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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE TRANSITION PERIOD FROM              TO             .

Commission File Number   0-18592

MERIT MEDICAL SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

1600 West Merit Parkway, South Jordan, UT, 84095

(Address and Zip Code of Principal Executive Offices)

(801) 253-1600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Sections 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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  o No x

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

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MERIT MEDICAL SYSTEMS, INC.

INDEX TO FORM 10-Q

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Part I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2009 AND DECEMBER 31, 2008

(In thousands - unaudited)

See notes to consolidated financial statements.

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2009 AND DECEMBER 31, 2008

(In thousands - unaudited)

See notes to consolidated financial statements.

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(In thousands, except earnings per common share - unaudited)

See notes to consolidated financial statements.

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(In thousands - unaudited)

See notes to consolidated financial statements.

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(In thousands - unaudited)

During the three months ended March 31, 2009, 23,829 of the Company’s common stock were surrendered in exchange for the Company’s recording of payroll tax liabilities in the amount of approximately $254,000, related to the exercise of stock options.  The shares were valued based upon the closing price of the Company’s common stock on the surrender date.

During the three months ended March 31, 2009, 21,556 shares of the Company’s common stock, with a value of approximately $230,000 were surrendered in exchange for the exercise of stock options.

See notes to consolidated financial statements.

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation. The interim consolidated financial statements of Merit Medical Systems, Inc. and Subsidiaries (“Merit,” “we” or “us”) for the three months ended March 31, 2009 and 2008 are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods, and consequently, do not include all disclosures required to be in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of March 31, 2009, and our results of operations and cash flows for the three months ended March 31, 2009 and 2008. The results of operations for the three months ended March 31, 2009 are not indicative of the results for a full-year period.  These interim consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission (the “SEC”).

Reclassifications. Subsequent to the issuance of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, we determined that changes to our deferred compensation plan balances should more properly be reflected as net cash provided by operating activities.  Accordingly, we have reclassified such changes from investing activities and financing activities to operating activities.  Our management has concluded that the error was not material to our consolidated financial statements, and accordingly the prior period presentation has been revised for 2008 by increasing net cash provided by operating activities by approximately $37,000.

2.   Inventories.  Inventories are stated at the lower of cost or market.  Inventories at March 31, 2009 and December 31, 2008 consisted of the following (in thousands):

3.   Comprehensive Income.  Comprehensive income for the three months ended March 31, 2009 and 2008 consisted of net income and foreign currency translation adjustments.  As of March 31, 2009 and December 31, 2008, the cumulative effect of such adjustments decreased stockholders’ equity by $126,813 and $58,276, respectively.  Comprehensive income for the three-month periods ended March 31, 2009 and 2008 has been computed as follows (in thousands):

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4. Stock-based Compensation.  We did not grant any stock awards during the three-month periods ended March 31, 2009 and 2008.    Stock-based compensation expense for the three-month periods ended March 31, 2009 and 2008 consisted of the following (in thousands):

The excess income tax benefit created from the exercises of stock options was $372,000 and $263,000 for the three-months ended March 31, 2009 and 2008, respectively. As of March 31, 2009, the total remaining unrecognized compensation cost related to stock options, net of forfeitures, was approximately $3.8 million and is expected to be recognized over a weighted average period of 3.67 years.

5. Earnings Common Share. The following table sets forth the computation of the number of shares of our common stock used in calculating basic and diluted net income per share (in thousands):

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6.  Acquisitions.  On March 9, 2009, we entered into an asset purchase agreement with Alveolus, Inc., a North Carolina corporation (“Alveolus”), to purchase their non-vascular interventional stents used for esophageal, tracheobronchial, and biliary stenting procedures.  We paid Alveolus $19.1 million in March 2009.  The gross amount of trade receivables we acquired from Alveolus is approximately $1.0 million, of which $49,000 is expected to be uncollectible.  Our consolidated financial statements for the three months ended March 31, 2009 reflect sales subsequent to the acquisition date of approximately $486,000 and a net loss of approximately $146,000 related to our Alveolus acquisition.  We are in the process of finalizing our valuation of certain tangible and intangible assets, and residual goodwill.  The purchase price allocation will be completed, no later than one year from the date of acquisition, and may change as more detailed analyses are completed and additional information about fair value of assets and liabilities becomes available.  The purchase price was preliminarily allocated as follows (in thousands):

We intend to amortize developed technology and trademarks over 15 years and customer lists on an accelerated basis over 7 years.  We will amortize in-process research and development over 15 years, which will begin once the product is successfully launched in the market.  The acquired trademarks will renew in 4.27 years (based on a weighted-average).  While trademarks can be renewed indefinitely, management estimates that the cash flow will be generated from the acquired trademarks for 15 years.

