Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MMSI > SEC Filings for MMSI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for MERIT MEDICAL SYSTEMS INC

Form 10-Q for MERIT MEDICAL SYSTEMS INC


9-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Disclosure Regarding Forward-Looking Statements

This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements in this Report, other than statements of historical fact, are forward-looking statements for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of our management for future operations, any statements concerning proposed new products or services, any statements regarding the integration, development or commercialization of the business or assets acquired from other parties, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this Report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "intends," "believes," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that any such expectation or any forward-looking statement will prove to be correct. Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements. Our financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including risks relating to product recalls and product liability claims; potential restrictions on our liquidity or our ability to operate our business by our current debt agreements; possible infringement of our technology or the assertion that our technology infringes the rights of other parties; the potential imposition of fines, penalties, or other adverse consequences if our employees or agents violate the U.S. Foreign Corrupt Practices Act or other laws or regulations; expenditures relating to research, development, testing and regulatory approval or clearance of our products and the risk that such products may not be developed successfully or approved for commercial use; greater governmental scrutiny and regulation of the medical device industry; reforms to the 510(k) process administered by the U.S. Food and Drug Administration (the "FDA"); laws targeting fraud and abuse in the healthcare industry; potential for significant adverse changes in, or our failure to comply with, governing regulations; increases in the price of commodity components; negative changes in economic and industry conditions in the United States and other countries; termination or interruption of relationships with our suppliers, or failure of such suppliers to perform; our potential inability to successfully manage growth through acquisitions, including the inability to commercialize technology acquired through recent, proposed or future acquisitions; fluctuations in Euro and GBP exchange rates; our need to generate sufficient cash flow to fund our debt obligations, capital expenditures, and ongoing operations; concentration of our revenues among a few products and procedures; development of new products and technology that could render our existing products obsolete; market acceptance of new products; volatility in the market price of our common stock; modification or limitation of governmental or private insurance reimbursement policies; changes in health care markets related to health care reform initiatives; failures to comply with applicable environmental laws; changes in key personnel; work stoppage or transportation risks; uncertainties associated with potential healthcare policy changes which may have a material adverse effect on Merit; introduction of products in a timely fashion; price and product competition; availability of labor and materials; cost increases; fluctuations in and obsolescence of inventory; and other factors referred to in our Annual Report on Form 10-K for the year ended December 31, 2011 and other materials filed with the Securities and Exchange Commission. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Actual results will differ, and may differ materially, from anticipated results. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results, and we assume no obligation to update or disclose revisions to those estimates. Additional factors that may have a direct bearing on our operating results are discussed in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011.

OVERVIEW

The following discussion and analysis of our financial condition and results of operation should be read in conjunction with the consolidated financial statements and related condensed notes thereto, which are included in Part I, Item 1 of this Report.

We design, develop, manufacture and market single-use medical products for interventional and diagnostic procedures. For financial reporting purposes, we report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of cardiology and radiology devices which assist in diagnosing and treating coronary arterial disease, peripheral vascular disease and other non-vascular diseases and includes our embolotherapeutic products. Our endoscopy segment consists of gastroenterology and pulmonology medical devices which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors.


Table of Contents

For the three months ended September 30, 2012, we reported record revenues of $95.9 million, up 6.0% from the three months ended September 30, 2011 of $90.5 million. Revenues for the nine months ended September 30, 2012 were a record $292.1 million, compared to $268.4 million for the first nine months of 2011, an increase of 8.8%.

Gross profit was 47.3% and 46.7% of sales for the three and nine-month periods ended September 30, 2012, respectively, compared to 45.4% and 46.0% of sales for the three and nine-month periods ended September 30, 2011, respectively. The improvement in gross margin for both periods can be attributed primarily to increased overhead and manufacturing efficiencies resulting from higher production volumes, sales of higher-margin products, including the QuadraSphere® and Endotek products, and increased sales in China.

