Merit Medical Systems, Inc. — FY2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. Merit designs, manufactures and sells single-use medical devices, primarily for cardiovascular and interventional procedures, with a smaller endoscopy business. Its two reporting segments are cardiovascular and endoscopy.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $449.0 million | $394.3 million |
| Gross profit / gross margin | $194.4 million / 43.3% | $182.0 million / 46.2% |
| Operating income / margin | $27.8 million / 6.2% | $29.6 million / 7.5% |
| Net income | $16.6 million | $19.7 million |
| Diluted EPS | $0.39 | $0.46 |
| Cash from operations | $51.4 million | $46.9 million |
| Capital expenditures | $59.5 million | $64.6 million |
- Sales rose 13.9%. Cardiovascular sales increased 14.2% to $432.1 million; endoscopy sales grew 7.2% to $16.9 million. International sales were $165.8 million, or 37% of total revenue.
- Gross margin fell 2.9 percentage points. Management attributed the decline principally to acquired-technology amortization, the medical-device excise tax, and higher standard costs from lower early-year production volumes. The 2.3% excise tax on certain U.S. device sales cost $4.3 million in 2013.
- Net income declined despite higher sales, reflecting lower gross margin and higher interest expense following increased borrowing. Interest expense was $8.0 million, versus $0.6 million in 2012; the effective tax rate fell to 16% from 29%, partly due to foreign earnings mix and tax credits.
- Cash and equivalents were $7.5 million at year-end, including $6.9 million held by foreign subsidiaries; approximately $6.0 million was in China and subject to local transfer approvals. Working capital was $100.3 million.
- Total debt was $248.9 million, comprising $10.0 million current and $238.9 million long-term. The company reported $34.6 million of additional borrowing availability under its credit agreement and compliance with covenants at year-end. Substantially all assets secure the facility, which matures December 19, 2017.
Material changes, outlook and risks
- 2013 growth included $26.3 million in sales from Thomas Medical CRM/EP products and acquired products including Datascope and Radial Assist. Merit paid approximately $27.5 million for Datascope assets and $2.5 million for Radial Assist assets in October 2013.
- The endoscopy segment returned to operating profit of $1.2 million, compared with a $0.8 million operating loss in 2012. Cardiovascular operating income declined to $26.6 million from $30.4 million.
- An Ostial-related intangible impairment of $8.1 million and a $4.1 million contingent-consideration benefit were recorded in 2013. Management said the combined adjustments reduced operating income by approximately $4.3 million, reflecting lower expected sales than anticipated at acquisition.
- Management expected approximately $3.0–$3.5 million of 2014 costs from the new Texas facility transition and planned approximately $35 million of 2014 capital expenditures. It said cash, operating cash flow and credit availability should fund current and planned operations for at least the next 12 months. No revenue or earnings guidance was provided in the filing.
- Key risks include regulatory approval and compliance, reimbursement and healthcare reform, product liability and recalls, intellectual-property disputes, supplier and sterilization concentration, foreign currency and interest-rate exposure, acquisition integration, and dependence on selected products and procedures. Inflation devices represented approximately 15% of 2013 revenue.
- Pending matters include a company-initiated contract dispute with Bard over a purchasing agreement and a third-party patent-infringement suit concerning aspiration catheters. Outcomes and potential losses were not estimable from the filing. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Assess whether sales growth and endoscopy profitability continue, and whether cardiovascular operating income stabilizes.
- Track gross-margin recovery, including acquisition amortization, the device excise tax, and Texas facility transition costs.
- Review debt reduction, borrowing availability, covenant headroom, interest costs and capital spending against cash generation.
- Monitor the Ostial asset’s sales and valuation assumptions, and the financial and operating consequences of the Bard and patent litigation.
- Check whether international growth, foreign cash availability and acquisition integration support returns on recent investments.