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On February 19, 2009, we entered into an asset purchase and supply agreement with Biosearch Medical Products, Inc., a New Jersey  corporation (“Biosearch”), to purchase a bipolar coagulation probe and grafted biliary stents.  We paid $1.1 million in February 2009 and have accrued an additional $500,000 in accrued expenses, which is payable on June 30, 2009.  Our financial statements for the three months ended March 31, 2009 reflect sales subsequent to the acquisition date of approximately $133,000 and  net income of approximately $30,000 related to the Biosearch acquisition.  We are in the process of finalizing our valuation of tangible and intangible assets, and residual goodwill.  The purchase price allocation will be completed no later than one year from the date of acquisition, and may change as more detailed analyses are completed and additional information about fair value of assets and liabilities becomes available.  The purchase price was preliminarily allocated as follows (in thousands):

We intend to amortize developed technology over 15 years, customer lists on an accelerated basis over eight years, and a non-compete covenant over seven years.

The goodwill arising from the acquisitions discussed above consists largely of the synergies and economies of scale we hope to achieve from combining the acquired operations with our historical operations.  The goodwill recognized from these acquisitions is expected to be deductible for income tax purposes.

The following table summarizes our unaudited consolidated result of operations for the three-month periods ended March 31, 2009 and 2008, as well as the unaudited pro forma consolidated results of operations as though the Alveolus and Biosearch acquisitions had occurred on January 1, 2008:

The unaudited pro forma condensed consolidated income statements are for informational purposes only and should not be considered indicative of actual results that would been achieved if Alveolus and Bioserach had been acquired the beginning of 2008, or results that may be obtained in any future period.

On January 29, 2008, we entered into an asset purchase and supply agreement with Micrus Endovascular Corporation, a Delaware corporation, to purchase three catheter platforms for $3.0 million dollars.  We paid $1.5 million in January 2008 and an additional $1.5 million in December of 2008.   We also paid $12,300 in acquisition costs.  The purchase price was allocated to inventories for $143,939, customer lists for $270,000, developed technology for $330,000, and goodwill for approximately $2.3 million.  We are currently amortizing customer lists on an accelerated basis over fourteen years, and developed technology over fifteen years. 

7. Recent Accounting Pronouncements.  In April 2009, the Financial Accounting Standards Board (“FASB”) staff issued Staff Position (“FSP”) No. FAS 107-1 and Accounting Principles Board (“APB”) 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP No. FAS 107-1 and APB 28-1”). This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This FSP also amends Accounting Principles Board Opinion No. 28, Interim Financial Reporting, to require these disclosures in all interim financial statements. The provisions of FAS 107-1 and APB 28-1 will be effective beginning with our June 30, 2009 interim consolidated financial statements, and we do not expect it to have a material impact on our consolidated financial statements.

In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FAS 157-2”), which delayed the effective date of SFAS No. 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008.  We adopted the provisions of FSP No. FAS 157-2 during the first quarter of 2009.  The adoption of this pronouncement did not have a material impact on our consolidated financial statements during the quarter ended March 31, 2009.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) requires all business combinations completed after the effective date to be accounted for by applying the acquisition method (previously referred to as the purchase method).  Companies applying this method will have to identify the acquirer, determine the acquisition date and purchase price and recognize at their acquisition-date fair values of the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree.  In the case of a bargain purchase, the acquirer is required to reevaluate the measurements of the recognized assets and liabilities at the acquisition date and recognize a gain on that date if an excess remains. We adopted the provisions of SFAS No. 141(R) on January 1, 2009; however, the effect of adoption on our consolidated financial statements will depend upon the nature of any acquisitions completed after adoption.  We expensed costs related to the acquisitions of Alveolus and Biosearch of

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approximately $330,000 during the quarter ended March 31, 2009, which would have been capitalized under SFAS No. 141.

