LeMaitre Vascular, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparisons are with the same 2019 periods. Amounts are in U.S. dollars unless noted. LeMaitre develops, manufactures, and sells vascular medical devices and provides tissue processing and cryopreservation services. It reports one operating segment.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $24.9 million | $29.5 million | $55.4 million | $58.0 million |
| Gross profit / margin | $17.0 million / 68.5% | $20.3 million / 68.9% | $37.5 million / 67.7% | $39.8 million / 68.6% |
| Operating income / margin | $4.9 million / approximately 19.6% | $5.9 million / approximately 20.1% | $9.2 million / approximately 16.7% | $10.4 million / approximately 17.9% |
| Net income | $3.5 million | $4.6 million | $6.7 million | $8.1 million |
| Diluted EPS | $0.17 | $0.23 | $0.33 | $0.40 |
Q2 net margin was approximately 14.1%, versus 15.7% a year earlier; six-month net margin was approximately 12.0%, versus 14.0%. Calculated margins are approximate.
- Cash flow: Six-month operating cash flow was $6.5 million, compared with $4.1 million in 2019. Investing activities used $57.9 million, principally reflecting $72.6 million in acquisition-related payments, partly offset by net proceeds from marketable securities. Financing activities provided $59.6 million, mainly from borrowings.
- Liquidity: At June 30, cash and cash equivalents were $20.0 million and short-term marketable securities were $5.1 million, totaling $25.1 million. Current assets were $91.9 million and current liabilities $44.4 million; the resulting current ratio is approximately 2.1.
- Debt: The company borrowed $65 million under a new five-year secured facility to fund the Artegraft acquisition: a fully drawn $25 million revolver and a $40 million term loan. The term loan’s balance-sheet carrying amount was $39.0 million net of issuance costs; $2.0 million was current. Borrowings bore 3.5% interest at quarter-end. The facility includes financial covenants, including a maximum consolidated leverage ratio, and is secured by substantially all company assets, subject to exceptions.
- Dividends: Two quarterly dividends of $0.095 per share were paid during the first half. The board approved another $0.095-per-share dividend in July, payable in September, subject to the stated record date.
Material changes versus the prior comparable period
- Q2 sales declined 16% year over year; first-half sales declined 4%. COVID-19-related restrictions on elective procedures and hospital access were the principal factors cited. Q2 declines were 15% in the Americas and 21% in EMEA; Asia/Pacific sales were flat.
- Management attributed the first-half sales decline to decreases across several product lines, partly offset by growth in bovine cardiac patches and valvulotomes, including acquired products.
- Q2 gross margin fell 0.4 percentage points and first-half gross margin fell 0.9 points. Management cited manufacturing inefficiencies in allografts and biologic patches and lower sales of higher-margin bovine carotid patches, partly offset by product-mix effects.
- Operating expenses declined 16% in Q2 and 4% for the first half. Lower sales and marketing costs, including reduced commissions, travel, and compensation, were partly offset by higher general and administrative costs, including approximately $1.2 million of Artegraft-related consulting and transaction costs in Q2.
- Cash and securities together were $25.1 million at June 30, compared with $32.7 million at December 31, 2019; cash alone rose to $20.0 million from $11.8 million. The change reflects, among other items, the acquisition, securities transactions, and new borrowing.
Outlook, risks, contingencies, and unusual items
- Management expected COVID-19 to continue to adversely affect revenue, gross profit, and potentially gross margin through the remainder of 2020, but said the magnitude and duration could not be reasonably estimated. No quantitative sales or earnings guidance was provided.
- To reduce costs, the company reduced its workforce by approximately 13% in April and temporarily cut salaries for employees earning at least $40,000 annually. The salary reductions were expected to continue through August 31, 2020. Management said cash, cash equivalents, investments, and interest income should cover anticipated needs for at least 12 months, while noting that additional capital might be needed beyond forecasts.
- In June, LeMaitre acquired Artegraft’s bovine carotid artery graft business for $72.5 million paid at closing, including $7.5 million placed in escrow. Up to $17.5 million of additional earn-out payments may be payable based on unit sales in 2021–2023. The acquired business contributed $0.2 million of revenue in the quarter. The preliminary allocation included $40.0 million of intangible assets and $26.2 million of goodwill.
- Some European product sales faced backorders because CE mark certifications had lapsed after a notified body ceased providing services. The filing gives expected reissuance timing extending into 2021 for certain products and describes temporary country-specific authorizations. Omniflow II’s certification was also expected to lapse during manufacturing transfer; the company anticipated certification by Q4 2021.
- The company reported that the COVID-19 pandemic delayed its XenoSure clinical trial in China. It also cited regulatory approval, acquisition integration, product demand, competition, foreign exchange, and manufacturing-transition risks.
- Management reported no legal matters expected to have a material adverse effect as of July 31, 2020, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective at reasonable assurance levels.
- Other notable items: the company classified its North Melbourne, Australia property as held for sale, with an expected September 2020 sale but no assurance of completion; and unrecognized tax benefits were $0.8 million at June 30.
Important facts for investors to verify
- Whether procedure volumes and hospital access recover as assumed, and how that affects sales, margins, and cash generation.
- Progress and timing of CE mark renewals, temporary exemptions, and potential European backorders, especially for XenoSure, AlboGraft, and Omniflow II.
- Integration and performance of the Artegraft business, earn-out likelihood, acquisition accounting, and the company’s ability to manage its new secured debt and covenants.
- Whether manufacturing inefficiencies and acquisition-related costs decline, and whether workforce reductions affect customer service, sales capacity, or execution.
- Liquidity and dividend sustainability if pandemic-related sales pressure persists; the filing’s 12-month liquidity assessment depends on management’s forecasts and assumptions.