LeMaitre Vascular, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company develops, manufactures and sells vascular surgery devices and provides human-tissue processing and cryopreservation services. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $29.5 | $27.0 | $58.0 | $53.0 |
| Gross profit | $20.3 | $19.0 | $39.8 | $37.5 |
| Gross margin | 68.9% | 70.3% | 68.6% | 70.7% |
| Operating income | $5.9 | $11.5 | $10.4 | $16.4 |
| Net income | $4.6 | $8.8 | $8.1 | $12.6 |
| Diluted EPS | $0.23 | $0.43 | $0.40 | $0.62 |
| Operating cash flow | Not separately provided | Not separately provided | $4.1 | $8.6 |
- Sales rose 9% in both the quarter and first half. Growth was driven principally by acquired embolectomy catheter and Cardial product lines, with contributions from allografts and other products.
- Gross margin fell 1.4 percentage points in Q2 and 2.1 points for the first half. Management attributed the pressure mainly to acquired products with lower margins and, in the year-over-year comparison, the prior-year Reddick product lines, partly offset by lower manufacturing costs for certain offerings.
- Net income and reported operating income were lower year over year largely because Q2 2018 included a $5.9 million gain on the Reddick divestiture. Excluding that gain, operating income was about $5.7 million in Q2 2018 versus $5.9 million in Q2 2019, and about $10.5 million in the first half of 2018 versus $10.4 million in the first half of 2019.
- Sales and marketing expense increased 12% in Q2, reflecting sales-force expansion and customer-relationship software costs; R&D increased 13% in Q2 and 18% in the first half, primarily for product development, testing and manufacturing transfers.
Cash, liquidity and capital
- At June 30, 2019, cash and cash equivalents were $13.3 million and short-term marketable securities were $35.0 million, totaling $48.2 million, compared with $48.0 million at December 31, 2018. Current assets were $98.2 million and current liabilities $17.4 million.
- The company reported no debt; lease liabilities were $6.9 million, including $1.7 million current and $5.2 million long-term. Operating leases were recognized on the balance sheet following adoption of the new lease standard in January 2019.
- First-half operating cash flow was $4.1 million, down from $8.6 million. Working-capital use of $8.7 million, particularly higher inventory and deferred costs and lower accounts payable and other liabilities, weighed on cash generation.
- Investing cash outflow was $14.8 million, mainly purchases of $13.2 million in marketable securities and $1.6 million in property and equipment. Financing cash outflow was $2.4 million, chiefly $3.3 million of dividends.
- The board authorized a share-repurchase program of up to $10 million through February 2020; no repurchases had been made by June 30. The quarterly dividend was $0.085 per share, and a further $0.085 dividend was approved in July.
Business developments, outlook and risks
- Sales were 94% direct-to-hospital. The sales force increased to 110 representatives from 102 a year earlier. Biologic products represented 35% of Q2 worldwide sales.
- Foreign exchange reduced first-half sales by an estimated $1.6 million versus 2018 exchange rates. Approximately 47% of first-half sales were outside the United States.
- Management said available cash, investments and interest income should cover anticipated cash needs for at least 12 months. No formal revenue or earnings guidance was provided. The company expected to complete the Applied embolectomy catheter manufacturing transfer in 2019 and the OmniFlow transfer to Burlington in early 2020.
- On July 12, 2019, the company agreed to acquire the remaining assets of UreSil’s Tru-Incise valve cutter business for $8.0 million.
- Management cited risks including product-demand and market-acceptance uncertainty, competition and pricing pressure in biologic patches, acquisition integration and realization of benefits, sales-force productivity, foreign exchange, product recalls, and execution of direct-selling transitions. The filing reported no legal matter management believed would materially adversely affect financial position, results or cash flows, and no substantive changes to previously disclosed risk factors.
- Disclosure controls were assessed as effective at reasonable assurance levels; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether sales growth from acquired products is sustainable and whether their lower margins continue to dilute gross margin.
- Whether operating cash conversion improves as inventory and other working-capital balances develop.
- Progress, costs and timing for manufacturing transfers and facility expansion, as well as integration of the acquired businesses.
- Foreign-exchange exposure and competitive pricing pressure, particularly in biologic vascular patches and international markets.
- Funding and capital-allocation implications of the $8.0 million UreSil acquisition, dividends and authorized repurchase program.