Net income for the quarter ended September 30, 2012 was $7.2 million, or $.17 per share, compared to $4.6 million, or $0.11 per share, for the corresponding period of 2011. Net income for the nine-month period ended September 30, 2012 was a record of $19.1 million, or $0.45 per share, compared to $18.1 million, or $0.47 per share, for the corresponding period of 2011. The increase in net income for the three and nine-month periods ended September 30, 2012 was primarily attributable to an increase in sales and gross profit and a lower effective income tax rate, both of which were partially offset by higher selling costs (related primarily to our engagement of additional sales representatives in U.S. and international markets), as well as increases in marketing and research and development expenses. We also incurred lower expenses for acquired in-process research and development of $275,000 and $2.5 million for the three and nine months ended September 30, 2012, respectively, compared to $3.4 million for the three and nine months ended September 30, 2011.

During the three and nine-month periods ended September 30, 2012, we continued to experience growth in our European direct and dealer markets, as well as our wholly-owned technology subsidiaries, such as Merit Sensor Systems, Inc. and Merit Coatings, and our OEM channels. The international sales investments we made over the last several years in China, Russia and Europe continue to pay off as a large portion of our sales increases are being derived from these markets. Our international sales for the nine months ended September 30, 2012 represented 37% of our total sales, compared to 35% of our total sales for the corresponding period of 2011. This international growth has been important to our financial results, as we have experienced slower sales growth in U.S. markets. We anticipate that we will make further investments in China, India, Brazil, Russia, certain Middle Eastern countries, and the Balkan countries, as well as countries located in the Pacific Rim.

Our endoscopy segment made significant progress in reducing its operating loss to approximately $87,000 for the three months ended September 30, 2012, when compared to the operating loss of approximately $898,000 for the corresponding period of 2011. This reduction in operating loss was largely driven by a sales increase of 31% in our endoscopy segment for the nine months ended September 30, 2012, when compared to the nine months ended September 30, 2011, and an improvement in gross margins. During the first quarter of 2012, we launched our new EndoMAXX™ fully-covered esophageal stent, which aided our sales growth for the three and nine months ended September 30, 2012. We plan to engage a new contract stent manufacturer by the end of 2012. If we are successful with this initiative, we expect to generate improved gross profits for this operating segment, which would help move us move toward profitability in the future.

Our product pipeline is promising with new cardiology, radiology and endoscopy products in the queue. We expect to launch a number of new products in the next few quarters, including the TIO™ three-in-one oral airway bite block, the One Snare™ single-loop device, the BowTie™ guide wire insertion device, the PHD™ hemostasis valve, the Concierge® guiding catheter and the Elation™ esophageal dilatation balloon. In September 2012, we received Section 510(k) clearance from the FDA to market the Merit Laureate® hydrophilic guidewire (the "Guidewire") in the United States and recommenced domestic distribution of the Guidewire, in addition to sales of the Guidewire in China. We expect substantial sales growth for the next several years from the Guidewire.


Table of Contents

Results of Operations

The following table sets forth certain operational data as a percentage of sales
for the three and nine-month periods ended September 30, 2012 and 2011:

                                               Three Months Ended      Nine Months Ended
                                                 September 30,           September 30,
                                                2012        2011       2012        2011
Net sales                                       100%        100%       100%        100%
Gross profit                                    47.3        45.4       46.7        46.0
Selling, general, and administrative expenses   30.1        28.4       30.3        28.5
Research and development expenses               7.4         6.0        6.9          5.9
Acquired in-process research and development    0.3         3.8        0.8          1.3
Income from operations                          9.5         7.2        8.7         10.3
Other income (expense) - net                     -          0.2        0.2         (0.2)
Income before income tax expense                9.4         7.4        8.8         10.1
Net income                                      7.5         5.0        6.5          6.7

Sales. Sales for the three months ended September 30, 2012 increased by 6.0%, or approximately $5.4 million, compared to the corresponding period of 2011. Sales for the nine months ended September 30, 2012 increased by 8.8%, or approximately $23.7 million, compared to the corresponding period of 2011. Listed below are our sales by business segment for the three and nine-month periods ended September 30, 2012 and 2011 (in thousands):

