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Nov. 5, 2021, 4:56 p.m. EDT

10-Q: MERIT MEDICAL SYSTEMS INC

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(EDGAR Online via COMTEX) -- 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 2020 Annual Report on Form 10-K.

OVERVIEW

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related condensed notes thereto, which are included in Part I of this report.

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

For the three-month period ended September 30, 2021, we reported sales of approximately $267.0 million, up approximately $23.0 million or 9.4%, compared to sales for the three-month period ended September 30, 2020 of approximately $244.0 million. For the nine-month period ended September 30, 2021, we reported sales of approximately $796.3 million, up approximately $90.4 million or 12.8%, compared to sales for the nine-month period ended September 30, 2020 of approximately $705.9 million. For the three and nine-month periods ended September 30, 2021, our net sales benefitted approximately $1.4 million and $11.4 million, respectively, from foreign currency fluctuations (net of hedging) assuming applicable foreign exchange rates in effect during the comparable prior-year period.

Gross profit as a percentage of sales increased to 45.1% for the three-month period ended September 30, 2021 compared to 41.8% for the three-month period ended September 30, 2020. Gross profit as a percentage of sales increased to 44.8% for the nine-month period ended September 30, 2021 compared to 41.1% for the nine-month period ended September 30, 2020.

Net income for the three-month period ended September 30, 2021 was approximately $12.0 million, or $0.21 per share, compared to net loss of approximately ($3.0) million, or ($0.05) per share, for the three-month period ended September 30, 2020. Net income for the nine-month period ended September 30, 2021 was approximately $27.8 million, or $0.49 per share, compared to net loss of approximately ($25.2) million, or ($0.46) per share, for the nine-month period ended September 30, 2020.

Recent Developments and Trends

In addition to the trends identified in the 2020 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 2021 has been impacted, and we believe will continue to be impacted, by the following recent events and trends:

We experienced overall improvements in sales trends in the three-month period ? ended September, with wide variation across regions of the world and within certain geographic regions.

During the three months ended September 30, 2021, we saw continued progress of ? our Wrapsody ArterioVenous (AV) Access Efficacy Pivotal Study (the "WAVE Study") of the Endovascular Stent Graft, and published the

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results from a prospective, observational, first-in-human study of the Merit WRAPSODY Endoprosthesis in CardioVascular and Interventional Radiology.

As part of our Foundations for Growth program we have continued to focus on ? scrap reduction and manufacturing efficiency across manufacturing sites, which has helped offset inflationary cost pressures in certain raw materials, shipping, and freight expenses.

? As of September 30, 2021, we had cash on hand of approximately $68.9 million and net available borrowing capacity of approximately $456 million.







        RESULTS OF OPERATIONS
        The following table sets forth certain operational data as a percentage of sales
        for the periods indicated:
                                                         Three Months Ended           Nine Months Ended
                                                           September 30,               September 30,
                                                          2021         2020           2021         2020
        Net sales                                            100 %        100 %          100 %        100 %
        Gross profit                                        45.1         41.8           44.8         41.1
        Selling, general and administrative expenses        32.4         29.6           32.5         30.9
        Research and development expenses                    6.4          5.5            6.4          6.0
        Legal settlement                                       -            -              -          2.6
        Impairment charges                                     -          8.4            0.5          4.0
        Contingent consideration expense (benefit)           0.4        (1.8)            0.4          0.1
        Income (loss) from operations                        6.0          0.0            4.9        (2.5)
        Other expense - net                                (0.7)        (0.9)          (0.7)        (1.3)
        Income (loss) before income taxes                    5.3        (0.9)            4.2        (3.8)
        Net income (loss)                                    4.5        (1.2)            3.5        (3.6)
        


Sales

Sales for the three-month period ended September 30, 2021 increased by 9.4%, or approximately $23.0 million, compared to the corresponding period in 2020. Sales for the nine-month period ended September 30, 2021 increased by 12.8%, or approximately $90.4 million, compared to the corresponding period in 2020. Listed below are the sales by product category within each of our financial reporting segments for the three and nine-month periods ended September 30, 2021 and 2020 (in thousands, other than percentage changes):







