Merit Medical Systems, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited. Merit designs, manufactures and sells medical products for interventional and diagnostic procedures through its cardiovascular and endoscopy segments.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $267.0m | $244.0m | $796.3m | $705.9m |
| Gross profit | $120.5m | $102.0m | $356.5m | $290.0m |
| Gross margin | 45.1% | 41.8% | 44.8% | 41.1% |
| Operating income (loss) | $15.9m | $0.1m | $39.0m | $(17.6)m |
| Net income (loss) | $12.0m | $(3.0)m | $27.8m | $(25.2)m |
| Diluted EPS | $0.21 | $(0.05) | $0.49 | $(0.46) |
- Sales grew 9.4% in Q3 and 12.8% year to date. Cardiovascular sales rose 9.9% and 13.0%, respectively; endoscopy sales declined 3.2% in Q3 but increased 7.0% year to date.
- Q3 growth was led by peripheral intervention, cardiac intervention and OEM. Custom procedural solutions declined 12.4%, including lower Cultura nasopharyngeal swab and test kit sales. International sales rose 14.5% in Q3, versus 5.9% U.S. growth. Foreign exchange contributed approximately $1.4m to Q3 sales and $11.4m to nine-month sales, net of hedging.
- Gross margin improved primarily on product mix, lower amortization, operational efficiencies and production volume; higher freight costs were a partial offset. SG&A and R&D increased, reflecting higher compensation, transformation costs and clinical and regulatory spending.
- Cash flow: Nine-month operating cash flow was $101.4m, down from $128.4m. Investing used $22.6m, including $19.6m of property and equipment spending; financing used $66.0m, principally reflecting debt repayment and contingent acquisition payments. Cash increased to $68.9m from $56.9m at year-end 2020.
- Liquidity and debt: Current assets exceeded current liabilities by $250.0m. Debt principal was $279.0m ($278.7m net of issuance costs); cash less principal debt implies approximately $210m net debt. The company reported approximately $456m of additional borrowing capacity and compliance with credit covenants. Debt matures under the facility in 2024, with $257.4m of principal payments scheduled that year.
Changes, outlook and notable items
- Results improved markedly against 2020, which included substantial impairment charges and an $18.2m DOJ-related legal settlement. The 2021 nine-month period included $4.3m of impairment charges, versus $28.3m in 2020. Q3 2021 had no impairment charge, compared with $20.6m in Q3 2020.
- 2021 impairment charges included write-downs related to the planned discontinuance of the Advocate peripheral angioplasty balloon product line and certain operating-lease assets. Merit also recorded approximately $6m in contract termination costs to renegotiate an acquisition agreement and end potential future payment obligations.
- Management cited uneven recovery in sales across regions, ongoing COVID-19 effects, inflation in raw materials and shipping/freight, and efforts to offset cost pressure through manufacturing efficiency and scrap reduction. The WRAPSODY AV Access pivotal study continued; management also noted publication of first-in-human study results.
- Merit expects 2021 spending of approximately $30m–$40m on buildings, property and equipment. It believes cash, operating cash flow and available credit will fund operations for at least the next 12 months. No clear full-year revenue or earnings guidance is provided in the filing text.
- Risks include ongoing COVID-19 uncertainty, foreign-exchange and interest-rate exposure, and litigation. The securities class action and a shareholder derivative action allege misconduct related to 2019; Merit intends to defend them, has not accrued losses, and says potential losses cannot presently be estimated. The derivative action was stayed until February 2022, subject to extension or lifting. Contingent consideration liabilities totaled $48.5m.
Important facts for investors to verify
- Whether revenue growth and margin gains persist as pandemic-related demand changes and product mix shifts; monitor the decline in custom procedural solutions and Q3 endoscopy sales.
- Whether higher SG&A, restructuring, freight and other inflationary costs remain elevated, and whether efficiency initiatives offset them.
- Cash conversion: operating cash flow declined despite improved reported earnings, with receivables and inventory absorbing cash.
- Debt repayment capacity, covenant headroom, variable-rate exposure and the large 2024 principal maturity.
- Developments in the securities and derivative litigation, contingent consideration estimates, and the Advocate product discontinuance.