters of credit and property leases or other utility deposits, (ii) short-term investments, (iii) cash in transit (including any credit card receivables and ACH deposits), and (iv) any of the items in subsections (i) through (iii) held by any Subsidiaries of the Company. Cash shall be increased by any deposited checks, wires or drafts, checks on hand and available for deposits, or other payments received, but which have not yet cleared as of the Reference Time but which do clear prior to preparation of the Closing Working Capital Statement, and shall be reduced by any overdrafts, uncleared outbound checks, wires or drafts. Cash (and all components thereof) shall be calculated in accordance with the Accounting Principles.
“Closing” shall have the meaning specified in Section 3.1.
“Closing Consideration” shall have the meaning specified in Section 2.1.
“Closing Date” shall have the meaning specified in Section 3.1.
“Closing Statement” shall mean a certificate executed by the chief executive officer of Seller certifying on behalf of Seller, an itemized list of outstanding Discharged Indebtedness as of the Reference Time, the Person to whom such outstanding Discharged Indebtedness is owed, and payment instructions for each such creditor’s account.
B-2
“Closing Working Capital Statement” shall have the meaning specified in Section 2.2(a).
“COBRA” shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and the rules and regulations promulgated thereunder.
“Code” shall mean the United States Internal Revenue Code of 1986, as amended.
“Collar Threshold” shall mean an amount equal to (a) Target Working Capital, multiplied by (b) 5%.
“Collected Information” shall have the meaning specified in Section 4.20(b).
“Confidential Information” shall mean all Trade Secrets and other confidential and/or proprietary information of a Person, including information derived from reports, investigations, research, work in progress, codes, marketing and sales programs, financial projections, cost summaries, pricing formulae, contract analyses, financial information, projections, confidential filings with any state or federal agency, and all other confidential concepts, methods of doing business, ideas, materials or information prepared or performed for, by or on behalf of such Person by its employees, officers, directors, agents, representatives, or consultants.
“Confidentiality Agreement” shall mean that certain confidentiality agreement between Purchaser and Seller, dated March 20, 2024.
“Consent” shall mean any approval, consent, ratification, permission, waiver or authorization (including any Governmental Approval).
“Contract” shall mean any agreement, contract, obligation, promise, understanding, arrangement, commitment, lease, license or undertaking of any nature, whether in written, oral, electronic or other form.
“Contract Manufacturing Agreement” shall have the meaning specified in Section 3.2(e).
“Copyrights” shall mean all rights in works of authorship, including all copyrights, mask works, and all registrations and applications for the foregoing and all statutory and common law rights related thereto, in any jurisdiction, including any prosecution and litigation files, extension, modification, or renewal of any such registration or application.
B-3
“Damages” shall mean and include any Liability, loss, damage, injury, settlement, judgment, award, fine, penalty, Tax, Proceeding, cost, fee or expense of any nature, including the cost of enforcing any right to indemnification hereunder (including reasonable fees and expenses of counsel, consultants, experts and other professional fees), irrespective of whether arising directly or indirectly from third-party claims and the cost of pursuing insurance providers.
“Data Room” shall mean the electronic data room hosted by Datasite LLC for “Project Escalus” (available through the Closing Date at https://login.global.datasite.com/).
“Discharged Indebtedness” shall mean indebtedness for borrowed money pursuant to that certain Term Loan Agreement among the Company, the Administrative Agent (as defined therein) and the Lenders (as defined therein), dated November 25, 2015 (as amended to date).
“Disclosure Schedule” shall have the meaning specified in Article 4.
“Downward Adjustment Amount” shall have the meaning specified in Section 2.2(f)(B).
“Encumbrance” shall mean any lien, pledge, hypothecation, charge, mortgage, security interest, deed of trust, covenant, option, right of first refusal or other encumbrance of any kind.
“Entity” shall mean any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust or company (including any limited liability company or joint stock company) or other similar entity.
“Environmental Law” shall mean any Law relating to the environment, natural resources, pollutants, contaminants, wastes, chemicals or public health and safety, including any Law pertaining to (a) treatment, storage, disposal, generation and transportation of toxic or hazardous substances or solid or hazardous waste, (b) air, water and noise pollution, (c) groundwater or soil contamination, (d) the release or threatened release into the environment of toxic or hazardous substances or solid or hazardous waste, including emissions, discharges, injections, spills, escapes or dumping of pollutants, contaminants or chemicals, (e) manufacture, processing, use, distribution, treatment, storage, disposal, transportation or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or oil or petroleum products or solid or hazardous waste, (f) underground and other storage tanks or vessels, abandoned, disposed or discarded barrels, containers and other closed receptacles, (g) public health and safety or (h) the protection of wildlife, marine sanctuaries and wetlands, including all endangered and threatened species.
