MERIT MEDICAL SYSTEMS INC - Quarter Report: 2009 June (Form 10-Q)

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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 JUNE 30, 2009.

 

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. 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

 

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008	1
	Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008	3
	Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008	4
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 6.	Exhibits	20
SIGNATURES		21

 

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Part I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2009 AND DECEMBER 31, 2008

(In thousands - unaudited)

 

		June 30,			December 31,
		2009			2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	4,873		$	34,030
Trade receivables - net of allowances of $621 and $505, respectively		30,454			27,749
Employee receivables		139			126
Other receivables		460			818
Inventories		46,308			38,358
Prepaid expenses and other assets		1,959			985
Deferred income tax assets		2,781			2,782
Income tax refunds receivable		651			607
Total current assets		87,625			105,455
PROPERTY AND EQUIPMENT:
Land and land improvements		7,992			7,992
Building		49,903			49,793
Manufacturing equipment		73,640			68,184
Furniture and fixtures		15,113			16,689
Leasehold improvements		9,906			9,868
Construction-in-progress		9,219			7,599
Total		165,773			160,125
Less accumulated depreciation		(58,260		)	(56,186		)
Property and equipment—net		107,513			103,939
OTHER ASSETS:
Other intangibles - net of accumulated amortization of $3,986 and $3,122, respectively		26,503			6,913
Goodwill		32,567			13,048
Other assets		2,730			2,325
Deferred income tax assets		36			23
Deposits		91			73
Total other assets		61,927			22,382
TOTAL ASSETS		$	257,065		$	231,776

 

See notes to consolidated financial statements.

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2009 AND DECEMBER 31, 2008

(In thousands - unaudited)

 

		June 30,			December 31,
		2009			2008
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade payables		$	14,304		$	10,622
Other payables		7,000
Accrued expenses		12,182			9,973
Advances from employees		428			211
Income taxes payable		2,161			366
Total current liabilities		36,075			21,172
DEFERRED INCOME TAX LIABILITIES		8,789			8,771
LIABILITIES RELATED TO UNRECOGNIZED TAX POSITIONS		2,818			2,818
DEFERRED COMPENSATION PAYABLE		2,736			2,348
DEFERRED CREDITS		1,931			1,994
OTHER LONG-TERM OBLIGATIONS		386			368
Total liabilities		52,735			37,471
STOCKHOLDERS’ EQUITY:
Preferred stock—5,000 shares authorized as of June 30, 2009 and December 31, 2008; no shares issued
Common stock—no par value; 100,000 shares authorized; 27,943 and 28,093 shares issued at June 30, 2009 and December 31 2008, respectively		60,343			61,689
Retained earnings		144,052			132,674
Accumulated other comprehensive loss		(65		)	(58		)
Total stockholders’ equity		204,330			194,305
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	257,065		$	231,776

 

See notes to consolidated financial statements.

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(In thousands, except per common share - unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2009			2008			2009			2008
NET SALES		$	64,837		$	57,441		$	123,208		$	110,994
COST OF SALES		36,694			32,939			70,257			64,900
GROSS PROFIT		28,143			24,502			52,951			46,094
OPERATING EXPENSES:
Selling, general, and administrative		16,287			12,839			31,116			25,911
Research and development		2,893			2,654			4,972			4,570
Total operating expenses		19,180			15,493			36,088			30,481
INCOME FROM OPERATIONS		8,963			9,009			16,863			15,613
OTHER INCOME (EXPENSE):
Interest income		28			162			150			312
Other (expense) income		(6		)	(16		)	46			(21		)
Other income - net		22			146			196			291
INCOME BEFORE INCOME TAXES		8,985			9,155			17,059			15,904
INCOME TAX EXPENSE		3,144			3,337			5,681			5,769
NET INCOME		$	5,841		$	5,818		$	11,378		$	10,135
EARNINGS PER COMMON SHARE:
Basic		$	.21		$	.21		$	.41		$	.37
Diluted		$	.21		$	.21		$	.40		$	.36
AVERAGE COMMON SHARES:
Basic		27,924			27,603			27,990			27,547
Diluted		28,427			28,325			28,487			28,311

 

See notes to consolidated financial statements.

