• Q2 2020 worldwide revenue of $218.4 million, down (14.5)% as reported compared to Q2 2019
  • Q2 2020 core revenue on a constant currency basis* down (13.6)% compared to Q2 2019
  • Q2 2020 GAAP loss per share was $(0.34), compared to GAAP EPS of $0.12 in Q2 2019
  • Q2 2020 non-GAAP EPS* was $0.31, compared to $0.42 in Q2 2019
  • Q2 2020 free cash flow* was $32 million, and $47 million YTD

* Core revenue on a constant currency basis, non-GAAP EPS, non-GAAP net income, non-GAAP operating margin, non-GAAP gross margin and free cash flow are non-GAAP financial measures. A reconciliation of these and other non-GAAP financial measures used in this release to their most directly comparable GAAP financial measures is included under the heading “Non-GAAP Financial Measures” below.

SOUTH JORDAN, Utah, July 29, 2020 (GLOBE NEWSWIRE) -- Merit Medical Systems, Inc. (NASDAQ: MMSI), 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, today announced revenue of $218.4 million for the quarter ended June 30, 2020, a decrease of (14.5)% compared to revenue of $255.5 million for the quarter ended June 30, 2019. Core revenue on a constant currency basis* for the second quarter of 2020 was down (13.6)% compared to revenue for the second quarter of 2019.

Merit’s GAAP gross margin for the second quarter of 2020 was 38.6%, compared to GAAP gross margin of 43.8% for the second quarter of 2019. Merit’s non-GAAP gross margin* for the second quarter of 2020 was 44.7%, compared to non-GAAP gross margin* of 48.7% for the second quarter of 2019.

Merit’s GAAP operating margin for the second quarter of 2020 was (8.7)%, compared to GAAP operating margin of 4.8% for the second quarter of 2019. Merit’s non-GAAP operating margin* for the second quarter of 2020 was 11.2%, compared to non-GAAP operating margin* of 13.3% for the second quarter of 2019.

Merit’s GAAP net loss for the second quarter of 2020 was $(19.1) million, or $(0.34) per share, compared to GAAP net income of $6.9 million, or $0.12 per share, for the second quarter of 2019. Merit’s non-GAAP net income* for the quarter ended June 30, 2020 was $17.4 million, or $0.31 per share, compared to non-GAAP net income* of $23.8 million, or $0.42 per share, for the quarter ended June 30, 2019.

Merit’s revenue by category for the three and six-month periods ended June 30, 2020, compared to the corresponding periods in 2019, was as follows (unaudited, in thousands, except for percentages):

                 
    Three Months Ended June 30,    Six Months Ended June 30, 
  % Change 2020 2019 % Change 2020 2019
Cardiovascular                
Peripheral Intervention (18.2)$ 72,635 $ 88,848 (7.9)$ 159,710 $ 173,481
Cardiac Intervention (17.1)  66,005   79,643 (8.9)  138,596   152,183
Custom Procedural Solutions (4.0)  45,319   47,216 (0.1)  92,940   93,077
OEM (8.9)  28,218   30,959 (3.3)  56,475   58,405
Total (14.0)  212,177   246,666 (6.2)  447,721   477,146
                 
Endoscopy                
Endoscopy devices (30.1)  6,194   8,866 (15.3)  14,175   16,735
                 
Total (14.5)$ 218,371 $ 255,532 (6.5)$ 461,896 $ 493,881

“During the second quarter we continued to make progress on the goals we initiated in early 2019, including the movement of 14 product lines and consolidation of certain facilities,” said Fred P. Lampropoulos, Merit’s Chairman and CEO. “We are particularly pleased with the generation of free cash flow* of $32 million for the quarter and $47 million year to date.”

“We also focused on dealing with the challenges of the COVID-19 pandemic,” Lampropoulos said. “Our priority was the safety of employees. Deemed an ‘essential provider,’ we continued operation in all of our facilities worldwide by implementing CDC recommendations, including temperature testing, social distancing, mask-wearing, frequent hand-washing and installing separation barriers.”

“In order to balance the reduction of incoming sales orders due to the suspension of elective procedures by many facilities we serve, we reduced headcounts, implemented targeted furloughs, and reduced salaries for a number of groups, including all executive positions,” Lampropoulos said. “We also reduced the number of research and development projects to focus on the highest priority projects in order to reach our financial and competitive objectives.”

