FY 2019
ANNUAL REPORT
A MESSAGE FROM THE CHAIRMAN & CEO
DEAR SHAREHOLDERS,
As I prepare this note, we find ourselves in what may be
the greatest calamity of several generations. There are
many things to think about, plan for and execute. Much
of our energy is spent on properly sizing the business, as
well as looking after the welfare of our employees and
the patients who rely upon our products.
Many of the events of last year have prepared us for the
realities of today. The lessons are engraved in our minds
as we assess the past and navigate the future.
Over the last several years, we have been engaged in
numerous merger and acquisition opportunities. They
are all different and require great attention. One unique
opportunity was the acquisition of the biopsy product
line from Becton, Dickinson and Company (BD), as well
as the pleural and peritoneal drainage product line of
C.R. Bard, Inc. which was acquired by BD and divested to
us. Operations conducted by two major medical device
companies with six different factories in three countries
all needed to be moved into one facility. This required a
Herculean effort, but our team overcame the challenge.
At the same time, we acquired three additional
businesses. The disruption and revamping of our sales
force, as well as the associated marketing efforts, were
considerable in the short term. Additionally, we had to
move the products and ramp them up. We fell short
of our projected revenues, but still had the expenses
of expected growth, resulting in a shortfall against our
goals. That was the bad news. Now for the good.
We responded promptly to the situation by reducing
expenses, headcount and capital projects, and realigned
the business, resulting in improved results for the fourth
quarter of 2019. We continue to implement our expense
reduction initiatives, resulting in reduced operating
expenses and improved free cash flow in the first
quarter of 2020 despite one of the most severe business
disruptions our generation has experienced.
Despite the challenges we face in the next few quarters,
we are prepared and have a head start because of the
operating improvements we initiated before the crisis hit.
I am optimistic that the medical device industry, or at
least our segment of that industry, will recover; however,
the timing and slope of the improvement is uncertain. Our
renewed business plan, ongoing facility consolidation and
product pipeline, together with the spirit and enthusiasm
of our employees, will move our company forward as we
emerge from these challenging times.
Thank you for your continued support of our company.
Sincerely,
FRED P. LAMPROPOULOS | CHAIRMAN & CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
☒ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2019
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
(State or other jurisdiction of incorporation or organization)
87-0447695
(IRS Employer Identification No.)
1600 West Merit Parkway, South Jordan, Utah 84095
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (801) 253-1600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Trading Symbol
MMSI
Name of exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 such
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 and posted pursuant
to Rule 405 of Regulation S-T (§ 229.405 of this chapter) 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 ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 28, 2019, based upon the closing price
of the common stock as reported by the NASDAQ Global Select Market on such date, was approximately $3.2 billion. As of February 27, 2020, the
registrant had 55,216,906 shares of common stock outstanding.
Portions of the following document are incorporated by reference in Part III of this Report: the registrant’s definitive proxy statement relating to
our 2020 Annual Meeting of Shareholders.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
SIGNATURES
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PART I
Unless otherwise indicated in this report, “Merit,” “we,” “us,” “our,” and similar terms refer to Merit Medical
Systems, Inc. and our consolidated subsidiaries.
DISCLOSURE 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. All forward-looking statements included in this report are made as of the date hereof and
are based on information available to us as of such date. We assume no obligation to update any forward-looking statement.
In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,”
“plans,” “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. Prospective
investors are cautioned not to unduly rely on any such forward-looking statements.
Our future financial condition and results of operations, as well as any forward-looking statements, are subject to
inherent risks and uncertainties, including the following:
risks relating to managing growth, particularly if accomplished through acquisitions, and the integration of
acquired businesses;
risks relating to protecting our intellectual property;
risks relating to the recent outbreak of a strain of coronavirus identified as “COVID-19” in China, and the
spread of COVID-19 to countries around the world;
claims by third parties that we infringe their intellectual property rights, which could cause us to incur
significant legal or licensing expenses and prevent us from selling our products;
changes in general economic conditions, geopolitical conditions, U.S. trade policies and other factors beyond
our control;
constant changes in international and national economic and industry conditions;
FDA regulatory clearance processes are expensive, time-consuming and uncertain and failure to obtain and
maintain required regulatory clearances and approvals could prevent us from commercializing our products;
international regulatory requirements and delays and failure to obtain and maintain required regulatory
clearances and approvals;
greater scrutiny and regulation by governmental authorities, including risks relating to the subpoena we
received in October 2016 from the U.S. Department of Justice seeking information on our marketing and
promotional practices;
risks relating to physicians’ use of our products in unapproved circumstances;
consolidation in the healthcare industry, group purchasing organizations or public procurement policies
leading to demands for price concessions;
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disruption of our information technology systems, our critical information systems or a breach in the security
of our systems;
changes in or failure to comply with governing regulations;
restrictions and limitations in our debt agreements and instruments, which could affect our ability to operate
our business and our liquidity;
fluctuations in foreign currency exchange rates negatively impacting our financial results;
expending significant resources for research, development, testing and regulatory approval or clearance of
our products under development and any failure to develop the products, any failure of the products to be
effective or any failure to obtain approvals for commercial use;
violations of laws targeting fraud and abuse in the healthcare industry;
loss of key personnel;
termination or interruption of, or a failure to monitor, our supply relationships or increases in the prices of
our component parts, finished products, third-party services or raw materials, particularly petroleum-based
products;
limits on reimbursement imposed by governmental and other programs;
product liability claims;
failure to report adverse medical events to the FDA or other governmental authorities, which may subject us
to sanctions that may materially harm our business;
failure to maintain or establish sales capabilities on our own or through third parties, which may result in our
inability to commercialize our products in countries where we lack direct sales and marketing capabilities;
employees, independent contractors, consultants, manufacturers and distributors engaging in misconduct or
other improper activities, including noncompliance;
pursuit of litigation which affects our financial condition or results of operations;
inability to compete in markets, particularly if there is a significant change in relevant practices or
technology;
inability to generate sufficient cash flow to fund our debt obligations, capital expenditures, and ongoing
operations;
uncertainties about the United Kingdom’s (“UK”) withdrawal from the European Union (“EU”);
uncertainties relating to the LIBOR calculation and the expected discontinuation of LIBOR after 2021;
inability to accurately forecast customer demand for our products or manage our inventory;
the addressable market for our product groups being smaller than our estimates;
failure to comply with export control laws, customs laws, sanctions laws and other laws governing our
operations in the U.S. and other countries, which could subject us to civil or criminal penalties, other remedial
measures and legal expenses;
risks relating to work stoppage, transportation interruptions, severe weather, natural disasters and outbreak
of disease;
fluctuations in our effective tax rate adversely affecting our business, financial condition or results of
operation;
risks relating to our revenues being derived from a few products and medical procedures;
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actions of activist shareholders being potentially disruptive and costly and causing change that conflicts with
our strategic direction;
effects of evolving U.S. and international laws and regulations regarding privacy and data protection;
failure to comply with applicable environmental laws and regulations;
volatility of the market price of our common stock and potential dilution from future equity offerings; and
other factors referenced in our press releases and in our reports filed with the Securities and Exchange
Commission (the “SEC”).
All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. Our actual results will likely differ, and may differ materially,
from anticipated results. Financial estimates are subject to change and are not intended to be relied upon as predictions of
future operating results, and we assume no obligation to update or disclose revisions to those estimates. If we do update
or correct one or more forward-looking statements, investors and others should not conclude that we will make additional
updates or corrections. Additional factors that may have a direct bearing on our operating results are described under
Item 1A “Risk Factors.”
DISCLOSURE REGARDING TRADEMARKS
This report includes trademarks, tradenames and service marks that are our property or the property of other third
parties. 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 1. Business.
Our Company
Merit Medical Systems, Inc. is a leading manufacturer and marketer of proprietary disposable medical devices
used in interventional, diagnostic and therapeutic procedures, particularly in cardiology, radiology, oncology, critical care
and endoscopy. We strive to be the most customer-focused company in healthcare. Each day we are determined to make
a difference by understanding our customers’ needs and innovating and delivering a diverse range of products that improve
the lives of people and communities throughout the world. We believe that long-term value is created for our customers,
employees, shareholders, and communities when we focus outward and are determined to deliver an exceptional customer
experience.
Merit Medical Systems, Inc. was founded in 1987 by Fred P. Lampropoulos, Kent W. Stanger, Darla Gill and
William Padilla. Initially we focused our operations on injection and insert molding of plastics. Our first product was a
specialized control syringe used to inject contrast solution into a patient’s arteries for a diagnostic cardiac procedure called
an angiogram. Since that time, our sales, products and product lines have expanded substantially, both through internal
research and development projects and through strategic acquisitions.
Business Strategy
Our business strategy focuses on five target areas as follows:
enhancing global growth and profitability through research and development, sales model optimization, cost
discipline and operational focus;
optimizing our operational capability through lean processes, cost effective environments and asset
utilization;
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targeting high-growth, high-return opportunities by understanding, innovating and delivering in our core
divisions;
maintaining a highly disciplined, customer-focused enterprise guided by strong core values to globally
address unmet or underserved healthcare needs; and
creating sustainability of our business for our employees, shareholders and community.
We conduct our operations through a number of domestic and foreign subsidiaries and representative offices. Our
principal offices are located at 1600 West Merit Parkway, South Jordan, Utah, 84095, and our telephone number is
(801) 253-1600. See Item 2. “Properties.” We maintain an Internet website at www.merit.com.
Products
We design, develop, market and manufacture, through our own operations and contract manufacturers, medical
products that offer a high level of quality, value and safety to our customers, as well as the patients they serve. Our products
are used in the following clinical areas: diagnostic and interventional cardiology; interventional radiology;
neurointerventional radiology; vascular, general and thoracic surgery; electrophysiology; cardiac rhythm management;
interventional pulmonology; interventional nephrology; orthopaedic spine surgery; interventional oncology; pain
management; outpatient access centers; intensive care; computed tomography; ultrasound; and interventional
gastroenterology. During the years ended December 31, 2019, 2018 and 2017, net sales generated by our top ten selling
products accounted for approximately 32%, 33% and 37%, respectively. Sales of our inflation devices (including our
Big60® device sold within our endoscopy segment and kits and packs which include inflation devices, but also include
other products) accounted for approximately 9.4%, 10.8% and 11.4% of our net sales for the years ended December 31,
2019, 2018 and 2017, respectively.
The success of our products is enhanced by the extensive experience of our management team in the healthcare
industry, our experienced direct sales force and distributors, our ability to provide custom procedural solutions such as
kits, trays and procedural packs at the request of our customers and our dedication to offering facility-unique solutions in
the markets we serve worldwide.
Our products are offered for sale in six core product groups: peripheral intervention, cardiac intervention,
cardiovascular and critical care, interventional oncology and spine, breast cancer localization and guidance, and
endoscopy. A number of our products are marketed within multiple product groups; accordingly, we do not maintain
separate measures of profitability by product group. Based on industry data and our internal market information, we
estimate that the addressable market opportunities (in terms of annual net sales), that we are targeting with our current or
newly released product portfolios, for each of our core product groups are as follows:
Peripheral Intervention: $3.3 billion (global)
Cardiac Intervention: $2.1 billion (global)
Cardiovascular and Critical Care: $3.5 billion (global)
Interventional Oncology and Spine: $1.7 billion (global)
Breast Cancer Localization and Guidance: $450 million (global)
Endoscopy: $527 million (U.S. domestic)
We conduct our business through two financial reporting segments: Cardiovascular (which includes our
Peripheral Intervention, Cardiac Intervention, Cardiovascular and Critical Care, Interventional Oncology and Spine and
Breast Cancer Localization and Guidance product groups) and Endoscopy. For information relating to our business
segments, see Note 13 to our consolidated financial statements set forth in Item 8 of this report.
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The following section describes our principal product offerings by product group.
Peripheral Intervention
Our Peripheral Intervention products support the minimally invasive diagnosis and treatment of diseases in
peripheral vessels and organs throughout the body, excluding the heart. Our peripheral intervention products are organized
into product portfolios as follows: Access, Angiography, Intervention, Biopsy, Drainage and Solutions.
We offer a broad line of medical devices used to gain and maintain vascular access. These products include
our micropuncture kits, angiographic needles, our family of Prelude® sheath introducers and a wide range of guide wires
and safety products. Additionally, we offer hemodialysis and peritoneal dialysis catheters and grafts which provide dialysis
access options across a continuum of disease states. The principal Access Portfolio offerings in our Peripheral Intervention
product group include our:
HeRO® (Hemodialysis Reliable Outflow) Graft, a fully subcutaneous vascular access system, which is
intended for use in maintaining long-term vascular access for chronic hemodialysis patients,
CentrosFLO® Long-Term Hemodialysis Catheter and ProGuide® Chronic Dialysis Catheter,
Broad offering of peritoneal dialysis catheters, accessories and implantation kits for home dialysis therapy,
and
Surfacer® Inside-Out® Access Catheter System, an innovative approach to restore access and to preserve
treatment options for hemodialysis patients with occluded veins. The Surfacer Inside-Out is currently sold
via our distribution agreement with BlueGrass Vascular Technologies.
The products in our Angiography Portfolio are used to identify blockages and other disease states in the blood
vessel. The principal Angiography Portfolio offerings in our Peripheral Intervention product group include our:
Extensive line of Merit Laureate® Hydrophilic Guide Wires, a smooth-surface guide wire designed to
minimize friction and promote rapid catheter exchanges,
InQwire® Diagnostic Guide Wires and InQwire® Amplatz guide wires,
Performa® and Impress® Diagnostic Catheters, a catheter offering designed for traversing difficult to access
peripheral blood vessels, and
Performa Vessel Sizing Catheters for vessel measurement.
The products in our Intervention Portfolio are chiefly used to remove blood clots, retrieve foreign bodies in blood
vessels and assist with placing balloons and stents to treat arterial disease. The principal Intervention Portfolio offerings
in our Peripheral Intervention product group include our:
ClariVein® Specialty Infusion Catheter, acquired in 2019, which is designed for controlled 360-degree
dispersion of physician specified agents to the peripheral vasculature,
Advocate™ Percutaneous Transluminal Angioplasty (“PTA”) Catheter and Dynamis AV™ PTA Dilatation
Catheter, a line of catheters to correct failing or thrombosed dialysis fistulae,
Q50X®, Q50® and Q50 Plus Stent Graft Balloon Catheters, a line of catheters that treat abdominal and
thoracic endovascular aortic repair procedures and reinterventions,
Fountain® Infusion System and Mistique® Infusion Catheters, a line of catheters that treat arterial and
hemodialysis graft occlusions and deep vein thrombosis,
EN Snare® and One Snare® Endovascular Snare Systems, a complete line of snares designed to manipulate,
capture and retrieve foreign material in the body, and
Inflation devices, including our basixTOUCH40™ and basixTOUCH™ Inflation Devices, BasixCompak™
Inflation Device and Blue Diamond™ Digital Inflation Device.
We offer an extensive line of soft tissue biopsy products, bone biopsy products and accessories to complement
these products. The principal Biopsy Portfolio offerings in our Peripheral Intervention product group include our:
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Soft tissue core needle biopsy, bone biopsy and accessory products including our innovative CorVocet®
Biopsy System for soft tissue biopsy procedures, designed to cut a full-core of tissue, providing large
specimens for pathological examination,
Achieve®, Temno® and TruCut® Soft Tissue Biopsy Devices, and
Full offering of manual bone biopsy products including our Madison™, Huntington™, Kensington™,
Preston™ and Westbrook™ biopsy products.
We offer a broad line of drainage products. The principal Drainage Portfolio offerings in our Peripheral
Intervention product group include our:
Aspira® Pleural Effusion Drainage and Aspira® Peritoneal Drainage Systems, a compassionate home
treatment option for end-stage cancer, allowing patients to spend more time at home by eliminating the need
for frequent hospital visits to treat their drainage needs,
Family of ReSolve® Drainage Catheters, including our ReSolve ConvertX® Stent System and Mini™
Locking Drainage Catheter, introduced in 2019 and our related tubing sets and drainage bags,
One-Step™ and Valved One-Step™ Drainage Catheters, sold individually and in kits, for quickly removing
unwanted fluid accumulation, and
Revolution™ Catheter Securement Device and StayFIX® Fixation Device, used to stop migration,
movement and accidental removal of a percutaneous catheter.
Our Solutions Portfolio is comprised of standard and custom kit and pack solutions that include items needed for
peripheral procedures, safety and waste management products, and hemostasis accessories. Our kit and pack solutions can
optimize efficiency, and reduce cost and waste.
Cardiac Intervention
We manufacture and sell a variety of products designed to treat various heart conditions. Our Cardiac Intervention
products are organized into product portfolios including: Access, Angiography, Hemostasis, Intervention, Interventional
Fluid Management, Pressure Monitoring, Thermodilution & Pulmonary Artery Catheters and Electrophysiology and
Cardiac Rhythm Management.
The principal Access Portfolio offerings in our Cardiac Intervention product group include our:
Merit Advance® needles, arm boards with radiation scatter protection, scalpels and guide wires, and
Family of Prelude® Introducer Sheaths, for both radial and femoral access, featuring our Prelude IDeal™
Hydrophilic Sheath Introducer, an ultra-thin wall introducer sheath that provides more room for the insertion
of catheters and other devices in the radial artery.
Angiography products identify blocked or narrowed coronary arteries and overlap with our peripheral
intervention angiography products. The principal Angiography Portfolio offerings in our Cardiac Intervention product
group include our:
InQwire® Guide Wires and a complete line of manifolds, syringes, and stopcocks for fluid management and
hemodynamic monitoring,
Performa® Diagnostic Catheter, known for its superior torque, high shaft strength for pushability and a large
inner diameter for improved flow rates, and
Performa Ultimate™ Diagnostic Catheters and MIV™ Radial Ventriculogram Pigtail Catheter, specifically
designed for radial artery procedures.
Our hemostasis products assist clinicians in obtaining and maintaining hemostasis or stopping the flow of blood
following arterial catheterization. The principal Hemostasis Portfolio offerings in our Cardiac Intervention product group
include our:
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PreludeSYNC™ Radial Compression devices, designed to reduce and stop blood flow and offered in a
variety of colorful band designs. In 2019 we expanded our product line to include our PreludeSYNC Distal™
and PreludeSYNC EVO™, and
SafeGuard® Pressure Assisted Device for the femoral artery and Safeguard Radial Compression Devices.
The principal Intervention Portfolio offerings in our Cardiac Intervention product group include our:
Full line of hemostasis valves including the PhD™ Hemostasis Valve, launched in late 2019 in the United
States and Japan; FLO40XR™ and FLO50™ Hemostasis Valves, introduced in 2018; and our full line of
hemostasis valves including the Honor®, AccessPLUS™, Access-9™, DoublePlay™, MBA™ and
Passage® valves,
BasixTAU™ Inflation Device, introduced in late 2018, which features a fold-out handle, reducing physician
fatigue by reducing the rotational force applied by physicians when performing multiple inflation procedures,
along with our legacy inflation devices, including our BasixCompak™, Blue Diamond™, DiamondTouch™
and basixTOUCH™,
ConcierGE® Guiding Catheters, featuring a large inner lumen and soft tip used to gain access to the heart,
Merit SureCross® Support Catheters, designed to reach and cross tight, difficult lesions,
Pericardiocentesis Kits, a combination of products containing devices used in pericardial drainage
procedures, and
Ostial PRO® Stent Positioning System, a stent alignment tool for precise stent implantation in aorto-ostial
lesions.
Electrophysiology is the study of diagnosing and treating abnormal electrical activities of the heart. Cardiac
rhythm management (“CRM”) is the field of cardiac disease therapy that relates to the diagnosis and treatment of cardiac
arrhythmias or the improper beating of the heart. The principal Electrophysiology and CRM Portfolio offerings in our
Cardiac Intervention product group include our:
Worley™ Advanced LV Delivery System, used to aid in the insertion and implantation of left ventricular
pacing leads,
HeartSpan® Transseptal Needle, for left-heart access procedures, and
HeartSpan® Steerable Sheath Introducer, featuring a neutral position indicator and tactile click to help
physicians identify curve orientation. In 2019 our product line was expanded to include new fixed curve
shapes.
Cardiovascular and Critical Care
The products in our Cardiovascular and Critical Care product group treat patients with life-threatening disease,
protect healthcare providers and patients from exposure to bloodborne pathogens and are designed for efficiency and
effectiveness, improving a patient’s and clinician’s experience, while simplifying the challenges of care. The products in
our Cardiovascular and Critical Care product group are organized under Interventional Fluid Management and Pressure
Monitoring.
The principal Interventional Fluid Management portfolio offerings in our Cardiovascular and Critical Care
product group include our:
DualCap® Disinfection Protection System, a system of two caps designed to protect and disinfect needleless
valves, reducing healthcare-associated infections,
Medallion® Syringes, a medication syringe, available in assorted colors for easy medication identification,
Pen and Label Medication Labeling Systems, for labeling syringes, bowls and other medical containers,
ShortStop® Temporary Sharps Holders, to hold needles and prevent accidental needlestick injuries to
hospital staff, and
Family of BackStop® Disposable Basins, protective containers for holding fluid waste.
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The principal Pressure Monitoring Portfolio offerings in our Cardiovascular and Critical Care product group
include our:
Meritrans DTXPLUS® Pressure Transducers, a disposable transducer to identify a patient’s blood pressure
and cardiovascular status,
Safedraw® Closed Arterial Blood Sampling System, a closed in-line arterial blood sampling device,
RadialFlo® Arterial Catheter, a catheter with an integral switch and silicone-coated for smooth insertion,
TRAM® Manifolds, an integral pressure transducer to measure blood pressures, and
Careflow™ Central Venous Catheter, a catheter used to administer medication or fluids.
Interventional Oncology and Spine
The products in our Interventional Oncology and Spine product group treat vertebral compression fractures,
metastatic spinal tumors, liver cancer, uterine fibroids, symptomatic benign prostatic hyperplasia, arteriovenous
malformations and hemostatic embolization. Our interventional oncology and spine product line is organized into product
portfolios as follows: Delivery Systems, Embolotherapy, Spine Ablation, Angiography and Vertebral Compression
Fracture.
The principal Delivery Systems Portfolio offerings in our Interventional Oncology and Spine product category
include our:
SwiftNINJA® Steerable Microcatheter, an advanced microcatheter with a 180-degree articulating tip, sold
through our exclusive worldwide distribution agreement (excluding Japan) with Sumitomo Bakelite Co.,
Ltd.,
Merit Maestro® and Merit Pursue™ Microcatheters, a small microcatheter designed for pushability and
trackability through small and tortuous vessels,
True Form™ Reshapable Guide Wire, designed to be shaped and reshaped multiple times, reducing the need
for multiple guide wires, and
Tenor® Steerable Guide Wire, for navigating challenging anatomy during embolic procedures.
Our embolotherapy products treat disease by blocking or slowing the flow of blood into the arteries or delivering
chemotherapy drugs in the treatment of primary and metastatic liver cancer. The principal Embolotherapy Portfolio
offerings for Interventional Oncology and Spine include our:
EmboCube® Embolization Gelatin, a pre-loaded syringe filled with gelatin foam which speeds up procedure
preparation,
Torpedo™ Gelatin Foam, a uniform, pre-shaped gelatin foam loaded into a cartridge,
Embosphere® Microspheres, a highly studied, round embolic for consistent and predictable results, and
HepaSphere™ Microspheres, a drug-eluting bead offered outside of the U.S., for the treatment of primary
and metastatic liver cancer.
The principal Spine Ablation Portfolio offerings for Interventional Oncology and Spine are used to treat painful
vertebral compression fractures caused by osteoporosis or cancer by injecting bone cement through a small hole in the
skin into a fractured vertebra and include our:
STAR™ Tumor Ablation System, designed to provide palliative treatment of painful metastatic spinal
tumors in cancer patients by targeted radiofrequency ablation,
Arcadia™ Steerable and straight balloons, designed to achieve controlled, precise, targeted cavity creation
in vertebral augmentation procedures, and
StabiliT® MX Vertebral Augmentation System, which uses our insufflation devices to deliver bone cement.
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Breast Cancer Localization and Guidance
The products in our Breast Cancer Localization and Guidance product group are dedicated to the innovative
treatment of early-stage breast cancer. Our primary products in this product group include our:
SCOUT® Radar Localization System, a nonradioactive, wire-free tumor localization system that facilitates
successful surgical removal of marked lesions and lymph nodes. The system consists of a reflector, placed
by radiologists to mark a suspicious lesion or lymph node, which a surgeon later detects using the SCOUT
Console and Surgical Guide to locate and remove the reflector and targeted tissue during lumpectomy,
targeted axillary dissection, and excisional biopsy procedures. SCOUT® reduces workflow inefficiencies
and improves the patient experience, and
SAVI® Brachytherapy, a precise, targeted approach to Accelerated Partial Breast Irradiation with lower
toxicities and reduced treatment duration.
In 2019 we launched several new oncology products including:
SCOUT and SAVI PinkPak™ Procedure Kits, to support workflow and convenience, by providing the
supplies and tools needed for procedures in a single package,
Tapered Sheath for the SCOUT Surgical Guide, a sheath that provides improved fit and longer length to
cover the reusable SCOUT Guide during surgical procedures, and
SCOUT Ultrasound Delivery System, a single-handed delivery system for placing the SCOUT Reflector
under ultrasound guidance.
Endoscopy
The products in our Endoscopy Division, Merit Endotek™, are directed to gastrointestinal, pulmonary and
thoracic surgery departments.
We offer a variety of non-vascular stents to treat gastrointestinal and pulmonary disease including our:
AERO®, AEROmini® and AERO DV® Fully Covered Tracheobronchial Stents, for the treatment of
tracheobronchial strictures produced by malignant neoplasms,
Alimaxx-ES™ and EndoMAXX® Fully Covered Esophageal Stents, for maintaining esophageal luminal
patency in certain esophageal strictures, and
Alimaxx-B® Biliary Stent Systems, for the palliation of malignant strictures in the biliary tree.
We offer dilation balloons to endoscopically dilate strictures. Our balloon dilator portfolio includes our:
Elation® Fixed Wire, Wire Guided and new 5-stage Balloon Dilators, intended for use in the alimentary
tract,
Elation Pulmonary Balloon Dilator, for the dilation of strictures of the trachea and bronchi, and
BIG60® Inflation Device, a 60-mL syringe and gauge designed to inflate and deflate non-vascular balloon
dilators while monitoring and displaying inflation pressures up to 12 atmospheres.
We offer NvisionVLE® Imaging System with Real-time Targeting™, an advanced imaging system, to identify
abnormalities in the esophagus and bile duct for tissue biopsy or resection. The NvisionVLE® is sold under our worldwide
distribution agreement with NinePoint Medical, Inc. (“NinePoint”).
We also offer a variety of kits and accessories for endoscopy and bronchoscopy procedures.
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Specialty Procedure Products
In 2019 we acquired Fibrovein®, a pharmaceutical product and detergent-based sclerosant licensed for the
treatment of varicose veins. Fibrovein is a sterile aqueous injection of Sodium Tetradecyl Sulfate, an anionic detergent,
and has been used in the treatment of varicose veins since 1946.
We provide coating services for medical tubes and wires under original equipment manufacturer (“OEM”) brands
in addition to many of the products identified above. We offer coated tubes and wires to customers on a spool or as further
manufactured components including guide wire components, coated mandrels/stylets and coated needles.
We also manufacture and sell microelectromechanical systems sensor components consisting of piezoresistive
pressure sensors in various forms, including bare silicon die, die mounted on ceramic substrates, and fully calibrated
components for numerous applications both inside and outside the healthcare industry.
Acquisitions
On June 14, 2019, we acquired Brightwater Medical Inc., (“Brightwater”). Brightwater’s primary product, the
ConvertX® Nephroureteral Stent System is a single use device that replaces a series of devices and procedures used to
treat severe obstructions of the ureter. The system is designed to be implanted once and converted from a nephroureteral
catheter to a nephroureteral stent without requiring sedation or local anesthesia. Brightwater recently received FDA
clearance for the ConvertX® Biliary Stent System.
On August 1, 2019, we entered into a share purchase agreement to acquire Fibrovein Holdings Limited, the owner
of 100% of the capital stock of STD Pharmaceutical Products Limited, a private company located in the UK (“STD
Pharmaceutical”). Its primary product is Fibrovein, a pharmaceutical product and detergent-based sclerosant.
Marketing and Sales
Target Market/Industry. Our principal target markets are peripheral intervention, cardiac intervention,
interventional oncology, critical care and endoscopy. Within these markets our products are used in the following clinical
areas: diagnostic and interventional cardiology; interventional radiology; neurointerventional radiology; vascular, general
and thoracic surgery; electrophysiology; cardiac rhythm management; interventional pulmonology; interventional
nephrology; orthopedic spine surgery; interventional oncology; pain management; breast cancer surgery, outpatient access
centers; intensive care; computed tomography; ultrasound and interventional gastroenterology.
According to U.S. government statistics, cardiovascular disease continues to be a leading cause of death and a
significant health problem in the U.S. Treatment options range from dietary changes to surgery, depending on the nature
of the specific disease or disorder. Endovascular techniques, including angioplasty, stenting and endoluminal stent grafts,
continue to represent important therapeutic options for the treatment of vascular disease. Breast cancer is the most
commonly diagnosed cancer in women and is the second leading cause of cancer death among women. We derive a
large percentage of our revenues from sales of products used during percutaneous diagnostic and interventional procedures
such as angiography, angioplasty and stent placement, and we intend to pursue additional sales growth by building on our
existing market position in both core technology and accessory products.
Marketing Strategy. As part of our product sales and marketing efforts, we attend major medical conventions
throughout the world pertaining to our target markets and invest in market development including physician training, peer-
to-peer education, and patient outreach. We work closely with major healthcare facilities and physicians involving our
primary target markets in the areas of training, therapy awareness programs, clinical studies and ongoing research.
In general, our target markets are characterized by rapid change resulting from technological advances and
scientific discoveries. We plan to continue to develop and launch innovative products to support clinical trends and to
address the increasing demands of these markets.
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Product Development Strategy. Our product development is focused on identifying and introducing a regular
flow of profitable products that meet customer needs. To stay abreast of customer needs, we frequently seek suggestions
from health care professionals working in the fields of medicine in which we offer, or are developing,
products. Suggestions for new products and product improvements may also come from engineers, marketing and sales
personnel, physicians and technicians who perform clinical procedures.
When we believe that a product suggestion demonstrates a sustainable competitive advantage, meets customer
needs, fits strategically and technologically with our business and has a good potential financial return, we generally
assemble a “project team” comprised of individuals from our sales, marketing, engineering, manufacturing, legal and
quality assurance departments. This team works to identify the customer requirements, integrate the design, compile
necessary documentation and testing, and prepare the product for market introduction. We believe that one of our
competitive strengths is our capacity to conceive, design, develop and introduce new products.
U.S. and International Sales. Sales of our products in the U.S. accounted for approximately 58%, 56% and 58%
of our net sales for the years ended December 31, 2019, 2018 and 2017, respectively. In the U.S., we have a dedicated,
direct sales organization primarily focused on selling to end-user physicians, hospitals and clinics, major buying groups
and integrated healthcare networks.
Internationally, we employ sales representatives and contract with independent dealer organizations and custom
procedure tray manufacturers to distribute our products worldwide, including territories in Europe, the Middle East, Africa,
Asia, Oceania, Central and South America, Mexico and Canada. In 2019, our international sales grew approximately 8.5%
over our 2018 international sales and accounted for approximately 42% of our net sales. China represents our most
significant international sales market, with net sales of approximately $113.3 million, $92.7 million, and $73.4 million for
the years ended December 31, 2019, 2018 and 2017, respectively. With the recent and planned additions to our product
lines, investments in resources, and movement to a “modified direct” sales approach, where our salespeople are involved
with promoting the advantages of our products to clinicians and other customers, while the distributors handle sales
transactions and address issues related to fulfillment and inventory management, we believe our international sales will
continue to increase.
Our largest non-U.S. market is China, which represented approximately 11.4% of our net sales in 2019. We
maintain a distribution center and administrative office in Beijing. We also have small sales offices in Shanghai,
Guangzhou, and Hong Kong. We sell our products through more than 500 distributors in mainland China, who are
responsible for reselling the products, primarily to hospitals. We utilize the “modified direct” sales approach in China,
employing sales personnel throughout China who work with our distributors to promote the clinical advantages of our
products to clinicians and other decision makers at hospitals.
The recent emergence of a novel strain of coronavirus, specifically identified as “COVID-19,” in the city of
Wuhan and the Hubei province of China has resulted in certain emergency measures to combat the spread of the virus,
including extension of the Lunar New Year holidays, implementation of travel bans and closure of factories and businesses
in China. While the full impact of the COVID-19 outbreak is unknown at this time, a significant reduction in medical
procedures in China could have a material impact on our operations and operating results in China and other areas of the
world, as well as our overall financial condition, For further discussion of risks and uncertainties associated with COVID-
19, refer to disclosure under the heading “The outbreak of COVID-19 has negatively impacted our business and operations
in China, as well as other countries around the world, and may materially and adversely impact our business, operations
and financial results” set forth in Item 1A “Risk Factors”.
In Europe, the Middle East and Africa, we have both direct and modified direct sales operations. Our corporate
sales operations are active throughout the region, including the largest markets of Germany, France, the UK and Russia.
Our direct sales personnel are principally engaged in each of our divisions. Marketing teams responsible for each
division operate clinical education programs, often directed by leading subject matter personnel, who provide technical
instruction on techniques and therapies to physicians, nurses and technologists. We are currently conducting education
programs specific to radial access, spinal intervention, surgical grafts and electrophysiology.
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We require our international dealers to store products and sell directly to customers within defined sales
territories. Each of our products must be approved for sale under the laws of the country in which it is sold. International
dealers are responsible for compliance with applicable anti-corruption laws, such as the U.S. Foreign Corrupt Practices
Act, as well as all applicable laws and regulations in their respective countries.
We consider training to be a critical factor in the success of our sales force. Members of our sales force are trained
by our clinical marketers, our staff professionals, consulting physicians, and senior field trainers in their respective
territories.
OEM Sales. Our global OEM Division sells components and finished devices, including molded components,
sub-assembled goods, custom kits and bulk non-sterile goods, to medical device manufacturers. These products may be
combined with other components and products from other companies and sold under a Merit or customer label. Products
sold by our OEM Division can be customized and enhanced to customer specifications, including packaging, labeling and
a variety of physical modifications. Our OEM Division serves customers with a staff of regional sales representatives
based in the U.S., Europe and Asia, and a dedicated OEM Engineering and Customer Service Group.
Customers
We provide products to hospitals and clinic-based physicians, technicians and nurses. Hospitals and acute care
facilities in the U.S. purchase our products through our direct sales force, distributors, OEM partners, or custom procedure
tray manufacturers who assemble and combine our products in custom kits and packs. Outside the U.S., hospitals and
acute care facilities generally purchase our products through our direct sales force, or, in the absence of a sales force,
through independent distributors or OEM partners.
In 2019, 40% of our net sales were to U.S. hospitals and clinics through our direct sales force and approximately
9% of our net sales were through other channels, such as U.S. custom procedure tray manufacturers and distributors. We
also sell products to other medical device companies through our U.S. OEM sales force, which accounted for
approximately 9% of our 2019 net sales. The remaining 42% of our 2019 net sales was attributable to sales made to
international markets by our direct sales force, international distributors, and our OEM sales force. Sales to our largest
customer accounted for approximately 2%, 2% and 2% of net sales during the years ended December 31, 2019, 2018 and
2017, respectively.
Research and Development
Our research and development operations have been central to our historical growth, and we believe they will be
critical to our continued growth. In 2019, our commitment to innovation led to the introduction of several new products,
improvements to our existing products and expansion of our product lines, as well as enhancements and new equipment
in our research and development facilities.