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(In thousands - unaudited)

 

		Six Months Ended
		June 30,
		2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	11,378		$	10,135
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,710			5,113
Losses on sales and/or abandonment of property and equipment		201			209
Write-off of a certain patent and trademarks		72			77
Amortization of deferred credits		(63		)	(53		)
Purchase of trading investments		(221		)	(180		)
Net unrealized (gains)/losses on trading investments		(185		)	90
Deferred income taxes					(1,277		)
Stock-based compensation		575			337
Excess tax benefit attributable to appreciation of common stock options exercised		(422		)	(310		)
Changes in operating assets and liabilities net of effects from acquisitions:
Trade receivables		(1,662		)	1,664
Employee receivables		(11		)	18
Other receivables		344			377
Inventories		(5,725		)	(2,006		)
Prepaid expenses and other assets		(731		)	(347		)
Income tax refund receivable		(41		)	(38		)
Deposits		(18		)
Trade payables		3,509			1,301
Accrued expenses		1,656			1,254
Advances from employees		210			66
Income taxes payable		2,212			411
Current liabilities related to unrecognized tax positions					(1,023		)
Deferred compensation payable		388			144
Other long-term obligations		(1		)	(49		)
Total adjustments		5,797			5,778
Net cash provided by operating activities		17,175			15,913
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment		(8,358		)	(7,931		)
Patents and trademarks		(782		)	(139		)
Proceeds from the sale of property and equipment		15			25
Cash paid in acquisitions		(35,241		)	(1,509		)
Net cash used in investing activities		(44,366		)	(9,554		)

 

See notes to consolidated financial statements.

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(In thousands - unaudited)

 

		Six Months Ended
		June 30,
		2009			2008
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		$	385		$	2,148
Additions to long-term debt		10,000
Payment on long-term debt		(10,000		)
Payment of taxes related to an exchange of common stock		(254		)
Common stock repurchased and retired		(2,474		)
Excess tax benefits from stock-based compensation		422			310
Net cash (used in) provided by financing activities		(1,921		)	2,458
EFFECT OF EXCHANGE RATES ON CASH		(45		)	365
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS		(29,157		)	9,182
CASH AND CASH EQUIVALENTS:
Beginning of period		34,030			17,574
End of period		$	4,873		$	26,756
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION—Cash paid during the period for:
Interest		$	11		$	5
Income taxes		$	3,526		$	7,609
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchases in accounts payable		$	1,576		$	1,877

 

During the six months ended June 30, 2009, 23,829 shares 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 six months ended June 30, 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. (“Merit,” “we” or “us”) for the three and six-month periods ended June 30, 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 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 June 30, 2009, and our results of operations and cash flows for the three and six-month periods ended June 30, 2009 and 2008. The results of operations for the three and six-month periods ended June 30, 2009 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, 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 June 30, 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 $54,000, decreasing net cash used in investing activities by approximately $90,000 and decreasing net cash provided by financing activities by approximately $144,000.

 

2.  Inventories. Inventories are stated at the lower of cost or market.  Inventories at June 30, 2009 and December 31, 2008 consisted of the following (in thousands):

 

		June 30,			December 31,
		2009			2008
Finished goods		$	20,924		$	17,818
Work-in-process		5,873			4,790
Raw materials		19,511			15,750
Total		$	46,308		$	38,358

 

3.  Reporting Comprehensive Income.  Comprehensive income for the three and six-month periods ended June 30, 2009 and 2008 consisted of net income and foreign currency translation adjustments.  As of June 30, 2009 and December 31, 2008, the cumulative effect of such adjustments decreased stockholders’ equity by approximately $65,000 and approximately $58,000, respectively.  Comprehensive income for the three and six-month periods ended June 30, 2009 and 2008 has been computed as follows (in thousands):

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2009			2008			2009			2008
Net income		$	5,841		$	5,818		$	11,378		$	10,135
Foreign currency translation		62			(33		)	(7		)	156
Comprehensive income		$	5,903		$	5,785		$	11,371		$	10,291

 

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4.  Stock-based Compensation.  Stock-based compensation expense for the three and six-month periods ended June 30, 2009 and 2008 has been categorized as follows (in thousands):

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2009			2008			2009			2008
Cost of sales		$	43		$	35		$	93		$	(3	)
Research and development		14			10			27			10
Selling, general and administrative		220			194			455			330
Stock-based compensation		$	277		$	239		$	575		$	337