“During the second quarter, we received the CE mark for the Merit WRAPSODY™ Endoprosthesis Stent System, and we have initiated commercialization in the European Union,” Lampropoulos continued. “We also received approval for the WRAPSODY Arterial Venous access Efficacy (WAVE) IDE trial from the FDA. This approval will allow us to proceed on several cohorts with up to 50 institutions and more than 350 patients, in anticipation of application for the FDA’s consideration of PMA approval for commercialization in the United States. We also introduced new products that address needs in the COVID-19 environment which have had an impact in the second quarter, which we believe will offer additional opportunities.”

“We added three new directors with substantial medical device experience and have formed an Operating Committee to establish future financial and performance objectives that we plan to announce during our third quarter report in October,” Lampropoulos said.

“As recently reported, we reached an agreement with the U.S. Department of Justice to fully resolve its pending investigation,” Lampropoulos said. “Based upon that agreement, we recorded a charge of approximately $18 million during the second quarter. We intend to release additional details regarding the settlement following the finalization of the settlement documents.”

“With COVID-19 cases increasing, the pace of recovery of elective procedures is still uncertain,” Lampropoulos said. “Access to customers and opportunities to pursue clinical trials for new products are still very limited. However, we are still proceeding with new product development, clinical and regulatory activities, and marketing and training programs. Assuming eventual progress in the fight against the COVID-19 pandemic, we believe we are well positioned to provide new products and services as well as reliable supply of our existing products.”

“In order to maintain various departments and prepare to meet the needs of our customers, we plan to reduce certain furloughs and provide guaranteed levels of income for some sales associates, which will add some expense in the third quarter,” Lampropoulos added.

“As we enter the uncertainty of the third quarter, we maintain our guidance suspension for 2020 until we have more visibility into the future,” Lampropoulos continued. “We believe we have substantially balanced the inputs and outputs of revenues and costs, while we strive to maintain a healthy sales force. We anticipate that additional adjustments will be necessary as we navigate these uncharted waters. We remain positive about our prospects for growth and continued profitability as we move forward.”

As of June 30, 2020, Merit had cash on hand of approximately $50 million and net borrowing capacity of approximately $183 million, which was undrawn as of June 30, 2020.

2020 GUIDANCE

Due to the general uncertainty and rapidly changing global environment related to the COVID-19 pandemic and corresponding economic downturn, Merit’s management has concluded that it cannot issue financial guidance for the remainder of 2020.

CONFERENCE CALL

Merit will hold its investor conference call (conference ID 6997109) today, Wednesday, July 29, 2020, at 5:00 p.m. Eastern (4:00 p.m. Central, 3:00 p.m. Mountain, and 2:00 p.m. Pacific). The domestic telephone number is (844) 578‑9672 and the international number is (508) 637‑5656. A live webcast and slide deck will also be available at merit.com.

CONSOLIDATED BALANCE SHEETS
(in thousands)

       
  June 30,  
  2020
 December 31,
  (unaudited) 2019 
ASSETS     
Current Assets      
Cash and cash equivalents $ 49,702  $ 44,320 
Trade receivables, net   138,792    155,365 
Other receivables   8,214    10,016 
Inventories   221,417    225,698 
Prepaid expenses and other current assets   13,860    12,497 
Prepaid income taxes   3,493    3,491 
Income tax refund receivables   10,467    3,151 
Total current assets   445,945    454,538 
       
Property and equipment, net   383,629    378,785 
Intangible assets, net   413,990    445,312 
Goodwill   353,093    353,193 
Deferred income tax assets   3,748    3,788 
Right-of-use operating lease assets   79,051    80,244 
Other assets   36,413    41,461 
Total Assets   1,715,869    1,757,321 
       
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current Liabilities      
Trade payables $ 44,444  $ 54,623 
Accrued expenses   106,934    105,184 
Current portion of long-term debt   7,500    7,500 
Short-term operating lease liabilities   12,886    11,550 
Income taxes payable   2,460    2,799 
Total current liabilities   174,224    181,656 
       
