Merit Medical Systems, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results. Merit designs, manufactures, and markets single-use medical products for interventional and diagnostic procedures, reporting in cardiovascular and endoscopy segments.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $100.5m | $91.2m | $196.2m | $177.9m |
| Gross profit / margin | $47.0m / 46.8% | $42.5m / 46.6% | $91.2m / 46.5% | $82.3m / 46.2% |
| Operating income / margin | $8.2m / 8.2% | $10.8m / 11.9% | $16.2m / 8.3% | $21.1m / 11.8% |
| Net income | $6.1m | $6.9m | $11.8m | $13.5m |
| Diluted EPS | $0.14 | $0.18 | $0.28 | $0.37 |
Revenue rose 10% in both comparisons. Gross margin improved modestly, attributed mainly to increased direct sales in China, lower Irish manufacturing costs from currency movements, and product mix. Profitability declined as selling, marketing, and R&D costs increased; acquired in-process R&D charges were $2.0m in Q2 and $2.2m year to date. A $648,000 gain on sale of marketable securities and lower interest expense lifted other income year over year.
Segments and operating trends
- Cardiovascular: Revenue was $96.6m in Q2, up 10%; six-month revenue was $188.2m, up 10%. Segment operating income fell to $8.5m in Q2 from $11.8m, and to $16.8m for the half from $23.0m.
- Endoscopy: Revenue increased 20% in Q2 to $4.0m and 32% for the half to $7.9m. Six-month operating loss narrowed to $607,000 from $1.9m, helped by higher sales and gross margins, including the EndoMAXX esophageal stent launch.
- International sales represented 37% of first-half sales versus 34% a year earlier; management cited slower U.S. sales growth and continued investment in international markets.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $21.6m, compared with $15.5m. Investing cash use was $48.2m, including $34.7m for property and equipment and $14.8m of acquisition payments. Financing provided $26.5m. Cash declined $0.2m to $9.9m.
- At June 30, cash was $9.9m; working capital was $88.5m and the current ratio was 2.7:1. Long-term debt was $56.6m, up from $30.7m at year-end. The $125m revolving facility had approximately $68.4m of availability under its leverage-based limit; the company reported compliance with all financial covenants.
- Management expected approximately $58m of 2012 property-and-equipment spending, including about $34m for construction. It stated existing cash, operating cash flow, equity sales, and committed financing should fund current and planned operations for the next 12 months and foreseeable future.
- Approximately $9.2m of cash was held by foreign subsidiaries, including $8.1m in China, where transfers abroad are subject to local approval requirements.
Acquisitions, outlook, and risks
- Merit acquired substantially all Ostial Solutions assets for a preliminary total purchase price of $21.5m, including $6.5m payable within six months and contingent payments of up to $13.5m based on future product sales. The contingent consideration liability was $6.7m at June 30.
- Merit paid $2.5m for exclusive worldwide distribution rights to Scion’s Clo-Sur PLUS P.A.D. Management also cited new FDA-cleared products and planned further international investment. It expects a new contract stent manufacturer by year-end; if successful, this could improve endoscopy gross profit and support future profitability. No earnings or revenue guidance was provided.
- The FDA issued a warning letter concerning a change to the Merit Laureate hydrophilic guidewire coating process. Merit halted U.S. shipments, submitted a 510(k) application and responded to FDA comments; approval and timing are uncertain. The affected shipments were less than 1% of 2011 worldwide revenue.
- A third party alleged patent infringement by certain products. Merit intends to defend itself, but the outcome and potential damages cannot be assessed; an adverse result could restrict sales or reduce margins. Management said ordinary-course litigation was not expected to have a material effect, apart from these identified uncertainties.
- Other disclosed exposures include foreign-exchange movements, interest-rate changes, medical-device regulation, product liability, acquisition integration, and the ability to fund debt service and significant capital expenditures.
- The filing corrected previously reported first-half 2011 cash-flow line items: operating cash flow was restated from $13.6m to $15.5m and investing cash use from $24.5m to $26.4m. The company said cash balances and income statements were unchanged and the correction was not material.
Important facts for investors to verify
- Progress and outcome of the FDA review, and whether U.S. guidewire shipments can resume.
- Patent litigation developments, potential exposure, and any effects on product sales or margins.
- Whether revenue growth and international expansion can offset rising selling and R&D expenses and restore operating-margin growth.
- Execution of the $58m annual capital-spending plan, construction costs, cash generation, and continued covenant compliance.
- Ostial-related contingent payments and valuation changes, and the commercial contribution from acquired and newly launched products.