 

The excess income tax benefit created from the exercises of stock options was $50,000 and $422,000 for the three and six-month periods ended June 30, 2009, respectively, when compared to $47,000 and $310,000 for the three and six-month periods ended June 30, 2008, respectively.  As of June 30, 2009, the total remaining unrecognized compensation cost related to non-vested stock options, net of forfeitures, was approximately $3.5 million and is expected to be recognized over a weighted average period of 3.54 years. During the six months ended June 30, 2009, there were no stock award grants and during the six months ended June 30, 2008, we granted 499,000 stock awards.  We use the Black-Scholes methodology to value the stock compensation expense for options.  In applying the Black-Scholes methodology to the option grants, we used the following assumptions:

 

		Six Months
		Ended June 30,
		2009		2008
Risk-free interest rate		N/A		3.24-3.55%
Expected option life		N/A		4.2-6
Expected price volatility		N/A		38-41-66.00%

 

We estimate the average risk-free interest rate using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock option.  We estimate the expected term of the stock options using the historical exercise behavior of employees.  We estimate the expected price volatility 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.

 

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5.  Shares Used in Computing Net Income Per 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):

 

		Three Months								Six Months
		Net					Per Share			Net					Per Share
		Income			Shares		Amount			Income			Shares		Amount
Ended June 30, 2009:
Basic EPS		$	5,841		27,924		$	0.21		$	11,378		27,990		$	0.41
Effect of dilutive stock options and warrants					503								497
Diluted EPS		$	5,841		28,427		$	0.21		$	11,378		28,487		$	0.40
Weighted-average shares under stock options excluded from the calculation of common stock equivalents as the impact was antidilutive					1,360								1,692
Ended June 30, 2008:
Basic EPS		$	5,818		27,603		$	0.21		$	10,135		27,547		$	0.37
Effect of dilutive stock options and warrants					722								764
Diluted EPS		$	5,818		28,325		$	0.21		$	10,135		28,311		$	0.36
Weighted-average shares under stock options excluded from the calculation of common stock equivalents as the impact was antidilutive					1,083								1,045

 

6.  Acquisitions.  On June 2, 2009, we entered into an asset purchase agreement with Hatch Medical, L.L.C., a Georgia limited liability corporation (“Hatch”), to purchase an EN Snare® foreign body retrieval system.  We paid $14 million in June 2009 and have accrued an additional $7 million in other payables, which is payable on December 31, 2009.  Our financial statements for the three and six months ended June 30, 2009 reflect royalty income subsequent to the acquisition date of approximately $143,000 and  net income of approximately $43,000, related to the Hatch  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):

 

 

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We intend to amortize developed technology over 11 years, customer lists on an accelerated basis over seven months, a non-compete covenant over seven years and a trademark over fifteen 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.

 

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 and six-month periods ended June 30, 2009 reflect sales subsequent to the acquisition date of approximately $1.8 million and $2.3 million, respectively, and a net loss of approximately $780,000 and $1.0 million (includes approximately $220,000 net of tax  in legal and accounting costs incurred in the first quarter of 2009), respectively,  related to our Alveolus acquisition.  We are in the process of finalizing our valuation of certain tangible and intangible assets, and residual goodwill.  Slight changes were made to the assets acquired and liabilities assumed during the three-month period ended June 30, 2009, but we do not believe those changes are material to our financial statements.   We intend to complete the purchase price allocation no later than one year from the date of acquisition, and that allocation 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 intend to amortize in-process research and development over 15 years, which will begin once the product is successfully launched in the market.   The acquired trademarks are scheduled to renew in 4.03 years (based on a weighted-average, from June 30, 2009 until the trademark renewal date).  While U.S. trademarks can be renewed indefinitely, we currently estimate that we will generate cash flow from the acquired trademarks for 15 years.

 

On March 3, 2009, we paid $500,000 to GMA Company, Ltd (“GMA”) representing the final payment due on our distribution agreement.  The total amount paid to GMA under this agreement was approximately $2.0 million and was allocated as a distribution agreement and we anticipate that it will be amortized over an estimated life of 11 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 paid an additional $500,000 in June 2009.  Our financial statements for the three and six-month periods ended June 30, 2009 reflect sales subsequent to the acquisition date of approximately $366,000 and $499,000, respectively, and  net income of approximately $60,000 and $90,000, respectively,  related to the Biosearch acquisition.

