Merit Medical Systems, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; interim financial statements are unaudited. Merit designs, manufactures, and markets single-use medical products for interventional and diagnostic procedures, reporting cardiovascular and endoscopy segments.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $95.6 million | $86.6 million |
| Gross profit / gross margin | $44.2 million / 46.2% | $39.8 million / 45.9% |
| Operating income / margin | $8.0 million / 8.4% | $10.2 million / 11.8% |
| Net income | $5.7 million | $6.6 million |
| Diluted earnings per share | $0.14 | $0.18 |
| Operating cash flow | $7.5 million | $6.8 million |
| Capital expenditures for property and equipment | $17.7 million | $10.7 million |
Sales rose 10.4%, while net income declined about 13%. Gross margin improved modestly, but higher selling, general and administrative expense (30.9% of sales versus 28.4%) and research and development expense (6.7% versus 5.8%) weighed on operating profit. The effective tax rate fell to 27.4% from 32.2%, primarily reflecting higher profits in Ireland.
Cardiovascular revenue increased 9% to $91.7 million; segment operating income declined to $8.3 million from $11.2 million. Endoscopy revenue rose 46% to $3.9 million, and its operating loss narrowed to $0.3 million from $1.0 million. Management attributed growth to selected cardiovascular products and endoscopy products, including the new EndoMAXX stent.
Cash, debt, and liquidity
- Cash and cash equivalents were $9.7 million at March 31, 2012, versus $10.1 million at year-end; $9.3 million was held by foreign subsidiaries, including $7.8 million in China, where transfers abroad are subject to government approval.
- Working capital was $86.3 million, down from $89.9 million; the reported current ratio was 2.6 to 1.
- Long-term debt was $52.5 million, up from $30.7 million at year-end. Under the $125 million revolving credit facility, approximately $72.5 million remained available based on covenant capacity. Merit reported compliance with financial covenants.
- Net cash used in investing activities was $29.9 million, including $17.7 million of property and equipment spending and $11.8 million of cash paid in acquisitions. Financing activities provided $21.9 million, including net borrowing activity.
Material developments, outlook, and risks
- Acquisitions and product investment: Merit acquired Ostial Solutions’ assets, including the Ostial Pro stent positioning system, for stated total purchase consideration of $21.5 million, including contingent consideration. Up to an additional $13.5 million may be payable based on future product sales. Merit also acquired worldwide distribution rights to Clo-Sur PLUS P.A.D. for $2.5 million, with a $1.0 million milestone payment recorded in other payables.
- Capital spending outlook: Management anticipated approximately $54 million of 2012 property and equipment spending, including approximately $34 million for building construction. Three production facilities were under construction; total anticipated project costs were approximately $78 million, of which $51.7 million had been incurred by quarter-end. Management said existing cash, operating cash flow, equity sales, and committed financing were expected to fund operations for the next 12 months and foreseeable future.
- Endoscopy outlook: Management expected a planned new contract stent manufacturer by year-end 2012, if implemented successfully, to improve gross profit and support progress toward segment profitability. Management also planned further international investment and anticipated additional product launches in 2012; no quantified revenue or earnings guidance was provided.
- FDA warning letter: Merit Ireland received a February 1, 2012 FDA warning letter concerning a modification to the Merit Laureate hydrophilic guidewire coating process and related premarket notification requirements. Merit stopped U.S.-related shipments of the product, submitted a 510(k) application, and was responding to FDA comments. The product represented less than 1% of worldwide revenue in 2011; the timing, cost, and outcome of resolution were uncertain.
- Intellectual property litigation: A third party alleged that certain Merit products infringe its patents. Merit said it intended to defend its position, but reported that the case was preliminary and that potential damages and outcome could not be assessed. An adverse outcome could restrict sales or reduce margins.
- Other exposures: Merit cited foreign-exchange and interest-rate risks, product and regulatory risks, acquisition integration and commercialization risks, and dependence on successful product development and market acceptance. A one-percentage-point change in average borrowing rates was estimated to change annual interest expense and pretax income by approximately $525,000, assuming borrowings remained constant.
- Cash-flow correction: Merit corrected certain Q1 2011 cash-flow statement line items: operating cash flow increased from previously reported $4.6 million to $6.8 million, while net investing cash use increased from $9.4 million to $11.6 million. The filing said cash balances and balance-sheet and income-statement amounts were unchanged and characterized the correction as not material.
Most important facts for investors to verify
- Progress, timing, and potential financial impact of FDA resolution for the Laureate guidewire, including any sales or compliance restrictions.
- Status and possible exposure from the patent infringement litigation.
- Acquisition-related milestone and contingent payments, and whether acquired products generate expected sales and returns.
- Execution and funding of the construction and capital spending program, alongside debt levels, covenant headroom, and cash availability across jurisdictions.
- Whether revenue growth can translate into improved operating income as sales, marketing, and R&D spending increase, and whether endoscopy approaches profitability.