Merit Medical Systems, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing. Unless noted, amounts are in U.S. dollars.
Business context
Merit designs, manufactures and markets single-use medical devices used in diagnostic and interventional procedures. It reports two segments: cardiovascular and endoscopy. Cardiovascular accounted for $347.4 million of FY 2011 sales; endoscopy accounted for $12.0 million. International sales were $125.9 million, or 35% of total sales. The company’s largest customer represented about 4% of total sales, while inflation devices represented about 19%.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $359.4 million | $296.8 million |
| Gross profit / margin | $165.5 million / 46.0% | $128.5 million / 43.3% |
| Operating income / margin | $33.2 million / 9.2% | $17.2 million / 5.8% |
| Net income | $23.0 million | $12.5 million |
| Diluted EPS | $0.58 | $0.35 |
| Cash from operations | $34.0 million | $34.8 million |
| Capital expenditures | $59.2 million | $23.6 million |
| Cash and cash equivalents at year-end | $10.1 million | $3.7 million |
| Working capital at year-end | $89.9 million | $72.1 million |
| Long-term debt at year-end | $30.7 million | $81.5 million |
Revenue increased 21.1%; management attributed growth to both base-business expansion and BioSphere embolization products. Gross-margin improvement reflected a greater contribution from higher-margin BioSphere products and stronger China pricing and unit sales. Operating cash flow was slightly lower year over year, while capital spending rose substantially; operating cash flow less property-and-equipment capital expenditures was approximately negative $25.2 million. The company had $94.3 million of additional borrowing availability under its $125 million revolving facility and reported compliance with its financial covenants.
Fourth-quarter 2011 sales were $91.1 million, gross profit $42.1 million, operating income $5.6 million, net income $5.0 million and diluted EPS $0.12.
Changes and notable items
- Cardiovascular sales rose 20.8%; endoscopy sales rose 33%. Endoscopy nevertheless recorded a $4.8 million operating loss, improved from a $13.0 million loss in 2010.
- R&D expense increased 43% to $21.9 million. FY 2011 operating expenses included $5.8 million of acquired in-process R&D charges, including abandoned technology; management cited approximately $4.0 million of after-tax charges from acquired R&D and BioSphere inventory step-up costs.
- Net income included unusual items. Management estimated FY 2011 net income of approximately $27.0 million excluding specified acquired R&D and inventory charges; its comparable adjusted FY 2010 figure was approximately $22.0 million excluding goodwill impairment and BioSphere acquisition-related costs. These are management’s non-GAAP adjustments, not reported GAAP net income.
- The company issued 5.52 million shares in June 2011, receiving $87.7 million net, and used $55 million of proceeds to repay credit-facility borrowings. Stock issuance and option exercises increased shares outstanding.
- Property-and-equipment spending was $59.2 million, including facility construction. Management anticipated approximately $54 million of such spending in 2012, including $34 million for buildings.
- After year-end, Merit acquired substantially all assets of Ostial Solutions on January 31, 2012: $10.0 million paid at closing, $6.5 million due within six months and up to $13.5 million tied to future product sales.
Outlook, risks and contingencies
Management said it expected cash balances, operating cash flow and available financing to fund current and currently planned operations for at least the next 12 months. It planned to spend approximately $3.5 million in 2012 toward a four-year, approximately $10 million clinical trial of QuadraSphere microspheres for primary liver cancer. The filing provides no numerical revenue or earnings guidance.
- FDA warning letter: On February 1, 2012, the FDA challenged modifications to the coating process for the Laureate Hydrophilic Guidewire. Merit said it had responded and ceased U.S.-related shipments; these shipments represented less than 1% of worldwide FY 2011 revenue. Resolution, cost and timing remained uncertain.
- Litigation: A third party alleged patent infringement. The matter was preliminary, damages and outcome could not be estimated, and Merit was self-insured for intellectual-property infringement claims.
- Regulatory and reimbursement exposure: Medical-device clearance, quality requirements, fraud-and-abuse laws and payer coverage could affect product commercialization and demand. The filing noted a 2.3% U.S. medical-device excise tax scheduled to begin in 2013.
- Operating and financial risks: Key risks include product concentration, competitive or technological change, supplier and sterilization interruptions, product liability or recalls, foreign-exchange movements, economic conditions and acquisition integration. About $9.0 million of year-end cash was held by foreign subsidiaries; transfers of cash held in China require government approval.
- Additional commitments: The company had $52.9 million of listed contractual cash obligations, including $30.7 million of debt, interest, leases and royalties; this table excluded certain uncertain-timing tax and deferred-compensation liabilities.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Progress and financial impact of resolving the FDA warning letter, including whether U.S. guidewire shipments can resume.
- Whether cardiovascular growth and improved gross margins continue, and whether the endoscopy segment approaches profitability.
- Execution and returns on elevated facility and equipment spending, clinical-trial investment, and the Ostial Solutions acquisition.
- Cash generation after capital expenditures, debt levels and covenant headroom, including the availability and geographic accessibility of cash.
- Potential outcomes of the patent litigation and the effect of the 2013 medical-device excise tax and reimbursement changes.