Merit Medical Systems, Inc. — Q1 2022 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Unless stated otherwise, amounts are in U.S. dollars. The company designs, manufactures and sells medical devices for interventional and diagnostic procedures through its cardiovascular and endoscopy segments.
Financial performance
- Revenue: $275.4 million, up 10.6% from $248.9 million. Cardiovascular sales rose 10.8% to $266.9 million; endoscopy sales rose 7.2% to $8.5 million. International sales grew 13.8%, compared with 8.2% growth in the United States. Currency movements, net of hedging, reduced sales by $1.7 million.
- Profit and margins: Gross profit was $120.9 million, up from $111.9 million, but gross margin declined to 43.9% from 45.0%. Operating income increased to $15.2 million from $14.2 million. Net income fell to $10.5 million from $11.0 million; diluted EPS was $0.18 versus $0.19. Net margin was 3.8%, compared with 4.4%.
- Cash flow: Operating cash flow was $12.0 million, down from $35.2 million. Investing activities used $9.9 million, including $9.5 million of property and equipment spending; financing activities used $14.2 million. Cash, cash equivalents and restricted cash totaled $55.8 million at quarter-end.
- Liquidity and debt: Working capital was $274.3 million. Debt carrying value was $252.5 million, with approximately $475 million of additional borrowing capacity. The company reported compliance with its credit-facility covenants. Cash plus restricted cash less debt was approximately $196.7 million of net debt.
- Other metrics: Inventories rose to $231.5 million from $221.9 million. The effective tax rate increased to 25.6% from 13.7%, primarily because of a smaller benefit from discrete items, including share-based compensation.
Changes versus Q1 2021
- Revenue growth was broad-based, led by peripheral intervention (+13.8%), OEM (+19.6%) and cardiac intervention (+9.0%). Management cited stronger-than-anticipated March demand and improved Asia-Pacific and rest-of-world sales trends.
- Gross margin fell by 1.1 percentage points, primarily due to inflation-related manufacturing variances, higher freight costs and increased obsolescence expense; product mix and lower amortization as a share of sales partly offset these pressures.
- Operating cash flow declined by $23.2 million. The main factors included an $18.25 million escrow payment associated with the securities-litigation settlement, timing of bonus and other accrued-liability payments, and increased inventory investment.
- Operating expenses included a $1.7 million impairment charge and $2.6 million of contingent consideration expense, versus no impairment and $0.4 million of contingent consideration expense in Q1 2021.
Outlook, risks and unusual items
- Management expected 2022 property-and-equipment capital expenditures of approximately $55 million to $60 million. It stated that existing cash, anticipated operating cash flows and available credit were expected to fund current and planned operations for the next 12 months and foreseeable future. No revenue or earnings guidance was provided in the supplied filing text.
- Management said SKU optimization, network consolidation, product transfers and manufacturing initiatives were helping offset inflation in raw materials and logistics. Risks include persistent inflation, freight and supply-chain disruption, limited suppliers for certain materials and sterilization, and difficulty passing higher costs to customers.
- The filing discusses the Russia-Ukraine conflict, sanctions and related global economic effects; Merit substantially suspended its Russia operations. China-based cash is subject to local approval requirements for transfers outside China.
- On April 30, 2022, Merit completed the divestiture of Fibrovein Holdings/STD Pharmaceutical. It recorded a $1.7 million intangible-asset impairment in Q1 and reported no anticipated material divestiture loss. On the same date, it agreed to acquire Restore Endosystems for $3 million at closing plus up to $4 million in later payments or milestone payments; the company expected to expense the purchase price as acquired in-process R&D.
- The securities class-action settlement was approved on April 13, 2022; approximately $10 million of net expense had been accrued. A separate shareholder derivative action remained in mediation, with potential loss not reasonably estimable. The filing also identifies contingent consideration valuation as sensitive to projected revenues, discount rates and payment timing.
Key investor follow-up
- Track whether gross margins recover as inflation, freight costs and manufacturing variances evolve.
- Assess the sustainability of operating cash flow, inventory growth and working-capital movements after the litigation-related payments.
- Review contingent consideration estimates and future cash payments, including the assumptions behind milestone-related fair values.
- Verify execution and financial effects of the Fibrovein divestiture and Restore Endosystems acquisition, and monitor the derivative litigation’s status.