We continue to develop new products and make improvements to our existing products utilizing many different
sources. Our Chief Executive Officer and our Executive Vice President of Global Research & Development work closely
with our sales and marketing teams to incorporate feedback from physicians and clinicians in the field, which can lead to
innovative new products and improvements to our existing products.
Currently, we have research and development facilities in California, Pennsylvania, Texas, Utah, Ireland, France,
and Singapore.
Manufacturing
We manufacture many of our products utilizing our proprietary technology and our expertise in plastic injection
and insert molding. We generally contract with third parties for the tooling of our molds, but we design and own most of
our molds. We utilize our experience in injection and insert molding technologies in the manufacture of most of the custom
components used in our products. We have received International Standards Organization (“ISO”) 13485:2016
certification for our facilities in California, Pennsylvania, Virginia, Texas, Utah, Ireland, France, Mexico, The Netherlands
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and Singapore. We have also received ISO 9001:2015 certification for our coatings facility in Venlo, The Netherlands and
our Merit Sensor Systems, Inc. (“Merit Sensors”) facility in South Jordan, Utah. Merit Sensors develops and markets
silicon pressure sensors and presently supplies the sensors we utilize in our digital inflation devices and blood pressure
sensors.
Given the specialization of our manufacturing personnel and processes in our Utah and Ireland facilities, we
possess the capability to strategically shift the manufacture of more technologically advanced products to those facilities
and utilize the manufacturing capacity of our other facilities for more commoditized products. The actual determination
of manufacturing location will be based upon multiple factors, including technological capabilities, market demand,
acquisition and integration activities and economic and competitive conditions.
We currently produce and package all of our embolic products. Manufacturing of our embolic products includes
the synthesis and processing of raw materials and third-party manufactured compounds.
We have packaging and manufacturing facilities located in Pennsylvania, Texas, Virginia, Utah, Mexico, Brazil,
Ireland, France, The Netherlands, Australia, and Singapore. See Item 2. “Properties.”
We have distribution centers located in Virginia, Utah, Canada, Brazil, The Netherlands, UK, South Africa,
Russia, South Korea, India, New Zealand, Japan, China and Australia.
Competition
The medical products industry is highly competitive. Many of our competitors are much larger than us and have
access to greater resources. We also compete with smaller companies that sell single or limited numbers of products in
specific product lines or geographies. We compete globally in several market areas, including diagnostic and interventional
cardiology;
thoracic surgery;
electrophysiology; cardiac rhythm management; interventional pulmonology; interventional nephrology; orthopedic spine
surgery; interventional oncology; pain management; outpatient access centers; intensive care; computed tomography;
ultrasound; and interventional gastroenterology.
interventional radiology; neurointerventional radiology; vascular, general and
The principal competitive factors in the markets in which our products are sold are quality, price, value, device
features, customer service, breadth of line, and customer relationships. We believe our products have achieved market
acceptance primarily due to the quality of materials and workmanship of our products, clinical outcomes, their innovative
design, our willingness to customize our products to fit customer needs, and our prompt attention to customer requests.
Some of our primary competitive strengths are our relative stability in the marketplace; a comprehensive, broad line of
ancillary products; and our history of introducing a variety of new products and product line extensions to the market on
a regular basis.
Our primary competitors in our Peripheral Intervention market are Teleflex Incorporated (“Teleflex”), Cook
Medical Incorporated (“Cook Medical”), Medtronic plc (“Medtronic”), Boston Scientific Corporation (“Boston
Scientific”), and Becton, Dickinson and Company (“BD”). Our primary competitors in our Cardiac Intervention market
are Teleflex, Medtronic, Abbott Laboratories, Boston Scientific, and Terumo Corporation. Our primary competitors in our
Cardiovascular and Critical Care market are Teleflex, BD, Argon Medical Devices, Inc. (“Argon”), Abbott Laboratories,
Cook Medical, and Boston Scientific. Our primary competitors in our Interventional Oncology and Spine market are
Medtronic, Stryker, and Johnson & Johnson. Our primary competitors in our Breast Cancer Localization and Guidance
market are BD, Hologic, Argon and Cook Medical. Our primary competitors in our Endoscopy market are Getinge AB,
Boston Scientific, Cook Medical, and Olympus Corporation.
Based on available industry data, with respect to the number of procedures performed, we believe we are a leading
provider of digital inflation technology in the world. In addition, we believe we are one of the market leaders in the U.S.
for analog inflation devices. We believe we are a market leader in the U.S. for control syringes, waste-disposal systems,
tubing and manifolds. Although we believe our recent and planned additions to these product lines will help us compete
even more effectively in both the U.S. and international markets, we cannot give any assurance that we will be able to
maintain our existing competitive advantages or compete successfully in the future.
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Sources and Availability of Raw Materials
Raw materials essential to our business are generally purchased worldwide and are normally available in
quantities adequate to meet the needs of our business. Where there are exceptions, the temporary unavailability of those
raw materials would not likely have a material adverse effect on our financial results.
Proprietary Rights and Litigation
We rely on a combination of patents, trade secrets, trademarks, copyrights and confidentiality agreements to
protect our intellectual property. We have a number of U.S. and foreign-issued patents and pending patent applications,
including rights to patents and patent applications acquired through strategic transactions, which relate to various aspects
of our products and technology. The duration of our patents is determined by the laws of the country of issuance and, for
the U.S., is typically 20 years from the date of filing of the patent application. As of December 31, 2019, we owned
approximately 1,600 U.S. and international patents and patent applications. Additionally, we hold exclusive and non-
exclusive licenses to a variety of third-party technologies covered by patents and patent applications. In the aggregate, our
intellectual property assets are critical to our business, but no single patent, trademark or other intellectual property asset
is of material importance to our business.
The Merit® name and logo are trademarks in the U.S. and other countries. In addition to the Merit name and
logo, we have used, registered or applied for registration of other specific trademarks and service marks to help distinguish
our products, technologies and services from those of our competitors in the U.S. and foreign countries. See “Products”
above. The duration of our trademark registrations varies from country to country; in the U.S. we can generally maintain
our trademark rights and renew any trademark registrations for as long as the trademarks are in use. As of December 31,
2019, we owned approximately 500 U.S. and foreign trademark registrations and trademark applications.
There is substantial litigation regarding patents and other intellectual property rights in the medical device
industry. At any given time, we may be involved as either a plaintiff or a defendant, as well as a counter-claimant or
counter-defendant, in patent, trademark, and other intellectual property infringement actions. If a court rules against us in
any intellectual property litigation we could be subject to significant liabilities, be forced to seek licenses from third parties,
or be prevented from marketing certain products. In addition, intellectual property litigation is costly and may consume
significant time of employees and management.
Regulation
Regulatory Approvals. Our products and operations are global and are subject to regulations by the U.S. Food
and Drug Administration (“FDA”) and various other federal and state agencies, as well as by foreign governmental
agencies. These agencies enforce laws and regulations that control the design, development, testing, clinical trials,
manufacturing, labeling, storage advertising, marketing and distribution, and market surveillance of our medical products.
The time required to obtain approval by the FDA and other foreign governmental agencies can be lengthy and
the requirements may differ. In particular, marketing of medical devices in the European Union (“EU”) is subject to
compliance with Council Devices Directive 93/92/EEC (“MDD”). In May 2017, the EU adopted Regulation (EU)
2017/745 (“MDR”), which will repeal and replace the MDD with effect from May 26, 2020. Under transitional provisions,
medical devices with notified body certificates issued under the MDD prior to May 26, 2020 may continue to be placed
on the market for the remaining validity of the certificate, until May 27, 2024 at the latest. After the expiry of any applicable
transitional period, only devices that have been CE marked under the MDR may be placed on the market in the EU. The
MDR includes increasingly stringent requirements in multiple areas, such as pre-market clinical evidence (some of which
are now in effect), review of high-risk devices, labeling and post-market surveillance. Under the MDR, pre-market clinical
data will now be required to obtain CE Mark approval for high-risk, new and modified medical devices.
U.S. and global counter-part regulatory approval processes for medical devices are expensive, uncertain and
lengthy. There can be no assurance that we will be able to obtain necessary regulatory approvals for any product on a
timely basis or at all. Delays in receipt of or failure to receive such approvals, the loss of previously received approvals,
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or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our
business, financial condition or results of operations.
In November 2019, we were granted a Breakthrough Device Designation by the FDA for the Merit Wrapsody™
Endovascular Stent Graft System and we are pursuing regulatory approval in the EU and elsewhere. Human clinical trials
of a medical device are often required for regulatory clearance or approval for devices and are expensive, time-consuming
and uncertain.
Quality System Requirements. The Federal Food, Drug and Cosmetic Act (“FDCA”) and its counterpart non-
U.S. laws require us to comply with quality system regulations (“QSR”) pertaining to all aspects of our product design
and manufacturing processes, including requirements for packaging, labeling, record keeping, personnel training, supplier
controls, design controls, complaint handling, corrective and preventive actions and internal quality system auditing. The
FDA and foreign regulators enforce these requirements through periodic inspections of medical device manufacturers.
These requirements are complex, technical and require substantial resources to remain compliant. Our failure or the failure
of our suppliers to maintain compliance with these requirements could result in the shutdown of our manufacturing
operations or the recall of our products, or could restrict our ability to obtain new product approvals or certificates from
the FDA that are necessary for export of our products to foreign countries. Any of these results which would have a
material adverse effect on our business. If one of our suppliers fails to maintain compliance with our quality requirements,
we may have to qualify a new supplier and could experience manufacturing delays as a result. We also could be subject to
injunctions, product seizures, or civil or criminal penalties.
Labeling and Promotion. Our labeling and promotional activities are also subject to scrutiny by the FDA and
foreign regulators. Labeling includes not only the label on a device, but also includes any descriptive or informational
literature that accompanies or is used to promote the device. Among other things, labeling violates the law if it is false or
misleading in any respect or it fails to contain adequate directions for use. Moreover, product claims that are outside the
approved or cleared labeling violate the FDCA and other applicable laws. If the FDA determines that our promotional
materials constitute promotion of an uncleared or unapproved use, or otherwise violate the FDCA, it could request that we
modify our promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled
letter, a notice of violation, a warning letter, injunction, seizure, civil fines or criminal penalties. Allegations of off-label
promotion can also result in enforcement action by federal, state, or foreign enforcement authorities and trigger significant
civil or criminal penalties, including exclusion from the Medicare and Medicaid programs and liability under the False
Claims Act, discussed further below.
Our product promotion is also subject to regulation by the Federal Trade Commission (the “FTC”), which has
primary oversight of the advertising of unrestricted devices, including FDA cleared devices. The Federal Trade
Commission Act prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting
commerce, as well as unfair or deceptive practices such as the dissemination of any false or misleading advertisement
pertaining to medical devices. FTC enforcement can result in orders requiring, among other things, limits on advertising,
corrective advertising, consumer redress, rescission of contracts and such other relief as the FTC may deem necessary.
In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation
relating to advertising claims.
In October 2016, we received a subpoena from the U.S. Department of Justice seeking information on certain of
our marketing and promotional practices. We have responded to the subpoena, as well as additional related requests. The
investigation is ongoing and at this stage we are unable to predict its scope, duration or outcome. Investigations such as
this may result in the imposition of, among other things, significant damages, injunctions, fines or civil or criminal claims
or penalties against our company or individuals.
Import Requirements. To import a medical device into the U.S., the importer must file an entry notice and bond
with the U.S. Bureau of Customs and Border Protection (“CBP”). All devices are subject to FDA examination before
release from the CBP. Any article that appears to be in violation of the FDCA may be refused admission and a notice of
detention and hearing may be issued. If the FDA ultimately refuses admission, the CBP may issue a notice for redelivery
and assess liquidated damages for up to three times the value of the lot. Additionally, the laws of the U.S. require imported
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articles to have their labels accurately marked with the appropriate country of origin, the violation of which may result in
confiscation, fines and penalties.
Export Requirements. Products for export are subject to foreign countries’ import requirements and the
exporting requirements of the exporting countries’ regulating bodies, as applicable. International sales of medical devices
manufactured in the U.S. that are not approved or cleared by the FDA for use in the U.S., or are banned or deviate from
lawful performance standards, are subject to FDA export requirements and we may not be able to export such products.
Foreign countries often require, among other things, an FDA certificate for products for export, also called a
Certificate to Foreign Government. To obtain this certificate from the FDA, the device manufacturer must apply to the
FDA. The FDA certifies that the product has been granted clearance or approval in the U.S. and that the manufacturing
facilities were in compliance with the QSR at the time of the last FDA inspection.
Additionally, the export of our products is subject to restrictions due to trade and economic sanctions imposed by
the U.S., the EU and other governments and organizations. The U.S. Departments of Justice, Commerce, State and
Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to
impose against corporations and individuals for violations of economic sanctions laws, export control laws, and other
federal statutes and regulations, including those established by the Office of Foreign Assets Control (“OFAC”). Under
these laws and regulations, as well as other export control laws, customs laws, sanctions laws and other laws governing
our operations, various government agencies may require export licenses and may seek to impose modifications to business
practices, including cessation of business activities in sanctioned countries or with sanctioned persons or entities.
Additional Post-Market Requirements. Medical device manufacturers are also subject to other post-market
requirements in multiple jurisdictions, including product listing, establishment registration, Unique Device Identification
(“UDI”), reports of corrections and removals and other requirements. Medical Device Reporting required by the FDA,
medical device vigilance reporting requirements under the European Medical Devices Directive and similar regulations in
other foreign markets, require manufacturers to report to the FDA or an equivalent foreign regulatory body any incident in
which their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would
likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. Our
obligation to report a complaint is triggered on the date on which we become aware of an adverse event and the nature of
the event. If we fail to comply with our reporting obligations or other post-market requirements, the FDA could issue
warning letters or untitled letters, take administrative actions, commence criminal prosecution, impose civil monetary
penalties, revoke our device approvals or clearances, seize our products, or delay the approval or clearance of our future
products. Other regulatory authorities could take similar actions within their jurisdictions.
The FDA regularly inspects companies to determine compliance with the QSRs and other post-market
requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483
(which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may
constitute violations), public warning letters, monetary penalties against a company or its officers and employees,
suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production,
injunctions, product recalls, product detentions, import refusals, refusal to provide export certificates, seizure of products
and/or criminal prosecution. Other regulatory authorities, including EU Notified Bodies, regularly audit companies to
determine compliance with ISO 13485 and their respective regulations. They may take similar actions as the FDA within
their jurisdictions.
Reimbursement. Our products are generally used in medical procedures that are covered and reimbursed by
governmental payers, such as Medicare, and/or private health plans. In general, these third-party payers cover a medical
device and/or related procedure only when the payer determines that healthcare outcomes are supported by medical
evidence and the device or procedure is medically necessary for the diagnosis or treatment of the patient’s illness or injury.
Even if a device has received clearance or approval for marketing by the FDA or a similar foreign regulatory agency, there
is no certainty that third-party payers will cover and reimburse for the cost of the device and related procedures. Because
of increasing cost-containment pressures, some private payers in the U.S. and government payers in foreign countries may
also condition payment on the cost-effectiveness of the device or procedure. Even if coverage is available, third-party
payers may place restrictions on the circumstances in which they provide coverage or may offer reimbursement that is not
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sufficient to cover the cost of our products. If healthcare providers such as hospitals and physicians cannot obtain adequate
coverage and reimbursement for our products or the procedures in which they are used, this may affect demand for our
products and our business, financial condition, results of operations, or cash flows could suffer a material adverse impact.
Anti-Corruption Laws. Anti-corruption laws are in place in the U.S. and in many jurisdictions throughout the
world. In the U.S., the Foreign Corrupt Practices Act (the “FCPA”) prohibits offering, paying, or promising to pay anything
of value to foreign officials for the purpose of obtaining or maintaining an improper business advantage. The FCPA also
requires that we maintain fair and accurate books and records and devise and maintain an adequate system of internal
accounting controls. Among other requirements to implement compliance, we are required to train our U.S. and
international employees, and to train and monitor foreign third parties with whom we contract, e.g., distributors, to ensure
compliance with these anti-corruption laws. Failing to comply with the FCPA or any other anti-corruption law could result
in fines, penalties or other adverse consequences.
As we expand our operations in China and other jurisdictions internationally, we will need to increase the scope
of our compliance programs to address the risks relating to the potential for violations of the FCPA and other anti-
corruption laws. Our compliance programs will need to include policies addressing not only the FCPA, but also the
provisions of a variety of anti-corruption laws in multiple foreign jurisdictions, including China, provisions relating to
books and records that apply to us as a public company, and include effective training for our personnel and relevant third
parties.
Anti-Kickback Statutes. The federal Anti-Kickback Statute prohibits persons and entities from, among other
things, knowingly and willfully offering or paying remuneration, directly or indirectly, to induce the purchase, order, lease,
or recommendation of a good or service for which payment may be made in whole or part under a federal healthcare
program such as Medicare or Medicaid, unless the arrangement fits within one of several statutory exemptions or
regulatory “safe harbors.” The definition of remuneration has been broadly interpreted to include anything of value,
including, for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash
and waivers of payments. Violations can result in significant penalties, imprisonment and exclusion from Medicare,
Medicaid and other federal healthcare programs. Exclusion of a manufacturer would preclude any federal healthcare
program from paying for the manufacturer’s products. Under the Affordable Care Act, a violation of the Anti-Kickback
Statute is deemed to be a violation of the False Claims Act. which is discussed in more detail below. A party’s failure to
fully satisfy the obligations of a regulatory “safe harbor” provision may result in increased scrutiny by government
enforcement authorities.
Government officials continue their vigorous enforcement efforts on the sales and marketing activities of
pharmaceutical, medical device and other healthcare companies, including the pursuit of cases against individuals or
entities that allegedly offered unlawful inducements to potential or existing customers to procure their business.
Settlements of these government cases have involved significant fines and penalties and, in some instances, criminal pleas.
In addition to the federal Anti-Kickback Statute, many states have their own anti-kickback laws. Often, these
laws closely follow the language of the federal law, although they do not always have the same exceptions or safe harbors.
In some states, these anti-kickback laws apply with respect to all payers, including commercial health insurance companies.
False Claims Laws. The False Claims Act prohibits any person from knowingly presenting, or causing to be
presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false
statement to get a false claim paid. Manufacturers can be held liable under false claims laws, even if they do not submit
claims to the government, if they are found to have caused submission of false claims. The False Claims Act also includes
whistleblower provisions that allow private citizens to bring suit against an entity or individual on behalf of the U.S. and
to recover a portion of any monetary recovery. Many of the recent, highly publicized settlements in the healthcare industry
relating to sales and marketing practices have been cases brought under the False Claims Act. Most states also have adopted
statutes or regulations similar to the federal laws, which apply to items and services reimbursed under Medicaid and other
state programs. Sanctions under the Federal Claims Act and state laws may include civil monetary penalties, exclusion of
a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.
Patient Protection and Affordable Care Act. The Patient Protection and Affordable Care Act (“Affordable
Care Act”) has changed the way healthcare in the U.S. is financed by both governmental and private insurers and has
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significantly affected the medical device industry. This law contains a number of provisions, including provisions
governing enrollment in federal healthcare programs, reimbursement changes, the increased funding of comparative
effectiveness research for use in healthcare decision-making, and enhancements to fraud and abuse requirements and
enforcement, that we believe affect existing government healthcare programs and result in the development of new
programs. Additionally, the long-term viability of the Affordable Care Act, and its impact on our business and results of
operations, remains uncertain. For instance, in December 2017, the U.S. enacted the Tax Cuts and Jobs Act, which, among
other things, eliminated the tax penalty for not obtaining health coverage (beginning in 2019). Additionally, members of
the U.S. Congress have suggested other changes that may impact individual insurance marketplaces. These and other
legislative and executive initiatives may significantly change the scope and impact of the Affordable Care Act and, in turn,
the medical device industry. See Note 6 to our consolidated financial statements set forth in Item 8 of this report for further
information on the Tax Cuts and Jobs Act.
The U.S. Physician Payment Sunshine Act, and similar state laws, also include annual reporting and disclosure
requirements for device manufacturers aimed at increasing the transparency of the interactions between device
manufacturers and healthcare providers. Reports submitted under these new requirements are placed in a public database.
Several other jurisdictions, including China, outside the U.S. have also adopted or begun adopting similar transparency
laws. In addition to the burden of establishing processes for compliance, if we fail to provide these reports, or if the reports
we provide are not accurate, we could be subject to significant penalties.
Labor Standards Laws. We are also subject to corporate social responsibility (“CSR”) laws and regulations
which require us to monitor the labor standards in our supply chain, including the California Transparency in Supply
Chains Act, the UK Modern Slavery Act, and U.S. Federal Acquisition Regulations regarding Combating Trafficking in
Persons. These CSR laws and regulations may impose additional processes and supplier management systems and have
led certain key customers to impose additional requirements on medical device companies, including audits, as a
prerequisite to selling products to such customers, which could result in increased costs for our products, the termination
or suspension of certain suppliers, and reductions in our margins and profitability.
Privacy and Security. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Health
Information Technology for Economic and Clinical Health Act (the “HITECH Act”), and accompanying rules, require
certain entities, referred to as “covered entities” (including most healthcare providers and health plans), to comply with
established standards, including standards regarding the privacy and security of protected health information (“PHI”).
HIPAA further requires that covered entities enter into agreements meeting certain regulatory requirements with their
“Business Associates,” as such term is defined by HIPAA, which, among other things, obligate the Business Associates
to safeguard the covered entity’s PHI against improper use and disclosure. In addition, a Business Associate may face
significant statutory and contractual liability if the Business Associate breaches the agreement or causes the covered entity
to fail to comply with HIPAA. Many state laws also regulate the use and disclosure of health information and require
notification in the event of breach of such information.
Although we do not believe we are a “covered entity” under HIPAA and do not meet the definition of Business
Associate, we are committed to maintaining the security and privacy of patients’ health information and believe that we
meet the expectations of the HIPAA rules in all material respects. However, to the extent we become subject to HIPAA,
whether through a change in our business model or an enforcement action brought by the U.S. government, we would be
directly subject to a broader range of requirements under HIPAA, HITECH Act, the rules issued thereunder and their
respective civil and criminal penalties.
The EU has adopted a single EU privacy regulation, the General Data Protection Regulation (“GDPR”), which
went into effect May 25, 2018. The GDPR extends the scope of the EU data protection law to all companies processing
personal data in the context of the activities of an establishment of a controller or a processor in the EU, regardless of
whether the processing takes place in the EU or not. In addition, it applies to the processing of personal data of data subjects
who are in the EU by a controller or processor not established in the EU, where the processing activities are related to:
(a) the offering of goods or services, irrespective of whether a payment of the data subject is required, to such data subjects
in the EU; or (b) the monitoring of their behavior as far as their behavior takes place within the EU. The GDPR provides
for a harmonization of the data protection regulations throughout the EU. It imposes a strict data protection compliance
regime with severe penalties of up to the greater of 4% of worldwide sales or €20 million and includes new rights such as
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the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing
legislation, it contains a number of opener clauses enabling the EU member states to provide for additional legislation. In
addition, local data protection authorities will still have the ability to interpret the GDPR, which has the potential to create
inconsistencies on a country-by-country basis. We have implemented changes to our business practices to comply with
the GDPR.
We post on our websites our privacy policies and practices regarding the collection, use and disclosure of user
data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any applicable regulatory
requirements or orders, or privacy, data protection, information security or consumer protection-related privacy laws and
regulations in one or more jurisdictions, could result in proceedings or actions against us by governmental entities or
others, including class action privacy litigation in certain jurisdictions, subject us to significant fines, penalties, judgments
and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and
adversely affect our business. Data protection, privacy and information security have become the subject of increasing
public, media and legislative concern. For example, California’s Consumer Protection Act went into effect on January 1,
2020, giving consumers the right to demand certain information and actions from companies who collect personal
information. This enhanced scrutiny and legal requirements could results in costly compliance efforts and potentially result
in fines, harm to reputation, or other consequences. If our customers were to reduce their use of our products and services
as a result of these concerns, our business could be materially harmed. As noted above, we are also subject to the possibility
of security and privacy breaches, which themselves may result in a violation of these privacy laws.
Seasonality
Our worldwide sales have not historically reflected a significant degree of seasonality; however, customer
purchases have historically been lower during the third quarter of the year, as compared to other quarters. This reflects,
among other factors, lower demand during summer months in countries in the northern hemisphere.
Environmental, Social, and Governance (“ESG”) Practices
The majority of our products are disposable medical devices and are generally disposed of after a single use due
primarily to the risks of exposing patients to bloodborne pathogens capable of transmitting disease or other potentially
infectious materials. Additionally, sterilization conditions differ and repeated sterilization may adversely affect the quality
of the plastic used in many of our products and this may result in the failure of our product to function properly if used in
multiple medical procedures. Consequently, many of our used products will likely end up in a medical waste disposal
facility at the end of their usefulness. Despite this obstacle, we continue to look for ways to deliver sustainable long-term
growth. Our sustainability practices are an integral component of our business strategy and our sustainability activities are
reviewed and approved by senior management and our Board of Directors.
We have a number of programs designed to reduce waste, improve efficiency, and protect the environment
including our:
goal to achieve ISO 14001 certification in most of our facilities world-wide (ISO 14001 is the international
standard that specifies requirements for an effective environmental management system);
employee gardens that promote pollination and provide farm-to-table nutrition for our employees at our
headquarters in South Jordan, Utah;
transition to re-usable pallets and methods to move products in bulk containers, reducing intra-company
shipping materials;
reduction in packaging materials by reducing film thickness and using original product packaging where
possible;
transition from paper to electronic work orders in our manufacturing facilities worldwide, which we expect to
reduce our paper usage by at least 2.8 million pieces and 20,000 plastic sleeves annually;
expansion of recycling programs where our employees recycle materials, including food waste, paper,
cardboard, food and beverage containers, scrap metal, and pallets, and re-use of our plastic scrap waste leftover
from our manufacturing process of our molded parts;
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investment in a line of fully compostable “to-go” containers made from plant starch and sugarcane, and our
program to transition to reusable dishes and cutlery at all our cafeterias;
car charging stations and car-pooling preferential parking to incentivize employees to reduce their carbon
footprint; and
efficient heating and cooling systems that operate on variable efficiency drives, increasing our energy
efficiency at our headquarters in South Jordan, Utah and our transition to Light Emitting Diode (“LED”)
lighting in our manufacturing facilities.
In 2019 we provided in-kind donations of our medical devices to support nine medical or humanitarian missions
and we worked closely with non-profit organizations in the United States to provide our medical devices for use in medical
procedures primarily in Africa, the Caribbean, and Central America. We plan on continuing this practice in 2020.
Employees
As of December 31, 2019, we employed 6,355 people. None of our U.S. employees are subject to collective
bargaining agreements; however, certain of our European employees are subject to such agreements. We believe our
employee relations are generally good. Although our European employees will likely continue to be subject to collective
organizing and bargaining activities, we do not expect such activities to materially affect our future operations.
Recent Developments
None.
Available Information
We file annual, quarterly and current reports and other information with the SEC. The SEC also maintains an
Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC. The address of the SEC’s Internet website is www.sec.gov.
Our Internet address is www.merit.com. On our Investor Relations website, www.merit.com/investors, we make
available, free of charge, a variety of information for investors. Our goal is to maintain the Investor Relations website as
a portal through which investors can easily find or navigate to pertinent information about us, including:
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports, as soon as reasonably practicable after we electronically file that material with
or furnish it to the SEC.
Press releases on our quarterly earnings and other pertinent information, including product launches and
participation in upcoming investor conferences.
Corporate governance information including our corporate governance guidelines, committee charters, and
codes of business conduct and ethics.
Additionally, we provide electronic and paper copies of such filings free of charge upon request.
The information on www.merit.com is not, and will not be deemed, a part of this Report or incorporated into any
other filings we make with the SEC.
Financial Information About Foreign and Domestic Sales
For financial information relating to our foreign and domestic sales see Note 2 and Note 13 to our consolidated
financial statements set forth in Item 8 of this report.
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Item 1A. Risk Factors.
Our business, operations and financial condition are subject to certain risks and uncertainties. Should one or more
of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, our actual results will
vary, and may vary materially, from those anticipated, estimated, projected or expected. Among the key factors that may
have a direct bearing on our business, operations or financial condition are the factors identified below:
We may be unable to successfully manage growth, particularly if accomplished through acquisitions, and the
integration of acquired businesses may present significant challenges that could harm our operations.
Successful implementation of our business strategy will require that we effectively manage our growth. To
manage growth effectively, our management will need to continue to implement changes in certain aspects of our business,
improve our information systems, infrastructure and operations to respond to increased demand, attract and retain qualified
personnel, and develop, train, and manage an increasing number of employees. Growth has placed, and will likely continue
to place, an increasing strain on our management, sales and other personnel, and on our financial, product design,
marketing, distribution, technology and other resources. Given the pace of our recent growth, we have experienced
operational challenges, and we could experience additional challenges in the future. Any failure to manage growth
effectively could have a material adverse effect on our business, operations or financial condition.
Over the past several years, we have completed a series of significant acquisitions and, in the future we may
consider other potential acquisitions and strategic transactions, certain of which may also be significant. As we grow
through acquisitions, we face the additional challenges of integrating the operations, culture, information management
systems and other characteristics of the acquired entity with our own, including sales models related to capital equipment.
Our efforts to integrate acquisitions may be hampered by delays, the loss of certain employees, suppliers or customers,
proceedings resulting from employment terminations, culture clashes, unbudgeted costs, and other issues, which may occur
at levels that are more severe or prolonged than anticipated. For example, our December 2018 acquisition of Vascular
Insights, LLC and VI Management, Inc. (combined “Vascular Insights”) presented a number of challenges, as demand for
the acquired ClariVein® products was lower than we initially anticipated, partially as a result of excess inventory held by
a number of distributors and customers at the time of our acquisition. Although sales of the ClariVein products have
increased in each of the quarters since the acquisition, we could face other challenges associated with completed or
prospective acquisitions, which we may not currently anticipate.
Additionally, past and future acquisitions may increase the risks of competition we face by, among other things,
extending our operations into industry segments and product lines where we have few existing customers or qualified sales
personnel and limited expertise. For example, although we acquired certain tunneled home drainage catheter and soft tissue
core needle biopsy products from BD in February 2018, BD retained other products that directly compete with the products
we acquired. As BD is a larger company with a more well-established market presence in such product lines, we may be
unable to realize expected benefits from the acquisition in the timeframe anticipated or at all. Further, as a result of several
of our completed acquisition and other strategic transactions, we are selling capital equipment, in addition to our historical
sales of disposable medical devices. The sale of capital equipment may create additional risks and potential liability, which
may negatively affect our business, operations or financial condition.
We have incurred, and will likely continue to incur, significant expenses in connection with negotiating and
consummating various acquisition and other strategic transactions, and we may inherit significant liabilities in connection
with prospective acquisitions or other strategic transactions, including regulatory, infringement, product liability,
discrimination or other legal claims or issues. In addition, we may not realize competitive advantages, synergies or other
benefits anticipated in connection with any such acquisition or other transaction. If we do not adequately identify and value
targets for, or manage issues related to, acquisitions and strategic transactions, such transactions may not produce the
anticipated benefits and have an adverse effect on our business, operations or financial condition.
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We may not be able to effectively protect our intellectual property, which could harm our business and financial
condition.
Our ability to remain competitive is dependent, in part, upon our ability to protect our intellectual property rights
and prevent other companies from using our intellectual property to produce competing products. We seek to protect our
intellectual property rights through a combination of confidentiality and license agreements, and through registrations
under patent, trademark, copyright and trade secret laws. However, these measures afford only limited protection and may
be challenged, invalidated, or circumvented by third parties. Additionally, these measures may not prevent competitors
from duplicating our products or gaining access to our proprietary information and technology. Third parties may copy all
or portions of our products or otherwise use our intellectual property without authorization, and we may not be able to
prevent the unauthorized disclosure or use of our intellectual property by consultants, vendors, former employees and
current employees. Despite our efforts to restrict such unauthorized disclosure or use through nondisclosure agreements
and other contractual restrictions, we may not be able to enforce these contractual provisions or we may incur substantial
costs enforcing our legal rights.
Third parties may also develop similar or superior technology independently or by designing around our patents.
In addition, the laws of some foreign countries do not offer the same level of protection for our intellectual property as the
laws of the U.S. Further, no assurances can be given that any patent application we have filed or will file will result in a
patent being issued, or that any existing or future patents will afford adequate or meaningful protection against competitors
or against similar technologies. All of our patents will eventually expire and some of our patents, including patents
protecting significant elements of our technology, will expire within the next several years.
Filing, prosecuting and defending our intellectual property in countries throughout the world may be impractical
and prohibitively expensive. Litigation may be necessary in the future to enforce our intellectual property rights, protect
our trade secrets or to determine the validity and scope of proprietary rights claimed by others. Any such lawsuits that we
might initiate could be expensive, take significant time and divert management’s attention from our business. Litigation
also puts our patents at risk of being invalidated or interpreted narrowly. Additionally, we may provoke third parties to
assert claims against us. Moreover, the legal systems of certain countries, particularly certain developing countries, do not
favor the aggressive enforcement of patents and other intellectual property protections, which makes it difficult to stop
infringement. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may
not be commercially valuable.
The outbreak of COVID-19 has negatively impacted our business and operations in China, as well as other countries
around the world, and may materially and adversely impact our business, operations and financial results.
The recent outbreak of COVID-19 in China has negatively impacted our business and operations within the
affected regions. Although the information we have received is preliminary and the situation is dynamic, we currently
expect the adverse impact of COVID-19 on our net worldwide sales during the first quarter of 2020 to be in the range of
$14 million to $19 million. Notwithstanding that preliminary estimate, if COVID-19 continues to spread and/or the
precautionary measures being taken continue for a prolonged period of time, our business in China, as well as other regions
around the world could be materially impacted, having a material adverse effect on our business, operations and financial
results. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are
uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and
the actions to contain its impact.
Third parties claiming that we infringe their intellectual property rights could cause us to incur significant legal or
licensing expenses and prevent us from selling our products.
Our commercial success will depend in part on not infringing or violating the intellectual property rights of others.
From time to time, third parties may claim that we have infringed their intellectual property rights, including claims
regarding patents, copyrights, trademarks, and trade secrets. We may not be aware of whether our products do or will
infringe existing or future patents or the intellectual property rights of others. Because of constant technological change in
the medical device industry in which we compete, the extensive patent coverage of existing technologies, and the rapid
rate of issuance of new patents, it is possible that the number of these claims may grow. In addition, former employers of
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our former, current, or future employees may assert claims that such employees have improperly disclosed to us the
confidential or proprietary information of such former employers. Any such claim, with or without merit, could result in
costly litigation, distract management from day-to-day operations and harm our brand or reputation, which in turn could
harm our business or results of operations. If we are not successful in defending such claims, we could be required to stop
selling, delay shipments of, or redesign, our products, discontinue the use of related trademarks, technologies or designs,
pay monetary amounts as damages, enter into royalty or licensing arrangements and satisfy indemnification obligations
that we have with some of our customers. Royalty or licensing arrangements that we may seek in such circumstances may
not be available to us on commercially reasonable terms or at all and we may not be able to redesign applicable products
in a way to avoid infringing the intellectual property rights of others. We have made and expect to continue making
significant expenditures to investigate, defend and settle claims related to the use of technology and intellectual property
rights as part of our strategy to manage this risk.
Changes in general economic conditions, geopolitical conditions, U.S. trade policies and other factors beyond our
control may adversely impact our business and operating results.
Our operations and performance depend significantly on global, regional and U.S. economic and geopolitical
conditions. In recent years, there has been discussion and dialogue regarding potential significant changes to U.S. trade
policies, legislation, treaties and tariffs, including the North American Free Trade Agreement (“NAFTA”). In January
2020, after passing the House and Senate, President Trump signed the United States Mexico Canada Agreement
(“USMCA”). Mexico had already ratified the USMCA, but before it can take effect, Canada must also ratify the USMCA.