Long-term debt   402,915    431,984 
Deferred income tax liabilities   45,236    45,236 
Long-term income taxes payable   347    347 
Liabilities related to unrecognized tax benefits   1,990    1,990 
Deferred compensation payable   14,194    14,855 
Deferred credits   2,053    2,122 
Long-term operating lease liabilities   71,785    72,714 
Other long-term obligations   74,278    56,473 
Total Liabilities   787,022    807,377 
       
Stockholders' Equity      
Common stock   595,726    587,017 
Retained earnings   345,434    368,221 
Accumulated other comprehensive loss   (12,313)   (5,294)
Total Stockholders' Equity   928,847    949,944 
Total Liabilities and Stockholders' Equity $ 1,715,869  $ 1,757,321 



CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited, in thousands except per share amounts)

             
  Three Months Ended June 30,  Six Months Ended June 30, 
  2020
 2019
 2020
 2019
NET SALES $ 218,371  $ 255,532  $ 461,896  $ 493,881 
             
COST OF SALES   134,155    143,568    273,896    277,281 
             
GROSS PROFIT   84,216    111,964    188,000    216,600 
             
OPERATING EXPENSES:            
Selling, general and administrative   66,767    79,977    145,575    158,247 
Research and development   14,026    16,332    28,898    32,375 
Legal settlement   18,200    —    18,200    — 
Impairment and other charges   3,875    548    7,720    548 
Contingent consideration expense   343    2,406    5,240    3,181 
Acquired in-process research and development   —    500    —    525 
             
Total operating expenses   103,211    99,763    205,633    194,876 
             
INCOME (LOSS) FROM OPERATIONS   (18,995)   12,201    (17,633)   21,724 
             
OTHER INCOME (EXPENSE):            
Interest income   88   342    167    698 
Interest expense   (2,715)   (3,115)   (5,859)   (5,879)
Other expense - net   (678)   (429)   (967)   (698)
             
Total other expense — net   (3,305)   (3,202)   (6,659)   (5,879)
             
INCOME (LOSS) BEFORE INCOME TAXES   (22,300)   8,999    (24,292)   15,845 
             
INCOME TAX (BENEFIT) EXPENSE   (3,242)   2,140    (2,080)   2,791 
             
NET INCOME (LOSS) $ (19,058) $ 6,859  $ (22,212) $ 13,054 
             
EARNINGS (LOSS) PER COMMON SHARE:            
Basic $ (0.34) $ 0.12  $ (0.40) $ 0.24 
             
Diluted $ (0.34) $ 0.12  $ (0.40) $ 0.23 
             
AVERAGE COMMON SHARES:            
Basic   55,406    55,017    55,326    54,967 
             
Diluted   55,406    56,555    55,326    56,523 


Non-GAAP Financial Measures

Although Merit’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), Merit’s management believes that certain non-GAAP financial measures referenced in this release provide investors with useful information regarding the underlying business trends and performance of Merit’s ongoing operations and can be useful for period-over-period comparisons of such operations. Non-GAAP financial measures used in this release include:

  • constant currency revenue,
  • core revenue,
  • core revenue on a constant currency basis,
  • non-GAAP gross margin,
  • non-GAAP operating margin,
  • non-GAAP net income,
  • non-GAAP earnings per share, and
  • free cash flow.

Merit’s management team uses these non-GAAP financial measures to evaluate Merit’s profitability and efficiency, to compare operating results to prior periods, to evaluate changes in the operating results of its operating segments, and to measure and allocate financial resources internally. However, Merit’s management does not consider such non-GAAP measures in isolation or as an alternative to measures determined in accordance with GAAP.

Readers should consider non-GAAP measures used in this release in addition to, not as a substitute for, financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures generally exclude some, but not all, items that may affect Merit’s net income. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by management about which items are excluded. Merit believes it is useful to exclude such items in the calculation of non-GAAP earnings per share, non-GAAP gross margin, non-GAAP operating margin, and non-GAAP net income (in each case, as further illustrated in the reconciliation tables below) because such amounts in any specific period may not directly correlate to the underlying performance of Merit’s business operations and can vary significantly between periods as a result of factors such as acquisition transactions, non-cash expenses related to amortization or write-off of previously acquired tangible and intangible assets, severance expenses, expenses resulting from non-ordinary course litigation or administrative proceedings and resulting settlements, governmental proceedings or changes in tax or industry regulations, and debt issuance costs. Merit may incur similar types of expenses in the future, and the non-GAAP financial information included in this release should not be viewed as a statement or indication that these types of expenses will not recur. Additionally, the non-GAAP financial measures used in this release may not be comparable with similarly titled measures of other companies. Merit urges investors and potential investors to review the reconciliations of its non-GAAP financial measures to the comparable GAAP financial measures, and not to rely on any single financial measure to evaluate Merit’s business or results of operations.

