Merit Medical Systems, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited consolidated results. Merit designs, manufactures and markets single-use medical products for interventional and diagnostic procedures. It reports cardiovascular and endoscopy segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $238.3 | $203.0 | +17.4% |
| Gross profit / margin | $104.6 / 43.9% | $88.1 / 43.4% | Margin +0.5 percentage points |
| Operating income / margin | $9.5 / 4.0% | $8.8 / 4.3% | Income +8.5%; margin lower |
| Net income | $6.2 | $5.3 | +17.6% |
| Diluted EPS | $0.11 | $0.10 | +10% |
| Operating cash flow | $13.5 | $7.9 | +$5.6 |
SG&A was $78.3 million, or 32.8% of sales, versus $64.9 million, or 32.0%. R&D was $16.0 million, or 6.7% of sales, versus $14.3 million, or 7.1%. The effective tax rate declined to 9.5% from 17.1%, primarily due to a larger discrete tax benefit from share-based awards.
Cash used in investing was $21.0 million, including $18.3 million of property and equipment expenditures and $0.9 million of intangible asset purchases. Cash used in financing was $9.8 million. Cash and equivalents fell $17.8 million during the quarter to $49.5 million. Operating cash flow less property and equipment expenditures was approximately negative $4.8 million.
Liquidity, debt and balance sheet
- At March 31, cash was $49.5 million, current assets $421.8 million and current liabilities $178.5 million. Working capital was $243.3 million and the current ratio was 2.36, compared with 2.45 at year-end 2018.
- Total debt, including the $7.0 million collateralized facility and net of issuance costs, was $384.2 million; $22.0 million was current and $362.2 million long-term. Borrowings under the main credit agreement were approximately $377.5 million, with approximately $65.5 million of additional borrowing capacity subject to the leverage ratio.
- Main credit-facility borrowings mature July 2021. The company reported covenant compliance. $175 million was fixed at 2.62% through an interest-rate swap; $202.5 million bore a floating rate of 4.00%. The separate $7.0 million HSBC loan matured and was settled April 10, 2019.
- Cash held by foreign subsidiaries was $41.0 million, including $20.6 million in China, where transfers abroad require government approval.
- Adoption of lease accounting in January 2019 added $80.5 million of operating-lease right-of-use assets and $84.1 million of lease liabilities to the balance sheet; management said adoption did not significantly affect operating results or cash flows.
Changes and business drivers
- Cardiovascular sales grew 17.7% to $230.5 million; endoscopy sales grew 9.6% to $7.9 million. International sales were $100.3 million, 42.1% of revenue, up 7.9%.
- Catheter sales increased 27.1% to $43.0 million; stand-alone devices grew 14.6% to $95.4 million. Cianna Medical contributed $12.8 million in sales, and BD-acquired products contributed $11.6 million. Embolization devices declined 6.0%; custom kits and inflation devices also decreased.
- Gross margin improved on product mix, partly offset by higher acquisition-related amortization and unfavorable currency effects. SG&A growth reflected increased headcount and acquisition amortization. Cardiovascular operating income rose to $7.6 million; endoscopy operating income fell to $1.9 million.
- Sales growth reflects both acquired products and underlying product performance; the filing does not quantify organic growth separately.
Outlook, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided. Management expected new products planned for the remainder of 2019 to contribute to sales growth and margin improvement, and said the BD manufacturing transition to Tijuana was on schedule for completion by year-end. Cianna integration was proceeding as expected; European regulatory approval for SAVI SCOUT was anticipated in the coming months.
- Management believed existing cash, operating cash flow and credit availability would fund planned operations for the next 12 months and foreseeable future. Significant future transactions or acquisitions could require additional financing.
- The company recorded $0.8 million of contingent-consideration expense. The fair-value liability for contingent consideration was $82.5 million, with $23.3 million current and $59.2 million long-term; estimates depend on projected revenues, milestone probabilities, discount rates and payment timing.
- A Department of Justice subpoena concerning certain marketing and promotional practices remained under investigation. The company expected its response to continue during 2019 and could not predict scope, duration or outcome. Legal expense was $1.7 million in each comparative quarter; potential outcomes include damages, injunctions, fines or civil or criminal claims and penalties.
- Foreign exchange reduced reported Q1 sales by $4.8 million and gross profit by $3.8 million, or about 68 basis points of gross margin. Management also cited acquisition integration, debt covenants and interest-rate exposure, regulatory matters, product liability, intellectual property, reimbursement, supply and demand risks.
Important facts for investors to verify
- How much of sales growth is organic versus attributable to acquisitions, particularly Cianna Medical and acquired BD products.
- Progress on acquired-business integration, the BD manufacturing transfer, planned product launches and SAVI SCOUT regulatory approval.
- Cash generation relative to capital spending, working-capital needs, debt repayments and acquisition-related obligations.
- Debt maturity and available borrowing capacity, covenant headroom, and sensitivity to floating interest rates and foreign exchange.
- Developments in the DOJ investigation, potential costs or outcomes, and changes in the $82.5 million contingent-consideration estimate.