At this time, it is unknown whether Canada will ratify the USMCA, new legislation will be passed into law, pending or
new regulatory proposals will be adopted, other international trade agreements will be negotiated, or the effect that any
such action would have, either positively or negatively, on our industry or our Company. If the USMCA is fully ratified,
any new legislation and/or regulations are implemented, or if existing trade agreements are renegotiated, it may be
inefficient and expensive for us to alter our business operations in order to adapt to or comply with such changes. Such
operational changes could have a material adverse effect on our business, financial condition, results of operations or cash
flows.
Recently, the outbreak of the COVID-19 in China has impacted certain business operations within the affected
regions. Throughout the year ended December 31, 2019, our sales in China increased, and in the absence of this outbreak,
we expected such growth in China to continue into the future. We currently expect the adverse impact on our net sales
during the first quarter of 2020 to be in the range of $14 million to $19 million. Moreover, if the COVID-19 outbreak
continues to spread for a prolonged period of time, our business in China could continue to be adversely impacted, having
a material adverse effect on our results of operations.
In addition to changes in U.S. trade policy and the COVID-19 outbreak, a number of other economic and
geopolitical factors both in the U.S. and abroad could have a material adverse effect on our business, financial condition,
results of operations or cash flows, which could ultimately result in:
a global or regional economic slowdown in any of our market segments;
postponement of spending, in response to tighter credit, financial market volatility and other factors;
effects of significant changes in economic, monetary and fiscal policies in the U.S. and abroad including
significant income tax changes, currency fluctuations and inflationary pressures;
rapid material escalation of the cost of regulatory compliance and litigation;
changes in government policies and regulations affecting the Company or its significant customers;
industrial policies in various countries that favor domestic industries over multinationals or that restrict foreign
companies altogether;
difficulties protecting intellectual property;
new or stricter trade policies and tariffs affecting China;
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longer payment cycles;
credit risks and other challenges in collecting accounts receivable; and
the impact of each of the foregoing on outsourcing and procurement arrangements.
In addition, any changes in U.S. trade policy could trigger retaliatory actions by affected countries, such as China,
resulting in a “trade war.” A trade war could result in increased costs for raw materials we use in our manufacturing and
could result in foreign governments imposing tariffs on products that we export outside the U.S. or otherwise limiting our
ability to sell our products abroad. These events could result in increased costs, lower margins and lower demand than we
have assumed in our projected financial results, which could have a material adverse effect on our business, financial
condition, results of operations, or cash flows.
International and national economic and industry conditions constantly change, and could harm our business and
results of operations.
Our business and our results of operation are affected by many changing economic, industry and other conditions
beyond our control, including, for instance, potential changes to the economic relationship between the U.S. and Mexico,
China, and other countries in which we operate as a result of the current U.S. administration, and other changes and
developments that we cannot anticipate, each of which could harm our business and results of operations. Actual or
potential changes in international, national, regional and local economic, business and financial conditions, including
recession, inflation and trade protection measures, may negatively affect consumer preferences, perceptions, spending
patterns or demographic trends, any of which could harm our business or results of operations. Because of these conditions,
our customers may experience financial difficulties or be unable to borrow money to fund their operations, which may
harm their ability or decision to purchase or pay for our products. Disruptions in the credit markets have previously
resulted, and could again result, in volatility, decreased liquidity, widening of credit spreads, and reduced availability of
financing. There can be no assurance that future financing will be available to our customers on acceptable terms, if at all.
An inability of our customers to obtain financing necessary to purchase our products could harm our business and results
of operations.
The FDA regulatory clearance process is expensive, time-consuming and uncertain, and the failure to obtain and
maintain required regulatory clearances and approvals could prevent us from commercializing our products.
Before we can introduce a new device or a new use of or a claim for a cleared device in the U.S., we must
generally obtain clearance from the FDA, unless an exemption from premarket review or an alternative procedure, such
as a de novo risk-based classification or a humanitarian device exemption, applies. The FDA clearance and approval
processes for medical devices are expensive, uncertain and time-consuming.
We may make changes to our cleared products without seeking additional clearances or approvals if we determine
such clearances or approvals are not necessary and document the basis for that conclusion. However, the FDA may disagree
with our determination or may require additional information, including clinical data, to be submitted before a
determination is made, in which case we may be required to delay the introduction and marketing of our modified products,
redesign our products, conduct clinical trials to support any modifications and pay significant regulatory fines or penalties.
In addition, the FDA may not approve or clear our products for the indications that are necessary or desirable for successful
commercialization.
There is no assurance that we will be able to obtain the necessary regulatory clearances or approvals for any
product on a timely basis or at all. Further, the FDA may change its clearance and approval policies, adopt additional
regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our
products under development or impact our ability to modify our currently cleared products on a timely basis. Delays in
receipt of, or failure to obtain, regulatory clearances for any product enhancements or new products we develop would
result in delayed or no realization of revenue from such product enhancements or new products and in substantial additional
costs, which could decrease our profitability.
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In addition, we are required to continue to comply with applicable FDA and other regulatory requirements once
we have obtained clearance or approval for a product. We cannot provide assurance that we will successfully maintain the
clearances or approvals we have received or may receive in the future. The loss of previously received clearances or
approvals, or the failure to comply with existing or future regulatory requirements, could also have a material adverse
effect on our business.
Our products are generally subject to regulatory requirements in foreign countries in which we sell those products. We
will be required to expend significant resources to obtain regulatory approvals or clearances of our products, and there
may be delays and uncertainty in obtaining those approvals or clearances.
In order to sell our products in foreign countries, generally we must obtain regulatory approvals and comply with
the regulations of those countries. These regulations, including the requirements for approvals or clearances and the time
required for regulatory review, vary from country-to-country.
The EU requires that manufacturers of medical devices obtain the right to affix the CE mark, for compliance with
the Council Directive (93/42/EEC) (“MDD”), as amended, to medical devices before selling them in member countries of
the EU. The CE mark is an international symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to obtain the authorization to affix the CE mark to products, a
manufacturer must obtain certification that its processes and products meet certain European quality standards.
In May 2017, the EU adopted Regulation (EU) 2017/745 (“MDR”), which will repeal and replace the MDD with
effect from May 26, 2020. Under transitional provisions, medical devices with notified body certificates issued under the
MDD prior to May 26, 2020 may continue to be placed on the market for the remaining validity of the certificate, until
May 27, 2024 at the latest. After the expiry of any applicable transitional period, only devices that have been CE marked
under the MDR may be placed on the market in the EU. The MDR includes increasingly stringent requirements in multiple
areas, such as pre-market clinical evidence (some of which are now in effect), review of high-risk devices, labeling and
post-market surveillance. Under the MDR, pre-market clinical data will now be required to obtain CE Mark approval for
high-risk, new and modified medical devices. We believe these new requirements have the potential to be expensive and
time-consuming to implement and maintain.
Complying with and obtaining regulatory approval in foreign countries, including compliance with the MDR,
have caused and will likely continue to cause us to experience more uncertainty, risk, expense and delay in
commercializing products in certain foreign jurisdictions, which could have a material adverse impact our net sales, market
share and operating profits from our international operations.
The medical device industry is subject to extensive scrutiny and regulation by governmental authorities. Moreover, in
October 2016, we received a subpoena from the U.S. Department of Justice seeking information on our marketing and
promotional practices. If governmental authorities determine that we have violated laws or regulations, including in
respect of our marketing or promotional practices, our company or our employees may be subject to various penalties,
including civil or criminal penalties.
Our medical devices and business activities are subject to rigorous regulation by the FDA and other federal, state
and foreign governmental authorities. These authorities and domestic and foreign legislators continue to scrutinize the
medical device industry. In recent years, the U.S. Congress, Department of Justice, the Office of Inspector General of the
Department of Health and Human Services and the Department of Defense, as well as foreign counterparts, have issued
subpoenas and other requests for information to medical device manufacturers, primarily related to financial arrangements
with healthcare providers, regulatory compliance and product promotional practices. If we fail to comply with applicable
regulatory requirements, we may be subjected to a wide variety of sanctions and enforcement actions, including warning
letters that require corrective action, injunctions, product seizures or recalls, suspension of product manufacturing,
revocation of approvals, import or export prohibitions, exclusion from participation in government healthcare programs,
civil fines and/or criminal penalties.
In October 2016, we received a subpoena from the U.S. Department of Justice seeking information on certain of
our marketing and promotional practices. We have responded to the subpoena, as well as additional related requests. The
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investigation is ongoing and at this stage we are unable to predict its scope, duration or outcome. Investigations such as
this may result in the imposition of, among other things, significant damages, injunctions, fines or civil or criminal claims
or penalties against our company or individuals. Even if we are successful in resolving the pending matter without such
consequences, we have incurred, and anticipate that we will continue to incur, substantial costs in connection with the
matter. The pending matter, or other governmental proceedings, could significantly impact our reputation and divert
management’s attention and resources from growing our business, which in turn could harm our business, results of
operations, financial condition and ability to obtain financing on reasonable terms or at all.
We anticipate that government authorities will continue to scrutinize our industry closely, and that additional
regulation by government authorities may increase compliance costs, exposure to litigation and other adverse effects on
our operations.
Use of our products in unapproved circumstances could expose us to liabilities.
The marketing clearances and approvals from the FDA and other regulators of certain of our products are, or are
expected to be, limited to specific uses. We are prohibited from marketing or promoting any uncleared or unapproved use
of our product. However, physicians may use these products in ways or circumstances other than those strictly within the
scope of the regulatory approval or clearance. The use of our products for unauthorized purposes could arise from our
sales personnel or distributors violating our policies by providing information or recommendations about such
unauthorized uses. Consequently, claims may be asserted by the FDA or other enforcement agencies that we are not in
compliance with applicable laws or regulations or have improperly promoted our products for uncleared or unapproved
uses. The FDA or such other agencies could require a recall of products or allege that our promotional activities misbrand
or adulterate our products or violate other legal requirements, which could result in investigations, prosecutions, fines or
other civil or criminal actions.
Consolidation in the healthcare industry, group purchasing organizations or public procurement policies could lead to
demands for price concessions, which may harm our ability to sell our products at prices necessary to support our
current business strategies.
Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost
reform initiatives by legislators, regulators and third-party payers. Cost reform has triggered a consolidation trend in the
healthcare industry to aggregate purchasing power, which has created more requests for pricing concessions and is
expected to continue in the future. Additionally, many of our customers belong to group purchasing organizations or
integrated delivery networks that use their market power to consolidate purchasing decisions for these hospitals and
healthcare service providers. These customers are often able to obtain lower prices and more favorable terms because of
the potential sales volume they represent, which can lead to lower revenues and require us to take on additional liability.
We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal
pressures will continue to change the healthcare industry worldwide, resulting in further business consolidations and
alliances among our customers, which may exert further downward pressure on the prices of our products.
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 computer viruses or other malicious code,
unauthorized access attempts, and cyber-attacks, any of which could result in data leaks or otherwise compromise our
confidential or proprietary information and disrupt our operations. Cyber-attacks are becoming more sophisticated and
frequent, and there can be no assurance that our protective measures have prevented or will prevent security breaches, any
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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 third-party systems could also become vulnerable to cyber-attacks, malicious intrusions, breakdowns, interference
or other significant disruptions, and 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, as a result, 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, lose customers, be
subject to fraud, breach our agreements with or duties toward customers, physicians, other health care professionals and
employees, be subject to regulatory sanctions or penalties, incur expenses or lose revenues, sustain damage to our
reputation or 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.
A significant adverse change in, or failure to comply with, governing regulations could adversely affect our business,
operations or financial condition.
We have extensive global operations, which necessitate that we seek various regulatory approvals for our products
in the jurisdictions where our products are sold. Different regulatory requirements for product approvals and our need to
comply with different regulatory regimes could impact our business.
Substantially all of our products are “devices,” as defined in the FDCA, and the manufacture, distribution, record
keeping, labeling and advertisement of substantially all of our products are subject to regulation by the FDA in the U.S.
and equivalent regulatory agencies in various foreign countries in which our products are manufactured, distributed,
labeled, offered or sold. Further, we are subject to regular review and periodic inspections at our facilities with respect to
compliance with the FDCA, QSR, ISO standards and similar requirements of foreign countries, which may cover, among
others, the procedures and documentation of the design, testing, production, control, quality assurance, labeling,
packaging, sterilization, storage and shipment of medical devices. Costs to comply with regulations, including, for
instance, the MDR, and costs associated with remediation can be significant. Additionally, failure to comply with such
requirements, or later discovery of previously unknown problems with our products or our third-party manufacturers’
manufacturing processes, including any failure to take satisfactory corrective action in response to an adverse QSR
inspection, could result in total or partial suspension of production or distribution, a regulatory agency’s refusal to grant
pending or future clearances or approvals for our products, withdrawal or suspension of clearances, approvals, clinical
holds, warning letters or untitled letters or refusal to permit the import or export of our products.
The agreements and instruments governing our debt contain restrictions and limitations that could significantly affect
our ability to operate our business, as well as significantly affect our liquidity.
On July 31, 2019 we entered into a Third Amended and Restated Credit Agreement (“Third Amended Credit
Agreement”), with Wells Fargo Bank, National Association, as administrative agent and a lender, and Wells Fargo
Securities, LLC, BOFA Securities, Inc., HSBC Bank USA, National Association, and U.S. Bank National Association as
joint lead arrangers and joint bookrunners, and Bank of America, N.A., HSBC Bank USA, National Association and U.S.
Bank National Association as co-syndication agents. In addition, Bank of America, N.A., HSBC Bank USA, National
Association, U.S. Bank, National Association, BMO Harris Bank, N.A., and MUFG Union Bank, Ltd. are parties to the
Third Amended Credit Agreement as lenders. The Third Amended Credit Agreement amends and restates in its entirety
our previously outstanding Second Amended and Restated Credit Agreement and all amendments thereto (the “Second
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Amended Credit Agreement”). The Third Amended Credit Agreement contains a number of significant covenants that
could adversely affect our ability to operate our business, our liquidity or our results of operations. These covenants restrict,
among other things, our incurrence of indebtedness, creation of liens or pledges on our assets, mergers or similar
combinations or liquidations, asset dispositions, repurchases or redemptions of equity interests or debt, issuances of equity,
payment of dividends and certain distributions and entry into related party transactions.
We have pledged substantially all of our assets as collateral for the Third Amended Credit Agreement. Our breach
of any covenant in the Third Amended Credit Agreement, not otherwise cured, waived or amended, could result in a
default under that agreement and could trigger acceleration of the underlying obligations. Any default under the Third
Amended Credit Agreement could adversely affect our ability to service our debt and to fund our planned capital
expenditures and ongoing operations. The administrative agent, joint lead arrangers, joint bookrunners and lenders under
the Third Amended Credit Agreement have available to them the remedies typically available to lenders and secured
parties, including the ability to foreclose on the collateral we have pledged. It could lead to an acceleration of indebtedness
and foreclosure on our assets.
As currently amended, the Third Amended Credit Agreement provides for potential borrowings of up to $750
million. Such increased borrowing limits may make it more difficult for us to comply with leverage ratios and other
restrictive covenants in the Third Amended Credit Agreement. We may also have less cash available for operations and
investments in our business, as we will be required to use additional cash to satisfy the minimum payment obligations
associated with this increased indebtedness.
Fluctuations in foreign currency exchange rates may negatively impact our financial results.
As our operations have grown outside the U.S., we have also become increasingly subject to market risk relating
to foreign currency. Those fluctuations could have a negative impact on our margins and financial results. During 2019,
2018 and 2017, the exchange rate between all applicable foreign currencies and the U.S. Dollar resulted in a decrease in
net sales of approximately $13.5 million, an increase of approximately $5.2 million and an increase of approximately $0.6
million, respectively.
For the year ended December 31, 2019, approximately $320.8 million, or 32.2%, of our net sales were
denominated in foreign currencies, with our CNY- and Euro-denominated sales representing our largest currency risks. If
the rate of exchange between foreign currencies declines against the U.S. Dollar, we may not be able to increase the prices
we charge our customers for products whose prices are denominated in those respective foreign currencies. Furthermore,
we may be unable or elect not to enter into hedging transactions which could mitigate the effect of declining exchange
rates. As a result, if the rate of exchange between foreign currencies declines against the U.S. Dollar, our financial results
may be negatively impacted.
We will be required to expend significant resources for research, development, testing and regulatory approval or
clearance of our products under development, and these products may not be developed successfully or approved for
commercial use.
Most of our products under development will require significant additional research, development, engineering
and, in some cases, preclinical and clinical testing, as well as regulatory approval or clearance and a commitment of
significant additional resources prior to their commercialization. It is possible that our products may not:
be developed successfully;
be proven safe or effective in clinical trials;
offer therapeutic or other improvements over current treatments and products;
meet applicable regulatory standards or receive regulatory approvals or clearances;
be capable of production in commercial quantities at acceptable costs and in compliance with regulatory
requirements;
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be successfully marketed; or
be covered by private or public insurers.
We are currently conducting one clinical trial in an effort to obtain approval from the FDA that would enable us
to expand our efforts to commercialize the QuadraSphere Microspheres. EU regulations do not currently require such
applications for these classes of medical device. In order for us to obtain FDA approval to promote the use of QuadraSphere
Microspheres for the purposes indicated in our clinical trial, we will need to complete the trial and submit positive clinical
data to the FDA. If we cannot enroll study subjects in sufficient numbers to complete the necessary study, if there is a
disruption in the supply of materials for the trial or if any other factors preclude us from completing the trial in a timely
manner, we will likely not be able to complete the trial. Even if we complete the clinical trial, the FDA may require us to
undertake additional testing, or the trial results may not be sufficient to obtain FDA approval for other reasons, including
inconclusive or negative results of our trials or those conducted by our competitors or other third parties. Any clinical trials
we undertake in the future will likely be subject to these and similar risks. If we do not obtain FDA approval or clearance
of the product use studied in a clinical trial, we will not be able to promote the subject product for the indicated treatment
of the specific disease or condition in the U.S.
We are subject to laws targeting fraud and abuse in the healthcare industry, the violation of which could adversely
affect our business or financial results.
Our operations are subject to various state and federal laws targeting fraud and abuse in the healthcare industry,
including the federal Anti-Kickback Statute and other anti-kickback laws, which prohibit any person from knowingly and
willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce or reward either the referral
of an individual, or the furnishing or arranging for an item or service, for which payment may be made under federal
healthcare programs, such as the Medicare and Medicaid programs. Violations of these fraud and abuse-related laws are
punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in
healthcare programs such as Medicare and Medicaid, any of which could harm our business or financial results.
We are also subject to the FCPA, the U.K. Bribery Act, and similar anti-corruption laws in non-U.S. jurisdictions.
These laws generally prohibit companies and their intermediaries from illegally offering things of value to any individual
for the purpose of obtaining or retaining business. As we continue to expand our business activities internationally,
compliance with the FCPA and other anti-corruption laws presents greater challenges to our operations. If our employees
or agents violate the provisions of the FCPA or other anti-corruption laws, we may incur fines or penalties, which could
have a material adverse effect on our operating results or financial condition.
We are dependent upon key personnel.
Our success is dependent on key management personnel, including Fred P. Lampropoulos, our Chairman of the
Board, President and Chief Executive Officer. Mr. Lampropoulos is not subject to any agreement prohibiting his departure,
and we do not maintain key man life insurance on his life. The loss of Mr. Lampropoulos, or of certain other key
management personnel, could have a materially adverse effect on our business and operations. Our success also depends
on, among other factors, the successful recruitment and retention of key operating, manufacturing, sales and other
personnel.
Termination or interruption of, or a failure to monitor, our supply relationships and increases in the price of our
component parts, finished products, third-party services or raw materials, particularly petroleum-based products, could
have an adverse effect on our business, operations or financial condition.
We rely on raw materials, component parts, finished products and third-party services in connection with our
business. For example, substantially all of our products are sterilized by only a few different entities. Additionally, many
of our products have components that are manufactured using resins, plastics and other petroleum-based materials which
are available from a limited number of suppliers. We are experiencing a growing trend among suppliers of polymer resins
to refuse to supply resin to the medical device manufacturers or to require such manufacturers to assume additional risks
due to the potential for product liability claims. Additionally, there is no assurance that crude oil supplies will be
29
uninterrupted or that petroleum-based manufacturing materials will be available for purchase in the future. Any
interruption to the supply of polymers or petroleum-based resins could have an adverse effect on our ability to produce, or
on the cost to produce, our products.
The availability and price of these materials, parts, products and services are affected by a variety of factors
beyond our control, including the willingness of suppliers to sell into the medical device industry, changes in supply and
demand, general economic conditions, labor costs, fuel-related transportation costs, liability concerns, competition, import
duties, tariffs, currency exchange rates and political uncertainty around the world. Our suppliers may pass some of their
cost increases on to us, and if such increased costs are sustained or increase further, our suppliers may pass further cost
increases on to us. In addition to the effect on resin prices, transportation costs generally increase based on the effect of
higher crude oil prices, and these increased transportation costs may be passed on to us.
We are also subject to corporate social responsibility, or CSR, laws and regulations which require us to monitor
the labor standards in our supply chain, including the California Transparency in Supply Chains Act, the UK Modern
Slavery Act, and U.S. Federal Acquisition Regulations regarding Combating Trafficking in Persons. These CSR labor
laws and regulations may impose additional processes and supplier management systems and have led certain key
customers to impose additional requirements on medical device companies, including audits, as a prerequisite to selling
products to such customers, which could result in increased costs for our products, the termination or suspension of certain
suppliers, and reductions in our margins and profitability.
Our ability to recover such increased costs may depend upon our ability to raise prices on our products. Due to
the highly competitive nature of the healthcare industry and the cost-containment efforts of our customers and third-party
payers, we may be unable to pass along cost increases through higher prices. If we are unable to fully recover these costs
through price increases or offset these increases through cost reductions, or we experience terminations or interruption of
our relationships with our suppliers, we could experience lower margins and profitability, and our results of operations,
financial condition and cash flows could be materially harmed.
Limits on reimbursement imposed by governmental and other programs may adversely affect our business and results
of operation.
We sell our products to hospitals and other healthcare providers around the world that typically receive
reimbursement for the services provided to patients from third-party payers such as government programs (e.g., Medicare
and Medicaid in the U.S.) and private insurance programs. The ability of our customers to obtain appropriate
reimbursement for the cost of our products from governmental and private third-party payers is critical to our
business. Limits on reimbursement imposed by such programs may adversely affect the ability of hospitals and others to
purchase our products, which could adversely affect our business and results of operations.
Third-party payers, whether foreign or domestic, or governmental or commercial, are developing increasingly
sophisticated methods of controlling healthcare costs. In general, a third-party payer covers a medical procedure only when
the plan administrator is satisfied that the product or procedure is reasonable and necessary to the patient’s treatment;
however, the cost-effectiveness of the treatment may also be a condition. In addition, in the U.S., no uniform policy of
coverage and reimbursement for procedures using our products exists among third-party payers. Therefore, coverage and
reimbursement for procedures using our products can differ significantly from payer to payer. In addition, payers
continually review new and existing technologies for possible coverage and can, without notice, deny or reverse coverage
or alter pre-authorization requirements for new or existing products and procedures. We cannot provide assurance that we
will be successful in any efforts we may potentially undertake to reverse such non-coverage decisions. If we are not
successful in reversing non-coverage policies, or if third-party payers that currently cover or reimburse certain procedures
reverse or limit their coverage of such procedures in the future, or if other third-party payers issue similar policies, our
business could be adversely impacted.
Further, we believe that future coverage and reimbursement may be subject to increased restrictions, such as
additional preauthorization requirements, both in the U.S. and in international markets. Third-party coverage and
reimbursement for procedures using our products or any of our products in development for which we may receive
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regulatory approval may not be available or adequate in either the U.S. or international markets, which could have an
adverse impact on our business.
Our products may be subject to product liability claims and warranty claims.
Our products are used in connection with invasive procedures and in other medical contexts that entail an inherent
risk of product liability claims. If medical personnel or their patients suffer injury or death in connection with the use of
our products, whether as a result of a failure of our products to function as designed, an inappropriate design, inadequate
disclosure of product-related risks or information, improper use, or for any other reason, we could be subject to lawsuits
seeking significant compensatory and punitive damages. Product liability claims may be brought by individuals or by
groups seeking to represent a class. We have previously faced claims by patients claiming injuries from our products. To
date, these claims have not resulted in material harm to our operations or financial condition. The outcome of this type of
personal injury litigation is difficult to assess or quantify. We maintain product liability insurance; however, there is no
assurance that this coverage will be sufficient to satisfy any claim made against us. Moreover, any product liability claim
brought against us could result in significant costs, divert our management’s attention from other business matters or
operations, increase our product liability insurance rates, or prevent us from securing insurance coverage in the future. As
a result, any lawsuit seeking significant monetary damages may have a material adverse effect on our business, operations
or financial condition.
We generally offer a limited warranty for the return of product due to defects in quality and workmanship. We
attempt to estimate our potential liability for future product returns and establish reserves on our financial statements in
amounts that we believe will be sufficient to address our warranty obligations; however, our actual liability for product
returns may significantly exceed the amount of our reserves. If we underestimate our potential liability for future product
returns, or if unanticipated events result in returns that exceed our historical experience, our financial condition and
operating results could be materially harmed.
In addition, the occurrence of such an event or claim could result in a recall of products from the market or a
safety alert relating to such products. Such a recall could result in significant costs, reduce our revenue, divert
management’s attention from our business, and harm our reputation.
Our products may cause or contribute to adverse medical events that we are required to report to the FDA or other
governmental authorities, and if we fail to do so, we may be subject to sanctions that may materially harm our business.
Our products are subject to medical device reporting regulations, which require us to report to the FDA
information that reasonably suggests one of our products may have caused or contributed to a death or serious injury, or
one of our products malfunctioned and, if the malfunction were to recur, this device or a similar device that we market
would be likely to cause or contribute to a death or serious injury. Our obligation to report under the medical device
reporting regulations is triggered on the date on which we become aware of information that reasonably suggests a
reportable adverse event occurred. We may fail to report adverse events of which we become aware within the prescribed
timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not
reported to us as an adverse event or if it is an adverse event that is unexpected or if the product characteristic that caused
the adverse event is removed in time from our products. If we fail to comply with our medical device reporting obligations,
the FDA could issue warning letters or untitled letters, take administrative actions, commence criminal prosecution, impose
civil monetary penalties, demand or initiate a product recall, seize our products, or delay the clearance of our future
products.
We lack direct sales and marketing capabilities in many countries and are dependent on our distributors for the
commercialization of our products in these countries. If we are unable to maintain or establish sales capabilities on
our own or through third parties, we may not be able to commercialize any of our products in those countries.
We have no or limited direct sales or marketing capabilities in some of the regions and countries in which our
products are sold, including, among others, China, Japan, Russia and India. We have entered into distribution agreements
with third parties to market and sell our products in those countries in which we do not have a direct sales force and in
those countries in which we utilize a “modified direct” sales approach. If we are unable to maintain or enter into such
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distribution arrangements on acceptable terms, or at all, we may not be able to successfully commercialize our products in
certain countries. Moreover, to the extent that we enter into distribution arrangements with other companies, our revenues,
if any, will depend on the terms of any such arrangements and the efforts of others. These efforts may turn out not to be
sufficient and our third-party distributors may not effectively sell our products. In addition, although our contract terms
require our distributors to comply with all applicable laws regarding the sale of our products, including anti-competition,
anti-corruption, anti-money laundering and sanctions laws, we may not be able to ensure proper compliance. If our
distributors fail to effectively market and sell our products in full compliance with applicable laws, our results of operations
and business could be impacted.
Our employees, independent contractors, consultants, manufacturers and distributors may engage in misconduct or
other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk that our employees, independent contractors, consultants, manufacturers and
distributors may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include
intentional, reckless or negligent conduct or disclosure of unauthorized activities to us that violates healthcare laws and
regulations of the FDA and other federal, state and international authorities, manufacturing standards, and laws that require
the true, complete and accurate reporting of financial information or data. We have adopted a code of business conduct
and ethics, and a global anti-corruption policy, but it is not always possible to identify and deter misconduct, and the
precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or
losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in
compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in
defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the
imposition of significant civil, criminal and administrative penalties.
We may be a party to litigation in the course of our business or otherwise, which could affect our financial condition
and results of operations.
We may become party to or otherwise involved in legal proceedings, claims or other legal matters, arising in the
course of our business. In particular, our company, our Chief Executive Officer and our Chief Financial Officer have been
named in a complaint filed in the Central District of California, which alleges violations of certain federal securities laws.
Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome
depending on a number of variables, some of which are not within our control. Litigation is subject to significant
uncertainty and may be expensive, time-consuming, and disruptive to our operations. Although it is our intention to
vigorously defend ourselves in such legal proceedings, their ultimate resolution and potential financial and other impacts
on us are uncertain. If a legal proceeding is resolved against us, it could result in significant compensatory damages or
injunctive relief that could materially adversely affect our financial condition, results of operations and cash flows.
We may be unable to compete in our markets, particularly if there is a significant change in relevant 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.
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. Competing
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. A reduction in the demand for a significant number of our products,
or a few key products, could have a material adverse effect on our business, operations or financial condition.
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We depend on generating sufficient cash flow to fund our debt obligations, capital expenditures, and ongoing
operations.
We are dependent on our cash on hand and free cash flow to fund our debt obligations, capital expenditures and
ongoing operations. Our ability to service our debt and to fund our planned capital expenditures and ongoing operations
will depend on our ability to continue to generate cash flow. If we are unable to generate sufficient cash flow or we are
unable to access additional liquidity sources, we may not be able to service or repay our debt, operate our business, respond
to competitive challenges, or fund our other liquidity and capital needs.
The exit of the UK from the European Union, and current uncertainty about whether such exit could harm our business
and results of operations in Europe and elsewhere.
On June 23, 2016, the UK held a referendum in which voters approved an exit from the European Union,
commonly referred to as “Brexit.” On January 31, 2020 Article 50 of the European Union’s Lisbon Treaty process by
which a member state leaves the European Union expired and the UK has now entered a transition process ending on
December 31, 2020 (the “Transitional Period”) with an option to request an extension of the deadline to be made by June,
2020. During the Transitional Period, the government will engage in negotiations on the future relationship between the
UK and the European Union. There is therefore a substantial risk that at the end of the Transitional Period, there could be
a Brexit without agreement between the UK and the EU. As a result of the disruption in the relationship between the UK
and other EU countries, it is possible that there will be greater restrictions and additional costs on the movement of goods
and people between the UK and the EU countries and increased regulatory complexities, which could affect our ability to
sell products in certain EU countries and in the UK. Currently, all of our European production is in EU countries outside
of the UK. However, during the fiscal year ended December 31, 2019, approximately 1.9% of our world-wide revenues
arose from sales into the UK. Disruptions arising from the exit of the UK from the EU, or from stalled or failed negotiations
between the UK and the EU, could result in various trade barriers limiting or prohibiting our ability to export or sell our
products into the UK.
In the fiscal year ended in December 31, 2019, approximately 11.9% of our world-wide revenue arose from sales
into EU countries, other than the UK. Brexit could adversely affect the economy of EU countries, which could adversely
affect our sales into those countries. In addition, Brexit could also harm worldwide economic and market conditions and
could further contribute to instability in global financial and foreign exchange markets, including volatility in the value of
the British pound and the Euro, to which we have significant exposure. In addition, other European countries may seek to
conduct referenda with respect to continuing membership with the EU. The uncertainties surrounding Brexit, and the
possibility that Brexit could result in restrictions on trade and related tariffs between the UK and the rest of the EU, could
result in additional costs, reduced demand, adverse currency fluctuations and otherwise harm our business and operations.
In late 2018 we opened a warehouse and distribution facility in Reading, England, principally to address the
potential impact of Brexit on our ability to market, sell and distribute our products in the UK. We have incurred, and will
continue to incur, substantial expenses in connection with the leasing, improvement and commencement of operations
associated with the new Reading facility. In part due to the continued uncertainty regarding the timing and consequences
of Brexit, there can be no assurance regarding the effect our Reading facility will have on our business, operations or
financial condition.
Uncertainty relating to the LIBOR calculation method and potential phasing out of LIBOR after 2021 may adversely
affect the interest rates under our Third Amended Credit Agreement.
Certain of the interest rates applicable to our Third Amended Credit Agreement, and applicable to hedging
instruments we have purchased to offset interest rate risk under our Third Amended Credit Agreement, are LIBOR-based.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”) announced that it will no longer persuade or compel
banks to submit rates for the calculation of LIBOR rates after 2021. Actions by the FCA, other regulators or law
enforcement agencies may result in changes to the method by which LIBOR is calculated. At this time, it is not possible
to predict the effect of any such changes or any other reforms to LIBOR that may be enacted in the UK or elsewhere.
Uncertainty as to the nature of such potential changes may adversely affect the trading market for LIBOR-based securities,
including the floating rates applicable to our Third Amended Credit Agreement and related hedges. It is possible that the
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changes in how LIBOR is calculated, changes in the trading market for LIBOR-based securities or actions of the FCA and
other government entities may cause unexpected increases in LIBOR rates or a breakdown in the LIBOR systems. If these
issues arise, we could experience increased interest rates or uncertainty with respect to the calculation of interest on our
Third Amended Credit Agreement and other instruments, which could harm our operations.
We may be unable to accurately forecast customer demand for our products and manage our inventory.
To ensure adequate supply, we must forecast our inventory needs and place orders with our suppliers based on
estimates of future demand for particular products. Our ability to accurately forecast demand for our products could be
negatively affected by many factors, including our failure to accurately manage our expansion strategy and customer
acceptance of new products, product introductions by our competitors, an increase or decrease in customer demand for our
products or for products of our competitors, unanticipated changes in general market conditions or regulatory matters and
weakening of economic conditions or consumer confidence in future economic conditions. Inventory levels in excess of
customer demand may result in inventory write-downs or write-offs, which would impact our gross margin. Conversely,
if we underestimate customer demand for our products, our manufacturing facilities may not be able to deliver products
to meet our order requirements, which could damage our reputation and customer relationships.
Our forecasts of customer demand and related decisions that we make about production levels may take into
account potential opportunities created by regulatory issues, supply disruptions or other challenges experienced by our
competitors. We generally do not know the extent and cannot predict the duration of these challenges experienced by our
competitors. As a result, our estimates about related increased demand for our products are inherently uncertain and subject
to change. If our estimates incorrectly forecast the extent or duration of this increased demand, or the product types to
which it relates, our revenues, margins and earnings could be adversely affected.
The size of the market for our product groups has not been established with precision and may be smaller than we
estimate.
Our estimates of the annual total addressable market for our cardiac intervention, peripheral intervention,
interventional oncology and spine, and cardiovascular and critical care and endoscopy product groups are based on a
number of internal and third-party estimates, including published industry data. While we believe these factors have
historically provided and may continue to provide us with effective tools in estimating the total market for our products,
these estimates may not be correct and the conditions supporting our estimates may change at any time, thereby reducing
the predictive accuracy of the underlying factors we consider in our analysis. As a result, our estimates of the annual total
addressable market for our products may prove to be incorrect. If the actual number of patients who would benefit from
our products and the annual total addressable market for our products is smaller than we have estimated, our sales growth
may be impaired and our business adversely impacted. Even if the markets are as large as projected, there is no assurance
that our market share or aggregate sales will increase as a result of the size of addressable markets.
We are subject to export control laws, customs laws, sanctions laws and other laws governing our operations in the
U.S. and other countries. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other
remedial measures and legal expenses, which could adversely affect our business, results of operations and financial
condition.
Our global operations expose us to trade and economic sanctions and other restrictions imposed by the U.S., the
EU and other governments and organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other
federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against
corporations and individuals for violations of economic sanctions laws, export control laws, and other federal statutes and
regulations, including those established by the Office of Foreign Assets Control. Under these laws and regulations, as well
as other export control laws, customs laws, sanctions laws and other laws governing our operations, various government
agencies may require export licenses, may seek to impose modifications to business practices, including cessation of
business activities in sanctioned countries or with sanctioned persons or entities and modifications to compliance
programs, which may increase compliance costs, and may subject us to fines, penalties and other sanctions. A violation of
these laws or regulations could adversely impact our business, results of operations and financial condition.