“ERISA” shall mean the Employee Retirement Income Security Act of 1974.
“ERISA Affiliate” shall mean any other Person that, together with Seller, would be treated as a single employer under section 414 of the Code.
“Excluded Assets” shall have the meaning specified in Section 1.2.
“Excluded Liability” shall have the meaning specified in Section 1.4.
B-4
“Export-Import Laws” shall mean all applicable United States and foreign Laws relating to export, reexport, transfer, and import controls, including the Export Administration Regulations and the EU Dual Use Regulation.
“FDA” shall mean the United States Food and Drug Administration or any successor agency.
“Financial Statements” shall have the meaning specified in Section 4.4(a).
“GAAP” shall mean United States generally accepted accounting principles consistently applied.
“General Assignment and Bill of Sale” shall have the meaning specified in Section 3.2(a).
“Governmental Approval” shall mean any: (a) permit, license, certificate, concession, approval, consent, ratification, permission, clearance, confirmation, exemption, waiver, franchise, certification, designation, rating, registration, notice, filing, variance, qualification, accreditation or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Authority or pursuant to any Law; or (b) right under any Contract with any Governmental Authority.
“Governmental Authority” shall mean any: (a) nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or Entity and any court or other tribunal); (d) multinational organization or body; or (e) United States or non-United States, individual, Entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, arbitral, regulatory, police, military or taxing authority or power.
“Indemnitee” shall have the meaning specified in Section 8.4(a).
“Indemnitor” shall have the meaning specified in Section 8.4(a).
“Intellectual Property Rights” shall mean any or all rights in and to intellectual property anywhere in and throughout the world, including (i) Patent Rights, Trade Secrets, Copyrights, and Trademarks, (ii) any rights similar, corresponding or equivalent to any of the foregoing anywhere in the world, (iii) any rights in computer software, data, and databases, (iv) all other proprietary rights, and (v) any claims or causes of action, including the right to sue, for past, present and future infringement, misappropriation, dilution, or any other violation of any of the foregoing.
“Law” shall mean any law, statute, legislation, constitution, principle of common law, resolution, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, permit, ruling, directive, pronouncement, requirement (licensing or otherwise), specification, determination, decision, opinion Order, regulatory guidance or interpretation issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise put into effect by or under the authority of any Governmental Authority including any (a) technical or scientific standard to which adherence is required by any Governmental Authority and (b) any rules or policies of non-governmental accreditation or oversight bodies applicable to medical devices and related accessories, including the Products.
B-5
“Leased Real Property” shall mean the real property leased or subleased by Seller, together with all buildings, structures and facilities located thereon that constitutes a Purchased Asset.
“Liabilities” shall mean any and all liabilities and obligations, whether accrued, fixed or contingent, mature or inchoate, known or unknown, reflected on a balance sheet or otherwise, including those arising under any Proceeding or Law, and those arising under any Contract.
“Licenses” shall have the meaning specified in Section 4.8(c).
“Material Adverse Effect” shall mean, any event, change or effect that, when taken individually or together with all other adverse events, changes and effects, (a) is or could reasonably be expected to be materially adverse to the Purchased Assets, Assumed Liabilities, Products or the financial or other condition, assets, business, operations or prospects of the Business, (b) could or could reasonably be expected to prevent or materially delay or impair consummation of the Transactions or (c) could or could reasonably be expected to have a materially adverse effect on Purchaser’s ability to operate the Business immediately after Closing in substantially the same manner as operated by Seller during the twelve (12) month period before Closing; provided, however, that any events, changes or effects will not be deemed to constitute a Material Adverse Effect to the extent resulting from (i) general changes or conditions in general economic, political or market conditions or in the industries (or therapeutic areas) in which the Business operates, except to the extent that such changes or conditions in the industries (or therapeutic areas) in which the Business operates have a disproportionate effect on the Business compared with other companies or businesses operating in such industries (or therapeutic areas); (ii) any failure by Seller, the Business, or the Products to meet internal projections or forecasts for any period (provided that the underlying causes of such failure may be taken into account in determining whether there has been a Material Adverse Effect); (iii) acts of war or terrorism (or the escalation of the foregoing); and (iv) changes in any Laws applicable to the Business or applicable accounting regulations or principles, except to the extent that such changes in the industries (or therapeutic areas) in which the Business operates have a disproportionate effect on the Business compared with other companies or businesses operating in such industries (or therapeutic areas).