                                                       Three Months Ended                      Nine Months Ended
                                                         September 30,                           September 30,
                                       % Change        2021         2020       % Change        2021         2020
        Cardiovascular
        Peripheral Intervention            16.5 %    $ 101,059    $  86,778        21.5 %    $ 299,573    $ 246,488
        Cardiac Intervention               15.5 %       79,813       69,089        15.7 %      240,203      207,685
        Custom Procedural Solutions      (12.4) %       49,435       56,429       (3.9) %      143,492      149,369
        OEM                                21.9 %       29,397       24,117        11.3 %       89,734       80,592
        Total                               9.9 %      259,704      236,413        13.0 %      773,002      684,134
        Endoscopy
        Endoscopy devices                 (3.2) %        7,317        7,562         7.0 %       23,257       21,737
        Total                               9.4 %    $ 267,021    $ 243,975        12.8 %    $ 796,259    $ 705,871
        


Cardiovascular Sales. Our cardiovascular sales for the three-month period ended September 30, 2021 were approximately $259.7 million, up 9.9% when compared to the corresponding period of 2020 of approximately $236.4 million. Sales for the three-month period ended September 30, 2021 were favorably affected by increased sales of:

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Peripheral intervention products, which increased by approximately $14.3

Cardiac intervention products, which increased by approximately $10.7 million, or 15.5%, from the corresponding period of 2020. This increase was

OEM products, which increased by approximately $5.3 million, or 21.9%, from

The foregoing increase in sales for the three-month period ended September 30, 2021 was partially offset by decreased sales of:

Custom procedural solutions products, which decreased by approximately ($7.0) million, or (12.4)%, from the corresponding period of 2020. This decrease was

Our cardiovascular sales for the nine-month period ended September 30, 2021 were approximately $773.0 million, up 13.0% when compared to the corresponding period of 2020 of approximately $684.1 million. Sales for the nine-month period ended September 30, 2021 were favorably affected by increased sales of:

Peripheral intervention products, which increased by approximately $53.1

Cardiac intervention products, which increased by approximately $32.5 million, or 15.7%, from the corresponding period of 2020. This increase was

OEM products, which increased by approximately $9.1 million, or 11.3%, from

The foregoing increase in sales for the nine-month period ended September 30, 2021 was partially offset by decreased sales of:

Custom procedural solutions products, which decreased by approximately ($5.9) million, or (3.9)%, from the corresponding period of 2020. This decrease was

Endoscopy Sales. Our endoscopy sales for the three-month period ended September 30, 2021 were approximately $7.3 million, down (3.2)%, when compared to sales in the corresponding period of 2020 of approximately $7.6 million. Sales for the three-month period ended September 30, 2021 were unfavorably affected by decreased sales of our EndoMAXX(R) fully covered esophageal stent, offset partially by increased sales of other stents and our Elation(R) Balloon Dilator.

Our endoscopy sales for the nine-month period ended September 30, 2021 were approximately $23.3 million, up 7.0%, when compared to sales in the corresponding period of 2020 of approximately $21.7 million. Sales for the nine-month period ended September 30, 2021 were favorably affected by increased sales of our Elation(R) Balloon Dilator and other stents.

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Geographic Sales

Sales trends for the three and nine-month periods ended September 30, 2021 and 2020 were influenced by the incidence and timing of COVID-19 infections and the associated governmental and patient responses, which varied between countries and regions in both the current and prior-year periods. Listed below are sales by geography for the three and nine-month periods ended September 30, 2021 and 2020 (in thousands, other than percentage changes):







                                         Three Months Ended                      Nine Months Ended
                                           September 30,                           September 30,
                         % Change        2021         2020       % Change        2021         2020
        United States         5.9 %    $ 151,505    $ 143,109        12.3 %    $ 451,648    $ 402,305
        International        14.5 %      115,516      100,866        13.5 %      344,611      303,566
        Total                 9.4 %    $ 267,021    $ 243,975        12.8 %    $ 796,259    $ 705,871
        


United States Sales. U.S. sales for the three-month period ended September 30, 2021 were approximately $151.5 million, or 56.7% of net sales, up 5.9% when compared to the corresponding period of 2020. The increase in our domestic sales in the three-month period ended September 30, 2021 compared to the three-month period ended September 30, 2020 was driven primarily by our U.S. Direct and OEM businesses.