 

We are in the process of finalizing our valuation of tangible and intangible assets, and residual goodwill.  We intend to complete the purchase price allocation no later than one year from the date of acquisition, and may change that allocation 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 following table summarizes our unaudited consolidated result of operations for the three and six-month periods ended June 30, 2009 and 2008, as well as the unaudited pro forma consolidated results of operations as though the Hatch, Alveolus and Biosearch acquisitions had occurred on January 1, 2008:

 

		Three Months Ended						Three Months Ended
		June 30, 2009						June 30, 2008
		As Reported			Pro Forma			As Reported			Pro Forma
Sales		$	64,837		$	65,091		$	57,441		$	60,270
Net income		5,841			5,912			5,818			4,980
Earnings per common share:
Basic		$	.21		$	.21		$	.21		$	.18
Diluted		$	.21		$	.21		$	.21		$	.18

 

		Six Months Ended						Six Months Ended
		June 30, 2009						June 30, 2008
		As Reported			Pro Forma			As Reported			Pro Forma
Sales		$	123,208		$	125,660		$	110,994		$	116,875
Net income		11,378			11,318			10,135			8,977
Earnings per common share:
Basic		$	.41		$	.40		$	.37		$	.33
Diluted		$	.40		$	.40		$	.36		$	.32

 

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The unaudited pro forma condensed consolidated income statements are for informational purposes only and should not be considered indicative of actual results that would have been achieved if Alveolus, Biosearch and Hatch 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 June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement No. 168, the FASB Accounting Standards Codification (“Codification”).  Codification will become the source of authoritative U.S. General Accepted Accounting Principles (“GAAP’) recognized by the FASB to be applied by nongovernmental entities. Once the Codification is in effect, all of its content will carry the same level of authority.  The Codification becomes effective for interim and annual periods ending after September 15, 2009.  We will apply the Codification in the third quarter of fiscal 2009.  The adoption of the Codification will not have an effect on our financial position and results of operations. However, because the Codification completely replaces existing standards, it will affect the way U.S. GAAP is referenced within the consolidated financial statements and accounting policies.

 

In May 2009, the FASB issued Statement No. 165, Subsequent Events, which provides guidance on the assessment of subsequent events.  This statement defines the period after the balance sheet date during which we should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, and the required disclosures for such events.  The statement is effective for interim or annual reporting periods ending after June 15, 2009. We adopted this statement in the second quarter of 2009.  We have performed an evaluation of subsequent events through August 6, 2009, which is the date the financial statements were issued.

 

In April 2009, the 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, respectively”). FSP No. 107-1 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. FSP 107-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require these disclosures in all interim financial statements. The adoption of this pronouncement did not have a material impact on our consolidated financial statements six months ended June 30, 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, Biosearch and Hatch of approximately $374,000 during the six months ended June 30, 2009, which would have been capitalized under SFAS No. 141.

 

8.  Income Taxes.  Our overall effective tax rate for the three months ended June 30, 2009 and 2008 was 35.0% and 36.5%, respectively.  Our overall effective tax rate for the six months ended June 30, 2009 and 2008 was 33.3% and 36.3%.  The decrease in the effective income tax rate for the three and six months ended June 30, 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.  A fair value hierarchy is used to prioritize the quality

 

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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 June 30, 2009 (in thousands):

 

					Fair Value Measurements Using
		Total Fair			Quoted prices in		Significant other			Significant
		Value at			active markets		observable inputs			Unobservable inputs
Description		June 30, 2009			(Level 1)		(Level 2)			(Level 3)
Deferred compensation assets (1)		$	2,730				$	2,730

 

(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.

 

During the six months ended June 30, 2009, we had a write-off of approximately $72,000 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.

 

10.  Goodwill and Intangible Assets.  The changes in the carrying amount of goodwill for the six months ended June 30, 2009 are as follows (in thousands):

 

Goodwill balance at December 31, 2008		$	13,048
Additions as the result of acquistions		19,519
Goodwill balance at June 30, 2009		$	32,567

 

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