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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011.

OR

o         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)

1600 West Merit Parkway, South Jordan, UT, 84095

(Address of Principal Executive Offices, including Zip Code)

(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, or a non-accelerated filer, or a smaller public company. . See the definitions 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, 2011 AND DECEMBER 31, 2010

(In thousands)

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2011 AND DECEMBER 31, 2010

(In thousands)

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

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

See condensed 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, 2011 AND 2010

(In thousands - unaudited)

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(In thousands - unaudited)

During the three months ended March 31, 2011, 13,116 shares of Merit’s common stock were surrendered in exchange for Merit’s recording of payroll tax liabilities in the amount of approximately $154,000, related to the exercise of stock options.  The shares were valued based upon the closing price of Merit’s common stock on the surrender date.

During the three months ended March 31, 2011, 6,721 shares of Merit’s common stock, with a value of approximately $79,000 were surrendered in exchange for the exercise of stock options.

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  Basis of Presentation. The interim consolidated financial statements of Merit Medical Systems, Inc. (“Merit,” “we” or “us”) for the three months ended March 31, 2011 and 2010 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 made 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, 2011, and our results of operations and cash flows for the three-month periods ended March 31, 2011 and 2010. The results of operations for the three-month period ended March 31, 2011 are not necessarily 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, 2010 filed with the Securities and Exchange Commission (the “SEC”).

2.  Inventories. Inventories are stated at the lower of cost or market.  Inventories at March 31, 2011 and December 31, 2010 consisted of the following (in thousands):

3.   Comprehensive Income.  Comprehensive income for the three-month periods ended March 31, 2011 and 2010 consisted of net income, the mark to market adjustment on an interest rate swap and foreign currency translation adjustments.  Comprehensive income for the three-month periods ended March 31, 2011 and 2010 has been computed as follows (in thousands):

4. Stock-based Compensation.  Stock-based compensation expense for the three-month periods ended March 31, 2011 and 2010 has been categorized as follows (in thousands):

The excess income tax benefit created from the exercises of stock options was approximately $1.1 million and $0 for the three-month periods ended March 31, 2011 and 2010, respectively.  As of March 31, 2011, the total

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remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was approximately $2.6 million and is expected to be recognized over a weighted average period of 2.5 years. We use the Black-Scholes methodology to value the stock-based compensation expense for options.

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

6. Acquisitions. On September 10, 2010, we completed our acquisition of BioSphere Medical, Inc. (“BioSphere”) in an all cash merger transaction valued at approximately $96 million, inclusive of all common equity and Series A Preferred preferences.  BioSphere develops and markets embolotherapeutic products for the treatment of uterine fibroids, hypervascularized tumors and arteriovenous malformations.  We anticipate that the acquisition of BioSphere will give us a platform technology applicable to multiple therapeutic areas with significant market potential while leveraging existing interventional radiology call points.  Two immediate applications for the embolotherapy are uterine fibroids and primary liver cancer.  The gross amount of trade receivables we acquired from BioSphere is approximately $4.6 million, of which $51,000 is expected to be uncollectible.  Our consolidated financial statements for the three months ended March 31, 2011 reflect sales subsequent to the acquisition date of approximately $7.7 million related to our BioSphere acquisition.  We report sales and operating expenses related to this acquisition in our cardiovascular segment.  Computation of the earnings related to this acquisition is impractical, as we cannot split out sales costs related to Biosphere’s products as our sales representatives are selling multiple products in the cardiovascular business segment.  As of December 31, 2010, the purchase price was allocated as follows as (in thousands):

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Changes have been made to the assets acquired and liabilities assumed during the three-month period ended March 31, 2011, but these changes were not significant.

With respect to the assets we acquired from BioSphere, we are amortizing developed technology over 15 years and a license agreement over 10 years and customer lists on an accelerated basis over 10 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 15 years from the acquisition date.  The total weighted-average amortization period for these acquired intangible assets is 13.6 years.