“Material Contracts” shall have the meaning specified in Section 4.9(a).
“Most Recent Balance Sheet” shall have the meaning specified in Section 4.4(a)
“Non-Assignable Asset” shall have the meaning specified in Section 1.5(a).
“Offered Employees” shall have the meaning specified in Section 6.11(a).
“Open Source” shall have the meaning specified in Section 4.8(j).
“Order” shall mean any: (a) temporary, preliminary or permanent order, judgment, injunction, edict, decree, ruling, pronouncement, determination, decision, opinion, verdict, sentence, stipulation, subpoena, writ or award that is or has been issued, made, entered, rendered or otherwise put into effect by or under the authority of any court, administrative agency or other Governmental Authority or any arbitrator or arbitration panel; or (b) Contract with any Governmental Authority that is or has been entered into in connection with any Proceeding.
B-6
“Patent Assignment” shall have the meaning specified in Section 3.2(c).
“Patent Rights” shall mean all patents, utility models, and industrial designs, and applications therefor, and all reissues, divisions, re-examinations, revisions, renewals, extensions, adjustments, reissues, provisionals, continuations, continuations-in-part thereof, and counterparts, invention disclosures, and all rights of priority related to any of the foregoing in any jurisdiction, including any prosecution and litigation files for any of the foregoing.
“Permitted Encumbrance” shall mean (a) statutory Encumbrances for Taxes or other governmental charges not yet due and payable or the amount or validity of which is being contested in good faith by appropriate proceedings; (b) mechanics’, materialmen’s, architects’, warehousemen’s, landlords’ and other like statutory Encumbrances arising or incurred in the ordinary course of business, either securing payments not yet due or that are being contested in good faith by appropriate proceedings and for which appropriate reserves have been set aside; (c) zoning, building codes and other land use laws that do not materially impair the value, merchantability or continued use of the Purchased Assets, and (d) Encumbrances that will be discharged upon payment of the Discharged Indebtedness in full. For the avoidance of doubt, any Encumbrance arising under the Code or ERISA in connection with any Benefit Plan is not a Permitted Encumbrance.
“Person” shall mean any individual, Entity or Governmental Authority.
“Policy Excluded Loss” shall mean Damages that arise or result from or are based on (a) the breach of a representation or warranty that is excluded from coverage under the R&W Insurance Policy, or (b) with respect to which the R&W Insurance Company otherwise denies coverage under the R&W Insurance Policy.
“Post-Closing Tax Period” shall mean any Tax period beginning after the close of business on the Closing Date or, in the case of any Tax period that includes, but does not begin, after the close of business on the Closing Date, the portion of such period beginning after the close of business on the Closing Date.
“PPP Loan” shall mean that certain loan received by the Company on April 30, 2020 from Bank of America, N.A. under the Paycheck Protection Program established by the CARES Act in the original principal amount of $2,095,497 and bearing interest of 1% per annum.
“Pre-Closing Tax Period” shall mean any Tax period ending on or before the close of business on the Closing Date or, in the case of any Tax period that includes, but does not end on, the Closing Date, the portion of such period ending on the Closing Date.
“Proceeding” shall mean any action, claim, charge, complaint, demand, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), prosecution, contest, hearing, inquiry, inquest, audit, examination or investigation that is, has been or may in the future be commenced, brought, conducted or heard at law or in equity or before any Governmental Authority.
“Products” shall have the meaning specified in the Recitals.
“Purchase Price” shall have the meaning specified in Section 2.1.
“Purchase Price Allocation” shall have the meaning specified in Section 7.1.
“Purchased Assets” shall have the meaning specified in Section 1.1.
B-7
“Purchased Intellectual Property” shall mean (a) the Product Intellectual Property, (b) Tangible Embodiments and (c) to the extent owned by Seller and used in connection with any Product: (i) any Patent Right anywhere in any jurisdiction that is derived from or claiming priority to any Patent Right on Schedule 4.8(a) but not listed on Schedule 4.8(a), and (ii) all other Intellectual Property Rights, including all rights in any labels, product inserts and training manuals used by Seller in connection with or related to the Business, the Products, or any Purchased Assets.
