LeMaitre Vascular, Inc. — Q1 2013 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. LeMaitre develops, manufactures, and sells medical devices and implants primarily for vascular surgery. It reports one operating segment.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $15.382 million | $13.928 million | +10% |
| Gross profit / margin | $11.206 million / 72.9% | $9.870 million / 70.9% | +14%; +2.0 percentage points |
| Operating income | $1.123 million | $0.854 million | +32% |
| Net income | $0.846 million | $0.386 million | +119% |
| Diluted EPS | $0.05 | $0.02 | Higher |
| Operating cash flow | $(0.346) million | $0.386 million | Decreased |
Gross margin improved partly because Q1 2012 included non-recurring Dacron graft inventory write-offs, and also due to manufacturing efficiencies and higher prices. Unfavorable product/geographic mix and XenoSure patch manufacturing start-up costs partly offset the improvement. Sales growth reflected increases in biologic patches, valvulotomes, catheters, and vessel closure systems, along with higher average selling prices across nearly all product lines.
Balance sheet, liquidity, and cash flow
At March 31, 2013, cash and cash equivalents were $15.302 million, down from $16.448 million at year-end 2012. Current assets were $38.728 million and current liabilities $7.874 million. Total liabilities were $9.908 million; the balance sheet reports no borrowings. Total stockholders’ equity was $53.338 million.
Cash decreased $1.146 million during the quarter. Investing activities used $0.795 million, including $0.676 million for property and equipment; approximately $0.4 million of capital spending related to XenoSure facility buildout and manufacturing equipment. Financing activities provided $0.080 million. Operating cash use reflected working-capital outflows, including higher receivables and inventory and payments of liabilities, primarily annual compensation.
Contractual obligations totaled $5.280 million: $3.731 million in operating leases and $1.549 million in inventory purchase commitments. The company stated that cash and cash equivalents and interest income should cover anticipated cash needs for at least the next 12 months. It had no off-balance-sheet arrangements.
Material changes and outlook
- International sales grew 15% to $5.134 million; Americas sales rose 8% to $10.248 million. The United States generated $9.735 million of sales.
- Operating expenses increased 12% to $10.083 million. This included $0.160 million of medical device excise tax, effective in 2013; management estimated the tax would reduce 2013 operating income by approximately $0.7 million.
- Management expected the XenoSure manufacturing transfer to Burlington to continue into the second half of 2013 and negatively affect gross profit in 2013. It anticipated potential gross-margin improvement beginning in 2014, but cautioned that results were not assured and that transition delays, added expenses, or insufficient interim supply could occur.
- The company began direct shipping to Canadian customers in March and expected expansion of its direct sales presence in Canada and Switzerland to increase 2013 sales and marketing expenses. It launched the MultiTASC device in March and the 1.5mm LeMaitre Valvulotome in April 2013.
- The board approved a $0.03-per-share quarterly dividend payable June 5, 2013, totaling approximately $0.5 million. The repurchase program had $3.5 million of authorization remaining and was scheduled to end no later than December 31, 2013.
Risks, contingencies, and unusual items
Foreign currency losses were $0.050 million versus $0.198 million in Q1 2012, while foreign-currency translation reduced comprehensive income by $0.295 million (compared with a $0.293 million gain in Q1 2012). Management cited currency exposure, competitive pressures in certain product markets, execution and supply risks in the XenoSure manufacturing transition, and the possibility that additional capital may be needed beyond current forecasts and may not be available on acceptable terms.
Unrecognized tax benefits were $0.321 million; approximately $0.1 million might be recognized in 2013 as statutes of limitation expire. A $3.1 million valuation allowance remained against deferred tax assets, principally foreign net operating loss carryforwards. The company disclosed $1.5 million of inventory purchase commitments through 2014. Management reported no legal matters it believed would have a material adverse effect as of May 8, 2013, and no substantive changes to the risk factors in its 2012 Form 10-K.
Important facts for investors to verify
- Whether XenoSure production transfers on schedule, interim supply meets demand, and the expected 2014 margin improvement is achieved.
- Whether revenue growth and gross-margin gains continue after accounting for the prior-year inventory write-offs, pricing, and product/geographic mix.
- Whether working-capital demands and capital spending continue to consume cash despite reported net income.
- The effect of the medical device excise tax, foreign exchange movements, and expansion of direct sales on operating results and cash.
- Future cash requirements from dividends, share repurchases, acquisitions, and contractual commitments, and management’s stated 12-month liquidity outlook.