Business context and reporting period
Merit Medical Systems, Inc. designs, manufactures and sells medical products for interventional and diagnostic procedures. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; amounts below are in U.S. dollars. The company reports cardiovascular and endoscopy segments.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $244.0m | $243.0m | $705.9m | $736.9m |
| Gross profit | $102.0m | $104.1m | $290.0m | $320.7m |
| Gross margin | 41.8% | 42.8% | 41.1% | 43.5% |
| Operating income (loss) | $0.1m | $(2.9)m | $(17.6)m | $18.8m |
| Net income (loss) | $(3.0)m | $(3.4)m | $(25.2)m | $9.7m |
| Diluted EPS | $(0.05) | $(0.06) | $(0.46) | $0.17 |
- Cash flow: Nine-month operating cash flow was $128.4m, versus $50.9m a year earlier. Investing activities used $36.8m; financing activities used $91.2m. Operating cash generation included favorable movements in receivables and inventory and higher accrued expenses, including legal-settlement accruals.
- Balance sheet and debt: Cash was $44.6m at September 30, 2020. Working capital was $248.6m. Debt principal was approximately $357.7m, down from $439.5m at December 31, 2019; approximately $327m of additional borrowing capacity was available under the credit agreement, subject to its net-leverage requirement. The company reported covenant compliance.
- Interest and capital spending: Borrowings carried a fixed 2.62% rate on $175m and a floating 1.66% rate on $182.7m at quarter-end. Nine-month property and equipment capital expenditures were $35.6m.
Material changes versus the prior comparable period
- Q3 sales were nearly flat year over year, while nine-month sales fell 4.2%. Cardiovascular sales rose 0.8% in Q3 but declined 3.9% year to date; endoscopy sales declined 12.3% and 14.3%, respectively.
- Custom procedural solutions grew, aided by $14.2m of Cultura COVID-19 swab and test-kit sales in the first nine months ($9.6m in Q3). Cardiac intervention, OEM and endoscopy sales were weaker year to date.
- Gross margin declined in both periods, reflecting product mix, inventory obsolescence and, year to date, higher amortization. Cost reductions lowered SG&A and R&D, but impairment charges and a $18.2m DOJ-related legal settlement contributed to the nine-month operating and net loss.
- Nine-month impairment charges were $28.3m, compared with $3.3m in 2019. These included $20.5m of intangible-asset impairments, as well as write-offs and impairments involving an acquisition option, an equity investment, property and equipment, and a lease asset. Q3 contingent-consideration remeasurement produced a $4.4m benefit.
Outlook, commentary, risks and contingencies
- Management said elective and deferrable procedures were recovering unevenly, with a stronger recovery in U.S. direct sales than U.S. OEM sales. The course of the pandemic, procedure volumes and restrictions on hospital access remained uncertain. The filing gives no revenue or earnings guidance.
- Management expected 2020 capital expenditures of approximately $42m–$48m and believed cash, operating cash flow and available borrowings would fund planned operations for the next 12 months and foreseeable future. Significant future acquisitions could require additional financing.
- Cost and efficiency actions included headcount reductions, furloughs and temporary salary cuts, reduced discretionary spending and R&D projects, facility consolidation, and transferring 14 product lines to facilities in Mexico and Texas. The Melbourne procedure-pack operation was expected to close in Q4 2020. Some temporary salary reductions were reduced or ended in Q3.
- On October 13, 2020, after quarter-end, Merit entered agreements resolving a DOJ investigation into certain marketing and promotional practices. The company denied the allegations; the filing reports an $18.2m settlement expense in the first nine months.
- A securities class action against Merit and two executives remained pending; the company moved to dismiss and had not accrued a loss because it was not considered probable or reasonably estimable. The filing says the potential loss range could not be estimated.
- Other risks include further COVID-19 disruption, procedure delays, supply and customer impacts, margin pressure, and possible additional asset impairments. The company also disclosed approximately $64.7m of contingent-consideration liabilities and a commitment to provide Selio with up to an additional €2m in loans.
Important facts for investors to verify
- Whether procedure volumes and geographic sales recovery sustain, and how much Cultura demand offsets declines in other product lines.
- Whether gross margins recover and whether further impairment, inventory-reserve or restructuring charges arise.
- The cash and operating effects of the DOJ resolution, pending securities litigation and contingent-consideration payments.
- Debt reduction, covenant headroom and the assumptions behind management’s liquidity and capital-expenditure outlook.
- How much of the reported operating cash-flow increase reflects durable earnings versus working-capital movements and accrued liabilities.