34
We are subject to work stoppage, transportation, severe weather, natural disasters, outbreak of disease and related risks.
We manufacture products at various locations in the U.S. and foreign countries and sell our products worldwide.
We depend on third-party transportation companies to deliver supplies necessary to manufacture our products from
vendors to our various facilities and to move our products to customers, operating divisions, and other subsidiaries located
worldwide. Our manufacturing operations, and the operations of the transportation companies on which we depend, may
be harmed by natural disasters or significant human events, such as a war, civil unrest, terrorist attack, riot, strike,
slowdown, or similar events. Any disruption in our manufacturing or transportation could materially harm our ability to
meet customer demands or our operations.
Additionally, outbreaks of contagious diseases, such as the COVID-19 outbreak, and related quarantines may
cause significantly reduced demand for our products in those regions, disrupt manufacturing and other business activities
or could prevent our products from being delivered to the affected areas or to other locations indirectly impacted by such
an outbreak, which could have a material adverse effect on our business and results of operations.
Furthermore, our manufacturing operations could be affected by many other factors beyond our control, including
severe weather conditions and natural disasters, including hurricanes, earthquakes and tornadoes. These conditions could
cause substantial damage to our facilities, interrupt our production and disrupt our ability to deliver products to our
customers.
Fluctuations in our effective tax rate may adversely affect our business, financial condition or results of operation.
We are subject to taxation in numerous countries, states and other jurisdictions. Our effective tax rate is derived
from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. In
preparing our financial statements, we estimate the amount of tax that will become payable in each of these jurisdictions.
Our effective tax rate may, however, differ from the estimated amount due to numerous factors, including a change in the
mix of our profitability from country to country and changes in tax laws. Relevant authorities may also disagree with tax
positions we have taken and assess further taxes. On December 22, 2017, the U.S. government enacted comprehensive
federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or TCJA. The TCJA makes changes to
the corporate tax rate, business-related deductions and taxation of foreign earnings, among others, that will generally be
effective for taxable years beginning after December 31, 2017. U.S. federal and state regulatory and standard-setting bodies
continue to issue guidance and regulations related to the TCJA that could have a material financial statement impact on
our effective tax rate in future periods. The implementation by us of new practices and processes designed to comply with,
and benefit from, the TCJA and its rules and regulations could require us to make substantial changes to our business
practices, allocate additional resources, and increase our costs, which could negatively affect our business, results of
operations and financial condition. In addition, further changes in the tax laws of foreign jurisdictions could arise, including
as a result of recommendations issued by the Organisation for Economic Cooperation and Development, or the OECD,
which could, if implemented, result in substantial changes to numerous long-standing tax positions and principles. These
contemplated changes, to the extent adopted by OECD members or other countries, could increase tax uncertainty and
may adversely affect our provision for income taxes. Any of these factors could cause us to experience an effective tax
rate significantly different from previous periods or our current expectations, which could have an adverse effect on our
business, financial condition or results of operation.
A significant portion of our revenues is derived from a few products and medical procedures.
A significant portion of our revenues is attributable to sales of our inflation devices. During the years ended
December 31, 2019 and 2018, sales of our inflation devices (including our Big60® device sold within our endoscopy
segment and kits and packs which include inflation devices, but also include other products) accounted for
approximately 9.4% and 10.8% of our net sales, respectively. Any material decline in market demand, or change in OEM
supplier preference, for our inflation devices could have an adverse effect on our business, operations or financial
condition.
In addition, the products that have accounted for a majority of our historical revenues are designed for use in
connection with a few related medical procedures, including angioplasty, stent placement procedures, and spinal
procedures. If subsequent developments in medical technology or drug therapy make such procedures obsolete, or alter
35
the methodology of such procedures so as to eliminate the usefulness of our products, we may experience a material
decrease in demand for our products and experience deteriorating financial performance.
Actions of activist shareholders, including a proxy contest, could be disruptive and potentially costly and the possibility
that activist shareholders may contest, or seek changes that conflict with, our strategic direction could cause uncertainty
about the strategic direction of our business.
On January 27, 2020, we received notice from Starboard Value and Opportunity Master Fund Ltd (“Starboard”)
that it intends to nominate up to seven individuals to stand for election as directors at our 2020 Annual Meeting of
Shareholders. Members of our Board of Directors and our management team have had initial discussions with
representatives of Starboard regarding their interest in the Company. Other than the director nominations, Starboard has
not informed us of any particular changes they wish for us to make or specific plans they want us to adopt. While our
Board of Directors and management team strive to maintain constructive, ongoing communications with all of our
shareholders, including Starboard, and we welcome constructive input from all shareholders toward the shared goal of
enhancing stakeholder value, activist campaigns that contest, or seek to change, our strategic direction could have an
adverse effect on us because: (i) responding to actions by activist shareholders could disrupt our operations, be costly and
time consuming, and divert the attention of our Board of Directors and senior management from the pursuit of business
strategies, which could adversely affect our results of operations and financial condition; (ii) perceived uncertainties as to
our future direction may lead to the perception of a change in the direction of the business, instability or lack of continuity
which may be exploited by our competitors, cause concern to our current or potential customers, may result in the loss of
potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners;
and (iii) these types of actions could cause significant fluctuations in our stock price based on temporary or speculative
market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our
business.
Our business is subject to complex and evolving U.S., state and international laws and regulations regarding privacy
and data protection. Many of these laws and regulations are subject to change and uncertain interpretation and could
result in claims, changes to our business practices, penalties, increased cost of operations, or declines in user growth
or engagement, or otherwise harm our business.
The U.S. and many other countries in which we conduct our operations have adopted laws and regulations
protecting certain data, including medical and personal data, and requiring data holders and controllers to implement
administrative, logical and technical controls and procedures in order to protect the privacy of such data. Individual states
have also begun to enact data privacy laws. For example, California’s Consumer Protection Act went into effect on
January 1, 2020, giving consumers the right to demand certain information and actions from companies who collect
personal information. Internationally, some countries have also passed laws and regulations that require individually
identifiable data on their citizens to be maintained on local servers and that may restrict transfer or processing of that data.
In addition, regulatory authorities around the world are considering a number of additional proposals concerning data
protection. These laws and regulations have been, and may continue to be, inconsistent with each other, requiring different
approaches in different jurisdictions. In addition, the interpretation and application of medical and personal data protection
laws and regulations in the U.S., Europe, China and elsewhere are often uncertain and in flux. Further, we have incurred,
and will likely continue to incur, significant expense in connection with our efforts to comply with those laws and
regulations. It is possible that these laws and regulations may be interpreted and applied in a manner that is inconsistent
with our data practices, possibly resulting in fines or orders requiring that we change our data practices, which could have
an adverse effect on our business and results of operations. Complying with these various laws could cause us to incur
substantial costs or require us to change our business practices in a manner adverse to our business.
Legal developments in Europe have created compliance uncertainty regarding certain transfers of personal data
from the EU to the U.S. and other non-EU jurisdictions. For example, the GDPR, which came into application in the EU
on May 25, 2018, applies to our activities conducted from an establishment in the EU or related to products and services
that we offer to EU users. The GDPR created a range of new compliance obligations, which could cause us to change our
business practices, and significantly increases financial penalties for noncompliance (including possible fines of up to 4%
of global annual turnover for the preceding financial year or €20 million (whichever is higher) for the most serious
infringements).
36
Our failure to comply with applicable environmental, health and safety laws and regulations could affect our business,
operations or financial condition.
We manufacture and assemble certain products that require the use of hazardous materials that are subject to
various national, federal, state and local laws and regulations governing the protection of the environment, health and
safety. While the cost of compliance with such laws and regulations has not had a material adverse effect on our results of
operations historically, compliance with future regulations may require additional capital investments. Additionally,
because we use a limited amount of hazardous and other regulated materials in our manufacturing processes, we are subject
to certain risks of future liabilities, lawsuits and claims resulting from any substances we manufacture, dispose of or
release. Certain environmental laws and regulations may impose “strict liability” for the conduct of, or conditions caused
by, others, or for acts that were in non-compliance with all applicable laws at the time the acts were performed, rendering
us liable without regard to our negligence or fault. Because of these laws, any accidental release may have an adverse
effect on our business, operations or financial condition.
Our operations are also subject to various laws and regulations relating to occupational health and safety. We
maintain safety, training and maintenance programs as part of our ongoing efforts to ensure compliance with applicable
laws and regulations. Compliance with applicable health and safety laws and regulations has required and continues to
require expenditures.
We cannot predict what additional environmental, health and safety legislation or regulations will be enacted or
become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect
to our operations, capital expenditures, results of operations or competitive position. Compliance with more stringent laws
or regulations or adverse changes in the interpretation of existing laws or regulations by government agencies could have
a material adverse effect on our business, operations or financial condition, and could require substantial expenditures.
The market price of our common stock has been, and may continue to be, volatile.
The market price of our common stock has recently been, and may in the future be, volatile for various reasons,
including those discussed in these risk factors. Other events that could cause volatility in our stock, include without
limitation, variances in our financial results; analysts’ and other projections or recommendations regarding our common
stock specifically or medical technology stocks generally; any restatement of our financial statements or any investigation
of us by the SEC, the FDA, or another regulatory authority; or a decline, or rise, of stock prices in capital markets generally.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our world headquarters is located in South Jordan, Utah, with our principal office for European operations located
in Galway, Ireland and our principal office for Asian distribution located in Beijing, China. We also support our European
operations from a distribution and customer service facility located in Maastricht, The Netherlands. In addition, we lease
commercial space in India, Hong Kong, Italy, Dubai, Australia, Russia, Canada, Brazil, Malaysia, South Korea, Japan,
South Africa, Great Britain, Vietnam, Taiwan, New Zealand, Indonesia, and France, as well as in Massachusetts and Texas.
Our principal manufacturing and packaging facilities are located in Virginia, Texas, Utah, Pennsylvania, Ireland, Brazil,
Australia, France, Singapore, Mexico, and The Netherlands. Our research and development activities are conducted
principally at facilities located in California, Texas, Pennsylvania, Utah, Ireland, France, and Singapore.
Our total manufacturing, commercial, distribution, and research space is approximately 2.0 million square feet,
of which approximately 1.0 million square feet is owned, and 1.0 million square feet is leased.
37
The following is a summary of the approximate square footage of our key facilities as of December 31, 2019:
Location
Utah
Mexico
Virginia
Ireland
The Netherlands
Texas
Singapore
China
Main Purpose
HQ, Manufacturing, Distribution, Research
Manufacturing
Manufacturing, Distribution
Manufacturing, Research
Distribution
Manufacturing, Research
Manufacturing, Research
Distribution
Area (sq. ft.)
724,170
196,690
187,659
139,680
136,501
94,000
68,000
37,100
Operations associated with our cardiology segments utilize all of our facilities, while operations associated with
our endoscopy segment are conducted primarily from our facilities located in Utah and Texas.
In February 2020, we completed construction of a manufacturing and research and development facility, which
we own, near our South Jordan, Utah, headquarters, totaling approximately 90,000 square feet.
We believe our existing and proposed facilities will generally be adequate for our present and future anticipated
levels of operations.
Item 3. Legal Proceedings.
In the ordinary course of business, we are involved in various claims and litigation matters. These claims and
litigation matters may include actions involving product liability, intellectual property, contract disputes, and employment
or other matters that are significant to our business. For example, in December 2019 our company, our Chief Executive
Officer and our Chief Financial Officer were named in a complaint filed in the Central District of California, which alleges
violations of certain federal securities laws. Based upon our review of currently available information, we do not believe
that any such actions are likely to be, individually or in the aggregate, materially adverse to our business, financial
condition, results of operations or liquidity.
In addition to the foregoing matters, in October 2016, we received a subpoena from the U.S. Department of Justice
seeking information on certain of our marketing and promotional practices. We have responded to the subpoena, as well
as additional related requests. We have incurred, and anticipate that we will continue to incur, substantial costs in
connection with the matter. The investigation is ongoing and at this stage we are unable to predict its scope, duration or
outcome. Investigations such as this may result in the imposition of, among other things, significant damages, injunctions,
fines or civil or criminal claims or penalties against our company or individuals.
It is possible that the ultimate resolution of any of the foregoing matters, or other matters, if resolved in a manner
unfavorable to us, may be materially adverse to our business, financial condition, results of operations or liquidity. Legal
costs for these matters, such as outside counsel fees and expenses, are charged to expense in the period incurred.
Item 4. Mine Safety Disclosures.
The disclosure required by this item is not applicable.
38
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities.
Market Price for the Common Stock
Our common stock is traded on the NASDAQ Global Select Market under the symbol “MMSI.” As of
February 27, 2020, the number of shares of our common stock outstanding was 55,216,906 held by approximately 104
shareholders of record, not including shareholders whose shares are held in securities position listings.
Performance
The following graph compares the performance of our common stock with the performance of the NASDAQ
Stock Market (U.S. Companies) and NASDAQ Stocks (SIC 3840-3849 U.S. Companies - Surgical, Medical and Dental
Instruments and Supplies) for a five-year period by measuring the changes in common stock prices from December 31,
2014 to December 31, 2019.
Comparison of 5 Year Cumulative Total Return
Among Merit Medical Systems, Inc., NASDAQ Stock Market (U.S.)
e
u
l
a
V
r
a
l
l
o
D
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
223.02
204.72
180.15
Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19
Date
Merit Medical Systems, Inc.
NASDAQ Stock Market (US Companies)
NASDAQ Stocks (SIC 3840-3849 US Companies
Surgical, Medical, and Dental Instruments and Supplies)
Merit Medical Systems, Inc.
NASDAQ Stock Market (U.S. Companies)
NASDAQ Stocks (SIC 3840-3849 U.S.
Companies)
12/2014
$ 100.00
100.00
12/2015
$ 107.27
107.71
12/2016
$ 152.91
118.26
12/2017
12/2018
$ 249.28 $ 322.04
150.42
152.92
12/2019
$ 180.15
204.72
100.00
111.44
115.68
162.19
182.93
223.02
The stock performance graph assumes for comparison that the value of our common stock and of each index was $100 on
December 31, 2014 and that all dividends were reinvested. Past performance is not necessarily an indicator of future
results.
NOTE: Performance graph data is complete through last fiscal year. Performance graph with peer group uses peer group only performance (excludes
only Merit). Peer group indices use beginning of period market capitalization weighting. Index Data: Calculated (or Derived) based from
CRSP NASDAQ Stock Market (US Companies), Center for Research in Security Prices (CRSP®), Graduate School of Business, The
University of Chicago. Copyright 2020. Used with permission. All rights reserved.
39
Securities Authorized for Issuance Under Equity Compensation Plans
The following table contains information regarding our equity compensation plans as of December 31, 2019 (in
thousands, except weighted-average price):
Plan category
Equity compensation Plans
approved by security holders
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
Number of securities remaining
available for future issuance under
outstanding options, equity compensation plans (excluding
warrants and rights
(b)
securities reflected in column (a))
(c)
4,319 (1),(3) $
34.10
1,784 (2),(3)
(1) Consists of 2,933,734 shares of common stock subject to the options granted under the Merit Medical Systems, Inc.
2006 Long-Term Incentive Plan and 1,385,677 shares of common stock subject to the options granted under the Merit
Medical Systems, Inc. 2018 Long-Term Incentive Plan.
(2) Consists of 69,877 shares available to be issued under the 1996 Merit Medical Systems, Inc. Non-Qualified Employee
Stock Purchase Plan and 1,714,323 shares available to be issued under the Merit Medical Systems, Inc. 2018 Long-
Term Incentive Plan.
(3) See Note 12 to our consolidated financial statements set forth in Item 8 of this report for additional information
regarding these plans.
Item 6. Selected Financial Data (in thousands, except per share amounts).
2019
2018
2017
2016
2015
Operating Data:
Net Sales
Gross Profit
Income from Operations
Income Before Income Taxes
Net Income
Diluted Earnings Per Common Share:
Balance Sheet Data:
Working capital
Total assets
Long-term debt, less current portion
Stockholders' equity
Cash Flow Data:
$ 994,852
432,366
15,434
2,193
5,451
0.10
$
$ 882,753
394,770
58,617
49,519
42,017
0.78
$
$ 727,852 $ 603,838
265,025
34,876
25,386
20,121
0.45
326,253
33,069
35,881
27,523
0.55 $
$
$ 542,149
235,781
37,543
31,200
23,802
0.53
$
$ 272,882
1,757,321
431,984
949,944
$ 254,491
1,620,012
373,152
932,775
$ 200,501 $ 155,092
942,803
314,373
498,189
1,111,811
259,013
676,334
$ 116,093
778,728
197,593
466,103
Net cash provided by operating activities
$
77,813
$
86,533
$
62,727 $ 53,599
$ 69,458
40
Item 7. 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 Notes thereto set forth in Item 8 of this report.
Overview
We design, develop, manufacture and market medical products for interventional and diagnostic procedures. For
financial reporting purposes, we report our operations in two operating segments: cardiovascular and endoscopy. Our
cardiovascular segment consists of cardiology and radiology devices, which assist in diagnosing and treating coronary
arterial disease, peripheral vascular disease and other non-vascular diseases and includes embolotherapeutic, cardiac
rhythm management, electrophysiology, critical care, breast cancer localization and guidance, biopsy, 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.
Within those two operating segments, we offer products focused in six core product groups: peripheral intervention,
cardiac intervention, interventional oncology and spine, cardiovascular and critical care, breast cancer localization and
guidance and endoscopy.
For the year ended December 31, 2019, we reported sales of approximately $994.9 million, up approximately
$112.1 million or 12.7%, over 2018 sales of approximately $882.8 million.
Gross profit as a percentage of sales decreased to 43.5% for the year ended December 31, 2019 as compared to
44.7% for the year ended December 31, 2018.
Net income for the year ended December 31, 2019 was approximately $5.5 million, or $0.10 per share, as
compared to $42.0 million, or $0.78 per share, for the year ended December 31, 2018.
We continue to focus our efforts on expanding our presence in foreign markets, particularly Europe, Middle East
and Africa (“EMEA”), China, Southeast Asia, Japan, Australia and Brazil, in an effort to expand our market opportunities.
These efforts have increased our selling, general and administrative expenses and lengthened our average collection period
as certain geographic markets have customary payment terms which are, on average, longer than payment terms in the
United States; however, we believe over time this expansion will help improve our profitability. Our international sales
growth was strong for the year ended December 31, 2019. In 2019, international sales were approximately $419.1 million,
or 42.1% of our net sales, up 8.5% from international sales of $386.3 million in 2018.
We believe our forecasted growth will be facilitated by recently obtained regulatory approvals, such as:
Clearance from the China National Medical Products Association (NMPA) to market the SwiftNinja®
Steerable Microcatheter and the InQwire® Amplatz Guide Wire in China.
Authorization of the CE mark for the Cianna Scout® Surgical Guidance System.
Notice from BlueGrass Vascular Technologies that the FDA has granted De Novo classification for its
Surfacer® Inside-Out® Access Catheter System. Merit owns approximately 19.5% of the common equity
of BlueGrass Vascular and has been the worldwide exclusive distributor of the system for the last three
years. Merit has the option to acquire the remaining equity of Bluegrass Vascular during the first part of
2020.
We continue to consolidate facilities, strategically reduce operating expenses and incentivize our sales force to
focus on products that will improve our financial performance. We currently plan to move production of 14 products to
our facilities in Mexico or Texas, and anticipate consolidating four facilities from 2020-2021. We presently estimate these
consolidations to result in cost savings of approximately $6 million to $10 million annually.
41
As we have significant sales and distribution in China and Southeast Asia, we recognize the potential impact the
coronavirus epidemic may have on our business. We currently expect the adverse impact on our net sales during the first
quarter of 2020 to be in the range of $14 million to $19 million.
Results of Operations
The following table sets forth certain operational data as a percentage of sales for the years indicated:
Net sales
Gross profit
Selling, general and administrative expenses
Research and development expenses
Impairment and other charges
Contingent consideration expense (benefit)
Acquired in-process research and development expenses
Income from operations
Income before income taxes
Net income
2019
2018
2017
100 %
43.5
32.9
6.6
2.4
(0.0)
0.1
1.6
0.2
0.5
100 %
44.7
31.3
6.7
0.1
(0.1)
0.1
6.6
5.6
4.8
100 %
44.8
31.5
7.1
0.1
—
1.7
4.5
4.9
3.8
Listed below are the sales by product category within each operating segment for the years ended December 31,
2019, 2018 and 2017 (in thousands):
Cardiovascular
Stand-alone devices
Cianna Medical
Custom kits and procedure trays
Inflation devices
Catheters
Embolization devices
CRM/EP
Total
Endoscopy
Endoscopy devices
% Change
2019
% Change
2018
% Change
2017
11.0 % $ 401,466
n/a
49,536
0.8 % 135,856
(1.9)%
90,681
14.4 % 177,876
52,072
53,494
13.1 % 960,981
4.1 %
9.5 %
31.3 % $ 361,613
n/a
6,292
6.9 % 134,756
15.7 %
92,419
21.7 % 155,525
50,038
1.0 %
48,834
16.5 %
21.2 % 849,477
44.1 % $ 275,456
— %
—
5.7 % 126,089
79,875
8.1 %
12.7 % 127,747
49,532
7.6 %
41,914
15.0 %
20.8 % 700,613
1.8 %
33,871
22.2 %
33,276
15.0 %
27,239
Total
12.7 % $ 994,852
21.3 % $ 882,753
20.5 % $ 727,852
Cardiovascular Sales. Our cardiovascular sales for the year ended December 31, 2019 were approximately
$961.0 million, up 13.1%, when compared to the corresponding period for 2018 of approximately $849.5 million. Sales
for the year ended December 31, 2019 were favorably affected by increased sales of (a) our stand-alone devices
(particularly our Map™ Merit Angioplasty Packs, Merit Laureate® Hydrophilic Guide Wire products, Dual Cap®
Disinfection & Protection System, as well as sales from our acquisitions of the BD product lines and the assets of Vascular
Insights, among others) of approximately $39.9 million, up 11.0%; (b) full year sales of Cianna Medical products of $49.5
million; and (c) catheters (particularly our Prelude® Radial Introducer Sheath product line, our Merit Maestro®
Microcatheters and our new Prelude IDeal™) of approximately $22.4 million, up 14.4%.
Our cardiovascular sales for the year ended December 31, 2018 were approximately $849.5 million, up 21.2%,
when compared to the corresponding period for 2017 of approximately $700.6 million. Sales for the year ended
December 31, 2018 were favorably affected by increased sales of (a) our stand-alone devices (particularly our Map™
Merit Angioplasty Packs, PreludeSYNC™, guide wires, and Merit Laureate® Hydrophilic Guide Wire products, as well
as sales from our acquisitions of BD and the Argon critical care division product lines, among others) of approximately
$86.2 million, up 31.3%; (b) catheters (particularly our Prelude® Radial Introducer Sheath product line, our Merit
42
Maestro® Microcatheters and our new Prelude IDeal™) of approximately $27.8 million, up 21.7%; and (c) our inflation
devices (particularly our basixTOUCH™ and BasixCompak™ product lines and inflation kits sold through our OEM
relationships) of approximately $12.5 million, up 15.7%.
Sales by our international direct sales forces are subject to foreign currency exchange rate fluctuations between
the natural currency of a foreign country and the U.S. Dollar. Foreign currency exchange rate fluctuations decreased sales
1.3% for the year ended December 31, 2019 compared to sales calculated using the applicable average foreign exchange
rates for 2018 and increased sales 0.6% for the year ended December 31, 2018 compared to sales calculated using the
applicable foreign exchange rates for 2017.
Endoscopy Sales. Our endoscopy sales for the year ended December 31, 2019 were approximately $33.9 million,
up 1.8%, when compared to sales in 2018 of approximately $33.3 million. Sales for the year ended December 31, 2019
were favorably affected by increased sales of our EndoMAXX™ fully covered esophageal stent, our Elation® balloon
dilator, and our AEROmini® fully covered esophageal stent, partially offset by decreased sales of other stents. Our
endoscopy sales for the year ended December 31, 2018 were approximately $33.3 million, up 22.2%, when compared to
sales in 2017 of approximately $27.2 million. This increase was primarily related to new sales from our distribution
agreement with NinePoint and our acquisition of BD, as well as an increase in sales of our EndoMAXX™ fully covered
esophageal stent and our Elation® balloon dilator.
International Sales. International sales for the year ended December 31, 2019 were approximately $419.1
million, or 42.1% of net sales, up 8.5% from 2018. International sales for the year ended December 31, 2018 were
approximately $386.3 million, or 43.8% of net sales, up 25.8% from 2017. The increase in our international sales during
2019 was primarily related to a year-over-year sales increase in China of approximately $20.6 million, or 22.2%, in
Southeast Asia of approximately $4.1 million, or 24.9%, and in Russia of approximately $2.6 million, or 30.0%. The
increase in our international sales during 2018 was primarily related to a year-over-year sales increase in China of
approximately $19.4 million, or 26%, in Japan of approximately $12.8 million, or 38%, and in Australia of approximately
$9.3 million, or 190% (primarily due to the acquisition of ITL).
Gross Profit. Our gross profit as a percentage of sales was 43.5%, 44.7%, and 44.8% for the years ended
December 31, 2019, 2018 and 2017, respectively. The decrease in gross profit as a percentage of sales for 2019, as
compared to 2018, was primarily related to increased amortization expense associated with current and prior year
acquisitions ($49.7 million in 2019 compared to $31.8 million in 2018), increased costs associated with new distribution
sites, and adverse impacts from tariffs and foreign currency fluctuations, which were partially offset by improvements
associated with changes in product mix. The decrease in gross profit as a percentage of sales for 2018, as compared to
2017, was primarily related to increased amortization expense and mark-up of acquired inventory associated with
acquisitions and unfavorable manufacturing variances associated with our operations in Australia, which was partially
offset by improvements associated with changes in product mix.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased
approximately $51.3 million, or 18.6%, for the year ended December 31, 2019 compared to 2018 and $46.9 million, or
20.5%, for the year ended December 31, 2018 compared to 2017. Selling, general and administrative expenses as
a percentage of sales were 32.9%, 31.3% and 31.5% for the years ended December 31, 2019, 2018 and 2017, respectively.
The increase in selling, general, and administrative expenses for the year ended December 31, 2019 compared to
the year ended December 31, 2018 was primarily related to higher compensation expenses associated with an increase in
headcount to support recent acquisitions and the growth in operations, higher commission expense associated with
increased sales, higher severance costs ($5.0 million compared to $0.9 million in 2018) related to restructuring, and legal
costs associated with the investigation by the U.S. Department of Justice ($6.5 million in 2019 compared to $5.6 million
in 2018), partially offset by decreased acquisition and integration-related costs ($3.5 million in 2019 compared to $7.6
million in 2018).
The increase in selling, general, and administrative expenses for the year ended December 31, 2018 compared to
the year ended December 31, 2017 was primarily related to $7.6 million of acquisition and integration-related costs
(compared to $6.6 million in 2017), increased headcount, increased amortization of intangible assets and foreign market
43
expansion, partially offset by decreased legal costs associated with responding to the pending subpoena from the U.S.
Department of Justice ($5.6 million in 2018 compared to $12.6 million in 2017).
Research and Development Expenses. Research and development (“R&D”) expenses increased by $6.1 million
or 10.2% to approximately $65.6 million for the year ended December 31, 2019, compared to approximately $59.5 million
in 2018. The increase in R&D expenses for the year ended December 31, 2019 was largely due to hiring additional research
and development personnel to support various new core and acquired product developments, as well as higher clinical and
regulatory costs. Research and development expenses increased by approximately $8.1 million or 15.8% to approximately
$59.5 million for the year ended December 31, 2018, compared to approximately $51.4 million in 2017. The increase in
R&D expenses for the year ended December 31, 2018 was largely due to hiring additional research and development
personnel to support various new core and acquired product developments. Our research and development expenses as
a percentage of sales were 6.6%, 6.7% and 7.1% for 2019, 2018, and 2017, respectively. We have a pipeline of new
products, and we believe that we have an effective level of capabilities and expertise to continue the flow of new, internally
developed products into the foreseeable future.
Impairment and Other Charges. For the year ended December 31, 2019 we recorded impairment charges of $23.8
million, primarily due to our write-off of our NinePoint note receivable and purchase option of $20.5 million due to our
assessment of the collectability of the note receivable and management’s decision not to exercise our option to purchase
the business. We also recorded impairment of certain intangible assets of $3.3 million, $0.7 million and $0.8 million for
the years ended December 31, 2019, 2018 and 2017, respectively, based on changes in revenue expectations associated
with these product lines and restructuring.
Contingent Consideration (Benefit). In fiscal 2019, 2018 and 2017, we recorded ($0.2) million, ($0.7) million
and ($0.3) million, respectively, of net contingent consideration (benefit) from changes in the estimated fair value of our
contingent consideration obligations stemming from our previously disclosed business acquisitions. Expense (benefit) in
each fiscal year relates 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. During the years ended December 31, 2019, 2018 and 2017, we
incurred in-process research and development charges of approximately $0.5 million, $0.6 million and $12.1 million,
respectively. Higher in-process research and development charges in the year ended December 31, 2017 was primarily
driven by the acquisition of IntelliMedical and its intellectual property rights associated with a steerable guidewire system
in 2017, as discussed in Note 3 to our consolidated financial statements set forth in Item 8 of this report.
Our operating profits by business segment for the years ended December 31, 2019, 2018 and 2017 were as follows
(in thousands):
Operating Income (Loss)
Cardiovascular
Endoscopy
Total operating income
2019
2018
2017
$ 25,780 $ 49,289
9,328
$ 15,434 $ 58,617
(10,346)
$ 24,819
8,250
$ 33,069
Cardiovascular Operating Income. Our cardiovascular operating income for the year ended December 31, 2019
was approximately $25.8 million, compared to cardiovascular operating income of approximately $49.3 million for
the year ended December 31, 2018. This decrease in cardiovascular operating income was primarily related to decreased
gross margin percentage, higher compensation expenses, higher severance costs ($5.0 million compared to $0.9 million in
2018), and legal costs associated with the investigation by the U.S. Department of Justice ($6.5 million in 2019 compared
to $5.6 million in 2018), partially offset by decreased acquisition and integration-related costs ($3.5 million in 2019
compared to $7.6 million in 2018) and increased sales. Our cardiovascular operating income for the year ended
December 31, 2018 was approximately $49.3 million, compared to operating income of approximately $24.8 million for
the year ended December 31, 2017. This increase in cardiovascular operating income was primarily related to increased
sales, lower R&D costs as a percentage of sales, the $11.9 million acquired in-process R&D charge from IntelliMedical
in 2017 which did not repeat in 2018, lower legal expenses incurred in responding to the pending subpoena from the U.S.
44
Department of Justice ($5.6 million in 2018 compared to $12.6 million in 2017), partially offset by costs related to
increased headcount, increased amortization of intangible assets, and costs associated with foreign market expansion.
Endoscopy Operating Income (Loss). Our endoscopy operating income for the year ended December 31, 2019
was a loss of approximately ($10.3) million, compared to operating income of approximately $9.3 million for the year
ended December 31, 2018. This decrease was primarily the result of the impairment of a note receivable and a purchase
option for NinePoint of approximately $20.5 million. Our endoscopy operating income for the year ended
December 31, 2018 was approximately $9.3 million, compared to approximately $8.3 million for the year ended
December 31, 2017. This increase was primarily the result of higher sales (due to the distribution agreement with
NinePoint and the acquisition of BD).
Effective Tax Rate. Our effective income tax rate for the years ended December 31, 2019, 2018 and 2017 was
(148.6%), 15.2%, and 23.3%, respectively. The decrease in the effective income tax rate for 2019 compared to 2018 was
primarily the result of book to tax differences related to stock options and deferred compensation as well as uncertain tax
positions lapsing that generated a greater benefit due to lower pre-tax book income. The decrease in the effective income
tax rate for 2018 compared to 2017 was primarily the result of the reduced U.S. corporate tax rate and the favorable impact
of the revision and completion of the transition tax calculation, partially offset by the unfavorable impact of the estimated
withholding tax on unremitted foreign earnings.
Other Income (Expense). Our other income (expense) for the years ended December 31, 2019, 2018 and 2017
was approximately ($13.2) million, ($9.1) million, and $2.8 million, respectively. The change in other income (expense)
for 2019 over 2018 was principally the result of increased interest expense due to higher average debt balances during
2019, the write-off of $1.6 million of accrued interest related to the NinePoint note receivable, and increased expense
related to foreign currency remeasurement. The change in other income (expense) for 2018 over 2017 was principally the
result of increased interest expense due to higher average debt balances during 2018 and the gain on bargain purchase
related to the 2017 acquisition of the Argon critical care division of approximately $11.0 million.
Net Income. Our net income for the years ended December 31, 2019, 2018 and 2017 was approximately $5.5
million, $42.0 million, and $27.5 million, respectively. The decrease in net income for 2019, when compared to 2018, was
primarily due to total charges of $22.1 million related to NinePoint (including the entire carrying value of the purchase
option and note receivable, along with $1.6 million of accrued interest), increased selling, general, and administrative
expenses as a percentage of sales, lower gross profit as a percentage of sales, and increased interest expense compared to
2018.
The increase in net income for the year ended December 31, 2018, when compared to 2017, was primarily due to
increased sales (both from acquisitions and organic growth), decreased R&D expenses as a percentage of sales, lower legal
expenses incurred in responding to the pending subpoena from the U.S. Department of Justice ($5.6 million in 2018
compared to $12.6 million in 2017) and a lower effective tax rate in 2018 (in large part due to tax reform), partially offset
by slightly lower gross margins and increased interest expense due to higher average debt balances in 2018.
Total Assets. Total assets utilized in our cardiovascular segment were approximately $1.7 billion as of
December 31, 2019, compared to approximately $1.6 billion as of December 31, 2018 and approximately $1.1 billion as
of December 31, 2017. Total assets utilized in our endoscopy segment were approximately $12.3 million as of
December 31, 2019, compared to approximately $31.0 million as of December 31, 2018 and approximately $8.0 million
as of December 31, 2017. The decrease in endoscopy segment total assets from December 31, 2018 to December 31, 2019
was primarily related to the impairment of the purchase option and note receivable with NinePoint.
Off-Balance Sheet Arrangements. We have committed to provide loans of up to an additional €2 million at the
discretion of Selio Medical Limited at a rate of 5% per annum. The current note receivable balance from Selio is $250,000.
If exercised these loans would be securitized by all the present and future assets and property of the borrower. Aside from
this arrangement, we do not have any off-balance sheet arrangements that have had, or are reasonably likely in the future
to have, an effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
45
Liquidity and Capital Resources
Capital Commitments and Contractual Obligations
The following table summarizes our capital commitments and contractual obligations as of December 31, 2019,
as well as the future periods in which such payments are currently anticipated to become due:
Payment due by period (in thousands)
Contractual Obligations
Long-term debt
Interest on long-term debt (1)
Operating leases
Royalty obligations
Total contractual cash
Total
$ 440,000
58,769
106,359
4,194
$ 609,322
$
$ 15,938 $ 416,562 $
Less than 1 Year 1-3 Years 4-5 Years After 5 Years
—
—
53,501
583
54,084
7,500
12,910
13,949
738
35,097
20,395
15,603
1,435
25,464
23,306
1,438
$ 66,146 $ 453,995 $
$
(1) Interest payments on our variable long-term debt were forecasted using the LIBOR forward curves plus a base of 1.50% based on
the terms of our Third Amended Credit Agreement. Interest payments on a portion of our long-term debt were forecasted using a
fixed rate of 2.62% through July 2021, and a fixed rate of 3.21% from July 2021 through July 2024, as a result of our interest rate
swaps (see Note 9 to our consolidated financial statements set forth in Item 8 of this report).
