LeMaitre Vascular, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unless noted, amounts are in millions of U.S. dollars. LeMaitre develops, manufactures and sells medical devices and implants used primarily in vascular surgery, through a single operating segment.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Net sales | $23.2 | $19.0 | $65.9 | $57.9 |
| Gross profit / margin | $17.0 / 73.3% | $13.5 / 71.0% | $46.7 / 71.0% | $39.8 / 68.7% |
| Operating income | $5.3 | $3.3 | $12.4 | $8.4 |
| Net income | $3.2 | $2.1 | $8.0 | $5.2 |
| Diluted EPS | $0.17 | $0.11 | $0.42 | $0.29 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $12.7 | $7.5 |
- Q3 sales grew 22%; nine-month sales grew 14%. International sales increased 22% in Q3 and 19% year to date.
- Higher biologic patch and valvulotome sales drove growth. Q3 patch sales rose $2.0 million, including an estimated $1.4 million attributable to a competitor’s safety alert/recall. ProCol contributed $0.3 million in Q3 and $0.7 million year to date.
- Gross margin improved 2.3 percentage points in both comparisons, supported by higher average selling prices, manufacturing efficiencies and product mix. Lower-margin sales in China and other markets, and warranty replacements for recalled valvulotome lots, were offsets.
- Cash and cash equivalents were $34.7 million at September 30, up from $27.5 million at December 31, 2015. Current assets were $68.2 million and current liabilities $12.1 million. The balance sheet presents no borrowings; total liabilities were $14.6 million.
- Nine-month investing cash outflow was $4.2 million, including $2.4 million for ProCol and $1.8 million for property and equipment. Financing cash outflow was $1.5 million, including $2.5 million of dividends. The quarterly dividend was $0.045 per share.
Changes, outlook and management commentary
- Sales and marketing expense increased 15% year to date, principally reflecting a larger sales force (91 representatives versus 82 a year earlier), compensation and travel. Management expected the sales force and related selling and marketing expenses to continue growing during 2016.
- Research and development expense rose 18% year to date, including costs for acquired-product manufacturing transitions and regulatory submissions, including in China. Management expected cash and cash equivalents to cover anticipated requirements for at least the next 12 months. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Management cited continued growth opportunities from direct sales, acquisitions, product development and geographic expansion. It also noted that international expansion can pressure gross margin and that direct-selling transitions and manufacturing consolidations may affect results.
- The Baxter-related patch sales increase may not persist: management estimated it would retain about $0.5 million of the elevated patch sales in Q4, and warned that customer retention or production constraints could reduce sales or impede fulfillment.
- The company voluntarily recalled approximately 4,500 units from certain HYDRO LeMaitre valvulotome lots because of a closure-mechanism issue. It expected the recall to be substantially complete by December 31, 2016; unaffected lots continued to be sold and returned units could be reworked at minimal expense.
- The company early adopted share-based payment accounting guidance in Q3, recognizing $0.3 million of excess tax benefits in the tax provision and recording a $0.1 million cumulative adjustment to beginning retained earnings. Q3 tax expense also included discrete items related to a federal tax audit. Management expected the 2016 effective tax rate to exceed 2015’s.
- Disclosure controls were concluded to be ineffective at September 30, 2016 because of a previously reported material weakness in revenue-recognition controls, including validation of pricing terms. Remediation was underway.
- Inventory purchase commitments were $4.2 million through 2017. Management reported no legal matters expected to have a material adverse effect as of November 4, 2016, and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether patch sales gained during Baxter’s safety alert are retained, and whether product demand and manufacturing capacity can support them.
- Recall completion, customer response and any further quality or regulatory issues involving the HYDRO valvulotome.
- Progress in remediating the revenue-recognition control weakness and whether disclosure controls become effective.
- Underlying sales and margin trends excluding the estimated Baxter-related contribution, alongside the impact of international expansion and product mix.
- Tax-audit and uncertain-tax-position developments; unrecognized tax benefits were $0.382 million at September 30, 2016.