“Purchased Inventory” shall have the meaning specified in Section 1.1(a).
“Purchaser” shall have the meaning specified in the Preamble.
“Purchaser Assignment and Assumption Agreements” shall have the meaning specified in Section 3.2(b).
“Purchaser Damages” shall have the meaning specified in Section 8.1.
“Purchaser Indemnified Persons” shall have the meaning specified in Section 8.1.
“Purchaser’s Fundamental Representations” shall mean the representations and warranties set forth in Article 5.
“Recalls” shall have the meaning specified in Section 6.6.
“Reference Time” shall mean as of immediately prior to the Closing.
“Registered Intellectual Property Rights” shall mean, in any jurisdiction, all: (i) Patent Rights; (ii) registered Trademarks and pending applications to register Trademarks; (iii) Copyright registrations, pending applications to register Copyrights, and Copyright renewals; (iv) domain name registrations; (v) branded accounts on any social medial networks; and (vi) any other Intellectual Property Rights that are the subject of a pending application, certificate, filing, registration or other document issued by, filed with, or recorded by, any Government Authority or other organization at any time.
“Regulatory Authority” shall mean any federal, national, state, foreign or multinational Governmental Authority (including the FDA) that has jurisdiction or oversight over (a) the research, development, approval, clearance, marketing, manufacture, labeling, sale, import, export and distribution of medical devices and technology, (b) federal healthcare programs under which such medical devices are purchased or reimbursed, or (c) the protection of personal healthcare information.
“Representatives” shall mean, as to any Person, its officers, directors, employees, counsel, accountants, financial advisers, consultants, financing sources and agents.
“Restricted Business” shall mean the business of developing and/or marketing an anti-reflux procedure or product for prevention, control, or treatment of gastroesophageal reflux disease.
“Restricted Parties” shall mean each of Darin Hammers, Brett Reynolds, and Darren Crow.
“Restricted Period” shall mean, (i) with respect to Darin Hammers and Brett Reynolds, a period of two (2) years commencing on the Closing Date, and (ii) with respect to Darren Crow, a period of one (1) year commencing on the Closing Date.
“Review Period” shall have the meaning specified in Section 2.2(b).
B-8
“R&W Insurance Company” shall mean the provider of R&W Insurance Policy selected by Purchaser, prior to Closing on the terms and subject to the conditions set forth herein.
“R&W Insurance Policy” shall mean the Purchaser-side representation and warranty insurance policy obtained by Purchaser; provided, however that each of Purchaser and Seller shall be responsible for fifty percent (50%) of the R&W Insurance Policy Premium.
“R&W Insurance Policy Premium” shall mean the premium and related fees and expenses payable to the underwriter and the broker with respect to the R&W Insurance Policy.
“R&W Policy Retention Amount” shall mean the aggregate amount of retention set forth in the R&W Insurance Policy.
“Sanctioned Country” shall mean any country or region that is the target of comprehensive United States economic sanctions, including currently Cuba, Iran, Sudan, Syria, North Korea, and the Crimea region of Ukraine.
“Sanctioned Person” shall mean any Person that is the subject or target of sanctions or restrictions under Sanctions Laws or Export-Import Laws, including: (a) any Person listed on any applicable United States or foreign sanctions- or export-related restricted party list, including OFAC’s Specially Designated Nationals and Blocked Persons List and the EU Consolidated List; (b) any entity that is, in the aggregate, fifty percent (50%) or greater owned, directly or indirectly, or otherwise Controlled by a Person or Persons described in clause (a); or (c) any national of a Sanctioned Country.
“Sanctions Laws” shall mean all United States and foreign Laws relating to economic sanctions, including those administered or enforced by the United States (including by OFAC or the United States Department of State), the United Nations Security Council, and the European Union.
“Seller” shall have the meaning specified in the Preamble.
“Seller Indemnified Persons” shall have the meaning specified in Section 8.2.
“Seller’s Fundamental Representations” shall mean the representations and warranties in Section 4.1, Section 4.2, Section 4.3, Section 4.8, Section 4.11, Section 4.14 and Section 4.15.
