Business context and reporting period
Merit Medical Systems, Inc. designs, manufactures and sells medical products for interventional and diagnostic procedures, reporting in cardiovascular and endoscopy segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $295.0 | $280.3 | $570.4 | $529.2 |
| Gross margin | 45.8% | 44.3% | 44.9% | 44.6% |
| Operating income | $23.3 | $8.9 | $38.5 | $23.1 |
| Net income | $15.3 | $4.9 | $25.8 | $15.9 |
| Diluted EPS | $0.27 | $0.09 | $0.45 | $0.28 |
Q2 revenue grew 5.2%; first-half revenue grew 7.8%. International sales were 44.2% of Q2 sales and rose 7.2%; U.S. sales rose 3.7%. Cardiovascular generated $286.7 million in Q2 sales, up 5.3%, while endoscopy sales were $8.3 million, up 3.4%. Q2 operating margin was 7.9%, versus 3.2% a year earlier; net margin was 5.2%, versus 1.8%.
- Management attributed improved gross margin mainly to product mix, operational efficiencies and lower obsolescence, partly offset by inflationary material costs and higher freight.
- Q2 SG&A fell 6.6% to $85.5 million, partly because the prior-year quarter included $6.1 million of contract termination costs. R&D rose 5.0% to $18.5 million, reflecting labor, clinical-trial and regulatory costs.
- First-half operating cash flow was $50.8 million, down from $76.4 million. Investing used $23.3 million, including $16.8 million of property and equipment spending; financing used $27.4 million. Cash, cash equivalents and restricted cash declined to $65.2 million from $67.8 million at year-end.
- At June 30, current assets were $492.6 million and current liabilities $195.6 million, a $297.0 million working-capital surplus. Inventory was $233.2 million, up $11.2 million from year-end.
- Debt principal outstanding was $246.3 million ($10.3 million current and $235.7 million long-term on the balance sheet). The company reported approximately $481 million of additional borrowing capacity and compliance with credit covenants. $75 million was fixed at 2.71% through an interest-rate swap; $171.3 million was floating at 2.67% at quarter-end.
Material changes, outlook and risks
Net income improved substantially year over year, supported by sales growth, margin expansion, lower SG&A and lower impairment charges. Results included $6.7 million of acquired in-process R&D expense for the Restore Endosystems asset purchase. The April 2022 divestiture of STD Pharmaceutical resulted in a $1.7 million intangible-asset impairment and a $1.3 million loss in other expense. First-half operating cash flow was pressured by working-capital movements, including a $14.8 million inventory cash outflow and a $21.0 million accrued-expense cash outflow; the latter included an $18.25 million escrow payment related to a securities class-action settlement.
Management said stronger-than-anticipated U.S. demand and better international trends supported Q2 sales. It reported continued enrollment in the WAVE clinical study and launches or progress in other product and clinical programs. The company expects 2022 property-and-equipment capital expenditures of approximately $55–$60 million and believes cash, operating cash flows and credit availability will fund planned operations for the next 12 months and foreseeable future. No revenue or earnings guidance is provided in the filing.
- Key risks include inflation, higher freight and labor costs, supply interruptions and limited suppliers for certain sterilization and product inputs; the company may not be able to recover cost increases through pricing.
- The company has substantially suspended Russian operations amid the Russia-Ukraine conflict and notes risks from geopolitical developments, trade restrictions, currency movements and regulatory requirements.
- An SEC Division of Enforcement inquiry seeks information about the China subsidiary’s business activities, including interactions with hospitals and healthcare officials. The company is cooperating and says the inquiry’s scope, timing and outcome cannot be predicted.
- A shareholder derivative action had a tentative $1.0 million settlement reflected in Q2 results, subject to final agreement and court approval. The filing also describes a securities class-action settlement and ongoing legal and regulatory contingencies.
- Cash held by the China subsidiary was $37.6 million and is subject to local approval requirements for transfers abroad. Foreign exchange movements reduced sales by $6.1 million in Q2 and $7.8 million in the first half, net of hedging.
Important facts for investors to verify
- Whether sales growth and gross-margin gains persist as inflation, freight expense and supply-chain conditions evolve.
- Progress, enrollment and regulatory outcomes for WRAPSODY and other clinical or product programs, and the timing of any commercialization.
- The outcome and potential financial or reputational effects of the SEC inquiry and pending legal matters.
- Inventory levels, working-capital cash conversion, planned $55–$60 million capital spending and remaining liquidity.
- Floating-rate debt exposure, borrowing capacity and compliance with credit-facility covenants.