Business context and reporting period
Merit Medical Systems, Inc. designs, manufactures and markets medical devices used in interventional, diagnostic and therapeutic procedures. It reports cardiovascular and endoscopy segments. This 10-K covers the fiscal year ended December 31, 2020; figures are annual unless a quarter is specifically identified.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Net sales | $963.9 million | $994.9 million |
| Gross profit / margin | $401.2 million / 41.6% | $432.4 million / 43.5% |
| Operating income (loss) / margin | $(1.6) million / (0.2)% | $15.4 million / 1.6% |
| Net income (loss) | $(9.8) million | $5.5 million |
| Diluted EPS | $(0.18) | $0.10 |
| Cash from operations | $165.3 million | $77.8 million |
| Capital expenditures | $46.0 million | $78.2 million |
Approximate operating cash flow less property-and-equipment capital expenditures was $119.3 million in 2020. Cash and equivalents were $56.9 million at year-end, versus $44.3 million in 2019. Working capital was $244.7 million, versus $272.9 million. Current assets of $429.7 million and current liabilities of $185.0 million imply a current ratio of approximately 2.3.
Debt principal was approximately $351.6 million at year-end, down from $440.0 million in 2019; reported long-term debt, net of issuance costs and current portion, was $343.7 million. The company reported approximately $389 million of additional borrowing availability, subject to its credit agreement’s leverage requirements. Stockholders’ equity was $958.6 million and total assets were $1.664 billion.
Material changes versus the prior comparable period
- Revenue declined 3.1% year over year. Cardiovascular sales fell 2.8% to $934.2 million; endoscopy sales fell 12.4% to $29.7 million.
- Within cardiovascular, cardiac intervention declined 8.2%, OEM declined 6.9%, and peripheral intervention declined 2.7%; custom procedural solutions grew 8.5%, partly on pandemic-related demand.
- Gross margin declined 1.9 percentage points, attributed primarily to product mix and higher obsolescence expense from weaker anticipated demand, partly offset by manufacturing efficiencies.
- The company recorded $18.7 million of DOJ settlement expense and $36.5 million of impairment charges, compared with $23.8 million of impairment charges in 2019. A $8.0 million contingent-consideration benefit partly offset expenses.
- SG&A declined 9.0% and R&D declined 12.3%, reflecting cost reductions, lower compensation and reduced discretionary spending. Operating results shifted from profit to loss.
- Operating cash flow increased by $87.5 million. Lower receivables and inventory provided cash, including $29.4 million from inventories, compared with a $27.0 million use in 2019.
Outlook, management commentary, risks and unusual items
- COVID-19 caused procedure delays or cancellations, customer-site access restrictions, supply-chain and logistics disruption, and lower demand in some product categories. Second-quarter 2020 sales fell 14.5% year over year; second-half sales were approximately level with the prior-year period. Management cautioned that the duration and financial effects remained uncertain.
- Management’s “Foundations for Growth” transformation, introduced in November 2020, targets multi-year growth and improved profitability; the filing does not provide specific numerical targets. The company moved production of 23 products and closed manufacturing operations at four sites during 2020.
- Management anticipated 2021 capital spending of approximately $45–$50 million and said cash, operating cash flow and available borrowings should fund operations and planned needs for at least the next 12 months.
- The October 2020 DOJ settlement resolved an investigation into past marketing practices. Merit denied the allegations, paid approximately $18.7 million including interest and related expenses, and entered a Corporate Integrity Agreement. Noncompliance could result in monetary penalties or exclusion from federal healthcare programs.
- Other significant risks include medical-device regulation and product approvals, EU Medical Device Regulation compliance, reimbursement and pricing pressure, supplier and manufacturing disruption, competition, foreign-exchange exposure, cybersecurity and privacy, and debt covenants. A securities-law complaint naming the company, CEO and CFO was pending; Merit had filed a motion to dismiss and was awaiting the court’s ruling.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Intangible-asset impairment estimates and contingent-consideration valuations were identified as critical audit matters.
Important facts for investors to verify
- Whether procedure volumes and customer access recover, and whether revenue and gross margin improve after pandemic-related disruption.
- The assumptions and future cash flows supporting the $36.5 million of impairments and the $55.7 million contingent-consideration liability.
- Progress and costs under the DOJ Corporate Integrity Agreement, and any developments in the pending securities litigation.
- Debt-covenant headroom, borrowing availability, upcoming debt maturities, and exposure to variable rates and LIBOR transition.
- Execution of the “Foundations for Growth” initiative, including the effects of facility closures and cost reductions on growth, capacity and product development.