Merit Medical Systems, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Amounts below are in U.S. dollars unless noted.
Business context
Merit designs, manufactures, and markets medical products used in interventional and diagnostic procedures. It reports cardiovascular and endoscopy segments. The filing compares Q1 2016 with Q1 2015.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $138.1 million | $129.6 million | Up 6.6% |
| Gross profit / margin | $60.1 million / 43.5% | $55.4 million / 42.7% | Margin up 0.8 percentage points |
| Operating income / margin | $7.7 million / 5.6% | $8.7 million / 6.7% | Down 11.5% |
| Net income | $4.4 million | $5.2 million | Down 15.9% |
| Diluted EPS | $0.10 | $0.12 | Down $0.02 |
| Cash from operations | $11.6 million | $19.3 million | Down $7.7 million |
- Sales increased in cardiovascular by 6.2% to $132.5 million and in endoscopy by 15.0% to $5.5 million. Cardiovascular operating income declined to $6.6 million from $8.1 million; endoscopy operating income rose to $1.1 million from $0.6 million.
- Gross margin improvement was attributed mainly to a greater focus on higher-margin products and suspension of the U.S. medical device tax. SG&A rose 13.1% to $41.7 million, driven primarily by acquisition costs, severance, and foreign-market expansion. R&D rose to $10.6 million from $9.7 million.
- Other expense, net, was $1.8 million versus $1.2 million, principally reflecting foreign-exchange losses. The effective tax rate fell to 26.3% from 30.7%, mainly due to reinstatement of the federal R&D credit and a higher share of foreign earnings.
- Investing activities used $31.9 million, including $11.0 million of property and equipment spending, $0.5 million for intangible assets, and $21.5 million net cash paid for acquisitions. Financing activities provided $21.2 million. Cash increased $1.0 million to $5.2 million.
Liquidity, debt, and material developments
- Working capital was $124.7 million and the current ratio was 2.46:1 at March 31, 2016. Cash was $5.2 million; $4.5 million was held by foreign subsidiaries, including $2.5 million in China, where transfers abroad require government approval.
- Debt totaled $228.4 million: $62.5 million term-loan principal and $165.9 million revolving borrowings. About $49.6 million of additional borrowing capacity was available, subject to the credit agreement’s leverage terms. The facility is secured by substantially all company assets, matures December 19, 2017, and the company reported covenant compliance.
- At quarter-end, $133.7 million of borrowings was fixed at 2.48% through an interest-rate swap; other borrowings carried floating rates of 1.94% and 2.13%. A one-percentage-point change in rates was estimated to change annual interest expense and pretax income by about $947,000, assuming borrowings stayed constant.
- Merit paid $18.5 million for CryoLife’s HeROGraft device and related assets in February; the acquired products generated about $1.3 million in Q1 sales. It also invested $2.0 million for an approximately 15% interest in Cagent Vascular and paid an additional $0.5 million under the ArraVasc license agreement.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management stated that cash, expected operating cash flows, equipment financing, and credit-agreement borrowings should fund current and planned operations for the next 12 months and the foreseeable future.
- A new risk disclosure says competitor regulatory issues recently increased demand for certain Merit products. The duration and magnitude are uncertain; demand could exceed inventory or manufacturing capacity, require customer allocation, strain suppliers and employees, and challenge quality, operating, or financial-reporting controls.
- Other cited risks include product liability and recalls, regulatory and reimbursement changes, acquisition integration and commercialization, foreign-exchange exposure, supplier and inventory risks, and the ability to generate cash for debt and capital needs. Foreign-currency movements reduced reported revenue by about $1.9 million, or 1.4%, in Q1.
- Management said ordinary-course claims and litigation were not expected to be material, but unfavorable developments could materially affect the business or financial results. The interest-rate swap had a $0.7 million liability at quarter-end.
Important facts for investors to verify
- Whether the recent competitor-related demand increase persists and whether production capacity, inventory, and suppliers can meet it without disrupting quality or service.
- Progress integrating and commercializing HeROGraft and other acquired or licensed products, including their contribution to sales and margins.
- Debt repayment and refinancing capacity ahead of the December 2017 credit-facility maturity, covenant headroom, and the availability of the reported $49.6 million borrowing capacity.
- Whether working-capital growth—particularly inventory, which reached $110.7 million as inventory turns declined to 3.10—converts into sales and cash flow.
- Exposure to foreign currencies and the effect of exchange-rate changes, including the filing’s estimated sensitivities for the euro and Chinese yuan.