LeMaitre Vascular, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company develops and sells vascular medical devices and provides human vascular tissue processing and cryopreservation services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $24.8 | $23.2 | $74.7 | $65.9 |
| Gross margin | 70.8% | 73.3% | 70.2% | 71.0% |
| Operating income | $5.1 | $5.3 | $14.8 | $12.4 |
| Net income | $5.0 | $3.2 | $12.9 | $8.0 |
| Diluted EPS | $0.25 | $0.17 | $0.65 | $0.42 |
- Cash and liquidity: Cash and cash equivalents were $37.5 million at September 30, 2017, up from $24.3 million at year-end 2016. Current assets were $75.6 million and current liabilities $12.1 million. The company said available cash and related resources should cover anticipated needs for at least 12 months.
- Debt: The balance sheet lists no borrowings; total liabilities were $15.2 million. The filing does not present a separate debt balance.
- Cash flow, nine months: Operating activities provided $16.1 million, investing activities used $4.8 million, and financing activities provided $1.1 million. Capital spending included facility improvements and equipment; cash dividends paid were $3.1 million.
- Margins and expenses: Operating expenses were $12.5 million in Q3 and $37.7 million year to date. The quarterly dividend declared was $0.055 per share.
Changes versus the comparable periods
- Sales rose 7% in Q3 and 13% for the first nine months. RestoreFlow contributed $1.6 million of Q3 sales and $4.4 million year to date; it was acquired in late 2016. Other year-to-date growth included biologic vascular patches, carotid shunts and other products. Lower valvulotome sales partly offset growth.
- Gross margin fell 2.5 percentage points in Q3 and 0.8 points year to date. Management attributed the decline chiefly to the comparatively lower-margin RestoreFlow service mix and lower valvulotome sales; pricing, product/geographic mix and foreign exchange partly offset the pressure.
- Year-to-date operating income and net income increased versus 2016. General and administrative expense rose 24% year to date, including acquisition and facility-related costs and a $0.5 million stock-option modification charge related to the departure of the President of International Operations.
- Q3 tax expense was just $0.03 million, versus $2.1 million a year earlier. The nine-month effective tax rate was 12.8%; management cited discrete items, primarily related to stock-option exercises. It expected the 2017 rate to remain uneven and below 2016’s rate.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management described growth plans centered on direct sales, complementary acquisitions, product development and manufacturing consolidation. It stated that cash resources were expected to meet anticipated needs for at least 12 months.
- The Burlington facility renovation was expected to cost approximately $2.3 million, with about $1.8 million incurred through September 30. ProCol manufacturing transfer was expected to be completed in 2018, subject to regulatory approval.
- Key risks identified include acquisition integration and realizing expected benefits; demand and market acceptance; productivity and retention of sales personnel; competition; execution of direct-selling expansion; foreign currency movements; and risks associated with the recently acquired tissue-processing business. Foreign exchange reduced reported sales by approximately $0.3 million in the first nine months.
- RestoreFlow acquisition consideration includes potential contingent payments of up to $6 million. The company recorded $0.6 million of fair-value adjustments to contingent liabilities in the first nine months.
- Management reported effective internal control over financial reporting as of September 30, 2017, but excluded RestoreFlow from that evaluation while assessing its controls. The company reported no legal matters expected to have a material adverse effect and no substantive changes to previously disclosed risk factors.
Investor verification checklist
- Confirm how much reported sales growth is attributable to RestoreFlow and whether its lower-margin service mix continues to weigh on gross margin.
- Track valvulotome sales, pricing, product/geographic mix and the trend in gross margin.
- Review the sustainability of unusually low 2017 tax expense and the effect of stock-option exercises on future tax rates.
- Monitor Burlington renovation spending, ProCol manufacturing transfer progress and the remaining contingent RestoreFlow payments.
- Check future filings for RestoreFlow control integration, cash use for dividends and repurchases, and any changes to liquidity expectations.