LeMaitre Vascular, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017. Figures are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
LeMaitre develops, manufactures and sells vascular surgery medical devices and implants, and provides human-tissue processing and cryopreservation services. It reports one operating segment and sells primarily through a direct sales force. Biologic devices represented 36% of worldwide sales in Q3.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $24.2 | $24.8 | $77.2 | $74.7 |
| Gross profit / margin | $17.3 / 71.4% | $17.6 / 70.8% | $54.7 / 70.9% | $52.4 / 70.2% |
| Income from operations | $4.6 | $5.1 | $21.0 | $14.8 |
| Net income | $4.3 | $5.0 | $16.9 | $12.9 |
| Diluted EPS | $0.21 | $0.25 | $0.84 | $0.65 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $12.9 | $16.1 |
Q3 revenue declined 3% year over year; nine-month revenue rose 3%. Gross margin improved in both comparisons, attributed to favorable product and geographic mix and higher average selling prices, partly offset by higher unit costs. Nine-month sales benefited by an estimated $1.8 million from foreign-exchange movements.
Nine-month operating income includes a $5.9 million gain on the Reddick product-line divestiture. Excluding that gain, operating income was approximately $15.1 million, compared with $14.8 million in the prior-year period. Q3 net income fell 14%, while nine-month net income increased 31%; the nine-month comparison includes the divestiture gain and differing tax effects. Effective tax rates were 8.8% for Q3 and 20.2% for the first nine months of 2018.
Cash, liquidity and capital
- At September 30, cash and cash equivalents were $20.1 million and short-term marketable securities were $25.5 million, together $45.6 million. Current assets were $86.8 million and current liabilities $14.6 million.
- Operating cash flow was $12.9 million for the first nine months, down from $16.1 million. The company cited working-capital use, particularly increased inventory and deferred costs.
- Investing activities used $8.3 million, including $11.0 million paid at closing for the Applied Medical acquisition, partly offset by $7.4 million of Reddick divestiture proceeds. Financing activities used $3.1 million, including $4.1 million of dividends and $1.2 million of acquisition-related payments.
- The balance sheet does not present borrowings or a debt line item. The filing says cash, investments and interest income are expected to cover anticipated requirements for at least the next 12 months.
Material changes, outlook and risks
- In September 2018, LeMaitre acquired Applied Medical’s clot-management device business for a stated purchase price of $14.2 million; $11.0 million was paid at closing, with deferred payments due later. The company planned to transition manufacturing to Burlington by 2019.
- In April 2018, it sold the Reddick product lines for $7.4 million and recognized a $5.9 million gain. It agreed to continue supplying the buyer under transition and balloon-supply arrangements, including production at prices at or below cost; associated deferred revenue was $0.8 million at quarter-end.
- After quarter-end, the company agreed to acquire Cardial’s business and facility for a total of €2.0 million. It expected to record an approximately €1.6 million gain in Q4 2018, subject to final purchase accounting.
- No specific revenue or earnings guidance is provided. Management expects increased costs from sales-force expansion, China’s move toward direct selling, regulatory work and integration/manufacturing transitions. It also expects adoption of lease accounting in 2019 to significantly increase reported balance-sheet assets and liabilities, with no significant effect on the statement of operations expected.
- Risks highlighted include quarterly-results variability, competition and product acceptance, acquisition integration, sales-force productivity, product recalls, foreign-exchange exposure and execution of direct-selling expansion. The company reported no legal matters it believed would materially adversely affect its financial position, results or cash flows; it disclosed no substantive changes to previously reported risk factors.
Important facts for investors to verify
- Underlying sales and earnings trends apart from the $5.9 million Reddick gain, including the Q3 sales decline and the impact of currency.
- Applied Medical integration progress, deferred purchase payments and expected manufacturing transition costs.
- Performance of the direct-sales transition in China and the related sales, marketing and regulatory expense burden.
- Working-capital needs, especially inventory growth, and cash conversion relative to reported earnings.
- Execution of Reddick transition-supply commitments and the Cardial transaction’s final accounting and expected gain.
- Dividend continuation remains subject to board approval; the filing disclosed a $0.07-per-share dividend approved for payment in December 2018.