Merit Medical Systems, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Merit designs, manufactures and sells medical products for interventional and diagnostic procedures through its cardiovascular and endoscopy segments. Financial figures below are in U.S. dollars; millions are used unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $320.1m | $295.0m | $617.6m | $570.4m |
| Gross profit / margin | $152.8m / 47.7% | $135.1m / 45.8% | $291.1m / 47.1% | $256.0m / 44.9% |
| Operating income | $28.8m | $23.3m | $55.2m | $38.5m |
| Net income | $20.2m | $15.3m | $40.9m | $25.8m |
| Diluted EPS | $0.35 | $0.27 | $0.70 | $0.45 |
| Operating cash flow | Not separately reported for the quarter | $31.8m | $50.8m |
- Q2 sales grew 8.5%; first-half sales grew 8.3%. U.S. sales increased 9.1% in Q2 and 10.5% in the first half; international sales rose 7.8% and 5.5%, respectively. Currency movements, net of hedging, reduced sales by $2.6m in Q2 and $7.4m in the first half.
- Cardiovascular generated $311.3m of Q2 sales, up 8.6%; endoscopy generated $8.8m, up 5.7%. First-half segment sales were $599.3m (+8.2%) and $18.4m (+9.4%), respectively.
- Gross-margin improvement reflected product mix, efficiencies from the Foundations for Growth program and lower freight costs as a share of sales. Operating income also benefited from higher sales and lower acquired in-process R&D charges; higher SG&A and R&D partly offset gains.
- SG&A increased 18.1% in Q2 and 12.7% for the first half, driven in part by acquisition costs, labor, equipment-disposal losses, travel and marketing. First-half R&D rose 15.6%, primarily due to labor and regulatory costs.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $72.1m; cash, cash equivalents and restricted cash totaled $74.2m. Working capital was $404.9m, versus $308.4m at year-end 2022.
- Long-term debt principal was $340.0m, compared with $198.2m at December 31, 2022. The company reported approximately $507m of additional available borrowing capacity and said it was in compliance with credit covenants.
- Debt included $150m in term loans and $190m in revolving loans under a credit agreement maturing June 2028. At quarter-end, $75m was fixed at 2.64% through an interest-rate swap; $265m bore a floating rate of 6.15%. Q2 interest expense was $3.7m, versus $1.3m a year earlier.
- First-half operating cash flow declined to $31.8m, primarily reflecting a $35.5m inventory cash outflow, versus $14.8m in the prior-year period. Management cited inventory investment for customer service, production-line transfers and supply delays. Investing used $157.8m, including $138.3m for acquisitions; financing provided $141.0m, largely reflecting increased net borrowings.
Material changes, outlook and risks
- In June, Merit acquired AngioDynamics’ dialysis catheter and BioSentry product assets for $100m. In May, it acquired Bluegrass’s Surfacer system assets for $32.7m. The acquisitions contributed only limited reported sales during the period; integration, manufacturing transfers, commercialization and realization of expected benefits remain uncertain.
- Merit also acquired soft-tissue-marker intellectual property from Advanced Radiation Therapy, recording $1.5m of acquired in-process R&D expense, and invested $4.0m in Solo Pace with an option to acquire the company under specified conditions.
- Management said Q2 demand was stronger than anticipated in the U.S. and international markets, particularly APAC and EMEA. It expects 2023 property-and-equipment spending of approximately $55m–$60m and believes cash, operating cash flow and available borrowings can fund current and planned operations for the next 12 months and foreseeable future. The filing provides no specific revenue or earnings guidance.
- Interest-rate and foreign-exchange exposure remain relevant; the company uses swaps and currency forwards to mitigate some risk. China-held cash is subject to local approval requirements for transfer outside China.
- The SEC has requested voluntary information about the China subsidiary’s business activities, including interactions with hospitals and healthcare officials. Merit is cooperating and investigating, but cannot predict the inquiry’s scope, timing, significance or outcome; an unfavorable resolution could materially affect the business and financial results.
- Other notable items include a $270,000 impairment charge related to the Bluegrass equity investment and $4.8m of AngioDynamics acquisition-related costs in SG&A. Management said disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting.
Investor verification priorities
- Track whether sales growth and gross-margin gains persist, particularly as acquisition-related costs, labor and R&D spending rise.
- Monitor inventory levels and conversion to operating cash flow, given the substantially larger inventory cash use in the first half.
- Verify integration progress and expected commercial contribution from the AngioDynamics and Bluegrass assets, including manufacturing transfer and regulatory milestones.
- Assess borrowing, floating-rate exposure, covenant headroom and refinancing needs as acquisition debt and interest expense increase.
- Follow developments in the SEC inquiry and any related legal, compliance or financial contingencies.