LeMaitre Vascular, Inc. — Q2 2012 Form 10-Q
Business and period: The company develops, manufactures, and markets medical devices and implants primarily for vascular surgery. This filing covers the quarter and six months ended June 30, 2012; financial statements are unaudited. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $14.36 million | $15.11 million | $28.29 million | $29.71 million |
| Gross profit | $10.55 million | $10.37 million | $20.42 million | $20.52 million |
| Gross margin | 73.4% | 68.6% | 72.2% | 69.1% |
| Operating income | $1.46 million | $0.90 million | $2.31 million | $0.87 million |
| Net income | $0.82 million | $0.52 million | $1.21 million | $0.58 million |
| Diluted earnings per share | $0.05 | $0.03 | $0.08 | $0.04 |
- Cash flow: Six-month operating cash flow was $2.43 million, compared with $1.10 million a year earlier. Investing activities used $0.52 million and financing activities used $1.84 million. Cash increased $30,000 during the period.
- Balance sheet and liquidity: June 30 cash and cash equivalents were $20.16 million; current assets were $40.67 million and current liabilities $6.94 million. Total assets were $60.00 million and total liabilities $8.03 million. No interest-bearing debt is reported on the balance sheet. Management said available cash and expected interest income should cover anticipated needs for at least 12 months.
- Capital returns: The company repurchased $1.11 million of stock and paid $0.76 million in dividends during the first half. The board approved a further $0.025-per-share dividend in July, expected to total about $0.4 million.
Changes versus comparable periods
- Sales declined 5% in both Q2 and the first half. Management attributed the decline primarily to divested stent-graft products, weaker international sales and euro translation effects. For the first half, international sales fell 19%, while Americas sales rose 4%.
- Open Vascular sales grew 4% in Q2 and 5% in the first half; Endovascular and Other sales fell 32% and 33%, respectively. The company said higher selling prices and biologic patch and catheter sales partly offset divestitures and foreign-exchange headwinds.
- Gross margin improved 4.8 percentage points in Q2 and 3.1 points for the first half, reflecting pricing, product/geographic mix and lower manufacturing transition costs. First-half gross profit nevertheless edged down as revenue fell.
- Net income rose to $0.82 million in Q2 and $1.21 million for the first half. Lower operating expenses—particularly the absence of prior-year restructuring charges—contributed to improved operating income. Sales and marketing expense increased 5% in both comparison periods.
Outlook, risks and unusual items
- AlboGraft: Device complaints prompted two lot recalls and UK and French sales prohibitions. In July 2012, after quarter-end, France rescinded its notice without qualification; the UK rescinded its notice subject to testing each device before implantation. Management warned that sales and reputation could remain affected and that further regulatory action or product issues could occur. At June 30, related inventory was about $1.9 million and intangible assets about $0.6 million.
- Other unusual items: The company recorded a $52,000 loss on a divestiture after the OptiLock buyer filed for insolvency protection. It also recorded a $0.1 million AlboGraft inventory write-off in Q1. No restructuring charges were recorded in the first half of 2012, compared with $1.66 million in the first half of 2011.
- Costs and commitments: A 2.3% U.S. medical-device tax was expected to take effect in 2013. Contractual obligations totaled $9.18 million, including $5.40 million of inventory purchase commitments and $3.79 million of operating leases. The company reported $329,000 of unrecognized tax benefits and a $4.4 million valuation allowance against certain deferred tax assets.
- Management commentary and uncertainty: Management expects its effective tax rate to remain fairly constant through the rest of 2012 and stated its intention to remain profitable, while noting that future profitability is not assured. Foreign-exchange exposure, competition, regulatory approvals, product quality, and the availability of additional capital are identified risks. No material legal proceeding was identified; management judged disclosure controls effective at the reasonable-assurance level.
Investor verification priorities
- Track AlboGraft testing requirements, regulatory developments, complaint trends, and the recoverability of related inventory and intangibles.
- Assess whether growth in Open Vascular products and direct sales can offset divestitures, declining Endovascular and Other sales, and international weakness.
- Review inventory growth and cash conversion: inventory increased to $9.13 million, and first-half operating cash flow included a $1.90 million inventory cash use.
- Monitor euro movements, pricing and product mix, as well as the 2013 medical-device tax and the company’s ability to sustain margins and profitability.
- Verify ongoing cash requirements from dividends, repurchases, leases and purchase commitments against management’s 12-month liquidity assessment.