LeMaitre Vascular, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Amounts are in U.S. dollars unless otherwise noted. The company develops, manufactures and sells vascular medical devices and also provides human vascular-tissue processing and cryopreservation services. It reports one operating segment.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $25.8m | $22.4m | $49.9m | $42.6m |
| Gross profit | $17.5m | $15.4m | $34.9m | $29.7m |
| Gross margin | 68.0% | 68.6% | 69.9% | 69.7% |
| Operating income | $5.5m | $3.8m | $9.7m | $7.1m |
| Net income | $4.6m | $2.6m | $7.9m | $4.8m |
| Diluted EPS | $0.23 | $0.14 | $0.40 | $0.25 |
- Q2 sales grew 15% year over year; first-half sales grew 17%. Q2 growth included $1.5m from RestoreFlow and $1.2m from biologic vascular patches. First-half growth included $2.8m from RestoreFlow and $2.9m from patches.
- Q2 gross margin declined 0.6 percentage points, reflecting lower-margin ProCol and RestoreFlow offerings, foreign exchange and manufacturing inefficiencies; higher patch sales and prices partly offset these factors. First-half gross margin increased 0.2 points, supported by higher average selling prices and lower unit manufacturing costs for biologic patches.
- Operating expenses were $12.0m in Q2, up 3%, and $25.1m in the first half, up 11%. First-half G&A rose 23%, including higher compensation, acquisition-related charges, facilities costs and professional fees.
- First-half operating cash flow was $7.9m, versus $6.4m a year earlier. Investing used $2.4m, primarily for Burlington facility expansion; financing used $0.2m, including $2.1m in dividends, partly offset by $2.3m from stock issuance.
- Cash and cash equivalents were $30.1m at June 30, 2017, up from $24.3m at year-end 2016. Current assets were $68.1m and current liabilities $9.4m. The filing presents no borrowings or interest-bearing debt balance; total liabilities were $13.7m.
- First-half capital spending and other asset purchases were $2.4m. The company estimated the Burlington renovation would cost about $2.5m, of which approximately $1.5m had been incurred by June 30.
Material changes and notable items
- Americas sales increased 22% in Q2 and 24% in the first half; international sales increased 5% and 7%, respectively. Foreign-exchange movements reduced first-half sales by approximately $0.6m.
- RestoreFlow, acquired in November 2016, contributed 5.6% of first-half revenue. Its preliminary purchase-price allocation was $13.0m, including $5.4m goodwill and $4.5m intangible assets. The agreement includes contingent payments of up to $6m, subject to specified conditions.
- The Q2 income-tax provision was $0.8m on $5.5m pretax income; the first-half provision was $1.9m on $9.7m pretax income. Reported effective rates were 15.2% for Q2 and 19.1% for the first half, with stock-option exercises and other discrete items affecting the rate. Management expected the 2017 effective rate to be below 2016’s, but somewhat inconsistent in the second half.
- Foreign-currency translation added $1.6m to other comprehensive income in the first half. The company reported $0.4m of fair-value adjustments to acquisition-related contingent liabilities during the period.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said existing cash and cash equivalents should cover anticipated cash requirements for at least the next 12 months; future requirements depend on sales, acquisitions, dividends, capital needs, taxes and potential repurchases.
- Management identified risks involving acquisition integration and expected benefits, demand and acceptance of products, sales-force productivity and retention, competition, regulatory approvals, expansion of direct sales in new territories, and foreign-exchange movements. RestoreFlow’s tissue-processing operations are a new business risk area.
- The company planned to finish its Burlington facility renovation in Q4 2017 and expected the ProCol manufacturing transition to be completed in 2018, subject to regulatory approval. It launched XenoSure pledgets in June 2017.
- The board approved a new share-repurchase authorization of up to $7.5m on July 25, 2017; no shares had been repurchased under it as of the filing. A $0.055-per-share quarterly dividend was also approved for payment in September 2017. The company reported no off-balance-sheet arrangements and no legal matters expected to materially affect its financial position, results or cash flows.
- Management reported effective internal control over financial reporting as of June 30, 2017, but excluded RestoreFlow from the evaluation and was still assessing controls for that acquired business.
Important facts for investors to verify
- How much sales growth is organic versus attributable to RestoreFlow and other acquired products, and whether patch growth and pricing can continue.
- Whether Q2 gross-margin pressure from acquired offerings, foreign exchange and manufacturing inefficiencies persists or improves.
- RestoreFlow’s revenue trajectory, integration progress, and potential earn-out or other acquisition-related payments.
- The effect of stock-option exercises and other discrete tax items on the effective tax rate in the second half of 2017.
- Actual Burlington renovation spending, ProCol transition timing, and the use of cash for dividends, repurchases, acquisitions and capital expenditures.