Merit Medical Systems, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. Merit designs, manufactures and markets single-use medical devices. Its segments are cardiovascular and endoscopy.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $90.5 million | $73.2 million | $268.4 million | $215.6 million |
| Gross profit / margin | $41.1 million / 45.4% | $31.2 million / 42.7% | $123.3 million / 46.0% | $92.1 million / 42.7% |
| Operating income (loss) | $6.5 million | ($3.4 million) | $27.6 million | $11.7 million |
| Net income (loss) | $4.6 million | ($2.0 million) | $18.1 million | $8.3 million |
| Diluted EPS | $0.11 | ($0.06) | $0.47 | $0.23 |
Sales rose 24% in both comparisons. Management attributed higher gross margins mainly to BioSphere’s higher-margin products and improved pricing and unit sales through its China distribution system. Q3 operating margin was 7.2% versus a 4.7% loss; nine-month margin was 10.3% versus 5.4%. Net margins were 5.0% and 6.7%, respectively, compared with a 2.7% loss and 3.8% in 2010.
Cardiovascular sales were $87.5 million in Q3 and $259.4 million year to date, up 23% and 24%. Endoscopy sales were $3.0 million and $9.0 million, up 39% and 28%. BioSphere embolization-device sales contributed $8.0 million in Q3 and $22.6 million year to date. Endoscopy remained loss-making, with operating losses of $0.9 million for Q3 and $2.8 million year to date.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $28.7 million, versus $20.6 million in 2010. Investing used $47.1 million, including $37.1 million of property and equipment spending and $8.3 million of acquisition payments. Financing provided $20.9 million; cash increased $2.1 million to $5.8 million.
- Capital expenditures for property and equipment were substantially higher than the prior-year $15.6 million. Construction in progress was $41.5 million at September 30.
- Working capital was $75.7 million; the current ratio was 2.6:1. Current assets were $124.0 million and current liabilities $48.3 million.
- Long-term debt was $5.6 million, down from $81.5 million at December 31, 2010. The company had a $125 million revolving credit facility, with approximately $119.4 million available under its leverage-based borrowing limit; the reported variable rate was 1.62%. Merit said it was in compliance with covenants.
- Total assets were $418.8 million and stockholders’ equity $350.7 million at quarter-end, compared with $369.5 million and $235.6 million at year-end 2010.
Material changes and unusual items
- Merit completed a 5.52 million-share public offering in June, receiving $87.7 million net. Proceeds were used in part to repay debt; the offering and option exercises also increased shares outstanding.
- Q3 included a $3.4 million acquired in-process research and development charge, primarily for vena cava filter and flexible sheath technology, plus a coating-technology write-off. Research and development expense increased as a share of sales, reflecting clinical-trial, regulatory and product-development costs.
- In 2010, results included an $8.3 million endoscopy goodwill impairment and other non-recurring BioSphere transaction and severance costs. These items make reported year-over-year earnings comparisons less directly comparable.
- Merit acquired Ash Access dialysis-catheter intellectual property for an initial $5.0 million, with further milestone and royalty obligations. It also made technology acquisitions and license payments during 2011.
- The company corrected a prior-quarter accounting error involving the vena cava filter asset and related liability. Management said the error and correction were not material to the affected periods or Q3.
Outlook, risks and contingencies
No numerical earnings or revenue guidance is provided. Management said growth continued in most regions and product groups, planned to expand in international markets, and stated that cash, expected operating cash flow and available financing should fund current and planned operations for the next 12 months and foreseeable future. International sales were 35% of nine-month revenue, versus 31% a year earlier.
Merit planned approximately $72 million of construction over two years for facilities in Utah, Ireland and Texas, and a Utah parking structure; approximately $24.9 million had been incurred by September 30. Further major acquisitions or transactions could require additional financing.
Principal disclosed risks include product recalls and liability, regulatory approval and healthcare-policy changes, competition and product acceptance, supplier and input-cost pressures, inventory obsolescence, foreign-exchange exposure, acquisition integration and commercialization, and the ability to meet debt, capital-spending and operating needs. Foreign-currency-denominated sales were approximately 14.6% of Q3 revenue; currency movements reduced gross profit by about 0.43% of sales, according to management. Routine legal matters were not expected to materially affect results or liquidity.
Important facts for investors to verify
- How much reported growth and margin improvement is sustainable from base-business demand versus BioSphere contribution and product mix.
- Whether endoscopy can reach operating profitability, and whether the acquired technologies achieve development, regulatory and commercialization milestones.
- Execution, timing and funding of the planned $72 million construction program, alongside elevated capital expenditures and inventory growth.
- Compliance with credit-facility covenants and the availability of borrowing capacity if cash needs rise.
- The impact of higher R&D and selling costs, foreign-exchange movements, and dilution following the equity offering and option exercises.