As of December 31, 2019, we had approximately $76.7 million of contingent consideration liabilities, $2.2
million of unrecognized tax positions, and $14.9 million of deferred compensation payable that have been recognized as
liabilities that have not been included in the contractual obligations table due to uncertainty as to when such amounts may
be settled.
Additional information regarding our capital commitments and contractual obligations, including royalty
payments and operating leases, is contained in Notes 8, 10, and 18 to our consolidated financial statements set forth in
Item 8 of this report.
Cash Flows
At December 31, 2019 and 2018, we had cash and cash equivalents of approximately $44.3 million and $67.4
million respectively, of which approximately $31.7 million and $57.3 million, respectively, were held by foreign
subsidiaries. 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, after evaluation of the permanent reinvestment assertion, we are no longer
permanently reinvested with respect to our historic unremitted foreign earnings as of December 31, 2018. 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 December 31, 2019 and 2018, we had cash and cash equivalents of
approximately $11.3 million and $18.6 million, respectively, held by our subsidiary in China.
Cash flows provided by operating activities. We generated cash from operating activities of approximately $77.8
million, $86.5 million and $62.7 million during the years ended December 31, 2019, 2018 and 2017, respectively. Net
cash provided by operating activities decreased $8.7 million for the year ended December 31, 2019 compared to the year
ended December 31, 2018. Significant changes in operating assets and liabilities affecting cash flows during these years
included:
Cash (used for) accounts receivable was approximately $(17.9) million and $(27.5) million for the years
ended December 31, 2019 and 2018, respectively, due primarily to increases in sales volume, and
Cash (used for) provided by accounts payable was ($2.3) million and $15.7 million for the years ended
December 31, 2019 and 2018, respectively, due primarily to growth in operations and timing of
payments.
46
The $23.8 million increase in net cash provided by operating activities for the year ended December 31, 2018
compared to the year ended December 31, 2017 was driven by an increase in net income of approximately $14.5 million
and an increase of approximately $21.1 million in non-cash items, partially offset by a decrease in the net change from
operating assets and liabilities of approximately $11.7 million. Significant changes in operating assets and liabilities
affecting cash flows during these years included:
Cash (used for) accounts receivable was approximately $(27.5) million and $(12.8) million for the years
ended December 31, 2018 and 2017, respectively, due primarily to increases in product sales volume;
Cash (used for) inventory was approximately ($28.2) million and ($17.8) million for the years ended
December 31, 2018 and 2017, respectively. The increase in the inventory balance was due to several
factors, including acquisitions, increased sales, and the opening of new modified direct sales markets in
South Korea, India, and Japan; and
Cash provided by accounts payable was approximately $15.7 million and $0.4 million for the years
ended December 31, 2018 and 2017, respectively, due primarily to growth in operations and timing of
payments.
Cash flows used in investing activities. We used cash in investing activities of approximately $134.5 million,
$378.8 million, and $146.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. We invested in
capital expenditures for property and equipment of approximately $78.2 million, $63.3 million, and $38.6 million for
the years ended December 31, 2019, 2018 and 2017, respectively. Capital expenditures in each fiscal year were primarily
related to investment in buildings, property and equipment to support development and production of new and expanded
product lines and to facilitate growth in our distribution markets. These investments include construction of a new
manufacturing and research and development facility in South Jordan, Utah completed in early 2020 and expansion of our
manufacturing facility in Tijuana, Mexico to incorporate production of our biopsy and drainage products acquired from
BD and other 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 $55 million in 2020 for buildings, property and equipment.
Cash outflows invested in acquisitions for the year ended December 31, 2019 were approximately $53.9 million
and were primarily related to our acquisition of Brightwater and STD Pharmaceutical. Cash outflows for acquisitions in
2018 were approximately $301.8 million and primarily related to our acquisition of BD product lines and Cianna Medical.
Cash outflows for acquisitions in 2017 were $105.6 million and primarily related to our acquisition of the assets of Laurane
Medical, the assets of Osseon LLC, Vascular Access Technologies, the critical care division of Argon and a custom
procedure pack business from ITL Healthcare Pty Ltd. (“ITL”). Each year also included additional less significant
acquisitions; for further discussion, refer to Note 3 to our consolidated financial statements set forth in Item 8 of this report.
Cash flows provided by financing activities. Cash provided by financing activities for the years ended
December 31, 2019, 2018 and 2017 was approximately $33.5 million, $328.3 million and $96.5 million, respectively. In
2019 we increased our net borrowings by approximately $44.5 million to partially finance our current period acquisitions
and pay contingent consideration of $15.7 million, which is classified as a financing activity, principally related to our
Cianna Medical acquisition. In 2018, our primary financing activities included a public equity offering of 4,025,000 shares
of common stock (from which we received net proceeds of approximately $205.0 million, which is net of approximately
$12.0 million in underwriting discounts and commissions incurred and paid by us in connection with this equity offering)
and additional net borrowings under our credit agreement of approximately $116.5 million to fund our acquisition activity.
This was partially offset by approximately $2.6 million used to purchase common stock to pay employee taxes resulting
from the exercise of stock options. Our primary financing activities in 2017 included a public equity offering of 5,175,000
shares of common stock from which we received proceeds of approximately $136.6 million, which is net of approximately
$8.8 million in underwriting discounts. This was partially offset by net paydowns on our outstanding debt of approximately
$46.0 million.
As of December 31, 2019, we had outstanding borrowings of $440 million under the Third Amended Credit
Agreement, with available borrowings of approximately $133.8 million, based on the leverage ratio required pursuant to
47
the Third Amended Credit Agreement. Our interest rate as of December 31, 2019 was a fixed rate of 2.62% on $175
million as a result of an interest rate swap (see Note 9 to our consolidated financial statements set forth in Item 8 of this
report) and a variable floating rate of 3.30% on $265 million. Our interest rate as of December 31, 2018 was a fixed rate
of 2.12% on $175 million as a result of an interest rate swap and a variable floating rate of 3.52% on $213.5 million. As
of December 31, 2018 we also had a variable rate of 3.39% on $7 million related to our collateralized debt facility with
HSBC in China. See Note 8 to our consolidated financial statements set forth in Item 8 of this report for additional details
regarding the Third Amended Credit Agreement and our long-term debt.
We currently believe that our existing cash balances, anticipated future cash flows from operations and
borrowings under the Third Amended Credit Agreement will be adequate to fund our current and currently planned future
operations for the next twelve months and the foreseeable future. In the event we pursue and complete significant
transactions or acquisitions in the future, additional funds will likely be required to meet our strategic needs, which may
require us to raise additional funds in the debt or equity markets.
Critical Accounting Policies and Estimates
The SEC has requested that all registrants address their most critical accounting policies. The SEC has indicated
that a “critical accounting policy” is one which is both important to the representation of the registrant’s financial condition
and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We base our estimates on past experience and on
various other assumptions our management believes to be reasonable under the circumstances, the results of which form
the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results will differ and may differ materially from these estimates under different assumptions or conditions.
Additionally, changes in accounting estimates could occur in the future from period to period. The following paragraphs
identify our most critical accounting policies:
Valuation of Goodwill and Intangible Assets. We allocate any excess purchase price over the fair value of the
net tangible and identifiable intangible assets acquired in a business combination to goodwill. We base the fair value of
identifiable intangible assets acquired in a business combination on valuations that use information and assumptions that
a market participant would use, including assumptions for estimated revenue projections, growth rates, cash flows,
discount rates, useful life, and other relevant assumptions.
We test our goodwill balances for impairment as of July 1 of each year, or whenever impairment indicators arise.
We utilize several reporting units in evaluating goodwill for impairment using a quantitative assessment, which uses a
combination of a guideline public company market-based approach and a discounted cash flow income-based approach.
The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case
an impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair value. This analysis
requires significant judgment, including estimation of future cash flows and the length of time they will occur, which is
based on internal forecasts, and a determination of a discount rate based on our weighted average cost of capital. During
our annual test of goodwill balances in 2019, which was completed during the third quarter of 2019, we determined that
the fair value of each reporting unit with goodwill exceeded the carrying amount by a significant amount.
We evaluate the recoverability of intangible assets subject to amortization whenever events or changes in
circumstances indicate that an asset’s carrying amount may not be recoverable. This analysis requires similar significant
judgments as those discussed above regarding goodwill, except that undiscounted cash flows are compared to the carrying
amount of intangible assets to determine if impairment exists. In-process technology intangible assets, which are not
subject to amortization until projects reach commercialization, are assessed for impairment at least annually and more
frequently if events occur that would indicate a potential reduction in the fair value of the assets below their carrying value.
During the year ended December 31, 2019, we compared the carrying value of the amortizing intangible assets
acquired in our July 2015 acquisition of certain assets from Distal Access, LLC (“Distal Access”), our June 2017
acquisition of certain assets from Lazarus Medical Technologies, LLC (“Lazarus”), and our July 2017 acquisition of
certain assets from Pleuratech APS (“Pleuratech”), all of which pertained to our cardiovascular segment, to the
undiscounted cash flows expected to result from the asset groups and determined that the carrying amounts were not
48
recoverable. We then determined the fair value of the amortizing assets related to the Distal Access, Lazarus, and
Pleuratech acquisitions based on estimated future cash flows discounted back to their present value using discount rates
that reflect the risk profiles of the underlying activities. Some of the factors that influenced our estimated cash flows were
slower than anticipated sales growth in the acquired products and uncertainty about future product development and
commercialization associated with the acquired technologies. The excess of the carrying values compared to the fair values
was recognized as an intangible asset impairment charge. We recorded impairment charges relating to intangible assets
acquired from Distal Access, Lazarus, and Pleuratech of approximately $869,000, $548,000 and $1.8 million, respectively.
During the year ended December 31, 2018, we compared the carrying value of the amortizing intangible assets
acquired in our July 2015 acquisition of certain assets from Quellent, LLC, all of which pertained to our cardiovascular
segment, to the undiscounted cash flows expected to result from the asset group and determined that the carrying amount
was not recoverable. We then determined the fair value of the amortizing assets related to the Quellent acquisition 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. Some of the factors that influenced our estimated cash flows were slower than anticipated sales
growth in the products acquired from our Quellent acquisition and uncertainty about future sales growth. The excess of
the carrying value compared to the fair value was recognized as an intangible asset impairment charge. We recorded an
impairment charge for Quellent of approximately $657,000.
Contingent Consideration. Contingent consideration is an obligation by the buyer to transfer additional assets
or equity interests to the former owner upon reaching certain performance targets. Certain of our business combinations
involve the potential for the payment of future contingent consideration, generally based on a percentage of future product
sales or upon attaining specified future revenue or operational milestones. In connection with a business combination, any
contingent consideration is recorded at fair value on the acquisition date based upon the consideration expected to be
transferred in the future. We base the fair value of contingent consideration obligations acquired in a business combination
on valuations that use information and assumptions that a market participant would use, including assumptions for
estimated revenue growth rates, discount rates, probabilities of achieving regulatory, performance, or revenue-based
milestones and other relevant factors.
We re-measure the estimated liability each quarter and record changes in the estimated fair value through
operating expense in our consolidated statements of income. Significant increases or decreases in our estimates could
result in changes to the estimated fair value of our contingent consideration liability, as the result of changes in the timing
and amount of revenue estimates, as well as changes in the discount rate or periods.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our principal market risk relates to changes in the value of the following currencies related to the U.S. Dollar
(USD):
Chinese Yuan Renminbi (CNY),
Euro (EUR), and
We also have a limited market risk relating to the following currencies (among others):
British Pound (GBP)
Hong Kong Dollar (HKD),
Mexican Peso (MXN),
Australian Dollar (AUD),
Canadian Dollar (CAD),
Brazilian Real (BRL),
Swiss Franc (CHF),
49
Swedish Krona (SEK),
Danish Krone (DKK),
South Korean Won (KRW), and
Japanese Yen (JPY).
Our consolidated financial statements are denominated in, and our principal currency is, the U.S. Dollar. For the
year ended December 31, 2019, a portion of our net sales (approximately $320.8 million, representing
approximately 32.2% of our aggregate net sales), was attributable to sales that were denominated in foreign currencies.
All other international sales were denominated in U.S. Dollars.
Our CNY- and Euro-denominated revenues represent our largest currency risks. As we continue to expand our
operations in China, we have been increasingly exposed to currency risk related to our CNY-denominated revenue. In
general, a strengthening of the U.S. Dollar against CNY has a negative effect on our operating income. Our Euro-
denominated expenses associated with our European operations (manufacturing sites, a distribution facility and sales
representatives) provide a natural hedge for Euro-denominated revenues. Accordingly, changes in the Euro, and in
particular a strengthening of the U.S. Dollar against the Euro, generally have a positive effect on our operating income.
The following table presents the USD impact to reported operating income related to a hypothetical positive and negative
10% exchange rate fluctuation in the value of the U.S. Dollar relative to both the CNY and EUR, before the effect of any
hedging activities:
Impact to Operating Income:
CNY
EUR
USD Relative to Other Currency
10% Strengthening
10% Weakening
$
$
(8,314)
5,610
$
$
8,314
(5,610)
During the year ended December 31, 2019, exchange rate fluctuations of foreign currencies against the U.S.
Dollar had the following impact on sales, cost of sales and gross profit (in thousands, except percentages):
Net Sales
Cost of Sales
Gross Profit (1)
Year Ended
December 31, 2019
Currency Impact to Reported Amounts
Increase/(Decrease) Percent Increase/(Decrease)
(1.3)%
(0.9)%
(1.9)%
(13,521)
(4,944)
(8,577)
(1) Represents approximately 27 basis points decrease in gross margin percentage
The impact to sales for the year ended December 31, 2019 was primarily a result of unfavorable impacts due to
sales denominated in EUR, CNY, BRL and GBP. The impact to cost of sales was primarily a result of favorable impacts
from EUR fluctuations related to manufacturing costs from our facilities in Europe denominated in EUR and MXN
fluctuations on our manufacturing costs from our facility in Tijuana, Mexico denominated in MXN.
50
We forecast our net exposure related to sales and expenses denominated in foreign currencies. As of
December 31, 2019, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with
the following notional amounts (in thousands and in local currencies):
Currency
Australian Dollar
Brazilian Real
Canadian Dollar
Swiss Franc
Chinese Renminbi
Danish Krone
Euro
British Pound
Japanese Yen
Korean Won
Mexican Peso
Norwegian Krone
Swedish Krona
Symbol Forward Notional Amount
8,540
10,315
8,025
3,660
591,000
33,575
37,750
8,380
1,145,000
8,950,000
527,000
15,475
54,170
AUD
BRL
CAD
CHF
CNY
DKK
EUR
GBP
JPY
KRW
MXN
NOK
SEK
We also 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 December 31, 2019, we
had entered into the following foreign currency forward contracts (which were not designated as hedging instruments)
related to those balance sheet accounts (amounts in thousands and in local currencies):
Currency
Australian Dollar
Brazilian Real
Canadian Dollar
Swiss Franc
Chinese Renminbi
Danish Krone
Euro
British Pound
Hong Kong Dollar
Japanese Yen
Korean Won
Mexican Peso
Norwegian Krone
New Zealand Dollar
Swedish Krona
Singapore Dollar
South African Rand
Symbol Forward Notional Amount
14,282
19,500
1,706
306
52,598
5,987
752
7,594
11,000
1,530,000
4,868,000
35,000
3,767
1,542
13,577
1,790
50,843
AUD
BRL
CAD
CHF
CNY
DKK
EUR
GBP
HKD
JPY
KRW
MXN
NOK
NZD
SEK
SGD
ZAR
See Note 9 to our consolidated financial statements set forth in Item 8 of this report for a discussion of our foreign
currency forward contracts.
As discussed in Note 8 to our consolidated financial statements set forth in Item 8 of this report, as of
December 31, 2019, we had outstanding borrowings of approximately $440 million under the Third Amended Credit
Agreement. Accordingly, our earnings and after-tax cash flow are affected by changes in interest rates. On August 5,
2016, we entered into a pay-fixed, receive-variable interest rate swap with Wells Fargo, which as of December 31, 2019
had a notional amount of $175 million, to fix the one-month LIBOR rate at 1.12%. The interest rate swap is scheduled
to expire on July 6, 2021. On December 23, 2019, we entered into a pay-fixed, receive-variable interest rate swap with
Wells Fargo, with a notional amount of $75 million, to fix the one-month LIBOR rate at 1.71% for the period from July 6,
2021 to July 31, 2024. These instruments are intended to reduce our exposure to interest rate fluctuations and were not
entered into for
51
speculative purposes. Excluding the amount that is subject to a fixed rate under the interest rate swaps and assuming the
current level of borrowings remained the same, it is estimated that our interest expense and income before income taxes
would change by approximately $2.7 million annually for each one percentage point change in the average interest rate
under these borrowings.
In the event of an adverse change in interest rates, our management would likely take actions to mitigate our
exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, additional analysis
is not possible at this time. Further, such analysis would not consider the effects of the change in the level of overall
economic activity that could exist in such an environment.
52
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Merit Medical Systems, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Merit Medical Systems, Inc. and subsidiaries
(the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive
income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the
related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 2, 2020, expressed an unqualified opinion on the
Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective January 1, 2019, the Company adopted FASB ASC
Topic 842, Leases, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial
statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts
or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
53
Acquisitions –Brightwater Medical Acquisition – Refer to Note 3 to the financial statements
Critical Audit Matter Description
On June 14, 2019, the Company completed the acquisition of Brightwater Medical, Inc. (“Brightwater”). The
Company accounted for this acquisition under the acquisition method of accounting for business combinations.
Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair
values, including developed technology intangible assets of $32.0 million. The determination of the fair value of the
developed technology intangible assets required management to make significant estimates and assumptions related to
future cash flows and the discount rate.
We identified the valuation of the acquired developed technology intangible assets from Brightwater as a critical
audit matter because of the significant estimates and assumptions management made to determine the fair value of these
assets. This required a high degree of auditor judgment and an increased extent of effort, including the involvement of our
fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s forecasts of
future cash flows and the discount rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of future cash flows and discount rate for the acquired Brightwater
developed technology intangible assets included the following, among others:
We tested the effectiveness of internal controls over the valuation of the developed technology intangible
assets, including those over forecasts of future cash flows and the selection of the discount rate.
We assessed the reasonableness of management’s forecasted cash flows by inquiring of management
regarding its processes for developing projected financial information and comparing the projections to
historical results achieved by the acquired entity, historical results of the Company and other acquisitions
completed in recent years, and comparable peer companies.
We performed sensitivity analyses of the significant assumptions used in the valuation model to evaluate the
change in fair value resulting from changes in the significant assumptions.
With the assistance of our fair value specialists, we (1) evaluated the reasonableness of the valuation
methodology; (2) evaluated the reasonableness of the discount rate through comparing the data underlying
the determination of the discount rate to independent sources and developing a range of independent
estimates and comparing those to the discount rates selected by management; and (3) tested the mathematical
accuracy of the discounted cash flow calculation.
/s/ DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 2, 2020
We have served as the Company’s auditor since 1988.
54
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2019 AND 2018
(In thousands)
December 31, December 31,
2019
2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Trade receivables — net of allowance for uncollectible accounts — 2019 — $3,108 and
2018 — $2,355
Other receivables
Inventories
Prepaid expenses and other current assets
Prepaid income taxes
Income tax refund receivables
Total current assets
PROPERTY AND EQUIPMENT:
Land and land improvements
Buildings
Manufacturing equipment
Furniture and fixtures
Leasehold improvements
Construction-in-progress
Total property and equipment
Less accumulated depreciation
Property and equipment — net
OTHER ASSETS:
Intangible assets:
Developed technology — net of accumulated amortization —2019 — $149,947 and
2018 — $102,357
Other — net of accumulated amortization — 2019 — $65,607 and 2018 — $49,136
Goodwill
Deferred income tax assets
Right-of-use operating lease assets
Other assets
Total other assets
TOTAL ASSETS
See notes to consolidated financial statements.
55
$
44,320 $
67,359
155,365
10,016
225,698
12,497
3,491
3,151
137,174
11,879
197,536
11,326
3,627
933
454,538
429,834
27,554
153,863
244,368
57,623
43,311
83,685
26,801
151,251
221,029
54,765
33,678
53,491
610,404
541,015
(231,619)
(209,563)
378,785
331,452
379,529
65,783
353,193
3,788
80,244
41,461
383,147
79,566
335,433
3,001
—
57,579
923,998
858,726
$ 1,757,321 $ 1,620,012
(continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade payables
Accrued expenses
Current portion of long-term debt
Short-term operating lease liabilities
Income taxes payable
Total current liabilities
LONG-TERM DEBT
DEFERRED INCOME TAX LIABILITIES
LONG-TERM INCOME TAXES PAYABLE
December 31, December 31,
2019
2018
$
54,623 $
105,184
7,500
11,550
2,799
54,024
96,173
22,000
—
3,146
181,656
175,343
431,984
373,152
45,236
56,363
347
392
LIABILITIES RELATED TO UNRECOGNIZED TAX BENEFITS
1,990
3,013
DEFERRED COMPENSATION PAYABLE
DEFERRED CREDITS
LONG-TERM OPERATING LEASE LIABILITIES
OTHER LONG-TERM OBLIGATIONS
Total liabilities
COMMITMENTS AND CONTINGENCIES (Notes 3, 8, 9, 10 and 18)
STOCKHOLDERS’ EQUITY:
Preferred stock — 5,000 shares authorized as of December 31, 2019 and
December 31, 2018; no shares issued
Common stock, no par value; shares authorized — 2019 and 2018 - 100,000; issued
and outstanding as of December 31, 2019 - 55,213 and December 31, 2018 - 54,893
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
14,855
11,219
2,122
2,261
72,714
—
56,473
65,494
807,377
687,237
—
—
587,017
368,221
(5,294)
571,383
363,425
(2,033)
949,944
932,775
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 1,757,321 $ 1,620,012
See notes to consolidated financial statements.
(concluded)
56
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
(In thousands, except per share amounts)
NET SALES
COST OF SALES
GROSS PROFIT
OPERATING EXPENSES:
Selling, general and administrative
Research and development
Impairment and other charges
Contingent consideration (benefit)
Acquired in-process research and development
2019
994,852
$
2018
882,753 $
$
2017
727,852
562,486
487,983
401,599
432,366
394,770
326,253
327,274
65,615
23,750
(232)
525
276,018
59,532
657
(698)
644
229,134
51,403
809
(298)
12,136
Total operating expenses
416,932
336,153
293,184
INCOME FROM OPERATIONS
15,434
58,617
33,069
OTHER INCOME (EXPENSE):
Interest income
Interest expense
Gain on bargain purchase
Other income (expense) - net
(291)
(12,413)
—
(537)
1,199
(10,360)
—
63
381
(7,736)
11,039
(872)
Total other income (expense) — net
(13,241)
(9,098)
2,812
INCOME BEFORE INCOME TAXES
2,193
49,519
35,881
INCOME TAX EXPENSE (BENEFIT)
(3,258)
7,502
8,358
NET INCOME
EARNINGS PER COMMON SHARE:
Basic
Diluted
AVERAGE COMMON SHARES:
Basic
Diluted
See notes to consolidated financial statements.
$
$
$
5,451
$
42,017 $
27,523
0.10
0.10
$
$
0.80 $
0.56
0.78 $
0.55
55,075
52,268
48,805
56,235
53,931
50,101
57
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
(In thousands)
Net income
Other comprehensive income (loss):
Cash flow hedges
Income tax benefit (expense)
Foreign currency translation adjustment
Income tax benefit (expense)
Total other comprehensive income (loss)
Total comprehensive income
See notes to consolidated financial statements.
2019
$
5,451
$
2018
42,017
$
2017
27,523
(5,456)
1,404
(18)
61
(4,009)
1,442
$
64
(16)
(3,606)
(9)
(3,567)
38,450
$
901
(350)
3,117
(252)
3,416
30,939
$
58
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
(In thousands)
BALANCE — January 1, 2017
Common Stock
Total
$ 498,189
Shares Amount
$ 206,186
44,645
Accumulated Other
Retained
Earnings
Comprehensive
Income (Loss)
$ 293,885 $
(1,882)
Net income
Other comprehensive income
Stock-based compensation expense
Options exercised
Issuance of common stock under Employee Stock
Purchase Plans
Issuance of common stock, net of offering costs
BALANCE — December 31, 2017
27,523
3,416
4,075
5,689
404
4,075
5,689
836
136,606
676,334
24
5,175
50,248
836
136,606
353,392
27,523
3,416
321,408
1,534
42,017
(3,567)
Net income
Other comprehensive loss
Stock-based compensation expense
Options exercised
Issuance of common stock under Employee Stock
Purchase Plans
Issuance of common stock, net of offering costs
Shares surrendered in exchange for payment of
payroll tax liabilities
Shares surrendered in exchange for exercise of
stock options
BALANCE — December 31, 2018
Net income
Reclassify deferred gain on sale-leaseback upon
adoption of ASC 842
Reclassify stranded tax effects upon adoption of
ASU 2018-02
Other comprehensive loss
Stock-based compensation expense
Options exercised
Issuance of common stock under Employee Stock
Purchase Plans
Shares surrendered in exchange for exercise of
stock options
BALANCE — December 31, 2019
See notes to consolidated financial statements.
42,017
(3,567)
6,117
10,634
1,087
205,030
690
22
4,025
6,117
10,634
1,087
205,030
(2,616)
(49)
(2,616)
(2,261)
932,775
(43)
54,893
(2,261)
571,383
363,425
(2,033)
5,451
93
(4,009)
9,382
4,930
1,415
288
35
9,382
4,930
1,415
5,451
93
(748)
748
(4,009)
(93)
$ 949,944
(3)
55,213
(93)
$ 587,017
$ 368,221 $
(5,294)
59
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
2019
2018
2017
$
5,451 $
42,017 $
27,523
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Gain on bargain purchase
Loss on sales and/or abandonment of property and equipment
Write-off of certain intangible assets and other long-term assets
Acquired in-process research and development
Amortization of right-of-use operating lease assets
Amortization of deferred credits
Amortization of long-term debt issuance costs
Deferred income taxes
Stock-based compensation expense
Changes in operating assets and liabilities, net of effects from acquisitions:
Trade receivables
Other receivables
Inventories
Prepaid expenses and other current assets
Prepaid income taxes
Income tax refund receivables
Other assets
Trade payables
Accrued expenses
Income taxes payable
Long-term income taxes payable
Liabilities related to unrecognized tax benefits
Deferred compensation payable
Operating lease liabilities
Other long-term obligations
92,100
—
115
25,563
525
12,256
(139)
721
(12,436)
9,382
(17,900)
1,859
(27,044)
(1,239)
128
(2,247)
(5,141)
(2,295)
9,580
(351)
(45)
(794)
3,635
(11,970)
(1,901)
69,546
—
625
814
644
—
(142)
804
2,052
6,117
(27,522)
(2,754)
(28,172)
(2,000)
(444)
232
315
15,726
12,706
918
(4,454)
267
39
—
(801)
53,582
(11,039)
427
988
12,136
—
(147)
685
(1,304)
4,075
(12,844)
(3,557)
(17,834)
(1,236)
(611)
(588)
(3,735)
417
6,461
21
4,846
(19)
1,970
—
2,510
Total adjustments
72,362
44,516
35,204
Net cash provided by operating activities
77,813
86,533
62,727
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment
Intangible assets
Proceeds from the sale of property and equipment
Issuance of note receivable
Cash paid in acquisitions, net of cash acquired
(78,173)
(3,324)
920
—
(53,904)
(63,324)
(3,012)
55
(10,750)
(301,789)
(38,623)
(2,577)
21
—
(105,582)
Net cash used in investing activities
(134,481)
(378,820)
(146,761)
See notes to consolidated financial statements.
(continued)
60
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
Offering costs
Proceeds from issuance of long-term debt
Payments on long-term debt
Long-term debt issuance costs
Contingent payments related to acquisitions
Payment of taxes related to an exchange of common stock
2019
2018
2017
$
6,252 $ 214,993 $ 143,810
(816)
(366)
197,214
639,108
(243,214)
(522,608)
(416)
—
(61)
(231)
—
(2,616)
—
246,659
(202,159)
(1,479)
(15,740)
—
Net cash provided by financing activities
33,533
328,280
96,517
EFFECT OF EXCHANGE RATES ON CASH
96
(970)
682
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(23,039)
35,023
13,165
CASH AND CASH EQUIVALENTS:
Beginning of period
End of period
67,359
32,336
19,171
$
44,320 $
67,359 $
32,336
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized interest of $1,290, $647 and $513, respectively)
Income taxes
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Property and equipment purchases in accounts payable
Receivable for issuance of common stock associated with option exercises
Acquisition purchases in accrued expenses and other long-term obligations
Merit common stock surrendered (3, 43, and 0 shares, respectively) in
exchange for exercise of stock options
$
$
$
$
$
$
12,434 $
10,324 $
7,707
12,069 $
8,692 $
6,049
7,952 $
4,989 $
1,992
— $
— $
137
10,541 $
72,209 $
10,488
93 $
2,261 $
—
—
Right-of-use operating lease assets obtained in exchange for operating lease
liabilities
$
10,637 $
— $
See notes to consolidated financial statements.
(concluded)
61
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Merit Medical Systems, Inc. (“Merit,” “we,” or “us”) designs, develops, manufactures and
markets single-use 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
cardiology and radiology medical device products which assist in diagnosing and treating coronary artery disease,
peripheral vascular disease and other non-vascular diseases and includes embolotherapeutic, cardiac rhythm management,
electrophysiology, critical care, 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. Within those two operating segments, we offer
products focused in six core product groups: peripheral intervention, cardiac intervention, interventional oncology and
spine, cardiovascular and critical care, breast cancer localization and guidance, and endoscopy.
We manufacture our products in plants located in the U.S., Mexico, The Netherlands, Ireland, France, Brazil,
Australia, and Singapore. We export sales to dealers and have direct or modified direct sales forces in the U.S., Canada,
Western Europe, Australia, Brazil, Russia, Japan, China, Malaysia, South Korea, UAE, India, New Zealand and South
Africa (see Note 13). Our consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The following is a summary of the more significant of such policies.
Use of Estimates in Preparing Financial Statements. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of Consolidation. The consolidated financial statements include our wholly owned subsidiaries.
Intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents. For purposes of the statements of cash flows, we consider interest bearing deposits
with an original maturity date of three months or less to be cash equivalents.
Receivables. Trade accounts receivable are recorded at the net invoice value and are not interest bearing. An
allowance for uncollectible accounts receivable is recorded based on our historical bad debt experience and on
management’s evaluation of our ability to collect individual outstanding balances. Once collection efforts have been
exhausted and a receivable is deemed to be uncollectible, such balance is charged against the allowance for uncollectible
accounts.
Inventories. We value our inventories at the lower of cost, at approximate costs determined on a first-in, first-
out method, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation. Inventory costs include material, labor and
manufacturing overhead. We review inventories on hand at least quarterly and record provisions for estimated excess,
slow moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable value. The
regular and systematic inventory valuation reviews include a current assessment of future product demand, historical
experience and product expiration.
Goodwill and Intangible Assets. We test goodwill balances for impairment on an annual basis as of July 1 or
whenever impairment indicators arise. We utilize several reporting units in evaluating goodwill for impairment using a
quantitative assessment, which uses a combination of a guideline public company market-based approach and a discounted
cash flow income-based approach. The quantitative assessment considers whether the carrying amount of a reporting unit
62
exceeds its fair value, in which case an impairment charge is recorded to the extent the reporting unit’s carrying value
exceeds its fair value.
Finite-lived intangible assets including developed technology, customer lists, distribution agreements, license
agreements, trademarks, covenants not to compete and patents are subject to amortization. Intangible assets are amortized
over their estimated useful life on a straight-line basis, except for customer lists, which are generally amortized on an
accelerated basis. Estimated useful lives are determined considering the period the assets are expected to contribute to
future cash flows. We evaluate the recoverability of our finite-lived intangible assets periodically and take into account
events or circumstances that warrant revised estimates of useful lives or that indicate impairment exists.
In-process technology intangible assets, which are not subject to amortization until projects reach
commercialization, are assessed for impairment at least annually and more frequently if events occur that would indicate
a potential reduction in the fair value of the assets below their carrying value. An impairment charge would be recognized
to the extent the carrying amount of the in-process technology exceeded its fair value.
Long-Lived Assets. We periodically review the carrying amount of our depreciable long-lived assets for
impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the
asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair
value is generally determined based on discounted future cash flow.
Property and Equipment. Property and equipment is stated at the historical cost of construction or purchase.
Construction costs include interest costs capitalized during construction. Maintenance and repairs of property and
equipment are charged to operations as incurred. Leasehold improvements are amortized over the lesser of the base term
of the lease or estimated life of the leasehold improvements. Construction-in-process consists of new buildings and various
production equipment being constructed internally and externally. Assets in construction-in-process will commence
depreciating once the asset has been placed in service. Depreciation is computed using the straight-line method over
estimated useful lives as follows:
Buildings
Manufacturing equipment
Furniture and fixtures
Land improvements
Leasehold improvements
40 years
4 - 20 years
3 - 20 years
10 - 20 years
4 - 25 years
Depreciation expense related to property and equipment for the years ended December 31, 2019, 2018 and 2017
was approximately $31.4 million, $28.3 million, and $26.8 million, respectively.
Deferred Compensation. We have a deferred compensation plan that permits certain management employees to
defer a portion of their salary until the future. We established a Rabbi trust to finance obligations under the plan with
corporate-owned variable life insurance contracts. The cash surrender value totaled approximately $15.1 million and $11.7
million at December 31, 2019 and 2018, respectively, which is included in other assets in our consolidated balance
sheets. We have recorded a deferred compensation payable of approximately $14.9 million and $11.2 million at
December 31, 2019 and 2018, respectively, to reflect the liability to our employees under this plan.
Other Assets. Other assets as of December 31, 2019 and 2018 consisted of the following (in thousands):
Deferred compensation plan assets
Investments in privately held companies
Long-term notes receivable
Other
Total
2019
15,053 $
17,129
2,722
6,557
41,461 $
2018
11,716
22,530
13,504
9,829
57,579
$
$
63
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.
Our share of earnings associated with equity method investments is reported within other income (expense) in our
consolidated statements of income. 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.
On April 6, 2018, we entered into long-term agreements with NinePoint, pursuant to which we (a) became the
exclusive worldwide distributor for the NvisionVLE® Imaging System and (b) acquired an option to purchase up to 100%
of the outstanding equity in NinePoint, both in exchange for total consideration of $10 million. In addition, we made a
loan to NinePoint for $10.5 million bearing interest at a rate of 9.0% and collateralized by NinePoint’s rights, interest and
title to the NvisionVLE® Imaging System. In 2019, we determined our investments in NinePoint were impaired and
recorded total impairment charges of $20.5 million for our investments in NinePoint. We also wrote off $1.6 million of
accrued interest related to the note receivable from NinePoint. In January 2020, our option to purchase the outstanding
equity of NinePoint expired.
Other Long-term Obligations. Other long-term obligations as of December 31, 2019 and 2018 consisted of the
following (in thousands):
Contingent consideration liabilities
Other long-term obligations
Total
2019
48,088 $
8,385
56,473 $
2018
58,486
7,008
65,494
$
$
In connection with a business combination, any contingent consideration is recorded at fair value on the
acquisition date based upon the consideration expected to be transferred in the future. We re-measure the estimated liability
each quarter based upon changes in the timing and amount of revenue estimates, as well as changes in the discount rate or
periods. Changes in the estimated fair value are recorded through operating expense in our consolidated statements of
income.
