LeMaitre Vascular, Inc. — Q2 2016 Form 10-Q
Business context and period. The company develops, manufactures, and sells medical devices and implants used mainly in vascular surgery. This unaudited report covers the quarter and six months ended June 30, 2016; financial amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $22.4 | $19.9 | $42.6 | $38.8 |
| Gross profit / margin | $15.4 / 68.6% | $13.1 / 66.0% | $29.7 / 69.7% | $26.2 / 67.6% |
| Operating income | $3.8 | $2.8 | $7.1 | $5.1 |
| Net income | $2.6 | $1.8 | $4.8 | $3.1 |
| Diluted EPS | $0.14 | $0.10 | $0.25 | $0.17 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $6.4 | $3.3 |
- Q2 sales rose 13% year over year; first-half sales increased 10%. International sales grew 22% in Q2 and 18% in the first half, compared with Americas growth of 7% and 5%, respectively.
- Gross margin improved 2.6 percentage points in Q2 and 2.1 points for the first half. Management attributed the gains primarily to manufacturing efficiencies, higher average selling prices, and lower per-unit costs for biologic patches; geographic and product mix partly offset the improvement.
- First-half operating expenses were $22.6 million, up 7%. Sales and marketing rose 13% as the sales force grew from 81 to 91 representatives; R&D increased 24%, partly reflecting manufacturing transitions and regulatory work. The medical device excise tax was suspended for 2016–2017.
- Cash and cash equivalents were $29.3 million at June 30, up from $27.5 million at year-end 2015. Current assets were $62.4 million and current liabilities $10.1 million. The balance sheet reports no debt; total liabilities were $12.7 million.
- First-half investing cash use was $3.6 million, including $2.4 million for ProCol-related acquisition payments and $1.3 million of property and equipment purchases. Financing cash use was $1.0 million, primarily dividends of $1.7 million, partly offset by $0.7 million of stock issuance proceeds.
Material changes, outlook, and risks
- Sales growth reflected biologic vascular patches, valvulotomes, and the newly acquired ProCol biologic graft; lower radiopaque tape sales partly offset gains. A competitor’s patch safety alert contributed an estimated $0.3 million of incremental patch sales in both the quarter and first half.
- The March 2016 ProCol acquisition had a stated $2.7 million purchase price plus revenue-based consideration; preliminary purchase accounting recorded $3.0 million of purchase price, including $0.3 million of contingent consideration. The company expected to complete the manufacturing transition in 2017.
- The filing provides no general full-year sales or earnings guidance. Management expected its 2016 effective tax rate to remain fairly consistent and higher than 2015, and said sales and marketing expense would increase as it continued expanding the sales force. Management stated existing cash and cash equivalents should cover anticipated requirements for at least the next 12 months.
- Q3 2016 guidance included $1.25 million of incremental XenoSure patch sales and Q4 included $0.5 million, based on an assumption that the competitor safety alert would end September 30, 2016 and that the company would retain about 40% of customers gained during the alert. Earlier resolution or lower retention could reduce sales. The company also warned that inadequate production capacity could constrain sales and harm customer relationships.
- Foreign exchange remains a risk: about 45% of first-half sales were outside the U.S.; currency movements reduced first-half sales by approximately $0.1 million versus 2015 rates. The company had no material off-balance-sheet arrangements and disclosed $3.6 million of inventory purchase commitments through 2017.
- Disclosure controls were deemed ineffective at June 30, 2016 because of a previously reported material weakness in revenue-recognition controls, particularly validation of contract pricing. Remediation was underway. Management reported no legal matters expected to materially affect financial position, results, or cash flows.
- After quarter-end, the board authorized up to $5.0 million of share repurchases through July 25, 2017, and approved a $0.045-per-share dividend payable September 6, 2016.
Important facts for investors to verify
- How much of patch growth and the 2016 outlook depends on the competitor safety alert, and whether customer retention and production capacity meet management’s assumptions.
- Whether improved gross margins persist despite international growth, product mix, and manufacturing-transition costs.
- Progress in remediating the revenue-pricing control weakness and the potential implications for reported revenue.
- ProCol integration, manufacturing transition timing, and the effect of revenue-based acquisition consideration.
- Cash deployment across dividends, the new repurchase authorization, acquisitions, and capital spending; the filing states future dividends remain subject to board approval.