U.S. sales for the nine-month period ended September 30, 2021 were approximately $451.6 million, or 56.7% of net sales, up 12.3% when compared to the corresponding period of 2020. The increase in our domestic sales for the nine-month period ended September 30, 2021 compared to the nine-month period ended September 30, 2020 was driven primarily by our U.S. direct business.

International Sales. International sales for the three-month period ended September 30, 2021 were approximately $115.5 million, or 43.3% of net sales, up 14.5% when compared to the corresponding period of 2020 of approximately $100.9 million. The increase in our international sales for the three-month period ended September 30, 2021, compared to the three-month period ended September 30, 2020, included increased sales in our Asia Pacific ("APAC") operations of $6.6 million or 13.2%, in EMEA of $6.0 million or 13.6% and increased sales in the rest of the world ("ROW") of $2.1 million of 30.6%.

International sales for the nine-month period ended September 30, 2021 were approximately $344.6 million, or 43.3% of net sales, up 13.5% when compared to the corresponding period of 2020 of approximately $303.6 million. The increase in our international sales for the nine-month period ended September 30, 2021, compared to the nine-month period ended September 30, 2020, included increased sales in APAC of $21.8 million or 14.7%, in EMEA of $15.9 million or 11.7%, and in ROW of $3.4 million or 17.2%.

Gross Profit

Our gross profit as a percentage of sales increased to 45.1% for the three-month period ended September 30, 2021, compared to 41.8% for the three-month period ended September 30, 2020. The increase in gross profit percentage was primarily due to changes in product mix, lower amortization expense (as certain intangibles from prior acquisitions became fully amortized), and improvements in manufacturing variances from operational efficiencies and increased production volume, partially offset by higher freight costs.

Our gross profit as a percentage of sales increased to 44.8% for the nine-month period ended September 30, 2021, compared to 41.1% for the nine-month period ended September 30, 2020. The increase in gross profit percentage was primarily due to lower amortization expense (as certain intangibles from prior acquisitions became fully amortized), changes in product mix, decreased obsolescence expense as a percentage of sales, and improvements in manufacturing variances from operational efficiencies and increased production volume.

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Operating Expenses

Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses increased approximately $14.3 million, or 19.7%, for the three-month period ended September 30, 2021 compared to the corresponding period of 2020. As a percentage of sales, SG&A expenses were 32.4% for the three-month period ended September 30, 2021, compared to 29.6% for the corresponding period of 2020. For the three-month period ended September 30, 2021, compared to the corresponding period of 2020, labor-related costs increased due to higher commissions and bonus expense in the current-year period, in contrast to temporary salary cuts and furloughs in the prior-year period. We incurred $4.3 million of corporate transformation and restructuring costs, including consulting charges, during the three-month period ended September 30, 2021 in connection with our Foundations for Growth program, compared to restructuring costs of $2.8 million for the three-month period ended September 30, 2020. These increased costs were offset partially by lower idle capacity costs due to increased production compared to the prior-year period.

SG&A expenses increased approximately $41.3 million, or 18.9%, for the nine-month period ended September 30, 2021 compared to the corresponding period of 2020. As a percentage of sales, SG&A expenses were 32.5% for the nine-month period ended September 30, 2021, compared to 30.9% for the corresponding period of 2020. For the nine-month period ended September 30, 2021, compared to the corresponding period of 2020, labor-related costs increased due to higher commissions and bonus expense in the current-year period, in contrast to temporary salary cuts and furloughs in the prior-year period. We incurred $17.0 million of corporate transformation and restructuring costs, including consulting charges, during the nine-month period ended September 30, 2021 in connection with our Foundations for Growth program, compared to restructuring costs of $6.3 million for the nine-month period ended September 30, 2020. We also recorded approximately $6 million of contract termination costs in SG&A during the nine-month period ended September 30, 2021 to renegotiate certain terms of an acquisition agreement. These increased costs were offset partially by lower idle capacity costs due to increased production compared to the prior-year period.