                                        Three Months Ended                     Nine Months Ended
                                           September 30,                         September 30,
                                % Change      2012         2011       % Change      2012          2011
Cardiovascular
Stand-alone devices                8%      $ 27,528     $  25,514       13%      $  85,869     $  76,312
Custom kits and procedure trays    -%        22,915        22,947        2%         69,959        68,878
Inflation devices                  6%        17,092        16,165        3%         51,950        50,564
Catheters                          8%        16,082        14,929       17%         47,812        41,037
Embolization devices               7%         8,489         7,969        9%         24,746        22,600
Total                              5%        92,106        87,524        8%        280,336       259,391

Endoscopy
Endoscopy devices                 29%         3,801         2,953       31%         11,721         8,966

Total                              6%      $ 95,907     $  90,477        9%      $ 292,057     $ 268,357

Our cardiovascular sales growth of 5% for the three months ended September 30, 2012, and 8% for the nine months ended September 30, 2012, when compared to the corresponding periods of 2011, was primarily due to increased sales of catheters (particularly our Prelude® sheath product line, diagnostic catheters, aspiration catheter product line and micro catheter product line), stand-alone devices (particularly our hemostasis valves, guidewires and newly-acquired Scion Clo-SurPLUS P.A.D.™), and BioSphere embolization devices and sales of our BasixCOMPAK™ inflation devices.

Our endoscopy sales growth of 29% for the three months ended September 30, 2012, and 31% for the nine months ended September 30, 2012, when compared to the corresponding periods of 2011, primarily related to an increase in sales of our Aero® Tracheobronchial stent and the release of our EndoMAXX™ fully-covered esophageal stent.

Gross Profit. Gross profit was 47.3% and 46.7% of sales for the three and nine-month periods ended September 30, 2012, respectively, compared to 45.4% and 46.0% of sales for the three and nine-month periods ended September 30, 2011, respectively.


Table of Contents

The improvement in gross margin for both periods can be attributed primarily to increased overhead and manufacturing efficiencies resulting from higher production volumes, sales mix of higher-margin products, including the QuadraSphere® and Endotek products, and increased sales in China, which has higher average sales prices.

Operating Expenses. Selling, general and administrative expenses increased to 30.1% of sales for the three months ended September 30, 2012, compared with 28.4% of sales for the three months ended September 30, 2011. Selling, general and administrative expenses increased to 30.3% of sales for the nine months ended September 30, 2012, compared with 28.5% of sales for the nine months ended September 30, 2011. The increases were due primarily to the hiring of additional sales and marketing representatives, both domestically and internationally, the development of programs to improve distribution and increase market share for new and existing products.

Research and Development Expenses. Research and development expenses increased to 7.4% of sales for the three months ended September 30, 2012, compared with 6.0% of sales for the three months ended September 30, 2011. Research and development expenses increased to 6.9% of sales for the nine months ended September 30, 2012, compared to 5.9% of sales for the nine months ended September 30, 2011. The increases were primarily due to headcount additions for the HiQuality study and our research and development group.

During the three and nine months ended September 30, 2012, we recorded charges of approximately $275,000 and $2.5 million, respectively, for acquired in-process research and development related to the purchase of several patents for the development of future products, primarily a new cross-support catheter and an exclusive license for certain nanotechnology.

Operating Income (Loss). The following table sets forth our operating income or loss by business segment for the three and nine-month periods ended September 30, 2012 and 2011 (in thousands):

                           Three Months Ended         Nine Months Ended
                             September 30,              September 30,
                            2012         2011         2012         2011
Operating Income (Loss)
Cardiovascular          $   9,169      $ 7,405     $ 26,005     $ 30,385
Endoscopy                     (87 )       (898 )       (694 )     (2,821 )
Total operating income  $   9,082      $ 6,507     $ 25,311     $ 27,564

Cardiovascular Operating Income. During the three months ended September 30, 2012, we reported income from operations of approximately $9.2 million from our cardiovascular business segment, compared to income from operations of approximately $7.4 million for the corresponding period of 2011. For the nine months ended September 30, 2012, we reported income from operations of approximately $26.0 million from our cardiovascular business segment, compared to income from operations of approximately $30.4 million for the corresponding period of 2011. When compared to the prior year periods, the operating income for the three and nine-month periods ended September 30, 2011 was favorably affected by higher sales and gross profits, and was negatively affected by higher selling, general and administrative expenses and research and development expenses, as discussed above.