In connection with our BioSphere acquisition, we paid approximately $522,000 in long-term debt issuance costs to Wells Fargo Bank (“Wells Fargo”) for our long-term debt (see Note 10).  These costs consist of loan origination fees and legal costs that we intend to amortize over five years, which is the contract term of an unsecured Credit Agreement, dated September 10, 2010 (the “Credit Agreement”) with lenders who are or may become party thereto (collectively, the “Lenders”) and Wells Fargo, as administrative agent for the Lenders.  We also incurred approximately $63,000 of acquisition-related costs during the three months ended March 31, 2011, which are included in selling, general and administrative expense in the accompanying consolidated statements of income

During the fourth quarter of 2010, we terminated several of our exclusive BioSphere sales distributor agreements in European countries where we already had previously established direct sales relationships.  In connection with the termination of these agreements, we agreed to purchase customer lists from the terminated distributors.  The total purchase price of the customer lists was approximately $1.3 million and was allocated to customer lists.  We are amortizing the customer lists on an accelerated basis over 10 years.

On February 19, 2010, we entered into a manufacturing and technology license agreement with a medical device manufacturer for certain medical products.  We made an initial payment of $250,000 in February of 2010, a second payment of $250,000 in May of 2010, a third payment of $250,000 in November of 2010 and accrued an additional $250,000 in accrued expenses at December 31, 2010.  The final payment is due upon reaching certain milestones set forth in the agreement.  We believe it is probable that we will be required to make the final payment.  We have included the $1.0 million intangible asset in license agreements and are amortizing the asset over an estimated life of 10 years.

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The following table summarizes our unaudited consolidated results of operations for the three months ended March 31, 2010, as well as the unaudited pro forma consolidated results of operations as though the BioSphere acquisition had occurred on January 1, 2010 (in thousands, except per share amounts):

The unaudited pro forma information set forth above is for informational purposes only and should not be considered indicative of actual results that would have been achieved if BioSphere had been acquired at the beginning of 2010, or results that may be obtained in any future period.

7. Segment Reporting. 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.  Our endoscopy segment consists of gastroenterology and pulmonary 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).  Financial information relating to our reportable operating segments and reconciliations to the condensed consolidated totals is as follows (in thousands):

8. Recent Accounting Pronouncements.  In December 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance to address diversity in practice about pro forma revenue and earnings disclosure requirements.  This guidance specifies that if a public entity presents comparative financial statements, the entity shall disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  We will apply these required disclosures to any future business combinations.

In December 2010, the FASB issued authoritative guidance which modifies the requirements of step one of the goodwill impairment test for reporting units with zero or negative carrying amounts.  This guidance modifies step one so that for those reporting units, an entity is required to perform step two of the goodwill impairment test if it

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is more likely than not that a goodwill impairment exists.  In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist.  This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010.  The adoption of this guidance did not have a material effect on our consolidated financial statements.

In January 2010, the FASB issued additional authoritative guidance on fair value disclosures.  The new guidance clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a “gross” presentation of activities (purchases, sales, and settlements) within the Level 3 rollforward reconciliation, which will replace the “net” presentation format; and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements.  This guidance is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years.  We adopted the fair value disclosure guidance on January 1, 2010, except for the gross presentation of the Level 3 rollforward information which we adopted on January 1, 2011.  The adoption of this guidance did not have a material effect on our consolidated financial statements.

9.  Income Taxes.  Our overall effective tax rate for the three months ended March 31, 2011 and 2010 was 32.2% and 28.8%, respectively, which resulted in a provision for income taxes of $3.2 million and $1.8 million, respectively.  The increase in the effective income tax rate for the first quarter of 2011, when compared to the first quarter of 2010, was primarily related to the increased profit of our U.S. operations which are taxed at a higher rate than our foreign operations income (primarily Ireland).

10.  Long-Term Debt. In connection with our acquisition of BioSphere, we entered into the Credit Agreement with the Lenders and Wells Fargo.  Pursuant to the terms of the Credit Agreement, the Lenders have agreed to make revolving credit loans up to an aggregate amount of $125 million.  Wells Fargo has also agreed to make swingline loans from time to time through the maturity date of September 10, 2015 in amounts equal to the difference between the amounts actually loaned by the Lenders and the aggregate credit commitment.

On September 10, 2015, all principal, interest and other amounts outstanding under the Credit Agreement are payable in full.  At any time prior to the maturity date, we may repay any amounts owing under all revolving credit loans and all swingline loans in whole or in part, without premium or penalty.

