Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes thereto set forth in Item 8 of this report.
Discussion of the year ended December 31, 2023, compared to the year ended December 31, 2022 is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023, and is incorporated by reference into this Form 10-K.
Overview
We design, develop, manufacture, market and sell 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 four product categories: peripheral intervention, cardiac intervention, custom procedural solutions, and OEM. Within these product categories, we sell a variety of products, including cardiology and radiology devices (which assist in diagnosing and treating coronary arterial disease, peripheral vascular disease and other nonvascular diseases), as well as embolotherapeutic, cardiac rhythm management, electrophysiology, critical care, breast cancer localization and guidance, biopsy, and interventional oncology and spine devices. Our endoscopy segment consists of gastroenterology and pulmonology devices which assist in the palliative treatment of expanding esophageal, tracheobronchial and biliary strictures caused by malignant tumors.
For the year ended December 31, 2024, we reported sales of $1.357 billion, up $99.1 million or 7.9%, compared to 2023 sales of $1.257 billion. Our revenue results for the year ended December 31, 2024 were driven primarily by demand in the U.S. and favorable international sales trends, particularly in Europe, the Middle East and Africa (“EMEA”) and in the “Rest of World” (“ROW”) regions.
Gross profit as a percentage of sales was 47.4% for the year ended December 31, 2024 as compared to 46.4% for the year ended December 31, 2023.
Net income for the year ended December 31, 2024 was $120.4 million, or $2.03 per share, as compared to $94.4 million, or $1.62 per share, for the year ended December 31, 2023.
In July 2024, we executed an asset purchase agreement with EndoGastric Solutions, Inc. (“EGS”), acquiring the EsophyX® Z+ device which delivers a durable, minimally invasive non-pharmacological treatment option for patients suffering from GERD. In November 2024, we completed the acquisition of a portfolio of Lead Management products from Cook Medical.
On February 28, 2024, we introduced our “Continued Growth initiatives” Program with muti-year financial targets for the three-year period ending December 31, 2026, which reflects our commitment to better-position Merit for long-term, sustainable growth and enhanced profitability.
On December 20, 2024, we announced that the WRAPSODY® Cell-Impermeable Endoprosthesis has received premarket approval from the US Food and Drug Administration (FDA). With this approval, Merit can begin commercialization of the device in the U.S. in 2025.
39
Table of Contents
Results of Operations
The following table sets forth certain operational data as a percentage of sales for the years indicated:
2024
2023
2022
Net sales
100
%
100
%
100
%
Gross profit
47.4
46.4
45.1
Selling, general and administrative expenses
29.5
29.7
29.8
Research and development expenses
6.4
6.6
6.6
Impairment charges
—
—
0.2
Contingent consideration expense
0.0
0.1
0.4
Acquired in-process research and development expense
—
0.1
0.6
Income from operations
11.5
9.9
7.6
Other expense — net
(0.4)
(0.9)
(0.4)
Income before income taxes
11.1
8.9
7.2
Net income
8.9
7.5
6.5
Sales
Listed below are the sales by product category within each operating segment for the years ended December 31, 2024, 2023 and 2022 (in thousands, other than percentage changes):
% Change
2024
% Change
2023
% Change
2022
Cardiovascular
Peripheral Intervention
9.9
%
$
552,168
14.2
%
$
502,220
8.6
%
$
439,810
Cardiac Intervention
3.5
%
370,993
4.4
%
358,451
7.0
%
343,186
Custom Procedural Solutions
3.0
%
201,201
2.7
%
195,333
(1.9)
%
190,194
OEM
7.8
%
177,382
13.5
%
164,556
17.4
%
145,034
Total
6.7
%
1,301,744
9.2
%
1,220,560
7.2
%
1,118,224
Endoscopy
Endoscopy Devices
48.8
%
54,770
12.4
%
36,806
3.9
%
32,757
Total
7.9
%
$
1,356,514
9.2
%
$
1,257,366
7.1
%
$
1,150,981
Cardiovascular Sales. Our cardiovascular sales for the year ended December 31, 2024 were $1.302 billion, up 6.7%, when compared to the year ended December 31, 2023 of $1.221 billion. Sales for the year ended December 31, 2024 were favorably affected by increased sales of:
(a) Peripheral intervention products, which increased by $49.9 million, or 9.9%, from the corresponding period of 2023. This increase was driven primarily by sales of our access, radar localization, delivery systems, and drainage products.
