Merit Medical Systems, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Financial statements are unaudited. Merit designs and sells medical products for interventional and diagnostic procedures through its cardiovascular and endoscopy segments. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
Financial performance and liquidity
- Revenue: $248.9 million, up 2.2% from $243.5 million. Foreign exchange, net of hedging, contributed approximately $3.8 million to the year-over-year increase.
- Gross profit and margins: Gross profit was $111.9 million; gross margin improved to 45.0% from 42.6%. Management attributed the improvement primarily to product mix, lower inventory obsolescence expense, and lower amortization.
- Operating results: Operating income was $14.2 million, compared with $1.4 million; operating margin was 5.7%, versus 0.6%. Net income was $11.0 million, or $0.19 diluted EPS, compared with a net loss of $3.2 million, or $0.06 loss per share.
- Cash flow: Operating cash flow was $35.2 million, up from $28.9 million. Investing activities used $6.3 million, including $6.2 million of property and equipment spending. Financing activities used $26.2 million, including a $30.9 million reduction in net borrowings. Cash increased $1.6 million to $58.5 million.
- Liquidity: Current assets were $438.5 million and current liabilities $207.7 million, representing working capital of $230.8 million. The company reported approximately $418 million of additional available borrowing capacity. Management believes cash, operating cash flows, and credit availability are sufficient for planned operations for the next 12 months and foreseeable future.
- Debt: Long-term debt, including the current portion and net of issuance costs, was $320.4 million at quarter-end, down from $351.2 million at year-end. The company reported approximately $320.8 million outstanding under its credit agreement and stated that it was in compliance with covenants. Rates were 2.12% fixed on $175 million under a swap and 1.11% floating on $145.8 million.
Changes versus the prior-year quarter
- Cardiovascular revenue increased 2.3% to $241.0 million; endoscopy revenue decreased 0.9% to $7.9 million.
- Within cardiovascular, peripheral intervention rose 6.7% and cardiac intervention rose 3.0%; custom procedural solutions fell 4.6% and OEM fell 1.1%.
- International revenue increased 4.9% to $107.5 million, including APAC growth of 20.5%; EMEA revenue declined 5.4%. U.S. sales were broadly mixed, with growth in certain intervention products offset by declines in custom procedural solutions and OEM.
- SG&A rose 2.8% to $81.0 million, while R&D rose 9.4% to $16.3 million. The prior-year quarter included $3.8 million of impairment charges and $4.9 million of contingent consideration expense; Q1 2021 included no impairment charge and $0.4 million of contingent consideration expense.
- Interest expense declined, reflecting lower average debt and interest rates. The prior-year quarter also included a $3.5 million write-off of an option to acquire Bluegrass Vascular and a $0.4 million property impairment related to NinePoint.
Outlook, management commentary, and risks
- Merit did not provide specific revenue or earnings guidance in the supplied filing text. It anticipates spending approximately $45–$50 million on buildings, property, and equipment in 2021.
- Management described uneven U.S. demand and continuing COVID-19 effects internationally. It noted strong demand for breast cancer radar localization products as elective procedures recovered and for Medallion syringes amid vaccination programs. EMEA remained affected by the pandemic; management expected China unit-volume growth in the second half of 2021 but warned of pricing pressure from tender processes.
- The first patients were enrolled in the WAVE pivotal study of the investigational WRAPSODY endovascular stent graft. The filing does not provide a commercial launch date or quantify potential financial contribution.
- The company’s Foundations for Growth program involved new executive roles and contributed to higher consulting and other costs. R&D spending also increased for projects including WAVE and preparation for EU Medical Device Regulation requirements.
- Risks include the continuing and unpredictable COVID-19 pandemic, foreign-exchange exposure, variable-rate debt and the approaching July 2021 change in interest-rate swap coverage. A securities class action alleging federal securities-law violations remains pending; the court denied the company’s motion to dismiss. Merit stated that a loss was not then probable or reasonably estimable and that it could not estimate a range of loss.
- Merit had a $55.8 million contingent consideration liability, measured using significant unobservable assumptions. It also had a commitment to provide Selio Medical with up to an additional €2 million in loans, subject to stated conditions, and reported a $250,000 current Selio note balance.
Important facts for investors to verify
- Whether revenue growth and improved gross margin persist, especially given product-category declines and potential China pricing pressure.
- Progress and outcomes of the WAVE study, and whether any future product approval or commercialization expectations are disclosed.
- 2021 capital spending versus the $45–$50 million estimate and the effect on cash generation and debt repayment.
- Debt balances, credit availability, covenant compliance, and borrowing costs following the July 2021 interest-rate swap transition.
- Developments in the securities litigation, contingent consideration estimates, and any additional Selio funding obligations.