Revenue Recognition. We sell our medical products through a direct sales force in the U.S. and through OEM
relationships, custom procedure tray manufacturers and a combination of direct sales force and independent distributors
in international markets. Revenue is recognized when a customer obtains control of promised goods based on the
consideration we expect to receive in exchange for these goods. This core principle is achieved through the following
steps:
Identify the contract with the customer. A contract with a customer exists when (i) we enter into an enforceable
contract with a customer that defines each party’s rights regarding the goods to be transferred and identifies the payment
terms related to these goods, (ii) the contract has commercial substance and (iii) we determine that collection of
substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay
the promised consideration. We do not have significant costs to obtain contracts with customers. For commissions on
product sales, we have elected the practical expedient to expense the costs as incurred if the amortization period would
have been one year or less.
Identify the performance obligations in the contract. Generally, our contracts with customers do not include
multiple performance obligations to be completed over a period of time. Our performance obligations generally relate to
delivering single-use medical products to a customer, subject to the shipping terms of the contract. Limited warranties are
provided, under which we typically accept returns and provide either replacement parts or refunds. We do not have
significant returns. We do not typically offer extended warranty or service plans, except in limited cases which are not
material.
Determine the transaction price. Payment by the customer is due under customary fixed payment terms, and we
evaluate if collectability is reasonably assured. Our contracts do not typically contain a financing component. Revenue is
64
recorded at the net sales price, which includes estimates of variable consideration such as product returns, rebates,
discounts, and other adjustments. The estimates of variable consideration are based on historical payment experience,
historical and projected sales data, and current contract terms. Variable consideration is included in revenue only to the
extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated
with the variable consideration is subsequently resolved. Taxes collected from customers relating to product sales and
remitted to governmental authorities are excluded from revenues.
Allocate the transaction price to performance obligations in the contract. We typically do not have multiple
performance obligations in our contracts with customers. As such, we generally recognize revenue upon transfer of the
product to the customer’s control at contractually stated pricing.
Recognize revenue when or as we satisfy a performance obligation. We generally satisfy performance obligations
at a point in time upon either shipment or delivery of goods, in accordance with the terms of each contract with the
customer. We do not have significant service revenue.
Reserves are recorded as a reduction in net sales and are not considered material to our consolidated statements
of income for the years ended December 31, 2019, 2018 and 2017. In addition, we invoice our customers for taxes assessed
by governmental authorities such as sales tax and value added taxes. We present these taxes on a net basis.
Shipping and Handling. We bill our customers for shipping and handling charges, which are included in net
sales for the applicable period, and the corresponding shipping and handling expense is reported in cost of sales.
Cost of Sales. We include product costs (i.e. material, direct labor and overhead costs), shipping and handling
expense, product royalty expense, developed technology amortization expense, production-related depreciation expense
and product license agreement expense in cost of sales.
Research and Development. Research and development costs are expensed as incurred.
Income Taxes. Under our accounting policies, we initially recognize a tax position in our financial statements
when it becomes more likely than not that the position will be sustained upon examination by the tax authorities. Such tax
positions are initially and subsequently measured as the largest amount of tax positions that has a greater than 50%
likelihood of being realized upon ultimate settlement with the tax authorities assuming full knowledge of the position and
all relevant facts. Although we believe our provisions for unrecognized tax positions are reasonable, we can make no
assurance that the final tax outcome of these matters will not be different from that which we have reflected in our income
tax provisions and accruals. The tax law is subject to varied interpretations, and we have taken positions related to certain
matters where the law is subject to interpretation. Such differences could have a material impact on our income tax
provisions and operating results in the period(s) in which we make such determination.
Earnings per Common Share. Net income per common share is computed by both the basic method, which
uses the weighted average number of our common shares outstanding, and the diluted method, which includes the dilutive
common shares from stock options as calculated using the treasury stock method.
Fair Value Measurements. The fair value of a financial instrument is the amount that could be received upon
the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements
do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information
used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement. The fair value hierarchy is defined in the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
65
Stock-Based Compensation. We recognize the fair value compensation cost relating to stock-based payment
in accordance with Accounting Standards Codification (“ASC”) 718, Compensation — Stock
transactions
Compensation. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on
the fair value of the award, and is recognized over the employee’s requisite service period, which is generally the vesting
period. The fair value of our stock options is estimated using a Black-Scholes option valuation model. Stock-based
compensation expense for the years ended December 31, 2019, 2018 and 2017 was approximately $9.4 million, $6.1
million and $4.1 million, respectively.
Concentration of Credit Risk. Financial instruments that potentially subject us to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts receivable. We provide credit, in the normal course of business,
primarily to hospitals and independent third-party custom procedure tray manufacturers and distributors. We perform
ongoing credit evaluations of our customers and maintain allowances for potential credit losses. Sales to our single largest
customer accounted for approximately 2%, 2%, and 2% of net sales for the years ended December 31, 2019, 2018 and
2017, respectively.
Foreign Currency. The financial statements of our foreign subsidiaries are measured using local currencies as
the functional currency, with the exception of our manufacturing subsidiaries in Ireland and Mexico, which each use the
U.S. Dollar as its functional currency. Assets and liabilities are translated into U.S. Dollars at year-end rates of exchange
and results of operations are translated at average rates for the year. Gains and losses resulting from these translations are
included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Foreign
currency transactions denominated in a currency other than the entity’s functional currency are included in determining
net income for the period.
Derivatives. We use forward contracts to mitigate our exposure to volatility in foreign exchange rates, and we
use interest rate swaps to hedge changes in the benchmark interest rate related to our Third Amended Credit Agreement
described in Note 8. All derivatives are recognized in the consolidated balance sheets at fair value. Classification of each
hedging instrument is based upon whether the maturity of the instrument is less than or greater than 12 months. We do not
purchase or hold derivative financial instruments for speculative or trading purposes (see Note 9).
New Financial Accounting Standards
Recently Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"), which requires lessees to recognize right-of-use ("ROU") assets
and related lease liabilities on the balance sheet for all leases greater than one year in duration. We adopted ASC 842 on
January 1, 2019 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements. The modified retrospective approach did not
require any transition accounting for leases that expired before the earliest comparative period presented. The adoption of
this standard resulted in the recording of ROU assets and lease liabilities for all of our lease agreements with original terms
of greater than one year. The adoption of ASC 842 did not have a significant impact on our consolidated statements of
income or cash flows. See Note 18 for the required disclosures relating to our lease agreements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting, which simplifies the accounting for nonemployee share-based payment
transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based
payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance
on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments
granted to employees. This standard became effective for us on January 1, 2019. The adoption of this standard did not
have a material impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a
reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects
66
resulting from U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act, which was enacted in
December 2017 (the "2017 Tax Act"). ASU 2018-02 became effective for us on January 1, 2019 and resulted in a decrease
of approximately $748,000 to retained earnings due to the reclassification from AOCI of the effect of the corporate income
tax rate change on our cash flow hedges. The adoption of this standard did not have a material impact on our consolidated
financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities, which expands and refines hedge accounting for both financial and non-financial
risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the
financial statements, and includes certain targeted improvements to ease the application of current guidance related to the
assessment of hedge effectiveness. ASU 2017-12 became effective for us on January 1, 2019. The adoption of this standard
did not have a material impact on our consolidated financial statements.
Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That
Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is
effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods.
Early adoption is permitted. We adopted ASU 2018-15 on January 1, 2020 on a prospective basis, and do not expect the
adoption will result in a material impact for future periods.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds various
disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels
will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs
used in determining level 3 fair value measurements will be added, among other changes. ASU 2018-13 is effective for
interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We will modify
our disclosures beginning in the first quarter of 2020 to conform to this guidance. We do not expect the adoption of this
standard and the associated changes to our disclosures to have a material impact to our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology for financial
assets with a methodology that reflects expected credit losses. The new credit losses model must be applied to loans,
accounts receivable, and other financial assets. ASU 2016-13 is effective for annual periods beginning after December 15,
2019, including interim periods within those annual periods. We plan to adopt the new standard in the first quarter of 2020
using a modified retrospective approach with a cumulative-effect adjustment to retained earnings as of the beginning of
the year of adoption. We do not believe this guidance will have a material impact on our statements of operations or cash
flows.
We currently believe that all other issued and not yet effective accounting standards are not relevant to our
financial statements.
67
2.
REVENUES
The following table presents sales by operating segment disaggregated based on type of product and geographic
region for the years ended December 31, 2019, 2018 and 2017.
Year Ended
December 31, 2019
Year Ended
December 31, 2018
Year Ended
December 31, 2017
United States International Total
United States International Total
United States International Total
Cardiovascular
Stand-alone devices $
Cianna Medical
Custom kits and
procedure trays
Inflation devices
Catheters
Embolization
devices
CRM/EP
Total
Endoscopy
222,263 $
49,324
179,203 $ 401,466 $
212
49,536
202,129 $
6,292
159,484 $ 361,613 $
—
6,292
148,620 $
—
126,836 $ 275,456
—
—
92,038
32,795
81,183
43,818 135,856
57,886
90,681
96,693 177,876
21,222
44,291
543,116
30,850
9,203
52,072
53,494
417,865 960,981
92,975
31,717
68,708
20,433
41,970
464,224
41,781
60,702
86,817
29,605
6,864
385,253
134,756
92,419
155,525
50,038
48,834
849,477
92,474
31,848
62,284
33,615
48,027
65,463
22,374
36,746
394,346
27,158
5,168
306,267
126,089
79,875
127,747
49,532
41,914
700,613
Endoscopy devices
32,595
1,276
33,871
32,189
1,087
33,276
26,357
882
27,239
Total
$
575,711 $
419,141 $ 994,852 $
496,413 $
386,340 $ 882,753 $
420,703 $
307,149 $ 727,852
3.
ACQUISITIONS
On October 11, 2019, we entered into a subscription and shareholders’ agreement to acquire 3,900 ordinary shares
and 1,365 C ordinary shares of Selio Medical Limited ("Selio"), an option to purchase all ordinary shares in Selio
throughout a 45 day period commencing from the date Selio receives FDA Section 510(k) approval of a medical device it
is currently developing, and an option to purchase all remaining shares on the third anniversary date of the agreement if
we elect to purchase all ordinary shares. The shares of stock we acquired, which represent an ownership interest of
approximately 19.5%, have been recorded as an equity investment accounted for at cost because we are not able to exercise
significant influence over the operations of Selio. The investment and purchase option of approximately $2.6 million are
reflected within other assets in the accompanying consolidated balance sheets. In addition, we have a loan to Selio of
$250,000, reflected within other assets, and have committed to provide a loan up to an additional €2 million at the
discretion of the borrower. Amounts outstanding under the loan accrue interest at a rate of 5% per annum payable monthly.
All amounts outstanding under the loan agreement become due and payable at the first anniversary of the expiration of our
option to purchase all ordinary shares.
On August 1, 2019, we entered into a share purchase agreement to acquire Fibrovein Holdings Limited, which is
the owner of 100% of the capital stock of STD Pharmaceutical Products Limited, a UK private company engaged in the
manufacture, distribution and sale of pharmaceutical sclerotherapy products (“STD Pharmaceutical”). The purchase
consideration consisted of an upfront payment of approximately $13.7 million, net of cash acquired. We also recorded a
contingent consideration liability of $934,000 related to royalties potentially payable pursuant to the terms of the share
purchase agreement. We accounted for this acquisition as a business combination. The sales and results of operations
related to the acquisition have been included in our cardiovascular segment since the acquisition date and were not material.
68
Acquisition-related costs associated with the STD Pharmaceutical acquisition, which were included in selling, general and
administrative expenses, were not material. During the fourth quarter, certain immaterial measurement period
adjustments have been made to the preliminary purchase price allocation which was first presented in our Quarterly Report
on Form 10-Q for the Quarter Ended September 30, 2019. The purchase price was preliminarily allocated as follows
(in thousands):
Assets Acquired
Trade receivables
Inventories
Prepaid expenses and other assets
Intangibles
Developed technology
Goodwill
Total assets acquired
Liabilities Assumed
Trade payables
Accrued expenses
Deferred income tax liabilities
Total liabilities assumed
Total net assets acquired
$
277
843
49
10,428
4,975
16,572
(53)
(29)
(1,890)
(1,972)
$
14,600
We are amortizing the developed technology intangible asset acquired from STD Pharmaceutical over 12 years. The
goodwill consists largely of the synergies we hope to achieve from combining operations and is not expected to be
deductible for income tax purposes.
On June 14, 2019, we consummated an acquisition transaction contemplated by a merger agreement to acquire
Brightwater Medical, Inc. ("Brightwater"). The purchase consideration consisted of an upfront payment of $35 million
plus a final working capital adjustment of approximately $39,000, net of cash acquired, with potential earn-out payments
of up to an additional $5 million for achievement of CE certification with respect to the Brightwater ConvertX®, a single-
use device used to replace a series of devices and procedures used to treat severe obstructions of the ureter, and up to an
additional $10 million for the achievement of sales milestones specified in the merger agreement. The ConvertX device is
designed to be implanted once and converted from a nephroureteral catheter to a nephroureteral stent without requiring
sedation or local anesthesia. Brightwater recently received FDA clearance for the ConvertX biliary stent device. We
accounted for this acquisition as a business combination. The sales and results of operations related to the acquisition have
been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs
associated with the Brightwater acquisition, which were included in selling, general and administrative expenses, were not
material. During the fourth quarter of 2019, certain immaterial measurement period adjustments have been made to the
69
preliminary purchase price allocation primarily related to the deferred tax liabilities associated with the fair value of the
acquired net assets which was offset to goodwill. The purchase price was preliminarily allocated as follows (in thousands):
Assets Acquired
Trade receivables
Inventories
Property and equipment
Other long-term assets
Intangibles
Developed technology
Customer lists
Trademarks
Goodwill
Total assets acquired
Liabilities Assumed
Trade payables
Accrued expenses
Other long-term obligations
Deferred income tax liabilities
Total liabilities assumed
Total net assets acquired
$
55
349
409
30
31,960
83
250
17,492
50,628
(58)
(261)
(1,522)
(4,148)
(5,989)
$
44,639
We are amortizing the developed technology intangible asset acquired from Brightwater over 13 years, the related
trademarks over five years and the customer list on an accelerated basis over one year. The total weighted-average
amortization period for these acquired intangible assets is approximately 12.9 years. The goodwill consists largely of the
synergies and economies of scale we hope to achieve from combining the acquired assets and operations with our historical
operations and is not expected to be deductible for income tax purposes.
On March 28, 2019, we paid $2 million to acquire convertible participating preferred shares of Fluidx Medical
Technology, LLC ("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. Our investment in Fluidx has been recorded as an equity investment accounted for at cost and reflected within
other assets in our accompanying consolidated balance sheet because we are not able to exercise significant influence over
the operations of Fluidx. Our total current investment in Fluidx represents an ownership of approximately 11.6% of the
outstanding equity interests of Fluidx.
On December 14, 2018, we consummated an acquisition transaction contemplated by an asset purchase
agreement with Vascular Insights, LLC and VI Management, Inc. (combined "Vascular Insights") and acquired Vascular
Insights’ intellectual property rights, inventory and certain other assets, including, the ClariVein® IC system and the
ClariVein OC system. The ClariVein systems are specialty infusion and occlusion catheter systems with rotating wire tips
designed for the controlled 360-degree dispersion of physician-specified agents to a targeted treatment area. We accounted
for this acquisition as a business combination. The purchase consideration included an upfront payment of $40 million,
and a final working capital adjustment of approximately $15,000 paid by Vascular Insights in the third quarter of 2019.
We are also obligated to pay up to an additional $20 million based on achieving certain revenue milestones specified in
the asset purchase agreement. The sales and results of operations related to this acquisition have been included in our
cardiovascular segment. During the year ended December 31, 2019 net sales of products acquired from Vascular Insights
were approximately $7.5 million. It is not practical to separately report earnings related to the products acquired from
Vascular Insights, as we cannot split out sales costs related solely to the products we acquired from Vascular Insights,
principally because our sales representatives sell multiple products (including the products we acquired from Vascular
Insights) in our cardiovascular business segment. Acquisition-related costs associated with the Vascular Insights
acquisition, which were included in selling, general and administrative expenses during the year ended December 31,
70
2018, were not material. The following table summarizes the purchase price allocated to the net assets acquired as follows
(in thousands):
Inventories
Intangibles
Developed technology
Customer list
Trademarks
Goodwill
Total net assets acquired
$
1,353
32,750
840
1,410
21,832
$
58,185
We are amortizing the developed technology intangible asset acquired from Vascular Insights over 12 years, the related
trademarks over nine years and the customer list on an accelerated basis over eight years. The total weighted-average
amortization period for these acquired intangible assets is approximately 11.8 years. The goodwill arising principally from
synergies anticipated upon consolidation of operations is expected the be deductible for income tax purposes.
On November 13, 2018 we consummated an acquisition transaction contemplated by a merger agreement to
acquire Cianna Medical, Inc. ("Cianna Medical"). The purchase consideration consisted of an upfront payment of $135
million plus a final working capital adjustment of approximately $1.2 million in cash, with earn-out payments of $15
million for achievement of supply chain and scalability metrics paid in the third quarter of 2019 and potential payments
up to an additional $50 million for the achievement of sales milestones specified in the merger agreement. Cianna Medical
developed the first non-radioactive, wire-free breast cancer localization system. Its SCOUT® and SAVI® Brachy
technologies are FDA-cleared and address unmet needs in the delivery of radiation therapy, tumor localization and surgical
guidance. We accounted for this acquisition as a business combination. During the years ended December 31, 2019 and
2018, net sales of Cianna Medical products were approximately $49.5 million and $6.3 million, respectively. It is not
practical to separately report earnings related to the products acquired from Cianna Medical, as we cannot split out sales
costs related solely to the products we acquired from Cianna Medical, principally because our sales representatives sell
multiple products (including the products we acquired from Cianna Medical) in our cardiovascular segment. Acquisition-
related costs associated with the Cianna Medical acquisition, which were included in selling, general and administrative
expenses during the year ended December 31, 2018, were approximately $3.5 million. During the measurement period,
which ended in November 2019, adjustments were made to finalize the allocation of purchase price related to deferred
71
income tax liabilities and goodwill. The following table summarizes the purchase price allocated to the net assets acquired
from Cianna Medical (in thousands):
Assets Acquired
Trade receivables
Inventories
Prepaid expenses and other current assets
Property and equipment
Other long-term assets
Intangibles
Developed technology
Customer lists
Trademarks
Goodwill
Total assets acquired
Liabilities Assumed
Trade payables
Accrued expenses
Other long-term liabilities
Deferred income tax liabilities
Total liabilities assumed
Total net assets acquired
$
6,151
5,803
315
1,047
14
134,510
3,330
7,080
61,379
219,629
(1,497)
(2,384)
(1,527)
(25,940)
(31,348)
$
188,281
We are amortizing the developed technology intangible assets of Cianna Medical over 11 years, the related trademarks
over ten years and the customer lists on an accelerated basis over eight years. The total weighted-average amortization
period for these acquired intangible assets is approximately 10.7 years. The goodwill consists largely of the synergies and
economies of scale we hope to achieve from combining the acquired assets and operations with our historical operations
and is not expected to be deductible for income tax purposes.
During July 2018, we purchased 1,786,000 preferred limited liability company units of Cagent Vascular, LLC, a
medical device company ("Cagent"), for approximately $2.2 million. We had previously purchased 3,000,000 preferred
limited liability company units of Cagent for approximately $3.0 million during 2016 and 2017. 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 Cagent. Our total current
investment in Cagent represents an ownership of approximately 19.5% of the outstanding stock.
On May 23, 2018, we entered into an asset purchase agreement with DirectACCESS Medical, LLC
(“DirectACCESS”) to acquire its assets, including, certain product distribution agreements for the FirstChoice™ Ultra
High-Pressure PTA Balloon Catheter. We accounted for this acquisition as a business combination. The purchase price
for the assets was approximately $7.3 million. 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
72
associated with the DirectACCESS acquisition, which were included in selling, general and administrative expenses during
the year ended December 31, 2018, were not material. The purchase price was allocated as follows (in thousands):
Inventories
Intangibles
Developed technology
Customer list
Trademarks
Goodwill
Total net assets acquired
$
971
4,840
120
400
938
$
7,269
We are amortizing the developed technology intangible asset of DirectACCESS over ten years, the related trademarks
over ten years and the customer list on an accelerated basis over five years. The total weighted-average amortization period
for these acquired intangible assets is approximately 9.9 years. The goodwill arising principally from synergies anticipated
upon consolidation of operations is expected to be deductible for income tax purposes.
On May 18, 2018, we paid $750,000 for a distribution agreement with QXMédical, LLC ("QXMédical") for the
Q50® PLUS Stent Graft Balloon Catheter. We accounted for this acquisition as an asset purchase. We are amortizing the
distribution agreement intangible asset over a period of ten years.
On April 6, 2018, we entered into long-term agreements with NinePoint, pursuant to which we (a) became the
exclusive worldwide distributor for the NvisionVLE® Imaging System with Real-time Targeting™ using Optical
Coherence Tomography (OCT) and (b) acquired an option to purchase up to 100% of the outstanding equity in NinePoint
throughout a three-month period commencing 18 months subsequent to the agreement date, both in exchange for total
consideration of $10 million. In addition, we made a loan to NinePoint for $10.5 million with a maturity date of April 6,
2023, at which time the loan, together with accrued interest thereon, will be due and payable. The loan bears interest at a
rate of 9.0% and is collateralized by NinePoint’s rights, interest and title to the NvisionVLE® Imaging System and any
other product owned or licensed by NinePoint utilizing OCT. This loan has been recorded as a note receivable within other
long-term assets in our consolidated balance sheets. We utilized the consolidation of variable interest entities guidance to
determine whether or not NinePoint was a variable interest entity ("VIE"), and if so, whether we are the primary beneficiary
of NinePoint. As of December 31, 2018, we concluded that NinePoint is a VIE based on the fact that the equity investment
at risk in NinePoint is not sufficient to finance its activities. We have also determined that Merit is not the primary
beneficiary of NinePoint as we do not have the power to direct NinePoint’s most significant activities. The results of
operations related to NinePoint have been included in our endoscopy segment since the acquisition date. During the years
ended December 31, 2019 and 2018 our net sales of NinePoint products were approximately $2.9 million and $3.0 million,
respectively. Our exposure to loss related to our transaction with NinePoint was the carrying value of the amounts paid to
and due from NinePoint. In 2019, we determined our investments in NinePoint were impaired, and we recorded impairment
charges of $20.5 million for the NinePoint note receivable and purchase option and $1.6 million related to interest accrued
on the note receivable. In January 2020, our option to purchase the outstanding equity of NinePoint expired.
On February 14, 2018, we acquired certain divested assets from Becton, Dickinson and Company ("BD"), for an
aggregate purchase price of $100.3 million. We also recorded a contingent consideration liability of $1.6 million related
to milestone payments payable pursuant to the terms of the acquired contract with Sontina Medical LLC. The assets
acquired include the soft tissue core needle biopsy products sold under the tradenames of Achieve® Programmable
Automatic Biopsy System, Temno® Biopsy System and TruCut® Biopsy Needles as well as the Aspira® Pleural Effusion
Drainage Kits, and the Aspira® Peritoneal Drainage System. We accounted for this acquisition as a business combination.
During the years ended December 31, 2019 and 2018, net sales of BD products were approximately $46.8 million and
$42.1 million, respectively. It is not practical to separately report earnings related to the products acquired from BD, as we
cannot split out sales costs related solely to the products we acquired from BD, principally because our sales representatives
sell multiple products (including the products we acquired from BD) in our cardiovascular business segment. Acquisition-
related costs associated with the BD acquisition, which were included in selling, general and administrative expenses
during the year ended December 31, 2018, were approximately $1.8 million. During the measurement period, which ended
in December 2018, adjustments were made to finalize the allocation of purchase price related to intangible assets, goodwill
73
and contingent liabilities. The following table summarizes the purchase price allocated to the assets acquired from BD (in
thousands):
Inventories
Property and equipment
Intangibles
Developed technology
Customer list
Trademarks
In-process technology
Goodwill
$
5,804
748
74,000
4,200
4,900
2,500
9,728
Total net assets acquired
$
101,880
We are amortizing the developed technology intangible assets acquired from BD over eight years, the related trademarks
over nine years, and the customer lists on an accelerated basis over seven years. The total weighted-average amortization
period for these acquired intangible assets is approximately eight years. The goodwill arising principally from synergies
anticipated upon consolidation of operations is expected to be deductible for income tax purposes.
On October 2, 2017 we acquired a custom procedure pack business located in Melbourne, Australia from ITL,
for an aggregate purchase price of $11.3 million. We accounted for this acquisition as a business combination. The
following table summarizes the aggregate purchase price allocated to the assets acquired from ITL (in thousands):
Assets Acquired
Trade receivables
Other receivables
Inventories
Prepaid expenses and other assets
Property and equipment
Intangibles
Customer lists
Goodwill
Total assets acquired
Liabilities Assumed
Trade payables
Accrued expenses
Deferred tax liabilities
Total liabilities assumed
Total net assets acquired
$
1,287
56
1,808
65
1,053
5,940
3,945
14,154
(216)
(747)
(1,901)
(2,864)
$
11,290
We are amortizing the customer list on an accelerated basis over seven years. The goodwill consists largely of the synergies
and economies of scale we hope to achieve from combining the acquired assets and operations with our historical
operations and is not expected to be deductible for income tax purposes. Acquisition-related costs associated with the ITL
acquisition, which are included in selling, general and administrative expenses in the accompanying consolidated
statements of income, were not material. The results of operations related to this acquisition have been included in our
cardiovascular segment since the acquisition date. During the years ended December 31, 2019, 2018 and 2017, our net
sales of ITL products were approximately $7.7 million, $8.0 million and $3.3 million, respectively. It is not practical to
separately report the earnings related to the ITL acquisition, as we cannot split out sales costs related solely to the products
we acquired from ITL, principally because our sales representatives sell multiple products (including the products we
acquired from ITL) in our cardiovascular business segment.
74
On September 1, 2017, we acquired intellectual property rights associated with a steerable guidewire system from
IntelliMedical Technologies Pty. Ltd. ("IntelliMedical"). We made an initial payment of approximately $11.9 million in
September 2017, and we are obligated to pay up to an additional A$15.0 million (Australian dollars) if certain milestones
set forth in the share purchase agreement with IntelliMedical are achieved. We are also required to pay royalties equal to
6% of net sales, commencing upon the first commercial sale of the product and throughout the term of the applicable
patents. We accounted for this transaction as an asset purchase. The initial payment has been included in the accompanying
consolidated statements of income as acquired in-process research and development expense for the year ended
December 31, 2017, because technological feasibility of the underlying research and development project had not yet been
reached and such technology had no identified future alternative use as of the date of acquisition.
On August 4, 2017 we acquired from Laurane Medical S.A.S. ("Laurane") and its shareholders inventories and
the intellectual property rights associated with certain manual bone biopsy devices, manual bone marrow needles and
muscle biopsy kits for an aggregate purchase price of $16.5 million. We also recorded a contingent consideration liability
of $5.5 million related to royalties potentially payable to Laurane’s shareholders pursuant to the terms of an intellectual
property purchase agreement. We accounted for this acquisition as a business combination. The following table
summarizes the aggregate purchase price (including contingent royalty payment liabilities) allocated to the assets acquired
from Laurane (in thousands):
Inventories
Intangibles
Developed technology
Customer list
Goodwill
Total net assets acquired
$
594
14,920
120
6,366
$
22,000
We are amortizing the developed technology intangible asset over 12 years and the customer list on an accelerated basis
over one year. The total weighted-average amortization period for these acquired intangible assets is 11.9 years. The
goodwill arising principally from synergies anticipated upon consolidation of operations is expected the be deductible for
income tax purposes. 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 Laurane acquisition,
which are included in selling, general and administrative expenses in the accompanying consolidated statements of income,
were not material.
On July 3, 2017, we acquired from Osseon LLC (“Osseon”) substantially all the assets related to Osseon’s
vertebral augmentation products. We accounted for this acquisition as a business combination. The purchase price for the
assets was approximately $6.8 million. Acquisition-related costs associated with the Osseon acquisition, which are
included in selling, general and administrative expenses in the accompanying consolidated statements of income, were not
material. The results of operations related to this acquisition have been included in our cardiovascular segment since the
acquisition date. During the years ended December 31, 2019, 2018 and 2017, our net sales of Osseon products were
approximately $1.7 million, $2.1 million and $942,000, respectively. It is not practical to separately report the earnings
related to the Osseon acquisition, as we cannot split out sales costs related solely to the products we acquired from Osseon,
principally because our sales representatives sell multiple products (including the products we acquired from Osseon) in
75
our cardiovascular business segment. The following table summarizes the purchase price allocated to the assets acquired
(in thousands):
Inventories
Property and equipment
Intangibles
Developed technology
Customer list
Goodwill
Total net assets acquired
$
979
58
5,400
200
203
$
6,840
We are amortizing the developed technology intangible asset over nine years and customer lists on an accelerated basis
over eight years. The total weighted-average amortization period for these acquired intangible assets is approximately
9.0 years. The goodwill arising principally from synergies anticipated upon consolidation of operations is expected the be
deductible for income tax purposes.
On July 1, 2017, we entered into an exclusive license agreement with Pleuratech ApS ("Pleuratech") to acquire
the rights to manufacture and sell the KatGuideTM chest tube insertion tool. We paid $2.0 million in connection with this
agreement. We recorded the amount paid upon closing as a license agreement intangible asset, which we were amortizing
over 15 years. During 2019, we recorded an impairment of this asset of approximately $1.8 million.
On June 16, 2017, we acquired from Lazarus Medical Technologies, LLC the patent rights and other intellectual
property related to the Repositionable Chest TubeTM and related devices. As of December 31, 2019, we had paid $620,000
in connection with this agreement. We accounted for this transaction as an asset purchase. We recorded the amount paid
upon closing as a license agreement intangible asset, which we are amortizing over 15 years. During 2019, we cancelled
this agreement with Lazarus Medical, impaired the license agreement, and are no longer required to complete future
obligations under the terms of this contract.
On May 23, 2017, we paid $2.5 million to acquire 182,000 shares of preferred stock of Fusion Medical, Inc.
("Fusion"), a developer of medical devices designed primarily for clot removal. The shares of preferred stock we acquired,
which represent an ownership interest of approximately 19.5%, have been accounted for as an equity method investment
of $2.5 million reflected within other assets in the accompanying consolidated balance sheets because we may be deemed
to exercise significant influence over the operations of Fusion.
On May 19, 2017, we terminated our distribution agreement with Sheen Man Co., Ltd. and Sugan Co, Ltd.,
("Sugan"), a Japanese medical device distributor and entered into a business purchase agreement, distribution agreement
and a supply agreement with Sugan. Pursuant to these agreements, we acquired the customer list Sugan used in the
distribution of our products in Japan. The purchase price is recorded as a customer list intangible asset of approximately
$1.2 million. We are amortizing the customer list intangible asset on an accelerated basis over five years. In addition, we
granted to Sugan the right to continue to distribute a limited number of our products, related to fluid administration, through
December 31, 2021 and to manufacture and sell to Sugan certain contrast injector products during a term of four years,
subject to extensions.
On May 1, 2017, we entered into an agreement and plan of merger with Vascular Access Technologies, Inc.
("VAT"), pursuant to which we acquired the SAFECVAD™ device. We accounted for this acquisition as a business
combination. The purchase price for the business was $5.0 million. We also recorded $4.9 million of contingent
76
consideration related to royalties potentially payable to VAT pursuant to the merger agreement. The following table
summarizes the purchase price allocated to the net assets acquired and liabilities assumed (in thousands):
Intangibles
Developed technology
In-process technology
Goodwill
Deferred tax liabilities
Total net assets acquired
$
7,800
920
4,281
(3,101)
$
9,900
We are amortizing the developed technology intangible asset over 15 years. The goodwill arising principally from
synergies anticipated upon consolidation of operations is not expected the be deductible for income tax purposes. 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 VAT acquisition, which are included in selling,
general and administrative expenses in the accompanying consolidated statements of income, were not material.
On January 31, 2017, we acquired Argon’s critical care division, including a manufacturing facility in Singapore,
the related commercial operations in Europe and Japan, and certain inventories and intellectual property rights within the
U.S. We made an initial payment of approximately $10.9 million and received a subsequent reduction to the purchase
price of approximately $797,000 related to a working capital adjustment according to the terms of the purchase agreement.
We accounted for the acquisition as a business combination. Acquisition-related costs associated with the acquisition of
the Argon critical care division during the year ended December 31, 2017, which are included in selling, general and
administrative expenses in the accompanying consolidated statements of income, were approximately $2.6 million. The
results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date.
During the years ended December 31, 2019, 2018 and 2017, our net sales of the Argon critical care products were
approximately $46.8 million, $45.5 million and $41.2 million, respectively. It is not practical to separately report the
earnings related to the Argon critical care acquisition, as we cannot split out sales costs related solely to the products we
acquired from Argon, principally because our sales representatives sell multiple products (including the products we
acquired from Argon) in our cardiovascular business segment. The assets and liabilities in the purchase price allocation
for the Argon critical care acquisition are stated at fair value based on estimates of fair value using available information
and making assumptions our management believes are reasonable. The following table summarizes the purchase price
allocated to the net tangible and intangible assets acquired and liabilities assumed (in thousands):
77
Assets Acquired
Cash and cash equivalents
Trade receivables
Inventories
Prepaid expenses and other assets
Income tax refund receivable
Property and equipment
Deferred tax assets
Intangibles
Developed technology
Customer lists
Trademarks
Total assets acquired
Liabilities Assumed
Trade payables
Accrued expenses
Deferred income tax liabilities
Total liabilities assumed
Total net assets acquired
Gain on bargain purchase (1)
Total purchase price
$
1,436
8,351
11,222
1,275
165
2,319
202
2,200
1,500
900
29,570
(2,414)
(5,083)
(934)
(8,431)
21,139
(11,039)
10,100
$
(1) The total fair value of the net assets acquired from Argon exceeded the purchase price, resulting in a gain on bargain
purchase which was recorded within other income (expense) in our consolidated statements of income. We believe the
reason for the gain on bargain purchase was a result of the divestiture of a non-strategic, slow-growth critical care
business for Argon. It is our understanding that the divestiture allows Argon to focus on its higher growth interventional
portfolio.
With respect to the Argon critical care assets, we are amortizing developed technology over seven years and customer lists
on an accelerated basis over five years. While U.S. trademarks can be renewed indefinitely, we currently estimate that we
will generate cash flow from the acquired trademarks for a period of five years from the acquisition date. The total
weighted-average amortization period for these acquired intangible assets is 6.0 years.
On January 31, 2017, we acquired substantially all the assets, including intellectual property covered by
approximately 40 patents and pending applications, and assumed certain liabilities, of Catheter Connections, Inc.
(“Catheter Connections”), in exchange for payment of $38 million. Catheter Connections, based in Salt Lake City, Utah,
developed and marketed the DualCap® System, an innovative family of disinfecting products designed to protect patients
from intravenous infections resulting from infusion therapy. We accounted for this acquisition as a business combination.
Acquisition-related costs associated with the Catheter Connections acquisition during the year ended December 31, 2017,
which are included in selling, general and administrative expenses in the accompanying consolidated statements of income,
were approximately $482,000. The results of operations related to this acquisition have been included in our cardiovascular
segment since the acquisition date. During the years ended December 31, 2019, 2018 and 2017, our net sales of the
products acquired from Catheter Connections were approximately $15.9 million, $13.7 million and $10.0 million,
respectively. It is not practical to separately report the earnings related to the products acquired from Catheter Connections,
as we cannot split out sales costs related solely to those products, principally because our sales representatives sell multiple
products (including the DualCap System) in the cardiovascular business segment. The purchase price was allocated as
follows (in thousands):
78
Assets Acquired
Trade receivables
Inventories
Prepaid expenses and other assets
Property and equipment
Intangibles
Developed technology
Customer lists
Trademarks
Goodwill
Total assets acquired
Liabilities Assumed
Trade payables
Accrued expenses
Total liabilities assumed
Net assets acquired
$
958
2,157
85
1,472
21,100
700
2,900
8,989
38,361
(338)
(23)
(361)
$
38,000
We are amortizing the Catheter Connections developed technology asset over 12 years, the related trademarks over
ten years, and the associated customer list over eight years. We have estimated the weighted average life of the intangible
Catheter Connections assets acquired to be approximately 11.7 years. The goodwill arising principally from synergies
anticipated upon consolidation of operations is expected the be deductible for income tax purposes.
