MMSI

Merit Medical Systems, Inc. (MMSI)

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Merit Medical Systems (MMSI)

Q3 2010 Earnings Call

November 4, 2010 5:00 p.m. ET

Executives

Fred Lampropoulos – Chairman and CEO

Rashelle Perry – General Counsel

Kent Stanger – CFO

Martin Stephens – EVP, Marketing and Sales

Analysts

Larry Solow – CJS Securities

Drew Jones – Stephens Inc.

Jayson Bedford – Raymond James

James Sidoti – Sidoti & Co.

Ross Taylor – CL King

Gregory Macosko – Lord Abbett

Presentation

Operator

Welcome to the Merit Medical third quarter 2010 earnings conference call. [Operator Instructions.] I will now turn the conference over to Fred Lampropoulos, Chairman and CEO. Please go ahead sir.

Fred Lampropoulos

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos. We are broadcasting from Salt Lake City. Assembled in our office here are members of our staff. We'd like to start our meeting by having Rashelle Perry, our general counsel, read our Safe Harbor provision. Rashelle?

Rashelle Perry

In the course of our discussion today, reference may be made to projections, anticipated events, or other information which is not purely historical. Please be aware that statements made in this call which are not purely historical maybe considered forward-looking statements.

We caution you that all forward-looking statements involve risks, unanticipated events, uncertainties, and other factors that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks, events, uncertainties, and other factors are discussed in our annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission, which are also available on our website.

To the extent any forward-looking statements are made in this call, such statements are made only as of today’s date, and we do not assume any obligation to update any such statements.

Fred Lampropoulos

Rashelle, thank you very much and good afternoon ladies and gentlemen. Our purpose today is to discuss with you the results of our third quarter as well as to give you an update on our acquisitions and our integration plans.

Let's start first by talking about the results for the third quarter in terms of revenues. Our revenues were $73.2 million for the quarter, an increase of 10% over the revenues of $66.8 million a year ago. As we take a look at year-to-date, we're up 13.5%

If we take a look at the first two quarters, which came in at 16% each, I think you would agree with me that a 10% growth rate is comparatively somewhat anemic for the third quarter. Now, why did we see this sales slowdown?

Several reasons. Primarily, I believe it's the first time that we've seen a slowdown because of procedure rates. We just clearly had lower sales in various areas. There are several other reasons, however, that I think are important.

With the acquisition of BioSphere, we spent a lot of time during the quarter planning integration. We had a lot of salespeople out in the field. We were doing a lot of training. So we were engaged in doing what was necessary to be done, and that is to integrate this business, and I will discuss that with you in a few moments.

If we can move on just briefly to the issues regarding our performance, during the quarter we recorded the acquisition accounting cost of which you are all aware. These are one-time expenses that have to do with issues such as investment banking expenses, legal, accounting, severance, and so on and so forth. In the quarter, we took about a $2.2 million charge of these one-time expenses.

It's important to note that we are mostly through with this. We had some of the expense in the second quarter, some in the third. We have about $400,000 of expense that we expect will come through in the fourth quarter, and this is for our carryover expense where we have a transition team on the ground in the Rockland facility in a Boston suburb. And this has to do with accounting and some sales and marketing and customer service and the severance associated with those folks to make sure that we have a smooth transition. I will talk further about that transition in a few moments.

Now there's a charge here that I'm sure you're all very interested in, and that is a one-time charge that was taken for our Endotek endoscopy division. Let me explain that to you. Once a year, under accounting rules, we are required to take and value all assets. They could be research and development projects, they could be any expenditures, [molds], and certainly businesses, and they fall under the scrutiny of impairment test.

The true test of impairment is cash flow. We have been operating in the endoscopy division, which we call Endotek, as a separate reporting unit. By that I mean they have their own sales force, they have their own marketing department, because they call on a different point of sale. And so consequently, our auditors came in.

We looked and we evaluated, as prescribed by GAAP, at those various accounting units, and that unit is not profitable at this point. And so the question was, we sat down and did an entire forecast, took it out, put all the new products, and did some forecasting on that, but the net result was that based on the rules of the game, it was not just suggested but it was required that we take this one-time charge.

Now there are a couple of things about that charge that are important for you to know, and many of you already know this. This is a non-cash expense. It is a one-time, it hits the income statement, and we offset it in the goodwill provision in terms of our key accounting. So Kent, I'm going to go ahead and let you comment on that, because I think it's important from an accounting point of view that everybody understands what we were required to do.

Kent Stanger

I think you've covered it pretty well, Fred. It's just a matter of you have to value the present value of the cash flows of the business plus you do some external comparisons. And basically it's an appraisal of the business, and then once you have triggered an issue where you have a valuation that's greater than your carrying value then you have to revalue the whole group of assets and the net change occurred in the goodwill.

So we had to then adjust our balance sheet to the carrying value or the current fair market value of this business, and therefore we had to write off the goodwill amount of the lower $8.3 million, which is the entire balance in that account.

Fred Lampropoulos

When we acquired Alveolus, our goal was to build a third leg of our business in the G.I. or endoscopy business. The purpose for that is that we take a look at our business and look at the opportunities. We felt that we needed additional technology and additional sales avenues for growth in the future. But there were a couple of things that didn't go quite the way we expected. Let me share some of those with you.

One of the things that we discovered for lack of a better word was that there were sales being made in areas that were questionable, and by that I mean there was a risk to the company that there were sales that were being made in off-brand uses. And Merit plays by the rules, and Merit is not going to go out and promote and do things which are illegal.

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