LeMaitre Vascular, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; quarterly results are noted separately below. Financial amounts are in U.S. dollars.
Business context
LeMaitre develops, manufactures and sells medical devices for peripheral vascular disease and, following its November 2016 acquisition of RestoreFlow, provides human vascular tissue processing and cryopreservation services. The company operates as one reportable segment and sells primarily through a direct sales force; 92% of 2016 net sales were in direct-sales territories. About 44% of net sales came from outside the United States.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $89.2 million | $78.4 million | +14% |
| Gross profit / margin | $62.9 million / 70.6% | $54.2 million / 69.1% | Margin +1.5 percentage points |
| Operating income | $16.3 million | $11.5 million | +42% |
| Net income | $10.6 million | $7.8 million | +36% |
| Diluted EPS | $0.55 | $0.42 | +31% |
| Operating cash flow | $16.9 million | $11.4 million | +$5.5 million |
| Cash and cash equivalents, year-end | $24.3 million | $27.5 million | -$3.2 million |
Growth was led by biologic vascular patches (+$5.2 million, including an estimated $2.3 million associated with a competitor’s safety alert), valvulotomes (+$1.9 million), vessel closure systems (+$1.5 million), and acquired ProCol sales (+$1.0 million). RestoreFlow contributed $0.5 million of revenue after acquisition. Gross margin benefited from higher selling prices and lower unit manufacturing costs, partly offset by sales mix in lower-margin markets.
Sales and marketing expense rose 15% to $26.1 million, mainly with expansion of the sales force to 96 representatives. R&D increased 12% to $6.1 million; G&A increased 2% to $14.4 million. The 2016 medical-device excise tax was suspended; the filing reports $0.7 million of expense in 2015.
At year-end, current assets were $59.0 million and current liabilities $10.5 million (a derived current ratio of approximately 5.6x). Total liabilities were $14.4 million and equity $87.5 million. The balance sheet reports no borrowings or debt line; interest expense was $14,000. Operating cash flow funded operations, while investing cash outflow of $17.2 million included $14.4 million for acquisitions and $2.8 million of property and equipment. Financing cash outflow was $2.6 million, mainly dividends. Management said available cash and expected interest income should cover anticipated needs for at least 12 months.
Fourth quarter: Net sales were $23.3 million versus $20.5 million in Q4 2015; operating income was $3.9 million versus $3.1 million, and net income was $2.6 million versus $2.5 million. Q4 gross margin was approximately 69.5%, compared with approximately 70.3% a year earlier.
Material changes and unusual items
- Acquired the ProCol biologic graft business in March for $2.7 million, plus sales-based consideration of 10% of ProCol revenue for three years.
- Acquired RestoreFlow in November for an initial $12.0 million, with additional contingent payments of up to $6.0 million. The purchase-price allocation was preliminary; the acquired business generated $0.5 million of 2016 revenue after acquisition.
- Investing outflows and acquisition-related assets increased; goodwill rose to $23.4 million from $17.8 million and net intangible assets to $9.9 million from $6.3 million.
- Cash dividends declared rose to $0.18 per share from $0.16. A $5 million share-repurchase authorization was approved in July 2016; no repurchases were made under that program by year-end.
- The company voluntarily recalled certain HYDRO valvulotome lots over a closure-mechanism issue and certain Reddick catheter lots over labeling. It estimated aggregate recall costs at $0.2 million and expected the recalls to be substantially complete by June 30, 2017.
Outlook, commentary and risks
- No specific 2017 revenue or earnings guidance is provided. Management expects a slight decrease in the effective tax rate in 2017 and expects higher China sales, marketing and regulatory expenses as its direct presence expands.
- Management expected a roughly $2.0 million renovation of the Burlington manufacturing facility in 2017, completion of the Tru-Incise manufacturing transfer in 2017, and ProCol manufacturing transfer in 2018 subject to regulatory approval.
- Key business risks include the market shift from open surgery to endovascular procedures; pricing and reimbursement pressure; dependence on selected sole- or limited-source suppliers; foreign-exchange exposure; and international regulatory and collection risks. Management estimated a hypothetical 10% currency-rate change could affect 2016 results of operations by about $1.7 million.
- RestoreFlow adds tissue-sourcing, processing, quality-control and regulatory risks. The filing also cites product-liability and recall exposure and competition from larger companies.
- Management reported internal control over financial reporting was effective at year-end and said a prior-year material weakness had been remediated. RestoreFlow was excluded from the company’s internal-control assessment and auditor’s internal-control opinion. The financial statements received an unqualified audit opinion.
Important facts for investors to verify
- How much of sales growth, especially biologic patch growth, is durable after the competitor safety alert was resolved?
- Whether the HYDRO and Reddick recalls are completed on schedule, and whether further costs or customer effects arise.
- RestoreFlow’s revenue growth, tissue supply, integration costs and any contingent acquisition payments; and progress against ProCol and Tru-Incise manufacturing-transfer plans.
- Cash conversion and working-capital trends, including collection of Southern European receivables; the filing cites $0.8 million due from Italy and $0.4 million from Spain.
- Future dividend and repurchase decisions, acquisition funding needs, and the effect of currency movements, regulation and reimbursement changes.