Revolving credit loans made under the Credit Agreement bear interest, at our election, at either (i) the base rate (described below) plus 0.25%, (ii) the London Inter-Bank Offered Rate (“LIBOR”) Market Index Rate (as defined in the Credit Agreement)  plus 1.25%, or (iii) the LIBOR Rate (as defined in the Credit Agreement) plus 1.25%.  Swingline loans bear interest at the LIBOR Market Index Rate plus 1.25%.  Interest on each loan featuring the base rate or the LIBOR Market Index Rate is due and payable on the last business day of each calendar month; interest on each loan featuring the LIBOR Rate is due and payable on the last day of each interest period selected by us when selecting the LIBOR Rate as the benchmark for interest calculation.  For purposes of the Credit Agreement, the base rate means the highest of (i) the prime rate (as announced by Wells Fargo), (ii) the federal funds rate plus 0.50%, and (iii) LIBOR for an interest period of one month plus 1.0%.

The Credit Agreement contains covenants, representations and warranties and other terms, that are customary for revolving credit facilities of this nature.  In this regard, the Credit Agreement requires us to maintain a leverage ratio and EBITDA ratio, consolidated net income and limits the amount of annual capital expenditures.  Additionally, the Credit Agreement contains various negative covenants with which we must comply, including, but not limited to, limitations respecting: the incurrence of indebtedness, the creation of liens on our property, mergers or similar combinations or liquidations, asset dispositions, investments in subsidiaries, and other provisions customary in similar types of agreements.  As of March 31, 2011, we were in compliance with all financial covenants set forth in the Credit Agreement.

As of March 31, 2011, we had outstanding borrowings of approximately $82.6 million under the Credit Agreement, with available borrowings of approximately $42.4 million, based on the leverage ratio in the terms of the Credit Agreement.  Our interest rate as of March 31, 2011 was a fixed rate of 2.73% on $55.0 million as a result of an interest rate swap, a fixed rate of 1.51% on $25.0 million and a variable floating rate of 1.56% on approximately $2.6 million.

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11.   Derivatives.

Interest Rate Swap.  On October 25, 2010, we entered into a $55 million pay-fixed, receive-variable interest rate swap with Wells Fargo at a fixed interest rate of 2.73%.  The variable portion of the interest rate swap is tied to the one-Month LIBOR (the benchmark interest rate).  The interest rates under both the interest rate swap and the underlying debt are reset, the swap is settled with the counterparty, and interest is paid, on a monthly basis.  The interest rate swap expires September 10, 2015.

At March 31, 2011, the interest rate swap qualified as a cash flow hedge.  During the three months ended March 31, 2011, we recorded a net gain on this hedge of approximately $37,000, which is included in interest expense in the accompanying consolidated statements of operations.  The fair value of our cash flow hedge at March 31, 2011 was approximately $1.5 million, which was offset by approximately $572,000 of deferred tax liability.

Foreign Currency Forward Contracts.  On February 28, 2011, we forecasted a net exposure for March 31, 2011 (representing the difference between Euro and Great Britain Pound (“GBP’)-denominated receivables and Euro-denominated payables) of approximately 530,000 Euros and 290,000 GBPs.  In order to partially offset such risks, on February 28, 2011, we entered into a 30-day forward contract for the Euro and GBP with notional amounts of approximately 530,000 Euros and 290,000 GBPs.  We enter into similar transactions at various times during the year to partially offset exchange rate risks we bear throughout the year.  These contracts are marked to market at each month-end.  During the three months ended March 31, 2011 and 2010, the effect on the consolidated statement of operations of all forward contracts and the fair value of our open positions was not material.

12.   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 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 identifies our financial assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2011 and December 31, 2010 (in thousands):

(1)          The fair value of the interest rate swap is determined based on forward yield curves.

During the three-month periods ended March 31, 2011 and 2010, we had write-offs of approximately $14,000 and $24,000, respectively, related to the measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

The carrying amount of cash and equivalents, receivables, and trade payables approximates fair value because of the immediate, short-term maturity of these financial instruments. The carrying amount of long-term debt

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approximates fair value, as determined by borrowing rates estimates to be available to us for debt with similar terms and conditions.

13.   Goodwill and Intangible Assets.  The changes in the carrying amount of goodwill for the three months ended March 31, 2011, are as follows (in thousands):

Intangible assets at March 31, 2011 and December 31, 2010 consisted of the following (in thousands):

The aggregate amortization expense for the three months ended March 31, 2011and 2010 was approximately $1.6 million and $670,000, respectively.

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