Merit Medical Systems, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. Merit designs, manufactures and sells medical products for interventional and diagnostic procedures. Its reporting segments are cardiovascular and endoscopy.
Financial performance
Amounts below are in millions of dollars except per-share data. Year-over-year comparisons are with the corresponding 2021 period.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $287.2 | $267.0 | $857.6 | $796.3 |
| Gross profit | $128.6 | $120.5 | $384.5 | $356.5 |
| Gross margin | 44.8% | 45.1% | 44.8% | 44.8% |
| Operating income | $18.7 | $15.9 | $57.1 | $39.0 |
| Net income | $15.3 | $12.0 | $41.1 | $27.8 |
| Diluted EPS | $0.27 | $0.21 | $0.71 | $0.49 |
- Sales rose 7.5% in Q3 and 7.7% year to date. Foreign exchange, net of hedging, reduced sales by $8.0 million and $15.8 million, respectively.
- Q3 operating margin increased to 6.5% from 6.0%; nine-month operating margin increased to 6.7% from 4.9%. Q3 gross margin edged down, principally due to material inflation and freight costs; efficiencies and product mix partly offset those pressures.
- Cardiovascular sales increased 7.4% in Q3 and 7.7% year to date. OEM and peripheral intervention grew; custom procedural solutions declined. Endoscopy sales grew 12.4% in Q3 and 7.5% year to date.
- Nine-month operating cash flow was $86.3 million, down from $101.4 million. Property and equipment capital expenditures were $32.5 million. Inventory increased to $246.7 million from $221.9 million at year-end 2021, using $30.7 million of operating cash.
- At September 30, cash, cash equivalents and restricted cash totaled $53.6 million. Working capital was $286.8 million. Debt borrowings were approximately $216.9 million, versus $243.1 million at December 31, 2021; available borrowing capacity was approximately $509 million. The company reported compliance with credit-agreement covenants.
Material changes and notable items
- Cardiovascular operating income improved, while endoscopy operating income declined slightly. Nine-month results included $6.7 million of acquired in-process R&D expense related primarily to the Restore Endosystems asset purchase.
- Merit divested the STD Pharmaceutical business in April 2022, recording $1.7 million of intangible-asset impairment and a separate $1.3 million loss associated primarily with the divestiture.
- Contingent consideration expense was $4.7 million for the first nine months, compared with $3.3 million in 2021. The contingent consideration liability declined to $18.3 million from $48.2 million at year-end, with substantial milestone payments during the period.
- Q3 foreign-currency translation losses contributed to other comprehensive loss; accumulated other comprehensive loss was $16.7 million at quarter-end.
Outlook, risks and contingencies
- Merit forecast 2022 property-and-equipment capital expenditures of approximately $55–$60 million. It gave no specific revenue or earnings guidance in this filing.
- Management said cash, expected operating cash flow and credit-facility availability should fund current and planned operations for the next 12 months and the foreseeable future. It noted significant future acquisitions could require additional financing.
- Management cited stronger-than-expected U.S. demand and more favorable international sales trends in Q3. Its Foundations for Growth program helped offset inflation in materials, shipping and freight. Four products were launched during the quarter.
- Risks include inflation and supply-chain disruption, supplier concentration for certain sterilization and materials, foreign-exchange movements, and geopolitical and trade uncertainty. The company said Russia operations had been substantially suspended.
- The SEC requested voluntary information concerning the China subsidiary’s business activities, including interactions with hospitals and healthcare officials. Merit said it was cooperating and investigating; it could not predict the matter’s scope, timing, significance or outcome. The filing cautions that it could adversely affect the company.
- A shareholder derivative action had a tentative $1.0 million settlement reflected in nine-month results; preliminary court approval was granted, with a settlement hearing scheduled for February 16, 2023. The filing also describes other proceedings and potential exposure but does not provide a clear aggregate maximum loss.
- After quarter-end, Merit acquired substantially all assets of BioTrace Medical for $2.5 million cash, with potential annual royalties of up to 10% of net sales after the first U.S. device sale.
Important facts for investors to verify
- Updates on the SEC inquiry and any related legal, regulatory or disclosure developments.
- Whether revenue growth and gross margins can hold up against currency headwinds, inflation and freight costs.
- Inventory levels, operating cash conversion and progress toward the stated 2022 capital-spending range.
- Debt levels, variable-rate exposure and continued compliance with credit-facility covenants.
- Final approval and cost of the derivative-action settlement, and any material changes in contingent consideration or acquisition obligations.