“Seller’s knowledge”, “knowledge of Seller” or any other similar knowledge qualification, shall mean the actual or constructive knowledge of any manager, director, officer or person fulfilling similar roles of Seller, after due inquiry.
“Solvent” when used with respect to any Person, shall mean that, as of any date of determination, (a) the amount of the “fair saleable value” of the assets of such Person will, as of such date, exceed (i) the value of all “liabilities of such Person, including contingent and other liabilities,” as of such date, as such quoted terms are generally determined in accordance with applicable Laws governing determinations of the insolvency of debtors, and (ii) the amount that will be required to pay the probable liabilities of such Person on its existing debts (including contingent liabilities) as such debts become absolute and matured, (b) such Person will not have, as of such date, an unreasonably small amount of capital for the operation of the businesses in which it is engaged or proposed to be engaged following such date and (c) such Person will be able to pay its liabilities, including contingent and other liabilities, as they mature.
“Statement of Objections” shall have the meaning specified in Section 2.2(c).
B-9
“Straddle Period” shall mean any Tax period that begins on or before and ends after the Closing Date.
“Tangible Embodiments” shall mean all tangible embodiments of the material unregistered Copyrights, including all software source code and object code, and all website content in any form or media.
“Target Working Capital” shall mean an amount equal to $2,825,000.
“Tax” (and, with correlative meaning, “Taxes” and “Taxable”) shall mean all forms of taxation imposed by any Tax Authority, including all national, state or local taxation (including income, value added, goods and services, occupation, real and personal property, social security, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, employer shared responsibility, excise, severance, occupation, premium or windfall profit taxes, stamp duty, customs and other import or export duties, estimated and other taxes), together with any interest, penalties, and additions to tax related thereto. For clarity, Taxes include any amounts described in the immediately preceding sentence imposed on or assessed against any Person for which Seller or its Affiliates have Liability by Contract, as successor or transferee, or otherwise under applicable Laws.
“Tax Authority” shall mean a Governmental Authority responsible for the imposition, assessment or collection of any Tax (domestic or foreign).
“Tax Claim” shall mean any action, suit, proceeding, investigation, audit or claim with respect to Taxes made or initiated by any Tax Authority.
“Tax Contest” shall have the meaning specified in Section 9.4.
“Tax Return” shall mean any report, return, statement, declaration, notice, certificate or other document filed or required to be filed with any Tax Authority in connection with the determination, assessment, collection or payment of any Tax.
“Territory” shall mean anywhere in the world.
“Third-Party Intellectual Property” shall have the meaning specified in Section 4.8(c).
“Trade Control Laws” shall have the meaning specified in Section 4.16.
“Trade Secrets” shall mean all trade secrets under applicable law and other rights in know-how and confidential or proprietary information, clinical study data, formulae, processes, manufacturing information, procedures, inventions, or marketing information, and all other non-public information with regard to the Products, and all claims and rights related thereto.
“Trademark Assignment” shall have the meaning specified in Section 3.2(c).
“Trademarks” shall mean any and all trademarks, service marks, trade dress, logos, slogans, trade names, and other source identifiers, all applications and registrations therefor, all common law rights therein and thereto, and all goodwill associated with any of the foregoing in any jurisdiction, including any prosecution and litigation files, extension, modification, or renewal of any such registration or application.
“Transaction Agreements” shall mean this Agreement and the General Assignment and Bill of Sale, the Purchaser Assignment and Assumption Agreements, the Parent Assignment, the Trademark Assignment, the Transition Services Agreement, the Contract Manufacturing Agreement, the Transition Distribution Agreement and any other agreements or instruments executed pursuant hereto.
B-10
“Transaction Confidentiality Agreement” shall mean any right or interest of Seller or any Affiliate of Seller under any confidentiality agreement entered into by Seller or any Affiliate of Seller, solely to the extent relating to information of a proprietary or confidential nature concerning the Products.
“Transaction(s)” shall mean, collectively, the transactions contemplated by this Agreement.
“Transfer Taxes” shall mean all federal, state, local or foreign sales, use, transfer, real property transfer, mortgage recording, stamp duty, value-added or similar Taxes that may be imposed in connection with the transfer of Purchased Assets.
“Transferred Employees” shall have the meaning specified in Section 6.11(a).
“Transition Services Agreement” shall have the meaning specified in Section 3.2(d).
