LeMaitre Vascular, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparison is with the three months ended March 31, 2016. LeMaitre develops and sells vascular surgery medical devices and implants and provides human vascular tissue processing and cryopreservation services. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $24.1 | $20.3; up 19% |
| Gross profit / margin | $17.4 / 71.9% | $14.4 / 70.9% |
| Operating income / margin | $4.2 / approximately 17.4% | $3.3 / approximately 16.3% |
| Net income | $3.2 | $2.2; up approximately 49% |
| Diluted earnings per share | $0.16 | $0.11 |
| Operating cash flow | $2.5 | $1.3 |
| Capital expenditures | $1.7 | $0.7 |
| Cash and cash equivalents at quarter-end | $25.8 | $24.3 at December 31, 2016 |
| Current assets / current liabilities | $62.5 / $10.8 | Current ratio approximately 5.8x |
Cash increased $1.5 million during the quarter. Working-capital investment included a $0.9 million increase in receivables and a $1.1 million increase in inventory. The balance sheet reports no borrowings or debt line item; interest expense was zero. Total liabilities were $14.9 million at March 31, 2017.
Material changes versus Q1 2016
- Sales rose $3.9 million. Growth was led by biologic vascular patches (+$1.7 million) and RestoreFlow allograft services (+$1.3 million), with additional contributions from vessel closure systems, powered phlebectomy systems and ProCol grafts.
- Americas sales increased 26% to $15.0 million; international sales increased 9% to $9.2 million. The United States accounted for $14.0 million of sales. Foreign-exchange changes reduced sales by approximately $0.3 million.
- Gross margin improved 1.0 percentage point, attributed to lower unit manufacturing costs, a higher U.S. sales mix and higher average selling prices; lower-margin RestoreFlow services and China sales partly offset the improvement.
- Operating expenses rose 19% to $13.2 million. General and administrative expense increased 36% to $4.5 million, reflecting higher professional fees, compensation, acquisition-related charges and facilities costs. Sales and marketing expense rose 11% and R&D rose 15%.
- Operating cash flow improved, while investing cash use declined to $1.7 million from $3.1 million; Q1 2016 investing included $2.4 million of ProCol acquisition payments.
Outlook, risks and contingencies
- The filing provides no formal revenue or earnings guidance. Management expects cash, cash equivalents, investments and interest income to cover anticipated cash needs for at least the next 12 months.
- Management expects the 2017 effective tax rate to be lower than 2016, principally due to excess tax deductions from certain stock-option exercises; the rate may fluctuate with the timing of exercises. The reported Q1 tax provision was $1.0 million, and management cited an estimated annual effective rate of 36.0%.
- Planned investment includes Burlington manufacturing expansion. The facility renovation was expected to cost approximately $2.0 million, of which approximately $1.2 million had been incurred through March 31. The company also expected increased China sales, marketing and regulatory expenses in 2017.
- RestoreFlow, acquired in November 2016, contributed 5.2% of Q1 revenue. Its purchase price allocation remained preliminary at $12.96 million; the agreement includes potential additional payments of up to $6 million subject to stated conditions. Integration and realization of acquisition benefits are identified risks.
- Inventory purchase commitments were $3.9 million through 2018. Other exposures include foreign-currency movements, product demand and market acceptance, competition, direct-sales-force productivity and retention, and regulatory approvals. The company reported $407,000 of unrecognized tax benefits and a $1.8 million valuation allowance against deferred tax assets.
- Management reported no legal matters expected to have a material adverse effect and no substantive changes to previously disclosed risk factors. Internal controls were considered effective as of March 31, 2017; RestoreFlow was excluded from the assessment while management assessed its controls.
- The board approved a $0.055-per-share quarterly dividend payable June 8, 2017, totaling approximately $1.0 million. The existing $5 million share-repurchase authorization had not been used and was set to expire July 25, 2017, or when the limit was reached.
Most important facts for investors to verify
- Whether sales growth, especially in biologic patches and RestoreFlow services, is sustained and translates into cash generation.
- Whether gross-margin gains persist as the sales mix changes, including growth in lower-margin international markets and tissue services.
- Progress, costs and regulatory timing for Burlington manufacturing transfers and facility renovation, and the expected return on that investment.
- RestoreFlow integration, final purchase accounting and any contingent payments or earn-outs; also monitor acquisition-related obligations and ProCol revenue-based payments.
- Working-capital needs, inventory growth, dividend commitments and the company’s liquidity beyond management’s stated 12-month outlook.
- Tax-rate variability, foreign-exchange exposure, and the status of the $407,000 unrecognized tax benefit and deferred-tax valuation allowance.