The following table summarizes our consolidated results of operations for the years ended December 31, 2018
and 2017, as well as unaudited pro forma consolidated results of operations as though the acquisition of the Argon critical
care division had occurred on January 1, 2016 and the acquisition of Cianna Medical and Vascular Insights had occurred
on January 1, 2017 (in thousands, except per common share amounts):
Net sales
Net income
Earnings per common share:
Basic
Diluted
As Reported
882,753
$
42,017
$
$
0.80
0.78
2018
$
$
$
Pro Forma
928,336
20,699
0.40
0.38
As Reported
2017
$
$
$
727,852
27,523
0.56
0.55
$
$
$
Pro Forma
768,571
(13,720)
(0.28)
(0.27)
Note: The pro forma results for the year ended December 31, 2019 are not included in the table above because the operating results of
the Argon critical care division, Cianna Medical, and Vascular Insights acquisitions were included in our consolidated statements of
income for these periods
The unaudited pro forma information set forth above is for informational purposes only and includes adjustments
related to the step-up of acquired inventories, amortization expense of acquired intangible assets, stock-based
compensation for cancelled or forfeited options, interest expense on long-term debt and changes in the timing of the
recognition of the gain on bargain purchase. The pro forma information should not be considered indicative of actual
results that would have been achieved if the acquisition of Cianna Medical and Vascular Insights had occurred on
January 1, 2017 or the acquisition of the Argon critical care division had occurred on January 1, 2016, or results that may
be obtained in any future period. The pro forma consolidated results of operations do not include the acquisition of assets
from BD because it was deemed impracticable to obtain information to determine net income associated with the acquired
product lines which represent a small product line of a large, consolidated company without standalone financial
information. The pro forma consolidated results of operations do not include the STD Pharmaceutical, Brightwater,
DirectACCESS, ITL, Laurane, Osseon, VAT, or Catheter Connections acquisitions as we do not deem the pro forma effect
of these transactions to be material.
79
4.
INVENTORIES
Inventories at December 31, 2019 and 2018, consisted of the following (in thousands):
Finished goods
Work-in-process
Raw materials
Total inventories
2019
2018
$ 134,467 $ 117,703
14,380
65,453
$ 225,698 $ 197,536
17,602
73,629
5.
GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018, are as follows
(in thousands):
Goodwill balance at January 1
Effect of foreign exchange
Additions and adjustments as the result of acquisitions
Goodwill balance at December 31
2019
2018
$ 335,433 $ 238,147
(1,304)
98,590
$ 353,193 $ 335,433
(199)
17,959
Total accumulated goodwill impairment losses aggregated to $8.3 million as of December 31, 2019 and 2018.
We did not have any goodwill impairments for the years ended December 31, 2019, 2018 and 2017. The total goodwill
balance as of December 31, 2019 and 2018, is related to our cardiovascular segment.
Other intangible assets at December 31, 2019 and 2018, consisted of the following (in thousands):
Patents
Distribution agreements
License agreements
Trademarks
Covenants not to compete
Customer lists
In-process technology
Total
Patents
Distribution agreements
License agreements
Trademarks
Covenants not to compete
Customer lists
In-process technology
Total
Gross Carrying
Amount
December 31, 2019
Accumulated
Amortization
Net Carrying
Amount
$
22,703
8,012
26,987
30,240
964
39,984
2,500
$
(6,863) $
(6,794)
(12,746)
(9,477)
(964)
(28,763)
—
15,840
1,218
14,241
20,763
—
11,221
2,500
$
131,390
$
(65,607) $
65,783
Gross Carrying
Amount
December 31, 2018
Accumulated
Amortization
Net Carrying
Amount
$
19,378 $
8,012
26,930
29,998
1,028
39,936
3,420
(5,012) $
(5,766)
(7,411)
(6,586)
(1,000)
(23,361)
—
14,366
2,246
19,519
23,412
28
16,575
3,420
$
128,702
$
(49,136) $
79,566
80
Aggregate amortization expense for the years ended December 31, 2019, 2018 and 2017 was approximately $60.7
million, $41.2 million and $26.8 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 are largely independent of the cash flows of other assets
and liabilities. We compare the carrying value of the amortizing intangible assets acquired to the undiscounted cash flows
expected to result from the asset group and determine whether the carrying amount is recoverable. 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 identified indicators of impairment associated with certain
acquired intangible assets based on our qualitative assessment, which required us to complete an interim quantitative
impairment assessment. The primary indicator of impairment was slower than anticipated sales growth in the acquired
products and uncertainty about future product development and commercialization associated with the acquired
technologies.
During the year ended December 31, 2019, we recorded impairment charges related to our amortizing intangible
assets of approximately $869,000 from our July 2015 acquisition of certain assets from Distal Access, LLC, $548,000 from
our June 2017 acquisition of certain assets from Lazarus Medical Technologies, LLC, and $1.8 million from our July 2017
acquisition of certain assets from Pleuratech ApS for a total of approximately $3.3 million. During the years ended
December 31, 2018 and 2017, we recorded impairment charges of $657,000, related to our July 2015 acquisition of certain
assets from Quellent, LLC and $809,000, related to our July 2015 acquisition of certain assets from Distal Access, LLC,
respectively. The impairment charges recorded in 2019, 2018, and 2017 all pertained to our cardiovascular segment.
Estimated amortization expense for the developed technology and other intangible assets for the next five years
consists of the following as of December 31, 2019 (in thousands):
Year Ending December 31,
2020
2021
2022
2023
2024
6.
INCOME TAXES
$
Estimated Amortization Expense
59,386
52,032
50,682
49,485
46,506
On December 22, 2017, U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (“TCJA”)
was signed into law. Significant provisions that have impacted (and will in the future impact) our effective tax rate include
the reduction in the corporate tax rate from 35% to 21%, effective in 2018; a one-time deemed repatriation (“transition
tax”) on earnings of certain foreign subsidiaries that were previously tax deferred; and new taxes on certain foreign sourced
earnings. At December 31, 2017, we had not completed our accounting for the tax effects of the TCJA; however, in certain
cases, as described below, we made reasonable estimates of the effects on our existing deferred tax balances and impact
of the one-time transition tax. In accordance with SEC Staff Accounting Bulletin 118 (“SAB 118”), income tax effects of
the TCJA may be refined upon obtaining, preparing, and/or analyzing additional information during the measurement
period and such changes could be material. During the measurement period, provisional amounts may also be adjusted for
the effects, if any, of interpretative guidance issued after December 31, 2017, by U.S. regulatory and standard-setting
bodies.
As of December 31, 2017, we were able to determine a reasonable estimate and recognize the provisional impacts
of the rate reduction on our existing deferred tax balances and the impact of the transition tax. The reduction in the U.S.
corporate tax rate resulted in a net tax benefit of approximately $8.4 million related to the revaluation of our U.S. net
deferred tax liability. The transition tax resulted in a one-time tax expense of approximately $10.6 million.
As of December 31, 2018, we revised these estimated amounts based upon further analysis of the TCJA and
notices and regulations issued and proposed by the U.S. Department of Treasury and the Internal Revenue Service. We
81
recognized an additional tax benefit of approximately $71,000 on the difference between the 2017 U.S. enacted tax rate of
35%, and the 2018 enacted tax rate of 21%. We recognized a tax benefit of approximately $3.3 million from the revised
transition tax calculation, which included the completion of our calculation of the total post-1986 foreign earnings and
profits (“E&P”) of our foreign subsidiaries, and related foreign tax credits. We elected to pay our transition tax over the
eight-year period provided by the TCJA.
For tax years beginning after December 31, 2017, the TCJA introduces new provisions of U.S. taxation of certain
Global Intangible Low-Tax Income (“GILTI”). The FASB provided guidance that companies should make an accounting
policy election to either treat taxes on GILTI as period costs or use the deferred method. We have elected to treat taxes on
GILTI as period costs and recognized tax expense of approximately $1.9 million and $347,000 during the years ended
December 31, 2019 and 2018, respectively.
As of December 31, 2018, we had completed our accounting for the tax effects of the enactment of the TCJA;
however, we continue to expect U.S. regulatory and standard-setting bodies to issue guidance and regulations that could
have a material financial statement impact on our effective tax rate in future periods.
We have historically asserted indefinite reinvestment of the earnings of certain non-U.S. subsidiaries outside the
U.S. The TCJA eliminated certain material tax effects on the repatriation of cash to the U.S. As such, future repatriation
of cash and other property held by our foreign subsidiaries will generally not be subject to U.S. federal income tax.
Therefore, after reevaluation of the permanent reinvestment assertion, we no longer consider our foreign earnings to be
permanently reinvested as of December 31, 2018. As a result of the change in the assertion, we recorded tax expense of
approximately $638,000 and $5.6 million for foreign withholding taxes on unremitted foreign earnings during the years
ended December 31, 2019 and 2018, respectively.
For the years ended December 31, 2019, 2018 and 2017, income before income taxes is broken out between U.S.
and foreign-sourced operations and consisted of the following (in thousands):
Domestic
Foreign
Total
2019
2018
$ (37,277) $ 21,084
39,470
28,435
2,193 $ 49,519
$
2017
$ 14,531
21,350
$ 35,881
The components of the provision for income taxes for the years ended December 31, 2019, 2018 and 2017,
consisted of the following (in thousands):
Current expense (benefit):
Federal
State
Foreign
Total current expense
Deferred expense (benefit):
Federal
State
Foreign
Total deferred (benefit) expense
2019
2018
2017
$
$
479 $ (1,132)
582
662
6,000
8,037
5,450
9,178
3,849
645
5,168
9,662
(8,111)
(3,523)
(802)
(12,436)
4,400
(667)
(1,681)
2,052
(314)
(216)
(774)
(1,304)
Total income tax expense (benefit)
$ (3,258) $
7,502
$
8,358
82
The difference between the income tax expense reported and amounts computed by applying the statutory federal
rate of 21.0% to pretax income for years ended December 31, 2019 and 2018, and 35% for the year ended December 31,
2017, consisted of the following (in thousands):
Computed federal income tax expense at applicable statutory rate
State income taxes
Tax credits
Foreign tax rate differential
Uncertain tax positions
Deferred compensation insurance assets
Transaction-related expenses
U.S. transition tax
TCJA remeasurement of deferred taxes
Stock-based payments
Bargain purchase gain
In-process research and development
Net GILTI
Foreign withholding tax
Other — including the effect of graduated rates
Total income tax expense (benefit)
2019
2018
$
461 $ 10,399
(59)
(1,734)
(1,361)
267
186
223
(3,271)
(71)
(4,278)
—
—
347
5,590
1,264
7,502
(2,241)
(1,567)
(1,536)
(794)
(503)
154
—
—
(1,654)
—
—
1,861
638
1,923
$ (3,258) $
2017
$ 12,559
279
(1,377)
(3,329)
(19)
(479)
90
10,612
(8,383)
(2,264)
(1,570)
1,486
—
—
753
8,358
$
Deferred income tax assets and liabilities at December 31, 2019 and 2018, consisted of the following temporary
differences and carry-forward items (in thousands):
Deferred income tax assets:
Allowance for uncollectible accounts receivable
Accrued compensation expense
Inventory differences
Net operating loss carryforwards
Deferred revenue
Stock-based compensation expense
Operating lease assets
Federal R&D Tax Credits
Other
Total deferred income tax assets
Deferred income tax liabilities:
Prepaid expenses
Property and equipment
Intangible assets
Foreign withholding tax
Operating lease liabilities
Other
Total deferred income tax liabilities
Valuation allowance
Net deferred income tax liabilities
Reported as:
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax liabilities
83
$
2019
2018
693 $
9,244
2,207
21,187
552
4,672
16,838
1,376
6,189
62,958
606
7,414
1,269
20,226
46
2,833
—
—
9,243
41,637
(1,128)
(21,242)
(53,933)
(5,240)
(15,847)
(2,372)
(99,762)
(4,644)
(1,142)
(20,045)
(58,883)
(5,590)
—
(4,350)
(90,010)
(4,989)
$ (41,448) $ (53,362)
$
3,788 $ 3,001
(56,363)
$ (41,448) $ (53,362)
(45,236)
The deferred income tax balances are not netted as they represent deferred amounts applicable to different taxing
jurisdictions. Deferred income tax balances reflect the temporary differences between the carrying amounts of assets and
liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or
recovered. The valuation allowance is primarily related to state credit carryforwards, non-US net operating loss
carryforwards, and capital loss carryforwards for which we believe it is more likely than not that the deferred tax assets
will not be realized. The valuation allowance decreased by approximately $345,000 during the year ended December 31,
2019 and increased by approximately $567,000 and $636,000 during the years ended December 31, 2018 and 2017,
respectively.
As of December 31, 2019 and 2018, we had U.S federal net operating loss carryforwards of approximately $93.3
million and $86.3 million, respectively, which were generated by Cianna Medical, VAT, DFINE, Biosphere Medical, Inc.,
and Brightwater Medical, Inc. prior to our acquisition of these companies. Brightwater Medical, Inc. was acquired on
June 14, 2019. These net operating loss carryforwards are subject to annual limitations under Internal Revenue Code
Section 382. We anticipate that we will utilize the net operating loss carryforwards over the next 23 years. We utilized a
total of approximately $20.6 million and $11.9 million in U.S. federal net operating loss carryforwards during the years
ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, we had approximately $3.4 million of non-U.S. net operating loss carryforwards, of
which approximately $2.4 million have no expiration date and approximately $1.0 million expire at various dates through
2028. As of December 31, 2018, we had $5.9 million of non-U.S. net operating loss carryforwards, of which approximately
$5.2 million had no expiration date and approximately $761,000 expire at various dates through 2027. Non-U.S. net
operating loss carryforwards utilized during the years ended December 31, 2019 and 2018 were not material.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required
in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary
course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. In
our opinion, we have made adequate provisions for income taxes for all years subject to audit. We are no longer subject
to U.S. federal, state, and local income tax examinations by tax authorities for years before 2016. In foreign jurisdictions,
we are no longer subject to income tax examinations for years before 2013.
Although we believe our estimates are reasonable, the final outcomes of these matters may be different from
those which we have reflected in our historical income tax provisions and accruals. Such differences could have a material
effect on our income tax provision and operating results in the period in which we make such determination.
The total liability for unrecognized tax benefits at December 31, 2019, including interest and penalties, was
approximately $2.5 million, of which approximately $2.2 would favorably impact our effective tax rate if recognized.
Approximately $230,000 of the total liability at December 31, 2019 was presented as a reduction to non-current deferred
income tax assets on our consolidated balance sheet. The total liability for unrecognized tax benefits at December 31, 2018,
including interest and penalties, was approximately $3.3 million, of which approximately $3.0 million would favorably
impact our effective tax rate if recognized. None of the total liability at December 31, 2018 was presented as a reduction
to non-current deferred income tax assets on our consolidated balance sheet. As of December 31, 2019 and 2018, the total
liability for uncertain tax benefits, as presented on our consolidated balance sheets, has been reduced by approximately
$307,000 related to certain liabilities for unrecognized tax benefits, which, if realized, would reduce the transition tax
under the TCJA by approximately $307,000. As of December 31, 2019 and 2018, we had accrued approximately $366,000
and $373,000 respectively, in total interest and penalties related to unrecognized tax benefits. We account for interest and
penalties for unrecognized tax benefits as part of our income tax provision. During the years ended December 31, 2019,
2018 and 2017, our liability for unrecognized tax benefit was increased (decreased) for interest and penalties by
approximately ($7,000), $69,000 and $88,000, respectively. It is reasonably possible that within the next 12 months the
total liability for unrecognized tax benefits may change, net of potential decreases due to the expiration of statutes of
limitation, up to $650,000.
84
A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax benefits for
the years ended December 31, 2019, 2018 and 2017, consisted of the following (in thousands):
Unrecognized tax benefits, opening balance
Gross increases (decreases) in tax positions taken in a prior year
Gross increases in tax positions taken in the current year
Lapse of applicable statute of limitations
Unrecognized tax benefits, ending balance
2019
2,947 $
(244)
229
(771)
2,161 $
2018
2,749
35
586
(423)
2,947
$
$
2017
2,549
80
403
(283)
2,749
$
$
The tabular roll-forward ending balance does not include interest and penalties related to unrecognized tax
benefits.
7.
ACCRUED EXPENSES
Accrued expenses at December 31, 2019 and 2018, consisted of the following (in thousands):
Payroll and related liabilities
Current portion of contingent liabilities
Advances from employees
Accrued rebates payable
Other accrued expenses
Total
2019
2018
$ 39,781 $ 37,396
23,760
540
6,789
27,688
28,621
286
9,202
27,294
$ 105,184 $ 96,173
Note: Accrued rebates payable is presented in 2019 as it has increased relative to total current
liabilities from the prior year. Accrued expenses have been reclassified for all periods presented
for comparability
8.
REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
Principal balances outstanding under our long-term debt obligations as of December 31, 2019 and 2018, consisted
of the following (in thousands):
Term loans
Revolving credit loans
Collateralized debt facility (paid in full)
Less unamortized debt issuance costs
Total long-term debt
Less current portion
Long-term portion
Third Amended and Restated Credit Agreement
2019
148,125 $
291,875
—
(516)
439,484
7,500
431,984 $
2018
72,500
316,000
7,000
(348)
395,152
22,000
373,152
$
$
On July 31, 2019, we entered into a Third Amended and Restated Credit Agreement (the "Third Amended Credit
Agreement"). The Third Amended Credit Agreement is a syndicated loan agreement with Wells Fargo Bank, National
Association and other parties. The Third Amended Credit Agreement amends and restates in its entirety our previously
outstanding Second Amended and Restated Credit Agreement and all amendments thereto. The Third Amended Credit
Agreement provides for a term loan of $150 million and a revolving credit commitment up to an aggregate amount
of $600 million, inclusive of sub-facilities for multicurrency borrowings, standby letters of credit and swingline loans. On
85
July 31, 2024, all principal, interest and other amounts outstanding under the Third Amended Credit Agreement are
payable in full. At any time prior to the maturity date, we may repay any amounts owing under all term loans and revolving
credit loans in whole or in part, without premium or penalty, other than breakage fees (as defined in the Third Amended
Credit Agreement).
Revolving credit loans denominated in dollars and term loans made under the Third Amended Credit Agreement
bear interest, at our election, at either the Base Rate or the Eurocurrency Rate (as such terms are defined in the Third
Amended Credit Agreement) plus the Applicable Margin (as defined in the Third Amended Credit Agreement). Revolving
credit loans denominated in an Alternative Currency (as defined in the Third Amended Credit Agreement) bear interest at
the Eurocurrency Rate plus the Applicable Margin. Swingline loans bear interest at the Base Rate plus the Applicable
Margin (as defined in the Third Amended Credit Agreement). Interest on each loan featuring the Base Rate is due and
payable on the last business day of each calendar quarter commencing December 31, 2019; interest on each loan featuring
the Eurocurrency Rate is due and payable on the last day of each interest period applicable thereto, and if such interest
period extends over three months, at the end of each three-month interval during such interest period.
The Third Amended Credit Agreement is collateralized by substantially all of our assets. The Third Amended
Credit Agreement contains affirmative and negative covenants, representations and warranties, events of default and other
terms customary for loans of this nature. In particular, the Third Amended Credit Agreement requires that we maintain
certain financial covenants, as follows:
Consolidated Total Leverage Ratio (1)
Consolidated Interest Coverage Ratio (2)
Facility Capital Expenditures (3)
Covenant Requirement
4.0 to 1.0
3.0 to 1.0
$50 million
(1) Maximum Consolidated Total Net Leverage Ratio (as defined in the Third Amended Credit Agreement) as of any fiscal quarter
end.
(2) Minimum ratio of Consolidated EBITDA (as defined in the Third Amended Credit Agreement and adjusted for certain
expenditures) to Consolidated interest expense (as defined in the Third Amended Credit Agreement) for any period of four
consecutive fiscal quarters.
(3) Maximum level of the aggregate amount of all Facility Capital Expenditures (as defined in the Third Amended Credit Agreement)
in any fiscal year.
As of December 31, 2019, we believe we were in compliance with all covenants set forth in the Third Amended Credit
Agreement.
As of December 31, 2019, we had outstanding borrowings of $440 million under the Third Amended Credit
Agreement, with additional available borrowings of approximately $133.8 million, based on the leverage ratio required
pursuant to the Third Amended Credit Agreement. Our interest rate as of December 31, 2019 was a fixed rate of 2.62%
on $175 million as a result of an interest rate swap (see Note 9) and a variable floating rate of 3.30% on $265 million. Our
interest rate as of December 31, 2018 was a fixed rate of 2.12% on $175 million as a result of an interest rate swap and a
variable floating rate of 3.52% on $213.5 million.
86
Future Payments
Future minimum principal payments on our long-term debt as of December 31, 2019, are as follows (in
thousands):
Years Ending December 31,
2020
2021
2022
2023
2024
Total future minimum principal payments
9.
DERIVATIVES
Future Minimum
Principal Payments
7,500
$
7,500
8,438
11,250
405,312
440,000
$
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 these risks by entering into derivative contracts. The
derivatives we use are interest rate swaps and foreign currency forward contracts. We recognize derivatives as either assets
or liabilities at fair value in the accompanying consolidated balance sheets, regardless of whether or not hedge accounting
is applied. We report cash flows arising from our hedging instruments consistent with the classification of cash flows from
the underlying hedged items. Accordingly, cash flows associated with our derivative programs 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
initially and on an ongoing basis. For qualifying hedges, the change in fair value is deferred in accumulated other
comprehensive income, a component of stockholders’ equity in the accompanying consolidated balance sheets, and
recognized in earnings at the same time the hedged item affects earnings. Changes in the fair value of derivatives not
designated as hedging instruments are recorded in earnings throughout the term of the derivative.
Interest Rate Risk. Our debt bears interest at variable interest rates and, therefore, we are subject to variability
in the cash paid for interest expense. In order to mitigate a portion of this risk, we use a hedging strategy to reduce the
variability of cash flows in the interest payments associated with a portion of the variable-rate debt outstanding under our
Third Amended Credit Agreement that is solely due to changes in the benchmark interest rate.
Derivatives Designated as Cash Flow Hedges
On August 5, 2016, we entered into a pay-fixed, receive-variable interest rate swap with a current notional amount
of $175 million with Wells Fargo to fix the one-month LIBOR rate at 1.12%. The variable portion of the interest rate swap
is tied to the one-month LIBOR rate (the benchmark interest rate). On a monthly basis, the interest rates under both the
interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid. The interest
rate swap is scheduled to expire on July 6, 2021.
On December 23, 2019, we entered into a pay-fixed, receive-variable interest rate swap with a notional amount
of $75 million with Wells Fargo to fix the one-month LIBOR rate at 1.71% for the period from July 6, 2021 to July 31,
2024. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). On
a monthly basis, the interest rates under both the interest rate swap and the underlying debt will reset, the swap will be
settled with the counterparty, and interest will be paid.
At December 31, 2019 and 2018, our interest rate swaps qualified as cash flow hedges. The fair value of our
interest rate swaps at December 31, 2019 was an asset of approximately $1.2 million (partially offset by approximately
$307,000 in deferred taxes), and a liability of ($290,000), partially offset by approximately ($75,000) in deferred taxes.
The fair value of our interest rate swap at December 31, 2018 was an asset of approximately $5.8 million, which was offset
by approximately $1.5 million in deferred taxes.
87
Foreign Currency Risk. We operate on a global basis and are exposed to the risk that our financial condition,
results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce
the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial
instruments in the form of foreign currency exchange forward contracts with major financial institutions. Our policy is to
enter into foreign currency derivative contracts with maturities of up to two years. We are primarily exposed to foreign
currency exchange rate risk with respect to transactions and balances denominated in Chinese Renminbi, Euros, British
Pounds, Mexican Pesos, Brazilian Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish Krona, Canadian
Dollars, Danish Krone, Japanese Yen, and South Korean Won, among others. We do not use derivative financial
instruments for trading or speculative purposes. We are not subject to any credit risk contingent features related to our
derivative contracts, and counterparty risk is managed by allocating derivative contracts among several major financial
institutions.
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 (loss) and then reclassified into earnings
in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged
transaction affects earnings. We entered into forward contracts on various foreign currencies to manage the risk associated
with forecasted exchange rates which impact revenues, cost of sales, and operating expenses in various international
markets. The objective of the hedges is to reduce the variability of cash flows associated with the forecasted purchase or
sale of the associated foreign currencies.
We enter into approximately 150 cash flow foreign currency hedges every month. As of December 31, 2019, we
had entered into foreign currency forward contracts, which qualified as cash flow hedges, with the following notional
amounts (in thousands and in local currencies):
Currency
Australian Dollar
Brazilian Real
Canadian Dollar
Swiss Franc
Chinese Renminbi
Danish Krone
Euro
British Pound
Japanese Yen
Korean Won
Mexican Peso
Norwegian Krone
Swedish Krona
Symbol Forward Notional Amount
8,540
10,315
8,025
3,660
591,000
33,575
37,750
8,380
1,145,000
8,950,000
527,000
15,475
54,170
AUD
BRL
CAD
CHF
CNY
DKK
EUR
GBP
JPY
KRW
MXN
NOK
SEK
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. We enter into approximately 20 foreign
88
currency fair value hedges every month. As of December 31, 2019, we had entered into foreign currency forward contracts
related to those balance sheet accounts with the following notional amounts (in thousands and in local currencies):
Currency
Australian Dollar
Brazilian Real
Canadian Dollar
Swiss Franc
Chinese Renminbi
Danish Krone
Euro
British Pound
Hong Kong Dollar
Japanese Yen
Korean Won
Mexican Peso
Norwegian Krone
New Zealand Dollar
Swedish Krona
Singapore Dollar
South African Rand
Symbol Forward Notional Amount
14,282
19,500
1,706
306
52,598
5,987
752
7,594
11,000
1,530,000
4,868,000
35,000
3,767
1,542
13,577
1,790
50,843
AUD
BRL
CAD
CHF
CNY
DKK
EUR
GBP
HKD
JPY
KRW
MXN
NOK
NZD
SEK
SGD
ZAR
Balance Sheet Presentation of Derivatives. As of December 31, 2019 and 2018, all derivatives, both those
designated as hedging instruments and those that were not designated as hedging instruments, were recorded gross at fair
value on our consolidated balance sheets. We are not subject to any master netting agreements.
The fair value of derivative instruments on a gross basis is as follows (in thousands):
Derivative instruments designated as hedging
instruments
Assets
Interest rate swaps
Foreign currency forward contracts
Foreign currency forward contracts
(Liabilities)
Interest rate swaps
Foreign currency forward contracts
Foreign currency forward contracts
Derivative instruments not designated as
hedging instruments
Assets
Foreign currency forward contracts
(Liabilities)
Foreign currency forward contracts
Balance Sheet Location
December 31, 2019 December 31, 2018
Fair Value
Other assets (long-term)
Prepaid expenses and other assets
Other assets (long-term)
$
1,192 $
1,663
466
Other long-term obligations
Accrued expenses
Other long-term obligations
(290)
(1,813)
(764)
5,772
613
151
—
(711)
(101)
Prepaid expenses and other assets $
318 $
814
Accrued expenses
(1,678)
(796)
89
Income Statement Presentation of Derivatives
Derivatives 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)
recognized in OCI
Year Ended December 31,
2019
2018
2017
Derivative instrument
Interest rate swaps
Foreign currency forward contracts
Location in statements of income
$ (2,830) $ 1,559
539
(587)
$ 853
491
Interest expense
Revenue
Cost of sales
Amount of Gain/(Loss)
reclassified from AOCI
Year ended December 31,
2017
2018
2019
$ 2,040 $ 1,537
136
361
577
(578)
$
95
(277)
625
All other amounts included in earnings related to designated cash flow hedges are immaterial.
As of December 31, 2019, approximately $315,000, or $234,000 after taxes, was expected to be reclassified from
accumulated other comprehensive income to earnings in revenue and cost of sales over the succeeding twelve months. As
of December 31, 2019, approximately $877,000, or $651,000 after taxes, was expected to be reclassified from accumulated
other comprehensive income to earnings in interest expense over the succeeding twelve months.
Derivatives Not Designated as Hedging Instruments
The following gains/(losses) from these derivative instruments were recognized in our consolidated statements
of income for the years presented (in thousands):
Derivative Instrument
Foreign currency forward contracts
Location in statements of income
Other income (expense)
$
(307) $ 4,147
Year ended December 31,
2018
2019
2017
$ (4,746)
See Note 16 for more information about our derivatives.
10.
COMMITMENTS AND CONTINGENCIES
We are obligated under non-terminable operating leases for manufacturing facilities, finished good distribution
centers, office space, equipment, vehicles, and land. See Note 18 for disclosures regarding these operating leases.
Loan Commitment. We have committed to provide loans of up to an additional €2 million at the discretion of
Selio at a rate of 5% per annum. The current note receivable balance from Selio is $250,000. If exercised these loans would
be securitized by all the present and future assets and property of the borrower.
Royalties. As of December 31, 2019, we had entered into a number of agreements to license or acquire rights to
certain intellectual property which require us to make royalty payments during the term of the agreements generally based
on a percentage of sales. Total royalty expense during the years ended December 31, 2019, 2018 and 2017, approximated
$6.7 million, $5.3 million and $4.4 million, respectively. Minimum contractual commitments under royalty agreements to
be paid within twelve months of December 31, 2019 were not significant. See Note 3 for discussion of future royalty
commitments related to acquisitions.
Litigation. In the ordinary course of business, we are involved in various claims and litigation matters. These
claims and litigation matters may include actions involving product liability, intellectual property, contract disputes, and
employment or other matters that are significant to our business. For example, in December 2019 our company, our Chief
Executive Officer and our Chief Financial Officer were named in a complaint filed in the Central District of California,
90
which alleges violations of certain federal securities laws. Based upon our review of currently available information, we
do not believe that any such actions are likely to be, individually or in the aggregate, materially adverse to our business,
financial condition, results of operations or liquidity.
In addition to the foregoing matters, in October 2016, we received a subpoena from the U.S. Department of Justice
seeking information on certain of our marketing and promotional practices. We have responded to the subpoena, as well
as additional related requests. We have incurred, and anticipate that we will continue to incur, substantial costs in
connection with the matter. The investigation is ongoing and at this stage we are unable to predict its scope, duration or
outcome. Investigations such as this may result in the imposition of, among other things, significant damages, injunctions,
fines, or civil or criminal claims or penalties against our company or individuals.
In the event of unexpected further developments, it is possible that the ultimate resolution of any of the foregoing
matters, or other similar matters, if resolved in a manner unfavorable to us, may be materially adverse to our business,
financial condition, results of operations or liquidity. Legal costs for these matters, such as outside counsel fees and
expenses, are charged to expense in the period incurred.
11.
EARNINGS PER COMMON SHARE (EPS)
The computation of weighted average shares outstanding and the basic and diluted earnings per common share
for the following periods consisted of the following (in thousands, except per share amounts):
2019
2018
2017
Net income
Average common shares outstanding
Basic EPS
Average common shares outstanding
Effect of dilutive stock options
Total potential shares outstanding
Diluted EPS
$
$
$
5,451
55,075
0.10
55,075
1,160
56,235
0.10
$
$
$
42,017
52,268
0.80
52,268
1,663
53,931
0.78
$
$
$
Stock options excluded as the impact was anti-dilutive
1,750
396
12.
EMPLOYEE STOCK PURCHASE PLAN, STOCK OPTIONS AND WARRANTS.
Our stock-based compensation primarily consists of the following plans:
27,523
48,805
0.56
48,805
1,296
50,101
0.55
381
2018 Long-Term Incentive Plan. In June 2018, our Board of Directors adopted and our shareholders approved,
the Merit Medical Systems, Inc. 2018 Long-Term Incentive Plan, which was subsequently amended effective
December 14, 2018 (the “2018 Incentive Plan”) to supplement the Merit Medical Systems, Inc. 2006 Long-Term Incentive
plan (the "2006 Incentive Plan"). The 2018 Incentive Plan provides for the granting of stock options, stock appreciation
rights, restricted stock, stock units (including restricted stock units) and performance awards. Options may be granted to
directors, officers, outside consultants and key employees and may be granted upon such terms and such conditions as the
Compensation Committee of our Board of Directors determines. Options will typically vest on an annual basis over a three
to five-year life with a contractual life of 7 years. As of December 31, 2019, a total of 1,714,323 shares remained available
to be issued under the 2018 Incentive Plan.
2006 Long-Term Incentive Plan. In May 2006, our Board of Directors adopted, and our shareholders approved,
the 2006 Incentive Plan. As of December 31, 2019, the 2006 Incentive Plan was no longer being used for the granting of
equity awards. However, as of December 31, 2019, options granted under this plan were still outstanding, vesting, and
being exercised and will continue to be outstanding until the vesting periods end and the terms of the equity awards expire.
91
Employee Stock Purchase Plan. We have a non-qualified Employee Stock Purchase Plan (“ESPP”), which has
an expiration date of June 30, 2026. As of December 31, 2019, the total number of shares of common stock that remained
available to be issued under our non-qualified plan was 69,877 shares. ESPP participants purchase shares on a quarterly
basis at a price equal to 95% of the market price of the common stock at the end of the applicable offering period.
Stock-Based Compensation Expense. The stock-based compensation expense before income tax expense for
the years ended December 31, 2019, 2018 and 2017, consisted of the following (in thousands):
Cost of sales
Research and development
Selling, general and administrative
Stock-based compensation expense before taxes
2019
1,289 $
961
7,132
9,382 $
2018
870
553
4,694
6,117
$
$
2017
632
376
3,067
4,075
$
$
We recognize stock-based compensation expense (net of a forfeiture rate) for those awards which are expected
to vest on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on our historical
experience and expectations about future forfeitures. As of December 31, 2019, the total remaining unrecognized
compensation cost related to non-vested stock options, net of expected forfeitures, was approximately $28.6 million and
is expected to be recognized over a weighted average period of 3.00 years.
In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted
were estimated using the following assumptions for the periods indicated below:
Risk-free interest rate
Expected option term
Expected dividend yield
Expected price volatility
2019
1.38% - 2.56%
3.0 - 5.0 years
—
2018
2.63% - 2.77%
5.0 years
—
28.66% - 39.38% 34.06% - 34.32% 33.81% - 34.07%
1.77% - 1.83%
5.0 years
—
2017
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 option. We determine the expected term of the stock options using the historical
exercise behavior of employees. The expected price volatility was determined using a weighted average of daily historical
volatility of our stock price over the corresponding expected option life and implied volatility based on recent trends of
the daily historical volatility. For options with a vesting period, compensation expense is recognized on a straight-line
basis over the service period, which corresponds to the vesting period. During the years ended December 31, 2019, 2018
and 2017, approximately 1.2 million, 692,000 and 1.3 million stock-based compensation grants were made, respectively,
for a total fair value of approximately $20.9 million, $11.1 million and $12.4 million, net of estimated forfeitures,
respectively.
The table below presents information related to stock option activity for the years ended December 31, 2019,
2018 and 2017 (in thousands):
Total intrinsic value of stock options exercised
Cash received from stock option exercises
Excess tax benefit from the exercise of stock options
$
2018
2019
9,910 $ 25,692
8,510
4,837
4,278
1,654
$
2017
9,264
5,552
2,264
92
Changes in stock options for the year ended December 31, 2019, consisted of the following (shares and intrinsic
value in thousands):
Beginning balance
Granted
Exercised
Forfeited/expired
Outstanding at December 31
Exercisable
Ending vested and expected to vest
$
Number Weighted Average
of Shares
3,507
1,244
(288)
(144)
4,319
1,532
4,186
Exercise Price
26.30
52.45
16.48
37.86
34.10
21.98
33.77
Remaining Contractual
Term (in years)
Intrinsic
Value
4.40
3.07
4.36
$ 23,512
16,403
23,344
The weighted average grant-date fair value of options granted during the years ended December 31, 2019, 2018
and 2017 was $16.78, $16.05 and $9.57, respectively.
