Merit Medical Systems, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; interim financial statements are unaudited. Merit designs, manufactures and sells medical products for interventional and diagnostic procedures through its cardiovascular and endoscopy segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $280.3M | $218.4M | $529.2M | $461.9M |
| Gross profit / margin | $124.1M / 44.3% | $84.2M / 38.6% | $236.0M / 44.6% | $188.0M / 40.7% |
| Operating income (loss) / margin | $8.9M / 3.2% | $(19.0)M / (8.7)% | $23.1M / 4.4% | $(17.6)M / (3.8)% |
| Net income (loss) | $4.9M | $(19.1)M | $15.9M | $(22.2)M |
| Diluted EPS | $0.09 | $(0.34) | $0.28 | $(0.40) |
- Q2 sales grew 28.4%; first-half sales grew 14.6%. Foreign exchange contributed approximately $6.2M and $10.0M, respectively, net of hedging.
- Cardiovascular sales were $272.3M in Q2, up 28.3%, and $513.3M for the first half, up 14.6%. Endoscopy sales were $8.0M in Q2, up 29.7%, and $15.9M for the first half, up 12.5%.
- First-half operating cash flow was $76.4M, versus $73.2M. Investing activities used $15.3M; property and equipment purchases were $12.8M and intangible-asset purchases $1.5M.
- At June 30, cash and cash equivalents were $69.7M, current assets exceeded current liabilities by $239.2M, and debt principal was approximately $292.7M. The company reported approximately $444M of additional borrowing capacity and material compliance with credit covenants.
- Cash increased $12.8M during the first half. Net debt repayments were approximately $58.9M. The credit facility matures in 2024; $269.3M of scheduled principal payments fall in 2024. Management said available cash, operating cash flows and credit availability should fund current and planned operations for at least the next 12 months.
Changes versus the prior-year period
- Profitability improved from prior-year losses as sales recovered and gross margin expanded. Management attributed margin improvement mainly to lower amortization and obsolescence costs, product mix, manufacturing efficiencies and higher production volumes.
- The comparison is affected by the prior-year $18.2M DOJ settlement expense, COVID-related demand disruption, and prior-year salary reductions and furloughs. Q2 2021 growth also included elevated demand for Medallion syringes associated with COVID-19 vaccination efforts.
- SG&A increased 37.1% in Q2 and 18.6% in the first half. First-half SG&A included $12.8M of Foundations for Growth transformation and restructuring costs and $6.1M of acquisition-contract termination costs. R&D increased 25.4% in Q2 and 17.2% in the first half.
- Q2 2021 impairment charges were $4.3M, compared with $3.9M in Q2 2020; first-half charges were $4.3M versus $7.7M. The 2021 charges included costs related to discontinuing the Advocate balloon product line and impairment of certain lease assets.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management cited improved U.S. hospital engagement and overall international sales trends, but noted varied recovery by region.
- Management expects approximately $40M of 2021 spending on buildings, property and equipment. It also described continued execution of the Foundations for Growth program and progress in the WRAPSODY WAVE clinical study.
- COVID-19 remains a source of demand volatility and supply-chain uncertainty, including possible effects on raw-material availability. Management noted that future pandemic developments and their financial impact are uncertain.
- Approximately $57.5M of contingent-consideration liabilities remained at June 30, including amounts dependent on future revenue, milestones and regulatory approvals; remeasurement could affect operating expenses.
- The company is defending a securities class action and a shareholder derivative action. It recorded no related expense because losses were not considered probable or reasonably estimable; the potential outcome and loss range were not clear.
- Approximately $64.2M of cash was held by foreign subsidiaries, including $34.9M in China, where transfers abroad are subject to local approval requirements. After a $175M interest-rate swap expired on July 6, 2021, $75M of debt remained fixed-rate under a swap; the rest was exposed to variable rates.
Important facts for investors to verify
- Whether sales and gross-margin gains persist as COVID-related comparisons and vaccination-driven product demand normalize.
- Whether transformation spending, acquisition-contract termination costs and other elevated SG&A produce expected operating efficiencies.
- Progress and commercial prospects for WRAPSODY, and execution of the planned Advocate product-line discontinuation.
- Updates on the securities and derivative litigation, contingent-consideration estimates, and any resulting financial exposure.
- Debt repayment, interest-rate exposure, covenant headroom, and accessibility of foreign-held cash, particularly cash in China.