Constant Currency Revenue

Merit’s revenue on a constant currency basis is prepared by translating the current-period reported revenue of subsidiaries whose functional currency is a currency other than the U.S. dollar at the applicable foreign exchange rates in effect during the comparable prior-year period. The constant currency revenue adjustments of $2.7 million and $5.5 million to reported revenue and to core revenue for the three and six-month periods ended June 30, 2020, respectively, were calculated using the applicable average foreign exchange rates for the three and six-month periods ended June 30, 2019, respectively.

Core Revenue and Core Revenue on a Constant Currency Basis

Merit’s core revenue is defined (a) with respect to prior fiscal year periods, as GAAP revenue, and (b) with respect to current fiscal year periods, as GAAP revenue, less revenue from certain acquisitions and strategic transactions. For the three and six-month period ended June 30, 2020, Merit’s core revenue excludes revenues attributable to the acquisition of (1) Brightwater Medical, Inc. in June 2019 (excluded through May 2020 only), and (2) Fibrovein Holdings Limited in August 2019. Core revenue on a constant currency basis is defined as core revenue (as described in the first sentence of this paragraph) adjusted to eliminate the foreign exchange impact related to those core revenues for the relevant period, using the applicable average foreign exchange rates in effect for the comparable prior-year periods presented.

Non-GAAP Gross Margin

Non-GAAP gross margin is calculated by reducing GAAP cost of sales by amounts recorded for amortization of intangible assets, certain inventory write-offs and inventory mark-up related to acquisitions.

Non-GAAP Operating Margin

Non-GAAP operating margin is calculated by adjusting GAAP operating income (loss) for certain items which are deemed by Merit’s management to be outside of core operations and vary in amount and frequency among periods, such as expenses related to new acquisitions, non-cash expenses related to amortization or write-off of previously acquired tangible and intangible assets, severance expenses, performance-based stock compensation expenses, expenses resulting from non-ordinary course litigation or administrative proceedings and resulting settlements, governmental proceedings or changes in industry regulations, as well as other items set forth in the tables below.

Non-GAAP Net Income

Non-GAAP net income is calculated by adjusting GAAP net income (loss) for the items set forth in the definition of non-GAAP operating margin above, as well as for expenses related to debt issuance costs and changes in tax regulations, as well as other items set forth in the tables below.

Non-GAAP EPS

Non-GAAP EPS is defined as non-GAAP net income divided by the diluted shares outstanding for the corresponding period.

Free Cash Flow

Free cash flow is defined as cash flow from operations less capital expenditures as defined by GAAP in the consolidated statement of cash flows.

Other Non-GAAP Financial Measure Reconciliation

The following tables set forth supplemental financial data and corresponding reconciliations of non-GAAP net income and non-GAAP earnings per share to Merit’s net income and earnings per share prepared in accordance with GAAP, in each case, for the three and six-month periods ended June 30, 2020 and 2019. The non-GAAP income adjustments referenced in the following tables do not reflect non-performance-based stock compensation expense of approximately $2.4 million and $2.5 million for the three-month periods ended June 30, 2020 and 2019, respectively, and approximately $4.7 million and $4.3 million for the six-month periods ended June 30, 2020 and 2019, respectively.