Endoscopy Operating Loss. During the three months ended September 30, 2012, we reported a loss from operations of approximately $87,000 from our endoscopy business segment, compared to a loss from operations of approximately $898,000 for the corresponding period of 2011. For the nine months ended September 30, 2012, we reported a loss from operations of approximately $694,000 from our endoscopy business segment, compared to a loss from operations of approximately $2.8 million for the corresponding period of 2011. The decrease in operating loss for the three and nine-month periods ended September 30, 2012, when compared to the corresponding periods of 2011, was favorably affected by higher sales and gross profits, lower research and development expenses and was negatively affected by higher selling, general and administrative expenses as we added sales representatives to this segment.

Other Income (Expense) - Net. Other expense for the three months ended September 30, 2012 was approximately ($45,000), compared to other income of approximately $176,000 for the corresponding period in 2011. The net decrease in other income for the three months ended September 30, 2012 was primarily the result of an increase in interest expense resulting from higher long-term average debt balances during 2012 for the three months ended September 30, 2012 and an increase in foreign exchange transaction losses. Other income for the nine months ended September 30, 2012 was approximately $457,000, compared to other expense of approximately ($465,000) for the corresponding period in 2011. The net increase in other income for the nine months


Table of Contents

ended September 30, 2012 was the result of a gain on sale of marketable securities of approximately $745,000 and a reduction in interest expense resulting from lower long-term average debt balances during 2012 for the nine months ended September 30, 2012.

Income Taxes. Our overall effective tax rate for the three months ended September 30, 2012 was 20.0% compared to 31.7% for the corresponding period of 2011. For the nine months ended September 30, 2012, our effective tax rate was 26%, compared to 33.3% for the corresponding period of 2011. The decrease in the effective tax rate for the three and nine-month periods ended September 30, 2012, when compared to the corresponding periods of 2011, was primarily attributable to the release of reserves established pursuant to FASB Interpretation No. 48 ("FIN 48") due to statute of limitation expirations, an increase to the Domestic Production Activity deduction, and increases to research and development credits in the U.S. and foreign jurisdictions. In addition, the effective tax rates for the two periods of 2012 were also lower due to a higher mix of earnings in our foreign jurisdictions (primarily Ireland), which are taxed at a lower rate than our U.S. operations, during the three and nine-month periods ended September 30, 2012, compared to the corresponding periods of 2011.

Net Income. During the three months ended September 30, 2012, we reported net income of approximately $7.2 million, compared to net income of approximately $4.6 million for the corresponding period of 2011. For the nine months ended September 30, 2012, we reported net income of approximately $19.1 million, compared to net income of approximately $18.1 million for the corresponding period of 2011. The increase in net income for the three and nine-month periods ended September 30, 2012 was primarily attributable to an increase in sales and gross profit and a lower effective income tax rate, both of which were partially offset by higher in selling costs (related primarily to our engagement of additional sales representatives in U.S. and international markets), as well as increases in marketing and research and development expenses. We also incurred lower expenses for acquired in-process research and development of $275,000 and $2.5 million for the three and nine months ended September 30, 2012, respectively, compared to $3.4 million for each of the three and nine-month periods ended September 30, 2011.

Liquidity and Capital Resources

Our working capital as of September 30, 2012 and December 31, 2011 was $96.3 million and $89.9 million, respectively. The increase in working capital during the nine months ended September 30, 2012 was primarily the result of an increase in trade receivables and inventories as the result of increased sales, which was partially offset by increases in accounts payable related to increases in inventory and accrued expenses. As of September 30, 2012, we had a current ratio of 2.8 to 1.

