LeMaitre Vascular, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless otherwise noted, dollar amounts are in millions. LeMaitre develops, manufactures and sells vascular-surgery devices and implants, and provides human-tissue processing and cryopreservation services. It reports one operating segment.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $36.4 | $29.1 | $91.8 | $87.1 |
| Gross profit / margin | $22.7 / 62.3% | $20.2 / 69.3% | $60.2 / 65.6% | $59.9 / 68.9% |
| Operating income | $10.0 | $5.9 | $19.2 | $16.3 |
| Net income | $7.5 | $5.2 | $14.2 | $13.3 |
| Diluted EPS | $0.37 | $0.25 | $0.69 | $0.66 |
| Operating cash flow | — | — | $20.6 | $8.6 |
Q3 sales grew 25%; management attributed $5.4 million of the increase to acquired Artegraft products and approximately $0.5 million to foreign exchange. Other contributors included CardioCel patches and valvulotomes. Nine-month sales increased 5%, principally from acquired Artegraft and CardioCel products, partly offset by pandemic-related weakness across several product lines. Gross margin fell 7.0 percentage points in Q3 and 3.3 points year to date, primarily due to purchase-accounting effects from Artegraft and, to a lesser extent, manufacturing inefficiencies. Q3 operating expenses declined 11%, including lower sales and marketing costs; general and administrative expense rose with acquisition-related amortization. A $0.5 million building-sale gain benefited operating results.
Balance sheet, liquidity and cash flows
- At September 30, cash and equivalents were $29.3 million and short-term marketable securities were $5.1 million, versus $11.8 million and $20.9 million, respectively, at year-end 2019. Current assets were $102.3 million and current liabilities $44.4 million.
- Debt was approximately $59.5 million: $21.0 million drawn on the revolving facility and $38.5 million of term-loan carrying value, including the current portion. Borrowings bore 3.5% interest at quarter-end. The company reported compliance with its debt covenants.
- Nine-month operating cash flow of $20.6 million was up from $8.6 million, helped by lower working-capital cash use. Investing used $56.6 million, including $72.6 million of acquisition-related payments, partly offset by marketable-security transactions and building-sale proceeds. Financing provided $53.2 million, mainly from debt proceeds; dividends paid were $5.8 million.
- Stockholders’ equity was $161.0 million. Quarterly dividends declared were $0.095 per share; a further $0.095 dividend was approved for payment in December 2020.
Material developments, outlook and risks
- Artegraft acquisition: Acquired June 22 for $72.5 million at closing, with potential additional consideration of up to $17.5 million tied to future unit sales. Acquired products contributed $5.6 million of revenue from acquisition through September 30. Purchase-price allocation remained preliminary; it included $39.1 million of intangibles and $27.1 million of goodwill.
- COVID-19: Pandemic-related limits on elective procedures and hospital access pressured demand. Sales declined approximately 16% year over year in Q2, then rose in Q3, although acquisition and currency effects contributed to the increase. Management expected continued negative effects on revenue, gross profit and potentially gross margin for the rest of 2020, with magnitude uncertain; no specific forward financial guidance was provided.
- Cost actions: The company reduced its workforce by approximately 13% in April and temporarily cut certain salaries through August 31. It had 79 sales representatives at quarter-end versus 109 a year earlier. Management said cash, investments and operating resources were expected to cover anticipated needs for at least 12 months.
- European regulatory exposure: Lapsed CE certifications for certain products caused backorders, reported at approximately $0.2 million at September 30. Temporary country authorizations mitigated some disruption, but key recertifications remained pending, and the filing described potential further interruptions, including for Omniflow II and under the EU Medical Device Regulation transition.
- Other items: A $0.5 million gain followed the sale of the North Melbourne, Australia building. Acquisition-related contingent liabilities were measured using significant unobservable assumptions. Management reported no legal matters expected to have a material adverse effect and no off-balance-sheet arrangements.
Investor verification priorities
- Separate organic performance from Artegraft and CardioCel contributions, foreign-exchange effects and the recovery in elective procedures.
- Track gross-margin recovery, including Artegraft purchase-accounting effects and manufacturing efficiency.
- Monitor CE-mark and MDR recertification timing, temporary authorizations, and product backorders in Europe.
- Review acquisition integration, preliminary purchase accounting, earn-out estimates and debt repayment, interest costs and covenant headroom.
- Assess whether pandemic-related demand, workforce reductions and sales-force rebuilding affect the company’s stated 12-month liquidity outlook.