Merit Medical Systems, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Merit designs and sells disposable medical devices for interventional, diagnostic and therapeutic procedures, reporting through cardiovascular and endoscopy segments.
Financial performance
Amounts are in U.S. dollars; financial-statement amounts below are in millions except per-share data.
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Net sales | $882.8 | $727.9 | Up 21.3% |
| Gross profit / margin | $394.8 / 44.7% | $326.3 / 44.8% | Margin down 0.1 percentage point |
| Operating income / margin | $58.6 / 6.6% | $33.1 / 4.5% | Up $25.5 |
| Net income | $42.0 | $27.5 | Up 52.7% |
| Diluted EPS | $0.78 | $0.55 | Up 41.8% |
| Cash from operations | $86.5 | $62.7 | Up $23.8 |
| Cash and cash equivalents, year-end | $67.4 | $32.3 | Includes $57.3 held by foreign subsidiaries |
| Working capital / current ratio | $254.5 / 2.45 | $200.5 / 2.73 | Working capital increased; current ratio declined |
| Total debt, including current portion | $395.2 | $278.5 | Year-end balance-sheet carrying amount |
| Capital expenditures for property and equipment | $63.3 | $38.6 | Higher investment in expanding operations |
Fourth quarter: Sales were $233.2 million versus $190.9 million in Q4 2017. Operating income was $13.7 million versus $13.2 million; net income was $9.2 million versus $6.8 million; diluted EPS was $0.16 versus $0.13.
Sales mix: Cardiovascular sales were $849.5 million, up 21.2%; endoscopy sales were $33.3 million, up 22.2%. International sales were $386.3 million, or 44% of total sales, up 26%; China sales were $92.7 million. The top ten products generated about 33% of sales, while inflation devices contributed about 10.8%.
Material changes and notable items
- Growth reflected acquisitions and increased sales of stand-alone devices, catheters, inflation devices and endoscopy products; management also cited new products and market-share gains. The filing does not quantify total organic growth separately.
- 2018 acquisitions included BD divested product lines, Cianna Medical and Vascular Insights, alongside smaller transactions and distribution arrangements. Net cash paid for acquisitions was $301.8 million. Cianna and Vascular Insights also involved potential milestone payments.
- Merit issued 4.025 million shares in a public offering, receiving approximately $205.0 million net, primarily to repay borrowings. Average diluted shares increased to 53.9 million from 50.1 million.
- Gross margin edged down, primarily due to higher acquired-inventory mark-up and amortization and unfavorable Australian manufacturing variances, partly offset by product mix. SG&A rose 20.5%; R&D rose 15.8% to $59.5 million.
- Net income benefited from higher sales, lower DOJ-related legal costs ($5.6 million versus $12.6 million), and a lower effective tax rate (15.2% versus 23.3%). Higher interest expense and the non-recurrence of the $11.0 million 2017 bargain-purchase gain were offsets.
- Investing cash outflow was $378.8 million, principally reflecting acquisitions and $63.3 million of property and equipment spending. Financing cash inflow was $328.3 million, including debt and equity proceeds.
Liquidity, outlook and risks
- At year-end, Merit had $388.5 million outstanding under its main credit agreement and approximately $58.3 million of borrowing availability based on covenant capacity. The agreement is secured by substantially all assets and matures July 6, 2021. Merit reported covenant compliance.
- Of main-facility borrowings, $175 million was fixed through an interest-rate swap at 2.12%; $213.5 million carried a floating rate of 3.52%. Management estimated that a one-percentage-point rate change would affect annual interest expense and pretax income by about $2.1 million, assuming borrowings stayed constant.
- Management said cash, expected operating cash flow and available borrowing capacity should fund current and planned operations for the next 12 months and foreseeable future. It forecast 2019 capital expenditures of approximately $60–$65 million. No specific revenue or earnings guidance is provided in the supplied filing text.
- A DOJ subpoena received in October 2016 concerning marketing and promotional practices remained under investigation; Merit expected its response to continue during 2019 and said the outcome, scope and duration could not be predicted. The company anticipated further related costs and disclosed possible fines, penalties or other consequences.
- Other significant risks include medical-device regulation and product approvals, reimbursement and pricing pressure, acquisition integration, debt covenants and interest rates, foreign exchange, supply and sterilization disruptions, product liability, cybersecurity and data privacy, and Brexit-related disruption. The filing also identifies the EU Medical Device Regulation transition and possible reinstatement of the U.S. medical-device excise tax after its suspension through 2019.
- Merit recorded a $0.7 million intangible-asset impairment charge related to Quellent-acquired assets. Inventory obsolescence expense was $8.2 million, and inventory write-offs were $7.9 million. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. Cianna was excluded from the internal-control assessment while integration continued.
Important facts for investors to verify
- How much of sales growth and operating-income improvement came from acquired businesses versus organic growth, and whether acquired operations meet expected returns.
- The DOJ investigation’s status, eventual resolution, legal costs and any potential financial or operational consequences.
- Debt reduction, covenant headroom, refinancing needs before the July 2021 maturity, and exposure to floating interest rates.
- Acquisition earn-outs and contingent consideration: the year-end liability was $82.2 million, including revenue milestones and other payments.
- Whether inventory growth, lower inventory turns and margin pressures ease as demand and acquired operations are integrated.
- Progress toward the $60–$65 million 2019 capital-spending plan and management’s expected operating cash generation.
- Execution of product approvals, EU MDR compliance, international expansion and Brexit preparations, including the new Reading distribution facility.