LeMaitre Vascular, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Comparisons are with the three months ended March 31, 2018 unless otherwise noted. LeMaitre develops, manufactures and sells vascular-surgery devices and provides human-tissue processing and cryopreservation services. It reports as one operating segment.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $28.5 million | $26.0 million | +10% |
| Gross profit / margin | $19.5 million / 68.3% | $18.5 million / 71.1% | Profit +5%; margin -2.8 percentage points |
| Operating income / margin | $4.4 million / 15.6% | $4.9 million / 18.7% | Income -9% |
| Net income | $3.5 million | $3.9 million | -9% |
| Diluted EPS | $0.17 | $0.19 | -11% |
| Operating cash flow | $(0.2) million | $3.8 million | Down $4.0 million |
Sales growth was led by embolectomy catheters, polyester grafts and carotid shunts. By geography, Americas sales rose 3%, Europe, Middle East and Africa sales rose 14%, and Asia/Pacific Rim sales rose 52%. Acquired products contributed to growth. The company estimated foreign-exchange movements reduced sales by $0.9 million year over year.
Cost of sales increased faster than revenue, and gross margin declined. Management attributed the margin pressure principally to the lower-margin acquired Syntel/Python embolectomy catheter and Cardial products, and the absence of the higher-margin Reddick products divested in 2018; lower manufacturing costs for some products partly offset the decline. Operating expenses increased 10% to $15.0 million: sales and marketing rose 11%, general and administrative 5%, and research and development 23%. Sales-force expansion and related costs, a CRM system implementation, and regulatory and product testing work contributed to higher expenses.
Cash, liquidity and obligations
- At March 31, 2019, cash and cash equivalents were $14.8 million and short-term marketable securities were $32.7 million, totaling $47.5 million in cash and short-term investments. Total current assets were $95.4 million and current liabilities were $19.4 million.
- Cash declined $11.6 million from year-end 2018. Investing activities used $11.8 million, including $11.0 million to purchase marketable securities and $0.8 million for property, equipment and other assets. The cash-flow statement reported a $0.2 million operating cash outflow, reflecting working-capital use, including higher inventory and lower accounts payable and accrued expenses.
- The balance sheet shows no borrowings or conventional debt. Lease liabilities were $6.7 million in total ($1.4 million current and $5.3 million long-term) following adoption of the new lease standard. Management said cash, investments and interest income should cover anticipated requirements for at least 12 months.
- The company paid a quarterly dividend of $0.085 per share in April 2019; another $0.085 dividend was approved in April for payment in June. A share-repurchase program of up to $10 million was authorized in February 2019, but no repurchases had been made by the filing date.
Changes, outlook and risks
- LeMaitre adopted ASC 842 leases on January 1, 2019, recording $7.0 million of lease liabilities and $6.5 million of right-of-use assets at adoption; no opening retained-earnings adjustment was required.
- The 2018 Applied Medical embolectomy and Cardial acquisitions expanded the product portfolio. The company was transitioning Applied Medical manufacturing to Burlington, with completion expected in 2019. A clean-room expansion was also expected to finish in 2019, at an estimated cost of $0.8 million.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expects available cash and investments to meet anticipated needs for at least the next 12 months, while noting future needs depend on sales, dividends, acquisitions, expansion, regulatory costs and possible repurchases.
- Key stated risks include changing product growth and demand, market acceptance and pricing, competition in biologic vascular patches, acquisition integration and realization of strategic benefits, sales-force productivity, product recalls, foreign-exchange movements and the transition to direct selling in new territories. Management noted international growth may pressure gross margins and that the stronger U.S. dollar reduced Q1 sales.
- Management reported no legal matters expected to have a material adverse effect as of April 30, 2019, 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 was reported.
Important facts for investors to verify
- Whether revenue growth from acquired products and Asia/Pacific Rim can continue, and how much is offset by currency effects.
- Whether gross margin stabilizes as acquired products are integrated and manufacturing transitions are completed.
- Whether working-capital outflows, especially inventory growth and payments of accrued expenses, reverse in subsequent quarters.
- Progress, cost and expected benefits of the Burlington manufacturing and clean-room projects, plus the $10 million repurchase authorization and ongoing dividends.
- Current liquidity, lease commitments and management’s 12-month funding assessment; the filing notes $4.3 million of foreign cash is held in jurisdictions where earnings are intended to be permanently reinvested.