“Treasury Regulation” shall mean the regulations promulgated under the Code by the United States Treasury and Internal Revenue Service.
B-11
EXHIBIT 10.2
MERIT MEDICAL SYSTEMS, INC 2018 LONG-TERM INCENTIVE PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT
This Restricted Stock Unit Award Agreement (this “Award Agreement”), dated effective as May 16, 2024 (the “Grant Date”), is made by and between Merit Medical Systems, Inc. (the “Company”), and ___________, a director of the Company (“you”).
1. |
Award of Restricted Stock Units |
The Company hereby grants to you an award of restricted stock units (“RSUs”) with respect to its common stock, no par value (the “Shares”), pursuant to the Merit Medical Systems, Inc. 2018 Long-Term Incentive Plan (as amended from time to time, the “Plan”), subject to the terms and conditions set forth in this Award Agreement and the Plan. The RSUs constitute Restricted Stock Units and this Award Agreement constitutes an “Award Agreement” under the Plan. Capitalized terms used but not otherwise defined in this Award Agreement and the Appendix A attached hereto have the applicable meanings set forth in the Plan. With respect to your RSUs granted hereunder, the applicable Total Number of Shares are as follows:
Total Number of Shares |
|
2,431 |
2. |
Vesting Conditions to Award |
Subject to the other terms and conditions of this Award Agreement and the Plan, you will be entitled to a payment in Shares with respect to your RSUs based on your Total Number of Shares set forth above and the vesting provisions contained herein. Except as otherwise provided in Section 3 below, you shall become vested in the RSUs on the one (1) year anniversary of the Grant Date (the “Vesting Date”) and in accordance with the Plan, subject to your Continuous Service with the Company through the Vesting Date. Failure to satisfy the foregoing service-based vesting condition will result in total forfeiture of your RSUs and all rights to payment hereunder.
3. |
Effect of a Change in Control |
If a Change in Control occurs prior to the Vesting Date, then you will be entitled to receive, no later than thirty (30) days following the effective date of the Change in Control, the Total Number of Shares covered by this Award Agreement.
4. |
Payment |
(a)Timing of Settlement. Subject to Section 2 of this Award Agreement, promptly following the Vesting Date the Company will issue to you the Total Number of Shares. Such issuance and payment will be made in accordance with Section 4(c) below within the thirty (30) day period following the Vesting Date; provided, however, that in the event of a Change in Control, your RSUs will be settled and paid within the thirty (30) day period specified in Section 3 above.
(b) No Dividend Equivalents. No Dividend Equivalents will be paid on or with respect to the RSUs.
(c) Form of Payment. All amounts payable with respect to your RSUs will be paid in the form of Shares. RSUs will not be settled or paid in cash.
(d) Taxes. Taxes may be assessed and/or withheld as required by law at applicable United States federal, state and/or other tax rates (under the laws of the jurisdictions in which you reside or that may otherwise be applicable to you) with respect to your RSUs and the issuance of Shares in payment of your RSUs. Notwithstanding anything in this Award Agreement to the contrary, the issuance of Shares in payment of your RSUs described in this Award Agreement will be reduced by a number of Shares having a then Fair Market Value equal to the amount necessary to satisfy the minimum tax withholding obligations applicable to such RSUs and Share issuance.
5. |
Other Provisions |
(a) Future Adjustments. In the event of any merger, acquisition, disposition or other corporate event affecting the Company prior to the Vesting Date, the Committee may make such adjustments to the Total Number of Shares subject to this Award Agreement pursuant to Section 12.2 of the Plan.
(b) No Guaranty of Future Awards. This Award Agreement in no way guarantees you the right to or expectation that you may receive similar awards with respect to any other period which the Committee may, in its discretion, establish and as to which the Committee may elect to grant Awards under the Plan.
(c) No Rights as Shareholder. You will not be considered a shareholder of the Company with respect to the Shares covered by this Award Agreement unless and until such underlying Shares are issued to you in settlement of your RSUs.
(d) No Rights to Continued Service. This Award Agreement will not be deemed to create a contract or other promise of continued service as a director or otherwise with the Company and will not in any way prohibit or restrict the ability of the Company to terminate your service at any time for any reason, with or without cause, at will with or without notice.
(e) Compliance with Section 409A of the Code. This Award Agreement and your RSUs are intended to constitute and result in a “short-term deferral” that is exempt from the definition of a “nonqualified deferred compensation plan” under Section 409A of the Code.
