Merit Medical Systems, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Merit designs, manufactures and sells medical products for interventional and diagnostic procedures, reporting cardiovascular and endoscopy segments. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $315.2m | $287.2m | $932.9m | $857.6m |
| Gross profit / margin | $142.2m / 45.1% | $128.6m / 44.8% | $433.3m / 46.5% | $384.5m / 44.8% |
| Operating income / margin | $35.1m / 11.1% | $18.7m / 6.5% | $90.3m / 9.7% | $57.1m / 6.7% |
| Net income | $25.8m | $15.3m | $66.8m | $41.1m |
| Diluted EPS | $0.44 | $0.27 | $1.14 | $0.71 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $82.9m | $86.3m |
Q3 sales rose 9.8% year over year and nine-month sales rose 8.8%. Cardiovascular sales increased 9.7% in Q3 and 8.7% for nine months; endoscopy sales increased 11.2% and 10.0%, respectively. U.S. sales grew faster than international sales in both periods. Foreign currency movements, net of hedging, increased Q3 sales by $0.2m but reduced nine-month sales by $7.3m.
As of September 30, cash, cash equivalents and restricted cash were $60.7m; current assets were $585.3m and current liabilities $187.1m, yielding working capital of $398.2m. Inventory was $303.9m, up from $266.0m at year-end. Long-term debt, including its current portion, was $286.1m; the company reported $558m of additional available borrowing capacity. Operating cash flow was $82.9m for nine months, while investing activities used $167.0m and financing activities provided $86.5m.
Material changes and drivers
- Profitability improved: gross margin rose 0.3 percentage points in Q3 and 1.7 points year to date. Management cited product mix, standard-cost changes, manufacturing efficiencies from its Foundations for Growth program and lower freight costs.
- Q3 SG&A declined 3.3% year over year, and SG&A as a share of sales fell to 27.6% from 31.3%. Nine-month SG&A increased 7.2% in dollars, with headcount-related costs, equipment-disposal losses, travel and marketing contributing; the ratio improved slightly to 29.8% from 30.2%.
- R&D expense increased 2.2% in Q3 and 10.9% year to date, reflecting labor, clinical trial and development costs, and higher regulatory costs for the nine-month period.
- Interest expense increased as borrowings and market rates rose. Total other expense was $4.9m in Q3 versus $1.1m a year earlier, and $9.7m for nine months versus $4.7m.
- Operating cash flow was below the prior-year period despite higher net income, in part reflecting increased inventory investment and lower trade payables. Management attributed inventory investment to service levels, production-line transfers and supply delays.
Outlook, risks and unusual items
- Management expects 2023 property-and-equipment capital expenditures of approximately $55m–$60m. It stated that cash, anticipated operating cash flows and credit-facility borrowings should fund current and planned operations for the next 12 months and the foreseeable future. The filing provides no specific revenue or earnings guidance.
- In 2023 Merit acquired AngioDynamics dialysis catheter and BioSentry product assets for $100m and Bluegrass’s Surfacer system assets for approximately $32.7m; it also made a $1.5m payment for ART intellectual property and a $4.0m investment and related arrangements with Solo Pace. Acquired AngioDynamics products contributed approximately $7.3m of Q3 sales. Integration, manufacturing transfer, commercialization and expected synergies remain uncertain.
- Merit’s amended credit agreement provides a $150m term loan and up to $700m of revolving commitments, matures June 2028, and is secured by substantially all assets. At quarter-end, $75m of principal was fixed at 2.89% through a swap and $212.1m bore a floating rate of 6.67%. Merit said it was in compliance with its covenants, including a maximum net leverage ratio of 4.0-to-1.0 and minimum interest coverage ratio of 3.0-to-1.0.
- The SEC Enforcement Division requested information about the China subsidiary’s business activities, including interactions with hospitals and health care officials. Merit is cooperating and investigating; it cannot predict the matter’s scope, timing, significance or outcome. An unfavorable resolution could materially affect the business, financial condition, results or liquidity.
- Other risks include anti-bribery compliance in international operations, acquisition integration and execution, foreign-exchange and interest-rate exposure, and supply-related pressures. Cash held in China is subject to local approval requirements for transfers outside China; $24.9m of cash, cash equivalents and restricted cash was held there at quarter-end.
- Unusual period items included $1.6m of acquired in-process R&D expense related primarily to ART and $0.27m of impairment related to the Bluegrass equity investment. The contingent-consideration liability declined to $4.0m from $18.1m at year-end, primarily reflecting payments.
Most important facts for investors to verify
- Whether sales growth and margin gains persist, particularly the contributions from U.S. demand, product mix and manufacturing efficiencies.
- How acquired products perform after integration, including the costs and results of manufacturing transfers and commercialization.
- The outcome and potential financial, operational or reputational effects of the SEC inquiry concerning China operations.
- Debt, floating-rate exposure, covenant headroom and the extent to which acquisition spending affects cash generation and leverage.
- Whether inventory levels and supply-chain conditions improve, and whether planned 2023 capital spending remains within the stated range.