Reconciliation of GAAP Net Income (Loss) to Non-GAAP Net Income
(Unaudited, in thousands except per share amounts)

             
  Three Months Ended June 30, 2020
  Pre-Tax Tax Impact (a) After-Tax Per Share Impact
GAAP net loss $ (22,300) $ 3,242  $ (19,058) $(0.34)
             
Non-GAAP adjustments:            
Cost of Sales            
Amortization of intangibles   12,807    (3,300)   9,507   0.17 
Inventory write-off (b)   345    (104)   241   0.00 
Inventory mark-up related to acquisitions   146    (37)   109   0.00 
Operating Expenses            
Severance   1,301    (364)   937   0.02 
Acquisition and restructuring-related (c)   715    (197)   518   0.01 
Medical Device Regulation expenses (d)   303    (78)   225   0.00 
Fair value adjustments to contingent consideration (e)   343    45    388   0.01 
Impairment and other charges (f)   3,894    (1,105)   2,789   0.05 
Amortization of intangibles   1,975    (533)   1,442   0.03 
Special legal expense (g)   1,710    (440)   1,270   0.02 
DOJ Settlement (h)   18,200    (636)   17,564   0.31 
Activist shareholder recovery fees   563    (145)   418   0.01 
Performance-based share-based compensation (i)   1,064    (140)   924   0.02 
Other (Income) Expense            
Amortization of long-term debt issuance costs   151    (39)   112   0.00 
             
Non-GAAP net income $ 21,217  $ (3,831) $ 17,386  $ 0.31 
             
Diluted shares (j)            56,250 


                
  Three Months Ended June 30, 2019
  Pre-Tax  Tax Impact (a)  After-Tax  Per Share Impact
GAAP net income $ 8,999  $ (2,140)  $ 6,859  $0.12
                
Non-GAAP adjustments:               
Cost of Sales               
Amortization of intangibles   12,178    (3,118)    9,060   0.16
Inventory mark-up related to acquisitions   212    (54)    158   0.00
Operating Expenses               
Severance   494    (127)    367   0.01
Acquisition and restructuring-related (c)   1,173    (289)    884   0.02
Medical Device Regulation expenses (d)   113    (29)    84   0.00
Fair value adjustments to contingent consideration (e)  2,406    (44)    2,362   0.04
Acquired in-process research and development   500    (129)    371   0.01
Impairment and other charges (f)   971    (250)    721   0.02
Amortization of intangibles   2,699    (710)    1,989   0.03
Special legal expense (g)   1,015    (261)    754   0.01
Other (Income) Expense               
Amortization of long-term debt issuance costs   201    (52)    149   0.00
Tax expense related to restructuring (k)   —    2     2   0.00
                
Non-GAAP net income $ 30,961  $ (7,201)  $ 23,760  $ 0.42
                
Diluted shares               56,555


Reconciliation of GAAP Net Income (Loss) to Non-GAAP Net Income
(Unaudited, in thousands except per share amounts)

             
  Six Months Ended June 30, 2020
  Pre-Tax Tax Impact (a) After-Tax Per Share Impact
GAAP net loss $ (24,292) $ 2,080  $ (22,212) $ (0.40)
             
Non-GAAP adjustments:            
Cost of Sales            
Amortization of intangibles   25,624    (6,604)   19,020    0.34 
Inventory write-off (b)   1,776    (472)   1,304    0.02 
Inventory mark-up related to acquisitions   146    (37)   109   0.00 
Operating Expenses            
Severance   2,711    (727)   1,984    0.04 
Acquisition and restructuring-related (c)   1,388    (357)   1,031    0.02 
Medical Device Regulation expenses (d)   603    (155)   448   0.01 
Fair value adjustments to contingent consideration (e)   5,240    66    5,306   0.10 
Impairment and other charges (f)   7,820    (1,219)   6,601    0.12 
Amortization of intangibles   4,157    (1,124)   3,033    0.06 
Special legal expense (g)   3,212    (827)   2,385    0.04 
DOJ Settlement (h)   18,200    (636)   17,564    0.31 
Activist shareholder recovery fees   563    (145)   418    0.01 
Performance-based share-based compensation (i)   1,511    (192)   1,319    0.02 
Other (Income) Expense            
Amortization of long-term debt issuance costs   302    (78)   224   0.00 
             
Non-GAAP net income $ 48,961  $ (10,427) $ 38,534  $ 0.69 
             
Diluted shares (j)            56,133 


                
  Six Months Ended June 30, 2019
  Pre-Tax  Tax Impact (a)  After-Tax  Per Share Impact
GAAP net income $ 15,845  $ (2,791)  $ 13,054  $ 0.23
                
