Merit Medical Systems, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited interim results. Merit designs, manufactures and markets single-use medical products for interventional and diagnostic procedures. Its operating segments are cardiovascular (including BioSphere embolotherapy products) and endoscopy. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $91.2 | $74.9 | $177.9 | $142.4 |
| Gross profit | $42.5 | $32.5 | $82.3 | $60.9 |
| Gross margin | 46.6% | 43.3% | 46.2% | 42.8% |
| Operating income | $10.8 | $8.8 | $21.1 | $15.1 |
| Net income | $6.9 | $5.7 | $13.5 | $10.2 |
| Diluted EPS | $0.18 | $0.16 | $0.37 | $0.28 |
- Sales increased 22% in Q2 and 25% in the first half. Management attributed growth to base-business sales, BioSphere products, and increased sales of cardiovascular products; BioSphere contributed $7.0 million of Q2 sales and $14.6 million for the six months.
- Gross-margin improvement was attributed primarily to higher-margin BioSphere products and higher prices and unit sales in China. SG&A rose to 28.7% of Q2 sales from 26.6%; R&D rose to 6.0% from 5.0%, reflecting commercial expansion, BioSphere-related costs and clinical/product development.
- Cardiovascular generated operating income of $11.8 million in Q2 and $23.0 million for the six months. Endoscopy remained loss-making, with operating losses of $0.9 million and $1.9 million, respectively, although losses narrowed year over year.
Cash, liquidity and debt
- Six-month operating cash flow was $13.6 million, versus $14.9 million in 2010. Investing cash outflow was $24.5 million, including $21.6 million for property and equipment and $1.4 million for patents and trademarks. Operating cash flow less these capital expenditures was approximately negative $9.4 million.
- Cash and equivalents were $63.0 million at June 30, 2011, versus $3.7 million at year-end 2010. The increase was principally supported by a June equity offering: 5.52 million shares generated approximately $87.8 million net of underwriting discounts and commissions.
- Working capital was $138.6 million and the current ratio was 4.5:1 at June 30. Long-term debt was $55.0 million, down from $81.5 million at year-end; approximately $70 million remained available under the credit facility, subject to its leverage terms. The company reported compliance with all financial covenants.
- On July 12, 2011, after quarter-end, Merit repaid the remaining $55.0 million credit-agreement balance using equity-offering proceeds and terminated its interest-rate swap, receiving a final settlement gain of approximately $28,000.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management said it expects cash balances, operating cash flows and available financing to fund current and currently planned operations for the next 12 months and foreseeable future.
- Merit plans three production facilities in Utah, Ireland and Texas, plus a Utah parking terrace, over the next two years, at anticipated total cost of approximately $66 million; $17.2 million had been incurred by June 30. Management also described plans to expand product offerings and direct sales in strategic foreign markets.
- The company had $55 million of borrowings fixed at 2.73% through a cash-flow hedge at quarter-end; the swap was terminated after quarter-end. Foreign-exchange exposure includes the euro and pound sterling; forward contracts were used to partially offset exposures and their reported income-statement effect was not material.
- Risks highlighted include product liability and recalls; regulatory and reimbursement changes; competition and product acceptance; acquisition integration and commercialization; supplier, labor and material availability; foreign-exchange movements; inventory obsolescence; and dependence on key products and procedures. Management said routine legal matters were not expected to materially affect financial position, liquidity or results.
- Unusual and material items include the equity issuance, post-quarter debt repayment, BioSphere-related amortization and acquisition expenses, and contingent acquisition payments: $3.5 million tied to a medical-device intellectual-property purchase and $0.5 million tied to Vysera milestones.
Important facts for investors to verify
- Whether continued sales growth and gross-margin gains persist as acquisition contributions, pricing and China sales develop.
- Whether planned facility spending and other capital needs are consistent with cash generation after the debt payoff.
- The status and potential cost of acquisition milestone payments, BioSphere integration and related product development.
- Whether endoscopy can reduce operating losses and whether rising SG&A and R&D spending produces expected growth.
- Management reported disclosure controls were effective at a reasonable-assurance level; it was still integrating BioSphere’s policies, processes and systems.