The following table summarizes information about stock options outstanding at December 31, 2019 (shares in
thousands):
Range of Exercise
Options Outstanding
Options Exercisable
Weighted Average
Remaining Contractual Average Exercise Number Weighted Average
Weighted
Life (in years)
Price
Exercisable
Number
Outstanding
$9.95 - $17.27
$18.80 - $25.89
$28.20
$28.93 - $50.50
$51.31 - $57.26
$9.95 - $57.26
1,052
335
914
957
1,061
4,319
2.27
3.32
4.26
5.29
6.18
$
$
$
$
$
15.04
20.36
28.20
42.02
55.28
795 $
200 $
335 $
202 $
— $
Exercise Price
14.62
20.25
28.20
42.36
—
1,532
13.
SEGMENT REPORTING AND FOREIGN OPERATIONS
We report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment
consists of cardiology and radiology medical device products which assist in diagnosing and treating coronary artery
disease, peripheral vascular disease and other non-vascular diseases and includes embolotherapeutic, cardiac rhythm
management ("CRM"), electrophysiology ("EP"), critical care, Cianna Medical, interventional oncology and spine devices,
and breast cancer localization and guidance. Our endoscopy segment consists of gastroenterology and pulmonology
medical device products which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary
strictures caused by malignant tumors. We evaluate the performance of our operating segments based on operating income
(loss). See Note 2 for a detailed breakout of our sales by operating segment and product group, disaggregated between
domestic and international sales.
During the years ended December 31, 2019, 2018 and 2017, we had international sales of approximately $419.1
million, $386.3 million and $307.1 million, respectively, or approximately 42%, 44% and 42%, respectively, of net sales,
primarily in China, Japan, Germany, France, the United Kingdom, Australia, and Russia. China represents our most
significant international sales market with sales of approximately $113.3 million, $92.7 million, and $73.4 million for
the years ended December 31, 2019, 2018 and 2017, respectively. International sales are attributed based on location of
the customer receiving the product.
93
Our long-lived assets (which are comprised of our net property, plant and equipment) by geographic area at
December 31, 2019, 2018 and 2017, consisted of the following (in thousands):
United States
Ireland
Other foreign countries
Total
2019
2017
2018
$ 273,816 $ 231,864 $ 202,504
45,671
44,645
$ 378,785 $ 331,452 $ 292,820
45,283
54,305
44,912
60,057
Financial information relating to our reportable operating segments and reconciliations to the consolidated totals
for the years ended December 31, 2019, 2018 and 2017, are as follows (in thousands):
2019
2018
2017
Net Sales
Cardiovascular
Endoscopy
Total net sales
Operating Expenses
Cardiovascular
Endoscopy
Total operating expenses
Operating Income
Cardiovascular
Endoscopy
Total operating income
Total other income (expense) - net
Income tax expense (benefit)
$ 960,981 $ 849,477 $ 700,613
27,239
727,852
33,276
882,753
33,871
994,852
382,313
34,619
416,932
321,461
14,692
336,153
281,095
12,089
293,184
25,780
(10,346)
15,434
(13,241)
(3,258)
49,289
9,328
58,617
(9,098)
7,502
24,819
8,250
33,069
2,812
8,358
Net income
$
5,451 $
42,017 $
27,523
Total assets by business segment at December 31, 2019, 2018 and 2017, consisted of the following (in thousands):
Cardiovascular
Endoscopy
Total
2019
2018
$ 1,745,057 $ 1,588,970 $ 1,103,806
8,005
$ 1,757,321 $ 1,620,012 $ 1,111,811
31,042
12,264
2017
Total depreciation and amortization by business segment for the years ended December 31, 2019, 2018 and 2017
consisted of the following (in thousands):
Cardiovascular
Endoscopy
Total
2019
91,151 $
949
92,100 $
2018
68,722 $
824
69,546 $
2017
52,700
882
53,582
$
$
94
Total capital expenditures for property and equipment by business segment for the years ended December 31,
2019, 2018 and 2017 consisted of the following (in thousands):
Cardiovascular
Endoscopy
Total
14.
EMPLOYEE BENEFIT PLANS
2019
77,631 $
542
78,173 $
2018
63,032 $
292
63,324 $
2017
38,437
186
38,623
$
$
We have a contributory 401(k) savings and profit sharing plan (the “Plan”) covering all U.S. full-time employees
who are at least 18 years of age. The Plan has a 90-day minimum service requirement. We may contribute, at our discretion,
matching contributions based on the employees’ compensation. Contributions we made to the Plan for the years ended
December 31, 2019, 2018 and 2017, totaled approximately $3.1 million, $3.5 million and $2.4 million, respectively.
We also have defined contribution plans covering some of our foreign employees. We contribute between 2%
and 32% of the employee’s compensation for certain foreign non-management employees, and between 2% and 32% of
the employee’s compensation for certain foreign management employees. Contributions made to these plans for the years
ended December 31, 2019, 2018 and 2017, totaled approximately $3.5 million, $3.0 million and $2.3 million, respectively.
15.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly data for the years ended December 31, 2019 and 2018 consisted of the following (in thousands, except
per share amounts):
2019
Net sales
Gross profit
Income (loss) from operations
Income tax expense (benefit)
Net income (loss)
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
2018
Net sales
Gross profit
Income from operations
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
March 31
June 30
September 30 December 31
Quarter Ended
$ 238,349
104,636
9,523
651
6,195
0.11
0.11
$ 255,532 $ 243,049
104,136
(2,881)
(2,292)
(3,398)
(0.06)
(0.06)
111,964
12,201
2,140
6,859
0.12
0.12
$ 257,922
111,630
(3,409)
(3,757)
(4,205)
(0.08)
(0.08)
$ 203,035
88,056
8,781
1,090
5,269
0.10
0.10
$ 224,810 $ 221,659
102,039
21,061
2,766
16,619
0.31
0.30
100,009
15,114
624
10,941
0.22
0.21
$ 233,249
104,666
13,661
3,022
9,188
0.17
0.16
As discussed in Note 1, an impairment charge of $20.5 was recorded in the three months ended December 31,
2019 due to our write-off of our NinePoint note receivable and purchase option, along with $1.6 million of accrued interest.
Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of
the quarterly amounts may not equal the total computed for the year.
95
16.
FAIR VALUE MEASUREMENTS
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of December 31, 2019
and 2018, consisted of the following (in thousands):
Total Fair
Value at
December 31, 2019
Quoted prices in
active markets
(Level 1)
Significant other
observable inputs unobservable inputs
Significant
(Level 2)
(Level 3)
Fair Value Measurements Using
Interest rate contract (1)
Interest rate contract (1)
Foreign currency contract assets, current and
long-term (2)
Foreign currency contract liabilities, current and
long-term (3)
Contingent consideration liabilities
$
$
$
$
$
$
1,192
(290)
— $
— $
1,192 $
(290) $
2,447
$
— $
2,447 $
—
—
—
(4,255) $
(76,709) $
— $
— $
(4,255) $
— $
—
(76,709)
Total Fair
Value at
December 31, 2018
Quoted prices in
active markets
(Level 1)
Significant other
observable inputs unobservable inputs
Significant
(Level 2)
(Level 3)
Fair Value Measurements Using
Interest rate contract (1)
Foreign currency contract assets, current and
long-term (2)
Foreign currency contract liabilities, current and
long-term (3)
Contingent receivable asset
Contingent consideration liabilities
$
$
$
$
$
5,772
1,578
$
$
(1,608) $
$
607
(82,236) $
— $
5,772 $
— $
1,578 $
—
—
— $
— $
— $
(1,608) $
— $
— $
—
607
(82,236)
(1) The fair value of the interest rate contracts is determined using Level 2 fair value inputs and is recorded as other long-
term assets or other long-term obligations in the consolidated balance sheets.
(2) The fair value of the foreign currency contract assets (including those designated as hedging instruments and those
not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as prepaid and
other assets or other long-term assets in the consolidated balance sheets.
(3) The fair value of the foreign currency contract liabilities (including those designated as hedging instruments and those
not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as accrued
expenses or other long-term obligations in the consolidated balance sheets.
Certain of our business combinations involve the potential for the payment of future contingent consideration,
generally based on a percentage of future product sales or upon attaining specified future revenue milestones. See Note 3
for further information regarding these acquisitions. The contingent consideration liability is re-measured at the estimated
fair value at each reporting period with the change in fair value recognized within operating expenses in the accompanying
consolidated statements of income. 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
96
contingent consideration liability during the years ended December 31, 2019 and 2018, consisted of the following (in
thousands):
Beginning balance
Contingent consideration liability recorded as the result of acquisitions
(see Note 3)
Fair value adjustments recorded to income
Contingent payments made
Ending balance
2019
2018
$ 82,236 $ 10,956
10,517
(304)
(15,740)
72,209
(698)
(231)
$ 76,709 $ 82,236
As of December 31, 2019, approximately $48.1 million was included in other long-term obligations and
approximately $28.6 million was included in accrued expenses in our consolidated balance sheet. As of
December 31, 2018, approximately $58.5 million was included in other long-term obligations and $23.8 was included in
accrued expenses in our consolidated balance sheet. The cash paid to settle the contingent consideration liability recognized
at fair value as of the acquisition date (including measurement-period adjustments) has been reflected as a cash outflow
from financing activities in the accompanying consolidated statements of cash flows.
During the year ended December 31, 2016, we sold an equity investment for cash and for the right to receive
additional payments based on various contingent milestones. We determined the fair value of the contingent payments
using Level 3 inputs defined under authoritative guidance for fair value measurements, and we recorded a contingent
receivable asset, which as of December 31, 2018 had a value of approximately $607,000. We recorded all changes in fair
value to operating expenses as part of our cardiovascular segment in our consolidated statements of income. For the year
ended December 31, 2019, there were no significant changes to the fair value of the contingent receivable which impacted
net income and we collected payments of approximately $535,000. As of December 31, 2019, the receivable was settled
in full and there was no balance remaining to collect. During the year ended December 31, 2018, there were no significant
changes to the fair value of the contingent receivable which impacted net income and we collected payments of
approximately $153,000. As of December 31, 2018, approximately $607,000 was included in other receivables as a current
asset in our consolidated balance sheet.
The recurring Level 3 measurement of our contingent consideration liability and contingent receivable includes
the following significant unobservable inputs at December 31, 2019 and 2018 (amounts in thousands):
Contingent consideration asset or liability
Revenue-based royalty payments
contingent liability
Revenue milestones contingent
liability
Fair value at
December 31,
2019
7,710 Discounted cash flow
Valuation
technique
$
Unobservable inputs
Discount rate
Range
13% - 24%
Projected year of payments
2020-2034
$ 66,114 Monte Carlo simulation Discount rate
9% - 13.5%
Projected year of payments
2020-2023
Regulatory approval contingent
liability
$
2,885 Scenario-based method Discount rate
Probability of milestone payment
Projected year of payment
2.4%
65%
2022
97
Contingent consideration asset or liability
Revenue-based royalty payments
contingent liability
Fair value at
December 31,
2018
Valuation
technique
$ 10,661 Discounted cash flow Discount rate
Unobservable inputs
Range
9.9% - 25%
Projected year of payments
2018-2037
Supply chain milestone contingent
liability
$ 13,593 Discounted cash flow Discount rate
Probability of milestone payment
Projected year of payments
5.3%
95%
2019
Revenue milestones contingent
liability
$ 57,982 Discounted cash flow Discount rate
3.3% - 13%
Projected year of payments
2019-2023
Contingent receivable asset
$
607 Discounted cash flow Discount rate
Probability of milestone payment
Projected year of payments
10%
67%
2019
The contingent consideration liability and contingent receivable are re-measured to fair value each reporting
period using projected revenues, discount rates, probabilities of payment, and projected payment dates. Projected
contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected
revenues are based on our most recent internal operational budgets and long-range strategic plans. An increase (decrease)
in either the discount rate or the time to payment, in isolation, may result in a significantly lower (higher) fair value
measurement. A decrease in the probability of any milestone payment may result in lower fair value measurements. Our
determination of the fair value of the contingent consideration liability and contingent receivable 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.
Fair Value of Other Financial Instruments
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. The carrying amount of long-term debt approximates
fair value, as determined by borrowing rates estimated to be available to us for debt with similar terms and conditions. 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 are Level 1 inputs.
We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property and
equipment, intangible assets and goodwill in connection with impairment evaluations. All of our nonrecurring valuations
use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy. During the years ended
December 31, 2019, 2018 and 2017, we had losses of approximately $3.3 million, $657,000 and $809,000, respectively,
related to certain acquired intangible assets (see Note 5). In addition, we had losses of approximately $837,000 and
$157,000 for the years ended December 31, 2019 and 2018, respectively, related to the measurement of other non-financial
assets, property and equipment and patents, at fair value on a nonrecurring basis subsequent to their initial recognition.
Our equity investments in privately held companies, including options to acquire these companies, were $17.1
million and $22.5 million at December 31, 2019 and 2018, respectively. Our outstanding long-term notes receivable,
including accrued interest, were approximately $2.7 million and $13.5 million, as of December 31, 2019 and 2018,
respectively. We assess the credit support available and the value of any underlying collateral to determine if there are any
other-than temporary impairments. Credit losses represent the difference between the present value of cash flows expected
to be collected on these notes receivable and the amortized cost basis. For the year ended December 31, 2019 we recorded
impairment charges of $20.5 million due to our write-off of our NinePoint note receivable and purchase option due to our
assessment of the collectability of the note receivable and management’s decision not to exercise our option to purchase
98
this business. We also wrote off $1.6 million of accrued interest related to the note receivable. These valuations use
significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.
17.
COMMON STOCK AND ACCUMULATED OTHER COMPREHENSIVE INCOME
On July 30, 2018, we closed a public offering of 4,025,000 shares of common stock and received proceeds of
approximately $205.0 million, which is net of approximately $12.0 million in underwriting discounts and commissions
and approximately $366,000 in other direct cost incurred in connection with this equity offering. The net proceeds from
the offering were used primarily to repay outstanding borrowings (principally revolving credit loans) under our Second
Amended Credit Agreement.
On March 28, 2017, we closed a public offering of 5,175,000 shares of common stock and received proceeds of
approximately $136.6 million, which is net of approximately $8.8 million in underwriting discounts and commissions and
approximately $816,000 in other direct costs incurred in connection with this equity offering. The net proceeds from the
offering were used primarily to repay outstanding borrowings (including our term loan and revolving credit loans) under
our Second Amended Credit Agreement.
99
The changes in each component of Accumulated Other Comprehensive Income (Loss) for the years ended
December 31, 2019 and 2018 were as follows:
December 31, 2016
OCI (loss)
Income taxes
Reclassifications to:
Revenue
Cost of Sales
Interest Expense
Net OCI (loss)
December 31, 2017
OCI (loss)
Income taxes
Reclassifications to:
Revenue
Cost of Sales
Interest Expense
Net OCI (loss)
December 31, 2018
OCI (loss)
Income taxes
Reclassifications to:
Revenue
Cost of Sales
Interest Expense
Net OCI (loss)
Reclassification of stranded tax effects 1
Cash Flow Hedges Foreign Currency Translation
$
2,923 $
(4,805) $ (1,882)
Total
1,344
(350)
277
(625)
(95)
551
3,474
2,098
(16)
(136)
(361)
(1,537)
48
3,522
(3,417)
1,404
(577)
578
(2,040)
(4,052)
748
3,117
(252)
2,865
4,461
(602)
277
(625)
(95)
3,416
(1,940)
1,534
(3,606)
(9)
(3,615)
(1,508)
(25)
(136)
(361)
(1,537)
(3,567)
(5,555)
(2,033)
(18)
61
43
(3,435)
1,465
(577)
578
(2,040)
(4,009)
748
December 31, 2019
$
218 $
(5,512) $ (5,294)
(1) Amounts reclassified to retained earnings as a result of the adoption of ASU 2018-02.
100
18.
LEASES
We adopted ASC 842 using the modified retrospective approach, electing the practical expedient that allows us
not to restate our comparative periods prior to the adoption of the standard on January 1, 2019. As such, the disclosures
required under ASC 842 are not presented for periods before the date of adoption. For the comparative periods prior to
adoption, we present the disclosures which were required under ASC 840.
We have operating leases for facilities used for manufacturing, research and development, sales and distribution,
and office space, as well as leases for manufacturing and office equipment, vehicles, and land. Our leases have remaining
terms of less than one year to approximately 30 years. A number of our lease agreements contain options to renew at our
discretion for periods of up to 15 years and options to terminate the leases within one year. The lease term used to calculate
ROU assets and lease liabilities includes renewal and termination options that are deemed reasonably certain to be
exercised. Lease agreements with lease and non-lease components are generally accounted for as a single lease component.
We do not have any bargain purchase options in our leases. For leases with an initial term of one year or less, we do not
record a ROU asset or lease liability on our consolidated balance sheet. Substantially all of the ROU assets and lease
liabilities as of December 31, 2019 recorded on our consolidated balance sheet are related to our cardiovascular segment.
From time to time we enter into agreements to sublease a portion of our facilities to third-parties. Such sublease
income is not material. We also lease certain hardware consoles to customers and record rental revenue as a component of
net sales. Rental revenue under such console leasing arrangements for the years ended December 31, 2019 and 2018 was
not significant.
The following was included in our consolidated balance sheet as of December 31, 2019 (in thousands):
Assets
ROU operating lease assets
Liabilities
Short-term operating lease liabilities
Long-term operating lease liabilities
Total operating lease liabilities
As of December 31, 2019
$
$
$
80,244
11,550
72,714
84,264
During the year ended December 31, 2015, we entered into sale and leaseback transactions to finance certain
production equipment for approximately $2.0 million. At that time, we deferred the gain from the sale and leaseback
transaction, of which approximately $93,000 remained as of December 31, 2018. As part of the adoption of ASC 842, we
wrote-off the deferred gain as an adjustment to equity through retained earnings as of January 1, 2019.
We recognize lease expense on a straight-line basis over the term of the lease. Net lease cost for the years ended
December 31, 2019, 2018, and 2017 was approximately $16.5 million, $14.5 million, and $13.6 million, respectively. The
components of lease costs for the year ended December 31, 2019 were as follows, in thousands:
Lease Cost
Operating lease cost (a)
Sublease (income) (b)
Net lease cost
Classification
Selling, general and administrative expenses
Selling, general and administrative expenses
Year Ended
December 31, 2019
$
$
16,828
(361)
16,467
(a) Includes expense related to short-term leases and variable payments, which were not significant.
(b) Does not include rental revenue from leases of hardware consoles to customers, which was not significant.
101
Supplemental cash flow information for the year ended December 31, 2019 was as follows:
Cash paid for amounts included in the measurement of lease liabilities
Right-of-use assets obtained in exchange for lease obligations
Year Ended
December 31, 2019
14,646
$
10,637
$
Generally, our lease agreements do not specify an implicit rate. Therefore, we estimate our incremental borrowing
rate, which is defined as the interest rate we would pay to borrow on a collateralized basis, considering such factors as
length of lease term and the risks of the economic environment in which the leased asset operates. As of
December 31, 2019, the following disclosures for remaining lease term and discount rates were applicable:
Weighted average remaining lease term
Weighted average discount rate
December 31, 2019
12.3 years
3.2%
As of December 31, 2019, maturities of operating lease liabilities were as follows, in thousands:
Year ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: Imputed interest
Total
$
Amounts due under Operating Leases
13,949
12,938
10,368
8,273
7,330
53,501
106,359
(22,095)
84,264
$
As previously disclosed in our 2018 Form 10-K under the prior guidance of ASC 840, minimum payments under
operating lease agreements as of December 31, 2018 were as follows, in thousands:
Year ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Operating
Leases
13,421
11,319
9,995
8,053
6,953
52,754
102,495
$
$
As of December 31, 2019, we had additional operating leases for office space that had not yet commenced. These
leases will commence during 2019 and are not deemed material.
Supplementary Financial Data
The supplementary financial information required by Item 302 of Regulation S-K is contained in Note 15 to our
consolidated financial statements set forth above.
102
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer
and principal financial officer, we conducted an evaluation of the design and operation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934
("Exchange Act"), as of December 31, 2019. Based on this evaluation, our principal executive officer and principal
financial officer concluded that as of December 31, 2019, our disclosure controls and procedures were effective, at a
reasonable assurance level, to ensure that information we are required to disclose in the reports we file or submit under the
Exchange Act is (a) recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms and is (b) accumulated and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the U.S. of America.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31,
2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission ("COSO") in Internal Control-Integrated Framework (2013). Based on the criteria discussed
above and our management’s assessment, our management concluded that, as of December 31, 2019, our internal control
over financial reporting was effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter ended December 31, 2019, there were no changes in our internal control over financial
reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
Our independent registered public accountants have also issued an audit report on our internal control over
financial reporting. Their report appears below.
103
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Merit Medical Systems, Inc.:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Merit Medical Systems, Inc. and subsidiaries (the
“Company”) as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the
Company and our report dated March 2, 2020, expressed an unqualified opinion on those financial statements and included
an explanatory paragraph regarding the Company’s adoption of the FASB’s new standard related to leases.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 2, 2020
104
Item 9B. Other Information.
None.
Items 10, 11, 12, 13 and 14.
PART III
The information required by these items is incorporated by reference to our definitive proxy statement relating to
our 2020 Annual Meeting of Shareholders. We currently anticipate that our definitive proxy statement will be filed with
the SEC not later than 120 days after December 31, 2019, pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended.
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this Report:
PART IV
(1) Financial Statements. The following consolidated financial statements and the notes thereto, and the
Reports of Independent Registered Public Accounting Firm are incorporated by reference as provided
in Item 8 and Item 9A of this report:
Report of Independent Registered Public Accounting Firm — Internal Control
Report of Independent Registered Public Accounting Firm — Financial Statements
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule.
— Schedule II - Valuation and qualifying accounts
105
Years Ended December 31, 2019, 2018 and 2017
(In thousands)
Description
ALLOWANCE FOR UNCOLLECTIBLE
ACCOUNTS:
2017
2018
2019
Balance at
Balance at
Beginning of Year Costs and Expenses (a) Deduction (b) End of Year
Additions Charged to
(1,587)
(1,769)
(2,355)
(1,012)
(1,055)
(1,163)
830
469
410
(1,769)
(2,355)
(3,108)
(a) We record a bad debt provision based upon historical experience and a review of individual customer
balances.
(b) When an individual customer balance becomes impaired and is deemed uncollectible, a deduction is made
against the allowance for uncollectible accounts.
Years Ended December 31, 2019, 2018 and 2017
(In thousands)
Description
TAX VALUATION ALLOWANCE:
Balance at
Additions Charged to
Beginning of Year Costs and Expenses (c) Deduction
Balance at
End of Year
2017
2018
2019
(3,786)
(4,422)
(4,989)
(636)
(567)
—
—
—
345
(4,422)
(4,989)
(4,644)
(c) We record a valuation allowance against a deferred tax asset when it is determined that it is more likely than
not that the deferred tax asset will not be realized.
(b) Exhibits:
The following exhibits required by Item 601 of Regulation S-K are filed herewith or have been filed previously with
the SEC as indicated below:
Exhibit
No.
1.1
1.2
2.1
2.2
Index to Exhibits
Underwriting Agreement, dated March 22, 2017, by and among Merit Medical Systems, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, and Piper Jaffray & Co.*
Underwriting Agreement, dated July 25, 2018, by and among Merit Medical Systems, Inc., Wells Fargo
Securities, LLC and Piper Jaffray & Co.*
Asset Purchase Agreement by and between Merit Medical Systems, Inc. and Becton, Dickinson and Company
dated November 15, 2017*
Agreement and Plan of Merger, dated October 1, 2018, by and among Merit Medical Systems, Inc., CMI
Transaction Co., Cianna Medical, Inc. and Fortis Advisors LLC, as the Securityholder’s Representative *
106
Exhibit
No.
2.3
3.1
3.2
4.1
4.2
Asset Purchase Agreement, dated December 14, 2018, by and among Merit Medical Systems, Inc., Vascular
Insights, LLC and VI Management, Inc.*
Index to Exhibits
Amended and Restated Articles of Incorporation dated May 31, 2018*
Third Amended and Restated Bylaws dated May 31, 2018*
Specimen Certificate of the Common Stock*
Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of
1934
10.1
Merit Medical Systems, Inc. Long Term Incentive Plan (as amended and restated) dated March 25, 1996*†
10.2
Lease Agreement dated as of June 8, 1993 for office and manufacturing facility*
10.3
Amended and Restated Deferred Compensation Plan*†
10.4
Seventh Amendment to the First Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan*†
10.5
Merit Medical Systems, Inc. Amended and Restated Deferred Compensation Plan, effective January 1, 2008*†
10.6
Second Amendment to the Merit Medical Systems, Inc. 2006 Long-Term Incentive Plan*†
10.7
Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan*†
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Exhibit
No.
First Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
effective September 19, 2010*†
Second Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
dated November 29, 2010 *†
Third Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
effective October 1, 2010*†
Fourth Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
dated December 31, 2011*†
Fifth Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
dated December 28, 2012*†
Sixth Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
dated December 31, 2013.*†
Seventh Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
dated June 10, 2014*†
Eighth Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
dated December 29, 2014*†
Index to Exhibits
107
10.16
10.17
Second Amended and Restated Credit Agreement dated as of July 6, 2016 by and among Merit Medical
Systems, Inc., Wells Fargo Bank, National Association, Well Fargo Securities, LLC and the lenders named
therein*
Form of Indemnification Agreement, dated June 13, 2016, between the Company and each of the following
individuals: Fred P. Lampropoulos, Kent W. Stanger, Nolan E. Karras, A. Scott Anderson, Franklin
J. Miller, M.D., Michael E. Stillabower, M.D., F. Ann Millner, Ed. D., Ronald A. Frost, Joseph C. Wright,
Justin J. Lampropoulos, and Brian G. Lloyd*†
10.18
Form of Employment Agreement, dated May 26, 2016 between the Company and each of the following
individuals: Ronald A. Frost, Joseph C. Wright, Justin J. Lampropoulos, and Brian G. Lloyd*†
10.19
Employment Agreement, dated May 26, 2016 between the Company and Fred P. Lampropoulos*†
10.20
Third Amendment to the Merit Medical Systems, Inc. 2006 Long-Term Incentive Plan dated February 13,
2015*†
10.21
Merit Medical Systems, Inc., Restatement of the 1996 Employee Stock Purchase Plan dated July 1, 2000*†
10.22
10.23
10.24
10.25
First Amendment to the Merit Medical Systems, Inc., 1996 Employee Stock Purchase Plan dated April 1,
2001*†
Second Amendment to the Merit Medical Systems, Inc., 1996 Employee Stock Purchase Plan dated January 1,
2006*†
Third Amendment to the Merit Medical Systems, Inc., 1996 Employee Stock Purchase Plan dated April 7,
2006*†
Fourth Amendment to the Merit Medical Systems, Inc., 1996 Employee Stock Purchase Plan dated
February 13, 2015*†
10.26
Indemnification Agreement, dated July 23, 2016, between the Company and David M. Liu*†
10.27
First Amendment to Second Amended and Restated Credit Agreement, dated September 28, 2016*
10.28
Second Amendment to Second Amended and Restated Credit Agreement, dated March 20, 2017, entered into
by and among Merit Medical Systems, Wells Fargo Bank, National Association and the lenders and subsidiary
guarantors named therein*
10.29
Indemnification Agreement with Thomas J. Gunderson*†
10.30
10.31
10.32
10.33
Exhibit
No.
Third Amendment to Second Amended and Restated Credit Agreement and Incremental Increase Agreement,
dated December 13, 2017, entered into by and among Merit Medical Systems, Inc., Wells Fargo Bank National
Association and the lenders and subsidiary guarantors named therein*
First Amendment to Employment Agreement made and entered into by and between Merit Medical
Systems, Inc. and Fred P. Lampropoulos as of the 11th day of December, 2017*†
Form of First Amendment to Employment Agreement for each of Ronald A. Frost, Justin J. Lampropoulos,
Joseph C. Wright, and Brian G. Lloyd*†
First Amendment to Lease Agreement dated May 22, 2017 for office and manufacturing facility*
Index to Exhibits
108
10.34
10.35
Asset Purchase Agreement by and between Merit Medical Systems, Inc. and Becton, Dickinson and Company
dated November 15, 2017*
Fourth Amendment to Second Amended and Restated Credit Agreement, dated March 28, 2018, entered into
by and among Merit Medical Systems, Inc., Wells Fargo Bank National Association and the lenders and
subsidiary guarantors named therein*
10.36
Merit Medical Systems, Inc. 2018 Long-Term Incentive Plan effective May 24, 2018*†
10.37
10.38
10.39
Indemnification Agreement dated made and entered into by and between Merit Medical Systems, Inc. and Raul
Parra as of the 1st day of August, 2018.*†
Employment Agreement made and entered into by and between Merit Medical Systems, Inc. and Raul Parra
as of the 1st day of August, 2018.*†
First Amendment to the Merit Medical Systems, Inc. 2018 Long-Term Incentive Plan effective December 14,
2018*†
10.40
Form of Indemnification Agreement, dated December 14, 2018 between the Company and Jill Anderson*†
10.41
Merit Medical Systems, Inc. 2019 Executive Bonus Plan, dated January 1, 2019*†
10.42
10.43
10.44
10.45
10.46
Ninth Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
dated August 1, 2016*†
Tenth Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
dated January 1, 2017*†
Eleventh Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing
Plan, dated January 1, 2019*†
Twelfth Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan,
effective June 1, 2018*†
Third Amended and Restated Credit Agreement entered into by and among Merit Medical Systems, Inc., Wells
Fargo Bank National Association and the lenders and subsidiary guarantors named therein, dated July 9, 2019*
10.47
Indemnification Agreement with Lynne N. Ward dated August 13, 2019*†
10.48
Thirteenth Amendment to the Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit Sharing
Plan, effective January 1, 2019†
21
Subsidiaries of Merit Medical Systems, Inc.
23.1
Consent of Independent Registered Public Accounting Firm
31.1
Certification of Chief Executive Officer
31.2
Certification of Chief Financial Officer
Certification of Chief Executive Officer
32.1
Exhibit
No.
Index to Exhibits
32.2
Certification of Chief Financial Officer
109
101
The following materials from the Merit Medical Systems, Inc. Annual Report on Form 10-K for the fiscal year
ended December 31, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language):
(i) Consolidated Statements of Earnings, (ii) Consolidated Statements of Comprehensive Income,
(iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements
of Equity, and (vi) Notes to Consolidated Financial Statements
104
Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document).
* These exhibits are incorporated herein by reference.
†
Indicates management contract or compensatory plan or arrangement.
(c)
Schedules:
None
Item 16. Form 10-K Summary.
None.
110
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on March 2, 2020.
SIGNATURES
MERIT MEDICAL SYSTEMS, INC.
By:
/s/ FRED P. LAMPROPOULOS
Fred P. Lampropoulos, President and
Chief Executive Officer
ADDITIONAL SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on
form 10-K has been signed below by the following persons in the capacities indicated on March 2, 2020.
Signature
Capacity in Which Signed
/s/: FRED P. LAMPROPOULOS
Fred P. Lampropoulos
President, Chief Executive Officer and Director
(Principal executive officer)
/s/: RAUL PARRA
Raul Parra
/s/: A. SCOTT ANDERSON
A. Scott Anderson
/s/: JILL D. ANDERSON
Jill D. Anderson
/s/: THOMAS J. GUNDERSON
Thomas J. Gunderson
/s/: NOLAN E. KARRAS
Nolan E. Karras
/s/: DAVID M. LIU
David M. Liu
/s/: FRANKLIN J. MILLER
Franklin J. Miller
/s/: F. ANN MILLNER
F. Ann Millner
/s/: KENT W. STANGER
Kent W. Stanger
/s/: LYNNE N. WARD
Lynne N. Ward
Chief Financial Officer and Treasurer
(Principal financial and accounting officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
111
CORPORATE INFORMATION
CORPORATE INFORMATION
EXECUTIVE OFFICERS
FORM 10-K
Fred P. Lampropoulos
Chairman, Chief Executive Officer
Raul Parra
Chief Financial Officer, Treasurer
Ronald A. Frost
Chief Operating Officer
Joseph C. Wright
President, International
Brian G. Lloyd
Chief Legal Officer, Corporate Secretary
Justin J. Lampropoulos
Executive Vice President Global Sales,
Marketing and Strategy
Merit Medical Systems, Inc. filed an Annual Report on Form 10-K with the Securities and Exchange
Commission for the fiscal year ended December 31, 2019. A copy may be obtained by written
request from Anne-Marie Wright, Vice President, Corporate Communications, at Merit’s corporate
office in South Jordan, Utah.
ANNUAL MEETING
All shareholders are invited to attend Merit’s Annual Meeting of shareholders on Friday, June 19,
2020, at 8:00 a.m. at Merit’s corporate offices in South Jordan, Utah.
STOCK TRANSFER AGENT/REGISTRAR
Zions Bank, a division of ZB, N.A.
P. O. Box 30880
Salt Lake City, Utah 84130
BOARD OF DIRECTORS
MARKET INFORMATION
Fred P. Lampropoulos
Chairman and Chief Executive Officer
Merit Medical Systems, Inc.
A. Scott Anderson
President and Chief Executive Officer
Zions First National Bank
Jill D. Anderson
Co-Founder and Former Chief Executive
Officer of Cianna Medical
Thomas J. Gunderson
Chairman at Minneapolis Heart
Institute Foundation, Inc.
Nolan E. Karras
Chairman and Chief Executive Officer
The Karras Company, Inc.
David M. Liu, M.D.
Clinical Associate Professor,
Faculty of Medicine,
University of British Columbia
Franklin J. Miller, M.D.
Emeritus Professor, Interventional Radiology
University of Utah
F. Ann Millner, Ed. D.
Regents Professor and Professor
of Health Administrative Services
Weber State University
Kent W. Stanger
Former Chief Financial Officer
Merit Medical Systems, Inc.
Lynne N. Ward
Former Executive Director of My529
(formerly Utah Educational Savings Plan)
Merit’s common stock is traded on the NASDAQ Global Select Market System under the
symbol “MMSI.” As of February 27, 2020, the number of shares of common stock outstanding
was 55,216,906, held by approximately 104 shareholders of record, not including shareholders
whose shares are held in securities position listings.
MARKET INFORMATION
Anne-Marie Wright
Vice President, Corporate Communications
(801) 253-1600
FOR MORE INFORMATION, CONTACT
Raul Parra
Chief Financial Officer, Treasurer
Merit Medical Systems, Inc.
(801) 253-1600
CORPORATE OFFICES
Merit Medical Systems, Inc.
1600 West Merit Parkway
South Jordan, Utah 84095
(801) 253-1600
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
LEGAL COUNSEL
Parr Brown Gee & Loveless
Corporate and Securities Counsel
Stoel Rives LLP
Intellectual Property Counsel
Workman Nydegger
Intellectual Property Counsel
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are
forward-looking statements for purposes of these provisions. Merit assumes no obligation to update any forward-
looking statement. Although Merit believes 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 may differ materially, from those projected or
assumed in the forward-looking statements. Merit’s future financial condition and results of operations, as well
as any forward-looking statements, are subject to inherent risks and uncertainties, including factors referenced
in Merit’s press releases and filings with the Securities and Exchange Commission. A number of the factors that
may have a direct bearing on Merit’s financial condition and operating results are described under “Risk Factors”
beginning on page 21 of Merit’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission
on March 2, 2020.
MERIT MEDICAL SYSTEMS, INC.
1600 West Merit Parkway
+1 (801) 253–1600
www.merit.com
South Jordan, Utah 84095