Merit Medical Systems, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2023. Merit designs, manufactures and sells medical products for interventional and diagnostic procedures through its cardiovascular and endoscopy segments. Unless otherwise noted, figures below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $297.6 million | $275.4 million | Up 8.0% |
| Gross profit / margin | $138.4 million / 46.5% | $120.9 million / 43.9% | Margin up 2.6 percentage points |
| Operating income | $26.4 million | $15.2 million | Up $11.2 million |
| Net income | $20.7 million | $10.5 million | Up $10.2 million |
| Diluted EPS | $0.36 | $0.18 | Up $0.18 |
| Cash from operations | $14.5 million | $12.0 million | Up $2.5 million |
Revenue growth was led by U.S. sales, up 12.0% to $171.4 million; international sales rose 3.1% to $126.2 million. Cardiovascular sales increased 7.9% to $288.0 million, including 23.2% growth in OEM. Endoscopy sales rose 13.1% to $9.6 million. Foreign currency movements, net of hedging, reduced Q1 2023 sales by $4.9 million.
Gross margin improved with favorable product mix, efficiencies from the Foundations for Growth program, lower freight and distribution costs, lower intangible amortization as a share of sales, and lower obsolescence expense. SG&A increased 7.3% to $90.1 million, mainly due to labor, severance, travel and marketing. R&D increased 22.6% to $21.3 million, largely reflecting EU Medical Device Regulation compliance costs.
Liquidity, debt and cash flows
- At March 31, 2023, cash, cash equivalents and restricted cash totaled $60.1 million; current assets were $557.2 million and current liabilities $216.0 million, leaving $341.3 million of working capital.
- Long-term debt principal was approximately $197.8 million, including $11.3 million current. The company reported approximately $521 million of additional available borrowing capacity and compliance with its credit covenants.
- Of the debt principal, $75 million was fixed at 2.71% through an interest rate swap; approximately $122.8 million bore a floating rate of 5.84% at quarter-end. The credit agreement matures July 31, 2024.
- Operating cash flow was $14.5 million. Investing used $14.9 million, including $12.8 million of property and equipment spending and a $2.0 million investment in Solo Pace. Financing used $0.5 million. Inventory growth used $23.0 million of cash.
Changes, outlook and risks
- Compared with Q1 2022, net income nearly doubled and operating margin rose to 8.9% from 5.5%. Higher sales and gross margin drove improvement; lower impairment and contingent-consideration expense also contributed. Q1 2022 included a $1.7 million intangible-asset impairment related to the STD Pharmaceutical business, divested in April 2022.
- Management attributed stronger-than-anticipated revenue to U.S. demand and more favorable international trends, particularly in EMEA. The Foundations for Growth program helped offset inflation in certain raw materials, shipping and freight.
- Management expects to spend approximately $55–$60 million on property and equipment in 2023 and believes cash, operating cash flows and credit-facility borrowings will fund operations for the next 12 months and foreseeable future. The filing provides no specific revenue or earnings guidance.
- Merit is cooperating with SEC Enforcement Division requests for information about its China subsidiary’s business activities, including interactions with hospitals and health care officials, and is investigating. The company cannot predict the matter’s scope, timing or outcome; an unfavorable resolution could materially affect the business or financial condition.
- Risk considerations include variable-rate debt and rising interest costs; foreign-exchange exposure; supply delays and inventory investment; China restrictions requiring government approval to transfer subsidiary funds abroad; and regulatory, product-liability and other legal risks. The company reported $16.0 million of contingent-consideration liabilities.
- Merit invested $2.0 million for an approximately 19% interest in Solo Pace, accounted for at cost. The filing reports no Q1 2023 goodwill or intangible-asset impairment.
Investor verification priorities
- Monitor the SEC inquiry involving China operations, potential costs, disclosures and any changes in the company’s assessment of exposure.
- Track sales growth by geography and product category, particularly OEM, EMEA and Asia Pacific, and assess foreign-exchange effects.
- Evaluate whether gross-margin gains and cost-program benefits persist as labor, R&D and regulatory costs rise.
- Review inventory levels, cash conversion and planned 2023 capital spending against operating cash flow.
- Assess refinancing or repayment plans ahead of the July 2024 credit-agreement maturity, alongside floating interest rates, borrowing capacity and covenant headroom.
- Follow contingent-consideration estimates and payment timing, which depend on milestone and revenue assumptions.