(b) Cardiac intervention products, which increased by $12.5 million, or 3.5%, from the corresponding period of 2023. This increase was driven primarily by sales of our cardiac rhythm management/electrophysiology (“CRM/EP”), fluid management, and access products, partially offset by a decrease in sales of our hemostasis products.
(c) Custom procedural solutions products, which increased by $5.9 million, or 3.0% from the corresponding period of 2023. This increase was driven primarily by increased sales of our kits and critical care products , offset partially by decreased sales of trays.
(d) OEM products, which increased by $12.8 million, or 7.8% from the corresponding period of 2023. This increase was driven primarily by sales of our access, vertebral compression fracture, and fluid management products as well as our kits, partially offset by a decrease in sales of our CRM/EP products.
40
Table of Contents
Endoscopy Sales. Our endoscopy sales for the year ended December 31, 2024 were $54.8 million, up 48.8%, when compared to sales for the year ended December 31, 2023 of $36.8 million. Sales for the year ended December 31, 2024 were favorably affected by sales of our recently-acquired EsophyX® Z+ Device.
Geographic Sales
Listed below are sales by geography for the years ended December 31, 2024, 2023 and 2022 (in thousands, other than percentage changes):
% Change
2024
% Change
2023
% Change
2022
United States
10.2
%
800,780
11.7
%
726,989
6.8
%
650,559
International
4.8
%
555,734
6.0
%
530,377
7.4
%
500,422
Total
7.9
%
$
1,356,514
9.2
%
$
1,257,366
7.1
%
$
1,150,981
United States Sales: U.S. sales for the year ended December 31, 2024 were $800.8 million, or 59.0% of net sales, up 10.2% when compared to 2023. The increase in our domestic sales in 2024 was driven primarily by our U.S. direct, OEM and endoscopy businesses.
International Sales . International sales for the year ended December 31, 2024 were $555.7 million, or 41.0% of net sales, up 4.8% when compared to 2023. The increase in our international sales during 2024 was primarily a result of higher sales in EMEA, which increased $11.2 million or 4.8%, higher ROW sales which increased $8.9 million or 18.1%, and higher sales in our Asia Pacific region, which increased $5.3 million or 2.1%, compared to the corresponding period of 2023.
Our international sales are subject to foreign currency exchange rate fluctuations between the natural currency of a foreign country and the U.S. Dollar. Foreign currency exchange rate fluctuations, calculated by using the applicable average foreign exchange rates for the prior year decreased sales (0.6)% for the year ended December 31, 2024 compared to 2023.
Gross Profit
Our gross profit as a percentage of sales was 47.4%, 46.4%, and 45.1% for the years ended December 31, 2024, 2023 and 2022, respectively. The increase in gross profit as a percentage of sales for 2024, as compared to 2023, was primarily due to increased sales combined with favorable changes in standard costs and product mix, partially offset by higher intangible amortization expense as a percentage of sales associated with acquisitions.
Operating Expenses
Selling, General and Administrative Expenses . Our selling, general and administrative (“SG&A”) expenses as a percentage of sales were 29.5%, 29.7% and 29.8% for the years ended December 31, 2024, 2023 and 2022, respectively. SG&A expenses increased $26.1 million, or 7.0%, for the year ended December 31, 2024 compared to 2023. The increase in SG&A expenses for the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily related to increased labor-related costs associated with an increase in headcount and higher variable compensation linked to company performance, an increase of stock-based compensation expense associated with new equity grants and variability in our stock price, and an increase in travel related costs associated with our sales and marketing activities, partially offset by a decrease in consulting costs primarily associated with our Foundations for Growth Program which ended in 2023.
Research and Development Expenses . Our research and development (“R&D”) expenses as a percentage of sales were 6.4%, 6.6% and 6.6% for the years ended December 31 2024, 2023, and 2022, respectively. R&D expenses increased by $4.7 million or 5.7% to $87.5 million for the year ended December 31, 2024, compared to $82.7 million in 2023. The increase in R&D expenses for the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily related to labor-related costs consistent with an increase in headcount and an increase materials and scrap utilized in R&D, partially offset by lower regulatory costs related to Medical Device Rgulation in the E.U.
