Merit Medical Systems, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited consolidated results. Merit develops and sells medical devices for interventional, diagnostic and therapeutic procedures through its cardiovascular and endoscopy segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $323.5 | $297.6 | +8.7% |
| Gross profit / margin | $151.7 / 46.9% | $138.4 / 46.5% | Margin +0.4 pts |
| Operating income / margin | $35.9 / 11.1% | $26.4 / 8.9% | Income +36.2% |
| Net income | $28.2 | $20.7 | +36.4% |
| Diluted EPS | $0.48 | $0.36 | +$0.12 |
| Cash from operating activities | $36.2 | $14.5 | +$21.7 |
Foreign exchange movements, net of hedging, reduced Q1 2024 sales by $1.7 million. Management attributed higher gross margin primarily to favorable product mix and lower freight costs, partly offset by higher acquired-intangible amortization and increased inventory obsolescence provisions. SG&A was $94.4 million, or 29.2% of sales versus 30.3%; R&D was $21.5 million, or 6.6% versus 7.2%.
Revenue mix and period-over-period changes
- Cardiovascular sales rose 8.8% to $313.4 million; endoscopy sales rose 5.7% to $10.1 million.
- Peripheral intervention grew 18.3% to $134.6 million, the strongest reported product-category increase. Cardiac intervention rose 6.3% to $90.7 million; custom procedural solutions increased 2.3% to $48.8 million. OEM declined 4.6% to $39.3 million.
- U.S. sales increased 8.6% to $186.1 million; international sales increased 8.9% to $137.4 million. Management cited U.S. demand and favorable international trends, particularly in Asia Pacific.
- Operating income improved in both segments: cardiovascular $32.9 million versus $23.9 million; endoscopy $3.0 million versus $2.4 million.
- Net income benefited from higher sales and gross margin, partly offset by higher SG&A and income tax expense. Net other expense increased to $1.6 million from $0.9 million, reflecting higher interest expense and foreign-currency losses, partly offset by higher interest income.
Cash, debt and liquidity
- At March 31, cash, cash equivalents and restricted cash totaled $584.0 million, down from $589.1 million at year-end 2023. Balance-sheet cash and cash equivalents were $581.9 million.
- Working capital was $921.9 million; current assets were $1,105.3 million and current liabilities $183.3 million.
- Debt principal outstanding was $822.5 million: $75.0 million under the credit agreement and $747.5 million of 3.00% convertible notes due February 2029. Carrying-value long-term debt was $800.1 million after unamortized issuance costs.
- Merit reported approximately $657 million of additional borrowing capacity and stated it was in compliance with credit-agreement covenants. The $75 million term-loan balance was fixed at 3.39% through an interest-rate swap; the notes bear 3.00% interest.
- Investing activities used $22.1 million, including $11.7 million of property-and-equipment spending and $6.2 million of notes issued to other companies. Financing activities used $18.0 million, including $24.1 million of debt repayment.
- Management expects 2024 property-and-equipment spending of approximately $50–$60 million and believes cash, operating cash flows and borrowing capacity are adequate for planned operations over the next 12 months and foreseeable future.
Outlook, risks and notable items
- Merit announced a “Continued Growth Initiatives” program with financial targets for the three-year period ending December 31, 2026; the targets’ numerical values are not provided in this filing text. The filing gives no specific 2024 revenue or earnings guidance.
- The SEC has requested voluntary information concerning the activities of Merit’s China subsidiary, including interactions with hospitals and health care officials. Merit is cooperating and investigating; it cannot estimate the matter’s scope, outcome or potential loss. An unfavorable resolution could materially affect the business, financial position, results or liquidity.
- Cash held in China was $20.5 million and is subject to local approval requirements for transfers outside China. The company also notes that future global minimum tax rules could increase tax rates or cash taxes, although it does not anticipate a material effect on fiscal 2024 results.
- Credit-loss allowance on notes receivable increased to $1.4 million from $0.6 million, including an $0.8 million quarterly provision. Notes receivable totaled $8.5 million, including new loans to Selio, Solo Pace and Fluidx.
- Q1 included the acquisition of selected Scholten Surgical Instruments assets for an upfront $3 million plus three deferred payments of $1 million each. Merit also invested an additional $0.3 million in Fluidx, bringing its ownership to approximately 19.9%.
- Management reported no goodwill or other asset impairment charges in the quarter. The filing describes ordinary-course litigation and contingencies; aside from the SEC inquiry, management did not identify proceedings expected to have a material adverse effect based on its current assessment.
Most important facts for investors to verify
- Progress and numerical details of the three-year growth and profitability targets, and whether momentum in peripheral intervention and international markets continues.
- Developments in the SEC inquiry, including any change in estimated exposure or potential business impact.
- Debt reduction, convertible-note terms and dilution exposure; note conversion price is approximately $86.83 per share, subject to adjustment, and capped-call coverage is limited by an initial cap price of approximately $114.68.
- Cash conversion and working-capital trends, particularly vendor-payment timing, inventory levels and the planned $50–$60 million of 2024 capital spending.
- Recoverability and credit quality of notes receivable and private-company investments, and any further increase in expected-credit-loss allowances.