Research and Development Expenses. Research and development ("R&D") expenses for the three-month period ended September 30, 2021 were approximately $17.0 million, up 25.7%, when compared to R&D expenses in the corresponding period of 2020 of approximately $13.5 million. R&D expenses for the nine-month period ended September 30, 2021 were approximately $50.8 million, up 19.9%, when compared to R&D expenses in the corresponding period of 2020 of approximately $42.4 million. The increase in R&D expenses for the three and nine-month periods ended September 30, 2021 compared to the corresponding periods in 2020 was largely due to increased clinical expenses for certain R&D projects (including our WRAPSODY AV Access Efficacy Study), increased compensation expense due to temporary salary cuts and furloughs in the prior-year periods, and higher expenses related to implementation of the Medical Device Regulation in the European Union.

Legal Settlement. We recorded a settlement in the nine-month period ended September 30, 2020 of $18.2 million in connection with an agreement in principle with the Department of Justice ("DOJ") to fully resolve the DOJ's investigation of certain marketing and promotional practices.

Impairment Charges. For the nine-month period ended September 30, 2021 we recorded impairment charges of approximately $4.3 million. These impairments included $1.6 million of intangible assets and $1.3 million of property and equipment due to the planned discontinuance of the Advocate(TM) Peripheral Angioplasty Balloon product line, sold under our license agreements with ArraVasc, and $1.4 million of impairments of certain ROU operating lease assets due to site consolidation decisions and changes in our projected cash flows for the underlying lease assets.

For the three and nine-month periods ended September 30, 2020, we recorded impairment charges of approximately $20.6 million and $28.3 million, respectively. These impairments included a $3.5 million write-off in the first quarter of 2020 of our purchase option to acquire Bluegrass Vascular due to our decision not to exercise our option to purchase this company, $0.4 million impairment in the first quarter of property and equipment related to our distribution agreement with NinePoint, $2.4 million impairment in the second quarter of the customer list intangible asset from our ITL acquisition, $1.5 million impairment in the second quarter of our right-of-use operating lease asset associated with closure of a facility in California, $2.5 million impairment in the third quarter related to our equity investment in the preferred shares of Fusion due to uncertainty about future product development and commercialization associated with the technologies, and $18.1 in the third quarter for intangible impairment charges based on planned closure and restructuring activities and uncertainty about

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future product development and commercialization associated with the acquired technologies due in part to the economic impacts of the COVID-19 pandemic.

Contingent Consideration Expense (Benefit). For the three and nine-month periods ended September 30, 2021, 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 approximately $1.1 million and $3.3 million, respectively, compared to contingent consideration expense (benefit) of ($4.4) million and $0.9 million for the three and nine-month periods ended September 30, 2020. Expense (benefit) in each period relates to changes in the probability and timing of achieving certain revenue and operational milestones, as well as expense for the passage of time.







        Operating Income (Loss)
        The following table sets forth our operating income (loss) by financial
        reporting segment for the three and nine-month periods ended September 30, 2021
        and 2020 (in thousands):
                                           Three Months Ended        Nine Months Ended
                                             September 30,             September 30,
                                           2021         2020         2021         2020
        Operating Income (Loss)
        Cardiovascular                   $  14,411    $ (1,702)    $ 33,389    $ (20,662)
        Endoscopy                            1,520        1,766       5,631         3,093
        Total operating income (loss)    $  15,931    $      64    $ 39,020    $ (17,569)
        


Cardiovascular Operating Income (Loss). Our cardiovascular operating income for the three-month period ended September 30, 2021 was approximately $14.4 million, compared to cardiovascular operating loss in the corresponding period of 2020 of approximately ($1.7) million. The increase in cardiovascular operating income during the three-month period ended September 30, 2021 compared to the corresponding period of 2020 was primarily a result of higher sales ($259.7 million compared to $236.4 million), higher gross margin and decreased impairment expense (none in the three-month period ended September 30, 2021 compared to $20.6 million in the three-month period ended September 30, 2020), partially offset by increased SG&A and R&D expenses and higher contingent consideration expense.