Non-GAAP adjustments:               
Cost of Sales               
Amortization of intangibles   24,157    (6,185)    17,972   0.32
Inventory mark-up related to acquisitions   884    (228)    656   0.01
Operating Expenses               
Severance   822    (212)    610   0.01
Acquisition and restructuring-related (c)   1,741    (435)    1,306   0.02
Medical Device Regulation expenses (d)   113    (29)    84   0.00
Fair value adjustments to contingent consideration (e)   3,181    (185)    2,996   0.05
Acquired in-process research and development   525    (135)    390   0.01
Impairment and other charges (f)   1,182    (304)    878   0.02
Amortization of intangibles   5,506    (1,450)    4,056   0.07
Special legal expense (g)   2,678    (689)    1,989   0.04
Other (Income) Expense               
Amortization of long-term debt issuance costs   402    (104)    298   0.01
Tax expense related to restructuring (k)   —    93     93   0.00
                
Non-GAAP net income $ 57,036  $ (12,654)  $ 44,382  $ 0.79
                
Diluted shares               56,523



Reconciliation of Reported Operating Income (Loss) to Non-GAAP Operating Income
(Unaudited, in thousands except percentages)

                         
  Three Months Ended Three Months Ended Six Months Ended Six Months Ended
  June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
  Amounts % Sales Amounts % Sales Amounts % Sales Amounts % Sales
Net Sales as Reported $ 218,371     $ 255,532    $ 461,896     $ 493,881   
                         
GAAP Operating Income (Loss)   (18,995) (8.7)%   12,201 4.8%   (17,633) (3.8)%   21,724 4.4%
Cost of Sales                        
Amortization of intangibles   12,807  5.8 %   12,178 4.8%   25,624  5.6 %   24,157 4.9%
Inventory write-off (b)   345  0.2 %   —  —    1,776  0.5 %   —  — 
Inventory mark-up related to acquisitions   146  0.1 %   212  0.1%   146  0.0 %   884 0.2%
Operating Expenses                        
Severance   1,301  0.6 %   494 0.2%   2,711  0.6 %   822 0.2%
Acquisition and restructuring-related (c)   715  0.3 %   1,173 0.5%   1,388  0.3 %   1,741 0.4%
Medical Device Regulation expenses (d)   303  0.1 %   113 0.0%   603  0.1 %   113 0.0%
Fair value adjustment to contingent consideration (e)   343  0.2 %   2,406 0.9%   5,240  1.1 %   3,181 0.6%
Acquired in-process research & development   —   —    500 0.2%   —   —    525 0.1%
Impairment and other charges (f)   3,894  1.8 %   971 0.4%   7,820  1.7 %   1,182 0.3%
Amortization of intangibles   1,975  0.9 %   2,699 1.0%   4,157  0.9 %   5,506 1.1%
Special legal expense (g)   1,710  0.8 %   1,015 0.4%   3,212  0.7 %   2,678 0.5%
DOJ Settlement (h)   18,200  8.3 %   —  —    18,200  3.9 %   —  — 
Activist shareholder recovery fees   563  0.3 %   —  —    563  0.1 %   —  — 
Performance-based share-based compensation (i)   1,064  0.5 %   —  —    1,511  0.3 %   —  — 
                         
Non-GAAP Operating Income $ 24,371  11.2 % $ 33,962 13.3% $ 55,318  12.0 % $ 62,513 12.7%

a) Reflects the tax effect associated with pre-tax income (loss) and the non-GAAP adjustments.
b) Represents write-off of inventory related to the announced closure of the ITL Healthcare Pty Ltd. (“ITL”) procedure pack operations in Australia in Q2 2020 and our distribution agreement with NinePoint Medical, Inc in Q1 2020.
c) Represents transaction costs and certain integration costs related to acquisitions and certain restructuring costs, including accelerated depreciation for certain fixed assets related to our announced closure of the ITL procedure pack operations in Australia.
d) Represents incremental expenses incurred to comply with the Medical Device Regulation (MDR) in Europe.
e) Represents changes in the fair value of contingent consideration liabilities and contingent receivables as a result of acquisitions.
f) Represents impairment charges related to abandoned patents, other long-term assets, certain acquired intangible assets, right-of-use operating lease assets, and in 2020 the option to purchase Bluegrass Vascular Technologies, Inc.
g) Costs incurred in responding to an inquiry from the U.S. Department of Justice.
h) Accrued amount anticipated to be paid in settlement of an inquiry from the U.S. Department of Justice.
i) Represents performance-based share-based compensation expense, including stock-settled and cash-settled awards.
j) For the three and six-months periods ended June 30, 2020 the non-GAAP net income per diluted share calculation includes 844 and 807 shares, respectively, that were excluded from the GAAP net income per diluted share calculation.
k) Net tax expense related to non-recurring tax withholdings in connection with restructuring of certain international subsidiaries.


