Merit Medical Systems, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; comparisons are with the corresponding 2018 periods. Merit designs, manufactures and markets single-use medical products, reporting cardiovascular and endoscopy segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $243.0 million | $221.7 million | $736.9 million | $649.5 million |
| Gross profit | $104.1 million | $102.0 million | $320.7 million | $290.1 million |
| Gross margin | 42.8% | 46.0% | 43.5% | 44.7% |
| Operating income (loss) | $(2.9) million | $21.1 million | $18.8 million | $45.0 million |
| Net income (loss) | $(3.4) million | $16.6 million | $9.7 million | $32.8 million |
| Diluted EPS | $(0.06) | $0.30 | $0.17 | $0.62 |
- Sales increased 9.6% in Q3 and 13.5% year to date. Cardiovascular sales rose 10.5% and 14.0%, respectively; endoscopy sales fell 9.3% in Q3 and increased 1.0% year to date.
- Q3 sales growth included $11.6 million from Cianna Medical, acquired in November 2018. Nine-month sales also benefited from acquired product lines, including $35.7 million of Cianna Medical products. International sales were $99.0 million in Q3 and $310.2 million year to date.
- Gross margin declined year over year. Management cited higher acquisition-related amortization, costs of new distribution sites, tariffs and foreign-exchange effects. SG&A rose 31.0% in Q3 and 22.4% year to date; R&D rose 16.9% and 11.8%.
- Cash from operations was $50.9 million for the nine months, versus $62.9 million in 2018. Investing used $113.9 million, including $58.1 million of property and equipment spending and $53.5 million for acquisitions. Financing provided $33.7 million. Cash declined $30.0 million to $37.3 million.
- At September 30, cash was $37.3 million; current assets were $441.3 million and current liabilities $153.2 million, with working capital of $288.1 million and a current ratio of 2.88. Inventory was $216.8 million, up from $197.5 million at year-end.
- Debt principal outstanding was approximately $440.5 million, up from $395.5 million at December 31, 2018. The company reported approximately $191.1 million of additional borrowing availability, subject to its leverage ratio. The new credit agreement matures July 31, 2024; management said it was in covenant compliance.
Material changes, outlook and risks
- Q3 operating results weakened sharply: cardiovascular reported a $6.2 million operating loss versus $18.2 million income a year earlier. Management attributed the deterioration chiefly to lower gross margins, increased amortization and impairment, higher contingent-consideration expense and SG&A.
- Merit recorded $2.7 million of Q3 and $3.3 million of nine-month intangible-asset impairment charges. The filing cites slower-than-anticipated sales growth and uncertainty about future product development and commercialization. Contingent-consideration expense was $3.6 million year to date; the liability was $79.6 million at quarter-end.
- Recent acquisitions included Brightwater Medical and STD Pharmaceutical in 2019. Brightwater consideration included potential earn-outs; other acquisition agreements also carry milestone or revenue-based payments. Acquisition integration, amortization and contingent payments remain relevant to results and cash needs.
- Management said cash, expected operating cash flows and credit-facility borrowings should fund current and currently planned operations for the next 12 months and foreseeable future. It cautioned that significant future transactions or acquisitions could require additional debt or equity funding. No specific revenue or earnings guidance is provided in this filing.
- Cost and efficiency actions included workforce reductions of approximately 2%, closure of the San Jose facility with essential activities absorbed in South Jordan, and review of possible additional facility consolidations. The BD-product manufacturing transition to Tijuana was completed on schedule and within budget.
- The Department of Justice investigation into certain marketing and promotional practices remains ongoing. Merit reported $2.4 million of related legal expense in Q3 and $5.0 million year to date, and said it cannot predict the investigation’s scope, duration or outcome; an unfavorable resolution could be materially adverse.
- Other risks include debt covenants and collateral pledges, interest-rate exposure, foreign-exchange movements, regulatory and product-liability matters, acquisition integration, and inventory-demand uncertainty. A 1 percentage-point change in borrowing rates was estimated to change annual interest expense and pretax income by approximately $2.7 million, assuming borrowings remained constant.
Important facts for investors to verify
- Whether sales growth translates into improved margins and operating profitability, particularly in cardiovascular.
- Acquisition performance, including acquired-product sales, integration costs, amortization, impairment assumptions and the potential timing and amount of earn-out payments.
- Operating cash conversion, elevated inventory, capital spending and the extent of future borrowing needs.
- Available credit capacity and covenant headroom under the amended credit agreement, including the effect of any further borrowing.
- Developments in the DOJ investigation and associated legal costs or potential penalties.
- Management’s stated liquidity outlook and the effects of tariffs, foreign exchange, regulatory changes and the identified product-development risks.