Impairment Charges . During the year ended December 31, 2024, we recognized no impairment costs.
41
Table of Contents
Contingent Consideration Expense . For the years ended December 31, 2024, 2023 and 2022, we recorded $0.4 million, $1.7 million and $4.6 million, respectively, of net contingent consideration expense from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions. The expense in each fiscal year relates to changes in the probability and timing of achieving certain revenue and operational milestones, as well as expense for the passage of time.
Acquired In-process Research and Development . During the year ended December 31, 2024, we recognized no acquired in-process research and development costs.
Operating Income
Our operating profit by operating segment for the years ended December 31, 2024, 2023 and 2022 was as follows (in thousands):
Operating Income
2024
2023
2022
Cardiovascular
$
150,150
$
114,440
$
80,946
Endoscopy
5,543
9,504
6,617
Total operating income
$
155,693
$
123,944
$
87,563
Cardiovascular Operating Income. Our cardiovascular operating income for the year ended December 31, 2024 was $150.2 million, compared to cardiovascular operating income of $114.4 million for the year ended December 31, 2023. This increase in cardiovascular operating income was primarily related to higher sales and gross profit, decreased acquired in-process research and development charges, and decreased contingent consideration expense ($0.4 million in 2024 compared to $1.7 million in 2023), partially offset by higher SG&A and R&D expenses.
Endoscopy Operating Income. Our endoscopy operating income for the year ended December 31, 2024 was $5.5 million, compared to operating income of $9.5 million for the year ended December 31, 2023. This decrease in endoscopy operating income relative to 2023 was primarily due to higher SG&A expense associated with the acquisition and integration of operations acquired from EGS and higher R&D expenses, partially offset by higher sales.
Other Income (Expense)
Our other expense for the years ended December 31, 2024, 2023 and 2022 was $5.7 million, $11.9 million, and $4.9 million, respectively. The decrease in other expense for 2024 compared to 2023 was principally the result of an increase in interest income associated with and increased cash and cash equivalents and reduced borrowings under the Amended Fourth A&R Credit Agreement, partially offset by interest expense associated with outstanding convertible debt.
Effective Tax Rate
Our provision for income taxes for the years ended December 31, 2024, 2023 and 2022 was a tax expense of $29.6 million, $17.7 million and $8.1 million, respectively, which resulted in an effective income tax rate of 19.8%, 15.8%, and 9.8%, respectively. The increase in the effective income tax rate for 2024 compared to 2023 was primarily the result of decreased benefit from items such as stock-based compensation and foreign tax credit utilization.
Net Income
Our net income for the years ended December 31, 2024, 2023 and 2022 was $120.4 million, $94.4 million, and $74.5 million, respectively. The increase in net income for 2024, when compared to 2023, was primarily related to higher sales, higher gross margin as a percentage of sales, decreased contingent consideration expense ($0.4 million in 2024 compared to $1.7 million in 2023), decreased acquired in-process research and development expense ($0 in 2024 compared to $1.6 million in 2023) and decreased other expenses; partially offset by higher SG&A, R&D, and income tax expense .
42
Table of Contents
Liquidity and Capital Resources
Capital Commitments and Contractual Obligations
Our most significant contractual obligations as of December 31, 2024 included total long-term debt obligations of $747.5 million, interest payments on this debt, contingent consideration liabilities of $3.5 million, of which $0.4 million is recorded in current liabilities, and operating lease liabilities of $65.1 million, of which $10.3 million is recorded in current liabilities. Additional information about these obligations is contained in Notes 8, 15 and 17 to our consolidated financial statements set forth in Item 8 of this report.
Cash Flows
At December 31, 2024 and 2023, we had cash, cash equivalents and restricted cash of $378.8 million and $589.1 million respectively, of which $50.6 million and $48.7 million, respectively, were held by foreign subsidiaries. We do not consider our foreign earnings to be permanently reinvested. As of December 31, 2024 and 2023, approximately $2.1 million and $2.1 million respectively, of our cash and cash equivalents represents restricted cash for the payment of certain import and other taxes for our subsidiary in China. 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 December 31, 2024 and 2023, we had cash and cash equivalents, including restricted cash, of $18.1 million and $17.6 million, respectively, held by our subsidiary in China.