Reconciliation of Reported Revenue to Core Revenue (Non-GAAP), Constant Currency Revenue (Non-GAAP), and Core Revenue on a Constant Currency Basis (Non-GAAP)
(Unaudited; in thousands except percentages)

                 
    Three Months Ended   Six Months Ended
    June 30,    June 30, 
  % Change 2020 2019 % Change 2020 2019
Reported Revenue (14.5)$ 218,371 $ 255,532  (6.5)$ 461,896 $ 493,881
                 
Add: Impact of foreign exchange (a)     2,693   —     5,495   —
                 
Constant Currency Revenue (13.5)$ 221,064 $ 255,532  (5.4)$ 467,391 $ 493,881


                 
    Three Months Ended   Six Months Ended
    June 30,    June 30, 
  % Change 2020  2019 % Change 2020  2019
Reported Revenue (14.5)$ 218,371  $ 255,532 (6.5)%$ 461,896  $ 493,881
                 
Less: Revenue from certain acquisitions (b)     (400)   —     (1,170)   —
                 
Core Revenue (14.7)$ 217,971  $ 255,532 (6.7)$ 460,726  $ 493,881
                 
Add: Impact of foreign exchange (a)     2,693    —     5,495    —
                 
Core Revenue on a Constant Currency Basis (13.6)$ 220,664  $ 255,532 (5.6)$ 466,221  $ 493,881

(a) The constant currency revenue adjustments of $2.7 million and $5.5 million to reported revenue and to core revenue for the three and six months ended June 30, 2020, respectively, were calculated using the applicable average foreign exchange rates for the three and six months ended June 30, 2019, respectively.

(b) Merit’s core revenue is defined (a) with respect to prior fiscal year periods, as GAAP revenue, and (b) with respect to current fiscal year periods, as GAAP revenue, less revenue from certain acquisitions and strategic transactions. For the three and six-month periods ended June 30, 2020, Merit’s core revenue excludes revenues attributable to the acquisition of (1) Brightwater Medical, Inc. in June 2019 (excluded through May 2020 only), and (2) Fibrovein Holdings Limited in August 2019. Core revenue on a constant currency basis is defined as core revenue (as described in the first sentence of this paragraph) adjusted to eliminate the foreign exchange impact related to those core revenues for the relevant period, using the applicable average foreign exchange rates in effect for the comparable prior-year periods presented.

Reconciliation of Reported Gross Margin to Non-GAAP Gross Margin (Non-GAAP)
(Unaudited, as a percentage of reported revenue)

          
  Three Months Ended Six Months Ended 
  June 30,  June 30,  
  2020 2019 2020 2019 
Reported Gross Margin  38.6 43.8 40.7 43.9%
          
Add back impact of:         
Amortization of intangibles  5.9 4.85.6 4.8%
Inventory write-off (a)  0.1 — 0.4 — 
Inventory mark-up related to acquisitions  0.1 0.10.0 0.2%
          
Non-GAAP Gross Margin  44.7 48.7 46.7 48.9%

(a) Represents write-off of inventory related to: the announced closure of the ITL procedure pack operations in Australia in Q2 2020 and our distribution agreement with NinePoint Medical, Inc in Q1 2020.

ABOUT MERIT

Founded in 1987, 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. Merit serves client hospitals worldwide with a domestic and international sales force and clinical support team totaling in excess of 300 individuals. Merit employs approximately 6,000 people worldwide with facilities in South Jordan, Utah; Pearland, Texas; Richmond, Virginia; Malvern, Pennsylvania; Rockland, Massachusetts; Aliso Viejo, California; Maastricht and Venlo, The Netherlands; Paris, France; Galway, Ireland; Beijing, China; Tijuana, Mexico; Joinville, Brazil; Ontario, Canada; Melbourne, Australia; Tokyo, Japan; Reading, United Kingdom; Johannesburg, South Africa; and Singapore.