Our cardiovascular operating income for the nine-month period ended September 30, 2021 was approximately $33.4 million, compared to cardiovascular operating loss in the corresponding period of 2020 of approximately ($20.7) million. The increase in cardiovascular operating income during the nine-month period ended September 30, 2021 compared to the corresponding period of 2020 was primarily a result of higher sales ($773.0 million compared to $684.1 million), higher gross margin, lower impairment expense ($4.3 million for the nine-month period ended September 30, 2021 compared to $27.9 million for the nine-month period ended September 30, 2020) and the $18.2 million legal settlement expense related to the DOJ inquiry recorded in the prior-year period, partially offset by increased SG&A and R&D expenses and higher contingent consideration expense.

Endoscopy Operating Income. Our endoscopy operating income for the three-month period ended September 30, 2021 was approximately $1.5 million, compared to endoscopy operating income of approximately $1.8 million for the corresponding period of 2020. This decrease in endoscopy operating income was primarily a result of increased operating expenses (due in part to temporary salary reductions and furloughs during the three-month period ended September 30, 2020).

Our endoscopy operating income for the nine-month period ended September 30, 2021 was approximately $5.6 million, compared to endoscopy operating income of approximately $3.1 million for the corresponding period of 2020. This increase in endoscopy operating income was primarily a result of higher sales, improved gross margins (largely a result of the write-off of inventory related to the suspension of our distribution agreement with NinePoint in the first quarter of 2020, which did not repeat in 2021) and decreased impairment expense (none in the nine-month period ended September 30, 2021 compared to approximately $0.4 million in the nine-month period ended September 30, 2020).

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Other Expense

Our other expense for the three-month periods ended September 30, 2021 and 2020 was approximately ($1.8) million and ($2.2) million, respectively. The change in other expense was primarily related to decreased interest expense as a result of a lower effective interest rate and a lower average debt balance and a gain of approximately $0.5 million on the sale of the assets associated with our Hypotube product line in the third quarter of 2020.

Our other expense for the nine-month periods ended September 30, 2021 and 2020 was approximately ($5.3) million and ($8.9) million, respectively. The change in other expense was primarily related to decreased interest expense as a result of a lower effective interest rate and a lower average debt balance, an increase in interest income due to partial recoveries of loan interest from NinePoint which had previously been written off, and a gain of approximately $0.5 million on the sale of the assets associated with our Hypotube product line in the third quarter of 2020.

Effective Tax Rate

Our provision for income taxes for the three-month periods ended September 30, 2021 and 2020 was a tax expense of approximately $2.2 million and $0.8 million, respectively, which resulted in an effective tax rate of 15.6% and (37.7)%, respectively. Our provision for income taxes for the nine-month periods ended September 30, 2021 and 2020 was a tax expense (benefit) of approximately $5.9 million and ($1.3) million, respectively, which resulted in an effective tax rate of 17.5% and 4.7%, respectively. The increase in the income tax expense and the corresponding change in the effective income tax rate for the three and nine-month periods ended September 30, 2021, when compared to the prior-year periods, was primarily due to a pre-tax loss during the 2020 periods, as well as a change in the jurisdictional mix of earnings. Our effective tax rate differs from the U.S. statutory rate primarily due to the impact of GILTI inclusions, state income taxes, foreign taxes, other non-deductible permanent items and discrete items (such as share-based compensation).

Net Income (Loss)

Our net income (loss) for the three-month periods ended September 30, 2021 and 2020 was approximately $12.0 million and ($3.0) million, respectively. The . . .

Nov 05, 2021

COMTEX_396403759/2041/2021-11-05T16:55:58

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