Cash flows provided by operating activities. We generated cash from operating activities of $220.8 million, $145.2 million and $114.3 million during the years ended December 31, 2024, 2023 and 2022, respectively. Net cash provided by operating activities increased $75.6 million for the year ended December 31, 2024 compared to the year ended December 31, 2023. Significant changes in operating assets and liabilities affecting cash flows during these years included:
● Net income was $120.4 million and $94.4 million for the years ended December 31, 2024 and 2023, respectively.
● Cash used for inventories was $2.3 million and $32.1 million for the years ended December 31, 2024 and 2023, respectively due primarily to efforts to normalize inventory levels following prior year investments to build bridge inventory for production line transfers and increases in safety stock due to vendor supply delays.
● Cash provided by (used for) accrued expenses was $9.7 million and $(2.5) million for the years ended December 31, 2024 and 2023, respectively, primarily due to an increase in accrued interest and the associated expense related to our convertible debt.
● Cash paid for income taxes was $45.0 million and $31.5 million for the years ended December 31, 2024 and 2023, respectively, primarily due to increases in income before tax.
Cash flows used in investing activities. We used cash in investing activities of $368.7 million, $175.3 million, and $57.4 million for the years ended December 31, 2024, 2023 and 2022, respectively. We invested in capital expenditures for property and equipment of $35.1 million, $34.3 million, and $45.0 million for the years ended December 31, 2024, 2023 and 2022, respectively. Capital expenditures in each period were primarily related to investment in property and equipment to support development and production of our products. Historically, we have incurred significant expenses in connection with facility construction, production automation, product development and the introduction of new products. We anticipate that we will spend approximately $55 to $60 million in 2025 for property and equipment.
Cash outflows invested in acquisitions and other equity investments for the year ended December 31, 2024 were $320.2 million and were primarily related to payments required by our asset purchase agreements with Cook Medical Holdings LLC ($210.0 million), Endogastric Solutions, Inc. ($105.0 million) and Scholten Surgical Instruments, Inc. ($3.0 million). Cash outflows invested in acquisitions for the year ended December 31, 2023 were $134.5 million and were primarily related to payments required by our asset purchase agreements with AngioDynamics, Inc. ($100 million), Bluegrass Vascular Technologies, Inc. ($32.7 million) and ART ($1.5 million). Cash outflows invested in acquisitions for the year ended December 31, 2022 were $6.9 million and were primarily related to our $3.0 million upfront payment in our purchase of Restore Endosystems LLC and our $2.5 million payment in our purchase of BioTrace Medical, Inc.
43
Table of Contents
Cash flows provided by (used in) financing activities. Cash (used in) provided by financing activities for the years ended December 31, 2024, 2023 and 2022 was $(60.0) million, $559.3 million, and $(60.3) million, respectively. In 2024 we decreased our net borrowings under our Amended Fourth A&R Credit Agreement by $99.1 million and had cash proceeds from the issuance of common stock of $40.9 million. In 2023 we issued convertible debt of $747.5 million, paid $66.5 million for the purchase of capped call options, and decreased our net borrowings under our Amended Fourth A&R Credit Agreement by $99.1 million. In 2022 we decreased our net borrowings under our Third Amended Credit Agreement by $44.9 million and paid contingent consideration of $32.9 million, which is classified as a financing activity, principally related to our acquisitions of Cianna Medical Inc. (“Cianna Medical”) and Vascular Insights LLC (“Vascular Insights”).
As of December 31, 2024, we had outstanding borrowings of $747.5 million and issued letter of credit guarantees of $2.9 million, with additional available borrowings of approximately $697 million under the Amended Fourth A&R Credit Agreement, based on the leverage ratio required pursuant to the Amended Fourth A&R Credit Agreement. Our interest rate as of December 31, 2024 was a fixed rate of 3.0% on our Convertible Notes. Our interest rate as of December 31, 2023 was a fixed rate of 3.0% on our Convertible Notes, a fixed rate of 3.39% on $75 million as a result of an interest rate swap, and a variable floating rate of 7.21%% on $24.1 million. The foregoing fixed rates are exclusive of potential future changes in the applicable margin associated with our variable rate debt under the Amended Fourth A&R Credit Agreement. See Note 8 Debt and Note 9 Derivatives to our consolidated financial statements set forth in Item 8 of this report for additional details regarding the Amended Fourth A&R Credit Agreement, Convertible Notes, and our interest rate swap.