At September 30, 2012 and December 31, 2011, we had cash and cash equivalents of approximately $9.5 million and $10.1 million respectively, of which approximately $8.8 million and $9.0 million, respectively, were held by foreign subsidiaries. For each of our foreign subsidiaries, we make an assertion as to whether the earnings are intended to be repatriated to the United States or held by the foreign subsidiary for permanent reinvestment. The cash held by our foreign subsidiaries for permanent reinvestment is generally used to fund the operating activities of our foreign subsidiaries and for further investment in foreign operations. We have accrued a deferred tax liability on our consolidated financial statements for the portion of our foreign earnings that are available to be repatriated to the United States.

In addition, cash held by our subsidiary in China is subject to local laws and regulations that require government approval for the transfer of such funds to entities located outside of China. As of September 30, 2012 and December 31, 2011, we had cash and cash equivalents of approximately $7.1 million and $5.9 million, respectively, held by our subsidiary in China.
During the nine months ended September 30, 2012, our inventory balances increased by approximately $8.9 million, from $69.9 million at December 31, 2011 to $78.8 million at September 30, 2012. The increase was primarily the result of an increase of sales of 8% for the nine-months ended September 30, 2012 and approximately $3.0 million increase in finished goods related to new product launches, transitioning a product line to a contract manufacturer in Mexico and new kits.
On September 10, 2010, we entered into a Credit Agreement (the "Credit Agreement") with the lenders who are or may become party thereto (collectively, the "Lenders") and Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent for the Lenders. Pursuant to the terms of the Credit Agreement, the Lenders have agreed to make revolving credit loans up to an aggregate amount of $125 million. Wells Fargo has also agreed to make swingline loans from time to time through the maturity date of September 10, 2015 in amounts equal to the difference between the amounts actually loaned by the Lenders and the aggregate credit commitment. The Credit Agreement contains covenants, representations and warranties and other terms, that are customary for revolving credit facilities of this nature. In this regard, the Credit Agreement requires us to maintain a leverage ratio, an EBITDA ratio, a minimum adjusted consolidated net income, and limits the amount of annual capital expenditures we can incur. Additionally, the Credit Agreement contains various negative covenants with which we must comply, including, but not limited to, a prohibition on the payment of dividends and limitations respecting: the incurrence of indebtedness, the creation of liens on our property, mergers or similar combinations or liquidations, asset dispositions, investments in subsidiaries, and other provisions customary in similar types of agreements. As of September 30, 2012, we were in compliance with all financial covenants set forth in the Credit Agreement


Table of Contents

As of September 30, 2012, we had outstanding borrowings of approximately $64.5 million under the Credit Agreement, with available borrowings of approximately $60.5 million, based on the leverage ratio in the terms of the Credit Agreement. Our interest rate as of September 30, 2012 was a fixed rate of 1.47% on $54.5 million, and a fixed rate of 1.48% on $10.0 million.

Capital expenditures for property and equipment were approximately $49.3 million and $38.8 million for the nine months ended September 30, 2012 and 2011, respectively. Of those capital expenditures, we spent approximately $25.6 million and $24.0 million, respectively, for the construction of buildings and a parking lot as discussed below. We anticipate that we will spend approximately $65 million in 2012 for property and equipment, of which approximately $34 million will be spent on building construction.

Historically, we have incurred significant expenses in connection with new facilities, production automation, product development and the introduction of new products. Over the last two years, we spent a substantial amount of cash in connection with our acquisition of certain assets and product lines (including $18.5 million to acquire the assets of Ostial Solutions, LLC and to enter into a marketing and distribution agreement with Scion Cardio-Vascular, Inc. during the nine months ended September 30, 2012; $10.3 million to acquire the assets of Ash Access Technology, Inc., and AAT Catheter Technologies, LLC, among other transactions, during 2011; and approximately $86.0 million (net of acquired cash) to acquire BioSphere Medical, Inc. in September 2010). We are in the process of constructing two new production facilities in South Jordan, Utah and . . .

  Add MMSI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MMSI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.