8.  Income Taxes.  Our overall effective tax rate for the three months ended March 31, 2009 and 2008 was 31.4% and 36.0%, respectively, which resulted in a provision for income taxes of $2.5 million and $2.4 million, respectively. The decrease in the effective income tax rate for the first quarter of 2009, when compared to the prior year period, was primarily related to the profitability of our Irish operations which are taxed at a lower tax rate than our U.S. and other foreign operations.

9.  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.  We adopted SFAS No. 157, Fair Value Measurements, on January 1, 2008.  This statement defines fair value, establishes a framework to measure fair value, and expands disclosures about fair value measurements.  SFAS No. 157 establishes a fair value hierarchy 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 into the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market

The following table provides our financial assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2009 (in thousands):

(1)          The deferred compensation investments are held in a Rabbi trust under an insurance-based deferred compensation plan.  The investments of the Rabbi trust are valued based upon unit values multiplied by the number of units held.  The unit value is based upon the investment’s net asset value adjusted for some administrative fees.

10.  Goodwill and Intangible Assets.

The changes in the carrying amount of goodwill for the three months ended March 31, 2009 are as follows (in thousands):

Intangible assets at March 31, 2009 and December 31, 2008, consisted of the following (in thousands):

*In-process research and development was capitalized as per the adoption of SFAS No. 141(R), in connection with our acquisition of Alveolus. Our in-process research and development intangible is currently not subject to amortization.

The aggregate amortization expense for the three months ended March 31, 2009 was approximately $300,000.

Estimated amortization expense for the intangible assets for the next five years consisted of the following (in thousands):

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 management for future operations, any statements concerning proposed new products or services, 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,” “believes,” “estimates,” “potential,” or “continue,” 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 any such expectations or any forward-looking statement will prove to be correct.  Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements.  Our financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including, unanticipated consequences of Merit’s recent or future acquisitions; challenges associated with Merit’s efforts to pursue new market opportunities, including opportunities in the gastroenterology and pulmonary markets; infringement of Merit’s technology or the assertion that Merit’s technology infringes the rights of other parties; product recalls and product liability claims; downturn of the national economy and its effect on Merit’s revenues, collections and supplier relations; termination of supplier relationships, or failure of suppliers to perform; inability to successfully manage growth through acquisitions; delays in obtaining regulatory approvals, or the failure to maintain such approvals; concentration of Merit’s revenues among a few products and procedures; development of new products and technology that could render Merit’s products obsolete; market acceptance of new products; introduction of products in a timely fashion; price and product competition; availability of labor and materials; cost increases; and fluctuations in and obsolescence of inventory; volatility of the market price of Merit’s common stock; foreign currency fluctuations; changes in key personnel; work stoppage or transportation risks; modification or limitation of governmental or private insurance reimbursement procedures; changes in health care markets related to health care reform initiatives; and other factors referred to in our press releases and reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2008. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.  Additional factors that may have a direct bearing on our operating results are discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

For the quarter ended March 31, 2009, we reported record revenues of $58.4 million, up 9% from the three months ended March 31, 2008.  During the first quarter of 2009, we completed the closing of the Alveolus and Biosearch transactions.  We believe the technology and intellectual property acquired in these transactions will facilitate growth and opportunity in the gastroenterology and pulmonary markets.

Gross profit as a percentage of sales was up to 42.5% for the first quarter of 2009, compared to 40.3% for the first quarter of 2008. This improvement can be attributed primarily to lower average fixed overhead unit costs through increased productivity as fixed costs are shared over an increased number of units, reduction in material costs and a favorable Euro to U.S. dollar exchange rate which reduced our unit costs in our Irish operations. During 2009, we plan to implement new automation and manufacturing cost-saving improvements related to logistics and product labeling, and introduce new products through organic growth and acquisitions, which we believe will increase our average product margins.

Net income increased for the three months ended March 31, 2009 to $5.5 million, compared to $4.3 million for the prior year period, an increase of 28%.  When compared to the prior year period, net income for the quarter ended March 31, 2009 was primarily affected by higher sales and gross margins, and a lower effective income tax rate, all of which offset  higher selling, general and administrative expenses.

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Results of Operations

The following table sets forth certain operational data as a percentage of sales for the three months ended March 31, 2009 and 2008:

Sales.  Sales for the three months ended March 31, 2009 increased by 9%, or approximately $4.8 million, compared to the same period of 2008.  We report sales in five product categories.  Listed below are the sales relating to these product categories for the three months ended March 31, 2009 and 2008 (in thousands):