We currently believe that our existing cash balances, anticipated future cash flows from operations and borrowings under our long-term debt agreements will be adequate to fund our current and currently planned future operations for the next twelve months and the foreseeable future. In the event we pursue and complete significant transactions or acquisitions in the future, additional funds may be required to meet our strategic needs, which may require us to raise additional funds in the debt or equity markets.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 1 Organization and Summary of Significant Accounting Policies to our consolidated financial statements set forth in Item 8 of this report. While these significant accounting policies affect the reporting of our financial condition and results of operations, the SEC has requested that all registrants address their most critical accounting policies. The SEC has indicated that a “critical accounting policy” is one which is both important to the representation of the registrant’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on past experience and on various other assumptions our management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ and may differ materially from these estimates under different assumptions or conditions. Additionally, changes in accounting estimates could occur in the future from period to period. The following paragraphs identify our most critical accounting policies:
Inventory Obsolescence. Our management reviews inventory quantities on hand and records provisions for estimated excess, slow moving and obsolete inventory. Based on this review, we provide adjustments for any slow-moving finished good products or raw materials that we believe will expire prior to being sold or used to produce a finished good and any products that are unmarketable. This review of inventory quantities for unmarketable and/or slow moving products is based on forecasted product demand derived from our historical experience of product sales and production raw material usage. If market conditions become less favorable than those projected by our management, additional inventory write-downs may be required. During the years ended December 31, 2024, 2023 and 2022, we recorded obsolescence expense of approximately $10.6 million, $11.5 million, and $9.8 million, respectively, and wrote off approximately $12.0 million, $11.9 million, and $10.2 million, respectively. Based on this historical trend, we believe that our inventory balances as of December 31, 2024 have been accurately adjusted for any unmarketable and/or slow moving products that may expire prior to being sold.
Valuation of Goodwill and Intangible Assets. We allocate any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination to goodwill. We base the fair value of identifiable intangible assets acquired in a business combination on valuations that use information and assumptions that a market
44
Table of Contents
participant would use, including assumptions for estimated revenue projections, growth rates, cash flows, discount rates, useful life, and other relevant assumptions.
We test our goodwill balances for impairment annually as of July 1, or whenever impairment indicators arise. When impairment indicators are identified, we may elect to perform an optional qualitative assessment to determine whether it is more likely than not that the fair value of our reporting units has fallen below their carrying value. During our annual impairment test performed as of July 1, we utilized four reporting units in evaluating goodwill for impairment using a quantitative assessment, which uses a combination of a guideline public company market-based approach and a discounted cash flow income-based approach. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair value. This analysis requires significant judgment, including estimation of the amount, timing and duration of future cash flows, which is based on internal forecasts, and a determination of a discount rate based on our weighted average cost of capital. During our annual test of goodwill balances in 2024, which was completed during the third quarter of 2024, we determined that the fair value of each reporting unit with goodwill exceeded the carrying amount by a significant amount.
We evaluate long-lived assets, including amortizing intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We perform the impairment analysis at the asset group for which the lowest level of identifiable cash flows is largely independent of the cash flows of other assets and liabilities. We first compare undiscounted cash flows to the carrying amount of the asset group to determine if impairment exists, and then determine the fair value of our amortizing assets based on estimated future cash flows discounted back to their present value using a discount rate that reflects the risk profiles of the underlying activities. This analysis requires similar significant judgments as those discussed above regarding goodwill. In-process technology intangible assets, which are not subject to amortization until projects reach commercialization, are assessed for impairment at least annually and more frequently if events occur that would indicate a potential reduction in the fair value of the assets below their carrying value.
During the year ended December 31, 2022, we identified indicators of impairment associated with certain acquired intangible assets within the asset groups based on our qualitative assessment. During the year ended December 31, 2022, we recorded total impairment charges associated with intangible assets in our cardiovascular segment of $1.7 million. We did not have any goodwill or intangible asset impairments for the years ended December 31, 2024 and 2023. These expenses are reflected within impairment charges in our consolidated statements of income. The primary factors driving impairment of certain intangible assets were planned closure and restructuring activities and uncertainty about future product development and commercialization associated with certain acquired technologies. See Note 5 Goodwill and Intangible Assets to our consolidated financial statements set forth in Item 8 of this report for additional details regarding impairments of intangible assets.
45
Table of Contents