Merit Medical Systems, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed March 1, 2018. This is an annual filing, not a standalone fourth-quarter report. The company manufactures and markets disposable medical devices for interventional, diagnostic and therapeutic procedures, reporting in cardiovascular and endoscopy segments.
Financial performance
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Net sales | $727.9 million | $603.8 million | Up 20.5% |
| Gross profit / margin | $326.3 million / 44.8% | $265.0 million / 43.9% | Margin improved 0.9 percentage points |
| Operating income / margin | $33.1 million / 4.5% | $34.9 million / 5.8% | Income declined despite sales growth |
| Net income | $27.5 million | $20.1 million | Up 36.8%; included a $11.0 million bargain-purchase gain |
| Diluted EPS | $0.55 | $0.45 | Average diluted shares rose to 50.1 million from 44.9 million |
| Cash from operations | $62.7 million | $53.6 million | Up; working-capital investment increased |
| Capital expenditures | $38.6 million | $32.8 million | 2018 expected spending: $50–$55 million |
Cardiovascular sales were $700.6 million, up 20.8%; segment operating income fell to $24.8 million from $30.1 million. Endoscopy sales rose 15.0% to $27.2 million, while operating income increased to $8.3 million from $4.8 million. International sales were $307.1 million, or 42% of revenue, up 32%; China sales were $73.4 million.
Liquidity, debt and capital
- Cash and cash equivalents were $32.3 million at year-end, including $30.4 million held by foreign subsidiaries and $13.1 million in China, where transfers abroad are subject to local approval.
- Working capital was $200.5 million and the current ratio was 2.73. Inventory increased $34.6 million to $155.3 million; inventory turns eased to 2.91 from 2.99.
- Balance-sheet debt was $278.5 million, including $19.5 million current and $259.0 million long-term. Borrowings under the main credit agreement were approximately $272 million, with approximately $188 million of availability subject to leverage limits. The company reported covenant compliance.
- The credit agreement is secured by substantially all assets and includes leverage, capital expenditure and other restrictions; its maturity is July 2021. A $175 million interest-rate swap fixed a portion of the company’s borrowing exposure.
- Merit raised $136.6 million net from a March 2017 offering of 5.175 million shares, primarily to repay debt. It has never paid cash dividends and does not anticipate doing so in the foreseeable future.
Material changes and unusual items
- Growth reflected acquisitions, new products, international expansion and channel changes. Acquired businesses and assets included Argon critical care, Catheter Connections, Osseon, Laurane, VAT, IntelliMedical and ITL. The Argon acquisition generated the $11.0 million bargain-purchase gain.
- SG&A rose 24.3% to $229.1 million, including $12.6 million of legal expenses responding to the DOJ subpoena, $6.6 million in acquisition and integration costs, and higher staffing, amortization and international expansion costs. R&D increased 13.7% to $51.4 million.
- Acquired in-process R&D expense was $12.1 million, primarily associated with IntelliMedical. Merit also recorded an $0.8 million impairment of Distal Access-related intangible assets after slower-than-anticipated sales growth.
- Operating cash flow was partly absorbed by acquisition spending: cash paid for acquisitions, net of cash acquired, was $105.6 million; investing cash outflow totaled $146.8 million.
- The 2017 quarterly results included a $3.6 million net loss in the third quarter, despite full-year profitability. The filing does not provide a clear standalone explanation in the quarterly table; full-year results included significant acquisition, legal and tax-related items.
Outlook, risks and contingencies
- Management expects growth from new products, international expansion and greater physician awareness, and sees potential margin improvement from product mix, operational efficiencies and modified-direct sales models. It provided no quantified revenue or earnings guidance.
- Management expects continued sales-force and international investment; these initiatives may raise costs before improving channel control or margins. Acquisitions may be margin-dilutive, and acquired-business synergies may not materialize.
- The DOJ investigation into marketing and promotional practices remained ongoing; Merit expected to continue responding during 2018 and could not predict its scope, duration or outcome. The company reported substantial related costs and potential exposure to fines, penalties or other consequences.
- The Tax Cuts and Jobs Act produced a provisional $10.6 million transition-tax expense and an $8.4 million benefit from remeasuring U.S. deferred taxes. The company said its calculations remained subject to refinement.
- Other key risks include medical-device regulation and product liability, reimbursement and pricing pressure, integration and execution of acquisitions, supplier and inventory disruptions, currency and interest-rate movements, cybersecurity and data protection, and compliance with healthcare and anti-corruption laws.
- On February 14, 2018, after year-end, Merit completed a $100.1 million BD product-line acquisition, financed with credit-facility borrowings. Management anticipated continued international expansion and budgeted $50–$55 million of 2018 capital expenditures.
Important facts for investors to verify
- Progress and potential financial or legal consequences of the DOJ investigation, including future legal costs.
- Whether sales growth converts into higher operating income and margins, given rising SG&A and declining cardiovascular operating income.
- Acquisition integration, realized sales and margins, contingent consideration, and the debt used to fund the February 2018 BD acquisition.
- Inventory growth and turnover, operating cash generation, and compliance with tightening leverage covenants.
- Final accounting effects of the Tax Cuts and Jobs Act and the performance of new products and international sales channels.