FORWARD-LOOKING STATEMENTS

Statements contained in this release which are not purely historical, including, without limitation, statements regarding Merit’s forecasted plans, net sales, net income (GAAP and non-GAAP), gross and operating margins (GAAP and non-GAAP), earnings per share (GAAP and non-GAAP), free cash flow, effective tax rate and other financial results, the potential impact, scope and duration of, and Merit’s response to, the coronavirus (COVID-19) pandemic and the potential for recovery from that pandemic, consolidation of Merit’s facilities or other expense reduction initiatives, anticipated settlement of a pending government investigation, the consequences of existing or future regulatory approvals, or the development and commercialization of new products, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties such as those described in Merit’s Annual Report on Form 10-K for the year ended December 31, 2019, as amended by Amendment No. 1 to Annual Report on Form 10-K/A (as amended, the “2019 Annual Report”) and subsequent filings with the Securities and Exchange Commission. Such risks and uncertainties include inherent risks and uncertainties relating to Merit’s internal models or the projections in this release; risks and uncertainties associated with the COVID-19 pandemic and Merit’s response thereto; risks relating to Merit’s potential inability to successfully manage growth through acquisitions generally, including the inability to effectively integrate acquired operations or products or commercialize technology developed internally or acquired through completed, proposed or future transactions; negative changes in economic and industry conditions in the United States or other countries; expenditures relating to research, development, testing and regulatory approval or clearance of Merit’s products and risks that such products may not be developed successfully or approved for commercial use; governmental scrutiny and regulation of the medical device industry, including governmental inquiries, investigations and proceedings involving Merit; litigation and other judicial proceedings affecting Merit; restrictions on Merit’s liquidity or business operations resulting from its debt agreements; infringement of Merit’s technology or the assertion that Merit’s technology infringes the rights of other parties; actions of activist shareholders, including a potential proxy contest; product recalls and product liability claims; changes in customer purchasing patterns or the mix of products Merit sells; risks and uncertainties associated with Merit’s information technology systems, including the potential for breaches of security and evolving regulations regarding privacy and data protection; increases in the prices of commodity components; the potential of fines, penalties or other adverse consequences if Merit’s employees or agents violate the U.S. Foreign Corrupt Practices Act or other laws or regulations; laws and regulations targeting fraud and abuse in the healthcare industry; potential for significant adverse changes in governing regulations, including reforms to the procedures for approval or clearance of Merit’s products by the U.S. Food & Drug Administration or comparable regulatory authorities in other jurisdictions; changes in tax laws and regulations in the United States or other countries; termination or interruption of relationships with Merit’s suppliers, or failure of such suppliers to perform; fluctuations in exchange rates; uncertainties relating to the LIBOR calculation method and the expected discontinuation of LIBOR; concentration of a substantial portion of Merit’s revenues among a few products and procedures; development of new products and technology that could render Merit’s existing or future products obsolete; market acceptance of new products; volatility in the market price of Merit’s common stock; modification or limitation of governmental or private insurance reimbursement policies; changes in healthcare policies or markets related to healthcare reform initiatives; failure to comply with applicable environmental laws; changes in key personnel; work stoppage or transportation risks; introduction of products in a timely fashion; price and product competition; availability of labor and materials; fluctuations in and obsolescence of inventory; and other factors referenced in the 2019 Annual Report and other materials filed with the Securities and Exchange Commission. All subsequent forward-looking statements attributable to Merit or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. 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 Merit assumes no obligation to update or disclose revisions to those estimates.

TRADEMARKS

Unless noted otherwise, trademarks and registered trademarks used in this release are the property of Merit Medical Systems, Inc. and its subsidiaries in the United States and other jurisdictions.

Contacts:

 
Judy WagnerPatrick McCarty
Corporate CommunicationsInvestor Relations
+1-801-208-4793+1-801-208-4581
jwagner@merit.compatrick.mccarty@merit.com