LeMaitre Vascular, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company develops, manufactures, and markets medical devices and implants primarily for vascular surgery. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $15.1 | $14.2 | $29.7 | $28.0 |
| Gross profit | $10.4 | $10.7 | $20.5 | $21.0 |
| Gross margin | 68.6% | 75.3% | 69.1% | 75.0% |
| Operating income | $0.9 | $2.0 | $0.9 | $3.3 |
| Net income | $0.5 | $1.5 | $0.6 | $2.5 |
| Diluted earnings per share | $0.03 | $0.09 | $0.04 | $0.16 |
- Sales increased 7% in Q2 and 6% for the first half. Vascular sales rose 12% in both periods; Endovascular sales fell 7% in Q2 and 10% year to date.
- Management attributed sales growth to higher average selling prices, favorable foreign exchange, and LifeSpan graft sales, partly offset by lower stent graft and shunt sales.
- Gross margin declined year over year, mainly due to manufacturing start-up and wind-down costs from relocating graft production, other higher manufacturing costs, and the LifeSpan inventory purchase-accounting step-up. Higher selling prices partly offset these effects.
- Operating expenses increased 10% in Q2 and 11% in the first half. First-half expenses included $1.7 million of restructuring charges; research and development expense declined 20%.
Cash, liquidity, and capital
- Cash and cash equivalents were $21.4 million at June 30, 2011, down from $22.6 million at December 31, 2010. The company reported no marketable securities at quarter-end.
- Current assets were $41.6 million and current liabilities $8.4 million. Total liabilities were $8.9 million; stockholders’ equity was $52.8 million.
- Operating cash flow was $1.1 million for the first half, versus $3.5 million a year earlier. Investing cash outflow was $1.3 million and financing cash outflow was $1.1 million; cash declined $1.2 million during the period.
- The filing reports no conventional credit facility. An Italian government loan and grant repayment was accelerated following the Biomateriali plant closure; approximately $0.4 million remained accrued at June 30, with repayment timing to be determined by the government.
- The company paid two quarterly dividends of $0.02 per share during the first half and announced a further $0.02 dividend payable September 6, 2011, subject to the stated record date. It also repurchased $0.5 million of shares in the first half.
Material changes, outlook, and risks
- The company agreed to exit the TAArget and UniFit stent graft lines in June, completing its exit from the stent graft market. It reported a roughly $0.4 million charge on the divestiture and retained about $0.4 million of unfulfilled orders expected to ship by September 30, 2011.
- In July, it agreed to terminate its European Endologix distribution rights effective August 31, 2011, for $1.3 million. Management expected this transaction to produce a gain of approximately $0.6 million, recognized in the third quarter.
- Management expected LifeSpan sales to partially offset the lost stent graft revenue by about $1.3 million in 2011. No full-year revenue or earnings guidance was provided.
- The company was relocating AlboGraft production from Italy and LifeSpan production from California to Burlington, Massachusetts. It expected additional 2011 restructuring costs, including about $0.2 million for the LifeSpan plan and further costs related to facility closures and transfers.
- A newly highlighted risk is that manufacturing-transfer delays, cost overruns, or quality problems could cause backorders, harm customer relationships, and adversely affect sales and results. The AlboGraft transfer had already experienced delays and impaired the ability to meet demand.
- Management said available cash and expected interest income should meet anticipated cash requirements for at least 12 months, while noting that future capital needs depend on operating results, restructuring, growth investments, dividends, repurchases, and acquisitions. Additional financing, if required, might not be available on acceptable terms.
- Other notable obligations include $4.8 million of inventory purchase commitments through 2016 and $277,000 of unrecognized tax benefits. Management reported no legal matters expected to have a material adverse effect and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether gross margins recover as manufacturing transfers progress, and whether graft production can meet customer demand without further backorders.
- Whether the announced Endologix payment, expected gain, and timing of recognition match subsequent reporting.
- How the exit from stent grafts and growth in Vascular products affect sales mix, revenue, and profitability after the transition.
- Whether restructuring costs, working-capital movements, dividends, and share repurchases continue to reduce cash, and whether liquidity remains adequate.
- The timing and amount of repayment demanded by the Italian government for the accelerated loan and grant obligations.