(f) Plan. All terms and conditions of the Plan are incorporated herein by reference and constitute an integral part hereof. In the event of any conflict between the provisions of this Award Agreement and the Plan, the provisions of the Plan, including without limitation Sections 4.2, 13.5, 13.6 and 13.15 of the Plan, will govern and be controlling.
(g)Transfers. Neither the RSUs nor the right to receive Shares hereunder may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by you. Any attempt to assign, alienate, pledge, attach, sell or otherwise transfer or encumber the RSUs or the rights relating thereto will be wholly ineffective. Notwithstanding the foregoing, in the event of your death, Shares deliverable with respect to the vested RSUs will be delivered to your designated beneficiary under the Plan (or if none, to your estate).
(h)Securities Law Restrictions. The issuance of Shares hereunder is conditioned upon compliance by the Company and you with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company's Shares may be listed. No Shares will be issued or transferred unless and until any then applicable requirements of state and federal laws and regulatory agencies have been fully complied with to the satisfaction of the Company and its counsel. In addition, the Company may require that prior to the issuance of Shares hereunder you enter into a written agreement to comply with any restrictions on subsequent disposition that the Company deems necessary or advisable under any applicable federal and state securities laws. The Shares issued hereunder may be legended to reflect such restrictions.
(i)Governing Law. This Award Agreement will be construed and interpreted in accordance with the laws of the State of Utah without regard to conflict of law principles.
(j)Effect on Other Benefits. Participation in the Plan is voluntary. The value of the RSUs is an extraordinary item of compensation outside the scope of your normal service and compensation rights, if any. As such, the RSUs are not part of normal or expected compensation for purposes of calculating any severance, bonuses, awards, or retirement benefits or similar payments unless specifically and otherwise provided in the plans or agreements governing such compensation.
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(k) Entire Agreement. This Award Agreement supersedes in its entirety all prior undertakings and agreements of the Company and you, whether oral or written, with respect to the RSUs granted hereunder.
By executing and accepting this Award Agreement, you agree to be bound as a Participant by the terms and conditions herein, the Plan and all conditions established by the Committee and the Company in connection with Awards issued under the Plan.
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MERIT MEDICAL SYSTEMS, INC. |
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/s/ Fred P. Lampropoulos _ Fred P. Lampropoulos |
_________________________________________________ [Director name] |
President and Chief Executive Officer |
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APPENDIX A
(Definitions)
For purposes of this Award Agreement, the following terms have the following meanings:
“Change in Control” has the meaning set forth in the Plan; provided, that no event will constitute a Change of Control unless it is described in Code Section 409A(a)(2)(A)(v) and the Treasury Regulations thereunder.
“Continuous Service” has the meaning set forth in the Plan and includes service with the Company as an employee or Director of the Company.
“Total Number of Shares” means the number of Shares specified in Section 1 of this Award Agreement.
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EXHIBIT 31.1
CERTIFICATION
I, Fred P. Lampropoulos, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of Merit Medical Systems, Inc. (the “Registrant”);
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with general accepted accounting principles;
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
d) disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: August 1, 2024 |
/s/ Fred P. Lampropoulos |
Fred P. Lampropoulos |
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President and Chief Executive Officer |
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(principal executive officer) |
EXHIBIT 31.2
CERTIFICATION
I, Raul Parra, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of Merit Medical Systems, Inc. (the “Registrant”);
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with general accepted accounting principles;
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
d) disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: August 1, 2024 |
/s/ Raul Parra |
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Raul Parra |
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Chief Financial Officer |
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(principal financial officer) |
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EXHIBIT 32.1
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Merit Medical Systems, Inc. (the “Company”) for the quarter ended June 30, 2024, as filed with the Securities and Exchange Commission (the “Report”), I, Fred P. Lampropoulos, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 1, 2024 |
/s/ Fred P. Lampropoulos |
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Fred P. Lampropoulos |
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President and Chief Executive Officer |
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(principal executive officer) |
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This certification accompanies the foregoing Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Merit Medical Systems, Inc. (the “Company”) for the quarter ended June 30, 2024, as filed with the Securities and Exchange Commission (the “Report”), I, Raul Parra, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 1, 2024 |
/s/ Raul Parra |
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Raul Parra |
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Chief Financial Officer |
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(principal financial officer) |
This certification accompanies the foregoing Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.