LeMaitre Vascular, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The company develops, manufactures, and markets medical devices and implants primarily for vascular surgery.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $16.0m | $14.4m | $31.3m | $28.3m |
| Gross profit / margin | $11.2m / 70.4% | $10.5m / 73.4% | $22.4m / 71.6% | $20.4m / 72.2% |
| Operating income | $1.4m | $1.5m | $2.6m | $2.3m |
| Net income | $0.9m | $0.8m | $1.7m | $1.2m |
| Diluted EPS | $0.06 | $0.05 | $0.11 | $0.08 |
- Q2 operating margin was approximately 9.1% and net margin 5.6%; six-month margins were approximately 8.2% and 5.5%, respectively.
- For the six months, operating cash flow was $1.6m, investing cash flow was negative $2.3m, and financing cash flow was negative $0.8m. Cash declined $1.5m from year-end to $14.9m; the comparable 2012 six-month ending cash balance was $20.2m.
- At June 30, cash was $14.9m, current assets $38.8m, and current liabilities $7.5m. Total liabilities were $9.5m and stockholders’ equity $54.1m. The balance sheet provides no clear value for borrowings; no debt balance is separately listed.
- Inventory was $11.7m, up from $10.9m at year-end. Property and equipment rose to $5.8m from $4.5m, reflecting investment that included XenoSure manufacturing facilities and equipment.
Changes versus the prior comparable periods
- Sales increased 11% in both Q2 and the first half. International sales grew 19% in Q2 and 17% year to date; Americas sales grew 7% and 8%, respectively.
- Growth was led by biologic vascular patches, valvulotomes, catheters, and Dacron grafts. Management cited higher average selling prices and unit sales; some European Dacron graft sales recovered after restrictions in 2012.
- Gross margin fell 3.0 percentage points in Q2 and 0.6 points for the six-month period. Drivers included $0.4m of non-occlusive modeling catheter inventory write-offs, manufacturing inefficiencies and start-up costs for biologic patches, and unfavorable product/geographic mix. Higher prices and prior-year Dacron write-offs partly offset these pressures.
- Six-month net income increased to $1.7m from $1.2m, while operating cash flow decreased to $1.6m from $2.4m, primarily reflecting working-capital investment and higher capital spending.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management said cash and expected interest income should meet anticipated cash requirements for at least 12 months.
- The XenoSure manufacturing transfer to Burlington was expected to continue into the second half of 2013 and weigh on gross profit in 2013. Management expected possible margin improvement beginning in 2014, but cautioned that transfer delays, added costs, or inadequate supply during the transition could occur.
- The company began direct sales in Canada in March and transitioned Swiss distribution in January and a Japanese territory in April; expansion of direct sales in Canada and Switzerland was expected to increase 2013 sales and marketing expense. Direct-to-hospital sales represented 93% of first-half sales versus 95% in 2012.
- The 2.3% U.S. medical device excise tax was $0.3m for the first half; management estimated an approximately $0.7m operating-income impact for 2013. Foreign currency movements remain a risk; the first-half foreign currency loss was $0.1m.
- In July 2013, the company acquired substantially all assets of Clinical Instruments International for $1.1m and declared a $0.03-per-share quarterly dividend payable in September. Future dividends remain subject to board approval.
- The company identified and corrected an inventory valuation error: inventory had been understated by $0.2m at year-end 2011 and $0.4m at year-end 2012, with cost of sales overstated by $0.2m in each year. The 2013 statements include a $0.4m understatement of cost of sales and $0.3m overstatement of net income for both Q2 and the first half. Management concluded the error was not material to the prior years or expected 2013 results.
- Inventory purchase commitments totaled about $2.0m, and operating lease obligations about $3.6m. Management reported no material adverse effect expected from pending legal matters and no off-balance-sheet arrangements. It reported no substantive changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether XenoSure production transfer proceeds on schedule, maintains adequate supply, and delivers the expected post-transition margin improvement.
- How much of sales growth reflects unit growth versus pricing, and whether margin pressure from mix and manufacturing costs persists.
- Whether working-capital needs, capital expenditures, dividends, buybacks, and acquisition payments affect cash and the stated 12-month liquidity outlook.
- The effects of the inventory correction on comparisons and reported earnings, and the adequacy of inventory valuation controls.
- The realized 2013 medical device excise-tax impact, foreign-exchange exposure, and remaining tax uncertainties, including $0.321m of unrecognized tax benefits at June 30.